Globalization in Business PDF

Provide a recommendation about where to invest and justify the decision: -​ new country for producing its devices and the main goal is to reduce costs. Course Outline: -​ Don’t need the textbook and don’t need connect (can find it online if I want) Risk assignment (presentation)- feb 12th (w...

Provide a recommendation about where to invest and justify the decision: -​ new country for producing its devices and the main goal is to reduce costs. Course Outline: -​ Don’t need the textbook and don’t need connect (can find it online if I want) Risk assignment (presentation)- feb 12th (which country is less risk management to invest) -​ 3 to 6 members per group -​ 3 to 5 pages (15%) -​ No presentation for the first assignment -​ Can also choose 3 countries (but should be from 3 different continents) Final exam: cumulative 50 to 60 multiple choice, 2-3 cases -​ Case studies Course project: a team. Chapter 1- Globalization Learning objectives 1. Define the terms globalization, globalization of markets, and globalization of production. 2. Examine the rise and functions of global institutions. 3. Examine Drivers of Globalization. 4. Illustrate the changing demographics of the global economy. 5. Globalization debate: Impact of globalization on job security, income levels, labour and environmental policies, and national sovereignty. 6. Understand opportunities and challenges that business managers must confront in Canada and beyond. 7. Understand how establishing and committing to a global supply chain code of conduct can result in sustainable international operations. Labour is not cheap but some sources exist in certain countries and its way cheaper than making it in Canada. -​ China and india were the last two countries to join globalization Opening Case: Globalization of Production at Bombardier Designated Metal Connection (DMC) from the United States, Kobe Steel LTD from Japan, Chengdu Sigma Precision Components from China, Chemetall GMBH from Germany, Cheltenham Tool Co. Ltd. from the U.K., Centro Tratamientos from Spain, Castle Metals from Mexico. Lack of Barriers to Trade and Investment Transportation – sold to Alstom SA (France)  Commercial Line – sold to Airbus (multinational – France, Spain, Netherlands) What Is Globalization? Globalization refers to the shift toward a more integrated and interdependent world economy. -​ Make a product that everyone can enjoy. Globalization has several different facets, including: Globalization of Markets Globalization of Production Globalization of Consumers Globalization of Markets and Consumers -​ Thailand is a good place for investment, Vietnam is also for americans. -​ Elon musk is investing in china. Refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell internationally. Tastes and preferences of consumers in different nations converge on some global norm, thereby helping to create a global market Consumer products such as Citicorp credit cards, Apple iPhones, offer a standardized product worldwide, helping create a global market. Globalization of Production Refers to the sourcing of goods and services from locations around the world to take advantage of national differences in costs and quality of factors of production(labor, energy, land and capital). Companies lower overall cost structure and/or improve quality or functionality of product offering, thereby allowing them to compete more effectively. Global institutions Global institutions help manage, regulate, and police the global marketplace; Promote the establishment of multinational treaties to govern the global business system. Including the following organizations: United Nations (1945) World Trade Organization (WTO) preceded by the GATT International Monetary Fund (IMF) World Bank World Trade Organization (WTO) www.wto.org Responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states -​ 2 people from the WTO will witness and sign whatever is happening in the agreement between countries.  International Monetary Fund and World Bank (created in 1944) -​ Can give loan for struggling countries -​ China one child policy: The USA was scared of their growing numbers. IMF was to maintain order in the international monetary system Lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value World Bank was to promote economic development Provides low interest rate loans to cash-strapped governments that wish to undertake infrastructure investments (building dams or road systems,..). International Monetary Fund The IMF loans come with strings attached: Countries are required to adopt specific policies aimed at returning their troubled economies to stability and growth. Some critics charge that the IMF’s policy recommendations are often inappropriate; We will look at the debate over the role of the IMF in Chapter 10. The World Bank (WB) -​ Getting money from all these rich countries to minimize immigration (keep your people into your own country) but not happening because of corruption. -​ If they give a loan, a lot of countries are not able to pay back and the interest increases every time they need more money. WB is a group comprised of the following: IBRD- the Int’l Bank for Reconstruction and Development IDA- International Development Association IFC- International Finance Corporation MIGA- Multilateral Investment Guarantee Agency ICSID- International Centre for Settlement of Investment Disputes -​ Most often it is the IBRD that is involved in international business opportunities for Canadian companies -​ Canada's Dept. of Foreign Affairs has a section on their website providing an overview of the steps a company must take to be involved with World Bank projects Drivers of Globalization (1) Two macro factors seem to underlie the trend toward greater globalization: ​ Decline in barriers to the free flow of goods, services, and capital, since the end of World War II ​ Technological change in communication, information processing, and transportation Declining Trade and Investment Barriers Lowering barriers to international trade enables firms to view the world, rather than a single country, as their market. Reducing and eliminating trade and investment barriers allows firms to base production at the optimal location, serving the world market from that location. A firm might design a product in one country, produce component parts in two other countries, assemble the product in yet another country, and then export the finished product around the world. Technological Change Technological change has made globalization of markets and production a tangible reality. Since the end of World War II, the world has seen major advances in: Communication, Information processing, Transportation technology and Explosive emergence of the Internet and World Wide Web. Technological Change Microprocessors and Telecommunications Development of the microprocessor enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed. Satellite, Optical fiber, wireless and Internet technologies rely on microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways. Technological Change Internet In 1990, fewer than 1 million users were connected to the Internet. By 2019, approximately 4 billion Internet users. The Web makes it much easier for buyers and sellers to find each other, wherever they may be located and whatever their size. It enables enterprises to coordinate and control a globally dispersed production system in a way that was not possible 25 years ago Technological Change Transportation Technology Several major innovations in transportation technology have occurred since World War II: Development of commercial jet aircraft and superfreighters reducing time needed to get from one location to another; has effectively shrunk the globe Introduction of containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances The Changing Demographics of the Global Economy The Changing World Output and World Trade Picture -​ If the american economy goes down then we are down -​ 60% of investment is coming from America -​ 80% of our economy is going to U.S so we will be doomed. Changes in Foreign Direct Investment (FDI) ​ Among developing nations, the largest recipient of FDI has been China (received between 2004 and 2012 between $60B to $100B a year, followed by Brazil, Mexico, and India. ​ Sustained flow of FDI into developing nations is an important stimulus for economic growth in these countries The Changing Nature of the Multinational Enterprise A multinational enterprise (MNE) is any business that has productive activities in two or more countries. Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise: The rise of non-U.S. multinationals, particularly Japanese multinationals, and The growth of mini-multinationals Non-U.S. multinationals (japan) -​ Countries have more trust between each other and borders are open. The large number of U.S. multinationals reflected U.S. economic dominance in the three decades after World War II while, The large number of British multinationals reflected that country’s industrial dominance in the early decades of the twentieth century Globalization of the world economy and Japan’s rise to the top rank of economic powers has resulted in a relative decline in the dominance of U.S. and British firms in the global marketplace  If we look at smaller firms, we see significant growth in the number of multinationals from developing economies. The Rise of Mini-Multinationals Most Int’l trade and investment still conducted by large firms but, Many medium-sized and small businesses are becoming increasingly involved in international trade and investment. Example: International Road Dynamics (IRD) of Saskatchewan has subsidiaries in the United States, Chile, China, Belgium. Iceculture Inc., based in Ontario with a staff of 15 export to Britain, Europe, South Africa, Iceland, etc. The Changing World Order -​ south korea is doing better than a lot of developed countries The economies of most of the former communist states are in very poor condition, and their continued commitment to democracy and free market economics cannot be taken for granted. More quiet revolutions have been occurring in India, China, and Latin America. Their implications for international businesses may be just as profound as the collapse of communism in Eastern Europe China continues to move progressively toward greater free market reforms. (nobody was expecting of the speed of china, they kept the money in their country and they started buying manufacture, company in the U.S to keep expanding) If what is occurring in China continues for two more decades, China may move from developing economy to industrial superpower status even more rapidly than Japan did. Throughout most of Latin America debt and inflation are down; Governments are selling state-owned enterprises to private investors; FDI(foreign direct investment) is welcomed and the region’s economies are growing; These changes have increased the attractiveness of Latin America, both