Global Business Study Guide PDF

Global Business Study Guide Chapter 1: Globalizing Business ❖ European & Global Business International business (IB): a firm that engages in international (cross-border) economic activities and/or the action of doing business abroad....

Global Business Study Guide Chapter 1: Globalizing Business ❖ European & Global Business International business (IB): a firm that engages in international (cross-border) economic activities and/or the action of doing business abroad. Multinational enterprise (MNE): a firm that engages in foreign direct investments and operates in multiple countries. Foreign direct investment (FDI): investments in, controlling and managing value-added activities in other countries. Emerging economies (emerging markets): economies that only recently established institutional frameworks that facilitate international trade and investment, typically with low-or middle- level income and above average economic growth. Gross domestic product (GDP): the sum of value added by resident firms, households and governments operating in an economy. ❖ Why study IB? Gross national product (GNP): gross domestic product plus income from nonresident sources abroad. Gross national income (GNI): GDP plus income from nonresident sources abroad. GNI is the term used by the World Bank and other international organizations to supersede the term GNP. Purchasing power parity (PPP): a conversion that determines the equivalent amount of goods and services different currencies can purchase. This conversion is usually used to capture the differences in cost of living in different countries. ❖ A unified Framework  Triple bottom line: performance along economic, social and environmental dimensions. First core perspective: an institution-based view Formal and informal rules Second core perspective: a resource-based view Suggests that firm’s success and failure around the globe are influenced by their environments. Liability of outsidership: the inherent advantage that outsiders experience in a new environment because of their lack of familiarity. ❖ Understanding Globalization Defining globalization Industry 4.0: disruptions of operations and supply chains through advances in digital technologies. Globalization: a process leading to greater interdependence and mutual awareness among economic, political and social units in the world, and among actors in general. Risk management: the identification, assessment and management of risks. Trends of globalization Liberalization: the removal of regulatory restrictions on business. Waves of globalizations: the pattern of globalization arising from a combination of long-term trends and pendulum swings. The current wave of globalization Reverse innovation: multinationals tapping into local knowledge in a less developed country to advance their global products. ❖ A glance at the Global Economy Indicators of economic power create different rankings for the most strong countries Economies in terms of size By assets outside the home economy By fortune 500 companies ❖ Debates & Extensions Global business vs. National societies  While globalization has dramatically reduced inequality between nations, it appears to contribute to rising inequalities within nations. Global business vs. Natural environment ❖ Implications for Practice Ethnocentric perspective: a view of the world through the lens of one’s own culture. Not-invented-here syndrome: the tendency to distrust new ideas coming from outside of one’s own organization or community. Global mindset: cognitive ability to connect your own activities to what is happening around the world. Cosmopolitans: the people embracing cultural diversity and the opportunities of globalization. Globalization-the trade-offs (Dani Rodrik) ❖ Describe the benefits from globalization. Do you agree with Dany Rodrik? Poverty eradication in China would not have been possible without the country’s globalization initiatives. Globalization provides the challenge of who is going to provide the institutional underpinnings needed. ❖ How does globalization affect workers in developed economies such as the United States or Europe? Low skilled workers do not benefit because they have to compete with workers from third world countries. High skilled workers benefit.  ❖ Describe the “Globalization Trilemma” Hyper-globalization National sovereignty Democracy You can have at most 2 out of 3 → Nature of the trade-offs Chapter 4: Firm Resources: Competitiveness & Growth ❖ Resource-based view: a theoretical perspective that posits that firm performance is fundamentally driven by firm-specific resources. ❖ Identifying Resources Competitive advantage: the ability of a firm to outperform its rivals. Resources: the tangible and intangible assets a firm uses to choose and implement its strategies. Primary resources: the tangible and intangible assets as well as human resources that a firm uses to choose and implement its strategies. Capabilities: firm specific abilities to use resources to achieve organizational objectives. Primary resources Tangible assets: assets that are observable and easily quantified.  Financial assets: reflect the depth of a firm’s financial pockets. Physical assets: include plants, offices, infrastructure and equipment. Intangible assets: assets that are hard to observe and difficult (or sometimes impossible) to quantity. Technological resources: include patents, licenses and copyrights that entitle the firm to intellectual property rights in technologies or products and enable it to generate valuable products. Reputational resources: reflect the value of a firm’s reputation. ◆ Goodwill: the value of a firm’s abilities to develop and leverage its reputation. Human resources: resources embedded in individuals working in an organization. ◆ Individual employees’ skills, talent, and knowledge  ◆ Individual employees’ capacity for collaboration and their abilities for interpersonal interaction within teams. ◆ Employees’ shared values, traditions and social norms within an organization. Organizational culture: employees’ shared values, traditions and social norms within an organization. Capabilities Value chain: a chain of activities vertically related in the production of goods and services.  Firms may concentrate on selected stages of the value chain. Dynamic capabilities: higher level capabilities that enable an organization to continuously adapt to new technologies and changes in the external environment. ❖ Appraisal resources: The VRIO Framework VRIO Framework: the resource-based framework that focuses on the value creation (V), rarity(R), imitability (I), and organizational (O) aspects of resources. The question of rarity  Temporary competitive advantage: the ability to outperform rivals for a limited time. The question of imitability Causal ambiguity: the difficulty of identifying the causal determinant of successful firm performance. Social complexity: the socially complex ways of organizing typical of many firms. The question of organization Sustainable competitive advantage: the ability to deliver persistently above-average performance. Appropriability: the ability of the firm to appropriate the values for itself. Depends on; ◆ Revenues received from customers ◆ Expenses paid to suppliers Overall, only valuable, rare and hard-to-imitate resources that are organizationally embedded and exploited can lead to sustainable competitive advantage. ❖ Appraising resources: Benchmarking Benchmarking as an analytical tool Benchmarking: an examination of resources to perform a particular activity compared against competitors. 4 steps; ◆ Choose a benchmark organization ◆ Identity the relevant resources ◆ Assess the importance of your resources ◆ Assess the relative strengths of the resources you have identified, compared to your benchmark organization(s) Useful analytical tool Benchmarking only tells you where you have to catch-up potential NOT how to overtake your competition. ❖ The scope of a firm’s resources Outsourcing: turning over an activity to an outside supplier that will perform it on behalf of the firm. Can take place at home or internally Benchmarking can help to assess outsourcing opportunities Business process outsourcing (BPO): the outsourcing of business services such as IT, HR or logistics. Offshoring: moving an activity to a location abroad. Nearshoring: offshoring to a nearby location, i.e. within Europe. Reshoring: bringing activities back to a firm’s home country. Offshore outsourcing: outsourcing to another firm doing the activity abroad. Domestic outsourcing: outsourcing to a firm in the same country. Captive offshoring: setting up subsidiaries abroad – the work done is in-house but the location is foreign. ❖ Debates & Extensions Global value Chains (GVCs): chains of geographically dispersed production activities governed by MNEs. Robustness & resilience of GVCs Optimize the efficiency of GVCs by ‘just in time’ processes that ensure a fast flow of materials through their operations.  