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Week 1 Develop skills in research, oral and written Netiquette Guide for Online Courses reports/presentation including data Mode of Learning: Blended Learning collection, interpre...

Week 1 Develop skills in research, oral and written Netiquette Guide for Online Courses reports/presentation including data Mode of Learning: Blended Learning collection, interpretation and draw critical Synchronous and Asynchronous conclusions. BPSU Vision and Mission GRADING SYSTEM Vision: An inclusive and sustainable University recognized for its global academic excellence by 2030. Mission: To develop innovative leaders and empowered communities by delivering transformative instruction, research, extension and production through Change Drivers and responsive policies. SYLLABUS for INTERNATIONAL BUSINESS and TRADE COURSE POLICY I. Attendance Introduction to International Trade II. Oral / Written Presentation ·Foreign Direct Investment (FDI) Theory & III. Case Study / Research Application IV. Mid Term and Final Examinations The Multinational Enterprise (MNE) and Small Medium Size International Enterprise Week 2 (SMIE) The Cultural and Political Environment INTRODUCTION TO INTERNATIONAL Legal Environment & the International TRADE Economic Integration & Institutions Monetary System & Financial Markets WHAT IS TRADE? Global Operations Management The transfer of goods and services from one Global Internet & E-Commerce person or entity to another, often in exchange for money Course Outcomes Explain and analyze basic International What is the difference between DOMESTIC and business and Trade theories / other related INTERNATIONAL TRADE? theories The exchange of goods and services Apply International business and trade between countries and across borders is policy, challenges and adjustments available referred to as international trade. to firms, government, international Domestic trade happens when this business organizations specifically in less developed is conducted inside of a country’s borders. economies Develop analytical and critical thinking INTERNATIONAL TRADE THEORIES skills and utilize these to judge the are simply the different theories that explain appropriateness of International Business International Trade. It justifies why a and Trade policy options company does international trade.  1. Mercantilism 2. Absolute Advantage GLOBAL STRATEGIC RIVALRY THEORY 3. Comparative Advantage This economic theory emerged in the 1980s 4. Country Similar Theory and was based on the work of economists 5. Product Life Cycle Theory Paul Krugman and Kevin Lancaster 6. Global Strategic Rivalry Theory Under this theory, the companies focus on 7. Porter’s National Competitive Advantage how to get competitive advantage when Theory competing against global firms in the same industry MERCANTILISM An economic theory that was popular from PORTER’S NATIONAL COMPETITIVE the 16th to 18th centuries THEORY This is when a country should grow its Developed by Harvard Business School reserve of gold and silver by encouraging Professor Michael Porter exports and discouraging imports. The theory argues that a nation’s competitiveness is based on a number of ABSOLUTE ADVANTAGE THEORY factors, including quality of its Economic concept developed by Adam infrastructure, availability of skilled labor, Smith in the 18th century level of government support and strength of A country that can produce goods or its institutions. services more efficiently than other countries. TRADE BARRIERS Trade barriers are government-induced COMPARATIVE ADVANTAGE THEORY restrictions on international trade. This Economic concept developed by David maybe any regulation or policy that restricts Ricardo in the 19th century international trade A country can produce goods or services at The types of trade barriers can be a lower opportunity cost compared to categorized between: another country. - TARIFFS - NON TARIFF BARRIERS COUNTRY SIMILAR THEORY Developed by Swedish economist Steffan Tariffs - are taxes imposed on imported goods. It Linder in 1961 raises the price of imported goods relative to An economic theory that states that domestic goods. countries are more likely to trade with each other if they have similar levels of Non-tariff barrier - is any measure, other than economic development, institutional customs tariff, that acts as a barrier to international structures and cultural characteristics. trade. PRODUCT LIFE CYCLE THEORY Examples of Non-Tariff Barriers: Economic theory that describes the stages a - Import Bans product goes through its life cycle from its - General