Chapter 1 Globalization I. What Is Globalization?

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system Globalization refers to the shift toward a more integrated and interdependent world economy Globalization has two facets: 1) the globalization of markets The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace In many industries, it is no longer meaningful to talk about the German market or the American market Instead, there is only the global market Falling trade barriers make it easier to sell internationally The tastes and preferences of consumers are converging on some global norm Firms help create the global market by offering the same basic products worldwide 2) the globalization of production The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production like land, labor, and capital Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering II. The Emergence Of Global Institutions Institutions are needed to: help manage, regulate, and police the global marketplace promote the establishment of multinational treaties to govern the global business system Institutions created over the past half century include: the General Agreement on Tariffs and Trade (GATT) the World Trade Organization (WTO) The World Trade Organization (like its predecessor GATT) is primarily responsible for policing the world trading system and making sure that nation-states adhere to the rules laid down in trade treaties signed by WTO members In 2007, the 150 nations that accounted for 97% of world trade were WTO members The WTO promotes lower barriers to trade and investment the International Monetary Fund (IMF) 1

 The International Monetary Fund and the World Bank were created in 1944 The IMF was established to maintain order in the international monetary system The World Bank was established to promote economic development the World Bank the United Nations (UN) The United Nations was established in 1945 to: maintain international peace and security develop friendly relations among nations cooperate in solving international problems and in promoting respect for human rights be a center for harmonizing the actions of nations III. Drivers Of Globalization Two macro factors underlie the trend toward greater globalization: the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II Declining Trade And Investment Barriers International trade occurs when a firm exports goods or services to consumers in another country Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country After World War II, advanced countries made a commitment to lower barriers to trade and investment Since 1950, average tariffs have fallen significantly and are now at about 4% Countries have also been opening markets to FDI Lower barriers to trade and investment mean: that firms can view the world, rather than a single country, as their market that firms can base production in the optimal location for that activity technological change The Role Of Technological Change Technological change has made the globalization of markets a reality Important advances have occurred in: microprocessors and telecommunications the Internet and World Wide Web transportation technology Implications of technological change for the globalization of production include: lower transportation costs that enable firms to disperse production to economical, geographically separate locations 2

 lower information processing and communication costs that enable firms to create and manage globally dispersed production systems Implications of technological change for the globalization of markets include: low cost global communications networks help create electronic global marketplace low-cost transportation help create global markets global communication networks and global media are creating a worldwide culture, and a global market for consumer products IV. The Changing Demographics Of The Global Economy There has been a drastic change in the demographics of the world economy in the last 30 years Four trends are important: the Changing World Output and World Trade Picture In 1960, the United States accounted for over 40% of world economic activity By 2006, the United States accounted for less than 20% of world economic activity A similar trend occurred in other developed countries The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020 the Changing Foreign Direct Investment Picture In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows Today, the United States accounts for less than one-fifth of worldwide FDI flows Other developed countries have followed a similar pattern In contrast, the share of FDI accounted for by developing countries has risen from less than 2% in 1980 to almost 12% in 2005 Developing countries, especially China, have also become popular destinations for FDI the Changing Nature of the Multinational Enterprise A multinational enterprise (MNE) is any business that has productive activities in two or more countries Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-multinationals the Changing World Order Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies and so, create new opportunities for international businesses China and Latin America are also moving toward greater free market reforms V. The Global Economy Of The Twenty-first Century The world is moving toward a more global economic system, but globalization is not inevitable 3

 Globalization also brings risks like the financial crisis that swept through South East Asia in the late 1990s VI. The Globalization Debate Is the shift toward a more integrated and interdependent global economy a good thing? Supporters believe that increased trade and cross-border investment mean lower prices for goods and services, greater economic growth, higher consumer income, and more jobs Critics worry that globalization will cause job losses, environmental degradation, and the cultural imperialism of global media and MNEs VII. Anti-Globalization Protests

More than 40,000 anti-globalization protesters took to the street at the WTO meeting in Seattle in 1999 Protesters now regularly show up at most major meetings of global institutions VIII. Globalization, Jobs, And Income

Globalization critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries Supporters of globalization contend that the benefits of this trend outweigh the coststhat countries will specialize in what they do most efficiently and trade for other goodsand all countries will benefit IX. Globalization, Labor Policies, And The Environment

Globalization critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced Globalization supporters claim that tougher environmental and labor standards are associated with economic progress, so as countries get richer from free trade, they get tougher environmental and labor regulations X. Globalization And National Sovereignty Critics of globalization worry that todays interdependent global economy is shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN Supporters of globalization contend that the power of these organizations is limited to what nation-states agree to grant, and that the power of the organizations lies in their ability to get countries to agree to follow certain actions XI. Globalization And The Worlds Poor

Critics of globalization argue that the gap between rich nations and poor nations is getting wider Supporters of globalization claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment and implement economic policies based on free market economies, and to receive debt forgiveness for debts incurred under totalitarian regimes XII. Managing In The Global Marketplace

An international business is any firm that engages in international trade or investment Managing an international business differs from managing a domestic business because: countries are different

 the range of problems confronted in an international business is wider and the problems more complex than those in a domestic business firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system international transactions involve converting money into different currencies Chapter 3 Differences in Culture Introduction Successful international managers need cross-cultural literacy - an understanding of how cultural differences across and within nations can affect the way in which business is practiced A relationship may exist between culture and the costs of doing business in a country or region What Is Culture? Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living where - Values are abstract ideas about what a group believes to be good, right, and desirable Values provide the context within which a societys norms are established and justified and form the bedrock of a culture - Norms are the social rules and guidelines that prescribe appropriate behavior in particular situations Norms include folkways (the routine conventions of everyday life) and mores (norms that are seen as central to the functioning of a society and to its social life) Society refers to a group of people who share a common set of values and norms Culture, Society, And The Nation-state There is not a strict one-to-one relationship between a society and a nation state Nation-states are political creations that can contain one or more cultures Similarly, a culture can embrace several nations 1) The Determinants Of Culture The values and norms of a culture are the evolutionary product of a number of factors at work in a society including religion, political and economic philosophies, education, language, and social structure 2) Social Structure Social structure refers to a societys basic social organization Two dimensions to consider: the degree to which the basic unit of social organization is the individual, as opposed to the group the degree to which a society is stratified into classes or castes 5

Individuals And Groups A group is an association of two or more people who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each others behavior Societies differ in terms of the degree to which the group is viewed as the primary means of social organization In many Western societies, there is a focus on the individual, and individual achievement is common This contributes to the dynamism of the US economy, and high level of entrepreneurship But, leads to a lack of company loyalty and failure to gain company specific knowledge, competition between individuals in a company instead of than team building, and less ability to develop a strong network of contacts within a firm In many Asian societies, the group is the primary unit of social organization This may discourage job switching between firms, encourage lifetime employment systems, and lead to cooperation in solving business problems But, might also suppress individual creativity and initiative Social Stratification All societies are stratified on a hierarchical basis into social categories, or social strata While all societies are stratified to some extent, they differ by: the degree of mobility between social strata the significance attached to social strata in business contacts Social mobility is the extent to which individuals can move out of the strata into which they are born A caste system is a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime A class system is a form of open social stratification in which the position a person has by birth can be changed through his or her achievement or luck The social stratification of a society is significant if it affects the operation of business organizations Class consciousness is a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with others In cultures where class consciousness is high, the way individuals from different classes work together may be very prescribed and strained Religious And Ethical Systems Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred Christianity Christianity is the worlds largest religion and is found throughout Europe, the Americas, and other countries settled by Europeans Perhaps the most important economic implication of Christianity is the Protestant work ethic 6

 In 1804, Max Weber suggested that it was this ethic and its focus on hard work, wealth creation, and frugality, that was the driving force of capitalism Islam Islam, the worlds second largest religion, extends the underlying roots of Christianity to an all-embracing way of life that governs one's being In the West, Islamic fundamentalism is associated in the media with militants, terrorists, and violent upheavals, but in fact Islam teaches peace, justice, and tolerance Fundamentalists, who demand rigid commitment to religious beliefs and rituals, have gained political power in many Muslim countries, and blame the West for many social problems The key economic implication of Islam is that under Islam, people do not own property, but only act as stewards for God and thus must take care of that which they have been entrusted with, so while Islam is supportive of business, the way business is practiced is prescribed Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior Religion and ethics are often closely intertwined Four religions dominate society -Christianity, Islam, Hinduism, and Buddhism Confucianism is also important in influencing behavior and culture in many parts of Asia

Chapter 5 International Trade Theory I. An Overview Of Trade Theory Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country 1) The benefits of Trade Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself International trade allows a country: to specialize in the manufacture and export of products that it can produce efficiently import products that can be produced more efficiently in other countries 2) The Patterns Of International Trade Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee But, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry? Why does Japan export automobiles, consumer electronics, and machine tools? 3) Trade Theory And Government Policy Mercantilism makes a crude case for government involvement in promoting exports and limiting imports Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade New trade theory and Porters theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries 7

II.

Mercantilism Mercantilism suggests that it is in a countrys best interest to maintain a trade surplus -- to export more than it imports Mercantilism advocates government intervention to achieve a surplus in the balance of trade It views trade as a zero-sum game - one in which a gain by one country results in a loss by another

III.

Absolute Advantage Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries Assume that two countries, Ghana and South Korea, both have 200 units of resources that could either be used to produce rice or cocoa In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice So, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between the two extremes ton of rice In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one

So, South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no cocoa, or some combination in between Ghana has an absolute advantage in the production of cocoa South Korea has an absolute advantage in the production of rice

Without trade: Ghana would produce 10 tons of cocoa and 5 tons of rice South Korea would produce 10 tons of rice and 2.5 tons of cocoa

If each country specializes in the product in which it has an absolute advantage and trades for the other product: Ghana would produce 20 tons of cocoa South Korea would produce 20 tons of rice Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice After trade: Ghana would have 14 tons of cocoa left, and 6 tons of rice South Korea would have 14 tons of rice left and 6 tons of cocoa Both countries gained from trade IV. Comparative Advantage all goods David Ricardo asked what might happen when one country has an absolute advantage in the production of 8

 Ricardos theory of comparative advantage suggests that countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home Assume: rice of the two rice So, South Korea could produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of the two With trade: Ghana could export 4 tons of cocoa to South Korea in exchange for 4 tons of rice Ghana will still have 11 tons of cocoa, and 4 additional tons of rice South Korea still has 6 tons of rice and 4 tons of cocoa So, Ghana could produce 20 tons of cocoa and no rice, 15 tons of rice and no cocoa, or some combination In South Korea, it takes 40 resources to produce one ton of cocoa and 20 resources to produce one ton of Ghana is more efficient in the production of both cocoa and rice In Ghana, it takes 10 resources to produce one tone of cocoa, and 13 1/3 resources to produce one ton of

If each country specializes in the production of the good in which it has a comparative advantage and trades for the other, both countries gain Comparative advantage theory provides a strong rationale for encouraging free trade

1) Qualifications And Assumptions The simple example of comparative advantage assumes: only two countries and two goods zero transportation costs similar prices and values resources are mobile between goods within countries, but not across countries constant returns to scale fixed stocks of resources no effects on income distribution within countries 2) Extensions Of The Ricardian Model Resources do not always move freely from one economic activity to another, and job losses may occur

Unrestricted free trade is beneficial, but because of diminishing returns, the gains may not be as great as the simple model would suggest Opening a country to trade: might increase a country's stock of resources as increased supplies become available from abroad 9

might increase the efficiency of resource utilization, and free up resources for other uses might increase economic growth