as a market for exports and as a site for FDI. -​ China and Venezuela had a contract for oil and were given unlimited time which was stupid because they are getting no money and China is giving them plastic to Venezuela instead of money. -​ Even Americans can’t help Venezuela because they are not that stable and need China. -​ India is exporting oil through the Russians just to take away the domination from the U.S. -​ FDI is mostly owned by U.S. The Globalization Debate Is the shift toward a more integrated and interdependent global economy a good thing? -​ Oil and gas production in nigeria is in control of U.S Anti-globalization arguments: Harmful effects on jobs and income Labor policies  Environmental impact National sovereignty World’s poor Globalization, Jobs and Income Outsourcing of Canadian jobs to developing countries: fears of a long-term harmful effects on Canada’s well- being. (Example: Gildan Activewear Inc. Montreal). Technological change has had a bigger impact than globalization on the declining share of national income enjoyed by labour. The solution is not in limiting free trade and globalization, but in increasing society’s investment in education to reduce the supply of unskilled workers Globalization, Labour Policies A second source of concern is less developed countries lack adequate regulations to protect labour and the environment from abuse by the unscrupulous. Globalization critics often argue that adhering to labour and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace Globalization and National Sovereignty Another concern is increasingly interdependent global economy shifts economic power away from national governments toward organizations such as WTO, EU and UN. The WTO is a favourite target of those who attack the headlong rush toward a global economy Globalization and the World’s Poor Critics of globalization argue that despite the supposed benefits associated with free trade and investment, the gap between the rich and poor is widening. While some of the world’s poorer nations are capable of rapid periods of economic, there is stagnation among the world’s poorest nations' economies. Managing in the Global Marketplace The task of managing an international business Differences between countries require that an international business vary its practices country by country; Cross-border transactions also require that money be converted from the firm’s home currency into a foreign currency and vice versa. Sustainability in Practice ADIDAS GROUP: APPROACH to SUSTAINABILITY and SUPPLY-CHAIN MANAGEMENT APPROACH to LABOUR STANDARDS What has been the result and benefit to Adidas Group? Implications for Business International Organizations – Open Environment for goods and services The North – South Divide The Role of Technology in International Trade Chapter 2- Country Differences in Political Economy Learning objectives 1. Examples of how the political systems of countries differ. 2. Distinguish how the economic systems of countries differ. 3. Explain how the legal systems of countries differ and how corruption affects economic development. 4. Determines the level of economic development of a nation. 5. Summarize the main changes that are currently reshaping political, economic, and legal systems worldwide. 6. Describe how transition economies are moving toward market-based systems. 7. Explain the implications of changes in political economies. Country Differences Opening Case: Hong Kong Protests In 2019, Hong Kong’s Security Bureau, proposed amendments that allowed to extradite criminal suspects to mainland China Hong Kong civil society reacted with mass protests demanding the repeal of the law and the resignation of the executive chief The beginning of 2020 marked another wave or protests, focused on wider democratic reforms, culminating with the dismissal of; Wang Zhimin, Beijing's liaison officer for the territory, and the appointment of a provincial Communist Party secretary. Political Systems Collectivism and Individualism Collectivism Political system that stresses the primacy of collective goals over individuals goals. Plato (427-347 BC) - Individual rights should be sacrificed for the good of society. Socialism 1. Communism – revolution and totalitarian dictatorships 2. Social Democrats – socialism by democratic means Individualism ​ Political system that focuses on the interests of the individual over the interests of the state. Aristotle (384 – 322 BC) – Private property is more highly productive than communal property and will thus stimulate progress ​ Individualism has two central tenets: 1.​ Individual Freedom and self-expression – John Stuart Mill 2.​ Let people pursue their own economic self interest –Adam Smith Democracy and Totalitarianism Democracy Political system in which the people elect representatives to form the government. Democracy demands: 1. Freedom of expression (we feel safe) 2. Free media 3. Regular elections -​ Zimbabwe president used jesus to stay in power and a lot of them are uneducated 4. Limited terms for representatives 5. Fair court system: being rich won’t help you. 6. Non political – police and army Totalitarianism All the constitutional guarantees on which representative democracies are built—such as an individual’s right to freedom of expression and organization, a free media, and regular elections—are denied to the citizens. In most totalitarian states, political repression is widespread and those who question the right of the rulers to rule, find themselves imprisoned or worse. There are four major forms of totalitarianism: Communist totalitarianism: north korea, russia and cuba Theocratic totalitarianism: based on religion like in iran Tribal totalitarianism: a big family owning the country, president to the minister are from the same family. (royal families like in africa, dubai) Right-wing totalitarianism: dictatorship, people believe that they have the right like the zimbabwe president using jesus to say he has the right.  Economic Systems Market Economy All productive activities are privately owned; Supply and demand determines price and production Command Economy The government determines the allocation of resources including the determination of production and prices -​ So people can’t sell the products into the black market. Mixed Economy Some sectors are left to private ownership and free market mechanism; Others have significant government ownership and government planning. Legal Systems Legal systems refers to a system of rules that regulates behavior and the processes by which the laws of a country are enforced and through which redress of grievances is obtained. Example: you speed, you get a ticket. You steal, you go to jail. Different Legal Systems Common Law -​ Quebec has civil law and all of the Canada has common law. System of law based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics. Civil Law Law based on a very detailed set of written laws and codes. Theocratic Law System of law based on religious teachings. -​ Ex: Saudi Arabia where women used to not be able to drive or shake hands with women so you might have to sign a contract. Different in Contract Law Definition of Contract Contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. Contract Law Contract law is the body of law that governs contract creation and enforcement Parties to an agreement invoke contract law when there is belief there was violation of the agreement International Trade and Contract Disputes -​ If there is a dispute then you know where to go.  -​ I am from Pakistan but I can find the food in Canada United Nations Convention of Contacts for the International Sale of Goods (CISG); By adopting the CISG, a nation accepts to treat the convention rules as part of its law. CISG applies automatically to all contracts for the sale of goods between different firms based in countries that have ratified the convention, unless the parties to the contract explicitly opt out -​ So all the property of russian and ukraine citizens get sold in russia and given to them Property rights Property Refers to a resource over which an individual or business holds a legal title, meaning it owns the resource. -​ The country of Venezuela needs to keep their property secured. Resources include: Land & real estate; Equipment; Capital Mineral rights; Businesses; Intellectual property(patents, copyrights and trademarks) Property rights Bundle of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource. Essentially, “people own stuff and can use it” Actions Against Property Rights Private Action Private Action is an action by private individuals or groups against property holders including actions such as: Theft Piracy Blackmail Any criminal activity against property rights Public Action and Corruption Public Action violates property rights when public officials extort income from property holders, including -​ In some countries you can take gifts but in Canada you can’t because it's a bribe. actions such as: Bribes Levying excessive taxation Requiring expensive licenses or permits from property holders or taking assets into state ownership without compensating the owners Table 2.1 Corruption Perceptions Index (2018) In the table, Canada had corruption so they introduced Bill S-21. -​ Most corrupt is Quebec Canada’s Bill S-21 Otherwise known as the Corruption of Foreign Public Officials Act that entered into force in1999 It has long been illegal to bribe officials in Canada Now it is illegal for Canadian officials to bribe officials in another country Does have “loophole” provisions to cover for those instances in which a bribe might be solely a perception, due to cultural considerations of gift giving, in other countries Sets out a lawful exception that an accused could use as a defence. Namely, that the payment was lawful in the foreign state or public international organization for which the foreign public official performs duties or functions. The Protection of Intellectual Property Intellectual Property refers to property that is the product of intellectual activity such as computer software, music, formulas etc. Ownership rights are established through: 1. Patents 2. Copyrights 3. Trademarks Paris Convention for the Protection of Industrial Property : International agreement signed by 96 nations to protect intellectual property Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement (1995) Agreement amongst member states of the World Trade Organization (WTO) to oversee the enforcement of stricter intellectual property regulations. Table 2.2 Corruption Perceptions Index (2018) Product Safety and Product Liability Product Safety Laws set safety standards to which products must adhere, where it is going to be commercialized. -​ In Canada, your company is protected but outside Canada it is not. -​ Ex: In pakistan, a canadian company killed a lot of citizens so pakistan went to them and paid for it. Product Liability involves holding a firm and its officers