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International Business NotesLecture 1 – Overview of globalisationWhat is globalisation? It is the process of eliminating trade, investment, cultural, information technology and political barriers across countries. o It can lead to economic growth and geopolitical integration and interdependence amon...

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International Business Notes Lecture 1 – Overview of globalisation What is globalisation? -

It is the process of eliminating trade, investment, cultural, information technology and political barriers across countries. o It can lead to economic growth and geopolitical integration and interdependence among nations of the world.

Globalisation allows countries to cooperate with each other through geopolitical integration. Globalisation is a shift towards an integrated society where countries are interdependent on each other.

Two facets of Globalisation 1. Globalisation of markets o Elimination of trade barriers o The role of competition o The variety of consumer tastes 2. Globalisation of production

What does the IMF do? - The IMF’s purpose is to maintain order in international monetary system o To maintain stability (exchange rates, currencies, growth and etc.)

What does the World Bank do? - The World Bank’s purpose is to promote economic development o Global integration through liberalisation (loosing or removal of restrictions) o Provide trade policy advice

What does the World Trade Organisation do? - Liberalising trade by lowering/removal of trade barriers such as, tariffs, quotas and subsidies The WTO Agreements - Trade without discrimination (Most favoured Nation) - Increasingly freer trade - Promote fair competition - Encouragement of economic reforms in developing countries

Drivers of globalisation - Technological change o Advancement in communication technologies  Phone  Internet (WWW)  Computers o Advancement in transportation  Aircrafts  Cargo ships The globalisation debate: Pro-globalisation

Anti-globalisation

Globalisation drives economic growth

Globalisation allows the rich to exploit the poor, resulting in inequality - Job loss, destroys domestic industries

Week 2 – The evolution of international business 1. Briefly explain why trade and foreign investment are good for society as a whole. Benefits of international trade 1 2 3

Increased variety of goods and services Lower prices for goods and services Increased quality of life and higher living standards

2. Describe the major international trade theories and how they operate. Major theories of international trade

- Mercantilism o Mercantilists believe gains from external trade is only beneficial if the country of origin has a trade surplus o Practiced during the 1500-1750s as Europe moved towards nationalism o Wealth largely determined by the amount of precious metals owned

- Specialisation o Free trade encourages countries to specialise in the production of those goods and services that they most efficiently produce  Absolute advantage  The ability of one country to produce a good/service more efficiently than others  Comparative advantage  The ability of one country that has as absolute advantage in the production of town or more goods (or services) to produce one of them relatively more efficiently than the other

- Factor endowments o Nations primarily exports goods and services that intensely use their abundant factors of production  Factors of production  Land (quality, quantity and mineral resources)  Labour (quantity and efficiency)  Capital (cost)  Technology (quality) o The Heckscher-Ohlin (H-O) theory  Attribute the comparative advantage of a nation to its factor endowments  Key assumptions of the theory o Perfect competition in the market place o Perfect immobility of factors of production among countries  Factor price equalisation theory  When factors are allowed to move freely among trading nations o Efficiencies increases

Therefore, superior allocation of production of goods/services among countries Free mobility of factors will lead to efficient reallocation of recourses (factors of production) until price equilibrium is reached 

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3. Evaluate trade policy, the main instruments of trade policy, and their impact on business, consumers, and governments. Trade instruments - Tariffs - Specific tariffs - Preferential duties: An import tariff established by a national for goods of certain countries and not applied to the same goods of other countries. - Generalised systems of preferences (GPS): An agreement where a larger number of developed countries permit duty-free imports of a selected list of products that originate from specific countries - Export subsidy - Export taxes Explain the Impacts of trade policy on government, business and consumers

- Porter’s “Diamond” Model of National Competitive Advantage

4. Explain the rationale behind a country’s choice of managing trade.

Week 3 - Regional economic integration

1. Explain regional economic integration, its evolution, and its benefits and costs. Regional integration

- Implementation of a multitude of economic and/or political steps by member states to increase their global competitiveness, including preferential trade access 5 Stages of regional integration Free-trade agree -> Customs union -> Common market -> Economic and monetary union -> Political union Pros and Cons of Regional Integration Advantages Creating a larger pool of consumers with similar culture, taste and social values Encourages economies of scale, increase global competitiveness, enhance economic growth Freeing the flow of capital, labour and technology Increase cooperation, peace and security

Disadvantages Eliminating jobs and increasing unemployment in protected industries Losing sovereignty, national independence and identity Reducing the powers of the national government Increase problems associated with illegal drugs and terrorism due to the ease of cross-border labour movement

Encourage enhancement of social welfare

- The European union is an example of regional integration 2. Identify how economic geography helps explain, promote, and segment regional integration blocs. Spatial transformations

- The process of allowing efficient geographic distribution of business activities within and among countries

Steps to Regional Integration

1

Start small

2

Think global

3

Compensate the least fortunate

3. Identify the primary reasons why countries are now seeking to pursue regional integration at the expense of multilateral trade liberalisation.

o o o o

Exposed to a larger consumer base Lower production costs Economic growth Higher profit

4. Explain why the European Union is seen as the most advanced regional integration bloc.

o The EU has undergone full 5 stages of regional integration. 5. Describe how NAFTA has affected U.S.–Mexico bilateral trade in goods and services.

o NAFTA increased bilateral trade in goods and services between U.S.-Mexico significantly. 6. Explain the importance of ASEAN and indicate why Asia may become the most important free trade region for this century.

