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130 Cards in this Set

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globalization
shift towards interdependent global econ. and away from a closed market

shift towards integrated and interdependent world economy

2 facets:
globalization of mkts.
gloablization of production
globalization of markets
merging of distinct and serperate markets into one huge market-place
causes of globalization of markets
- falling trade barriers make it easy to sell internationally
- tastes and preferences of consumers around the world are turning into a global norm
- firms can create their markets by offering same general products around the world
globalization of prodcution
sourcing of goods and services from locations around the world to take advantage of differences of costs and quantities of factors of production
- companies can compete more effectively by lowering their costs in this way
World Trade Organization (WTO)
came after GATT

polices world trade system and makes sure that nation-states adhere to rules laid out in trade treaties signed by WTO members

promotes lower barriers to trade and investment

150 nations/97% of world trading nations are members
international monetary fund (IMF)
created in 1944

established to maintain order in the international monetary system
world bank
created in 1944

established to promote economic development
united nations (UN)
established in 1945 to:
- maintain international peace and security
- develop friendly relations among nations
- cooperate in solving international problems and promoting human rights
- harmonizing the actions of nations
drivers of globalization
delcining barriers to free flow of goods, services, and capital that has appeared since WWII -- tarrifs have fallen since 1950 and are now at about 4%

technolocigal change
international trade
firm exports goods or services to other countries
declining trade barriers
firms can view the world as their mkt.

firms can base production in locations for optimal productivity
role of technological change
made globalization possible

advancements have occurred in:
- telecommunications and microprocessors
- internet
- transportation

role of technology:
- lower transportation costs so firms can do business and produce around the world
- lower telecommunications costs so that firms can manage global markets
- low costs telecommunications create global mkt. place
- global communication networks and media are creating a worldwide culture
global economy of the 21st century
moving towards a more global economic system, but globalization is not in inevitable

can bring risks like the s/e asia financial crisis
multinational enterprises (MNEs)
business that have productive activities in 2+ countries
- there has been a rise in non-US multinationals
- growth in mini-mulinationals
changing world order
communism is disappearing

communist nations in europe and asia are now moving towards more free market and democratic govts.

this means these countries have many investment oppurtunities

due to unrest, risk is high, but return can also be very high

China is moving from 3rd world to industrial superpower

democratic reforms are taking hold in latin america. inflation and debt are decreasing -- substantial opportunities but also high risks
globalization debate
supporters: increased trade and investment can mean lower prices, higher economic growth, higher income, and more jobs

critics: can cause job losses, damage to the environment, and cultural imperialism of MNEs and global media
anti-globalization protests
40,000+ protesters came out for 1999 seattle WTO meeting in 1999 -- meeting was about cutting barriers to cross border trade and investment

protestors now regulary appear at most WTO and other global institution events
globalization, jobs, and income
critics: globalization is causing a loss of manufacturing jobs in advanced countries

supporters: benefits of this trend outweigh costs -- countries specialize in what they do best and export the rest. everything evens out
globalization and the world's poor
supporters: best way for developing nations to get stronger is to welcome free trade and begin to adopt democratic and free mkt. policies for debt foregiveness for debt incurred under totalitarian regimes
managing global businesses
keep in mind:
- countries are different
- wider range of problems confronted in international business
- firms must find ways to work work within limits imposed by govts.
- transactions involve changing foreign currency
political economy
how the political, economic, and legal systems of a country are interdependent; they interact and influence each other and in doing so affect the level of economic well-being
political system
refers to the system of govt. in a nation

can be assessed according to:
- individual vs. collectivism
- democratic vs. totalitarian
collectivism
political system that stresses the primacy of collective goals over individual goals; needs of society are considered more important than individual freedoms