Supply chain robustness: ability to supply a product under any circumstances. Redundancy (in supply chains): options to source a product from a supplier at short notice. Organization stack: a cushion of resources that allow an organization to adapt successfully to pressures. Supply chain resilience: the ability of a supply chain to bounce back after a disaster. In principle, GVCs are more resilient because they offer a wider range of accessible resources, enable increasing supply globally when needed, and tap into diverse pools of knowledge to develop new solutions. BUT GVCs increase interdependencies and require active risk management → more inventory in the warehouses, more redundancy in the supplier network and a rich network of innovation partners. The resilience of a value chain varies considerably across products, depending on factors such as reliance on specialized inputs, scale economies in production and government interventions. Long-term consequences of offshoring Outsourcing can create enormous value for firms The development of new products and processes requires close coordination between different activities. Offshore outsourcing nurtures rivals Original equipment manufacturers (OEMs): firms that execute the design blueprints provided by other firms and manufactures such as products. Original design manufacturers (ODMs): firms that both design and manufacture products.  Original brand manufacturers (OBMs): firms that design, manufacture and market branded products. ❖ Implications for Practice Develop strategic foresight → ‘over-the-horizon radar’: that enables leaders to anticipate future needs and move early to identify and develop resources for future competition. Case: Lego’s Secrets ❖ Innovation & experimentation ❖ Insisting on excellence ❖ Lego is also world famous for generating a system, not merely a product. ❖ Change of CEO in 2004 allowed the company to refocus and establish a new vision “to inspire and develop the builders of tomorrow” ❖ High costs in the production sites resulted in an offshore outsourced production to another company → faced with quantity and quality issues Lego bought Flextronics. ❖ 2021 new plant in Vietnam, the first plant that is carbon-neutral. ❖ Today’s challenge: how to grow sales for Lego toys in a world that is becoming digital and driven by fashion trends. Video: Lego Systems President discusses the company’s turnaround strategy on “Bottom Line” ❖ What firm capabilities does Soren Laursen attribute Lego’s current success to? Understanding the needs of children Spend money on R&D and retail partners → execution of the brand to be interesting and appealing ❖ How does Lego manage resources differently from what they did in the past? Constant listening → move into the digital space ❖ How do trends like ‘digitalization’ impact Lego? Digital space → changed how the products are being marketed and played with Lego movie Chapter 10: Responsible Business ❖ Responsible business: businesses acting both efficiently and ethically, meeting and exceeding legal requirements, and considering their impact on people and the environment. ❖ Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their needs around the world. ❖ United Nations Sustainable Development Goals (UN SDGs): a set of 17 goals declared by the UN in 2015. ❖ Human rights: fundamental rights to which a person is entitled because they are a human being. ❖ Stakeholders of the firm Stakeholder: any group or individual who can affect or is affected by the achievement of the organization’s objectives.  Primary and secondary stakeholder groups Primary stakeholder group: the constituents on which the firm relies for its continuous survival and prosperity. Secondary stakeholder groups: those who influence or affect, or are influenced or affected by, the corporation, but are not engaged in transactions with the corporation and are not essential for its survival. Why shareholders matter: 2 perspectives Instrumental view: a view that treating stakeholders well may indirectly help financial performance. Corporate social and environmental responsibility (CSER): firm’s engagement with social and environmental issues in their communities. Normative view: a view that firms ought to be self-motivated to ‘do it right’ because they have societal obligations.  Shared value creation: an approach to CSER that focuses on activities that are good for both the firm and its stakeholders. Greenwashing: talking about social or environmental initiatives without addressing fundamental concerns. Stakeholder conflicts The challenge is to balance between the conflicting objectives and interests of the different stakeholder groups. ❖ Responsible business in the Global Economy Environment: arbitraging or raising standards? Institutional arbitrage: the practice of locating activities wherever the costs of complying with regulatory institutions are lowest. Pollution havens: countries with lower environmental standards. Race to the bottom: countries competing for foreign direct investment by lowering environmental standards.  Labour: how to treat those who work for you abroad Labor standards: rules for the employment of laborers included working hours, minimum pay, union representation and child labor. Footloose plants: plants that can easily be relocated. Standards and compliance Code of conduct (standards of engagement, code of ethics): written policies and standards for corporate conduct and ethics. Health, safety and environment (HSE): a common term to cover the areas for which companies have mandatory standards. Compliance: procedures to monitor and enforce standards for employees. Compliance training: mandatory training and tests designed to ensure that every employee knows the relevant codes of conduct. ❖ Institutions, stakeholders and responsible business Liberal market economies (LMEs) i.e. USA, UK, etc. Firms are unambiguously considered an economic enterprise that exist to serve the shareholders’ interests. Explicit CSER: voluntarily assuming responsibilities of societal concerns. Philanthropy: donations for purposes that benefit the wider society.  Coordinated market economies (CMEs) i.e. western Europe, etc.  Managers have to act in the interests of the shareholders, yet a wide range of formal and informal constraints impose other obligations on firms. Implicit CSER: participating in the wider formal and informal institutions for society’s interests and concerns. Convergence? Institutional context for CSER has changed in two ways; 1. CSER has moved up the corporate agenda around the world 2. There has been some convergence between CMEs and LMEs. ❖ Debates & Extensions Responsibility for entire supply chains Is CSER good for society? Normative view: asserting that responsible business goes beyond CSER and should be independent of profit considerations. Some critics suggest that CSER is mainly making up for damage caused by the same MNEs earlier. Local norms VS hypernorms Hypernorms: norms considered valid anywhere in the world. ❖ Implications for Practice Defensive strategy: a strategy that focuses on regulatory compliance with little top management commitment to CSER causes. Accommodative strategy: a strategy that is characterized by some support from top managers, who may increasingly view CSER as a worthwhile endeavor. Proactive strategy: a strategy that endeavors to do more than is required in CSER. Case: GSK tackles corrupt practices in China ❖ 2013: 4 senior managers of GSK found themselves in a Chinese jail. Accused of a massive bribery network → bribing doctors and hospital officials. Internal investigations were complex and had to cut across different divisions. Settled legal proceedings in China but still faced the prospect of further penalties as overseas bribery is also punishable in home countries too. ❖ Pharma Industry in China In 2000, the WTO ranked China’s health system as one of the most unequal in the world. Public hospitals accounted for over 72% of the sales of drugs and were the most important sales channel BUT public hospitals were underfunded. Doctors were under a lot of pressure in terms of workload and underpaid. “Red envelopes” Commissions from pharma sales agents to physicians. ❖ Why do people pay bribes? Bribery typically emerges where poorly paid people make decisions about the use of resources valuable to others. Sales agents have strong incentives to provide under the table benefits to doctors. GSK; “China should be responsible for non-compliance behavior, not sales representatives. These bribes were approved by supervisors. In some cases, the management even instructed them to purchase fake recipes for reimbursement. China knew corruption was widespread, but they lacked the resources or incentives to address it comprehensively. ❖ An Industry responds  Doctors in hospitals across China reduced or even completely stopped direct interactions with drug companies. Doctors were anxious to be drawn into the scandal. GSK remained in the Chinese market. Several multinational pharma companies rotated their top executives out of China as a precaution. Increased their focus on compliance. ❖ Concerned community Other pharma companies went under the microscope Competition law enforcement was tightened Chinese authorities emphasized that the law was applied to both domestic and foreign firms. Chapter 2: Formal Institutions: Political, Economic, & Legal systems ❖ Institutions: formal and informal rules of the game. ❖ Institutional framework: formal and informal institutions governing individual and firm behavior. ❖ Institution-based view: a theoretical perspective suggesting that firm performance is, at least in part, determined by the institutional frameworks governing firms. ❖ An institution-based view of international business Transaction costs: the costs of organizing economic transactions. Informal institutions: rules that are not formalized but exist in, for example, norms, values and ethics.  