What is international Business?

1. A transaction between paries located in 2 countires
2. All the complexities of domestic business, but with additional layers:

• differing political, legal and economic systems, and levels of uncertainty
• differing cultures and consumer tastes
• differing levels of development
• different currencies, interest rates and rates of growth plus more..

implies that firms are basing individual productive activities at the optimal world locations for the particular activities. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products, since these are being replace by "global" products.

Example: Tee Shirt made all over the world

1) education

2) limited liability forms of business ownership

3)technology

4) growth in property rights, including intellectual property protection

5) diminishing restrictions on trade and investment flows

6) growing homogeneity in tastes

7) Plus other factors...

Globalization has period of growth and decline; not a constant process. What are the notable stops?

1. Great Depression
2. World war I and II
3. Now? 
4. Mobility of workers, visas, passports and security

1492-1800

Military force drove global integration (often inspired by religion or imperialism or a combination of both)

1800-2000 (interrupted by the Great Depression and the World Wars)

Multinational corporations drove global integration

technological innovation in hardware enabled pursuit of new markets-steamships, railroads, telephones, computers

breakdown of soviet system symbolized the end of this period of globalization: "the walls fell down"

2000-present

Shringing the world from a small size to a tiny size

individiuals (not countries or companies) will be the primary force driving globalization

software (not hardware) facilitates the new power of indiviual entrepreneurship

Global fiber-optic network allows individuals to connect seamlessly (call centers, radiologists, accountants, reservations)

1. Command economy: an economic system in which the government plans the goods and services that  a country produces, the quantity it which they are produced and the prices at which they are sold. Consistent with "collectivist" ideology of society. Instead of growing and becoming more prosperous, these economies tend to stagnate
2. Market economy: an economic system in which the interaction of supply and demand determines the quantity in which goods and services are produced. has a major positive impact on economic growth and development. Innovation and entrepreneurship require a market economy.
3. Mixed economy: Between Market and Command economy. in a mixed economy, certain sectors of the economy are left to private ownership and free market mecanisms while other sectors have significant state ownershp and government planning. . Government tends to take into state ownership troubled firms whose continued operation is thought to be vital to national iterests.

a political philosophy advocating substantial public involvement through govrnment ownership, in the means of producting and distribution

1. communists: those who believe socialism can be achieved only through revoution and totalitarian dictatorship.
2. social democrats: those committed to achieving socialism by democratic means. 

an emphasis on the importance of guaranteeing individual freedom and self-expression. stresses that the interests of the individual should take precedence over the intersts of the state

it is built on 2 central tenants:

1. an emphasis on the importance of guaranteeing individual freedom and self expression
2. the welfare of the society is best served by letting people pusue their own economic sel-interest, as opposed to some collective body (such as government) dictating what is in society's best interest

political system in which government is by the people, exercised either directly or through elected representatives

representative democracy: a politial system in which citizens periodially elect indiviuals to represent them. 

democracy and individualism go hand in hand

form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parites.

1. communist totalitarianism: a version of collectivism advocating that socialism can be achieved only through a totalitarian dictatorship
2. theocratic totalitarianism: a political system in which political power is monopolized by a party, group, or individual that governs according to religious principles
3. tribal totalitarianism: a political system in which a party, group, or individual that represents the interests of a particluar tribe monoplizes political power. 
4. right-wing-totalitarianism: a political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, frequently on the grounds that it would lead to the rise of communism

a system of law based on tradition, precedent, and custom

when law courts interpet common law, they do so with regard to these characteristics. This gives a comon law system a degree of glexibility that other systems lack

As new precendents arise, laws may be altered clarified, or ammended to deal with new situations

a system of law based on a detailed set of written laws and codes

Judges in a common law system have the power to interpret the law, whereas judges in a civil law system have the power only to apply the law

a system of law based on religious teachings

islamic law is the most widely practiced theocratic legal system in the modern world

contract law: the body of law that governs contract enforcement

contracts drafted under a common law framework tend be very detailed with all contingencies spelled out. In a civil law system, however, contracts tend to be much shorter and less specific because many of the issues are already covered in the civil code

products of the mind, such as computer software, a screenplay, a music score, or the chemical formula for new drug; can be protected by patents, copyrights, and trademarks.

