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INTERNATIONAL BUSINESS AND TRADE Tony Angelo C. Alvaran  Table of Contents Module 1: Introduction to International Business Introduction 1 Learning Objectives...

INTERNATIONAL BUSINESS AND TRADE Tony Angelo C. Alvaran  Table of Contents Module 1: Introduction to International Business Introduction 1 Learning Objectives 1 Lesson 1. Opening Case: Google’s Steep Learning Curve in China 2 Lesson 2. International Business Defined 6 Lesson 3. The Stakeholders 7 Lesson 4. Forms of international Business 8 Lesson 5. The Globalization Debate 8 Assessment Task 12 Summary 12 References 13 Module 2: International Trade Introduction 15 Learning Objectives 15 Lesson 1. Opening Case: China in Africa 16 Lesson 2. International Trade Theory 18 Lesson 3. Political and Legal Factors Affecting International Trade 22 Assessment Task 24 Summary 25 References 25 Module 3: Foreign Direct Investment Introduction 28 Learning Objectives 28 Lesson 1. Foreign Direct Investment Explained 29 Lesson 2. Why Government Encourage FDI 30 Lesson 3. How Government Discourage or Restrict FDI 31 Lesson 4. How Government Encourage FDI 31 Assessment Task 32 Summary 32 References 32 Course Code: ENT 9 Course Description: This course provides an overview of the environment, concepts, and basic differences involved in international business. Topics include forms of foreign involvement, international trade theory, governmental influences on trade and strategies, international organizations, multinational corporations, personnel management, and international marketing. Upon completion, students should be able to describe the foundation on international business. Course Intended Learning Outcomes (CILO): At the end of the course, students should be able to: 1. Develop an understanding of the overview of the environment, concepts, and basic differences involved in international business; 2. Evaluate the forms of foreign involvement, international trade theory, governmental influences on trade and strategies, international organizations, multinational corporations, personnel management, and international marketing; 3. Discuss the impacts of international business and trade to developing countries; and 4. Describe the foundation on international business. Course Requirements: *Components of Class Standing are reflected in the OBTLP  Class Standing - 60%  Major Exams - 40% Periodic Grade 100% PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam) MIDTERM GRADE : 30% (Prelim Grade) + 70 % [60% (Activity 5-7) + 40% (Midterm exam)] FINAL GRADE : 30% (Midterm Grade) + 70 % [60% (Activity 8-10) + 40% (Final exam)]  MODULE 1 INTRODUCTION TO INTERNATIONAL BUSINESS Introduction This module introduces you to the study of international business. To engage you to the topic, a case is presented in Lesson 1. It is advised that you immerse yourselves in the case first as the discussions progress. With Google Inc., the largest Internet search-engine organization, you will begin to learn what makes international business such an important topic for students like you. Because international business is a vital ingredient in strategic management and entrepreneurship, this module introduces you to the basic concept of the subject matter. This will also develop the perspectives that will help you understand international business. Learning Outcomes At the end of this module, students should be able to: 1. discuss the operation of an international business; 2. identify opportunities and challenges of international business; and 3. evaluate the effects of international business to stakeholders. 1 Lesson 1. Opening Case: Google’s Steep Learning Curve in China Of all the changes going on in the world, the Internet is the one development that many people believe makes our world a smaller place—a flat or flattening world, according to Thomas Friedman, Pulitzer Prize–winning author of The World Is Flat: A Brief History of the Twenty-First Century and. The Lexus and the Olive Tree: Understanding Globalization. Because of this flattening effect, Internet businesses should be able to cross borders easily and profitably with little constraint. However, with few exceptions, cross-border business ventures always seem to challenge even the most able of competitors, Internet-based or not. Some new international ventures succeed, while many others fail. But in every venture the managers involved can and do learn something new. Google Inc.’s learning curve in China is a case in point (International Business, 2020). In 2006, Google announced the opening of its Chinese-language website amid great fanfare. While Google had access to the Chinese market through Google.com at the time, the new site, Google.cn, gave the company a more powerful, direct vehicle to further penetrate the approximately 94 million households with Internet access in China. As company founders Larry Page and Sergey Brin said at the time, “Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there. Building a real operation in China should increase our influence on market practices and certainly will enhance our service to the Chinese people” (Page & Brin, 2005). A Big Market, Bigger Concerns Google’s move into China gave it access to a very large market, but it also raised some ethical issues. Chinese authorities are notorious for their hardline censorship rules regarding the Internet. They take a firm stance against risqué content and have objected to The Sims computer game, fearing it would corrupt their nation’s youth. Any content that was judged as possibly threatening “state security, damaging the nation’s glory, disturbing social order, and infringing on other’s legitimate rights” was also banned (Oates, 2004). When asked how working in this kind of environment fit with Google’s informal motto of “Don’t be evil” and its 2 code-of-conduct aspiration of striving toward the “highest possible standard of ethical business,” Google’s executives stressed that the license was just to set up a representative office in Beijing and no more than that—although they did concede that Google was keenly interested in the market. As reported to the business press, “For the time being, [we] will be using the [China] office as a base from which to conduct market research and learn more about the market” (Sheriff, 2005). Google likewise sidestepped the ethical questions by stating it couldn’t address the issues until it was fully operational in China and knew exactly what the situation was. One Year Later Google appointed Dr. Kai-Fu Lee to lead the company’s new China effort. He had grown up in Taiwan, earned BS and PhD degrees from Columbia and Carnegie Mellon, respectively, and was fluent in both English and Mandarin. Before joining Google in 2005, he worked for Apple in California and then for Microsoft in China; he set up Microsoft Research Asia, the company’s research-and-development lab in Beijing. When asked by a New York Times reporter about the cultural challenges of doing business in China, Lee responded, “The ideals that we uphold here are really just so important and noble. How to build stuff that users like, and figure out how to make money later. And ‘Don’t Do Evil’ (referring to the motto ‘Don’t be evil’). All of those things. I think I’ve always been an idealist in my heart” (Thompson, 2006). Despite Lee’s support of Google’s utopian motto, the company’s conduct in China during its first year seemed less than idealistic. In January, a few months after Lee opened the Beijing office, the company announced it would be introducing a new version of its search engine for the Chinese market. Google’s representatives explained that in order to obey China’s censorship laws, the company had agreed to remove any websites disapproved of by the Chinese government from the search results it would display. For example, any site that promoted the Falun Gong, a government-banned spiritual movement, would not be displayed. Similarly (and ironically) sites promoting free speech in China would not be displayed, and there would be no mention of the 1989 Tiananmen Square massacre. As one Western reporter noted, “If you search for ‘Tibet’ or ‘Falun Gong’ most anywhere in the world on google.com, you’ll find thousands of blog entries, news items, and chat rooms on Chinese repression. Do the same search inside China on google.cn, and most, if not all, of these links will be gone. Google will have erased them completely” (International Business, 2020). 