or specific quotas development to eventual decline. - Complex/discriminatory Rules of Origin  - Quality Conditions imposed by the With FPI, an investor does not have direct importing country on exporting countries control over the assets or the businesses. In - Additional trade documents like Certificate contrast, FDI lets an investor purchase a of Origin, etc direct business interest in a foreign country - Occupational safety and health regulation - Export subsidies THEORIES OF FDI - Quota shares Product Life Cycle Theory WEEK 3 This theory, developed by Raymond Vernon, INTRODUCTION TO FDI postulates that firms invest abroad at different stages Foreign Direct Investment (FDI) involves an of a product’s life cycle. investor buying a significant interest in a company in another country. Eclectic Paradigm Proposed by John Dunning, this theory combines BENEFITS OF FDI three factors: Ownership advantages, Location Stimulation of Economic Development advantages, and Internalization advantages. Increased employment Resource Development Market Power Theory Reduced Costs This theory suggests that firms engage in FDI to Increased Productivity increase their market power and reduce competition. Increased in Country’s income Internalization Theory TYPES OF FDI This theory suggests FDI occurs when a firm 1. Horizontal FDI is when a company internalizes certain advantages such as technology, establishes the same type of business brand or management expertise. operation in a foreign country as it operates in its home country 2. Vertical FDI is when a business acquires a Week 4 complementary business in another country 3. Conglomerate FDI is when a company WHAT IS MNE? invests in a foreign business that is Multinational Enterprise (MNE) is a firm that unrelated to its core business operates in multiple countries. For a firm to be an 4. Platform FDI is when a business expands MNE, the following criteria need to be fulfilled: into a foreign country, but the products Should own or control operations in manufactured are exported to another, third multiple countries country Should generate a substantial portion of its revenues by its foreign operations FDI vs FPI Should employ workforce from multiple What is Foreign Portfolio Investment (FPI)? countries FPI is the purchase of securities of foreign Should have a strategic management countries such as stocks and bonds perspective and a vision of multinational FDI involves a long-term commitment operations. while FPI is a short-term investment THE DEGREE OF INTERNALIZATION market, such as the United States, Japan, or Western TRANSNATIONALITY INDEX (TNI) measures Europe. the degree to which a company operates internationally, calculated as the average of three TYPICAL FEATURES of DMNEs ratios: Internalization Patterns Foreign assets to total assets Focus on Other Developing Markets Foreign sales to total sales Reliance on Third Parties Foreign employment to total employment Governance Industry Domain INTERNATIONALIZATION INDEX (III) Bargaining Power evaluates the extent to which a company internalizes Strategy its operations across borders. This is simply the ratio of the number of foreign affiliates to the total DMNEs ADVANTAGES in GLOBAL number of affiliates in the firm MARKETS HOME GOVERNMENT SUPPORT EFFECTS OF MNEs Impact of the DMNE on the national POSITIVE economy Provide knowledge Shields the firm from the marketplace, Bring in FDI hampering its capability development Transfer of Technology Promote competition FLEXIBILITY Promote research and development Lower production scale permits flexibility Benefit customers and adaptation Promote exports in the host economies Less investment sunk in older plants and technologies NEGATIVE Influencing host-country government WHAT IS SMIE or International SMEs? decisions SMIE is a small to medium sized Transfer of inappropriate technology organization. Cultural imperialism SMIEs account for approximately 94% of Exploitation of host country resources all International firms Perceived as agents of neo-colonialism They often face serious obstacles to Promotes hostile mergers and acquisitions Internalization Crowding out domestic entrepreneurship Limited benefits to host countries SME INTERNATIONALIZATION FEATURES Circumventing host countries’ regulatory Internalization Patterns framework SMIE Exporter Profile Exporter Demographics MNE from EMERGING/ DEVELOPING SMIE Foreign Investment Profile ECONOMIES (DMNE) Chance Expansion Nature of FDI by SMIEs A developed market multinational enterprise - Emphasis on Developed Markets (DMNE) is a company that operates in multiple - Selective Globalization