The Samuelson Critique Paul Samuelson argues that dynamic gains from trade may not always be beneficial

The ability to offshore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages would then fall V. Heckscher-Ohlin Theory Ricardos theory suggests that comparative advantage arises from differences in productivity

Eli Heckscher and Bertil Ohlin argued that comparative advantage arises from differences in national factor endowments the extent to which a country is endowed with resources like land, labor, and capital The Heckscher-Ohlin theory predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce The Leontief Paradox Wassily Leontief theorized that since the U.S. was relatively abundant in capital compared to other nations, the U.S. would be an exporter of capital intensive goods and an importer of labor-intensive goods. Paradox VI. However, he found that U.S. exports were less capital intensive than U.S. imports Since this result was at variance with the predictions of the theory, it became known as the Leontief

The Product Life Cycle Theory The product life-cycle theory, proposed by Raymond Vernon, suggested that as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade Vernon argued that the size and wealth of the U.S. market gave U.S. firms a strong incentive to develop new products Vernon argued that initially, the product would be produced and sold in the U.S., later, as demand grew in other developed countries, U.S. firms would begin to export Over time, demand for the new product would grow in other advanced countries making it worthwhile for foreign producers to begin producing for their home markets U.S. firms might also set up production facilities in those advanced countries where demand was growing limiting the exports from the U.S. As the market in the U.S. and other advanced nations matured, the product would become more standardized, and price the main competitive weapon Producers based in advanced countries where labor costs were lower than the United States might now be able to export to the U.S. If cost pressures became intense, developing countries would begin to acquire a production advantage over advanced countries The United States switched from being an exporter of the product to an importer of the product as production becomes more concentrated in lower-cost foreign locations

10

The Product Life Cycle Theory The product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the US in the 1960s and 1970s But, the increasing globalization and integration of the world economy has made this theory less valid in today's world VII. New Trade Theory New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade New trade theory suggests that: through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods in those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises 1) Increasing Product Variety And Reducing Costs important Without trade, nations might not be able to produce those products where economies of scale are With trade, markets are large enough to support the production necessary to achieve economies of scale 11

 So, trade is mutually beneficial because it allows for the specialization of production, the realization of scale economies, and the production of a greater variety of products at lower prices 2) Economies Of Scale, First Mover Advantages, And The Pattern Of Trade The pattern of trade we observe in the world economy may be the result of first mover advantages (the economic an strategic advantages that accrue to early entrants into an industry) and economies of scale New trade theory suggests that for those products where economies of scale are significant and represent a substantial proportion of world demand, first movers can gain a scale based cost advantage that later entrants find difficult to match 3) Implications Of New Trade Theory Nations may benefit from trade even when they do not differ in resource endowments or technology

A country may dominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good While this is at variance with the Heckscher-Ohlin theory, it does not contradict comparative advantage theory, but instead identifies a source of comparative advantage An extension of the theory is the implication that governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important VIII. National Competitive Advantage: Porters Diamond Michael Porter tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage: Factor endowments Demand conditions Relating and supporting industries Firm strategy, structure, and rivalry

1) Factor Endowments industry Factor endowments refer to a nations position in factors of production necessary to compete in a given A nation's position in factors of production can lead to competitive advantage

These factors can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how) 2) Demand Conditions 12

Demand conditions refer to the nature of home demand for the industrys product or service

The nature of home demand for the industrys product or service influences the development of capabilities Sophisticated and demanding customers pressure firms to be competitive

3) Relating And Supporting Industries Firm strategy, structure, and rivalry refers to the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry impacts firm competitiveness Different management ideologies affect the development of national competitive advantage

Vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features 4) Evaluating Porters Theory Government policy can: affect demand through product standards influence rivalry through regulation and antitrust laws impact the availability of highly educated workers and advanced transportation infrastructure.

The four attributes, government policy, and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage IX. Implications For Managers There are three main implications for international businesses: location implications first-mover implications policy implications 1) Location Different countries have advantages in different productive activities

It makes sense for a firm to disperse its various productive activities to those countries where they can be performed most efficiently International trade theory suggests that firm sthat fail to do this, may be at a competitive disadvantage

2) First-Mover Advantages Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors 3) Government Policy 13 Firms that establish a first-mover advantage may dominate global trade in that product

 Government policies with respect to free trade or protecting domestic industries can significantly impact global competitiveness Businesses should work to encourage governmental policies that support free trade

Firms should also lobby the government to adopt policies that have a favorable impact on each component of the diamond

Chapter 6 The Political Economy of International Trade I. Introduction Free trade occurs when governments do not attempt to restrict what its citizens can buy from another country or what they can sell to another country While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups II. Instruments of Trade Policy The main instruments of trade policy are: Tariffs Subsides Import Quotas Voluntary Export Restraints Local Content Requirements Administrative Polices Antidumping Policies 1) Tariffs products Tariffs are taxes levied on imports that effectively raise the cost of imported products relative to domestic Specific tariffs are levied as a fixed charge for each unit of a good imported Ad valorem tariffs are levied as a proportion of the value of the imported good

Tariffs increase government revenues, provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods, and force consumers to pay more for certain imports So, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy 2) Subsidies Subsidies are government payments to domestic producers Consumers typically absorb the costs of subsidies 14

Subsidies help domestic producers in two ways: they help them compete against low-cost foreign imports they help them gain export markets 3) Import Quotas And Voluntary Export Restraints Import quotas directly restrict the quantity of some good that may be imported into a country

Tariff rate quotas are a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing countrys government A quota rent is the extra profit that producers make when supply is artificially limited by an import quota

Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods 4) Local Content Requirements A local content requirement demands that some specific fraction of a good be produced domestically Local content requirements benefit domestic producers, but consumers face higher prices

5) Administrative Policies Administrative trade polices are bureaucratic rules that are designed to make it difficult for imports to enter a country These polices hurt consumers by denying access to possibly superior foreign products

6) Antidumping Policies Dumping refers to selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their fair market value Dumping enables firms to unload excess production in foreign markets

Some dumping may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits Antidumping polices (or countervailing duties) are designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition III. The Case For Government Intervention Arguments for government intervention: Political arguments are concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) Economic arguments are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers) 1) Political Arguments For Free Trade Political arguments for government intervention include: protecting jobs 15

 protecting industries deemed important for national security retaliating to unfair foreign competition protecting consumers from dangerous products furthering the goals of foreign policy protecting the human rights of individuals in exporting countries a- Protecting Jobs And Industries Protecting jobs and industries is the most common political reason for trade restrictions

Usually this results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than the consumers that will eventually pay the costs b- National Security Industries such as aerospace or electronics are often protected because they are deemed important for national security

c- Retaliation When governments take, or threaten to take, specific actions, other countries may remove trade barriers If threatened governments dont back down, tensions can escalate and new trade barriers may be enacted

d- Protecting Consumers Governments may intervene in markets to protect consumers

e- Furthering Policy Objectives Foreign policy objectives can be supported through trade policy Preferential trade terms can be granted to countries that a government wants to build strong relations with Trade policy can also be used to punish rogue states that do not abide by international laws or norms However, it might cause other countries to undermine unilateral trade sanctions

The Helms-Burton Act and the DAmato Act, have been passed to protect American companies from such actions f- Protecting Human Rights Trade policy can be used to improve the human rights policies of trading partners However, unless a large number of countries choose to take such action, it is unlikely to be successful

Some critics have argued that the best way to change the internal human rights of a country is to engage it in international trade The decision to grant China MFN status in 1999 was based on this philosophy

2) Economic Arguments For Intervention 16

Economic arguments for intervention include: the infant industry argument strategic trade policy a- The Infant Industry Argument The infant industry argument suggests that an industry should be protected until it can develop and be viable and competitive internationally the WTO The infant industry argument has been accepted as a justification for temporary trade restrictions under However, it can be difficult to gauge when an industry has grown up

Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government b- Strategic Trade Policy Strategic trade policy suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages Strategic trade policy also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage IV. Revised Case For Free Trade Restrictions on trade may be inappropriate in the cases of: Retaliation and Trade War Domestic Politics 1) Retaliation And Trade War Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries Countries that attempt to use such policies will probably provoke retaliation

2) Domestic Policies Krugman argues that since special interest groups can influence governments, strategic trade policy is almost certain to be captured by such groups who will distort it to their own ends V. Development Of The World Trading System How has the current world trade system emerged? 1) From Smith To The Great Depression goods Until the Great Depression of the 1930s, most countries had some degree of protectionism The Smoot-Hawley tariff was enacted in 1930 in the U.S creating significant import tariffs on foreign Other nations took similar steps and as the depression deepened, world trade fell further

2) 1947-79: GATT, Trade Liberalization, And Economic Growth 17

 After WWII, the U.S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT) trade The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to

3) 1980-1993: Protectionist Trends In the 1980s and early 1990s, the world trading system was strained

Japans economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japans perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries Persistent trade deficits by the U.S., the worlds largest economy, caused significant economic problems for some industries and political problems for the government Many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT 4) The Uruguay Round And The World Trade Organization The Uruguay Round of GATT negotiations began in 1986

The talks focused on several areas: Services and Intellectual Property

-going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture The World Trade Organization

-it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules The WTO encompassed GATT along with two sisters organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) 5) WTO: Experience To Date Since its establishment, the WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services So far, the WTOs policing and enforcement mechanisms are having a positive effect Most countries have adopted WTO recommendations for trade disputes

In 1997, 68 countries that account for more than 90% of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications 102 countries pledged to open to varying degrees their banking, securities, and insurance sectors to foreign competition The agreement covers not just cross-border trade, but also foreign direct investment

The 1999 meeting of the WTO in Seattle was important not only for what happened between the member countries, but also for what occurred outside the building Inside, members failed to agree on how to work toward the reduction of barriers to cross-border trade in agricultural products and cross-border trade and investment in services Outside, the WTO became a magnet for various groups protesting free trade 18

6) The Future Of The WTO: Unresolved Issues And The Doha Round The current agenda of the WTO focuses on: the rise of anti-dumping policies the high level of protectionism in agriculture the lack of strong protection for intellectual property rights in many nations continued high tariffs on nonagricultural goods and services in many nations duties economies 50 years The WTO is encouraging members to strengthen the regulations governing the imposition of antidumping The WTO is concerned with the high level of tariffs and subsidies in the agricultural sector of many TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting

The WTO would like to bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates The WTO launched a new round of talks at Doha, Qatar in 2001 The agenda includes: cutting tariffs on industrial goods and services phasing out subsidies to agricultural producers reducing barriers to cross-border investment limiting the use of anti-dumping laws VI. Implications For Managers Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm 1) Trade Barriers And Firm Strategy Trade barriers raise the cost of exporting products to a country

Voluntary export restraints (VERs) may limit a firms ability to serve a country from locations outside that country To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise barriers All of these can raise the firms costs above the level that could be achieved in a world without trade

2) Policy Implications International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies While there may be short run benefits to having governmental protection in some situations, in the long run these can backfire and other governments can retaliate

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Chapter 8 Regional Economic Integration I. Introduction Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Regional trade agreements are designed to promote free trade, but instead the world may be moving toward a situation in which a number of regional trade blocks compete against each other II. Levels Of Economic Integration There are five levels of economic integration: 1. A free trade area eliminates all barriers to the trade of goods and services among member countries, but members determine their own trade policies for nonmembers the European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland), and the North American Free Trade Agreement (between the U.S., Canada, and Mexico) are both free trade areas 2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy The Andean Pact (between Bolivia, Columbia, Ecuador and Peru) is an example of a customs union 3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay) is aiming for common market status 4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rates, and a common monetary and fiscal policy The European Union (EU) is an imperfect economic union 5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states The EU is headed toward at least partial political union, and the United States is an example of even closer political union The Case for Regional Integration 1) The Economic Case For Regional Integration 2) All countries gain from free trade and investment Regional economic integration is an attempt to exploit the gains from free trade and investment

III.