3  Google’s decision didn’t go over well in the United States. In February 2006, company executives were called into congressional hearings and compared to Nazi collaborators. The company’s stock fell, and protesters waved placards outside the company’s headquarters in Mountain View, California. Google wasn’t the only American technology company to run aground in China during those months, nor was it the worst offender. However, Google’s executives were supposed to be different; given their lofty motto, they were supposed to be a cut above the rest. When the company went public in 2004, its founders wrote in the company’s official filing for the US Securities and Exchange Commission that Google is “a company that is trustworthy and interested in the public good.” Now, politicians and the public were asking how Google could balance that with making nice with a repressive Chinese regime and the Communist Party behind it (Page & Brin, 2004). One exchange between Rep. Tom Lantos (D- CA) and Google Vice President Elliot Schrage went like this: Lantos: You have nothing to be ashamed of? Schrage: I am not ashamed of it, and I am not proud of it…We have taken a path, we have begun on a path, we have done a path that…will ultimately benefit all the users in China. If we determined, congressman, as a result of changing circumstances or as a result of the implementation of the Google.cn program that we are not achieving those results then we will assess our performance, our ability to achieve those goals, and whether to remain in the market (McCullagh, 2006). See the video “Google on Operating inside China” athttp://news.cnet.com/1606-2 6040114.html. In the video, Schrage, the vice president for corporate communications and public affairs, discusses Google’s competitive situation in China. Rep. James Leach (R-IA) subsequently accuses Google of becoming a servant of the Chinese government. Google Ends Censorship in China In 2010, Google announced that it was no longer willing to censor search results on its Chinese service. The world’s leading search engine said the decision followed a cyberattack that it believes was aimed at gathering information on Chinese human rights activists (Vascellaro, Dean, Gorman, 2010). Google also cited the Chinese government’s restrictions on the Internet in China during 2009 (Branigan, 2010). Google’s announcement led to speculation whether Google would close its offices in China or would close Google.cn. Human rights activists cheered Google’s move, while business pundits speculated on the possibly huge 4 financial costs that would result from losing access to one of the world’s largest and fastest- growing consumer markets. In an announcement provided to the US Securities and Exchange Commission, Google’s founders summarized their stance and the motivation for it. Below are excerpts from Google Chief Legal Officer David Drummond’s announcement on January 12, 2010. (Drummond, 2010). Like many other well-known organizations, we face cyberattacks of varying degrees on a regular basis. In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China, resulting in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident—albeit a significant one—was something quite different (International Business, 2020). First, this attack was not just on Google. As part of our investigation, we have discovered that at least twenty other large companies from a wide range of businesses—including the Internet, finance, technology, media, and chemical sectors—have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant US authorities (International Business, 2020). Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date, we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves (International Business, 2020). Third, as part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of US-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers (International Business, 2020). 5  We have taken the unusual step of sharing information about these attacks with a broad audience, not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech. In the last two decades, China’s economic reform programs and its citizens’ entrepreneurial flair have lifted hundreds of millions of Chinese people out of poverty. Indeed, this great nation is at the heart of much economic progress and development in the world today (International Business, 2020). The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised (International Business, 2020). The Chinese government’s first response to Google’s announcement was simply that it was “seeking more information.” In the interim, Google “shut down its censored Chinese version and gave mainlanders an uncensored search engine in simplified Chinese, delivered from its servers in Hong Kong” (Branigan, 2010). Like most firms that venture out of their home markets, Google’s experiences in China and other foreign markets have driven the company to reassess how it does business in countries with distinctly different laws (McCracken, 2010). Lesson 2. International Business Defined As suggested by the opening case study on Google, international business relates to any situation where the production or distribution of goods or services crosses country borders. Globalization—the shift toward a more interdependent and integrated global economy— promotes greater opportunities for international business. Such globalization can happen in terms of markets, where trade barriers are shrinking and consumer preferences are changing. It can also be evident in terms of production, where a company can source goods and services easily from other countries. There are managers who consider the definition of international business to relate purely to “business,” as suggested in the opening case. However, a general definition of international business may serve you better both personally and professionally in 6 a world that has moved beyond simple industrial production. International business covers a full range of cross-border exchanges of goods, services, or resources among two or more countries. These exchanges can go more than the exchange of money for physical goods to include international transfers of other resources like people, intellectual property, and contractual assets or liabilities. The entities engaged in international business range from large multinational firms with a huge number of employees doing business in many countries around the globe to a small one-person company having the role of an importer or exporter. This general definition of international business also covers for-profit border-crossing transactions as well as transactions stimulated by nonfinancial gains that affect a business’s future (International Business, 2020). Strategic Management and Entrepreneurship A knowledge concerning both strategic management and entrepreneurship will improve your understanding of international business. Strategic management, id defined, is the body of knowledge that answers questions about the development and implementation