responsible when a product causes injury, death or damage Determinants of Economic Development  The political, economic, and legal systems can have a profound impact on a country’s economic development. Gross National Income (GNI) Total income of all citizens of a country. -​ Some countries pay more or less depending on what they make. Purchasing Power Parity (PPP) Adjustment in gross domestic product per capita for a comparison of living standards in different countries. Differences in Economic Development Table 2.3 GNI per Capita for Select Countries Most rich people in U.S, Ireland, Canada Broader Conceptions of Development: Amartya Sen Human Development Index (HDI) Human Development Index (HDI) measures the quality of human life in different countries The Nobel prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures, such as GNP per capita, and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities. Measures quality of human life in different countries in terms of: 1. Life expectancy at birth (which is a function of health care) 2. Education attainment (which is measured by a combination of the adult literacy rate and enrolment in primary, secondary, and tertiary education), 3. Average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care). Political Economy and Economic Progress Innovation and Entrepreneurship: The engines of growth -​ In the past, you would have to travel to a country to see what the people there eat, read or live like but now the internet can tell you. Innovation and entrepreneurial activity are the engines of long- run economic growth. Innovation definition broadly to include not just new products, but also new processes, new organizations, new management practices, and new strategies. Innovation and Entrepreneurship require a Market Economy  Economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. In a planned economy, the state owns all means of production: Entrepreneurial individuals have little economic incentive to develop valuable new innovations, since it is the state, rather than the individual, that captures most of the gains. Innovation and Entrepreneurship require strong property rights: -​ Companies like the one elon musk owns are paying a lot to protect their property rights. -​ Difference in China, it's all owned by China's government. Both individuals and businesses must be given the opportunity to profit from innovative ideas Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal elements or by the state. The Required Political System There is a great deal of debate as to the kind of political system that best achieves a functioning market economy with strong protection for property rights. Four of the fastest-growing economies of the past 30 years— South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth: undemocratic governments. Economic Progress Begets Democracy -​ Sometimes a project will be tax free because its gonna help children so the most the government can do is make it tax free because they also need money. While it is possible to argue that democracy is not a necessary precondition for a free market economy in which property rights are protected, subsequent economic growth often leads to establishment of a democratic regime. Several of the fastest-growing Asian economies adopted more democratic governments during the past two decades, including South Korea and Taiwan. Geography, Education, and Economic Development While a country’s political and economic system is probably the big locomotive driving its rate of economic development, other factors are also important: ​ Geography: with a Canadian passport we can travel to 250 countries which shows our reputation in those countries. Harvard’s Jeff Sachs: by virtue of favourable geography, certain societies were more likely to engage in trade than others and were thus more likely to be open to and to develop market-based economic systems The general assertion is that nations that invest more in education will have higher growth rates because an educated population is a more productive population.  States in Transition The political economy of many of the world’s nation-states has changed radically since the late 1980s. Two trends have been evident. 1.​ During the late 1980s and early 1990s, a wave of democratic revolutions swept the world. -​ Ex: South Korea became democratic but used to be communist. -​ China was a different case, they had a lot of resources so the government has to give in. Totalitarian governments collapsed and were replaced by democratically elected governments 2.​ There has been a strong move away from centrally planned and mixed economies and toward a more free market economic model. The Spread of Democracy Map 2.1. Freedom in the World 2018 -​ Freedom to invest and make changes. -​ In Canada, people don’t feel oppressed by doing any business. The New Order? The end of the Cold War and the “new world order” that followed the collapse of communism in Eastern Europe and the former Soviet Union, taken together with the collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future shape of global geopolitics: Author Francis Fukuyama has argued that “we may be witnessing... the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. Huntington theorizes that modernization in non-Western societies can result in a retreat toward the traditional, such as the resurgence of Islam in many traditionally Muslim societies: The Islamic resurgence is both a product of and an effort to come to grips with modernization In contrast to Fukuyama, Huntington sees a world that is split into different civilizations, each of which has its own value systems and ideology. The Spread of Market-Based Systems In general, command and mixed economies failed to deliver the kind of sustained economic performance achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan. The Nature of Economic Transformation Deregulation Deregulation involves removing legal restrictions to the free play of markets, to the establishment of private enterprises, and to the manner in which private enterprises operate Privatization Transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction. Legal Systems Without a legal system that protects property rights, and without the machinery to enforce that system, the incentive to engage in economic activity can be reduced substantially by private and public entities, including organized crime, that expropriate the profits generated by the efforts of private-sector entrepreneurs Implications of the Changing Political Economy In practice, the road that must be travelled to reach a market-based economic system has often been rocky. This has been particularly true for the states of Eastern Europe in the post-communist era. In this region, the move toward greater political and economic freedom has sometimes been accompanied by economic and political chaos Implications for business The implications for business are enormous. For the best part of 50 years, half of the world was off-limits to Western businesses. Now all that is changing. Many of the national markets of Eastern Europe, Latin America, Africa, and Asia may still be undeveloped and impoverished, but they are potentially enormous Attractiveness Benefits In the most general sense, the long-run monetary benefits of doing business in a country are a function of: the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers First-mover advantages are the advantages that accrue to early entrants into a market. Late-mover disadvantages are the handicap that late entrants might suffer Costs A number of political, economic, and legal factors determine the costs of doing business in a country.  With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business. One of the most important variables is the sophistication of a country’s economy. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses. Risks Risks of doing business in a country are determined by a number of: political, economic, and legal factors. Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise. Economic risk can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise Legal risk might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. Overall attractiveness The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Ethics and Regulations Ethics and Human rights One major ethical dilemma facing firms from democratic nations is whether they should do business in totalitarian countries, such as China, that routinely violate the human rights of their citizens. Some argue that investing in totalitarian countries provides comfort to dictators and can help prop up repressive regimes that abuse basic human rights. A second important ethical issue is whether an international firm should adhere to the same standards of product safety, work safety, and environmental protection that are required in its home country. This is of particular concern to many firms based in Western nations, where product safety, worker safety, and environmental protection laws are among the toughest in the world. Ethics and Corruption -​ A final ethical issue concerns bribes and corruption Should an international business pay bribes to corrupt government officials to gain market access to a foreign country?  -​ To most Westerners, bribery seems to be a corrupt and morally repugnant way of doing business, so the answer might initially be no. Group B -​ Group project for assignment 1 Midterm -​ 50 multiple choice and 3 case studies Chapter 3 (the cultural environment) Learning objectives 1. Explain what is meant by the culture of a society. 2. Identify the forces that lead to differences in social culture and explain the business and economic implications of differences in culture. 3. Recognize how differences in social culture influence values in the workplace. 