The Political Case For Regional Integration

Linking countries together, making them more dependent on each other: creates incentives for political cooperation and reduces the likelihood of violent conflict gives countries greater political clout when dealing with other nations 3) Impediments To Integration Economic integration can be difficult because: IV. while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose it implies a loss of national sovereignty

The Case Against Regional Integration diverts Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it 20

 producers suppliers V.

Trade creation occurs when low cost producers within the free trade area replace high cost domestic

Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external

Regional Economic Integration In Europe Europe has two trade blocs: The European Union (EU) with 27 members The European Free Trade Area (EFTA) with 4 members The EU is seen as the worlds next economic and political superpower 1) Evolution Of The European Union The EU was formed as a result of the devastation of two world wars on Western Europe and the desire for a lasting peace, and the desire by the European nations to hold their own on the worlds political and economic stage The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951 The European Economic Community was formed in 1957 at the Treaty of Rome with the goal of becoming a common market 2) Political Structure Of The European Union There are five main institutions of the EU: the European Council - resolves major policy issues and sets policy directions the European Commission - responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws the Council of the European Union - the ultimate controlling authority within the EU the European Parliament - debates legislation proposed by the commission and forwarded to it by the council the Court of Justice - the supreme appeals court for EU law 3) The Single European Act ( o lut Chu u thng nht) The Single European Act: was adopted by the EU in 1987 committed the EC countries to work toward establishment of a single market by December 31, 1992 was born out of frustration among EC members that the community was not living up to its promise provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case 4) The Establishment Of The Euro The Maastricht Treaty committed the EU to adopt a single currency

By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar The euro is used by 12 of the 25 member states

For now, three EU countries, Britain, Denmark and Sweden, that are eligible to participate in the eurozone, are opting out Benefits of the Euro: There are savings from having to handle one currency, rather than many A common currency will make it easier to compare prices across Europe 21

 European producers will be forced to look for ways to reduce their production costs in order to maintain their profit margins It should give a strong boost to the development of highly liquid pan-European capital market

A pan-European euro denominated capital market will increase the range of investment options open both to individuals and institutions Costs of the Euro: National authorities lose control over the monetary policy

The EU is not an optimal currency area (an area where similarities in the underlying structure if economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy) Since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar

Initially, the euro fell in value relative to the dollar, but strengthened to a five year high of $1.30 in February 2006 5) Enlargement Of The European Union Many countries have applied for EU membership

Ten countries joined on May 1, 2004 expanding the EU to 25 states, with population of 450 million people, and a single continental economy with a GDP of 11 trillion In 2007, Bulgaria and Romania joined bring membership to 27 countries

The new countries will not be able to adopt the euro until at least 2007, nor will there be free movement of labor between new and existing countries until then VI. Regional Economic Integration In The Americas There is a move toward greater regional economic integration in the Americas The biggest effort is the North American Free Trade Area (NAFTA) Other efforts include the Andean Community and MERCOSUR A hemisphere-wide Free Trade of the Americas is under discussion

1) The North American Free Trade Agreement The North American Free Trade Area (NAFTA) became law January 1, 1994 NAFTAs participants are the United States, Canada, and Mexico NAFTA: base abolished tariffs on 99 percent of the goods traded between members removed most barriers on the cross-border flow of services protects intellectual property rights removes most restrictions on FDI between the three member countries allows each country to apply its own environmental standards, provided such standards have a scientific

22

 establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored NAFTAs supporters argue that: Mexico will benefit from increased jobs as low cost production moves south, and will attain more rapid economic growth as a result The U.S. and Canada will benefit from the access to a large and increasingly prosperous market and from the lower prices for consumers from goods produced in Mexico U.S. and Canadian firms with production sites in Mexico will be more competitive on world markets

Critics of NAFTAs argued that: that jobs would be lost and wage levels would decline in the U.S. and Canada Mexican workers would emigrate north pollution would increase due to Mexico's more lax standards Mexico would lose its sovereignty

Research indicates that NAFTAs early impact was subtle, and both advocates and detractors may have been guilty of exaggeration The agreement has helped to create the background for increased political stability in Mexico Several other Latin American countries have indicated their desire to eventually join NAFTA Currently both Canada and the U.S. are adopting a wait and see attitude with regard to most countries

2) The Andean Community The Andean Pact: area 3) MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina was expanded in 1990 to include Paraguay and Uruguay has been making progress on reducing trade barriers between member states was formed in 1969 using the EU model had more or less failed by the mid-1980s was re-launched in 1990, and now operates as a customs union signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade

may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis 4) Central American Common Market And CARICOM There are two other trade pacts in the Americas: the Central American Trade Market (CAFTA) to lower trade barriers between the U.S. and members CARICOM to establish a customs union Neither pact has achieved its goals yet In 2006, six CARICOM members formed the Caribbean Single Market and Economy (CSME) - to lower trade barriers and harmonize macro-economic and monetary policy between members 23

5) Free Trade Of The Americas Talks began in April 1998 to establish a Free Trade of The Americas (FTAA) by 2005 The FTAA was not established and now support from the U.S. and Brazil is mixed

If the FTAA is established, it will have major implications for cross-border trade and investment flows within the hemisphere VII. The FTAA would create a free trade area of nearly 800 million people

Regional Economic Integration Elsewhere Several efforts have been made to integrate in Asia and Africa One of the most successful is the Association of Southeast Asian Nations (ASEAN)

1) Association Of Southeast Asian Nations The Association of Southeast Asian Nations (ASEAN): was formed in 1967

currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia policies 2003 2) Asia-Pacific Economic Cooperation The Asia-Pacific Economic Cooperation (APEC): currently has 21 members including the United States, Japan, and China wants to foster freer trade between member countries and to achieve some cooperation in their industrial an ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in

wants to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region 3) Regional Trade Blocs In Africa Progress toward the establishment of meaningful trade blocs in Africa has been slow Many countries are members of more than one of the nine dormant blocs in the region Kenya, Uganda, and Tanzania committed to re-launching the East African Community (EAC) in 2001, however so far, the effort appears futile VII. Implications For Managers The EU and NAFTA currently have the most immediate implications for business 1) Opportunities Regional economic integration: opens new markets makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal 2) Threats Within each grouping, the business environment becomes competitive EU companies are becoming more capable There is a risk of being shut out of the single market by the creation of a trade fortress 24

 The EU is becoming more willing to intervene and impose conditions on companies proposing mergers and acquisitions which could limit the ability of firms to follow the strategy of their choice Chapter 9 The Foreign Exchange Market I. Introduction country A firms sales, profits, and strategy are affected by events in the foreign exchange market The foreign exchange market is a market for converting the currency of one country into that of another The exchange rate is the rate at which one currency is converted into another

The foreign exchange market is the market where currencies are bought and sold and in which currency prices are determined. It is a network of banks, brokers and dealers that exchange currencies 24 hours a day. II. The Functions Of The Foreign Exchange Market The foreign exchange market: is used to convert the currency of one country into the currency of another

provide some insurance against foreign exchange risk (the adverse consequences of unpredictable changes in exchange rates) 1) Currency Conversion International companies use the foreign exchange market when: the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies they must pay a foreign company for its products or services in its countrys currency they have spare cash that they wish to invest for short terms in money markets

they are involved in currency speculation (the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates) 2) Insuring Against Foreign Exchange Risk a- Spot Exchange Rates ( T gi giao ngay) The foreign exchange market can be used to provide insurance to protect against foreign exchange risk (the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm) A firm that insures itself against foreign exchange risk is hedging

The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Spot rates change continually depending on the supply and demand for that currency and other currencies

b- Forward Exchange Rates (T gi k hn/ giao sau) exchanges To insure or hedge against a possible adverse foreign exchange rate movement, firms engage in forward

A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future 25

A forward exchange rate is the rate governing such future transactions Rates for currency exchange are typically quoted for 30, 90, or 180 days into the future

c- Currency Swaps A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk III. The Nature Of The Foreign Exchange Market The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systemsit is not located in any one place The most important trading centers are London, New York, Tokyo, and Singapore The markets is always open somewhere in the worldit never sleeps

High-speed computer linkages between trading centers around the globe have effectively created a single marketthere is no significant difference between exchange rates quotes in the differing trading centers If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for arbitrage (the process of buying a currency low and selling it high), and the gap would close Most transactions involve dollars on one sideit is a vehicle currency along with the euro, the Japanese yen, and the British pound IV. Economic Theories Of Exchange Rate Determination Exchange rates are determined by the demand and supply for different currencies.

Three factors impact future exchange rate movements: a countrys price inflation a countrys interest rate market psychology

1) Prices And Exchange Rates The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency Purchasing power parity (PPP) theory argues that given relatively efficient markets (markets in which few impediments to international trade and investment exist) the price of a basket of goods should be roughly equivalent in each country PPP theory predicts that changes in relative prices will result in a change in exchange rates

In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency Example: US/French exchange rate: $1 = .78Eur A jacket selling for $50 in New York should retail for 39.24Eur in Paris (50x.78) A positive relationship between the inflation rate and the level of money supply exists When the growth in the money supply is greater than the growth in output, inflation will occur 26

 PPP theory suggests that changes in relative prices between countries will lead to exchange rate changes, at least in the short run A country with high inflation should see its currency depreciate relative to others

Empirical testing of PPP theory suggests that it is most accurate in the long run, and for countries with high inflation and underdeveloped capital markets 2) Interest Rates And Exchange Rates There is a link between interest rates and exchange rates

The International Fisher Effect states that for any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries In other words: (S1 - S2) / S2 x 100 = i $ - i where i $ and i are the respective nominal interest rates in two countries (in this case the US and Japan), S1 is the spot exchange rate at the beginning of the period and S2 is the spot exchange rate at the end of the period 3) Investor Psychology And Bandwagon Effects Investor psychology also affects exchange rates

The bandwagon effect occurs when expectations on the part of traders can turn into self-fulfilling prophecies, and traders can join the bandwagon and move exchange rates based on group expectations Governmental intervention can prevent the bandwagon from starting, but is not always effective

Government restrictions can include: A restriction on residents ability to convert the domestic currency into a foreign currency Restricting domestic businesses ability to take foreign currency out of the country

Governments will limit or restrict convertibility for a number of reasons that include: flight 4) Summary Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates So, international businesses should pay attention to countries differing monetary growth, inflation, and interest rates V. Exchange Rate Forecasting Should companies use exchange rate forecasting services to aid decision-making? The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money The inefficient market school argues that companies can improve the foreign exchange markets estimate of future exchange rates by investing in forecasting services 27 Preserving foreign exchange reserves A fear that free convertibility will lead to a run on their foreign exchange reserves known as capital

1) The Efficient Market School An efficient market is one in which prices reflect all available information

If the foreign exchange market is efficient, then forward exchange rates should be unbiased predictors of future spot rates Most empirical tests confirm the efficient market hypothesis suggesting that companies should not waste their money on forecasting services 2) The Inefficient Market School An inefficient market is one in which prices do not reflect all available information

So, in an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates and it may be worthwhile for international businesses to invest in forecasting services However, the track record of forecasting services is not good