of good strategies and is focused mainly with the determinants of firm performance. A strategy, on the other hand, is the central, integrated, and externally oriented concept of how an organization will achieve its performance objectives. One of the basic tools of strategy is a SWOT (strengths, weaknesses, opportunities, threats) assessment (Sanders, 2007). The SWOT tool help you take stock of an organization’s internal and external characteristics, its strengths, weaknesses, opportunities, and threats. Because strategic management is concerned with organizational performance, be that social, environmental, or economic, your understanding of a company’s SWOT will assist you better evaluate how international business factors should be accounted for in the firm’s strategy. Lesson 3. The Stakeholders As presented from the previous lesson, international business refers to a broad set of entities and activities. But who are the people that care about international business in the first place? To answer this, let us discuss stakeholders and stakeholder analysis. A stakeholder, if defined, is an individual or organization whose interests may be affected as the result of what another individual or organization does. Stakeholder analysis is a technique you use to identify and assess the importance of key people, groups of people, or institutions that may significantly 7 influence the success of your activity, project, or business (Principles of Management, n.d.). In the perspective of what you are learning here, individuals or organizations will have an interest Lesson 4. Forms of International Business (International Business, 2020) The Forms of International Business International businesses can take on a variety of forms. Knowing that international business, in accordance to our general definition, spans business, government, and non- governmental organizations (popularly known as NGOs), let us start by looking at business. A business, id we define, can be a person or organization engaged in commerce with the objective of generating a profit. Business profit is typically measured in financial and economic terms. Nevertheless, some level of sustained financial and economic profits are required for a business to pursue other sustainable outcomes gauged as social or environmental performance. Nongovernmental Organizations National nongovernmental organizations, popularly known as NGOs, include any nonprofit, voluntary citizens’ groups that are organized on a local, national, or international level. International NGOs (NGOs whose operations cross borders) date back from at least 1839. Lesson 5. The Globalization Debate At present’s global economy, everybody is accustomed to purchasing goods from other countries—examples include electronics from Taiwan, vegetables from Mexico, clothes from China, cars from Korea, and skirts from India. A huge number of modern shoppers take the “Made in [a foreign country” stickers on their products for granted. Long distance commerce was not always this usual, although foreign trade (the movement of goods from one geographic region to another) has been a key factor in human affairs since prehistoric times. Thousands of years ago, merchants transported only the most precious items (examples include silk, gold and other precious metals and jewels, spices, porcelains, and medicines) via ancient, extended land and sea trade routes, which includes the Silk Road through central Asia. 8 Moving goods great distances was simply too difficult and expensive to waste the effort on ordinary products, although people often carted grain and other foods over shorter distances from farms to market towns (Bernstein, 2008). The globalization debate is not so much a debate as it is a stark difference of opinion on how the internationalization of businesses is influencing countries’ cultural, consumer, and national identities, and if these changes are desirable. Let us take for an instance, the ubiquity of such food purveyors as Coca-Cola and McDonald’s in practically every nation shows the fact that some consumer tastes are converging, though at the likely expense of local beverages and foods. Take note that, globalization is the shift toward a more interdependent and integrated global economy. Globalization is fueled largely by (1) the decline of trade and investment barriers and (2) new technologies (like the Internet). The debate we are discussing surrounds whether and how fast markets are actually merging together (International Business, 2020). We Live in a Flat World (Friedman, 2005) The flat-world view is authored by Thomas Friedman (2005) in his best seller, The World Is Flat. It is nonetheless essential to understand the flat-world perspective. He covers the world for the New York Times, and his access to significant local authorities, corporate executives, local Times bureaus and researchers, the Internet, and a voice recorder enabled him to compile huge information. A large number of people consider globalization a modern phenomenon, but according to the author, this is its third stage already. The first stage of global development is called “Globalization 1.0.” It started with Columbus’s discovery of the so-called New World and ran from 1492 to about 1800. Driven by nationalism and religion, this long stage was described by how much industrial power nations could produce and apply. “Globalization 2.0” dated from about 1800 up to 2000. It was disrupted by the Great Depression and both World Wars and was mainly shaped by the emerging power of huge, multinational corporations. Globalization 2.0 flourished with the European mercantile stock companies as they expanded in exploring new markets, cheap labor, and raw materials. It continued with subsequent advances in transportation (both sea and rail). This period was a witness of the introduction of modern communications and lower shipping costs. “Globalization 3.0” on the other hand, started around 2000, with advances in global electronic interconnectivity that allowed individuals to communicate like never before. 9  Talking about Globalization 1.0, nations dominated global expansion. Globalization 2.0, on the other hand, was driven by the ascension of multinational companies, which pushed global development. In Globalization 3.0, major software advances have permitted an unprecedented number of people globally to work together with limitless potential. How the World Got Flat. Friedman identifies ten major events that helped reshape the modern world and make it flat:  11/9/89: When the walls came down and the windows went up. The fall of the Berlin Wall ended old-style communism and planned economies. Capitalism ascended.  8/9/95: When Netscape went public. Internet browsing and e-mail helped propel the Interne by making it commercially viable and user friendly.  Work-flow software: Let’s do lunch. Have your application talk to my application. With more powerful, easier-to-use software and improved connectivity, more people can share work. Thus, complex projects with more interdependent parts can be worked on collaboratively from anywhere.  Open-sourcing: Self-organizing, collaborative communities. Providing basic software online for free gives everyone source code, thus accelerating collaboration and software development.  Outsourcing: Y2K. The Internet lets firms use employees worldwide and send specific work to the most qualified, cheapest labor, wherever it is. Enter India, with educated and talented people who work at a fraction of US or European wages. Indian technicians and software experts built an international reputation during the Y2K millennium event. The feared computer-system breakdown never happened, but the Indian IT industry began handling e-commerce and related businesses worldwide.  