- socialism
- communism
- social democrats
individualism
individuals should have freedom in their own economic pursuits; individual interests should take precedence
democracy
govt. is by the people, exercised directly or through elected representatives
totalitarianism
form of govt. in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties
legal system
rules that regulate behavior and processes are enforced and punishment for grievances are obtained
common law
based on tradition (country's legal history), precedent (cases that have come before courts in the past), and custom (ways in which laws are applied to certain situations)
- more flexible
- judges have the power to interpret law to certain cases
civil law
based on detailed set of law organized into codes
- less flexible that common
- judges only have power to apply laws
- ex.: germany, france, russia, japan, etc.
theocratic law
law is based on religious teachings
- ismalic is the most widely practiced
contract
doc. that specifies conditions under which exchange is to occur and details of the rights and obligations of the parties involved
contract law
body of law that governs contract enforcement; parties normally resort to this when once feels that the other has violated the agreement
- common law tends to draw up more specific contracts b/c of the vagueness of their gen. laws
- civil law contracts tend to be less detailed
- more expensive to draw up contracts under common law but greater flexilibty in judges handling disputes
- hard to approach contract disputes when contract has been violated in civil law system but was drawn up under contract law
united nations convention on contracts for the international sale of goods (CIGS)
establishes uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations
cross-cultural literacy
how cultural differences across and within nations affect the way that business is practiced
culture
system of values and norms that are shared among a group of people constitute a design for living
values
abstract ideas about what a group believes to be good, right, and desirable
norms
social rules and guidelines that prescribe appropriate behavior in certain situations
society
group of people who share a common set of norms and values
culture, society, and the nation state
no strict one-to- one relationship between a society and a nation state

nation states are political creations that can create one or more cultures

a culture can also embrace several nations
determinants of culture
values and norms of culture are the evolutionary product of a number of factors at work in a society such as religion, political and economic philosophies, education, and social structures
social structure
society's basic social organization

2 dimensions:
- degree to which the basic unit of social organization is the individual as opposed to the group
- degree to which a society is stratisfied into classes/castes
individual
building block of social org. in most western societies

high degree of managerial mobility

can make it hard to build teams

leads to dynamism and success of US econ.

leads to lack of company loyalty, more company competition, less ability to do team work
group
association of 2+ people who have shared sense of indentity and who interact with eachother in structured ways on basis of common expectations about eachother's behavior

in asian countries group is the primary building block of social structure

can discourage job switching and lead to business cooperation

can suppress individual creativty and initiative
social strata
hierarchal social categories; defined on the basis of characteristics such as family background, occupation, and income; people are born into a certain stratum

they differ by:
- degree of mobility
- significance attached to strata
social mobility
extent to which people can move out of the strata that they were born in to; varies
caste system
closed strata system in which social position is determined by birth into a certain family; can be tied to a certain occupation

- india
class system
less rigid form of social strata; position by birth can changed through acheivements or luck; people can go up or down
class conciousness
people tend to percieve themselves in terms of class background and this influences their relationships with other classes
ethics
accepted principles of right and wrong that govern conduct
ethical strategy
course of action that does not violate accepted principles
employment practice ethics
if work condition in host nation are clearly inferior multinational's home nation, business should apply:
- home country stds.?
- host country std.?
- something in between?

establish min. accecptable standards that protect human rights and dignity of workers and audit on reg. basis
human rights ethics
in many developing countries basic human rights are take for granted while in many developing countries they may not exist
ethical delimmas
situations where no available alternatives seem ethically acceptable

obligations of a firm are not always clear cut
ethical decision making
to make sure ethical decisions are considered in business, firms should:
- favoring hiring and promoting people with a good sense of personal ethics
- build culture that places high value on ethics
- make sure leaders articulate rhetoric of ethical behavior and act on it
- put decision making process in place that requires people to consider ethics in decision making
- develop moral courage
organizational culture and leadership
to foster ethical behavior firms must:
- explicitly articulate values that place strong emphasis on ethical decisons -- code of ethics
- repeatedly emphasizing the importance of ethics
- system of incentives for people who act on ethics
ethics officers
ensure that:
- employees are always trained in ethics - ethics is considered in the decision making process
- company's code of conduct is followed
moral courage
enables managers to walk away from decisions that are profitable but unethical

gives employee strength to say no when a superior tries to get him to do something unethical

gives employees courage to blow whislte on unethical behavior

does not come easily

can cause employees to lose their jovs
free trade
govt does not try to influence through quotas or duties
benefits of trade
smith, ricardo, heckscher-olin show why it is good to trade products a country could probably produce on its own