4. Demonstrate an appreciation for the economic and business implications of cultural change What Is Culture? -​ It's your identity Follow both Hofstede, and Namenwirth and Weber a culture is seen as a system of values and norms that are shared among a group of people, and that when taken together constitute a design for living. Values and Norms Values form the bedrock of a culture. They provide the context within which a society’s norms are established and justified. Norms are the social rules that govern people’s actions toward one another. Norms can be subdivided further into two major categories: folkways and mores Culture, Society, and the Nation-State -​ In Canada, we don’t have racism There is not a strict one-to-one correspondence between a society and a nation-state Nation-states are political creations. They may contain a single culture or several cultures: France is embodiment of French culture Canada has at least 3 cultures—an Anglo culture, a French-speaking “Quebecois” culture, and Indigenous culture (encompasses hundreds of different cultures). -​ Hiring people from different languages can help the government understand their immigrant citizens Determinants of Culture Culture, norms and value system(don’t need interpreter)= Social Culture Individual and Groups individual Group Definition: Group is the association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior. Example: One central value of some Asian cultures is the importance attached to group membership. Individual (western society is all individual because they leave their families) Definition: In Western societies, the individual is the basic building block of social organization. Example :In the United States and Canada the emphasis on individual performance finds expression in an admiration of “rugged individualism” and entrepreneurship. Social Culture Social Stratification Social Strata : Hierarchical social categories often based on family background, occupation, and income. -​ There will be a conflict from people that are not willing to change their old cultural ways. -​ Ex: a royal princess can’t marry a commoner which a japanese lady did. Defined on the basis of characteristics such as family background, occupation, and income. Individuals are born into a particular stratum. Social Mobility -​ Refers to the extent to which individuals can move out of the strata into which they are born. Caste system: is a closed system of stratification in which social position is determined by the family into which a person is born and change in that position is usually not possible during an individual’s lifetime. Religious and Ethical systems Religion: a system of shared beliefs and rituals that are concerned with the realm of the sacred. Ethical systems: refer to a set of moral principles, or values, that are used to guide and shape behaviour. Religious and Ethical Systems Major Religions 1.​ christian 2. Muslim and 3. Hindu 4. Sikh Christianity Protestant Denomination Ethics emphasize the importance of hard work and wealth creation. Direct communication with God Catholic Denomination Promise of salvation in the next world, and how the poor would reach heaven. Communication with God through the priesthood Catholic Denomination  Promise of salvation in the next world, and how the poor would reach heaven. Communication with God through the priesthood Islam Economic principles of Islam favour free enterprise and of earning legitimate profit through trade and commerce. ​ Earning interest is wrong. In the Islamic view of the world, humans are part of a collective in which the wealthy and successful have obligations to help the disadvantaged. ​ Two main denominations ​ Sunni and Shia Hinduism Hindu values emphasize that individuals should be judged not by their material achievements, but by their spiritual achievements. Hinduism also supported India’s caste system. -​ India supports their president Modern India is a very entrepreneurial society, with millions of hard working entrepreneurs, many of whom are educated in the Western World. -​ India is making a route to western world similar to China. -​ Japan does not have competition. They stick to the company they like and don’t run after money. Confucianism The Confucian system of ethics are of particular interest —loyalty, reciprocal obligations, and honesty. In Confucian cultures, the loyalty that binds employees to the heads of their organization can reduce the conflict between management and labor Guanxi refers to relationship networks supported by reciprocal obligations Language Spoken Language -​ Most spoken language in the world is mandarin. Business wise it's english. Second is Spanish, Urdu and farsi. -​ We have more than 2,000 languages in the world. -​ Diversity is important to Canada. Language does far more than just enable people to communicate with each other. The nature of language also structures the way we perceive the world. It also helps define culture. In countries with more than one language, one also often finds more than one culture Unspoken Language Unspoken language refers to nonverbal communication. Many nonverbal cues, however, are culturally bound.  A failure to understand the nonverbal cues of another culture can lead to a failure of communication -​ In the Middle East, using your finger to call someone is seen as bad. Education From an international business perspective, one important aspect of education is its role as a determinant of national competitive advantage -​ UNICEF can help kids in poor countries to get an education through buses and other initiatives. The availability of skilled and educated workers seems to be a major determinant of the likely economic success of a country Culture and the Workplace -​ In Canada, there are no titles with your name but in Tunisia they call you doctor Hedi. How a society’s culture affects the values found in the workplace is of considerable importance to an international business with operations in different countries. Hofstede isolated five dimensions that he claimed summarized different cultures: Power distance Individualism versus Collectivism Uncertainty avoidance Masculinity versus femininity Long-term versus short-term orientation Power distance Focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities Individualism versus Collectivism Focused on the relationship between the individual and his or her fellows. Uncertainty avoidance measured the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty Masculinity versus femininity -​ Don’t have a female president in U.S. In masculine cultures, sex roles were sharply differentiated and traditional “masculine values,” such as achievement and the effective exercise of power, determined cultural ideals. Long-term versus short-term orientation Deals with virtue regardless of truth. Values associated with long-term orientation are thrift and perseverance; values associated with short-term orientation are respect for tradition, fulfilling social obligations, and protecting one’s “face Table 3.2. Work-Related Values for 10 Selected Countries 1.​ Argentina  2.​ Australia 3.​ Brazil 4.​ Canada 5.​ Denmark 6.​ France -​ Taiwan was built by the ladies because women like to work a lot. Cultural Change Culture is not a constant; it evolves over time. Several studies have suggested that economics may be an important factor in societal change. The cultures of societies may also change as they become richer because economic progress affects a number of other factors, which in turn influence culture. -​ You can respect your friends' religious beliefs like not bringing pork for them. Cross-Cultural Literacy Doing business in different cultures requires adaptation to conform with the value systems and norms of that culture. Adaptation embraces all aspects of an international firm’s operations in a foreign country, including: The way deals are negotiated The appropriate incentive and pay systems for salespeople The structure of the organization The name of a product The tenor of relations between management and the workforce The manner in which the product is promoted Cultural and Competitive Advantage The value systems and norms of a country influence the costs of doing business Attitudes toward cooperation between management and labour, toward work, and toward the payment of interest are influenced by social structure and religion. The connection between culture and competitive advantage has important implications for the choice of countries in which to locate production facilities and do business Cultural and Business Ethics Although many ethical principles are universal, some are culturally bound When faced with conflicting ethical principles, international businesses may be confronted with difficult dilemmas. For example, guanxi networks are often supported by the idea of reciprocal gift giving. One response to such a dilemma is to argue that because customs vary from country to country, businesses should adopt the customs (and by extension, ethical practices) of the country in which they are currently doing business. Chapter 4- ethics in international business (country differences) Learning objectives 1.Explain the source and nature of ethical issues and dilemmas in international business. 2.Show how important it is for managers to consider ethical issues when making strategic and operating decisions. 3.Identify the causes of poor ethical decision making in international business organizations. 4. Explain why the Internet and social media are having such a large influence on ethics. 5. Discuss the steps that managers can take to promote an awareness of ethical issues throughout the organization and to make sure that ethical considerations enter into strategic and operational decisions. Ethics in International Business Opening Case: The most corrupt industry sectors? OECD report on bribery and corruption: Extraction (mining, oil and gas, logging, etc.) Construction (building) Transportation (highways, bridges, railroads, airports, etc.) IT (information technology and telecommunications) Why the extraction, construction, transportation and IT industries are vulnerable to corruption Ethics as Affected by Different Environments The circumstances that affect ethical considerations Political environment (regional, national and international), and the consequent laws and regulations Social-cultural environment, which has been influenced by immigration worldwide, and a continued movement of populations from rural to urban areas. Technological environment, which has affected communications regionally and globally and has also affected the work environment and productivity. Economic environment, which sees currency fluctuations and international organizations like the IMF and World Bank playing a more significant role in national and regional economies. The need for corporations to remain economically competitive influences corporate objectives and also has consequences for consumer priorities. The competitive environment which is causing companies to make decisions in a global context, resulting in actions that affect their employees or customers. Ethical Issues in International Business Ethics in the Changing Political Environment Corruption International businesses can still gain economic advantages by making payments to corrupt officials. Convention on Combating Bribery of Foreign Public Officials in International Business Transactions The convention obliges member states to make the bribery of foreign public officials a criminal offence. Perceptions of corrupt politicians in Canada Corruption in government and businesses in Quebec and federal government money from taxpayers Toronto Mayor Rob Ford scandal Political scandals based on unethical dealings that are played out daily in the international news raise concerns of international business people dealing with Canada. Human Rights In 2011 and 2012, Canada was caught up in human rights issues through its participation in a coalition of countries operating in Afghanistan. Ethics in the Changing Sociocultural Environment What is considered normal practice in one culture may be considered unethical