3) Approaches To Forecasting There are two schools of thought on forecasting: Fundamental analysis draw upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates Technical analysis charts trends with the assumption that past trends and waves are reasonable predictors of future trends and waves VI. Currency Convertibility A currency is freely convertible when a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency A currency is externally convertible when non-residents can convert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way A currency is nonconvertible when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency Most countries today practice free convertibility, although many countries impose some restrictions on the amount of money that can be converted Countries limit convertibility to preserve foreign exchange reserves and prevent capital flight (when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency) When a countrys currency is nonconvertible, firms may turn to countertrade (barter like agreements by which goods and services can be traded for other goods and services) to facilitate international trade VII. Implications For Managers Firms need to understand the influence of exchange rates on the profitability of trade and investment deals There are three types of foreign exchange risk:

1. Transaction exposure 2. Translation exposure 3. Economic exposure 1) Transaction Exposure 28

 Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values It includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending o funds in foreign currencies 2) Translation exposure Translation exposure is the impact of currency exchange rate changes on the reported financial statements of a company It is concerned with the present measurement of past events Gains or losses are paper losses theyre unrealized

3) Economic Exposure Economic exposure is the extent to which a firms future international earning power is affected by changes in exchange rates Economic exposure is concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs 4) Reducing Translation And Transaction Exposure To minimize transaction and translation exposure, firms can: buy forward use swaps

leading and lagging payables and receivables (paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements) A lead strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate Lead and lag strategies can be difficult to implement To reduce economic exposure, firms need to: distribute productive assets to various locations so the firms long-term financial well-being is not severely affected by changes in exchange rates ensure assets are not too concentrated in countries where likely rises in currency values will lead to damaging increases in the foreign prices of the goods and services the firm produces 5) Other Steps For Managing Foreign Exchange Risk In general, firms should: have central control of exposure to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies other hand distinguish between transaction and translation exposure on the one hand, and economic exposure on the attempt to forecast future exchange rates 29

 position

establish good reporting systems so the central finance function can regularly monitor the firms exposure produce monthly foreign exchange exposure reports

Chapter 10 The International Monetary System I. Introduction The institutional arrangements that countries adopt to govern exchange rates are known as the international monetary system When a country allows the foreign exchange market to determine the relative value of a currency, a floating exchange rate system exists When a country fixes the value of its currency relative to a reference currency, a pegged exchange rate system exists When a country tried to hold the value of its currency within some range of a reference currency, dirty float exists Countries that adopt a fixed exchange rate system fix their currencies against each other

Prior to the introduction of the euro, some European Union countries operated with fixed exchange rates within the context of the European Monetary System (EMS) II. The Gold Standard (Ch bng v vng) The gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value Payment for imports was made in gold or silver Later, as trade grew, payment was made in paper currency which was linked to gold at a fixed rate A key problem with the gold standard was that there was no multinational institution that could stop countries from engaging in competitive devaluations. 1) Mechanics Of The Gold Standard Pegging currencies to gold and guaranteeing convertibility is known as the gold standard In the 1880s, most of the worlds trading nations followed the gold standard Under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold The amount of a currency needed to purchase one ounce of gold was called the gold par value

2) Strength Of The Gold Standard The great strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium (when the income a countrys residents earn from its exports is equal to the money its residents pay for imports) by all countries 3) The Period Between The Wars: 1918-1939 The gold standard worked fairly well from the 1870s until the start of World War I in 1914

During the war, many governments financed their war expenditures by printing money, and in doing so, created inflation

30

 People lost confidence in the system and started to demand gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility III. By 1939, the gold standard was dead

The Bretton Woods System In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system that would facilitate postwar economic growth Under the new agreement: a fixed exchange rate system was established all currencies were fixed to gold, but only the U.S. dollar was directly convertible to gold devaluations could not to be used for competitive purposes a country could not devalue its currency by more than 10% without IMF approval The Bretton Woods agreement also established two multinational institutions: the International Monetary Fund (IMF) to maintain order in the international monetary system the World Bank to promote general economic development

1) The Role Of The IMF The IMF was charged with executing the main goal of the Bretton Woods agreement - avoiding a repetition of the chaos that occurred between the wars through a combination of discipline and flexibility Discipline mean that: the need to maintain a fixed exchange rate put a brake on competitive devaluations and brought stability to the world trade environment a fixed exchange rate regime imposed monetary discipline on countries, thereby curtailing price inflation

Flexibility meant that: while monetary discipline was a central objective of the agreement, a rigid policy of fixed exchange rates would be too inflexible the IMF was ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficit, when a rapid tightening of monetary or fiscal policy would hurt domestic employment The International Monetary Fund (IMF) Articles of Agreement were heavily influenced by the worldwide financial collapse, competitive devaluations, trade wars, high unemployment, hyperinflation in Germany and elsewhere, and general economic disintegration that occurred between the two world wars. The aim of the IMF was to try to avoid a repetition of that chaos through a combination of discipline and flexibility. 2) The Role Of The World Bank The World Bank is also called the International Bank for Reconstruction and Development (IBRD) There are two ways to borrow from the World Bank: 1. Under the IBRD scheme, money is raised through bond sales in the international capital market expenses. Borrowers pay what the bank calls a market rate of interest - the bank's cost of funds plus a margin for 31

2. Through the International Development Agency, an arm of the bank created in 1960 IV. IDA loans go only to the poorest countries

The Collapse Of The Fixed Exchange Rate System Bretton Woods worked well until the late 1960s

It collapsed when huge increases in welfare programs and the Vietnam War were financed by increasing the money supply and causing significant inflation Other countries increased the value of their currencies relative to the dollar in response to speculation the dollar would be devalued However, because the system relied on an economically well managed U.S., when the U.S. began to print money, run high trade deficits, and experience high inflation, the system was strained to the breaking point V. The system of fixed exchange rates established at Bretton Woods worked well until the late 1960s. The US dollar was the only currency that could be converted into gold The US dollar served as the reference point for all other currencies Any pressure to devalue the dollar would cause problems through out the world Factors that led to the collapse of the fixed exchange system include: President Johnson financed both the Great Society and Vietnam by printing money High inflation and high spending on imports On August 8, 1971, President Nixon announces dollar no longer convertible into gold Countries agreed to revalue their currencies against the dollar On March 19, 1972, Japan and most of Europe floated their currencies In 1973, Bretton Woods fails because the key currency (dollar) is under speculative attack

The Floating Exchange Rate Regime. In 1976, following the collapse of Bretton Woods, IMF members formalized a new exchange rate system at a meeting in Jamaica The rules that were agreed on then, are still in place today

1) The Jamaica Agreement Under the Jamaican agreement: billion floating rates were declared acceptable gold was abandoned as a reserve asset total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41

2) Exchange Rates Since 1973 Since 1973, exchange rates have become more volatile and less predictable than they were between 1945 and 1973 Volatility has increased because of: The 1971 oil crisis The loss of confidence in the dollar that followed the rise of U.S. inflation in 1977 and 1978 32

 VI.

The 1979 oil crisis The unexpected rise in the dollar between 1980 and 1985 The partial collapse of the European Monetary System in 1992 The 1997 Asian currency crisis

Fixed Versus Floating Exchange Rates The merit of a fixed exchange rate versus a floating exchange rate system continues to be debated Many countries today are disappointed with the floating exchange rate system

1) The Case For Floating Exchange Rates The case for floating exchange rates has two main elements: 1. Monetary policy autonomy 2. Automatic trade balance adjustments Supporters of floating exchange rates argue that removing the obligation to maintain exchange rate parity restores monetary control to a government Under a fixed system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity So, under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, the IMF would have to agree to a currency devaluation 2) The Case For Fixed Exchange Rates Supporters of fixed exchange rates focus on monetary discipline, uncertainty, and the lack of connection between the trade balance and exchange rates Having to maintain a fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates They also claim that speculation that is associated with floating exchange rates can cause uncertainty Advocates of floating exchange rates also argue that floating rates help adjust trade imbalances 3) Who Is Right? work There is no real agreement as to which system is better We know that a fixed exchange rate regime modeled along the lines of the Bretton Woods system will not

A different kind of fixed exchange rate system might be more enduring and might foster the kind of stability that would facilitate more rapid growth in international trade and investment VII. Exchange Rate Regimes In Practice

Various exchange rate regimes are followed today Currently: 14% of IMF members follow a free float policy 26% of IMF members follow a managed float system 28% of IMF members have no legal tender of their own the remaining countries use less flexible systems such as pegged arrangements, or adjustable pegs

1) Pegged Exchange Rates 33

 A country following a pegged exchange rate system, pegs the value of its currency to that of another major currency Pegged exchange rates are popular among the worlds smaller nations There is some evidence that adopting a pegged exchange rate regime does moderate inflationary pressures in a country 2) Currency Boards Countries using a currency board commit to converting their domestic currency on demand into another currency at a fixed exchange rate To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100% of the domestic currency issued VIII. Crisis Management By The IMF Since many of the original reasons for the IMF no longer exist, the organization has redefined its mission The IMF now focuses on lending money to countries experiencing financial crises However, critics claim that IMF policies in these countries have actually made the situation worse

1) Financial Crises In The Post-Bretton Woods Era A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt 2) Mexican Currency Crisis Of 1995 The Mexican currency crisis of 1995 was a result of: high Mexican debts a pegged exchange rate that did not allow for a natural adjustment of prices To keep Mexico from defaulting on its debt, a $50 billion aid package was created

3) The Asian Crisis The 1997 Southeast Asian financial crisis was caused by a series of events that took place in the previous decade: huge increases in exports that helped fuel a boom in commercial and residential property, industrial assets, and infrastructure investments that were made on the basis of projections about future demand conditions that were unrealistic and created significant excess capacity Investments made on the basis of unrealistic projections about future demand conditions created significant excess capacity investments were often supported by dollar-based debts when inflation and increasing imports put pressure on the currencies, the resulting devaluations led to default on dollar denominated debts by the mid 1990s, imports were expanding across the region by mid-1997, it became clear that several key Thai financial institutions were on the verge of default foreign exchange dealers and hedge funds started to speculate against the Baht, selling it short after struggling to defend the peg, the Thai government abandoned its defense and announced that the Baht would float freely against the dollar With its foreign exchange rates depleted, Thailand lacked the foreign currency needed to finance its international trade and service debt commitments, and was in desperate need of the capital the IMF could provide Following the devaluation of the Baht, speculation caused other Asian currencies including the Malaysian Ringgit, the Indonesian Rupaih and the Singapore Dollar to fall 34

 These devaluations were mainly driven by similar factors to those that led to the earlier devaluation of the Baht--excess investment, high borrowings, much of it in dollar denominated debt, and a deteriorating balance of payments position 4) Evaluating The IMFs Policy Prescriptions By 2006, the IMF was committing loans to some 59 countries in economic and currency crisis All IMF loan packages require a combination of tight macroeconomic policy and tight monetary policy However, critics worry: the one-size-fits-all approach to macroeconomic policy is inappropriate for many countries

the IMF is exacerbating moral hazard (when people behave recklessly because they know they will be saved if things go wrong) IX. The IMF has become too powerful for an institution without any real mechanism for accountability As with many debates about international economics, it is not clear who is right

Implications For Managers For managers, understanding the international monetary system is important for: 1) currency management business strategy corporate-government relations Currency Management Managers must recognize that the current international monetary system is a managed float system in which government intervention can help drive the foreign exchange market Under the present system, speculative buying and selling of currencies can create volatile movements in exchange rates 2) Business Strategy Managers need to recognize that while exchange rate movements are difficult to predict, their movement can have a major impact on the competitive position of businesses To contend with this situation, managers need strategic flexibility

3) Corporate-Government Relations Managers need to recognize that businesses can influence government policy towards the international monetary system So, companies should promote an international monetary system that facilitates international growth and development

Chapter 12 35

The Strategy of International Business I. Strategy And The Firm A firms strategy refers to the actions that managers take to attain the goals of the firm Profitability can be defined as the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time Expanding internationally can boost profitability and profit growth

Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firms products, which enables the firm to raise prices. Managers can increase the rate at which the firms profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firms profitability and increase the rate of profit growth over time. 1) Value Creation The value created by a firm is measured by the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product) The higher the value customers place on a firms products, the higher the price the firm can charge for those products, and the greater the profitability of the firm Profits can be increased by: adding value to a product so that customers are willing to pay more for it a differentiation strategy lowering costs a low cost strategy

Michael Porter argues that superior profitability goes to firms that create superior value by lowering the cost structure of the business and/or differentiating the product so that a premium price can be charged 2) Strategic Positioning Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choice To maximize long run return on invested capital, firms must: pick a viable position on the efficiency frontier configure internal operations to support that position have the right organization structure in place to execute the strategy

The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes

3) Operations: The Firm As A Value Chain A firms operations can be thought of a value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure

36

II.