countries and is headquartered in a developed - Strategy SME OBSTACLES IN INTERNALIZATION LANGUAGE Scale and Transaction Constraints Language is a means by which we Access to Capital communicate verbally Lack of Knowledge We use it for socialization and for Lack of Market Power communicating how values and norms are Vulnerability to Intellectual Property expressed and understood Violations There are approximately 20 different language families that cut across national Week 5 borders Not only are words different, but also WHAT IS CULTURE? syntax and usages are also quite different The knowledge, beliefs, art law, morals, between language families customs and other capabilities of one group The artifacts that surround language are: distinguishing it from other groups. - Linguistics Main features of culture: - Proxemics - Culture is shared - Pragmatics - Culture is intangible - Nonverbals - Culture is confirmed by others English has become the business world’s lingua franca, and the number one foreign CULTURE AND INTERNATIONAL BUSINESS language taught in other countries Culture is very important to the practice of International Business RELIGION Management, decision making and Religion contains key values and norms that negotiations are all influence through are reflected in adherents’ way of life culture People try to adopt business practices that Culture influences nearly all business will satisfy religious tenets without functions from accounting to finance to sacrificing modern practices in business production to service. Culture is a key ingredient in the “liability NATIONAL CULTURE CLASSIFICATIONS of foreign-ness” Culture and Nation are not synonymous Culture is what makes International National and cultural boundaries overlap business practice difficult or easy partially, and there will be cultural Culture is both divisive and unifying differences in almost all nations Scholars have created cultural typologies CORRELATES OF CULTURE that try to describe cultural differences and Culture is correlated with other variables ascribe them to national boundaries that vary cross-nationally, like language and religion HOFSTEDE’S DIMENSIONS OF CULTURE Culture often cuts across religious, Hofstede’s survey revealed six underlying linguistic and national borders and vice dimensions of culture: versa i.e. religious, linguistic and national - Power Distance boundaries also often cut across cultures - Uncertainty Avoidance - Individualism/ Collectivism - Masculinity /Femininity  - Long-Term Orientation - Divergence Hypothesis assumes - Indulgence / Restraint that countries will continue to maintain their distinctive TROMPENAARS AND HAMPDEN-TURNER characteristics CLASSIFICATION Trompenaars and Hampden-Turner defined WEEK 6 seven dimensions of culture: - Universalism vs particularism THE POLITICAL ENVIRONMENT - Communitarianism vs individualism Politics play an important role in - Neutral vs emotional International Business - Diffuse vs specific Political behavior is defined as the - Achievement vs ascription acquisition, development, securing and use - Attitudes to time of power in relation to other entities - Attitudes toward the environment THE INSTITUTIONAL CONTEXT OTHER LAYERS OF CULTURE Organizations work closely with ETHNICITY – significant ethnic governments and political groups in a communities exist in many countries likely pluralistic environment to affect a myriad of issues Business objectives usually require the INDUSTRY – important layer of culture cooperation of political authority. DEMOGRAPHICS – education, age, Businesses work with government officials seniority and hierarchical level affect and ministries to clear the way for difference in values operations. IDEOLOGY – not always consistent with The ease of this work is dependent on the cultures and can vary along time and across institutional context faced during regions negotiations. KEY CULTURAL ISSUES THE INSTITUTIONAL CONTEXT CULTURAL ETIQUETTE – the manners Businesses sometimes work with and behavior that are expected in a given governments that are similar to their own. situation Affinity between company and political CULTURAL STEREOTYPES – our groups, with common understanding, makes beliefs about others, their attitudes and the work easier. behavior Sometimes, however, businesses work with - Ethnocentric governments that are very different. This - Auto-stereotypes presents an animosity of systems that make - Hetero-stereotypes the work more frustrating and difficult. CULTURAL DISTANCE – the extent to which cultures differ from each other THE MNE-GOVERNMENT RELATIONSHIP CONVERGENCE AND DIVERGENCE