in others. Examples of these “ranges” of ethical/unethical behaviour may include things such as: how gift giving might be considered bribery; -​ If you work outside Canada and you are given 1,000 dollars then its bribery. how you interact with law enforcement officers; -​ In some countries, you can get out of speeding and drunk driving through money. -​ You have to respect the law in every country whether companies only concern themselves with obeying precise regulations In 2011 and 2012, Canada was caught up in human rights issues through its participation in a coalition of countries operating in Afghanistan -​ The fields in Nigeria were destroyed by American companies. Which went against American regulations. Ethics in the Changing Technological Environment Developments and applications of sophisticated technology can create ethical nightmares reaching far across the globe and touching many governments and organizations. Fake news” is information sourced from opinion sites. Stories lack research and, therefore, journalistic integrity The growing popularity of social media has affected how employees connect with one another and the world. Ethics in the Changing Economic Environment The economic environment sees currency fluctuations and international NGOs playing a more significant role in national and regional economies Panama Papers scandal and wealthy Canadians Ethics in the Changing Competitive Environment Employment practices  Competitive environment increases in intensity, and continued advances in the technological environment conspire to challenge companies to increase employee productivity. how whistle-blowers are treated. Canadian Amazon Web Services VP case. Outsourcing When outsourced firms provide products and services at a lower cost, one of the most obvious considerations is discovering how the provider of the outsourced activity is “doing it cheaper. Are they using cheaper materials than what you would have used? Do they get away with bypassing pollution and environmental considerations? Environmental Pollution Ethical issues arise when environmental regulations in host nations are far inferior to those in the home nation. Should a multinational feel free to pollute in a developing nation? (To do so hardly seems ethical.) Is there a danger that amoral management might move production to a developing nation precisely because costly pollution controls are not required. A Corporate Right to Pollute? Some parts of the environment are a public good that no one owns, but anyone can despoil. No one owns the atmosphere or the oceans, but polluting both, no matter where the pollution originates, harms all The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation. The Power of Multinationals By 1985, South Africa faced economic and political sanctions, and many multinational companies began to pull out of the country. After several bloody uprisings, the existing government was forced to dismantle the system Some regimes are so repressive that investment cannot be justified on ethical grounds. A current example would be Myanmar (formally known as Burma). Ethical Dilemmas Managers must confront very real ethical dilemmas There are situations in which none of the available alternatives seems ethically acceptable Ethical dilemmas exist because many real-world decisions are complex, difficult to frame, and involve first-, second-, and third-order consequences that are hard to quantify. The Roots of Unethical Behaviour 2020, COVID-19 business ethics garner stories on businesses unethically describing their products as having certain capabilities that are unproven (such as a well-known brand of hand sanitizer that claimed to kill 99 percent of all germs, even though it did not). French doctors proposing testing a new COVID-19 vaccine in certain African countries before launching it in Europe and North America Determinants Of Ethical Behaviour Ethical behaviour → personal ethics, decision-making process, leadership, unrealistic performance goal, organization culture. Business ethics are not divorced from personal ethics, which are the generally accepted principles of right and wrong governing the conduct of individuals An individual with a strong sense of personal ethics is less likely to behave in an unethical manner in a business setting Ethics and the Internet and Social Media Why Does the Internet Have Such a Big Influence on Ethics? Quantity Variety Speed Impact The answer is magnitude. A large amount of content can be created on a large scale in a short period of time. Web content is being created in larger volumes because there are more devices being used by more people. The global population continues to increase, and most of the increase is in urban areas with high-speed Internet connectivity. Ethical Decision Making For many of the most vexing ethical problems arise because there are very real dilemmas inherent in them and no obvious correct action. Managers can and should do many things to make sure that basic ethical principles are adhered to and that ethical issues are routinely inserted into international business decisions. -​ five things international business and its managers can do to make sure ethical issues are considered in business decisions: 1. Favor hiring and promoting people with a well-grounded sense of personal ethics. 2. Build an organizational culture that places a high value on ethical behavior. 3. Make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent with that rhetoric. 4. Put decision-making processes in place that require people to consider the ethical dimension of business decisions. 5. Develop moral courage. Ethical Decisions and Approaches to Corporate Social Responsibility Corporate social responsibility refers to the idea that business people should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and social consequences. CSR Moral Obligations Multinational corporations have power that comes from their control over resources and their ability to move production from country to country. Some moral philosophers argue that with power comes the social responsibility for multinationals to give something back to the societies that enable them to prosper and grow Businesses, particularly large successful businesses, need to recognize their noblesse oblige and give something back to the societies that have made their success possible Noblesse oblige is a French term that refers to honourable and benevolent behaviour considered the responsibility of people of high (noble) birth. Four common terms used to describe corporates CSR behavior: 1. Obstructionist stance: Companies taking this stance create barriers that make it difficult for customers to address their concerns. 2. Defensive stance: Companies taking this stance deny responsibility for the cause of concern. 3. Accommodative stance: In taking this stance, a company exceeds its customers’ expectations. 4. Proactive stance: In taking this stance, companies respond to issues as soon as they arise and inform their customers of how they will be proceeding. Chapter 5 (part 3 cross-border trade and investment) Learning objectives 1. Explain why nations trade with each other. 2. Distinguish theories that explain trade flows between nations. 3. Unrestricted (free) trade between nations will raise the economic welfare of all participant countries. 4. Government can play a proactive role in promoting national competitive advantage in certain industries. 5. Demonstrate the important implications that international trade theory holds for business practice. International Trade Theories Opening Case: “Trade wars are good and easy to win” US president tweet: When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win In large part, the post–World War II international trading system, with its emphasis on lowering barriers to international trade and investment, was only possible because of vigorous U.S. leadership Last time protectionist policies were implemented was in the early 1930s, when a trade war between nations deepened the Great depression. An Overview of Trade Theory Mercantilism advocated that should simultaneously encourage exports and discourage imports Adam Smith’s theory of absolute advantage. Proposed in 1776, Smith’s theory was the first to explain why unrestricted free trade is beneficial to a country. Free trade refers to a situation where a government does not attempt to influence what its citizens can buy and sell. Building on Smith’s work are additional theories One is the theory of comparative advantage, by David Ricardo Ricardo’s work was refined by Eli Heckscher and Bertil Ohlin, whose theory is known as the Heckscher–Ohlin theory The great strength of the theories of Smith, Ricardo, and Heckscher–Ohlin is that they identify with precision the specific benefits of international trade Benefits of Trade The gains of trade arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries. The theories of Smith, Ricardo, and Heckscher–Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself. Many Canadians believe that to help save Canadian jobs from foreign competition, Canadian consumers should buy products produced in Canada, by Canadian companies, whenever possible. The Pattern of International Trade The theories of Smith, Ricardo, and Heckscher–Ohlin also help to explain the pattern of international trade that we observe in the world economy. Some aspects of the pattern are easy to understand. Climate and natural-resource endowments explain why ​ Ghana exports cocoa, ​ Brazil exports coffee,  ​ Saudi Arabia exports oil, (Canada is highly dependent b/c our oil not good enough), russia also exports oil. ​ and China exports ginseng. Some aspects of the pattern are difficult to understand, leading to the New Trade Theory: New Trade Theory stresses that, in some cases, countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. -​ Most of the products made in the old days was from germany or japan. National competitive advantage Theory put forward by Michael Porter that attempts to explain why particular nations achieve international success in particular industries. In addition to factor endowments, Porter points out the importance of country factors such as domestic demand and domestic rivalry in explaining a nation’s dominance in the production and export of particular products. Trade Theory and Government Policy All of these theories agree that international trade is beneficial to a country, but they lack agreement in their recommendations for government policy. Mercantilism: Government involvement in promoting exports and limiting imports. The theories of Smith, Ricardo, and Heckscher–Ohlin form part of the case for unrestricted free trade. New trade theory and Porter’s theory of national competitive advantage: Some limited government intervention to support the development of certain export-oriented industries. Theories explain trade flows between nations Mercantilism Mercantilism is an economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. The flaw with mercantilism was that it viewed trade as a zero-sum game. Absolute Advantage A country has an Absolute Advantage in the production of a product when it is more efficient than any other country in producing it. Absolute Advantage and the Gains from Trade -​ Difference in what Ghana, South Korea are producing between the rice and cocoa. Comparative Advantage Theory that countries should specialize in the production of goods and services they can produce most efficiently -​  Does Free Trade Lead to Gains for All? The conclusion that free trade is universally beneficial is a rather bold one to draw from such a simple model. Our simple model includes many unrealistic assumptions: Assumed there are only two countries and two goods. Assumed away transportation costs between countries. -​ 50% more than before because they are making a lot of money. Assumed away differences in the prices of resources in different countries Assume that resources can move freely from the production of one good to another within a country. Heckscher-Ohlin Theory (midterm) 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. What is this theory? -​ He wants these three lines. Like Ricardo’s theory, the Heckscher– Ohlin theory argues that free trade is beneficial. The Product Life-Cycle Theory Raymond Vernon’s theory went on to argue that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries is limited to high-income groups. -​ In Bugatti, they make 50 cars each year for people that have money to buy them. -​ Same with jets. Vernon’s argument that most new products are developed and introduced in the United States seems ethnocentric. New Trade Theory Began to emerge in the 1970s when a number of economists were arguing that increasing returns to specialization might exist in some industries. -​ Someone might come to canada and like tim horton cause it's cheap and then want it in their country. Economies of scale: Represent one particularly important source of increasing returns. Economies of scale are unit cost reductions associated with a large scale of output. Increasing Product Variety and Reducing Costs Consequences of a small national market. -​ Business is growing because of online businesses. What happens when national markets are combined into a larger world market -​ Some countries' citizens will pay more for the same product because of demand. National Competitive Advantage Michael Porter’s Theory (The Competitive Advantage of Nations, 1990) determines that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage. -​ You have to be first in presenting your product in that countries even if there are a lot of those products. 1. Demand conditions 2. Relating and supporting industries 3. Factor endowments 4. Firm strategy, structure, and rivalry Determinants of National Competitive Advantage: Porter’s Diamond Firm strategy, structure and rivalry → demand conditions → related and supporting industries → factor endowments Implications for International Businesses Location Implications: which place to choose? First-mover Implications: Policy Implications: 15% has to be sold nationally so if the policies are too much then you need to choose a new country. Location Implications. different countries have particular advantages in different productive activities it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. First-mover Implications Firms that establish a first-mover advantage with regard to the production of a particular new product may subsequently dominate global trade in that product It pays to invest substantial financial resources in trying to build a first-mover, or early-mover, advantage, even if that means several years of substantial losses before a new venture becomes profitable Policy Implications The theories of international trade also matter to international businesses because firms are major players on the international trade scene. Because of their pivotal role in international trade, businesses can influence government trade policy, lobbying to promote free trade or trade restrictions. Chapter 6: government policy and international trade (part 3 is cross-border trade and investment) Learning objectives 1. Identify the policy instruments used by governments to influence international trade flows. 2. Understand why governments sometimes intervene in international trade. 3. Arguments against strategic trade policy. 4. Describe the development of the world trading system and the current trade issue. 5. Explain the implications for managers of developments in the world trading system. Government Policy and International Trade Opening Case: U.S. and South Korea strike a revised trade deal In 2012, a free trade deal between the USA and South Korea went into effect. In 2016, the US exported $63.8Bn in goods and services to South Korea and imported $80.8Bn, resulting in a trade deficit of $17Bn. January 2018 the US announced it was entering into negotiations with South Korea to revise the terms of the agreement In late March, the two countries announced that they had reached a revised deal. South Korea would be exempt from the 25 percent tariff on steel imports into the United States Instruments of Trade Policy Trade policy uses seven main instruments: Tariffs, Ad valorem tariffs Are levied as a proportion of the value of the imported good. Specific tariffs Are levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil) Subsidies, A government payment to a domestic producer. Can take many forms including cash grants, low-interest loans, tax breaks, and government equity participation. By lowering production costs, subsidies help domestic producers in two ways: they help them compete against foreign imports, and they help them gain export markets. Import quotas and voluntary export restraints, -​ Only some companies can import cheese because if it’s contaminated then the government can know who brought it and stop it and hold them accountable. A direct restriction on the quantity of some goods that may be imported into a country. The restriction is usually enforced by issuing import licences to a group of individuals or firms. For example, the United States has a quota on cheese imports. The only firms allowed to import cheese are certain trading companies Hypothetical tariff rate quota -​ Sometimes more and less. Export Tariffs and Bans -​ Can’t export everything like weapons to a country that can use it against us. An export tariff is a tax placed on the export of a good. The goal behind an export tariff is to discriminate against exporting to ensure there is sufficient supply of goods within a country. An export ban is a policy that partially or entirely restricts the export of a good. One well-known example was the ban on exports of U.S. crude oil production that was enacted by the U.S. Congress in 1975. local content requirements, Demands that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms, (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally). Buy America Act, specifies that government agencies must give preference to American products when putting contracts for equipment. -​ Always keep America first. If there is a billionaire that wants something and America. Then choose America. Administrative policies Bureaucratic rules designed to make it difficult for imports to enter a country. Japanese are the masters of this trade barrier. In recent decades, Japan’s formal tariff and nontariff barriers have been among the lowest in the world. However, critics charge that the country’s informal administrative barriers to imports more than compensate for this. For example, Japan’s car market has been hard for foreigners to crack. Anti-dumping duties Dumping is selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their “fair” market value. -​ Not common in Canada, because we know what comes in our country. Antidumping duties (often called countervailing duties ) If a domestic producer believes that a foreign firm is dumping production in the local market, it can file a petition In Canada, companies can complain to the Canada Border Services Agency (CBSA) The Case for Government Intervention Political Arguments for Intervention 1. Protecting jobs and industries The most common political argument for government intervention is that it is necessary for protecting jobs and industries from unfair foreign competition. Competition is viewed as unfair when producers in exporting country are subsidized in some way by their government in Canada particularly, protect cultural industries from foreign competition 2. Protect National security  ​ Countries argue that it is necessary to protect certain industries because they are important for national security. ​ Defence-related industries get this kind of attention (e.g., aerospace, advanced electronics, and semiconductors) -​ We want to protect the country from extremists. ​ Trump Adm. announced tariffs on imports of foreign steel and aluminum in March 2018 citing national security issues. 3. Retaliation -​ Some products are only gonna be in that country and its not imported outside. The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese government to enforce its intellectual property laws If it works, such a politically motivated rationale for government intervention may liberalize trade and bring with it resulting economic gains. 4. Protecting consumers Many governments have long had regulations to protect consumers from unsafe products. The indirect effect of such regulations often is to limit or ban the importation of such products. In 2003 several countries, including Japan and South Korea, banned imports of U.S. beef after a single case of mad cow disease was found in Washington State -​ That's why I might not be allowed to bring stuff from my country. 5. Furthering foreign policy objectives -​ We are allowed to have friendship partnerships so you can sell your product to them. A government may grant preferential trade terms to a country with which it wants to build strong relations. Trade policy has also been used several times to pressure or punish “rogue states” that do not abide by international law or norms. 6. Protecting human rights Governments sometimes use trade policy to try to improve the human rights policies of trading partners. In the 1980s and 1990s, Western governments like Canada used trade sanctions against South Africa as a way of pressuring that nation to drop its apartheid policies, which were seen as a violation of basic human rights. Economic Arguments for Intervention 1. The infant industry argument New manufacturing industries cannot initially compete with well-established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries with tariffs, import quotas, and subsidies until they have grown strong enough to meet international competition. 