Value creation activities can be categorized as primary activities (R&D, production, marketing and sales, customer service) and support activities (information systems, logistics, human resources Global Expansion, Profitability, And Profit Growth International firms can: expand the market for their domestic product offerings by selling those products in international markets

realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firms global network of operations 1) Expanding The Market: Leveraging Products And Competencies Firms can increase growth by selling goods or services developed at home internationally

The success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (skills within the firm that competitors cannot easily match or imitate) Core competencies enable the firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible 2) Location Economies When firms base each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity, they realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be) By achieving location economies, firms can: lower the costs of value creation and achieve a low cost position differentiate their product offering

Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities Under this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized A caveat: transportation costs, trade barriers, and political risks complicate this picture

3) Experience Effects The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product Learning effects are cost savings that come from learning by doing

So, when labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns how to manage the new operation more efficiently Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product

Sources of economies of scale include: 37

spreading fixed costs over a large volume utilizing production facilities more intensively increasing bargaining power with suppliers By moving down the experience curve, firms reduce the cost of creating value To get down the experience curve quickly, firms can use a single plant to serve global markets

4) Leveraging Subsidiary Skills It is important for managers to: recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firms global network (not just at the corporate center) 5) Summary Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing In some cases, it may be worthwhile to price products low relative to their perceived value in order to gain market share III. Cost Pressures And Pressures For Local Responsiveness Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions pressures to be locally responsive These pressures place conflicting demands on the firm establish an incentive system that encourages local employees to acquire new skills have a process for identifying when valuable new skills have been created in a subsidiary

Pressures for cost reductions force the firm to lower unit costs, but pressure for local responsiveness require the firm to adapt its product to meet local demands in each marketa strategy that raises costs 1) Pressures For Cost Reductions Pressures for cost reductions are greatest: in industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon when major competitors are based in low cost locations where there is persistent excess capacity where consumers are powerful and face low switching costs

2) Pressures For Local Responsiveness Pressures for local responsiveness arise from: 38

 differences in consumer tastes and preferences - strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries differences in traditional practices and infrastructure - pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries differences in distribution channels - a firm's marketing strategies needs to be responsive to differences in distribution channels between countries host government demands - economic and political demands imposed by host country governments may necessitate a degree of local responsiveness IV. Choosing A Strategy There are four basic strategies to compete in the international environment: global standardization localization transnational International

The appropriateness of each strategy depends on the pressures for cost reduction and local responsivness in the industry 1) Global Standardization Strategy

The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies The strategic goal is to pursue a low-cost strategy on a global scale

The global standardization strategy makes sense when: 2) there are strong pressures for cost reductions demands for local responsiveness are minimal Localization Strategy

The localization strategy focuses on increasing profitability by customizing the firms goods or services so that they provide a good match to tastes and preferences in different national markets The localization strategy makes sense when: 3) there are substantial differences across nations with regard to consumer tastes and preferences where cost pressures are not too intense Transnational Strategy

The transnational strategy tries to simultaneously: operations achieve low costs through location economies, economies of scale, and learning effects differentiate the product offering across geographic markets to account for local differences foster a multidirectional flow of skills between different subsidiaries in the firms global network of

The transnational strategy makes sense when: 39

 4)

cost pressures are intense pressures for local responsiveness are intense International Strategy

The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization The international strategy makes sense when there are low cost pressures low pressures for local responsiveness

5) The Evolution of Strategy An international strategy may not be viable in the long term

To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strate

Chapter 13 The Organization of International Business I. Introduction Organizational architecture refers to the totality of a firms organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people To be the most profitable, firms need to be sure: the different elements of the organizational architecture are internally consistent the organizational architecture matches or fits the strategy of the firm the strategy and architecture of the firm are consistent with each other, and consistent with competitive conditions Organizational Architecture Organizational structure refers to: the formal division of the organization into subunits the location of decision-making responsibilities within that structure (centralized versus decentralized)

II.

the establishment of integrating mechanisms to coordinate the activities of subunits including crossfunctional teams or pan-regional committees Control systems are the metrics used to measure performance of subunits and make judgments about how well managers are running those subunits Incentives are the devices used to reward appropriate managerial behavior Processes are the manner in which decisions are made and work is performed within the organization

Organizational culture refers to the norms and value systems that are shared among the employees of an organization 40

 People refers to not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation III. Organizational Structure Organizational structure has three dimensions: 1. Vertical differentiation - the location of decision-making responsibilities within a structure 2. Horizontal differentiation - the formal division of the organization into sub-units 3. The establishment of integrating mechanisms - the mechanisms for coordinating sub-units IV. Vertical Differentiation: Centralization And Decentralization Vertical differentiation determines where decision-making power is concentrated

Centralized decision-making: facilitates coordination ensure decisions consistent with organizations objectives gives top-level managers the means to bring about organizational change avoids duplication of activities Decentralized decision-making: relieves the burden of centralized decision-making has been shown to motivate individuals permits greater flexibility can result in better decisions can increase control It can be worthwhile to centralize some decisions and decentralize others V. Horizontal Differentiation: The Design Of Structure Horizontal differentiation is concerned with how the firm decides to divide itself into sub-units

The decision is usually based on: function type of business geographical area Most firms begin with no formal structure

As they grow, the organization is split into functions reflecting the firms value creation activities (functional structure) The functions are typically coordinated and controlled by top management Decision-making tends to be centralized If the firm diversifies its product line, further horizontal differentiation may be necessary 41

 Firms may switch to a product divisional structure where each division is responsible for a distinct product line When firms expand internationally, they often group all of their international activities into an international division In time it might prove viable to manufacture the product in each country

The result could be that firms with a functional structure at home would replicate the functional structure in every country in which they do business and firms with a divisional structure would replicate the divisional structure in every country in which they do business The creates the potential for conflict and coordination problems between domestic and foreign operations

Many firms that continue to expand will abandon their international division structure and move to either a: Worldwide product divisional structure - tends to be adopted by diversified firms that have domestic product division Worldwide area structure - tends to be adopted by undiversified firms whose domestic structures are based on functions The worldwide area structure: is favored by firms with low degree of diversification and a domestic structure based on function divides the world into autonomous geographic areas decentralizes operational authority facilitates local responsiveness can result in a fragmentation of the organization is consistent with a localization strategy The global matrix structure is an attempt to minimize the limitations of the worldwide area structure and the worldwide product divisional structure The global matrix structure: allows for differentiation along two dimensions - product division and geographic area has dual decisionmaking - product division and geographic area have equal responsibility for operating decisions can be bureaucratic and slow can result in conflict between areas and product divisions can result in finger-pointing between divisions when something goes wrong VI. Integrating Mechanisms liaisons Regardless of the type of structure, firms need a mechanism to integrate subunits The need for coordination is lowest in firms with a localization strategy and highest in transnational firms Coordination can be complicated by differences in subunit orientation and goals The simplest formal integrating mechanism is direct contact between subunit managers, followed by

Temporary or permanent teams composed of individuals from each subunit is the next level of formal integration 42

Finally, the matrix structure allows for all roles to be integrating roles Many firms are using informal integrating mechanisms

A knowledge network is a network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems A knowledge network is a non bureaucratic conduit for knowledge flows

To be successful, a knowledge network must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations VII. Controls Systems And Incentives A firms leaders need to ensure that the actions of subunits are consistent with the firms overall strategic and financial objectives VIII. This is achieved through control and incentive systems

Types Of Control Systems There are four main types of control systems: 1. Personal controls control by personal contact with subordinates Most widely used in small firms

2. Bureaucratic controls control through a system of rules and procedures that directs the actions of subunits The most important bureaucratic controls are budgets and capital spending rules

3. Output controls setting goals for subunits to achieve and expressing those goals in terms of relatively objective performance metrics Control is achieved by comparing actual performance against targets and intervening selectively to take corrective action 4. Cultural controls exist when employees buy into the norms and value systems of the firm Firms with strong culture have less need for other forms of control

1) Incentive Systems Incentives are the devices used to reward behavior Incentives are usually closely tied to performance metrics used for output controls

Incentives: should vary depending on the employee and the nature of the work being performed should promote cooperation between managers in sub-units should reflect national differences in institutions and culture can have unintended consequences

2) Control Systems, Incentives, And Strategy In The International Business The key to understanding the relationship between international strategy, control systems and incentive systems is performance ambiguity - which exists when the causes of a subunits poor performance are not clear 43

The cost of control rises as performance ambiguity increases Performance ambiguity:

is common when a subunits performance is dependent on the performance of other subunits is lowest in firms with a localization strategy higher in international firms still higher in firms with a global standardization strategy and highest in transnational firms 3) Processes Processes refer to the manner in which decisions are made and work is performed Many processes cut across national boundaries as well as organizational boundaries Processes can be developed anywhere within a firms global operations network Formal and informal integrating mechanisms can help firms leverage processes 4) Organizational Culture Culture refers to a systems of values and norms that are shared among people Organizations have their own values and norms that employees are encouraged to follow Organizational culture tends to change very slowly

5) Creating And Maintaining Organizational Culture Organizational culture comes from: founders and important leaders national social culture the history of the enterprise decisions that resulted in high performance

Organizational culture can be maintained through: hiring and promotional practices reward strategies socialization processes communication strategies

6) Organizational Culture And Performance In The International Business Managers in companies with a strong culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed A strong culture: is not always good may not lead to high performance could be beneficial at one point, but not at another Companies with adaptive cultures have the highest performance 44

IX.