Relationships between governments in the - Convergence Hypothesis assumes home and host countries are important that the combination of technology issues facing Multinational Enterprise. and economics is making countries Governments affect the economic and legal more alike environment  - Set monetary and tax policies, price - Proprietary technologies or products controls and intellectual property - Capital regulations - Potential tax revenue - Influence labor relations, trade - Big exports policies, capital and exchange - Employment controls, and transfer pricing - Complex management requirements policies - Political/economic alliances - Can be a regulator, a legislator, a competitor, a customer, a GOVERNMENT INVESTMENT SUPPORT distributor, and a potential partner Governments compete fiercely for investment. They frequently provide incentives to companies seeking THE MNE RELATIONSHIP with HOST to invest. These could include: GOVERNMENT - Grants and Investment allowances Political power and size have a great deal to - Subsidies do with how MNEs deal with host - Preferential Tax Treatment governments. - Import Duty Exemptions Models like Sovereignty at Bay, - Loans Dependency and Neo-Mercantilism all - Loan Guarantees assume a powerful MNE interacting with a - Interest Subsidies less powerful developing country Some assume that MNEs may not act in the THE MNE and its HOME GOVERNMENT best interest and pursue institutional The home government remains important to MNEs hegemony and control over the less - Provides its main operating environment developing country - Helps negotiate its International affairs and incentives THE MNE RELATIONSHIP with HOST - Provides its own incentives for foreign GOVERNMENT investment to targeted areas COOPETITION is a simultaneous - The home government can even close the cooperation and competition between MNE home environment to competition and host. MNE compete with hosts in establishing POLITICAL RISK policy that is favorable Political Risk is the probability of They cooperate with hosts in providing disruption of operation from political forces what governments want: or events and their correlates. - Capital Risk comes from instability, whether - Employment political, economic, regulatory, policy - Revenues oriented, judicial and conflict oriented - Legitimacy THE MEASUREMENT OF POLITICAL RISK THE BARGAINING POWER of the MNE and The political landscape is difficult to the HOST GOVERNMENT forecast. Host bargaining power comes from creating Political risk can result from shifting power an attractive environment or balance. MNE bargaining power comes from: Methods of measuring political risk:  - Qualitative approaches Regional Jurisdiction - Aggregates of expert opinions - Regional bodies enacting and - Scenario approaches enforcing laws - Decision-free methods National Jurisdiction - Quantitative techniques - MNEs to comply with both domestic at home and foreign TYPES OF POLITICAL RISK jurisdictions OWNERSHIP RISK – potential threats to ownership from nationalization or seizure LEGAL ISSUES OF INTEREST OPERATIONAL RISK – threats PRODUCT ORIGIN Laws frequently governments impose for “changing the rules determine duties and tariffs to be paid of the game” COMPETITION Laws, like antitrust TRANSFER RISK – impediments to the regulations and insider trading laws, vary transfer of production factors, products or widely from country to country capital Marketing and Distribution Laws determine allowable practices and these also THE LEGAL ENVIRONMENT vary widely THE COMMON LAW SYSTEM Product Liability Laws determine liability - An independent judicial system that relies and allowable damages for product safety. legislative action, judicial interpretation thru These vary widely case precedent and application by users CIVIL LAW SYSTEM Week 7 - Relies almost exclusively on a legal code that is applied universally INTERNATIONAL ECONOMIC - Less flexible than common law system and INTEGRATION requires frequent government intervention Economic Integration is concerned with: THE THEOCRATIC SYSTEM - The removal of trade barriers or - Uses religious codes to create a legal system impediments between at least two participating nations LEGAL JURISDICTION - The establishment of cooperation Legal jurisdiction is the prevailing legal and coordination between them authority under which a legal case can be Integration creates high levels of judged. globalization and regionalization Jurisdictional Levels - International TYPES OF ECONOMIC INTEGRATION - Regional-global FREE TRADE AREA – removes trade - National impediments among member nations International