- allows country to specialize in products it can produce more efficiently
- countries can import goods that can be made more efficiently elsewhere

limits on imports often help producers, not consumers
patterns of international trade
some patterns are easy to explain and some are not

explained by comparitive advantage

life-cycle theory

new trade theory: countries sometimes specialize in production and export of products b/c certain industries can only support a limited amt. of firms -- first mover advantage
merchantalism
it is in a country's best interest to export more than it imports
- advocates govt. intervention to achieve a surplus in the balance of trade
- zero-sum game: gain of one country results in loss by another
absolute advantage
when one country is more efficient than others in producing a good

countries should specialize in these goods and trade for others
comparative advantage
countries should produce the goods that they specialize in and import what they do not, even if they could produce it more efficiently than another country
extensions of ricardian model
resources do not always more freely from one economy to another an job losses may occur

unrestricted free trade is beneficial but bc of diminishing returns gains may not be as great as the simple model suggests

opening a country to trade can:
- increase stock of resources as supplies become available from abroad
- might increase efficiency of resource untilization and free up resources for other things
- can increase economic growth
hecksher-ohlin theory
comparative advantage arises from differences in factor endowments - ext. to which a country is endowed resources such as land, labor, capital, etc.

resources should export goods created from abundant factors and import goods made from factors that are scarce
samuelson critique
gains in trade may not alway be beneficial; ability to offshore service jobs may cause a mass migration into the Us, causing wages to fall
leontief paradox
by wassily leontief

theorized that US would export capital intense goods since it had so many resources and import labor intensive products

however he discovered that it was actually the opposite -- leading it to be called a paradox
product life-cycle theory
raymond vernon

as products mature both the sales and place of production will shift due to flow and direction of trade

wealth of US gives firms incentives to develop new products and as demand increased the Us would begin to export to other countries

eventually developed countries would begin producing these goods at home to meet demands of their markets; US may also start to produce in these countries eliminating the amt of exports

product would eventually become more standard and price would be the competitive weapon

producers in countries where labor was cheaper may eventually be able to export to the US; these countries may eventually get production advantage

US eventually becomes the importer

- may be too ethnocentric
economies of scale
unit cost reductions associated with large scale output; being able to spread out fixed costs
new trade theory
ability of firms to gain economies of scale can have large impact on international trade
- through economies of scale variety of trade can be increased and prices can be decreased
- global trade may only be able to support a small amt. of these enterprises

increasing variety and reducing costs: with trade, markets are large enough to support economies of sclae; allows for specialization of products, economies of scale, and greater variety at lower prices

pattern of trade caused by first mover advantages and economies of scale; first movers can gain economies of scale on products where economies of scale are significant and it represents a large amt of world demand
national competitve advantage: porter's diamond
porter tried to explain why a nation achieves success in a certain industry and indentified 4 attributes that promote competitive advantage:
- factor endowments
- demand conditions
- relating and supporting industries
- firm strategy, structure, and rivalry
factor endowments
nations position in factors of production necessary to compete in give industry
can lead to competitive advantage
can be basic or advanced
demand conditions
nature of home demand for industry's product or service
nature of demand influences capabilities
sophisticated and demanding customers pressure firm to be competitve
relating and supporting industries
presence or absence of supplier industries and and related industries that are internationally competitive

presence can spill over into other industries

successful industries tend to be grouped into clusters in countries
firm, strategy and structure rivalry
conditions governing how counties are companies are created, organized, and managed and the nature of domestic rivalry on firm's competiteness

this all impacts firms's competitiveness

diff. mgt. ideologies impact development of competitve advantage

rivalry can improve products
evaluation of porter's theory
govt. polict can:
- affect demand through product standards
- influence rivalry through regulation of antitrust laws
- impact of skilled workers and advanced education and infrastructure

the 4 attributes, govt. policy, and chance work at reinforcing system, complementing eachother and creating the conditions appropriate for competitive advantage
tarrifs
taxes on imports to raise costs relative to domestic products