Synthesis: Strategy And Architecture 1) Localization Strategy Firms pursuing a localization strategy focus on local responsiveness. They do not have a high need for integrating mechanisms Performance ambiguity and the cost of control tends to be low

The worldwide area structure is common 2) International Strategy Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries. The need for control is moderate The need for integrating mechanisms is moderate Performance ambiguity is relatively low and so is the cost of control The worldwide product division structure is common

3) Global Standardization Strategy Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies. Headquarters maintains control over most decisions The need for integrating mechanisms is high Strong organizational cultures are encouraged The worldwide product division is common

4) Transnational Strategy Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning. X. Some decisions are centralized and others are decentralized The need for coordination is high An array of formal and informal integrating mechanism are used The cost of control is high A strong culture is encouraged Matrix structures are common

Environment, Strategy, Architecture, And Performance For a firm to succeed, two conditions must be met: 1. the firms strategy must be consistent with the environment in which the firm operates 2. the firms organization architecture must be consistent with its strategy 1) Organizational Change 45

 Firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing 2) Organizational Inertia Organizations are difficult to change

Sources of inertia include: the existing distribution of power and influence the current culture senior managers preconceptions about the appropriate business model or paradigm institutional constraints

3) Implementing Organizational Change There are three basic principles for successful organization change: 1. Unfreeze the organization through shock therapy Effective change requires taking bold actions like plant closures or dramatic structural reorganizations

2. Moving the organization to a new state through proactive change in architecture Movement requires a substantial change in the form of a firms organizational architecture so that it matches the desired new strategic posture Movement should be done quickly

3. Refreeze the organization in its new state Refreezing requires that employees be socialized into the new way of doing things

Chapter 14 Entry Strategy and Strategic Aliances

I.

Introduction Firms expanding internationally must decide: which markets to enter when to enter them and on what scale which entry mode to use

Entry modes include: exporting licensing or franchising to a company in the host nation establishing a joint venture with a local company establishing a new wholly owned subsidiary 46

acquiring an established enterprise

Several factors affect the choice of entry mode including: transport costs trade barriers political risks economic risks costs firm strategy The optimal mode varies by situation what makes sense for one company might not make sense for another II. Basic Entry Decisions Firms entering foreign markets make three basic decisions: 1. which markets to enter 2. when to enter those markets 3. on what scale to enter those markets 1) Which Foreign Markets? The choice of foreign markets will depend on their long run profit potential

Favorable markets are politically stable developed and developing nations with free market systems and relatively low inflation rates and private sector debt Less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations with excessive levels of borrowing Markets are also more attractive when the product in question is not widely available and satisfies an unmet need 2) Timing Of Entry Once attractive markets are identified, the firm must consider the timing of entry Entry is early when the firm enters a foreign market before other foreign firms Entry is late when the firm enters the market after firms have already established themselves in the market First mover advantages are the advantages associated with entering a market early

First mover advantages include: the ability to pre-empt rivals and capture demand by establishing a strong brand name

the ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business First mover disadvantages are disadvantages associated with entering a foreign market before other international businesses 47

First mover disadvantages include: pioneering costs - arise when the foreign business system is so different from that in a firms home market that the firm must devote considerable time, effort and expense to learning the rules of the game Pioneering costs include: the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes the costs of promoting and establishing a product offering, including the cost of educating customers

3) Scale Of Entry And Strategic Commitments entry After choosing which market to enter and the timing of entry, firms need to decide on the scale of market

Entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field Firms that enter a market on a significant scale make a strategic commitment to the market (the decision has a long term impact and is difficult to reverse) Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firms exposure to that market 4) Summary There are no right decisions when deciding which markets to enter, and the timing and scale of entry, just decisions that are associated with different levels of risk and reward III. Entry Modes (M hnh thm nhp) These are six different ways to enter a foreign market: 1. exporting 2. turnkey projects 3. licensing 4. franchising 5. establishing joint ventures with a host country firm 6. setting up a new wholly owned subsidiary in the host country 1) Exporting Exporting is a common first step in the international expansion process for many manufacturing firms Later, many firms switch to another mode to serve the foreign market Managers need to consider the advantages and disadvantages of each entry mode

Exporting is attractive because: it avoids the costs of establishing local manufacturing operations it helps the firm achieve experience curve and location economies Exporting is unattractive because: there may be lower-cost manufacturing locations 48

 high transport costs and tariffs can make it uneconomical agents in a foreign country may not act in exporters best interest 2) Turnkey Projects (D n cha kha trao tay) In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation Turnkey projects are common in the chemical, pharmaceutical, petroleum refining, and metal refining industries Turnkey projects are attractive because: they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process they can be less risky than conventional FDI Turnkey projects are unattractive because: the firm that enters into a turnkey deal will have no long-term interest in the foreign country the firm that enters into a turnkey project may create a competitor if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors 3) Licensing A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks

Licensing is attractive because: the firm does not have to bear the development costs and risks associated with opening a foreign market the firm avoids barriers to investment

firms with intangible property that might have business applications can capitalize on market opportunities without developing those applications itself Licensing is unattractive because: the firm doesnt have the tight control over manufacturing, marketing, and strategy required for realizing experience curve and location economies it limits a firms ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another proprietary (or intangible) assets could be lost

One way of reducing this risk is through the use of cross-licensing agreements where a firm might license intangible property to a foreign partner, but requests that the foreign partner license some of its valuable know-how to the firm in addition to a royalty payment

4) Franchising Franchising is basically a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business Franchising is used primarily by service firms

Franchising is attractive because: 49

Firms avoid many costs and risks of opening up a foreign market Firms can quickly build a global presence

Franchising is unattractive because: It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another

the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect 5) Joint Ventures (Lin doanh) firms A joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent Most joint ventures are 50:50 partnerships

Joint ventures are attractive because: they allow the firm to benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems economies time the costs and risks of opening a foreign market are shared with the partner When political considerations make joint ventures the only feasible entry mode Joint ventures are unattractive because: the firm risks giving control of its technology to its partner the firm may not have the tight control over subsidiaries need to realize experience curve or location shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over

6) Wholly Owned Subsidiaries Wholly owned subsidiaries are attractive because: they reduce the risk of losing control over core competencies

they give a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination they may be required in order to realize location and experience curve economies Wholly owned subsidiaries are unattractive because: IV. the firm bears the full cost and risk of setting up overseas operations

Selecting An Entry Mode All entry modes have advantages and disadvantages The optimal choice of entry mode involves trade-offs

1) Core Competencies And Entry Mode The optimal entry mode depends to some degree on the nature of a firms core competencies When a firms competitive advantage is based on proprietary technological know-how, the firm should avoid licensing and joint venture arrangements unless it believes its technological advantage is only transitory, or that it can establish its technology as the dominant design in the industry 50

 When a firms competitive advantage is based on management know-how, the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant 2) Pressures For Cost Reductions And Entry Mode When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries This will allow the firm to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution V. So, firms pursuing global standardization or transnational strategies prefer wholly owned subsidiaries

Greenfield Ventures Or Acquisitions Firms can establish a wholly owned subsidiary in a country by: Using a greenfield strategy - building a subsidiary from the ground up Using an acquisition strategy

1) Pros And Cons Of Acquisition Acquisitions are attractive because: they are quick to execute they enable firms to preempt their competitors acquisitions may be less risky than greenfield ventures Acquisitions can fail when: the acquiring firm overpays for the acquired firm the cultures of the acquiring and acquired firm clash attempts to realize synergies run into roadblocks and take much longer than forecast there is inadequate pre-acquisition screening To avoid these problems, firms should: carefully screening the firm to be acquired move rapidly once the firm is acquired to implement an integration plan 2) Pros And Cons Of Greenfield Ventures The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants However, greenfield ventures are slower to establish Greenfield ventures are also risky 3) Greenfield Or Acquisition? firm The choice between a greenfield investment and an acquisition depends on the situation confronting the

Acquisition may be better when the market already has well-established competitors or when global competitors are interested in building a market presence A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture VI. Strategic Alliances Strategic alliances refer to cooperative agreements between potential or actual competitors Strategic alliances range from formal joint ventures to short-term contractual agreements The number of strategic alliances has exploded in recent decades 1) The Advantages Of Strategic Alliances Strategic alliances: facilitate entry into a foreign market allow firms to share the fixed costs (and associated risks) of developing new products or processes 51

bring together complementary skills and assets that neither partner could easily develop on its own can help a firm establish technological standards for the industry that will benefit the firm

2) The Disadvantages Of Strategic Alliances Strategic alliances can give competitors low-cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives 3) Making Alliances Work The success of an alliance is a function of: partner selection alliance structure the manner in which the alliance is managed

A good partner: helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values shares the firms vision for the purpose of the alliance

is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firms technological know-how while giving away little in return Once a partner has been selected, the alliance should be structured: to make it difficult to transfer technology not meant to be transferred

with contractual safeguards written into the alliance agreement to guard against the risk of opportunism by a partner to allow for skills and technology swaps with equitable gains to minimize the risk of opportunism by an alliance partner

After selecting the partner and structuring the alliance, the alliance must be managed Successfully managing an alliance requires managers from both companies to build interpersonal relationships A major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners Chapter 15 Exporting, Importing and Countertrade I. Introduction Large and small firms export

Exporting is on the rise thanks to the decline in trade barriers under the WTO and regional economic agreements such as the EU and NAFTA Exporting firms need to identify market opportunities deal with foreign exchange risk navigate import and export financing

understand the challenges of doing business in a foreign market 52

II.

The Promise And Pitfalls Of Exporting Exporting is a way to increase market size--the rest of the world is usually much larger market than the domestic market Large firms often proactively seek new export opportunities Many smaller firms are reactive and wait for the world to come to them Many firms fail to realize the potential of the export market Smaller firms are often intimidated by the complexities of exporting and initially run into problems

Common pitfalls include: III. poor market analysis poor understanding of competitive conditions a lack of customization for local markets a poor distribution program poorly executed promotional campaigns problems securing financing a general underestimation of the differences and expertise required for foreign market penetration an underestimation of the amount of paperwork and formalities involved

Improving Export Performance There are various ways to gain information about foreign market opportunities and avoid the pitfalls associated with exporting Some countries provide direct assistance to exporters Export management companies can also help with the export process

1) An International Comparison A big impediment to exporting is the simple lack of knowledge of the opportunities available To overcome ignorance firms need to collect information Both Germany and Japan have developed extensive institutional structures for promoting exports

Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha, the countrys great trading houses In contrast, American firms have far fewer resources available

2) Information Sources firms The U.S. Department of Commerce is the most comprehensive source of export information for U.S.