Offshoring: Running with gazelles, eating with lions. When it comes to jobs leaving and factories being built in cheaper places, people think of China, Malaysia, Thailand, Mexico, Ireland, Brazil, and Vietnam. But going offshore isn’t just moving part of a manufacturing or service process. It means creating a new business model to make more goods for non-US sale, thus increasing US exports.  Supply-chaining: Eating sushi in Arkansas. Walmart demonstrates that improved acquisition and distribution can lower costs and make suppliers boost quality.  Insourcing: What the guys in funny brown shorts are really doing. This kind of service collaboration happens when firms devise new service combinations to improve service. Take United Parcel Service (UPS). The “brown” company delivers packages globally, but 10  it also repairs Toshiba computers and organizes delivery routes for Papa John’s pizza. With insourcing, UPS uses its logistics expertise to help clients create new businesses.  Informing: Google, Yahoo!, MSN Web Search. Google revolutionized information searching. Its users conduct some one billion searches annually. This search methodology and the wide access to knowledge on the Internet transforms information into a commodity people can use to spawn entirely new businesses.  The steroids: Digital, mobile, personal, and virtual. Technological advances range from wireless communication to processing, resulting in extremely powerful computing capability and transmission. One new Intel chip processes some 11 million instructions per second (MIPS), compared to 60,000 MIPS in 1971. We Live in a Multi-domestic World, Not a Flat One (Ghemawat, 2001) Pankaj Ghemawat, an international business professor, takes strong issue with the view that the world is flat and instead supports a world he identified as “semi-globalized” and “multi- domestic.” International business and global strategy would be easy if the world was flat. It was also suggested that, it would be domestic strategy applied to a bigger market. In the semi- globalized world global strategy starts with noticing national differences. Ghemawat’s research suggests that to study “barriers to cross-border economic activity” you will use a “CAGE” analysis. The CAGE framework covers these four factors:  Culture  Administration  Geography  Economics 11 Assessment Task 1 Analyze the case in Lesson 1. Use the following format. I. Case Summary II. Case Problem III. Case Facts IV. Alternative Courses of Action V. Evaluation of Alternatives and Solution to the Problem VI. Recommendation VII. Conclusion Note: You may find these guide questions useful to your case analysis. 1. Can Google afford not to conduct business in China? 2. Which stakeholders would be affected by Google’s possible decision to shut down its China operations? 3. How would these people be affected? 4. What trade-offs would Google be sacrificing? Summary International business includes a full range of cross-border exchanges of goods, services, or resources between two or more countries. These exchanges can go beyond the exchange of money for physical goods to cover international transfers of other resources like people, intellectual property. As an international business student, you can identify the people and organizations that might have an interest in international business if their interests are influenced now or in the future by it. Such international business stakeholders are commonly the employees, managers, businesses, governments, and nongovernmental organizations. International businesses have a variety of forms. Government and nongovernmental organizations also encompass international business. The globalization debate compares the opinions of Thomas Friedman against the works of Pankaj Ghemawat. The different views help the students to better understand the context of international business. 12  References Bernstein, W. J., (2008). A Splendid Exchange: How Trade Shaped the World. New York. Atlantic Monthly Press Branigan, T. (2010). Google to End Censorship in China over Cyber Attacks. http://www.guardian.co.uk/technology/2010/jan/12/google-china-ends-censorship Drummond, D. (2010). A New Approach to China. Official Google Blog. http://googleblog.blogspot.com/2010/01/new-approach-to-china.html Friedman, T. L. (2005). The World Is Flat. New York: Farrar, Straus and Giroux. p48–159 Ghemawat, P. (2001). Distance Still Matters, Harvard Business Review 79. No. 8: 137–47. International Business. (2020). Saylor Academy. https://resources.saylor.org/wwwresources/archived/site/textbooks/International%20Busi ness.pdf McCracken, H. (2010). Google’s Bold China Move. PCWorld. http://www.pcworld.com/article/192130/googles_bold_china_move.html McCullagh, D. (2006). “Congressman Quizzes Net Companies on Shame,” CNET. http://news.cnet.com/Congressman-quizzes-Net-companies-on-shame/2100-1028_3- 6040250.html Oates, J (2004). Chinese Government Censors Online Games. http://www.theregister.co.uk/2004/06/01/china_bans_games Page, L. & Brin, S. (2005). Founders’ Letter. Google Investor Relations. http://investor.google.com/corporate/2005/founders-letter.html Page, P. & Brin, S. (2004). Founders’ IPO Letter,” Google Investor Relations.” http://investor.google.com/corporate/2004/ipo-founders-letter.ht Principles of Management. (n.d.). Nyack, NY 13 Sanders, W. G. (2007). Strategic Management: A Dynamic Perspective, Concepts and Cases. Upper Saddle River, NJ. Pearson Education Sherriff, L. (2005). Google Goes to China. http://www.theregister.co.uk/2005/05/11/google_china Thompson, C. (2006). Google’s China Problem (and China’s Google Problem). New York Times. http://www.nytimes.com/2006/04/23/magazine/23google.html Vascellaro, J. Dean, J., and Gorman, S. (2010). Google Warns of China Exit over Hacking. http://online.wsj.com/article/SB126333757451026659.html#ixzz157TXi4FV MODULE 2 INTERNATIONAL TRADE 14  Introduction As students, it is easy to think that trade is merely about business interests in each country. You have to think that global trade is much more than that. There is a merging and, at times, a conflict of the interests of the stakeholders—from businesses to governments to local citizens. In the past years, technological advancements, a renewed enthusiasm for entrepreneurship, and a global sentiment that promotes free trade have further linked people, businesses, and markets—all flatteners that are helping expand global trade and investment. A vital part of international business is understanding the history of international trade and what stimulates countries to encourage or discourage trade within their borders. In this module, we will discover the evolution of international trade theory to our present time. Learning Outcomes At the end of this module, students should be able to: 1. enumerate the political and legal impacts to international trade; 2. analyze the applicability of classical and modern trade theories in a multinational organization; and 3. formulate strategies that would help international businesses in operating to other markets. Lesson 1. Opening Case: China in Africa 15  Foreign companies have been doing business in Africa for centuries. Much of the trade history of past centuries has been colored by European colonial powers promoting and preserving their economic interests throughout the African continent (Meredith, 2005). After World War II and since independence for many African nations, the continent has not fared as well as other former colonial countries in Asia. Africa remains a continent plagued by a continued combination of factors, including competing colonial political and economic interests; poor and corrupt local leadership; war, famine, and disease; and a chronic shortage