1. patent: grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sales of the invention.
2. copyright: the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit.
3. trademark: designs and names, often officially registered, by which merchants or manufacturers designated and differentiate their products

1500-1800

an economic philosophy advocating that counties should simultaneously encourage exports and discourage imports

to achieve this, imports were limited by tariffs and quotas, while exports were subsidized

a country will gain wealth when exports exceeds imports

Goals:

1. to earn goal and silver
2. gain wealth=store of government's gold and silver
3. have a trade surplus (not the current U.S. situation)
4. Maximize exports through subsidies
5. Limit imports through tariffs and quotas, or other methods
6. Flaw: a "zero-sum game" (zero sum game is a situation in which an economic gain by one country results in an economic loss by another

Adam Smith

a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it

Smith's basic argument is that a country should never produce goods at home that it can buy at a lower cost from other countries 

David Ricardo took adam smith's theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods.

It makes send for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that is produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

ricardo's theory of comparative advantage is useful, but there are some issues/assumptions:

the world does not consist of two countries and tow goods; no transportation costs assumed; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources and no effects on income distribution within countries

occurs when more units of resourcs are required to produce each additional unit.

it is more realistic to assume diminishing returns than constant returns because:

1. not all resources are of the same quality. As a country tries to increase its output of a certain good, it is increasingly likely to draw on more marginal resource whose productivity is not as great as those initially employed. the result is that it requires even more resources to produce an equal increase in output. (example: some land is more productive than other land. As ghana tries to expand its output of cocoa, it might have to utilize increasingly marginal land that is less fertile than the land it originally used.)
2. different goods use resources in different proportions. (example: imagine that growing cocoa uses more land and less labor than growing rice, and that Ghana tries to transfer resources from rice production to cocoa production. The rice industry will release proportionately too much labor and too little land, the cocoa industry will have to shift toward more labor intensive methods of production.

this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

this theory argues that free trade is beneficial

Relative factor endowments: the extent to which a county is endowed with such resources as land, labor, and capital

• resources vary among countries-oil,labor
• goods vary in the amount of resources needed to produce them
• a country will specialize in production of goods that align with its relative factor endowments of land, labor and capital.
• What would a country with an abundance of labor export?

Raymond vernon proposed this theory in the mid-1960s

Vernon argued that most new products were initially produced in America

the consequence of these trends for the pattern of world trade is that over time the United States switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations

1970s

the ability of firms to attain economies of scale might have important implications for international trade

Economies of Scale: cost advantages associated with large-scale production. Economies of scale are a major source of cost reductions in many industries.

New trade theory makes 2 important points:

1. through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average costs of those goods. 
2. in those industries where the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises.

 according to new trade theory, each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods--thus trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology

Trade is thus mutually beneficial because it allows for the specialization of production, the realization of scale economies, the production of a greater variety of products, and lower prices.

First mover advantage: advantages accruing to the first to enter a market. the first movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match

implications of new trade theory:

1. Nations may benefit from trade even when they do not differ in resource endowments or technology
2. a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce the good.
3. it is in variance with the Heckscher-Ohlin theory which suggests that a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture.
4. most contentious implication is the argument that it generates for government intervention and strategic trade policy

Michael porter-1990

Porter theorizes that 4 broad attributes of a nation shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage. These attributes are:

1. Factor endowments: a nation's position in factors for production such as skilled labor or the infrastructure necessary to compete in a given industry.
2. Demand conditions: the nature of home demand for the industry's product or service.
3. Relating and supporting industries: the presence or absence of supplier industries and related industries that are internationally competitive.
4. Firm Strategy, structure, and rivalry: the conditions governing how companies are created, organized and managed and the nature of domestic rivalry

• Cost competitiveness= comparative advantage
• importance of location for strategic positioning
• innovation is key, especially as technological change in countries like China and India is happening faster than developed economies are able to cope with

1. tariffs
2. subsidies
3. import quotas
4. voluntary export restraints
5. local content requirements
6. administrative policies
7. antidumping duties

tax levied on imports

Special tariff: a tariff levied as a fixed charge for each unit of good imported

Ad Valorem Tariff: a tariff levied as a proportion of the value of an imported good

Who are the winners and loser through the use of tariffs?