Jurisdiction CUSTOMS UNION – adds common - International law rarely enforced external economic initiatives to all member - Parties often agree in advance to an nations arbitration authority COMMON MARKET – allows free trade - Recent globalization of of products and services; also allows free International business regulations mobility of production factors like capital, labor and technology  ECONOMIC UNION – is a common The IMF is a key institution in the market with unification of all monetary and International Monetary System fiscal policies Helps members defend their currencies POLITICAL UNION – is where against cyclical, seasonal or random participating nations literally become one currency fluctuations nation in an economic and political sense, The IMF seeks to establish sound with common parliament and political monetary practices among member institutions nations through: - Promoting exchange stability GLOBAL-LEVEL COOPERATION AMONG - Maintaining orderly exchange NATIONS arrangements The World Trade Organization (WTO), - Helping members avoid serious the World Bank, and the International exchange deprecations Monetary Fund (IMF) are three - Placing reserves at the disposal of fundamental institutions affecting global member nations who are in cooperation or nations. financial crisis, subject to The IMF and World Bank serve as a safeguards and repayment financial base for cooperation. The IMF allows: The WTO serves as the institutional - Special Drawing Rights (SDRs), foundation of the world trading system which are a unit of account and allow countries to peg their THE WORLD TRADE ORGANIZATION currencies against the five largest (WTO) IMF members The WTO seeks to establish trade policy rules that - IMF members settle transactions help expand trade and improve world living with SDR for exchanges among standards. It does through: themselves - Administering Trade Agreements - Serving as the forum for Trade Negotiations THE WORLD BANK GROUP - Settling Trade Disputes The World Bank is owned by the - Reviewing National Trade Policies governments of 160 nations - Assisting Developing Nations on Trade Its capital is provided by subscription, and it Policy Issues finances its operations primarily through - Cooperating with Other International world capital markets Organizations It is financed by interest payments from borrower nations THE INTERNATIONAL MONETARY FUND Loans are geared toward Advanced (IMF) Developing Nations and must be used for The IMF seeks to: productive purposes like financing, - Promote international monetary infrastructure, telecommunications, ports cooperation and expansion of and power International trade The World Bank is formally know as the - Reduce inequity in member nations’ International Bank for Reconstruction and balances of payments Development The World Bank is tied with three affiliates  - The International Development Side agreements on labor adjustments, Association (IDA) environmental protection, import surges, - The International Finance child labor, minimum wages, productivity, Corporation (IFC) health and safety standards - The Multilateral Investment Guarantee Agency (MIGA) EUROPE – The European Union (EU) Their common objective is to help raise Established in 1957 as European Economic standards of living in developing nations by Community (EEC) and became European channeling financial resources to them from Community in 1995 (EC) developed countries In 1992, the Maastricht Treaty created the European Common Market THE WORLD BANK GROUP The new name for the EC, after Maastricht, The IDA concentrates on productive project is the European Union in the least developed nations Created the common European Currency the The IFC assists in economic development ECU or the Euro of maturing countries by investing in Gives every citizen in member states a private sector investments European Passport and free movement from The MIGA specializes in encouraging one country to another within the EU equity investment and foreign direct Removes all restrictions on capital investment to developing countries by movements among member states mitigating trade barriers Establishes a European Central Bank Transforms the EU into the European POST WAR REGIONAL INTEGRATION Economic and Monetary Union A total of 109 agreements from 1947 to 1994 ASIA PACIFIC Features of Regional Integration: Asia accounts for 20% of world trade - Postwar regional integration centered APEC (Asia Pacific Economic Cooperation in Western Europe Forum) was founded in 1994 and consists of - Many developing countries renewed 18 member nations their interest in regional