2. Strategic trade policy  Government can help raise national income Government might intervene in an industry if it helps domestic firms to overcome the barriers to entry created by foreign firms. Bombardier in Quebec has benefited greatly from support from the federal government and the Quebec provincial government Revised case for Free Trade Strategic trade policy looks appealing in theory but in practice it may be unworkable. This response to the strategic trade policy argument constitutes the revised case for free trade A strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbour policy (Krugman) that boosts national income at the expense of other countries. Domestic Politics Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. The European Union’s support for the Common Agricultural Policy (CAP), which arose because of the political power of French and German farmers, is an example. Development of World Trade System 1980 – 1993: GATT under pressure During the 80s and 90s GATT came under pressure due to: Economic success of Japan Persistent trade deficit in the world’s largest economies Countries found ways to get around GATT regulations, such as VERs (Voluntary Exports Restraints) The Uruguay Round and the World Trade Organization 1995 the agreement was formally signed The World Trade Organization (WTO) was created to implement the GATT agreement. World Trade Organization The WTO acts as an umbrella organization that encompasses the following bodies: 1. GATT 2. GATs (General Agreement on Trade in Services) 3. TRIPs (Trade Related Aspects of Intellectual Property Rights) WTO has taken the responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. The Future of the WTO: Unresolved Issues and Doha Round Unresolved Issues Three issues at the forefront of the WTO agenda: 1. The rise of antidumping policies 2. The high level of protectionism in agriculture 3. The lack of strong protection for intellectual property rights 4. Market Access for Non Agricultural Goods and Services A new round of talks: Doha Launched in 2001, The talks were originally scheduled to last three years, although they have already gone on for 15 years and are currently stalled. The Doha agenda includes cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of anti- dumping laws. The talks are currently ongoing. Chapter 7- Foreign Direct Investment Learning objectives 1. Recognize current trends regarding foreign direct investment (FDI) in the world economy. 2. Explain the different theories of FDI. 3. Understand how political ideology shapes a government's attitude toward FDI. 4. Describe the benefits and costs of FDI to home and host countries. 5. Explain the range of policy instruments that governments use to influence FDI. 6. Identify the implications for managers of the theory and government policies associated with FDI. Foreign Direct Investment Opening Case: GEELY GOES GLOBAL Chinese auto manufacturer that started in 1986 as a manufacturer of refrigerators In 2010, Geely reached an agreement to purchase Volvo for $1.8 billion. At the time, this was the largest overseas acquisition by a Chinese automobile maker. China has emerged as a major market for Volvo, where the brand is valued for its safety and elegance. Emboldened by its success with Volvo, Geely is now making more foreign investments. Foreign Direct Investment in the World Economy Flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). Stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Outflows of FDI refers to the flow of FDI OUT of a country. Inflows of FDI refers to the flow of FDI INTO a country. Graphs: Trends in FDI -​ The Canadian economy struggled in 2008 and this keeps changing. The direction of FDI -​ Transition countries are like South Korea. The sources of FDI The Form of FDI: Acquisitions versus Greenfield Investments FDI takes two main forms: The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. Canada’s Case Positive and Negative Factors Affecting FDI Flows, 2013–2015 Theories of Foreign Direct Investment Eclectic Paradigm -​ Argument that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI. -​ It requires the firm to establish production facilities where those foreign assets or resource endowments are located. Why Foreign Direct Investment Exporting involves sale of products produced in one country to residents of another country. Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm’s product in return for a royalty fee on every unit sold. Limitations of Exporting -​ Transportation makes exports expensive. When transportation costs are added to production costs, it becomes unprofitable to ship products over a large distance. Products of low value-to-weight ratio can be produced in almost any location: Examples: cement, soft drinks. Products with a high value-to weight ratio: transport costs are normally a very minor component of total landed cost. -​ Examples: electronic components, medical equipment. Limitations of Licensing Internalization theory explains why firms often prefer FDI over licensing as a strategy for entering foreign markets. Licensing may result in a firm giving away valuable technological know-how to a potential foreign competitor. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country. The Pattern of Foreign Direct Investment Strategic Behavior -​ Oligopoly (industry composed of a limited number of large firms.) -​ Multipoint competition(arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.) If Starbucks struggled then Tim Hortons might buy it. The Eclectic Paradigm Location-specific advantages: Advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm’s technological, marketing, or management know-how). The “Political Ideology” and FDI The Radical View -​ People believe that these corporations are evil and after my money. -​ If I like products in your country I might take it to my country. Going to a new country has a lot of risks. The radical view - Marxist political and economic theory Argues that the multinational enterprise (MNE) is an instrument of imperialist domination See the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. They argue that MNEs extract profits from the host country and take them to their home country. The Free Market View argues that international production should be distributed among countries according to the theory of comparative advantage. That is, countries should specialize in the production of those goods and services that they can produce most efficiently Pragmatic Nationalism -​ Most countries are after FDI. In practice, many countries have adopted neither a radical policy nor a free market policy toward FDI, but instead a policy that can best be described as pragmatic nationalism. The pragmatic nationalist view is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits often come at a cost. Ex: Risk: Nigeria, 70% is owned by America. These companies can help determine who becomes the president which shows they can influence politics there. Benefit: if these Nigerians worked in an American company in Nigeria. It makes it easier for them to find a job in America. Shifting Ideology Recent years have seen a marked decline in the number of countries that adhere to a radical ideology. Although few countries have adopted a pure free market policy stance, an increasing number of countries are gravitating toward the free market end of the spectrum and have liberalized their foreign investment regime As a counterpoint, there is some evidence of a shift to a more hostile approach to foreign direct investment in some nations. Benefits and Costs of FDI Host Country Benefits Resource-transfer effects Employment effects - FDI brings jobs to a host country Balance of payment effects. FDI is a substitute for imports of goods and services MNE uses the subsidiary in the host country to export goods and services to other countries Home Country Benefits Balance of payments from inward flow of foreign earnings. Positive employment effects when a subsidiary demands home country exports of capital equipment. Home country MNE learns skills transferable in technologies for use in the home country. Effect on Competition and Growth Host Country Costs Adverse effects on competition Foreign subsidiaries have strong economic power to put local competitors out of market Adverse effects on the balance of payments. Against the initial capital inflow that comes with FDI must be the outflow of earnings to be repatriated National sovereignty and autonomy Home Country Costs Balance of payments from outward FDI Employment effect from outward FDI Government policy instruments and FDI Home Country Policy Encouraging outward FDI Restricting outward FDI Host country policies Encouraging inward FDI Restricting inward FDI International Institutions and the Liberalization of FDI Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI. This changed with the formation of the World Trade Organization in 1995 Implication for Business A Decision Framework= How high are transportation costs and tariffs?--> low→ export High Is Chapter 8- Regional Economic Integration (On our Midterm) -​ Free 4 points (on the midterm) Learning objectives 1.Describe different levels of regional economic integration(REI). 2. Understand the economic and political arguments for REI. 3. Understand economic and political arguments against REI. 4. Explain the history, current scope, and future prospects of the world’s most important REI. 5. Understand how foreign investment can support sustainable community development. 6. Understand the implications for business that are inherent in regional economic integration agreements. Regional Economic Integration Opening Case: Nafta 2.0: CUSMA The renegotiation of NAFTA was complicated by the fact that multilayered supply chains now span both sides of the U.S.– Mexican border. Nowhere is this more the case than in the automobile industry. Auto parts manufactured in the US shipped to plants in Mexico, for assemblage and then shipped back to the US. On 30 September 2018, Canada, Mexico, and the United States reached agreement on a revised version of NAFTA. The past two decades have witnessed a proliferation of regional trade blocs that promote regional economic integration In 2018, there were 284 regional trade agreements in force Groups of countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO This has become an increasingly important policy approach, given the failure of the WTO to make any progress with its Doha Round. Midterm question: How many European countries do we have= 27. -​ Next wednesday, no class. Instead one member can email him the assignment with all of our names and our group letter (B). The level of Economic Integration Political union, Economic union (2003), Common market, Customs union → Free Trade Area X(CUSMA) → level of integration. 1. Free Trade Area: all barriers to the trade of goods and services among member countries are removed). 2. A Customs Union: group of countries committed to: removing all barriers to the free flow of goods and services between each other and the pursuit of a common external trade policy.) 