MGMT 421: Globalization and Economics PDF

CHAPTER 1) government policy and economics Market economy (capitalism) - everything privately owned, supply and demand determine price and production, economic freedom creates greater innovation Planned economy- gov owns resources, determines all allocation of resources including production and pr...

CHAPTER 1) government policy and economics Market economy (capitalism) - everything privately owned, supply and demand determine price and production, economic freedom creates greater innovation Planned economy- gov owns resources, determines all allocation of resources including production and price, entrepreneur individuals have little economic incentive Mixed economy- a mix of both ECONOMIC SYSTEMS, CONT -​ Past success- sustained econ performance has been achieved by countries adopting market-based systems -​ Transitions- many nations has changed since the 80s 1)deregulation 2) privatization- transfer ownership of the state to individuals Attractiveness of a country depends on balancing costs, risk and benefits 1)​ Costs- political, econ and legal factors determine the cost (not well developed countries higher cost) 2)​ Risks- i) political risk- likelihood political forces will cause drastic changes in a country's business environment ii) economic risk- odes of mismanagement will cause drastic changes iii) legal risk- trading partner will break a contract or expropriate property rights Fiscal- tax, design for econ growth, encourage certain investments, increase employment. Comes from corporate, personal tax, fees and borrowing. Monetary- money supply, adjusting interest rates to stimulate growth or curb inflation 7 MAIN INSTRUMENTS IN TRADE POLICIES 1)​ Tariffs- ad valorem tariffs; are levied as a proportion of the of the imported goods Specific tariffs- are levied as a fixed charge for each unit of goods imported 2)​ subsidies- gov pays domestic producer, in grants, low-interest loans, tax breaks and gov equity participation -​ Subsidies lower production costs so they can better compete against foreign imports and help gain exports markets 3)​ Import quotas- direct restriction on the quantity of some good that are imported into a country -​ Restriction enforced by issuing licences to some groups  Quotas: “quantity limit” -> Quotas usually a strategy for foreign companies to build manufacturing plants in the exporting country. 4)​ Export restraints (export tariff-> enough supply in a country and export quota) 5)​ Local content requirements- demand that some specific fraction of a good be produced domestically - expressed in physical or value term 6)​ Administrative policies- bureaucratic rules designed to make it difficult for imports to enter a country. E.g JAPAN- critics charge that the countries informal administrative barriers to import more than compensate for this 7)​ Antidumping policies (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) dumping- selling goods in a foreign market at below their cost of production or below fair market value POLITICAL ARGUMENTS FOR INTERVENTION 1)​ Protecting jobs and industries- competition is viewed as unfair when exporting goods are being subsidies by there gov 2)​ Protecting national security- defence related industries get this attention 3)​ Retaliation- may bring econ gains and protection but comes with risk of measures E.G US/China trade war 4)​ Protecting consumers from unsafe products 5)​ Further foreign policy objectives- a government may grant preferential trade terms to a country with which it wants to build a strong relation. They have been used a lot to punish “rogue states” that do not abide by international law or norms 6)​ Protecting human rights- Regional economic integration The economic case for integration- attempts tp achieve more gains from the free flow of trade and investment between countries beyond those attainable under global agreements. Political case for integration- linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation E.G-> NAFTA, USMA CHP 2) global finance- Foreign exchange market- converting currency from one country to another. Exchange rate- rate which one currency is converted into another 1)​ Spot exchange rate: foreign exchange dealer convert one currency into anothers 2)​ Forward exchange: the rate that will be used for settlement at some specific date in the future International business use foreign exchange when: 1)​ Payment a company receives are foreign currencies 2)​ They must pay foreign company for its products 3)​ They have spare cash that they wihs to invest for terms in the money market 4)​ They wish to hedge against foreign exchange risk (forward contracts/swaps) DRIVERS for currency fluctuations 1)​ Inflation 2)​ Interest rates 3)​ Strength of economy 4)​ Uncertainty 5)​ International trade 6)​ Commodity prices (in canada, fairly correlated with price of oil) Freely convertible currency: gov allows both (non)+ residents to purchase unlimited amounts of foreign currency with domestic currency Noncoonvertable currency: both (non)+ residents are prohibited from converting their holdings of that currency into other $ Externally convertible: Non-resident yes $ but resident limited International monetary system: internationally agreed rules and conventions that countries adopt to govern exchange rates to facilitate trade and cross-border transactions. FIXED peg arrangement-> a system where a country's currency value is set at a fixed rate against another currency. Impact on currency depreciation 1)​ Increase exports- product become less expensive for