integration ASEAN (Association of Southeast Asian since the Uruguay Round began Nations) was founded in 1967 by Malaysia, - The level of economic integration Indonesia, Philippines, Singapore and varies widely among agreements Thailand There are less formal agreements bilaterally REGIONAL LEVEL COOPERATION and multilaterally in abundance NORTH AMERICA – The North American Free Also has numerous sub-regional economic Trade Agreement (NAFTA) trade zones Established in 1992, implemented in 1994 NAFTA created a tri-national market area LATIN AMERICA between Canada, Mexico and United States Early attempts were the Latin American Free Dismantles trade barriers for industrial goods, Trade Association (LAFTA) and the Central and has agreements on services, investments, American Common Market (CACM). Both intellectual property rights, and agriculture failed economically and politically.  LAFTA was superceded by the Latin WEEK 8 American Integration Association (LAIA), whose goal was to increase bilateral trade INTERNATIONAL MONETARY SYSTEM among member nations International Monetary System (IMS) is MERCOSUR was established in 1995 as an a well-designed system that regulates the organization to promote trade in South valuations and exchange of money across America countries. It is a well-governed system looking after AFRICA and the MIDDLE EAST the cross-border payments, exchange rates, The Economic Community of West and mobility of capital. This system has African States (ECOWAS) – established in rules and regulations which help in 1975 by West African states computing the exchange rate and terms of Central African Economic and Customs international payments Union – established in 1966 in former In other words, International Monetary French Africa System mobilizes the capital from one Preferential Trade Area (PTA) – nation to another by facilitating trade established in 1981 from former members of the East African Economic Community EVOLUTION OF THE INTERNATIONAL Gulf Cooperation Council (GCC) – Middle MONETARY SYSTEM East free trade area established in 1981 Bimetalissm: before 1875 Classical Gold Standard: 1875-1914 COMMODITY LEVEL COOPERATION Interwar Period: 1915- 1944 AMONG NATIONS Bretton Woods System: 1945 – 1972 Commodity Cartel – a group of producing The Flexible Exchange Rate Regime: 1973 countries that wish to protect themselves to present from price fluctuations of certain commodities traded internationally Bimetalissm : before 1875 Can control prices through production - Gold and Silver as International means of quotas and limiting overall output payment. The exchange rate among currencies was determined by either their STRATEGIC RESPONSES of MNEs gold or silver content Defensive Export Substituting – where firms defend market share previously Classical Gold Standard: 1875-1914 achieved through exports - The exchange rate between two country’s Offensive Export Substituting – ensures currencies would be determined by relative market penetration through direct gold contents investment before markets are officially - Highly stable exchange rates under the integrated. classical gold standard provided an Rationalized Foreign Direct Investment – environment that was conducive to where Multinational Enterprises heighten International Trade and Investment resource commitment to operations to achieve new economies of scale in the wake of regionalisation Interwar Period: 1915- 1944 An account deficit means more money is Characterized by going out of a country to purchase goods - Economic nationalism than is coming in - Attempts and failure to restore gold An account surplus is its opposite standard - Economic and political instability These factors highlighted some of the shortcomings of the Gold Standard Bretton Woods System: 1945 – 1972 - Creation of the International Monetary Fund and the World Bank - The US Dollar was pegged to Gold at $35 per ounce and other currencies were pegged to the US dollar - Each country was responsible for maintaining its exchange rate by buying or selling foreign exchange reserves as necessary The Flexible Exchange Rate Regime: 1973 to present - Flexible exchange rates were declared acceptable to IMF members - Gold was abandoned as in International reserve asset - Non-oil exporting countries and less developed countries were given greater access to IMF funds CONTEMPORARY EXCHANGE RATE SYSTEMS Fixed Rate System Crawling Peg System Target Zone Arrangement Managed Float System THE BALANCE OF PAYMENTS is an accounting statement that summarized all the economic transactions between residents of a home county and those of all other countries