• government gains because the tariff increases gvernment revenues
• domestic producers gain because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods.
• consumers lose because they must pay more for certain imports

government financial assistance to a domestic producer

by lowering production costs, subsidies help domestic producers in 2 ways:

1. competing against foreign imports 
2. gaining export markets

import quota: a direct restriction on the quantity of some good that may be imported into a country

tariff rate quota: the process of applying a lower tariff rate to imports within the quota than those over the quota (common in agriculture, where their goal is to limit imports over quota)

voluntary export restraint (VER): a quota on trade imposed by the exporting country, typically at the request of the importing country's government. (foreign producers agree to VERs because they fear ore damaging punitive tariffs or import quotas might follow if they do not)

**import quota or VER always raises the domestic price of an imported good. 

Quota Rent: the extra profit producers make when supply is artificially limited by an import quota.

Hurts consumers and Helps producers: Raises domestic prices of imported goods (and possibly exported good)

a requirement that some specific fraction of a good be produced domestically (this can be expressed in physical amount such as 75 percent of component for this product must be produced locally or value amount such as 75 percent of the value of this product must be produced domestically)

it was initially used by developing countries to help shift from assembly to prodcution of goods

developed countries beginning to implement

Benefits producers, not consumers

bureaucratic rules designed to make it difficult for imports to enter a country

some countries impose a lot of rules:

• tulip bulbs-cutting bulbs (japan)
• federal express-opening packages (japan)
• licensing arrangement
• administrative delays
• reciprocal requirements
• service restrictions
• environmental standards
• currency and investment controls

dumping: sellin goods in a foreign market at below their costs of production or below their "fair market value"

used to unload excess production or predatory pricing

antidumping policies are used to punish foreign firms by protecting local industry from "unfair" practices and imposing "countervailing" duties

national accounts that track both payments to and receipts from other countries

it accounts for a country's international transactions for a period of time, typically a calendar year.

includes:

1. the current account
2. the capital/financial account

double entry system so each (+) transaction has a balancing (-) transaction. Also each current account entry is offset by a financial account entry. So, overall the account should be in balance.

Positive (+) transactionson current account result from receipt of payment from foreigners

• Merchandise exports
• transportation and travel receipts
• income received from investments abroad
• gifts received from foreign residents
• aid received from foreign governments

Occurs when a firm invests directly in facilities to produce or market a product in a foreign county.

In the US, FDI occurs whenever a U.S. citizen, organization or affiliated group takes an interest of 10 percent or more in foreign business entity.

involves ownership of entity abroad for:

• production
• marketing/service
• R&D
• raw materials or other resources access

Horizontal: FDI in the same industry as the firm operates at home

Vertical (2 types):

• Backward: providing inputs (raw materials, parts) for a firm's domestic production processes
• Forward: an industry abroad sells the outputs of the firm's domestic production processes

This takes on 2 forms:

1. greenfield investment: No local entity exists or is available for sale, local financial incentives may encourage, no inherited problems, long lead time to generation of sales or other desired outcomes. involves the establishment of a new operation in a foreign country
2. Merge and acquisition (M&A): quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problem. involves acquiring or merging with an existing firm in the foreign country. (acquisitions can be minority where the firm take a 10 percent to 49 percent interest in the firm's voting stock or majority where the firm takes 50 to 99 percent  or full outright stake where the foreign interest is 100 percent)

• FDI circumvents potential future trade barriers and transportation costs.
• keeps up with competition
• control
• potential profits
• but... FDI is expenseive and risky compared to exporting or licensing

Radical view: inbound FDI is harmful

• Multinational enterprises(MNE) is an instrument of imperialist domination
• exploit host to the advantage of the home country
• argue that MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
• Because of this , according to the radical view, FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward and dependent on advanced capitalist nations for investment, jobs, and technology