of resources, infrastructure, and political, economic, and social will (Wall Street Journal, 2010). And yet, through the bleak assessments, progress is emerging, led in large part by the successful emergence of a free and locally powerful South Africa. The continent generates a lot of interest on both the corporate and humanitarian levels, as well as from other countries. In particular in the past decade, Africa has caught the interest of the world’s second largest economy, China (Rice, 2005). At home, over the past few decades, China has undergone its own miracle, managing to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment. Today, China is involved in economic engagement, bringing its success story to the continent of Africa. As professor and author Deborah Brautigam (2010) explains, China’s “current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China's own successful development and of decades of its failed aid projects in Africa.” According to CNN (2010), “China has increasingly turned to resource-rich Africa as China's booming economy has demanded more and more oil and raw materials”. Trade between the African continent and China reached $106.8 billion in 2008, and over the past decade, Chinese investments and the country’s development aid to Africa have been increasing steadily (China Daily, 2009). “Chinese activities in Africa are highly diverse, ranging from government to government relations and large state owned companies (SOE) investing in Africa financed by China’s policy banks, to private entrepreneurs entering African countries at their own initiative to pursue commercial activities (Hon, Jansson, Shelton, Haifang, Burke, Kiala, 2010). Since 2004, eager for access to resources, oil, diamonds, minerals, and commodities, China has entered into arrangements with resource-rich countries in Africa for a total of nearly 16 $14 billion in resource deals alone. In one example with Angola, China provided loans to the country secured by oil. With this investment, Angola hired Chinese companies to build much- needed roads, railways, hospitals, schools, and water systems. Similarly, China provided nearby Nigeria with oil-backed loans to finance projects that use gas to generate electricity. In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. In Ghana, a Chinese government loan will be repaid in cocoa beans (Brautigam, 2010). The Export-Import Bank of China (Ex-Im Bank of China) has funded and has provided these loans at market rates, rather than as foreign aid. While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work aren’t competitive. Furthermore, the benefit to local workers may be diminished as Chinese companies bring in some of their own workers, keeping local wages and working standards low (International Business, 2020). In 2007, UNCTAD (United Nations Conference on Trade and Development) Press Office noted the following: Over the past few years, China has become one of Africa´s important partners for trade and economic cooperation. Trade (exports and imports) between Africa and China increased from US$11 billion in 2000 to US$56 billion in 2006….with Chinese companies present in 48 African countries, although Africa still accounts for only 3 percent of China´s outward FDI [foreign direct investment]. A few African countries have attracted the bulk of China´s FDI in Africa: Sudan is the largest recipient (and the 9th largest recipient of Chinese FDI worldwide), followed by Algeria (18th) and Zambia (19th) (United Nations, 2007). Observers note that African governments can learn from the development history of China and many Asian countries, which now enjoy high economic growth and upgraded industrial activity. These Asian countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general but also for attracting and benefiting from efficiency-seeking and export-oriented FDI (United Nations, 2005). 17  Criticized by some and applauded by others, it’s clear that China’s investment is encouraging development in Africa. China is accused by some of ignoring human rights crises in the continent and doing business with repressive regimes. China’s success in Africa is due in large part to the local political environment in each country, where either one or a small handful of leaders often control the power and decision-making. While the countries often open bids to many foreign investors, Chinese firms are able to provide low-cost options thanks in large part to their government’s project support. The ability to forge a government-level partnership has enabled Chinese businesses to have long-term investment perspectives in the region. China even hosted a summit in 2006 for African leaders, pledging to increase trade, investment, and aid over the coming decade (BBC News, 2007). The 2008 global recession has led China to be more selective in its African investments, looking for good deals as well as political stability in target countries. Nevertheless, whether to access the region’s rich resources or develop local markets for Chinese goods and services, China intends to be a key foreign investor in Africa for the foreseeable future (BBC News, 2007). Lesson 2. International Trade Theory (International Business, 2020) International Trade International trade theories are simply different theories to clarify international trade. Trade id defined, is the concept of exchanging goods and services between two people or entities. International trade, on the other hand, is the concept of this exchange between people or entities in two different countries. Classical or Country-Based Trade Theories Mercantilism. Introduced in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. The theory of mercantilism stated that a country’s wealth was measured by the amount of its gold and silver holdings. To simplify, mercantilists believed that a country should increase its holdings of gold and silver by encouraging exports and discouraging imports. In other words, if people in other countries buy more from you (exportation) than they sell to you (importation), then they have to pay you the difference in gold and silver. The goal of each country was to have a trade surplus, or a situation where the 18 value of exports are more than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is more than the value of exports. Absolute Advantage. As explained by Adam Smith (1776) questioned the leading mercantile theory of the time in The Wealth of Nations. He offered a new trade theory called absolute advantage. It focused on the ability of a country to produce a good more efficiently than another nation. The author argued that trade between countries should not be regulated or restricted by government policies or intervention. Smith said that trade should flow naturally in accordance to market forces. For example, In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Correspondingly, if Country B was better at producing another good, it could specialize as well. By specialization, countries would generate efficiencies, because their manpower would become more skilled by doing the same tasks. Production would also be more efficient, because there would be an incentive to create faster and better production methods to increase the specialization. Comparative Advantage. The trial to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In the other hand, another country may not have any useful absolute advantages. To address this, David Ricardo (English economist), introduced the theory of comparative advantage in 1817. He reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still take place between two countries. Comparative advantage happens when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does compared to other goods. The difference between