3. A Common Market: A group of countries committed to: ​ removing all barriers to the free flow of goods, services, and factors of production between each other; ​ pursuing a common external trade policy; and ​ allowing factors of production to move freely among members.) 4. Economic Union: A group of countries committed to: The removal of all barriers to the free flow of goods, services, and factors of production between each other; the adoption of a common currency; the harmonization of tax rates; and the pursuit of a common external trade policy. 5. Political Union: A central political apparatus that coordinates economic, social, and foreign policy. The Case for Regional Integration Economic Case for Integration Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under global agreements such as the WTO. Political Case for Integration Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between neighboring states and reduces the potential for violent conflict. Impediments to Integration Strong economic, political arguments for integration, but never been easy to achieve or sustain: 1.​ Economic integration benefits the majority but has its costs.  While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. Moving to a free trade regime involves some painful adjustments. 2.​ Concerns over national sovereignty. Mexico’s concerns about maintaining control of its oil interests resulted in an agreement with Canada and the USA under CUSMA (formally NAFTA). The Case Against Regional Integration Concerns that the benefits of regional integration have been oversold, while the costs have often been ignored. The benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. Trade diversion occurs when lower-cost external suppliers are replaced by higher cost suppliers within the free trade area. Regional Economic Integration in Europe MAP 8.1 -​ European Union Countries Political Structure of the European Union The five main institutions in this structure are: 1. The European Council 2. The Council of Ministers 3. The European Commission 4. The European Parliament 5. The Court of Justice The Establishment of the Euro In 1999, EU adopted the Euro as a common currency in Union. Benefits Individuals and businesses realize significant savings from having only one currency A common currency makes it easy to compare prices across Europe European producers will be forced to look for ways to reduce their production costs to maintain profits Supports the development of the pan-European capital market Costs National authorities have lost control over monetary policy The Maastricht Treaty called for establishment of an independent European Central Bank ECB has the responsibility to set interest rates and determine monetary policies for the euro zone. Enlargement of the European Union The United Kingdom's exit from the European Union in 2020 brings the total number of member states to 27. NAFTA The Case FOR NAFTA Proponents argue that NAFTA should be viewed as an opportunity to create an enlarged and more efficient productive base for the entire region. Advocate acknowledge that one effect of NAFTA would be that many U.S. and Canadian firms will move some production to Mexico to take advantage of lower labour costs ​ (In 2015, the average hourly labour cost in Mexican automobile factories was $8–$10 an hour including benefits, compared to $42–$58 an hour in the USA). The Case AGAINST NAFTA Trade agreements continue to elicit strong opinions. Those who opposed NAFTA claimed that ratification would be followed by a mass exodus of jobs from the USA and Canada into Mexico as employers sought to profit from Mexico’s lower wages and less strict environmental and labour laws. The period since NAFTA took effect has had little impact on trends already in place. The new NAFTA: CUSMA -​ Canada-United States-Mexico Agreement, or CUSMA for short, the "New NAFTA," made some changes to the 25-year- old NAFTA treaty, as discussed earlier in this chapter -​ NAFTA required automakers to produce 62.5 percent of a vehicle’s content in North America to qualify for zero tariffs. CUSMA raises that threshold to 75 percent. -​ The idea is to compel automakers to source fewer parts for a car assembled in North America from Germany, Japan, South Korea, or China -​ Critics see CUSMA as likely to result in trade diversion rather than trade creation and argue that the consequences may include higher costs to North American automobile producers and higher prices for consumers The Andean Community Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the Andean Pact trade bloc The Andean Community now operates as a customs union. In 2006, Venezuela withdrew from the Andean Community as part of that country’s attempts to join Mercosur. Mercosur Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area. As a customs union, they negotiate as a bloc with potential trading partners such as Canada Golden BRICS Countries Also sometimes called the golden BRICS or The Big Five refers to: Brazil, Russia, India, China, South Africa They are the largest economies outside of the OECD They are neither a formal economic bloc like the European Union, nor do they share a common currency Central American Common Market, CAFTA, and CARICOM Central American Common Market A trade pact among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, which began in the early 1960s but collapsed in 1969 due to war. Central America Free Trade Agreement (CAFTA) The agreement of the member states of the Central American Common Market joined by the Dominican Republic to trade freely with the United States. CARICOM -​ An association of English-speaking Caribbean states that are attempting to establish a customs union. -​ In early 2006, six CARICOM members established the Caribbean Single Market and Economy (CSME). -​ Modelled on the EU’s single market, CSME’s goal is to lower trade barriers and harmonize macroeconomic and monetary policy between member states Regional Economic Integration elsewhere Association of Southeast Asian Nations(ASEAN) -​ An attempt to establish a free trade area among Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. -​ Laos, Myanmar, Vietnam, and Cambodia have all joined recently, creating a regional Page 276 --> grouping of 600 million people with a combined GDP of some $2 trillion Regional Trade Blocs in Africa -​ Nominally there are now 19 trade blocs on the African continent. Many countries are members of more than one group. -​ Although the number of trade groups is impressive, progress toward the establishment of meaningful trade blocs has been slow Midterm: 50 multiple choice (5 extra questions for bonus), chapter 1 to 8. (after reading break) and chapter 9 is on the final exam but not on midterm. -​ Chapter 9 (Not on our Midterm) 3 case studies -​ My company is deciding to sent me to japan and one employee there had sexual harassment and based on culture we have in canada. How are you gonna deal with like the laws and in japan or canada -​ What is comparative advantage? -​ Third one: ethicals. How managers in the workplace can work with ethical issues. Chapter 9 (The foreign exchange Market)- the international money system (PART 4) Learning objectives 1. Describe the functions of the foreign exchange market. 2. Understand the nature of the foreign exchange market. 3. Understand the different theories explaining how currency exchange rates are determined and their relative merits. 4. Understand the issues surrounding currency convertibility. 5. Compare and contrast the differences among translation, transaction, and economic exposure. The Foreign Exchange Market Opening Case: The fluctuating value of the yuan gives Chinese business a lesson in foreign exchange risk. ​ Between 2015 and early 2018, the Chinese currency, the yuan, fluctuated significantly in value against the U.S. dollar, generally due to economic slowdown. Consequences of currency depreciation in China: Outflow of capital from China $1.5 trillion used to buy back the yuan Increased price of key imports Losses for Chinese companies In 2017, conditions reversed. Between January 2017 and April 2018 the yuan appreciated in value by 10 percent against the dollar. Consequences of currency appreciation in China: Outflow of capital from China Exporter became expensive, large FX losses Decreased price of key imports Gains for Chinese companies Solution: hedging and forward exchange transactions Foreign exchange market: -​ Is a market for converting the currency of one country into that of another country. Exchange rate: -​ Is the rate at which one currency is converted into another. Foreign exchange risk: -​ Is the adverse consequence of unpredictable changes in the exchange rate.  The Functions of the Foreign Exchange Market Currency Conversion International businesses use foreign exchange markets when: the payments a company receives for its exports, the income it receives from foreign investments, or the income it receives from licensing agreements with foreign firms may be in foreign currencies when they must pay a foreign company for its products or services in its country’s currency when they have spare cash that they wish to invest for short terms in money markets Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates The World and the Canadian Dollar The Canadian dollar is a currency linked to the raw materials, including oil and natural gas, that Canada exports (petrocurrency). The movements of the Canadian dollar have become increasingly correlated with price of oil Small Canadian businesses can be highly susceptible to exchange rate fluctuations when exporting to the United States and fear that a rise in the Canadian dollar will increase the cost to the U.S. consumer and damage export related profits. Insuring Against Foreign Exchange Risk A second function of the foreign exchange market is to provide insurance to protect against the possible adverse consequences of unpredictable changes in exchange rates. Spot exchange rates The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. When a Canadian tourist goes to a bank to convert her Canadian dollars into pounds, the exchange rate is the spot rate for that day. Forward exchange rates A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such future transactions are referred to as forward exchange rates. Currency swaps A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. The Nature of the Foreign Exchange Market -​ Even though the British pound has declined in importance as a vehicle currency, London remains the key location for global foreign exchange. The most important trading centres: London (37 percent of activity); New York (18 percent of activity); and Zurich, Tokyo,and Singapore Major secondary trading centres include: Zurich, Frankfurt, Paris, Hong Kong, San Francisco, and Sydney. Economic Theories of Exchange Rate Determination Prices and Exchange Rates The Law of One Price Purchasing Power Parity (PPP) Money supply and price inflation Interest Rates and Exchang