Benefits:

• resource-transfer (supplying capital, technology, and management resources)
• employment (direct effects arise when a foreign MNE employs a number of host-country citizens and Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE)
• balance of payment: (1) import substitution (2) source of exports potentially increases
• more competition and lower prices

Benefits:

• Adverse BOP current account effects mitigated by inward flow of foreign earnings
• positive employment effects from increased exports of raw materials or assemlies to the overseas subsidiary

Encourage outward FDI:

• risk reduction policies (financing, insurance, tax incentives)

Inward FDI encouragement:

• invest incentives
• Job creation incentives

• a system of values and norms shared by a society
• values: abstract ideas about good, the right, and the deirable
• social rules and morals (and often laws)

degree of social inequality considered normal by people. Distance between individuals at different levels of a hierachy

scale: from equal (small power distance) to extremely unequal (large power distance

Higher:

• directive styles leadership
• social strata

degree to which people in country prefer to act as individuals rather than in groups

describes the relations between the individual and his/her fellows

degree of need to avoid uncertainty about the future

degree of preference for structured versus unstructered situations

high:

• formal, rigid relationships and patterns
• people with more nervous energy
• risk averse

Division of roles and values in a society

musculine values prevail:

• assertiveness
• success
• competition

Atttudes towards:

• time
• persistence
• status in society
• "Face"
• Respect for tradition
• Gifts and Favors

independent vs interdependent

egalitarian vs hierarchical

risk vs restraint

direct communication vs indirect

task orientation vs relationship orientation

short term relationships vs long term

low comfort with silence vs High

self initiated vs awaits direction

low context vs high context

economic factors:

1. Balance of Payments
2. interest rates
3. inflation
4. monetary and fiscal policy
5. international competitiveness
6. monetary reserves
7. government controls and incentives
8. importance of currency in world

the foreign exchange (forex market)

it's almost a 24/7 market (except weekends and bank holidays)

USD 6 trillion worth of exchange daily for:

1. trade
2. investments
3. speculation
4. risk management
5. tourism

the exchange rate at which a foreign exchange dealer will convert one currency into another currency on a particular day

example: 1 EUR=1.40 USD

settlement for "spot" deals:

• 2 business days for most currencies
• 1 business day for USD with Canada or Mexico

When two parties agree to exchange currency and execute the deal at some specific date in the future

delivery for "forward" deals"

• one, three or six months
• up to one year common for widely traded currencies

in competitive markest free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their prices is expressed in terms the same currency

example: US/Euro exchange rate is $1=.6 euro. A jacket selling for $100 in New York should retail for 60 Euros in Paris

By comparing the prices of identical products in different currencies, it should be possible to determine the "real" or PPP eschange rate if markets were efficient

in relatively efficient markets (few impediments to trade and investment) then a "basket of goods' should be roughly equivalent in each country) 

Big Mac Index

government controls the limit the legal uses of a currency in international transactions

in general, only the relatively rich industrial countries have fwe or no currency exchange controls

methods of control:

1. Official exchange rates
2. convertibility restrictions: 

• freely convertible: a country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it
• externally convertible currency: non residents can convert their holdings of domestic currency into foreign currency, but the ability of residents to convert the currency in limited in some ways
• nonconvertible currency: a a currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.

closest approach to a perfect competition -aggregate supply and demand for currency affects exchange rates - not government intervention

equilibrium follows from overall macroeconomic indicators

governments focus more on interest rates and fiscal policy

Governments intervene in the currency markets as they perceive their national interests to be served

nations may explain their interventions in terms of "soothing market irregularities" or "assuring orderly markets"

exchange rate regime where a country will peg the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rses too.

pegged exchange rates are popular among many of the world's smaller nations

refinance post-WWII reconstruction and development

Provides low-interest long term loans to developing economies

Issues with World Bank

1. voting power
2. accountability
3. future role?

an arm of the bank created in 1960

raises funds from member states

loans only to poorest countries

50 year repayment at 1% per year interest