these two theories is subtle. Comparative advantage emphasizes the relative productivity differences, whereas absolute advantage focuses on the absolute productivity. Heckscher-Ohlin Theory (Factor Proportions Theory). Both the theories of Smith and Ricardo were not able to help countries determine which products would give a country an advantage. These theories assumed that free and open markets would direct countries and producers to determine which goods they could produce more efficiently. During the early 19 onset of 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, emphasized on how a country could gain comparative advantage by producing products that use factors that were in abundance in the country. Their theory is anchored on a country’s production factors (land, labor, and capital) which provide the funds for investment in plants and equipment. They were able to identify that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply compared to demand would be cheaper; factors in great demand relative to supply would have higher prices. Their theory, also referred to as the factor proportions theory, suggested that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. On the other hand, countries would import goods that required resources that were in short supply, but higher demand. Leontief Paradox. During the 1950s, Wassily W. Leontief (Russian-born American economist) studied the US economy closely and noted that the United States was rich in capital and, therefore, should export more capital-intensive goods. However, his research that utilized actual data presented the opposite: the United States was importing more capital-intensive goods. Based on the factor proportions theory, the United States should have been importing labor-intensive goods, but instead it was actually exporting them. This analysis has been popularly known as the Leontief Paradox. That is because it was the reverse of what was expected by the factor proportions theory. In the following years, economists have noted historically at that point in time, labor in the United States was both available in stable supply and more productive than in many other countries; hence it is logical to export labor-intensive goods. Over the past decades, there are many economists have used theories and data to clarify and minimize the impact of the paradox. Yet, what remains to be clear Is that international trade is complex and is influenced by a large number and often-changing factors. Trade cannot be clarified neatly by one single theory, and essentially, our understanding of international trade theories continues to evolve. Modern or Firm-Based Trade Theories Country Similarity Theory. Steffan Linder (Swedish economist) developed the country similarity theory in 1961. He tried to clarify the concept of intra-industry trade. His theory suggested that consumers in countries that are in the same (or similar) stage of development would have similar preferences. In this firm-based theory, it was suggested that companies first 20 produce for domestic consumption. When they decide to explore exporting, the companies often find that markets that appear similar to their domestic one, in terms of customer preferences, offer the most potential for success. The country similarity theory then declares that most trade in manufactured goods will be between countries with similar per capita incomes, and intra--industry trade will be common. Linder’s theory is usually most useful in understanding trade in goods where brand names and product reputations are essential factors in the consumers’ decision-making and purchase processes. Product Life Cycle Theory. Raymond Vernon (Harvard Business School professor) developed the product life cycle theory during the 1960s. This theory originated from the field of marketing. It stated that a product life cycle has three distinct stages which includes: (1) new product, (2) maturing product, and (3) standardized product. The product life cycle theory assumed that production of the new product will take place completely in the home country of its innovation. During the 1960s, this was a useful theory to clarify the manufacturing success of the United States. US manufacturing was the worldwide dominant producer in many industries after Second World War. Global Strategic Rivalry Theory. This theory emerged in the 1980s and was anchored on the work of Pau Krugman and Kelvin Lancaster (both are well-known economists. Their theory focused on MNCs (multinational companies) and their efforts to establish a competitive advantage against other global firms in their industry. Firms will experience global competition in their industries and in order to succeed, they must develop competitive advantages. The critical ways that firms can create a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry, of defined, are the obstacles a new firm may encounter when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize are as follows:  R&D (research and development),  the ownership of IPR (intellectual property rights),  economies of scale,  unique business processes or methods as well as extensive experience in the industry, and  the control of resources or favorable access to raw materials. 21  Porter’s National Competitive Advantage Theory. In the continuous evolution of international trade theories, Michael Porter (Harvard Business School) developed a new model to clarify national competitive advantage in 1990. His theory stated that nation’s competitiveness in an specific industry relies on the capacity of the industry to innovate and upgrade. Porter’s theory emphasized on explaining why some nations are more competitive in certain industries. To elaborate his theory, Porter identified four determinants that he linked together. These are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. Lesson 3. Political and Legal Factors Affecting International Trade (International Business, 2020) Different Political Systems The study of political systems is considered extensive and complex. A political system, if defined. is basically the system of politics and government in a country. The political system governs a complete set of rules, regulations, institutions, and attitudes. A main differentiator of political systems is each system’s philosophy on the rights of the person and the group as well as the role of government. Every political system’s philosophy influence the policies that govern the local economy and business environment. For the record, there are more than thirteen major types of government. Each of which consists of a number of variations. We now focus on the overarching modern political philosophies. At one end of the extremes of political philosophies, or ideologies, is the so- called anarchism, which argues that individuals should control political activities and public government is both unnecessary and unwanted. At the other extreme is the so-called totalitarianism, which argues that every aspect of an individual’s life should be controlled and dictated by a strong central government. In modern day reality, neither extreme exists in its purest form. Most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. The combination is referred to as pluralism, which asserts that both public and private groups are important in a well-functioning political system. Although many countries are pluralistic politically, they may lean more to one extreme than the other. 