Formal institutions: institutions represented by laws, regulations and rules. Cognitive pillar: the internalized, taken-for-granted values and beliefs that guide individual and firm behavior. Normative pillar: the mechanism through which norms influence individual and firm behavior. Regulatory pillar: the coercive power of governments. What do institutions do? Institutions’ main role is to reduce uncertainty. They influence decision making by signaling what conduct is legitimate and acceptable and what is not. Institutions constrain the range of acceptable actions and thereby reduce uncertainty. Uncertainty reduces people’s willingness to make long-term commitments, or any commitments at all. Opportunistic behavior: seeking self-interest with guile. Institutional transition: fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players. 2 core propositions ❖ Political systems Political system: a system of the rules of the game on how a country is governed politically. Democracy: a political system in which citizens elect representatives to govern the country on their behalf. Variations among democracies include; Proportional representation VS first-past-the-post; Most European  ◆ Proportional representation: election system that allocated seats in parliament in proportion to the votes received by each party (usually subject to minimum threshold). ◆ First-past-the-post system: election system by which in each constituency the candidate with the relative majority of votes gets the seat. Direct VS indirect elections of governments ◆ Most European countries have an indirect democracy, in which voters elect their representatives in parliament, who on their behalf elect and monitor the government and the most powerful official in the country, normally the prime minister. ◆ France & USA directly elect their presidents. Representative VS Direct Democracy; ◆ Voting directly or through representatives for laws. Centralization of power; ◆ The power vested in the sub-national parliaments varies considerably. Authoritarianism: a political system in which power is concentrated in the hands of one person or a small elite. Business & politics Lobbying: making your views known to decision makers with the aim to influence political processes. Corruption: the abuse of public power for private benefits. Non-market strategy: political and social activities aimed at influencing the rules set in their host countries. Political risk: risk associated with political changes that may negatively impact domestic and foreign firms. ❖ Economic systems Economic system: rules of the game on how a country is governed economically. Market economy: an economy that is characterized by the invisible hand of market forces. Command economy: an economy in which all factors of production are government-or state- owned and controlled, and all supply, demand and pricing are planned by the government.  Varieties of capitalism: a scholarly view suggesting that economies have different inherent logics on how markets and other mechanisms coordinate economic activity.  Liberal market economy (LME): a system of coordination primarily through market signals. Apprenticeship system: vocational training system for crafts and professions. ❖ Legal systems Legal system: a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgements. Civil law & common law Civil law: a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgements. Common law: a legal tradition that is shaped by precedents and traditions from previous judicial decisions. Case law: rules of law that have been created by precedents of cases in court.  Legal processes Legal certainty: clarity over the relevant rules applying to a particular situation. ❖ Debates & Extensions Property rights: the legal rights to use an economic property (resource) and to derive income and benefits from it.  Intellectual property rights (IPRs): rights associated with the ownership of intellectual property. Patents: legal rights awarded by government authorities to investors of new technological ideas, who are given exclusive (monopoly) rights to derive income from such inventions. Copyrights: exclusive legal rights of authors and publishers to publish and disseminate their work. Trademarks: exclusive legal rights of firms to use specific names, brands and designs to differentiate their products from others. Corporate governance: rules by which shareholders and other interested parties control corporate decision-makers. Institutions & Political risk Businesses like stable institutional environments, which make it easier to plan for the long term. BUT, changes in the law, such as a new taxation or regulation, are common around the world and represent a mild form of political risk. ❖ Implications for practice Chapter 3: Informal Institutions: Analyzing Cultures ❖ Expatriate assignments: a temporary job abroad with a multinational company. ❖ Informal institutions: rules that are not formalized but exist in, for example, norms, values, and ethics. ❖ Informal institutions influence individuals’ behavior in ways that they themselves may not even be aware of. ❖ Culture Artefacts of culture: physical objects that represent the visible surface of culture. Culture as shared values & norms  Power distance: the extent to which less powerful members within a country expect and accept that power is distributed unequally. Individualism: the perspective that the identity of an individual is fundamentally their own. Collectivism: the idea that the identity of an individual is primarily based on the identity of their collective group. In-group: individuals and firms regarded as part of ‘us’. Out-group: individuals and forms not regarded as part of ‘us’.  Masculinity: values traditionally associated with male roles, such as assertive, decisive, and aggressive.  Femininity: values traditionally associated with female roles, such as compassion, care and quality life. Uncertainty avoidance: the extent to which members in different cultures accept ambiguous situations and tolerate uncertainty. Long-term orientation: a perspective that emphasizes perseverance and savings for future betterment.  Religion A major manifestation of culture and a major source of differences in norms and values that in turn shape business practices. Holy: an item or activity that is treated with particular respect by a religion. Secular societies: societies where religion does not dominate public life. Religious differences, more than any other differences, tend to raise emotions and thus are challenging to handle for businesses. Language: a system of shared meanings that enables people to effectively communicate. Language barriers: communication barriers between people who speak different mother tongues and lack a shared language in which all are fluent. Corporate language: the language used for communication between entities of the same MNE in different countries. Lingua franca: the dominance of one language as a global business language. ❖ Cultural diversity & Openness Units of culture: social groups  Subcultures: groups within a nation sharing a culture that substantially varies from the national average. Cultural convergence: hypothesis that cultures are becoming more similar. Cultural divergence: hypothesis that cultures are becoming less similar. Organizational culture: culture shared by people working in the organization. Cultural tightness-looseness: the strength of social norms and the degree of sanctioning with societies. ❖ National cultural differences Cultural clusters Cultural cluster: countries that share similar cultures.  Countries may be also clustered due to shared religion or language. Cultural & institutional distance Cultural distance: the difference between two cultures along some dimensions of value or subjective affinity. Institutional distance: the extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries. ❖ Debates & extensions Do business norms travel? Ethics: the principles, standards and norms of conduct governing individual and firm behavior. Ethical relativism: a perspective that suggests that all ethical standards are relative. Ethical imperialism: the absolute belief that ‘there is only one set of Ethics, and we have it’. Code of conduct: written policies and standards for corporate conduct and ethics. Corruption: the abuse of public power for private benefits, usually in the form of bribery. Do scholarly insights travel? Most empirical studies underlying key ideas in psychology have been conducted with people that are Western, educated, industrialized, rich, and democratic (WEIRD). Are the findings valid? ❖ Implications for practice Cultural intelligence: an individual’s ability to understand and adjust to new cultures. 3 phases of the acquisition of cultural intelligence; Awareness Knowledge Skills Stereotypes: a set of simplistic and often inaccurate generalizations about a group that allows others to categorize them. Video: Douglass North: The difference between formal and informal institutions ❖ What is the relationship between the 2 types of institutions according to North? Informal rules are as important as the formal rules Rules cannot be enforced without informal rules Latin VS North American countries Latin America took the US’ constitution in the 2000s → did not work since the informal rules were different. Video: James Robinson on Institutions, Democracy, and Economic Development ❖ According to James Robinson, what are the key factors explaining successful economies? Illustrate your answer using some concrete examples. Politics and the way power is distributed makes successful economies Institutions make societies into successful economies Effective centralized state with a broad distribution of political power → when they fail you have an unsuccessful economy. Inclusive institutions Rule of Law and Protection of Property Rights Political stability & accountable governance ❖ If you were to advise the government of your home country on its institutions, what would be your advice? (Greece) Strengthen Inclusive Institutions Enhance the Rule of Law and combat corruption Improve political accountability and citizen engagement Invest in human capital and infrastructure Chapter 5: Trading Internationally ❖ Exporting: selling abroad. ❖ Importing: buying from abroad. ❖ What is International trade? Trade in goods (merchandise trade): sale of physical goods across national borders. Trade in services: sale of intangibles across national borders.  