foreign consumers 2)​ Increase the cost of imports- can create inflationary pressure 3)​ Increase competitiveness: foreign goods are less competitive in the local market, local goods are more competitive globally HOW TO FINANCE FOR GLOBAL EXPANSION 1)​ Private financing through banks/other financial institutions 2)​ Government grants loans and programs are available EXPORT AND IMPORT FINANCING TOOLS​ 1) letter of credit- issued by a bank at the request of an importer, the letter of credit states the bank will pay a specific sum of money to the exporter 2)draft: an order written by the exporter instructing the bank to pay specifie sum of money at a specific time for the product shipped 3)Bill of landing- a document issued by a common carrier transporting merch. It serves as a receipt. Globaledge course module Bretton Woods Systems -> IMF- International Monetary Fund Surveillance function-> money used to: build reserves, strengthen econ, stabilize exchange rates Poverty reduction and growth for low income countries-> ½% payback 5-10 years World bank purpose- reduce poverty, distribute funds, aim to satisfy millennium development goals -> access to water, school ect….. Middle income: per capita income US 1000$-10,000$ a month Low income: income of less than 1000$ US a month, qualify for credits and grants Bilateral financing: direct country-to-country exchange Multilateral financing: many countries give to one country E.G world bank ISSUES WITH IMF -​ Policies result in increased poverty levels -​ Privatization undermines gov public program -​ Wealth generation in hands of foreign investors Chp 3) Global supply chain management and operations- networks of companies that are involved in the production and distribution of goods and services globally global supply chain Activities 1)Production considerations (where?)  -​ Should firm own foreign production facilities? Or should it outsource to independent vendors? 2)Input/materials sourcing considerations-make or buy (who) -​ Which input should be made directly and inputs should be purchased from someone else -​ BASED on 2 factors: cost and production capacity but also can be based on -​ MAKE ELEMENTS: 1)​ Quality control 2)​ Proprietary tech 3)​ Operational control 4)​ Excess capacity 5)​ Limited suppliers 6)​ Assurance of continual supply -​ BUY ELEMENTS: 1)​ Firm lacks expertise 2)​ Supplier competencies 3)​ Volume 4)​ Brand preference 5)​ Nonessential items and inventory planning 3)Logistics considerations- collection, manufacturing and delivery activities -​ Cost issues and other considerations, as they relate to global sourcing and global logistics, should be strategically and tactically addressed CENTRALIZATION- product all made in one major foreign locations, allows for cost and operations efficiencies. DECENTRALIZATION- production locations are spread but closer to the customer market; helps risk mitigation HIDDEN COSTS 1)​ Employee turnover 2)​ workmanship/quality standards 3)​ productivity SUPPLY chains neeed to be protected from disruptions but consider cost/benefits trade-off: 1)diversification of suppliers and locations: decentralize/segmentation of supply chain 2) invest in protection/resilience (inventory levels) 3)work with reliable partners+gov 4)Relationship management 5) improve transparency Chap 4) Information technology CURRENT STATUS: IT and innovation functions significantly outsourced but core business operations remain internal. WHY the current growth in outsourcing tech? 1)​ Talent drought for skilled specialist in high tech industry 2)​ Speed to market-immediate access ti talent 3)​ Ability to scale up- flexible access to talent 4)​ Remote work allows easier access to global talent pool 5)​ Greater access to knowledge 6)​ Greater ability to maximize a combination of benefits 7)​ Data analytics CHALLENGES FOR OUTSOURCING TECH: 1)​ Cybersecurity 2)​ Loss of in-house expertise 3)​ Talent acquisition and retention -​ High growth/digitally transforming world -​ Remote working options allow talent to move to best offering 4)​ Collaboration with external providers 5)​ Cultural fit 6)​ Loss of proprietary knowledge TECH ADVANCEMENTS -​ Digital trading platforms- shopify, alibaba -​ logistics/supply chain software - can track where within the global chain that inputs parts are at any point - customers specific target marketing - data flow- between countries, supply partners and customers-> companies - remote work - smart contracts Chap 5) innovation across tech firms' boundaries article, Extended enterprise (EE model)- A new business model emerging from outsourcing strat that involves a network of interconnected organization working collaboratively to innovate and create value. Knowledge-based view- a perspective that emphasizes the importance of knowledge as a critical resource for competitive advantage and innovation. Dynamic capabilities-the ability of firms integrate, build and reconfigure internal and external competencies to address rapidly changing environments TOYOTAS success: they showcase that trust and collaborative networks can lead to superior performance. Article on Forbes IT outsourcing+ai and global trade+ future of outsourcing SHifts in outsourcing destinations: traditionally-india, china, vietnam, but it is increasingly trending towards nearshore outsourcing -> central america and eastern europe Shift from multi-vendor outsourcing to a strong partnership with fewer providers, -> They emphasize high-quality services and knowledge process outsourcing (KPO) for research, data analysis and process improvements. HOW TO PROTECT BUSINESS FROM CYBER ATTACKS 1)​ Conducting due diligence on partners security practices 2)​ Defining security requirements in contracts 3)​ Implementing encryption protocols and access controls 4)​ Regular security audits and training personal 5)​ Monitoring and incident response planning  6)​ Compliance with data protection laws and fostering open communication with partners. IMPACT ON AI TECH on traded goods 1)​ Innovation like 3d printing are reducing the need for imports. 