increase govt. revenues, provide protection to domestic markets agaisnt foreign producers, and force consumers to pay more for imports

pro-producer, anti-consumer

reduce effectiveness of world economy
specific tariffs
levied per unit of good imported
ad valorem tariffs
levied in proportion to the price of the good
subsidies
govt. payments to domestic producers; consumers usually absorb costs

help producers in 2 ways:
- help gain export mkts.
- help compete with lower import prices
import quotas
quoata on amt. of goods that can be imported
tariff rate quotas
hybrid of quota and tariff; lower tariff is applied to goods within quota but gets higher once quota is exceeded
voluntary export restraints
quoatas on trade imposed by exporting country, typically at request of importing company's govt.
quota rent
extra profit producers make when supply is artificially limited by quota
local content requirement
some specific fraction of good must be produced domestically

benefit domestic producers, but consumers must pay higher prices
administrative trade policies
rules designed to make it hard for imports to enter a country

hurt consumers by denying them access to superior products
uruguay round and WTO
began at GATT negotiations in 1986; talks focused on:
- int. prop. and services
- adressing trade issues related to services, intellectual prop., and agriculture
- the WTO
- enforcement mechanisms to make WTO more effective at policing

WTO encompassed GATT along with gen. agreement on trade and services (GATS) and agreement on trade related aspects of international property rights (TRIPS)

WTO was created overall
WTO: experience to date
has emerged as an advocated for future trade deals, esp. with services

policing and enforcement have a had a positive effect

most countries have adopted their recomendations for trade disputes

in 1997 90% of telecommunications mkt. agreed to opend mkts. to foreign competition and to abide by rules

about 102 countries have agreed to open banking, insurance, etc. in varing degress to world market

covers cross border trade as well as FDI

1999 WTO meeting in seattle
future of WTO: unresolved issues and the Doha round
current agenda:
- rise of antidumping policies
- level of protectionism in agriculture
- lack of protection for property right in developing nations
- high tarriffs

TRIPS

lowering tariff rates

Doha: cutting tariffs on ind. goods and services; agri. subsidies; reducing investment barriers; limiting the use of antidumping laws
Doha rounds
Doha: cutting tariffs on ind. goods and services; agri. subsidies; reducing investment barriers; limiting the use of antidumping laws
foreign direct investment
firm invests directly in new facilities to produce and/or market in foreign country

greenfield or acquisition
greenfield investment
establishment of new operation in a foreign country
acquistion
merger of existing firm in a foreign country
flow of FDI
amt undertaken in a given time period
stock of FDI
total acculated value of foriegn owened assets at a given point in time
outflows of FDI
flow of FDI out of a country
inflows of FDI
flow of FDI into a country
trends in FDI
greater flow and stock of FDI in the last 30 yrs.

FDI has grown more rapidly than world trade bc:
- threat of protectionism
- shift towards democracy and free mkts. encourage it
- gloablization is having a positive impact -- firms want to have a presence in the global economy
direction of FDI
historically directed at developed nations of the world with the US being a target

inflows have remained high in 2000s for US and EU

latin america and asia now seeing FDI inflows
gross fixed capital
total amt. of capital invested in factories, stores, buildings, etc.

the greater the capital investments in an econ., the better the prospects

FDI can be an important source of this and a determinant of future growth rate
greenfield vs. acquistion
acquisitions are more common
easier to execute
cheaper
less risky
easy to improve/increase efficiency
FDI: shift to services
driven by:
- gen. move in developed countries to services
- many services need to produced where they are consumed
- more liberal policies on services
- rise of telecommunications
exporting
producing goods at home and then shipping them

can be constrained by trasportation costs and trade barriers

may be a response to threatened trade barriers or tariffs or quotas
licensing
granting foreign entity right to sell firms product in return for royalties

does not give firm tight control over operations

competitve advantage based more on mgmt., mkting, etc. and less on actual product
pattern of FDI
firms with similar products often undertake FDI around the same time and in similar locations

strategic rivalry in the global mkt. place

multipoint competition

lifecycle of product

ecelectic paradigm:
- location specific advantages: resource endowments or assets tied to a certain location that a firm finds valuable in combning with own assets
- externalities: spillovers occur when companies in same industry locate to the same pace
pattern of FDI
ecelectic paradigm:
- location specific advantages: resource endowments or assets tied to a certain location that a firm finds valuable in combning with own assets
- externalities: spillovers occur when companies in same industry locate to the same pace
pragmatic nationalism
between radical and non-interventionalist