22  There are countries that government controls more aspects of daily life than in others. While the common use treats totalitarian and authoritarian as synonyms, consider that there is a distinct difference. For the purpose of this module, the main significant difference is in ideology. Authoritarian governments center all control in the hands of one strong leader or a small group of leaders. Take note that these leaders have full authority. These leaders are not democratically elected and are not politically, economically, or socially responsible to the people in the country. Totalitarianism, as we go along this module, is a more extreme form of authoritarianism. It occurs when an authoritarian leadership is motivated by a distinct ideology, like communism. In totalitarianism, the ideology affects or controls the people, not just a person or party. Authoritarian leaders has no tendency to have a guiding philosophy and use more fear and corruption to maintain control. Democracy, in general, is the most common form of government across the globe today. Democratic governments obtain power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). Democracy has also variations, both in theory and practice, some of which provide better representation and more freedoms for their citizens than others. Different Legal Systems We now briefly focus on how the political and economic ideologies that define countries impact their legal systems. Essentially, there are three main kinds of legal systems. These are common law, civil law, and religious or theocratic law. Many countries actually have a combination of the three systems that create hybrid legal systems. Civil law is anchored on a detailed set of laws that constitute a code and emphasize on how the law is applied to the facts. This type is the most widespread legal system in the world. Common law, on the other hand, is based on traditions and precedence. In common law systems, judges are present to interpret the law and judicial rulings can set precedent. Religious law is also known as theocratic law and is anchored on religious guidelines. Reasons for Governments Intervention in Trade? Governments do have interventions when it comes to trade for a combination of political, economic, social, and cultural reasons. Politically, a country’s government may aim to 23 protect jobs or specific industries. There are industries that may be considered essential for national security purposes, like defense, telecommunications, and infrastructure. How Do Governments Intervene in Trade? While the past hundred years has seen a major shift toward free trade, there are many governments that continue to intervene in trade. Governments have a number of key policy areas that can be used to create rules and regulations to control and manage trade.  Tariffs.  Subsidies  Currency controls  Local content requirements  Antidumping rules  Free-trade zone  Administrative policies 24 Assessment Task 2 Analyze the case in Lesson 1. Use the following format. I. Case Summary II. Case Problem III. Case Facts IV. Alternative Courses of Action V. Evaluation of Alternatives and Solution to the Problem VI. Recommendation VII. Conclusion Note: the case in Module 2 involves Module 3 as well. You may find these guide questions useful to your case analysis. 1. If you were the manager of a Chinese business that was operating in Sudan, how would you address issues concerning business ethics and doing business with a oppressive regime? 2. If you were a foreign businessman or businesswoman working for a global oil company that was eager to get favorable government approval to invest in a local oil refinery in an African country, how would you handle any demands for paybacks (example are bribes)? Summary Trade, from the discussions presented in this module, is the concept of exchanging goods and services between two people or entities. On the other hand, international trade is the concept of this exchange between people or entities in two different countries. There are two known categories of international trade, classical, country-based and modern, firm-based. Up to date, there are more than thirteen major types of government and each type has multiple variations. At one end of the political ideology extremes is anarchism. The other extreme is totalitarianism. Note that neither extreme exists in its purest form in reality, instead, most countries have a combination of both. This is called pluralism. Democracy is the most common form of government across the globe. There are three types of legal systems: (1) civil law, (2) common law, and (3) religious law. Governments have several policy areas in which they can establish rules and regulations in order to control and manage trade, including tariffs, subsidies; 25 import quotas and VER, currency controls, local content requirements, antidumping rules, export financing, free-trade zones, and administrative policies. References BBC News. (2007). China in Africa: Developing Ties. http://news.bbc.co.uk/2/hi/africa/7086777.stm BBC News. (2006). Summit Shows China’s Africa Clout. http://news.bbc.co.uk/2/hi/business/6120500.stm Berkhout, A.J., Hartmann, D. and Trott, P. (2010). Connecting technological capabilities with market needs using a cyclic innovation model, R&D Management, vol. 40, no. 474–90 Brautigam, D. (2010). Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa. Foreign Affairs. http://www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s- eastern-promise Business Week (2006). The world’s most innovative firms, 24 April. China Daily. (2009). China-Africa Trade up 45 percent in 2008 to $107 Billion. http://www.chinadaily.com.cn/china/2009-02/11/content_7467460.html CNN. (2010). China: Trade with Africa on Track to New Record. http://articles.cnn.com/2010-10-15/world/china.africa.trade_1_china-and-africa-link- trade-largest-tradepartner?_s=PM:WORLD Hon, T., Jansson, J., Shelton, G., Haifang, L., Burke, C., Kiala, C. (2010). Evaluating China’s FOCAC Commitments to Africa and Mapping the Way Ahead(Stellenbosch, South Africa: Centre for Chinese Studies. University of Stellenbosch. http://www.ccs.org.za/wpcontent/uploads/2010/03/ENGLISH-Evaluating-Chinas- FOCAC-commitments-to-Africa-2010.pdf 26 International Business. (2020). Saylor Academy. https://resources.saylor.org/wwwresources/archived/site/textbooks/International%20Busi ness.pdf Meredith, M. (2005). The Fate of Africa. New York. Public Affairs Rice, A. (2005). The Nation: Why Is Africa Still Poor?. http://www.thenation.com/article/why-africa-still-poor?page=0 Ridley, M. (2010). Humans: Why They Triumphed. Wall Street Journal. http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations United Nations. (2007). United Nations Conference on Trade and Development, “Asian Foreign Direct Investment in Africa: United Nations Report Points to a New Era of Cooperation among Developing Countries. http://www.unctad.org/Templates/Webflyer.asp?docID=8172&intItemID=3971&lang=1 United Nations. (2005). United Nations Conference on Trade and Development, Foreign Direct Investment in Africa Remains Buoyant, Sustained by Interest in Natural Resources. http://news.bbc.co.uk/2/hi/africa/7086777.stm Pittaway, L., Robertson, M., Munir, K., Denyer, D. and Neely, A. (2004). Networking and innovation: a systematic review of the evidence, International Journal of Management Reviews, vol. 5/6, numbers 3 and 4, 137–68 Wall Street Journal. (2010). Why Africa Is Poor: Ghana Beats Up on Its Biggest Foreign Investors. http://online.wsj.com/article/SB10001424052748704804204575069511746613890.html MODULE 3 FOREIGN DIRECT INVESTMENT 27  Introduction This module provides an introduction to the concept and role of foreign direct investment. FDI can take many forms of incentives, regulations, and policies. Companies respond to these business incentives and regulations as they examine with which countries to do business with and in which to invest. Governments commonly encourage foreign investment in their own country or in another country by offering