The International Trade Administration and the United States and Foreign Commercial Service Agency can provide best prospects lists for firms The Department of Commerce also organizes various trade events to help firms make foreign contacts and explore export opportunities 53

The Small Business Administration is also a source of assistance Local and state governments can also provide export support

3) Utilizing Export Management Companies Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms EMCs normally accept two types of export assignments: they start exporting operations for a firm with the understanding that the firm will take over operations after they are well established they start services with the understanding that the EMC will have continuing responsibility for selling the firms products A good EMCs will help the neophyte exporter identify opportunities and avoid common pitfalls However, not all EMCs are equalsome do a better job than others Firms that rely on an EMC may not develop their own export capabilities

4) Export Strategy To reduce the risks of exporting, firms should hire an EMC or export consultant, to help identify opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting IV. focus on one, or a few, markets at first enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failures recognize the time and managerial commitment involved develop a good relationship with local distributors and customers hire locals to help establish a presence in the market be proactive consider local production

Export And Import Financing Over time, various mechanisms for financing exports and imports have evolved in response to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger 1) Lack Of Trust Many international transactions are facilitated by a third party (normally a reputable bank) By including the third party, an element of trust is added to the relationship

2) Letter Of Credit A letter of credit is issued by a bank at the request of an importer and states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents

54

 The main advantage of the letter of credit is that both parties to the transaction are likely to trust a reputable bank even if they do not trust each other 3) Draft payment A draft, also called a bill of exchange, is the instrument normally used in international commerce for

A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment normally 30, 60, 90, or 120 days 4) Bill Of Lading The bill of lading is issued to the exporter by the common carrier transporting the merchandise

It serves three purposes: it is a receipt it is a contract it is a document of title

5) A Typical International Trade Transaction V. The typical international trade transaction involves 14 steps as outlined in Figure 15.4

Export Assistance There are two forms of government-backed assistance available to exporters: 1. Financing aid is available from the Export-Import Bank 2. Export credit insurance is available from the Foreign Credit Insurance Association 1) Export-Import Bank The Export-Import Bank (Eximbank) is an independent agency of the U.S. government

It provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries Eximbank achieves its goals though various loan and loan guarantee programs

2) Export Credit Insurance VI. Export credit insurance protects exporters against the risk that the importer will default on payment In the U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FICA) FICA provides coverage against commercial risks and political risks

Countertrade When conventional means of payment are difficult, costly, or nonexistent, some firms may turn to countertrade Countertrade refers to a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money 1) The Incidence Of Countertrade 55

 During the1960s, when the Soviet Union and the Communist states of Eastern Europe had nonconvertible currencies, countertrade emerged as a means purchasing imports During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997

2) Types of Countertrade There are five distinct versions of countertrade: 1. barter 2. counterpurchase 3. offset 4. compensation or buyback 5. switch trading 1. Barter is a direct exchange of goods and/or services between two parties without a cash transaction Barter is the most restrictive countertrade arrangement It is used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy 2. Counterpurchase is a reciprocal buying agreement It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made 3. Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made 4. A buyback occurs when a firm builds a plant in a countryor supplies technology, equipment, training, or other services to the countryand agrees to take a certain percentage of the plants output as a partial payment for the contract 5. Switch trading refers to the use of a specialized third-party trading house in a countertrade arrangement When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country Switch trading occurs when a third-party trading house buys the firms counterpurchase credits and sells them to another firm that can better use them 3) The Pros And Cons Of Countertrade Countertrade is unattractive because it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably It requires the firm to establish an in-house trading department to handle countertrade deals

Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade deals

Chapter 16 56

Global Production, Outsourcing and Logistics I. Strategy, Production, And Logistics Firms need to identify how production and logistics can be conducted internationally to: lower the costs of value creation add value by better serving customer needs Production refers to activities involved in creating a product

Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers To lower costs, firms can: disperse production to those locations where activities can be performed most efficiently manage the global supply chain efficiently to better match supply and demand

To improve quality, firms can: eliminate defective products from the supply chain and the manufacturing process Improved quality will also reduce costs

To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company quality Six Sigma, a direct descendant of total quality management (TQM), has a goal of improving product

In the European Union, firms must meet the standards set forth by ISO 9000 before the firm is allowed access to the European marketplace International companies have two other important production and logistics objectives: II. production and logistics functions must be able to accommodate demands for local responsiveness production and logistics must be able to respond quickly to shifts in customer demand

Where To Produce Three factors are important when making location decisions: 1) Country factors Firms should locate manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity Country factors that can affect location decisions include: the availability of skilled labor and supporting industries formal and informal trade barriers expectations about future exchange rate changes transportation costs regulations affecting FDI 2) Technological factors The type of technology a firm uses in its manufacturing can affect location decisions Three characteristics of a manufacturing technology are of interest: a- the level of fixed costs If the fixed costs of setting up a manufacturing plant are high, it might make sense to serve the world market from a single location or from a few locations 57

 b c 3)

When fixed costs are relatively low, multiple production plants may be possible Producing in multiple locations allows firms to respond to local markets and reduces dependency on a single loc the minimum efficient scale The larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense A low minimum efficient scale allows the firm to respond to local market demands and hedge against currency risk by operating in multiple locations the flexibility of the technology flexible manufacturing technology or lean production covers a range of manufacturing technologies that are designed to: reduce set up times for complex equipment increase the utilization of individual machines through better scheduling improve quality control at all stages of the manufacturing process Firms using flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output Mass customization implies that a firm may be able to customize its product range to meet the demands of local markets yet still control costs Flexible machine cells allow firms to increase efficiency by improving capacity utilization and reducing work-inprogress Concentrating production at a few choice locations makes sense when: fixed costs are substantial the minimum efficient scale of production is high flexible manufacturing technologies are available Production in multiple locations makes sense when: both fixed costs and the minimum efficient scale of production are relatively low appropriate flexible manufacturing technologies are not available Product factors

Two product factors impact location decisions: athe product's value-to-weight ratio: If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to other parts of the world If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world b- whether the product serves universal needs: When products serve universal needs, the need for local responsiveness falls, increasing the attractiveness of concentrating manufacturing in a central location 4) Locating Production Facilities There are two basic strategies for locating manufacturing facilities: 1. concentrating them in the optimal location and serving the world market from there 2. decentralizing them in various regional or national locations that are close to major markets III. The Strategic Role Of Foreign Factories time The strategic role of foreign factories and the strategic advantage of a particular location can change over

Factories initially established to take advantage of low cost labor can evolve into facilities with advanced design capabilities Improvement in a facility comes from two sources: 1. pressure to lower costs or respond to local markets 58

2. an increase in the availability of advanced factors of production Many companies now see foreign factories as globally dispersed centers of excellence This philosophy supports the development of a transnational strategy

A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firms domestic operations, it may also be found in its foreign subsidiaries This implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed IV. Outsourcing Production: Make-or-Buy Decisions Should an international business make or buy the component parts to go into their final product? Make-or-buy decisions are important factors in many firms' manufacturing strategies

Today, service firms also face make-or-buy decisions as they choose which activities to outsource and which to keep in-house markets Make-or-buy decisions involving international markets are more complex than those involving domestic

1) The Advantages Of Make Vertical integration (making component parts in-house) can: a- lower costs - if a firm is more efficient at that production activity than any other enterprise, it may pay the firm to continue manufacturing a product or component part in-house b- facilitate investments in highly specialized assets - internal production makes sense when substantial investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component c- protect proprietary technology - a firm might prefer to make component parts that contain proprietary technology inhouse in order to maintain control over the technology d- facilitate the scheduling of adjacent processes - the weakest argument for vertical integration is that the resulting production cost savings make planning, coordination, and scheduling of adjacent processes easier 2) The Advantages Of Buy Buying component parts from independent suppliers: 1. gives the firm greater flexibility By buying component parts from independent suppliers, the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate This is particularly important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time 2. helps drive down the firm's cost structure Firms that buy components from independent suppliers avoid: the challenges involved with coordinating and controlling the additional subunits that are associated with vertical integration the lack of incentive associated with internal suppliers the difficulties with setting appropriate transfer prices 59

3. helps the firm capture orders from international customers Outsourcing can help firms capture more orders from suppliers countries 4) Trade-Offs The benefits of manufacturing components in-house are greatest when: highly specialized assets are involved vertical integration is necessary for protecting proprietary technology the firm is more efficient than external suppliers at performing a particular activity 5) Strategic Alliances With Suppliers Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming long-term strategic alliances with key suppliers However, these commitments may actually limit strategic flexibility

V.

Managing A Global Supply Chain Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user The objectives of logistics are: To manage a global supply chain at the lowest possible cost and in a way that best serves customer needs To help the firm establish a competitive advantage through superior customer service 1) The Role Of Just-in-Time Inventory The basic philosophy behind just-in-time (JIT) systems is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before

JIT systems generate major cost savings from reduced warehousing and inventory holding costs JIT systems can help the firm spot defective parts and take them out of the manufacturing process to boost product quality However, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes 2) The Role Of Information Technology And The Internet Web-based information systems play a crucial role in materials management They allow firms to optimize production scheduling according to when components are expected to arrive Electronic Data Interchange (EDI): facilitates the tracking of inputs allows the firm to optimize its production schedule lets the firm and its suppliers communicate in real time eliminates the flow of paperwork between the firm and its suppliers ___________________________________________________________________________________

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Mc lc Chapter 1: Globalization ......................................................................................................................... 1 I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. What is globalization?................................................................................................................... 1 The emetgence of global institution .............................................................................................. 1 Driver of globalization .................................................................................................................. 2 The Changing Demographics Of The Global Economy ............................................................... 3 The Global Economy Of The Twenty-first Century ..................................................................... 3 The Globalization Debate ............................................................................................................. 4 Anti-Globalization Protests ........................................................................................................... 4 Globalization, Jobs, And Income .................................................................................................. 4 Globalization, Labor Policies, And The Environment .................................................................. 4 Globalization And National Sovereignty ...................................................................................... 4 Globalization And The Worlds Poor ........................................................................................... 4 Managing In The Global Marketplace .......................................................................................... 4

Chapter 3 Differences in Culture............................................................................................................ 5 Introduction ................................................................................................................................................ 5 Culture, Society, And The Nation-state ..................................................................................................... 5 Individuals And Groups ............................................................................................................................. 6 Social Stratification .................................................................................................................................... 6 Religious And Ethical Systems .................................................................................................................. 6

Chapter 5 International Trade Theory .................................................................................................. 7 I. An Overview Of Trade Theory ..................................................................................................... 7 1. The benefit of trade ................................................................................................................ 7 2. The pattern of Inter Trade....................................................................................................... 7 3. Trade Theory and Government Policy ................................................................................... 7 Mercantilism ................................................................................................................................. 8 Absolute Advantage ...................................................................................................................... 8 Comparative Advantage ................................................................................................................ 8 1. Qualifications And Assumptions ............................................................................................ 9 2. Extensions Of The Ricardian Model ...................................................................................... 9 Heckscher-Ohlin Theory ............................................................................................................... 10 The Product Life Cycle Theory .................................................................................................... 10 New Trade Theory ........................................................................................................................ 11 1. Increasing Product Variety And Reducing Costs ................................................................... 11 2. Economies Of Scale, First Mover Advantages, And The Pattern Of Trade ........................... 12 3. Implications Of New Trade Theory........................................................................................ 12 National Competitive Advantage: Porters Diamond ................................................................... 12 1. Factor Endowments ................................................................................................................ 12 2. Demand Conditions ................................................................................................................ 13 3. Relating And Supporting Industries ....................................................................................... 13 4. Evaluating Porters Theory..................................................................................................... 13 61

II. III. IV.

V. VI. VII.

VIII.

IX.

Implications For Managers ........................................................................................................... 13 1. Location .................................................................................................................................. 13 2. First- Mover Advantages ........................................................................................................ 13 3. Government Policy ................................................................................................................. 14 Chapter 6 The Political Economy of International Trade ........................................................... 14

I. II.

III.

IV.

V.

VI.

Intro ............................................................................................................................................. 14 Instruments of Trade Policy ........................................................................................................ 14 1. Tariffs.................................................................................................................................... 14 2. Subsidies ............................................................................................................................... 14 3. Import Quotas And Voluntary Export Restraints ................................................................. 15 4. Local Content Requirements................................................................................................. 15 5. Administrative Policies ......................................................................................................... 15 6. Antidumping Policies............................................................................................................ 15 The Case For Government Intervention ...................................................................................... 15 Political arguments Economic arguments ................................................................................................................... 15 1. Political Arguments For Free Trade ..................................................................................... 15 2. Economic Arguments For Intervention ................................................................................ 17 Revised Case For Free Trade ...................................................................................................... 17 1. Retaliation And Trade War ................................................................................................... 17 2. Domestic Policies ................................................................................................................. 17 Development Of The World Trading System.............................................................................. 17 1. From Smith To The Great Depression .................................................................................. 17 2. 1947-79: GATT, Trade Liberalization, And Economic Growth........................................... 18 3. 1980-1993: Protectionist Trends ........................................................................................... 18 4. The Uruguay Round And The World Trade Organization ................................................... 18 5. WTO: Experience To Date ................................................................................................... 18 6. The Future Of The WTO: Unresolved Issues And The Doha Round ................................... 19 Implications For Managers .......................................................................................................... 19 1. Trade Barriers And Firm Strategy ........................................................................................ 19 2. Policy Implications ............................................................................................................... 19

Chapter 8 Regional Economic Integration .................................................................................... 20 I. II. Introduction ................................................................................................................................. 20 Levels Of Economic Integration ................................................................................................. 20 1. A free trade area 2. A customs union 3. A common market 4. An economic union 5. A political union ................................................................................................................... 20

III.