FDI has both benefits and costs

FDI should be allowed only if benefits outweigh the costs
host country benefits of FDI
1. resource transfer: bringing technology, mgmt., and capital to places where it would not be available otherwise
2. employment effects: creating new jobs
3. can help countries achieve a current account surplus
4. effects on competition and economic growth
host-country costs
1. adverse competition affects
2. adverse effects on balance of payments: an FDI importing can cause this
3. percieved loss of national soveirgnty and autonomy
home-country benefits
good balance of payments from the inward flow of company earnings
employment effects from outward FDI
gains from learning valuable skills from foreign mkts
home-country costs of FDI
initial capital outflow required to finance FDI
if purpose is to serve as low cost labor location
employment can be affected if FDI is a sub. for domestic production
intrenational trade theory
home country concerns about neg. effects of off-shore production (FDI undertaken to serve home mkt.) may not be valid
regional economic integration
agreement between countries in the same region to reduce trade barriers have free flow of goods, services, factors of production

supposed to promote trade, but can also lead to competing trade blocks
levels of econ intergration in order from least to most integrated
free trade area, customs union, common market, economic union, political union
free trade area
eliminates trade barriers but members determine how to handle trade with nonmembers

european free trade union
nafta
customs union
eliminates trade barriers among member and adopts a common nonmember policy

andean pact
common market
no trade barrier to members, same policy for nonmembers, and free flow of factors of production

MERCOSUR
economic union
free flow of trade and factors of production among members, same policies for nonmbers, common currency, monetary and fiscal policy, harmonized tax rates'

EU
political union
central political apparatus that coordinates economic, social, and foreign policy among member states
economic case for integration
all countries gain

is an attempt to exploit gains from free trade investment
case against integration
can cause loss of national soveirgnty

only beneficial if amt. of trade that it creates is greater than the amt. of trade that it diverts
the political structure of the european union
euro council: resolves major policy issues and sets policies

euro commission: implementing EU law and making sure that member states comply

council of the EU: ultimate authority

court of justice: supreme court of appeals for EU laws
establishment of the euro
maastrict treaty

made EU 2nd largest currency zone

adopted by 12 out of 15 of the countries

volaitile history with the US dollar
benefits of euro
savings of not have to transfer currencies
would make it easier to compare prices across europe
prodcuers must find cheaper ways of doing business to increase profit margins
gives boost to highly liquid capital market
would increase range of investment options
costs of the euro
national authorities lose control over monetary policy

not an optimal currency area: area where similarities make it economically feasable to to adopt single exchange rate and currency
enlargement of EU
many countries have applied for membership

10 countries joined in may 04 expanding the union to 25 states

in 2007 bulgaria and romania joined

there will not free trade or adoption of the euro until at least 07
North american trade agreement (NAFTA)
became law in jan. 1994

between US, canada, and mexico

abolished tariffs on 99% of goods

opened cross border trade on services

protects int. prop. rights

removes most restrictions on FDI

allows each to employ their own environmental stds.

esablishes two commission to gives fines, etc. when environmental issues or public safety are ignored
support for NAFTA
mexico will benefit from low cost production there and that will help their economy

US and Canada will benefit from the Mexican market and the low costs of goods produced there

US and Canadian firms that produce in Mexico will have edge on competitio
critics against NAFTA
jobs would be lost and wage levels would decline due to moving production to mexico

mexican workers would go north

mexico would lose soveignty

environment would be damaged due to mexico's lax environmental stds.
MERCOSUR
originated as a trade pact between brazil and argentina in 1988 and expanded to include paruguay and urugauy in 1990

making progress reducing trade barriers

may actually be diverting trade -- less competition in worldwide market