loans and incentives to businesses in their home country as well as businesses in the recipient country to give way for investment and trade in the country. The case in Lesson 1 presents to you a reality in line with the topic. Learning Outcomes At the end of this module, students should be able to: 1. discuss the importance of foreign direct investment; 2. enumerate the roles of foreign direct investment; 3. analyze why and how governments encourage foreign direct investment; and 4. evaluate why and how governments discourage foreign direct investments. Lesson 1. Foreign Direct Investment Explained (International Business, 2020) Types of International Investments Starting our discussion, there are two main categories of international investment. The two are portfolio investment and foreign direct investment. Portfolio investment, if defined, 28 refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. It is common that the nvestors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets. Governments want to control and regulate the flow of FDI so that local political and economic concerns are addressed. Global businesses are considered to be the most interested in using FDI to benefit their companies. As a result, these two players, the governments and companies, can at times be at odds. It is essential to understand why companies implement FDI as a business strategy and how governments regulate and manage FDI. Factors That Influence a Company’s Decision to Invest Now we will discover why and how companies choose to invest in foreign markets. Simply purchasing goods and services or deciding to invest in a local market relies on a business’s needs and overall strategy. Direct investment in a country takes place when a company decides to set up facilities to produce or market their products; or chooses to partner with, invest in, or buy a local company for control and access to the local market, production, or resources. Many considerations influence its decisions. These are as follows.  Cost  Logistics  Market  Natural resources  Know-how  Customers and competitors  Policy  Ease  Culture  Impact  Expatriation of funds  Exit Generally, there are two forms of FDI. These are horizontal and vertical FDI. Horizontal FDI takes place when a company is trying to open up a new market—a retailer, for example, that establishes a store in a new country to sell to the local market. Vertical FDI, on the other hand, 29 is when a company invests internationally to provide input into its core operations— commonly in its home country. In addition, a firm may invest in production facilities in another country. When a firm brings the goods or components back to its home country, this is called backward vertical FDI. When a firm sells the goods into the local or regional market, this is called forward vertical FDI. The largest global companies often uses both backward and forward vertical FDI depending on the industry they belong to. To continue, there are different kinds of FDI. In this lesson, two of which are greenfield and brownfield FDI. These are highly applicable to global companies. Greenfield FDIs takes place when multinational corporations penetrate developing countries to build new factories or stores. These new facilities are built from scratch (usually in an area where no previous facilities existed). The term has its origin from the idea of building a facility on a green field, like farmland or a forested location. In addition to establishing new facilities that best satisfy their needs, the companies also create new long-term employment in the foreign country. Common offering include tax breaks, subsidies, and other incentives to set up greenfield investments. Lesson 2. Why Governments Encourage FDI There is a significant number of governments that encourage FDI in their countries. This is a way to create employment, expand local technical knowledge, and increase their overall economic standards (Bremmer, 2010). Countries such as Hong Kong and Singapore realized long ago that both global trade and FDI would help them develop exponentially and improve the standard of living for their citizens. The result is, Hong Kong (before its return to China) was one of the easiest places to set up a new business. Guidelines were clearly available, and businesses could set up a new office in a short period of time or even days. Similarly, Singapore, while a bit more discriminatory on the size and type of business or company, offered foreign companies a clear, streamlined process for putting up a new company. In contrast, for the past years, many other countries in Asia (examples include India, China, Pakistan, the Philippines, and Indonesia) restricted or controlled FDI in their countries by demanding for extensive paperwork and bureaucratic approvals as well as local partners for any new foreign business. These policies crafted disincentives for many global companies. By the 1990s, a number of countries in Asia had caught the global trade bug and were actively 30 trying to change their policies to promote more FDI. Some countries were more successful than others, often as a result of internal political concerns and pressures rather than from any repercussions of global trade (United Nations, 2011). Lesson 3. How Governments Discourage or Restrict FDI (International Business, 2020) In most cases, governments find ways to limit or control foreign direct investment to protect local industries and key resources, preserve the national and local culture, protect segments of their domestic population, maintain political and economic independence, and manage or control economic growth. A government implements different policies and rules:  Ownership restrictions  Tax rates and sanctions Lesson 4. How Governments Encourage FDI (International Business, 2020) Governments aim to to promote FDI when they are eager to improve their domestic economy and attract new technologies, business know-how, and capital to their country. In these instances, many governments still try to manage and control the type, quantity, and even the nationality of the FDI to accomplish their domestic, economic, political, and social objectives.  Infrastructure  Administrative processes and regulatory environment  Investment in education  Political, economic, and legal stability 31 Assessment Task 3 Identify an international/multinational company which implemented FDI in the Philippines. Consider the following: 1. Brief background of the company 2. Greenfield or Brownfield FDI 3. Government restrictions in accordance to its industry 4. Government incentives in accordance to its industry Summary In general, there are two categories of international investment: portfolio investment and foreign direct investment (FDI). Portfolio investment is the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. On the other hand, FDI is an investment in or the acquisition of foreign assets with the intention to control and manage them. Direct investment in a country takes place when a company chooses to put up facilities to manufacture or market its products or seeks to partner with, invest in, or purchase a local company for control and access to the local market, production, or resources. References Bremmer, I. (2010). The End of the Free Market: Who Wins the War Between States and Corporations. New York: Portfolio 32 International Business. (2020). Saylor Academy. https://resources.saylor.org/wwwresources/archived/site/textbooks/International%20Busi ness.pdf United Nations. (2011). UNCTAD compiles statistics on foreign direct investment (FDI):Foreign Direct Investment database UNCTAD http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx?sRF_ActivePath=P,5,27 &s F_Expanded=,P,5 ,27&sCS_ChosenLang=en. 33