2)​ Ai can improve agriculture yields, potentially reducing the need to ship food products 3)​ US gov funding for AI research aims to boost domestic production of key products KEY BENEFITS FOR IT OUTSOURCING 1)access to specialized talent 2) cost savings 3) no distractions 4)​ Fractional CIO and CISOs Chap 6) Global supply chains in the post-pandemic world, global supply chain effects from a pandemic GSC before and after the pandemic -​ Many manufacturers relief on a single source for vital products and materials -​ Just in time (JIT) production models made companies more vulnerable to supply chain disruption -​ Companies are now looking to reduce dependence from china -​ Emphasis on cost savings in GSC managements can be risky ARTICLE on Global outsourcing and offshoring STRATEGYS 1)​ Mapping supply chain strategy: this process helps categorize suppliers based on their risk levels and potential impact of loosing them. 2)​ Inventory management -> holding intermediate inventory or safety stock is suggested as a strategy against supply shocks 3)​ Process innovation-> atomation 4)​ Article on globalization war THE CHALLENGES THE WTO faces 1)​ Regional trade agreements 2)​ Stalled negotiations: WTO is struggling with the DOHA developments round, leading to frustration among member countries and a shift towards bilateral and regional agreements for more immediate trade benefits 3)​ Challenges to WTO role: the proliferation of RTAs described as the “spaghetti bowl” complicates the international trading landscape and poses a threat to WTO rules making it harder to achieve a global trade system. 4)​ Globalization vs. national interest: the rise of economic nationalism and public criticism of globalization have put pressure on the WTO, highlighting the need for change to adapt to geopolitical dynamics. Ivey Note: International Trade Policy: (omit pages 8-13) Tariffs (price-based constraints on some imports)- it is as tax charged on imports importer pays the tax but tries to pass it to the consumer. Goals of tariffs:1) makes local production more competitive 2) generates $ to gov 3) reduce the number of imports Subsidies: are offers to domestic companies to compete with imports. Gov offer, low-interest rate loans or tax breaks to lower the cost US gov doesn't offer much of this support unless the local gov provides subsidies for local producers. The trade-off someone has to pay for those substitutes and it is usually the taxpayers. Subsidies do not raise the price of the import, it has no expected effect on the price of the product in the market. FORM 2 of subsidies: Export sub: gov offers to stimulate the exports of domestic firms, gov will offer financial aid, in turn, these firms export more and stimulate national income. Quotas: “quantity limit” -> Quotas are usually a strategy for foreign companies to build manufacturing plants in the exporting country. Embargo-> sets the quota limit to 0, usually for political reasons. Economic cost of quotas are that they limit access by consumers to otherwise available products and tend to raise the prices of the protected products. CARTELS-> operate in international trade to fix prices or quantities sold in various markets. They aim to maximize the profits of their members. ALL cartels are country associations because most countries have outlawed anti-monopoly policies. DE BEERS AND OPEC are examples of cartels,  NONTARIFF Barriers-> NTBs: Gov use the as a barrier to product domestic producers and pursue goals such as maintaining health and sanitary conditions, and protect labor rights and the enviroment. These include: bureaucratic delays in processing requests Quality standards that preclude foreign-produced goods 1)These measures are widely used becasue domestic companies and people hurt by foreign competition make huge efforts to convince gov that restrictions would benefit them. 2)Import substitution emerges when gov put high tarrifs on selected products, so it encourages local or foreign investors to undertake local production of formerly imported products. 4) balance of payments: to improve BOP, restrictions are placed on broad class of imports or all imports or support exports or local business. Improving BOP can also be placed on capital flows (taxing foreign investements) + taxing imports/exports. These types of policys are imposed during BOP crises. DUMPING-> selling into a foreign market at a price below the firms cost. Dumping harms local firms and strethen foreign competititors. “Dumping claims” can be used unjustifiably. Company strategy for dealing with Barriers  1.​ negotiate with the government, find an alternative I,e produce locally. This points to direct investment, licensing local firm, use of turnkey ventures or any other organizational strategy that employes local production. 2.​ Establish production in more than one country to remove the “hostage problem”. 3.​ Many countries allow relative unrestricted importation of intermediate goods. So assemble product locally and source all the parts elsewhere. 4) foreign company has a joint venture with domestic producers