Trade deficit: an economic condition in which a nation imports more than it exports. Trade surplus: an economic condition in which a nation exports more than it imports. Balance of trade: the aggregation of importing and exporting that leads to the country-level trade surplus or deficit. ❖ Theories of International Trade Classic trade theories: the major theories of international trade advanced before the mid-20th century: mercantilism, absolute advantage, comparative advantage and factor endowments. Mercantilism: a theory that holds that the wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer. Exports are good, imports are bad Largely discredited by scholars → not extinct. Absolute advantage: a theory that suggests that under free trade, each nation gains by specializing in economic activities in which it has absolute advantage. Free trade: trade uninhibited by trade barriers.  Absolute advantage: the economic advantage one nation enjoys due to higher productivity in an economic activity. International trade is not a zero-sum game as suggested by mercantilism → it is a win-win game. There are net gains from trade based on absolute advantage.  Comparative advantage: a theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Comparative advantage: relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Opportunity cost: given the alternatives (opportunities), the cost of pursuing one activity at the expense of another activity. Most important theoretical concept in international business Factor endowment (or Heckscher-Ohlin theory): a theory that suggests nations will develop comparative advantage based on their locally abundant factors. Resource (factor) endowments: the extent to which different countries possess various resources (factors), such as labor, land, and technology. Implication; ◆ In theory, nations gain from trade, but not every individual in each nation gains.  Modern trade theories: the major theories of international trade advanced in the second half of the 20th century: product life cycle, strategic trade and national competitive advantage. Product Life Cycle: a theory that accounts for changes in the patterns of trade over time by focusing on product life cycle. 3 categories; ◆ Lead innovation nation ◆ Other developed nations ◆ Developing nations 3 life cycle stages;  ◆ New ◆ Maturing ◆ Standardized Strategic trade theory: a theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success. First-mover advantages: advantages that first entrants enjoy and do not share with late entrants. Strategic trade policy: government subsidies inspired by strategic trade theory. National competitive advantage industries (or ‘diamond’ model): a theory that suggests that the competitive advantage of certain industries in different nations depends on 4 aspects that form a ‘diamond’.  Evaluating theories of international trade Classic theories → highly simplistic assumptions, assume perfect resource mobility, assume no foreign exchange complications and zero transportation costs. ◆ Resource mobility: the ability to move resources from one part of a business to another. ❖ National Institutions & Barriers to trade Transportation costs: the costs incurred moving products from one country to another. Protectionism: government policies designed to protect a domestic industry from foreign competition. Tariffs Import tariff: a tax imposed on imports. Deadweight loss: net losses that occur in an economy as the result of tariffs. Deadweight loss= Loss to consumer–Gains to farmers–Tariff revenues to government (=Area of B+D)  Non-tariff barriers (NTBs): government policies designed to protect a domestic industry from foreign competition. Subsidies: government payments to (domestic) firms. Often paid indirectly, as open subsidies would attract too much attention from taxpayers. Import quotas: restrictions on the quantity of imports. The most straightforward denial of absolute or comparative advantage.  Anti-dumping duties: costs levied on imports that have been ‘dumped’ (selling below costs to ‘unfairly’ drive domestic firms out of business). Public procurement: units of government buying products or services. Local content requirements: a requirement that value added is created locally. During COVID-19 export controls gained prominence Industry regulations vary across countries on issues such as consumer protectionism, environmental standards, and labor laws. Trade barriers can reduce or even eliminate international trade. Economic arguments against free trade. The need to protect domestic industries The necessity to shield infant industries Infant industry argument: the argument that temporary protection of young industries may help them to attain international competitiveness in the long run. The distribution effects If a trade barrier is removed, some industries and their workers will often lose out. Political arguments against free trade National security Consumer protection Foreign policy Trade embargoes: politically motivated trade sanctions against foreign countries to signal displeasure. Environmental & social responsibility ❖ Debates & Extensions Trade deficit VS Trade surplus Economist Paul Krugman argued; international trade is not about competition, it is about mutually beneficial exchange… imports, not exports, are the purpose of trade. Critics disagree → international trade is about competition between nations, about markets, jobs and incomes.  What about jobs? Job losses after trade liberalization are geographically concentrated, and while people may find new jobs they are less attractive. Worker mobility into other industries or to other locations is lower than it has been historically, and as a consequence, whole communities experience the negative effects in economic and social indicators and develop resentment towards globalization. ❖ Implications for Practise Chapter 6: Investing Abroad Directly (IAD) ❖ Foreign direct investment (FDI): investment in, controlling and managing value-added activities in other countries. Emerging economy MNEs: MNEs that originate from an emerging economy and are headquartered there. ❖ The FDI Vocabulary The key word is ‘direct’ Foreign portfolio investment (FPI): investment in a portfolio of foreign securities such as stocks and bonds. Joint ventures: operations with shared ownership by several domestic or foreign companies. Horizontal & vertical FDI Horizontal FDI: FDI that creates operations abroad at the same position in the value chain as the operation in the home country. Vertical FDI: FDI in operations in different stages of the value chain, upstream or downstream.  Upstream vertical FDI: FDI in an upstream stage of the value. Downstream vertical FDI: FDI in a downstream stage of the value chain in two different countries. Measuring FDI FDI flow: the amount of FDI moving in a given period (usually a year) in a certain direction.  FDI stock: the total value of inbound FDI in a country or outbound FDI from a country operating at a given point in time. OLI paradigm: a theoretical framework positing that ownership (O), location (L) and internalization (I) advantages combine to induce firms to engage in FDI. ❖ Ownership Advantages Liability of foreignness: the inherent disadvantage a firm faces when competing with local firms in a foreign country. Location-bound resources: resources that cannot be transferred abroad. Ownership advantages (O-advantages): resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad. Not location-bound ❖ Location Advantages Locational advantage (L-advantage): an advantage enjoyed by firms operating in certain locations. Markets as L-advantages 5 different reasons encourage firms to set up operations close to their markets;  Protectionism Transportation costs Direct interaction with the customer The production and sale of some services Marketing assets Resources as L-advantages Agglomeration: the location advantages that arise from the clustering of economic activities in certain locations. Provides access to complementary resources in several ways; ◆ Knowledge spillovers: knowledge diffused from one firm to others among closely located firms. ◆ Specialized workforces ◆ Specialized buyers Institutions as L-advantages Low levels of corruption and an efficient bureaucracy make a country, a province and even a city more attractive to invest in. ❖ Internalization Advantages Internalization Advantages (I-advanategs): advantages of organizing activities within a multinational firm rather than using a market transaction. Transaction costs: the costs organizing a transaction. Tend to be higher for cross-border transactions compared with domestic transactions. Market failure: imperfections of the market mechanism that make some transactions prohibitively costly. High transaction costs can result in market failure. FDI VS Exporting Asset specificity: an investment that is specific to a business relationship. Intra-firm trade: international trade between two subsidiaries in two countries controlled by the same MNE.  