IV.

The Case for Regional Integration 1. The Economic Case For Regional Integration ...................................................................... 20 2. The Political Case For Regional Integration ......................................................................... 20 3. Impediments To Integration .................................................................................................. 20 The Case Against Regional Integration ....................................................................................... 20 62

V.

VI.

VII.

VIII.

Regional Economic Integration In Europe 1. Evolution Of The European Union ....................................................................................... 21 2. Political Structure Of The European Union .......................................................................... 21 3. The Single European Act ( o lut Chu u thng nht) .................................................. 21 4. The Establishment Of The Euro ........................................................................................... 21 5. Enlargement Of The European Union .................................................................................. 22 Regional Economic Integration In The Americas ....................................................................... 22 1. The North American Free Trade Agreement ........................................................................ 22 2. The Andean Community ....................................................................................................... 23 3. MERCOSUR ........................................................................................................................ 23 4. Central American Common Market And CARICOM .......................................................... 23 5. Free Trade Of The Americas ................................................................................................ 24 Regional Economic Integration Elsewhere ................................................................................. 24 1. Association Of Southeast Asian Nations .............................................................................. 24 2. Asia-Pacific Economic Cooperation ..................................................................................... 24 3. Regional Trade Blocs In Africa ............................................................................................ 24 Implications For Managers .......................................................................................................... 24 1. Opportunities ........................................................................................................................ 24 2. Threats .................................................................................................................................. 24

Chapter 9 The Foreign Exchange Market I. II. Introduction ................................................................................................................................. 25 The Functions Of The Foreign Exchange Market ....................................................................... 25 1. Currency Conversion ............................................................................................................ 25 2. Insuring Against Foreign Exchange Risk ............................................................................. 25 The Nature Of The Foreign Exchange Market ............................................................................ 26 Economic Theories Of Exchange Rate Determination................................................................ 26 1. Prices And Exchange Rates .................................................................................................. 26 2. Interest Rates And Exchange Rates ...................................................................................... 27 3. Investor Psychology And Bandwagon Effects...................................................................... 27 4. Summary ............................................................................................................................... 27 Exchange Rate Forecasting ......................................................................................................... 27 1. The Efficient Market School ................................................................................................. 28 2. The Inefficient Market School .............................................................................................. 28 3. Approaches To Forecasting .................................................................................................. 28 Currency Convertibility ............................................................................................................... 28 Implications For Managers .......................................................................................................... 28 1. Transaction Exposure............................................................................................................ 29 2. Translation exposure ............................................................................................................. 29 3. Economic Exposure .............................................................................................................. 29 4. Reducing Translation And Transaction Exposure ................................................................ 29 5. Other Steps For Managing Foreign Exchange Risk.............................................................. 29

III. IV.

V.

VI. VII.

Chap 10 The International Monetary System ............................................................................... 30 I. II. Intro ............................................................................................................................................. 30 The Gold Standard (Ch bng v vng ................................................................................... 30 1. Mechanics Of The Gold Standard......................................................................................... 30 63

III.

IV. V.

VI.

2. Strength Of The Gold Standard ............................................................................................ 30 3. The Period Between The Wars: 1918-1939 .......................................................................... 31 The Bretton Woods System ......................................................................................................... 31 1. The Role Of The IMF ........................................................................................................... 31 2. The Role Of The World Bank ............................................................................................... 31 The Collapse Of The Fixed Exchange Rate System.................................................................... 32 The Floating Exchange Rate Regime .......................................................................................... 32 1. The Jamaica Agreement ........................................................................................................ 32 2. Exchange Rates Since 1973 .................................................................................................. 33 Fixed Versus Floating Exchange Rates ....................................................................................... 33 1. The Case For Floating Exchange Rates.......................................................................... 33 2. The Case For Fixed Exchange Rates .............................................................................. 33 3. Who Is Right?................................................................................................................. 33 Exchange Rate Regimes In Practice ............................................................................................ 33 1. Pegged Exchange Rate ................................................................................................... 34 2. Currency Boards ............................................................................................................. 34 Crisis Management By The IMF ................................................................................................. 34 1. Financial Crises In The Post-Bretton Woods Era ................................................................. 34 2. Mexican Currency Crisis Of 1995 ........................................................................................ 34 3. The Asian Crisis.................................................................................................................... 34 4. Evaluating The IMFs Policy Prescriptions .......................................................................... 35 Implications For Managers .......................................................................................................... 35 1. Currency Management .......................................................................................................... 35 2. Business Strategy .................................................................................................................. 35 3. Corporate-Government Relations ......................................................................................... 35

VII.

VIII.

IX.

Chapter 12 The Strategy of International Busines ....................................................................... 36 I. Strategy And The Firm ................................................................................................................ 36 1. Value Creation ...................................................................................................................... 36 2. Strategic Positioning ............................................................................................................. 36 3. Operations: The Firm As A Value Chai................................................................................ 37 Global Expansion, Profitability, And Profit Growth ................................................................... 37 1. Expanding The Market: Leveraging Products And Competencies ....................................... 37 2. Location Economies.............................................................................................................. 37 3. Experience Effects ................................................................................................................ 37 4. Leveraging Subsidiary Skills ................................................................................................ 38 5. Summary ............................................................................................................................... 38 Cost Pressures And Pressures For Local Responsiveness ........................................................... 38 1. Pressures For Cost Reductions.............................................................................................. 38 2. Pressures For Local Responsiveness..................................................................................... 39 Choosing A Strategy ................................................................................................................... 39 1. Global Standardization Strategy ........................................................................................... 39 2. Localization Strategy ............................................................................................................ 39 3. Transnational Strategy .......................................................................................................... 39 4. International Strategy ............................................................................................................ 40 5. The Evolution of Strategy ..................................................................................................... 40

II.

III.

IV.

Chapter 13 The Organization of International Business ................................................................... 40 64

I. II. III.

IV. V. VI. VII. VIII.

IX.

X.

Intro ............................................................................................................................................. 40 Organizational Architecture ........................................................................................................ 40 Organizational Structure.............................................................................................................. 41 1. Vertical differentiation 2. Horizontal differentiation 3. Integrating mechanisms ........................................................................................................ 41 Vertical Differentiation: Centralization And Decentralization.................................................... 41 Horizontal Differentiation: The Design Of Structure .................................................................. 41 Integrating Mechanism ................................................................................................................ 42 Controls Systems And Incentives................................................................................................ 43 Types Of Control Systems........................................................................................................... 43 1. Incentive Systems ................................................................................................................. 43 2. Control Systems, Incentives, And Strategy In The International Business .......................... 44 3. Processes ............................................................................................................................... 44 4. Organizational Culture .......................................................................................................... 44 5. Creating And Maintaining Organizational Culture ............................................................... 44 6. Organizational Culture And Performance In The International Business............................. 44 Synthesis: Strategy And Architecture ......................................................................................... 45 1. Localization Strategy ............................................................................................................ 45 2. International Strategy ............................................................................................................ 45 3. Global Standardization Strategy ........................................................................................... 45 4. Transnational Strategy .......................................................................................................... 45 Environment, Strategy, Architecture, And Performance ............................................................. 46 1. Organizational Change.......................................................................................................... 46 2. Organizational Inertia ........................................................................................................... 46 3. Implementing Organizational Change .................................................................................. 46

Chapter 14 Entry Strategy and Strategic Aliances ............................................................................. 46 I. II. Intro ............................................................................................................................................. 46 Basic Entry Decisions ................................................................................................................. 47 1. Which Foreign Markets ........................................................................................................ 47 2. Timing Of Entry.................................................................................................................... 47 3. Scale Of Entry And Strategic Commitments ........................................................................ 48 4. Summary ............................................................................................................................... 48 Entry Modes (M hnh thm nhp) ............................................................................................. 48 1. Exporting .............................................................................................................................. 48 2. Turnkey Projects (D n cha kha trao tay) ........................................................................ 49 3. Licensing............................................................................................................................... 49 4. Franchising............................................................................................................................ 50 5. Joint Ventures (Lin doanh ................................................................................................... 50 6. Wholly Owned Subsidiaries ................................................................................................. 50 Selecting An Entry Mode ............................................................................................................ 50 1. Core Competencies And Entry Mode ................................................................................... 51 2. Pressures For Cost Reductions And Entry Mode.................................................................. 51 Greenfield Ventures Or Acquisitions .......................................................................................... 51 1. Pros And Cons Of Acquisition ............................................................................................. 51 2. Pros And Cons Of Greenfield Ventures ................................................................................ 51 3. Greenfield Or Acquisition? ................................................................................................... 51 Strategic Alliances ....................................................................................................................... 51 65

III.

IV.

V.

VI.

1. The Advantages Of Strategic Alliances ................................................................................ 52 2. The Disadvantages Of Strategic Alliances............................................................................ 52 3. Making Alliances Work ........................................................................................................ 52

Chapter 15 Exporting, Importing and Countertrade I. II. III. Intro ............................................................................................................................................. 52 The Promise And Pitfalls Of Exporting ...................................................................................... 53 Improving Export Performance ................................................................................................... 53 1. An International Comparison ................................................................................................ 53 2. Information Sources .............................................................................................................. 53 3. Utilizing Export Management Companies ............................................................................ 54 4. Export Strategy ..................................................................................................................... 54 Export And Import Financing ..................................................................................................... 54 1. Lack Of Trust ........................................................................................................................ 54 2. Letter Of Credit ..................................................................................................................... 55 3. Draft ...................................................................................................................................... 55 4. Bill of Lading ........................................................................................................................ 55 5. A Typical International Trade Transaction ........................................................................... 55 Export Assistance ........................................................................................................................ 55 1. Export-Import Bank .............................................................................................................. 55 2. Export Credit Insurance ........................................................................................................ 55 Countertrade ................................................................................................................................ 55 1. The Incidence Of Countertrade ............................................................................................. 56 2. Types of Countertrade........................................................................................................... 56 3. The Pros And Cons Of Countertrade .................................................................................... 56

IV.

V.

VI.

Chapter 16 Global Production, Outsourcing and Logistics................................................................ 57 I. II. Strategy, Production, And Logistics ............................................................................................ 57 Where To Produce ....................................................................................................................... 57 1. Country factors ..................................................................................................................... 57 2. Technological factors ............................................................................................................ 58 3. Product factors ...................................................................................................................... 58 4. Locating Production Facilities .............................................................................................. 58 The Strategic Role Of Foreign Factories ..................................................................................... 58 1. An International Comparison ................................................................................................ 53 Outsourcing Production: Make-or-Buy Decisions ...................................................................... 59 1. The Advantages Of Make ..................................................................................................... 59 2. The Advantages Of Buy........................................................................................................ 59 Managing A Global Supply Chain .............................................................................................. 60 1. The Role Of Just-in-Time Inventory..................................................................................... 60 2. The Role Of Information Technology And The Internet ...................................................... 60

III. IV.

V.

66