- Accelerate o Economic growth o Social progress o Cultural development - Promote o Peace o Stability

Week 4 - The international flow of funds The balance of international payments

- Balance of payments (BOP) o Shows all transactions between one country and the rest of the world for a given period of time - Current account o Shows the activities of consumers and businesses in the economy with respect to the trade balance, services balance, income balance, and net transfers

- Financial account o Consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives

International monetary systems • Gold standard – Monetary system that pegs currency values to the market value of gold • Bretton Woods Agreement – The 1944 decision to establish a global currency system with the U.S. dollar pegged at a fixed rate of exchange to gold, and the currencies of 43 other countries fixed to the dollar • International Monetary Fund (IMF) – The financial authority established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system Development of the Flexible exchange rate system • Smithsonian Agreement

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– The 1971 decision allowing the United States to devalue the dollar against other countries’ currencies Jamaica Agreement – The 1976 international monetary order that allowed countries to adopt different exchange rate systems including floating their currencies in world markets

Valuing (or Devaluing) currencies • Special drawing right (SDR) – A basket of currencies (dollars, euros, pounds, and yen) created by the IMF for use as a benchmark to value the currencies of different countries • Clean float currency – Monetary system with minimal government intervention; largely market determined • Dirty float currency – Monetary system with varying degrees of government intervention to maintain a range of acceptable values against other currencies Types of currencies

- Hard currencies o Leading world currencies of developed industrialised countries o Stable currencies - Soft currencies o Emerging market currencies o Less stable o Sometimes pegged to hard currency values International flows of goods and capital • Law of one price – Principle stating that identical goods should sell for the same price in different countries according to local currencies • Arbitrage – Buying goods in a lower priced market and selling them in a higher priced market to make profits • Purchasing power parity (PPP) – Theory stating that a basket of goods should have approximately the same prices across different countries International trade transaction processes

- Letter of credit o Issued by the bank at the request of an importer o States a specified sum of money to a beneficiary - Bill of Lading o Issued to the exporter by the common carrier transporting the merchandise 

Purposes

 A receipt  A contract  Document of title Week 5 - The Cultural environment •

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Culture refers to acquired knowledge that individuals use to interpret experience and to generate social behaviour. In turn, this knowledge forms values, creates attitudes, and exercises a pervasive influence on behaviour. Characteristics of culture – Culture is not inherited, but learned. – Culture is shared, cumulative, and transgenerational. – Culture is adaptive and capable of change. – Culture is patterned – change in one area of culture impacts on other aspects.

The elements of culture

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1. Power distance (PDI) defines the extent to which the less powerful members of society accept that power is distributed unequally. Inequality within society, either at the level of the family, the firm or politics, is accepted or endorsed by both the followers as well as the leaders (e.g., Mexico, South Korea, India). 2. Individualism vs. collectivism (IDV) defines the tendency of people to look after themselves and their immediate family only. This dimension measures the degree to which a culture is group oriented or not and the degree to which individual decision making and action are accepted and encouraged by society. 3. Uncertainty avoidance (UAI) defined as the extent to which people feel threatened by ambiguous situations, and have created beliefs and institutions that try to avoid these. Examples are Japan, Spain, Germany. 4. Masculinity vs. femininity (MAS) examines a situation in which the dominant values in society are success, money and material possessions. People are judged on their achievements and performance. Ambition and drive are considered good in a masculine society. Assertiveness is also associated with the trait of masculinity. 5. Long-term orientation vs. short-term orientation (LTO) associates the connection of the past with the current and future actions/challenges. A lower degree of this index (short-term) indicates that traditions are honoured and kept, while steadfastness is valued. Societies with a high degree in this index (long-term) views adaptation and circumstantial, pragmatic problem-solving as a necessity.

The importance of culture for managing and marketing overseas markets

- A country’s culture affects its attitudes toward work - Management styles can give rise to challenges or lead to success - When developing new products, management styles must be considered along with many other aspects of marketing

- Advertising campaigns must be carefully tailored to local cultures - Culture has an impact on communication styles

Culture and competitive advantage • • • •

The most significant development in the cultural environment in recent years is the movement from seeing cultural diversity as a problem to considering it as a source of competitive advantage. Attraction arises from the fact that in many industries traditional sources of advantage (technology, cost, quality) no longer provide a sustainable form of advantage. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. Companies can exploit unique cultural traits to develop targeted products and services.