FDI VS Contracting Licensing: a contract by which a firm allows another firm to use its intellectual property rights in return for a fee. Franchising: a contract by which a firm allows another firm to use its branded service or products in return for a fee. Advantages of an FDI over such contractual arrangements;  FDI provides a higher degree of direct management control that reduces the risk of firm-specific resources and capabilities being opportunistically taken advantage of. ◆ Dissemination risk: the risk associated with unauthorized diffusion of firm-specific know-how. If there is no opportunism on the part of the licensees and if they are willing to follow the wishes of the foreign firm, certain types of knowledge may be too difficult to transfer to licensees without FDI; ◆ Tacit knowledge: knowledge that is non-codifiable and whose acquisition and transfer require hands-on practice. FDI provides more direct and tighter control over foreign operations. FDI VS Offshore outsourcing 3 types of problems can arise in offshore outsourcing; Hold-up problems due to asset specificity Unauthorized dissemination of technology Costs of monitoring quality and standards ❖ Benefits & Costs of FDI ❖ National Institutions & FDI Host country institutions Restrict the presence of FDI Regulate the operations of FDI Restrictive institutions come in 3 forms; Outright bans on FDI Case-by-case approvals of FDI ◆ Substitute for outright bans of FDI and make every FDI subject to a registration and approval process. Ownership requirements ◆ A specific form of restriction that disallows full foreign ownership but allows foreign investors to operate in a country if they establish a joint venture with a local firm. Regulation of FDI comes in 3 parts;  General regulatory institutions of business ◆ From the perspective of a host country, an FDI establishes a new firm that, like any firm, is subject to the laws and regulations of the country. Trade regulation impacting FDI ◆ Some countries try to restrict exports to encourage MNEs to establish production in the country. ◆ Local content requirements: requirement that a certain proportion of the value of the goods made in a country originates from that country. Corporate taxation ◆ Companies have to pay corporate tax in each country in which they operate, but some countries deliberately design their tax codes to attract foreign investors. ◆ Tax avoidance: reducing tax liability by legally moving profits to jurisdictions where tax rates are lower. Home country institutions Home countries generally do not have specific policies to encourage or discourage outward FDI. Efficiency considerations suggest that in many cases relocation of labor-intensive parts of the value chain may actually enhance competitiveness and thus benefit the company and the home country in the long run. Paradoxically, the main argument for restricting FDI to a particular destination country is that it might help the economy of the other country. ❖ Debates & Extensions How MNEs and the host governments bargain Bargaining power: the ability to extract a favorable outcome from negotiations due to one party’s strengths. Obsolescing bargain: refers to the deal struck by MNEs and host governments which change their requirements after the initial FDI entry Sunk costs: up-front investments that are non-recoverable if the project is abandoned.  A government may opportunistically take advantage of the shifting bargaining power by renegotiating in 3 stages; Stage 1: the MNE and the government negotiate a deal that involves assurances of property rights and incentives. Stage 2: the MNE makes its investment by building the bridge or power plant, in the expectation of recovering the investment from future revenue streams. Stage 3: the MNE sells its services and thus recovers its investment and, after a while, may earn handsome profits. ◆ Expropriation: government confiscation of private (foreign-owned) assets. State-owned enterprises State-owned enterprises (SOEs): companies with direct ownership by the state. Tend to have access to resources controlled by the state. Soft budget constraint: phenomenon that SOEs tend to receive extra resources from the state when facing financial difficulties. SOEs tend to have more complex governance structures. SOEs are typically less efficient and less well organized. Sovereign wealth funds Sovereign wealth fund (SWF): a state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments. Operate differently from conventional MNEs; ◆ They are state-owned or controlled ◆ They typically acquire equity stakes sufficient to influence target forms, yet they rarely get involved in day-to-day management or integrate operations.  ❖ Implications for practice Case: Telenor tackles political upheaval in Myanmar ❖ Myanmar (Burma) → military dictatorship since 1988 In 1997, the USA introduced sanctions that were gradually accelerated and by 2003 all new investments by US businesses in the country were prohibited.  The EU introduced similar restrictions. Chinese investments in oil exploration, pipelines and informal jade mines became the only major source of foreign capital. ❖ In 2012, first parliamentary elections took place in Myanmar US President Obama visited Gradually sanctions were lifted. The military shifted power to a civilian government in 2015. ❖ Democratization went hand-in-hand with liberalization of many industries traditionally controlled by the military, and opened the economy to international trade and investment. Investment boom peaked in 2017 Companies invested 4 billion euros A major investor was Telenor from Norway ❖ Telenor is a global mobile phone operating company. By the end of 2014, its new network reached all of Myanmar ❖ In February 2021, the military staged another coup and took back control. Violent demonstrations Western governments reintroduced sanctions ❖ Challenges for Telenor Received directive to block certain social media sites and IP addresses. Requirement for all telecom operators to install intercept technology that allows eavesdropping on communications between users. In conflict with the values of the company Contravening EU rules that would lead to penalties in Europe. The company decides to leave Myanmar, by selling. No major Western company was interested → Telenor had to write off its investment. Agreement to sell for 93 million euros to M1 Group. Obstacles; The local telecom regulator refused to approve the transaction because of the poor reputation of the investors. Human rights groups objected to Telecom selling the company in ways that could ultimately give the local authorities access to call data records, which are metadata generated by its 19 million users that are required to provide telecom services. Other attempts to sell to other companies were made  January 2022, Telenor agreed to sell its 51% stake to a Singaporean company. → yet the sales of the telecom business remained unresolved. ❖ The regime found other means to make it more difficult for ordinary people to access independent sources of information; Introduced new taxes on both SIM cards and telecom revenues from data businesses. Chapter 8: European Integration ❖ European Union (EU): the political & economic organization of 27 countries in Europe. ❖ Brexit: the process of the UK leaving the EU. Free trade area (FTA): a group of countries that remove trade barriers between themselves.  Customs union: a free trade area with common external tariffs for imports to the union. Common market: an area with free movement of goods, services, capital and people. Economic union: countries coordinating their economic policies beyond the removal of tariffs and quotas. Euro: the currency of the European Monetary Union. Monetary union: countries sharing a common currency and monetary policy. Political union: countries integrating major aspects of their political and economic affairs. ❖ Overcoming Divisions Origins Council of Europe: a loose association in which essentially all European countries are members. European Convention on Human Rights: an international court for human rights cases in Europe. May 1950; the formation of the EU was set in motion by the “Schuman Plan”  Treaties of Rome: the first treaties establishing European integration, which eventually led to the EU. A growing union The union grew and deepened integration. Copenhagen criteria: criteria the new members have to fulfill to be admitted as members of the EU. Central & Eastern Europe (CEE): the common name used for the countries east of the former Iron Curtain. Comecon: the pre-1990 trading bloc of socialist countries. Economic transition: the process of changing from a central plan to a market economy. Continuous deepening Single European Act (SEA): the agreement that established the basis for the European common market. → adopted in 1986. Aimed to reinvigorate the European integration process along with economic liberalization. Maastricht Treaty (1992): a major treaty deepening integration in Europe. European Constitution: an ambitious project to create a new legal foundation for the EU. ❖ The EU as Institutional Framework for Business “Four freedoms” of the EU single market: freedom of movement of people, goods, services and capital. European laws are usually a compromise between national legislators who each prefer principles in use in their own country. Any new legislation affects countries and interest groups differently, and thus triggers political action from those facing major adjustments. With benefits widely shared and costs failing for specific groups, building and retaining political support for such reforms is challenging. Free movement goods Mutual recognition: the principle that products recognized as legal in one country may be sold throughout the EU. Subsidiarity: the EU takes action only if it is more effective than actions taken at lower levels. Harmonized sector: sectors of industry for which the EU has created common rules.  Harmonization often implies higher costs. Smaller firms complain that these costs often affect them more because the initial investment in procedures and documentation is similar for all firms. Creating harmonized rules is often challenging. Free movement of services Many service sectors have very complex regulatory regimes. Most services need some form of local delivery, because you cannot pack them up and send them by mail of freight like a pair of shoes or a car. Service providers are subject to both home country and host country regulations. Even with this harmonization, the common market for services is not really a single market, yet. Residual barriers increase costs and lower quality of services provided in other countries. Smaller businesses especially complain about administrative and legal requirements. Free movement of capital In principle, EU citizens should be able to conduct their financial transactions in any EU country BUT this principle requires mutual liberalization of capital markets and coordination of financial markets. Free moving people The EU introduced rules to guarantee mutual recognition of qualifications; The harmonization of training requirements which allow recognition of selected professional qualifications. The mutual recognition of all other professions that require a qualification. The automatic recognition of professional experience for professions of craft, commerce and industry sectors. Erasmus + Programme: an EU programme encouraging student mobility in Europe. Bologna ProcessL a political process aimed at harmonizing European higher education. Schengen Agreement (1985): the agreement that laid the basis of passport-free travel.  Schengen Area: the area covered by the Schengen Agreement. Implementation of these rules took 10 years. Schengen Visa: visa giving non-citizens access to the Schengen area. EU competition policy Competition policy: policy governing the rules of the game in competition in a country. State aid: financial support from government to firms through, e.g. subsidies or tax rebates. Subsidy competition: competition between governments trying to attract investors by offering subsidies. In practice, however, there are numerous exemptions from the prohibition of state efficiency, and the development, renewable energy and energy efficiency, and the development of designated disadvantaged regions. ❖ The Euro as a common currency Introduction of the euro Eurozone: the countries that have adopted the euro as their currency. The euro was introduced in 2 phases; ◆ First in 1999, it became ‘virtual money’ in 11 countries, used only for financial transactions. ◆ In 2002, the euro was introduced as banknotes and coins.  Maastricht criteria: criteria that countries have to fulfill to join the eurozone; Countries were required to have annual budget deficits not exceeding 3% of GDP, public debt under 60% of GDP, inflation rates within 1.5% of the three lowest rates in the EU, long term interest rates within 2% of the 3 EU countries with the lowest rates, and exchange rate stability. European Central Bank (ECB): the central bank for the eurozone.  Costs & benefits of the euro 4 major benefits; Reduced currency conversion costs Direct and transparent price comparisons are now possible, thus canceling more resources towards more competitive firms. The elimination of exchange rate risk means that businesses face less risk when contracting or investing in other countries. Adopting the euro was supposed to impose macroeconomic discipline on participating governments.  Costs; While giving up independent monetary policy reduces politicians’ ability to create spurious inflation-fuelled short-term growth, it can be a severe disadvantage when business cycles or production costs develop differently within the eurozone.  The agreed limits on budget deficits reduce the flexibility in fiscal policy, in particular government spending financed through debt. ◆ European Stability Mechanism (ESM): a fund to support member countries with difficulties raising money on the capital markets. Joining the euro was seen as a credible commitment to structural reforms that would make economies more competitive. → proven untrue (Greece) The eurozone as an optimal currency area ‘Optimum currency area’: a theory establishing criteria for the optimal size of an area sharing a common currency. Economies with closely related business cycles are less likely to have different needs in monetary policy and thus should join a currency union. Even if the business cycles are not perfectly aligned, labor mobility may help to ease tensions. BUT, labor markets are less flexible and differences in unemployment remain quite persistent. → eurozone exceeds its optimal size. ❖ Debates & Extensions EU political institutions European Council: the assembly of heads of governments setting overall policy directions for the EU. President of the European Council: the person chairing the meetings of the European Council. Council of the European Union: the top decision-making body of the EU, consisting of ministers from the national governments; it decides by qualified majority voting. European commission: the executive arm of the EU, similar to a national government. Directorate General (OG): a department of the Commission, similar to a ministry of a national government. President of the Commission: the head of the EU’s executive, similar to a national prime minister. European Parliament: the directly elected representation of European citizens. Members of the European Parliament (MEPs): parliamentarians directly elected by the citizens of the EU. European Court of Justice (ECJ): the court system of the EU. Democratic legitimacy  European elections tend to receive much less attention in the media than national elections. Yet the election is for one of the most influential political bodies in the world, and the election is probably the second-largest election in the world. ❖ Implications for practice Lobbying: making your views known to decision-makers with the aim of influencing political processes. Chapter 9: Global Integration & Multilateral Organizations ❖ Multilateral organizations: organizations set up by several collaborating countries. Ex. World Trade Organizations (WTO), IMF ❖ The multilateral Trade System Origins of the WTO General Agreement on Tariffs & Trade (GATT): a multilateral agreement governing the international trade of goods (merchandise). World Trade Organization (WTO): the organization underpinning the multilateral trading system. Its common set of rules apply to all trading partners and make life easier for businesses. 6 main areas;  The WTO setting rules for international trade Non-discrimination principle: a principle that a country cannot discriminate among its trading partners (also known as most favored nation principle). Also known as the ‘most favored nation principle’, because the most favorable rules imposed by a country for any trading partner country also apply to all other WTO member countries. ◆ Non-discrimination applies, at least in principle, not only to the tariffs charged at the border but also to regulatory standards and processes applied to the products.  The WTO does not, however, cover all aspects of trade regulations. Because of differences in regulatory standards, countries continue to maintain border controls, not only to collect tariffs but also to check imposters’ documents to verify that they meet the regulatory requirements of the importing country. Trade-Related Aspects of Intellectual Property Rights (TRIPS): a WTO agreement governing intellectual property rights. The TRIPS agreement covers; ◆ General rules of international trade in products and services embodying IP ◆ Minimum standards of protection for IP ◆ Principles for the enforcement of IP rights ◆ Dispute settlement procedures Not popular among developing countries because it increases their payments for, for example, urgently needed medicines first developed by Western MNEs. Allows countries facing major national emergencies to issue compulsory licenses. ◆ Compulsory licenses: licenses issued by a national government in an emergency without agreement of the license owner. Trade dispute settlement Before the WTO, the old GATT mechanisms experienced; Long delays Blocking by accused countries Inadequate enforcement WTO dispute settlement mechanism: a procedure of the WTO to resolve conflicts between governments over trade-related matters. In terms of enforcement, the WTO does not have its own enforcement capability. → simply recommends that the losing countries change their laws or practices. → if not then the winning countries are authorized to use tariff retaliation to compel the offending countries’ compliance with the WTO rulings. A country that has lost a dispute case can choose its own options; 1. Change its laws or practices to be in compliance  2. Defy the ruling by doing nothing and be willing to suffer trade retaliation by winning countries, known as ‘punitive duties’ No higher-level entity can order a sovereign government to do something against its wishes. In recent years, the dispute settlement mechanism has been weakened by the failure to appoint judges to the panels of the WTO that are responsible for arbitrating cases of trade disputes. Reforming the WTO Long-lasting controversies include; Agricultural subsidies in developed countries inhibiting exports from developing countries Tariffs in industries where developing countries may have comparative advantages Trade in services IP protection New issues added to the agenda; Climate change State ownership Digital economy ❖ Regional & Bilateral Economic Integration Free trade agreements (FTAs): a group of countries that remove trade barriers among themselves. Deep trade agreements: an FTA that covers more than removal of tariffs, quotas and export promotion. Multilateral trade agreements Regional FTAs: a free trade agreement between countries in the same region of the world. North American FTA (NAFTA): former name of the North American Free Trade Agreement Association of SouthEast Asian Nations (ASEAN): the association underpinning regional economic integration in South East Asia.  