Individualism: a social theory favouring freedom of action for individuals over collective or state control.

Lecture 6 – The international business environment (cont.)

1. Provide an overview of the different global political systems and their potential impact on international business. What is a political system?

- It is a system of government in a nation Two dimensions of Political systems 1. Degree of which they emphasis collectivism as opposed to individualism 2. Degree to which they are democratic or totalitarian

Political ideologies

Totalitarianism (Absolute Control)

- Imposed authority (controlling) - Lack of constitutional guarantees (free rights) - Restricted participations (do not tolerate opposing viewpoints)

Democracy

- Freedom of expression - Full civil rights and property rights - Periodic elections 2. Explain the differences between communism, capitalism, and socialism and how these different economic ideologies affect the conduct of international business.

Socialism: belief of public ownership of the means of production for the common good of society Capitalism: Belief of privatization of production and industry for profit, rather than by the state Communism: Belief that socialism can only be achieved through revolution and totalitarian dictatorship Social democrats: Believe that socialism can be achieved by democratic means Economic Systems 1. Countries where individual goals are most important. Free market economic systems a. Capitalistic approach b. democratic approach 2. Countries where collective goals are most important. State control of market a. Socialistic approach b. Communism, totalitarianism International companies operate across national boundaries, doing business in more than one country. Managers in international companies, therefore, have to understand different political and regulatory systems.

3. Discuss the key political and economic risks and the role of corruption when conducting global business. Political, economic and legal environment o Influences the attractiveness of that country as a market and/or investment site. o Raise important ethical issues that have implications for the practice of international business Political risks

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Conflict Corruption Terrorism Policy change Interference with operations

Economic risks

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Lack of growth Currency instability Poor infrastructure Unavailability of labour

4. Analyse the different types of legal systems.

o Common law 

Precedent

o Civil law o Theocratic law (religious law) The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions.

5. Discuss the importance of intellectual property protections in today’s global business environment.

o Patent o Copyright o Trademark Intellectual property protect is becoming increasing important in today’s global business environment due to technological advancements. The technological environment • • • • • •

Technology may be broadly defined as knowledge of the design, production and sale of products, processes, systems and services. This definition highlights the difference between technology and invention or innovation. Business success implies that technology must encompass not just the development of new products or processes but also their production and commercialisation. It is in the combination of these stages, design, production and marketing, that enterprises, and particularly multinational enterprises, create distinct competitive positions. Technology is both differentiated and cumulative. Technology is now recognised as one of the most important determinants of international competitiveness. This is true for both companies and countries.

Week 7 – Market entry strategies and decision making Considerations regarding international market entry

PEST analysis

- Political o Taxes o Government type and stability, level of corruption - Economic o Labour costs o State of the economy - Social o Population growth rate o Cultural factors o Education, and social mobility - Technological o R&D activities o Impact of emerging technologies

Porter’s 5 forces

The Upsala Model

Upsala Model suggests that when uncertainty is reduced – Firms will switch to higher commitment operation mode

Timing of Entry

Advantages

First-movers - Can capture the market first

- No direct competition - Ability to establish brand

Late-comers - Can learn from the firstmovers

- Reduce uncertainty by studying the first-movers

loyalty

- Ability to build sales volume ahead to latecomers Disadvantages

- no-existing experience - uncertainty in unfamiliar market

- pioneering cost (development, research costs) International market entry modes 1. Indirect and direct exporting Low risk Low cost 2. Contractual (franchising, licensing, contract manufacturing) 3. Foreign direct investment (FDI) 4. Cooperative ventures International cooperative ventures (ICVs)

- Strategic alliances (no equity) o Contractual arrangements between firms to cooperate o - Joint venture (equity) o Establishment of legal entity o Reduce risks and uncertainties - Acquisitions - Consortia

Motives for ICVs

- Minimise transaction costs

- hard to win over customers due to customer loyalty

- need to play catch up

- Organisational learning - Exchanging resources and knowledge Week 8 – 9: Strategic Capability What is strategic capability?

- 2 main elements o Resources that we have, factor of endowment  Machines, natural resoures  Balance sheet, cash flow  Managers, employees (workers) o Competences: what we do well   

Efficiency of production Ability to raise funds Skill and experience level

Where are competitive advantages from

Organisational capabilities

- Firms capacity to deploy resources (tangible/intangible and HR), for a desired results The VRIN framework

SWOT Analysis

Strength Weaknesses

Opportunities Threats International strategy framework

- Internationalisation drivers - Geographic advan...