Regional comprehensive economic partnership (RCEP): a trade agreement between 15 countries in Asia-Pacific. ECOWAS: economic integration in West Africa Since 1975, it has reduced tariffs and custom barriers. African continental Free Trade Area (AfCFTA): organization to facilitate economic integration in Africa. Challenges to regional integration 4 major challenges; Unequal benefits Asymmetric shocks  Similarity of comparative advantages Controversial investment protection rules Generalized system of preferences (GSP)(since 1971): a system of tariff reductions facilitating less and less developed country’s access to EU markets. Investor-state dispute settlement (ISDS): legal processes using tribunals that are outside the national and supranational court systems. Bilateral trade agreements Australia-New Zealand Closer Economic Relations Agreement (ANCERTA): a bilateral trade agreement between Australia and New Zealand, signed in 1983. Removed tariffs and other trade barriers Allowed citizens from both countries to freely work and reside in the other country. EU Canada Comprehensive Economic & Trade Agreement (TTIP): an economic integration agreement in negotiation between the EU and the USA. Trade creation or trade diversion? Trade diversion: a change in trade pattern away from comparative advantages due to trade barriers. Rules of origin (in FTAs): criteria products have to fulfill to be eligible for tariff exemption under an FTA. Prescribing that a certain minimum percentage of the value added must be from countries of the agreement to be eligible for tariff exemption in the importing country. Many economists see bilateral agreement not only as a poor subsidy for multilateral agreements but also as an obstacle to future multilateral agreement. The multilateral monetary system The IMF perform 3 primary activities; Monitoring the global economy Providing technical assistance to developing countries Lending to countries in financial difficulties. IMF conditionality: conditions that the IMF attached to loans to bail out countries in financial distress. ❖ Debates & Extensions  The development agenda Major challenge → the inequality between nations and persistent poverty in any developing countries. Development aid: a gift from generous donors wishing to help developing countries. European Bank for Reconstruction & Development (EBRD): a multilateral bank designed to help transition economics, established in 1991. Asian Infrastructure Investment Bank (AIIB): a development bank based in Beijing, initiated in 2014. The climate change agenda Intergovernmental Panel on Climate Change (IPCC): a global collaboration of climate scientists. Kyoto Protocol (1997): an agreement committing developed countries to limiting their greenhouse gas emissions. Paris Agreement (2015): an agreement in which countries make major commitments towards climate change goals. The financial sector regulation agenda Basel committee: a group of central bankers establishing standards for banking supervision. Basel II/Basel III: the name of a set of rules for banking regulations that were revised in 2004 and 2011.  Risk-ratings agencies: agencies that assign ratings to assets such as bonds that indicate the level of riskiness of the asset. Black swan events: rare events that occur only once in a generation. ❖ Implications for practice Case: Negotiating Brexit ❖ UK officially left the EU on January 31, 2020 A trading nation In 2017, roughly half the exports and imports from the UK went to other EU countries Overall deficit had been growing steadily since the 1990s → 2017, it reached 22% Future trade regimes 6 options;  Negotiations for free-trade agreements were initiated with other countries like the US and China. ❖ Questions for class Did the pre-Brexit concerns materialize? If so, in what form? Many of the pre-Brexit concerns about economic challenges have materialized, particularly in areas like trade, labor shortages, inflation, and GDP. Brexit-related trade barriers and additional paperwork have created a persistent drag on UK exports to the EU, especially in goods, which remain well below pre-Brexit levels. The UK’s labor market has also suffered, with a shortage of around  330,000 workers, primarily affecting sectors like hospitality and transport due to the loss of EU labor mobility. Additionally, inflation has increased notably, with around 30% of recent food price hikes attributed to Brexit-related trade barriers. This is especially pronounced for products like meat and dairy, which rely heavily on EU imports. The depreciation of the pound after Brexit further reduced purchasing power, compounding inflationary pressures on consumers. What are the consequences of Brexit for the UK? Brexit has created a more isolated economic environment for the UK, with a 5.5% reduction in GDP and an estimated 11% drop in business investment, according to analyses by think tanks like the Centre for European Reform. The shift has impacted various sectors differently: while service exports have rebounded, goods exports remain below pre-Brexit levels. Sectors reliant on EU imports, such as retail and agriculture, have seen significant cost increases. Brexit also introduced barriers that restrict UK citizens’ rights to live, work, or study freely within the EU, curtailing personal mobility and creating disruptions for students and workers who previously benefited from EU-wide opportunities. Many economists agree that, although the economy has avoided a catastrophic recession, Brexit has reduced growth potential and raised costs for consumers and businesses. What are the consequences for the EU (pick a country in the EU and research into specific consequence of Brexit for its economy) Ireland has experienced significant economic shifts as a result of Brexit, given its unique geographical and economic proximity to the UK. Although Ireland benefited from increased trade opportunities as businesses sought EU-friendly bases post-Brexit, it also faced challenges. Trade disruptions in goods, especially agricultural and manufactured items, impacted Irish exports to the UK. The establishment of customs checks and additional border requirements at Northern Ireland’s border created logistical challenges and increased costs for businesses on both sides. Additionally, the end of free movement impacted Irish workers who regularly commuted or worked in the UK. While Ireland saw an economic boost in some sectors as companies moved operations to maintain EU market access, these gains came with challenges  related to cross-border complexities and trade friction with one of its largest trading partners. Overall, Brexit has reshaped economic dynamics for both the UK and EU nations, introducing new frictions in trade, labor markets, and cost structures that will likely continue to influence future economic strategies and relationships. Chapter 11: Starting International Business ❖ Small and medium-size enterprises (SMEs): firms with fewer than 500 employees. ❖ Start-up companies: young firms that have only recently been formed. ❖ Entrepreneur: leader identifying opportunities and taking decisions to exploit them. ❖ Entrepreneurial team: a group of people jointly acting as entrepreneurs. ❖ Buying & Selling Abroad Exporters: sellers of products or services to another country. Importers: buyers of goods or services from another country. Exports & imports of goods  Direct exports: the sale of products made by firms in their home country to customers in other countries. Attractive strategy for less experienced firms because they can reach foreign customers directly.  Direct exports represent the basic node Key advantage is that the exporter can utilize economies of scale in production in the home country and directly control the relationship with the customers. Working with trade intermediaries Indirect exports: a way for SMEs to reach overseas customers by exporting through domestic-based export intermediaries. Export intermediaries: a firm that performs an important intermediary function by linking sellers and buyers overseas. Sales agents: intermediaries receiving commission for sales. Distributors: intermediaries trading on their own account. Risk: that the distributor effectively controls the local market and shares information only selectively. Trading across borders  Cross-border services: supplying services across national borders. Do not require a physical movement of people. Some services may be delivered by people traveling to another country on a temporary basis. Servicing foreign residents: supplying services to customers coming from abroad. Some services are provided through overseas subsidiaries in the country of the customer. Managing international contracts Licensing: a contract by which a firm allows another firm to use its intellectual property rights in return for a fee. Licensor: the company granting a license. Licensee: the company receiving a license. Franchising: a contract by which a firm allows another firm to use its branded service or products in return for a fee. Franchisor: the company granting a franchise. Franchisee: the company receiving a franchise. ADVANTAGE of licensors and franchisors → can expand abroad with relatively little capital of their own. DISADVANTAGE → lack of control over production and marketing.  Turnkey projects: projects in which clients pay contractors to design and construct new facilities and train personnel. Design-and-build (DB) contract: a contract combining the architectural or design work with the actual construction. Build-operate-transfer (BOT): a contract combining the construction and temporary operation of a project eventually to be transferred to a new owner. Tender: a competition for a major competition. Consortium: a project-based temporary business owned and managed jointly by several firms. Subcontracting: a contract that involves outsourcing of an intermediate stage of a value chain. R&D contracts: a subcontracting of R&D between firms. Management contract: a contract over the management of assets or a firm owned by someone else. ❖ Resources & Internalization Internalization as a process Experiential knowledge: knowledge learned by engaging in the activity and context. Internalization process models; Uppsala model: a model of internalization processes focusing on learning processes. ◆ Firms make decisions over their next step based on what they know at the time.  Network internalization model: a model of internalization that focuses on the international growth of business networks. ◆ Smaller firms and entrepreneurs especially draw on resources that they do not own but which they can access through relationships with other businesses. Stages models: models depicting internalization as a slow stage-by stage process an SME must go through. ◆ Firms would go through a sequence of modes that reflect an increasing degree of commitment. Accelerating resource acquisition International new venture (INV)(born global): start-up company that from inception, seeks to derive significant competitive advantages from the use of resources and the sale of outputs in multiple countries.  International experience: personal experience of living in another country. Immigrant entrepreneurs: people who set up a business after migrating to another country. Firms may build competencies for international business by working with foreign investors coming into their country. Firms may learn not only from their own experiences but from observing others. Mimetic behavior: imitating the behavior of others as a means to reduce uncertainty. Ambitious firms may speed up their international growth by acquiring specific resources locally. ❖ Institutions & Internalization The ability of internationally inexperienced forms to engage in international business is to a large extent shaped by; The institutional environments of the home country. The institutional distance between the home country and the host country. Internalization process models suggest that firms normally enter first where the cost of entry and the perceived risks are lowest, which is in culturally similar countries. ❖ Debates & Extensions Business models for the digital economy E-business: businesses that create and coordinate the value chain of their business online.  Digital platforms: online space where potential buyers and sellers can meet. Institutional barriers in internet space National regulations can cause friction to free trade on the internet, particularly in 4 areas; Privacy concerns are growing around the world ◆ General Data Protection Regulation (GDPR) Many digital businesses have developed strategies to channel their business internationally in ways that reduce their tax burden. Many countries have rules regarding the kind of content and services available to their citizens. National security and geopolitics can also create barriers to the digital economy. ❖ Implications for Practice Chapter 12: Foreign Entry Strategies ❖ Foreign subsidiary: an operation abroad set up by foreign direct investment. ❖ Entry strategy: a plan that specifies the objectives of an entry and how to achieve them. ❖ Strategic objectives of Establishing foreign subsidiaries 4 common objectivity for establishing subsidiaries abroad and the engage in FDI; Natural resource-seeking: investors’ quest to pursue natural resources in certain locations. Market-seeking: investors’ quest to go after countries that offer strong demand for their products and services. Efficiency-enhancing: investors’ quest to single out the most efficient locations for each value chain activity. Capability-enhancing FDI: investors’ quest for new ideas and technologies to upgrade their own technological and managerial capabilities. ❖ Where to enter?  Location-specific: advantages that can be exploited by those present at a location. The quality and costs of local resources are a prime concern for natural resource-seeking and efficiency enhancing investors. The costs and productivity of the local labor force are price considerations for efficiency-enhancing investors. The geography and logistics infrastructure is another consideration high on the list of efficiency-enhancing investors. The size and growth potential of a market are the prime attractors for market-seeking investors. Existing local capabilities are the main attraction for capability-enhancing investors. The existing structure of industry is important to all types of investors, as they may join industry clusters, though for different reasons. Global cities: cities with interconnectedness, cosmopolitanism, and abundance of advanced producer services. ❖ When to enter? First-mover advantages: advantages that first movers obtain that later movers do not enjoy. Late-mover advantages: advantages that late movers obtain and that first movers do not enjoy.  Advantages for both; Late-mover advantages are manifested in 3 ways; Second movers may be able to free ride on first movers’ huge pioneering investments to educate customers on the merits of the new technology. First movers face greater technological and market uncertainties. As incumbents, first movers may be locked into a given set of fixed assets or reluctant to cannibalize existing product lines in favor of new ones. Second movers may be able to take advantage of the first movers’ inflexibility by leapfrogging first movers. ❖ How to enter? Modes of entry: the format of foreign market entry. Non-equity modes: a mode of entry that does not involve owning equity in a local firm. Equity modes: a mode of entry (JV that involves taking full or partial) equity ownership in a local firm. Particularly preferred when it comes to transferring intangible assets. They face asymmetric information regarding the content, value and usage of assets, which are classic sources of market failures. Wholly owned subsidiary (WOS): a subsidiary located in a foreign country that is entirely owned by the parent multinational. Advantage: provides full control and thus the ability to integrate the operation tightly with the parent firm and to determine what the subsidiary should do.  WOS can be established in 2 ways; A greenfield project Full acquisition The resource dimension  Greenfield investments: building factories and offices from scratch Advantages; ◆ Allows investors to create a new operation from scratch according to their own designs and thus match it with their global organization. ◆ A greenfield WOS gives an MNE complete equity and management control. ◆ Greenfield investments may be designed to be small initially and to grow with the market development, thereby limiting the up-front capital commitment. ◆ Greenfield investments reduce the risk of failure due to conflict between the JV partners or with employees in an acquired firm. Disadvantages;  ◆ A greenfield WOS tends to add new capacity to an industry, which will make a competitive industry more crowded and thus increase the intensity of competition. ◆ Greenfield investments suffer from a slow entry speed because they normally take two or more years to plan and build the new plants and new distribution channels. ◆ Pay-back periods are likely to be long and investment risks are high. Acquisition: the transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. Sharing many benefits with greenfield WOS + : ◆ They enable faster speed of entry ◆ They do not intensify competition Drawbacks; ◆ Acquisitions are most likely to attract political resistance from both individuals working in the plant and from nationalistic sentiments. ◆ The restructuring integration of the acquired business. The control dimension Joint venture (JV) → 3 principal forms Minority JV