International Institutions Chapter 03 International Institutions from an International Business Perspective McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

What are Institutions and Why are They Useful? LO1 Organizations of groups, societies, or cultures to achieve a common goal: “to provide stability and meaning to social life” A collection of norms that “regulate the relations of individuals to each other” Institutions are socially constructed, limit behavior, and set the rules of the game!

Institutions Influence Behavior LO1 Formal Institutions Influence behavior through laws and regulations New Institutional Theory Social Constructs – norms that structure relations between people Informal Institutions Influence behavior through norms, values, customs regulations

Institutions Influence Behavior Examples Institutions Influence Behavior LO1 Formal Institutions: City, State, and National Governments, EU Operate through Laws & Rules New Institutional Theory: Societal Expectations: basic rules & social expectations of groups or organizations – written and unwritten Informal Institutions: Normative – set Standards: NGOs & Professional Organizations Cognitive – shared conceptual ideals

Institutions Influence Behavior Examples Institutions Influence Behavior Formal Institutions Tax Laws, Speed Limits Membership Rules Informal Institutions Normative Organizational standards & Principles Cognitive: Function as frameworks for behavior China – guanxi Japan – “supplier game”

The United Nations (UN) LO2 192 member countries dedicated to world peace and stability Fosters global business relationships Helps write international law Helps stabilize global economy Headquartered in New York City

The UN Impacts IB LO2 UN Center for Trade Facilitation and Electronic Business (UN/CEFACT) Sets technical standards and norms Standardized trade documents Standards for E-data exchange UN Educational, Scientific and Cultural Organization (UNESCO) Investment in emerging economies Development in health, education, governance & political stability

The UN Impacts IB UN Agencies a deal with downsides to globalization: Terrorism Crime Drugs Arms Traffic UN Environmental Programme (UNEP) Climate control Convention Kyoto Protocol Sustainable Business Practices

The UN Impacts IB UN Addresses Global Education & Health The Global Compact Education and health issues w/ private industry/developing nation partnerships UN Economic and Social Council promotes: Social Justice Human Rights Labor Rights

The UN and the Conduct of Global Business Ships sail protected across international waters. Commercial airlines fly across borders and land in emergencies – International Civil Aviation Organization. WHO sets quality standards for drug names and quality. Universal Postal Union protects mail and allows cross-border mailing. International Telecommunications Union keeps airwaves unclogged and avoids radio interference. World Meteorological Organization shares global weather data. UN Sales Convention and UN Convention on Carriage of Goods by Sea set rights and obligations of international buyers/sellers.

International Monetary Institutions LO3 IMF – coordinates and enforces international monetary rules World Bank – lends money for development projects Established in 1944 at Bretton Woods by treasury and central bank representatives from the Allied Nations of WWII

These funds are called “quotas.” IMF LO3 Basic Premise: all nations seek a workable international monetary system which transcends their conflicting national interests IMF Promotes International monetary cooperation Orderly exchange and payment systems Available funds for BOP corrections Each of the 186 members contribute funds based on the country’s relative size in the world economy. These funds are called “quotas.”

A World Education Bank to set up primary schools and train teachers The World Bank LO3 2 Major Institutions: International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) 3 Minor Institutions: International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Center for the Settlement of Investment Disputes (ICSID) A World Education Bank to set up primary schools and train teachers was called for in 2008

WTO Deals with rules of trade between nations: WTO Principles: LO4 Deals with rules of trade between nations: Established in 1995 153 members set and implement trade rules between nations Goal: Reduce or eliminate trade barriers and restrictions Minimize government action against trade WTO Principles: Trade without discrimination (MFN Principle) Freer trade through negotiation Predictability through binding and transparency Promoting fair competition Encouraging development and economic reform

Economics Integration Agreements LO5 The details are on pages 53 to 55 in the text. Free Trade Area (FTA) – tariffs among members eliminated but external tariffs remain Customs Union – collaboration that adds common external tariffs to an FTA

Economics Integration Agreements LO5 The details are on pages 53 to 55 in the text. Common Market – customs union that includes mobility of services, people, and capital within a union Complete Economic Integration – integration on economic and political levels

The European Union EU Development 3 Areas of Integration: 27 European countries committed to economic and political integration Established in 1993 by the EC in the Maastricht Treaty 3 Areas of Integration: Economic Community Foreign Policy Domestic Affairs EU Profile Today: 27 member countries 500+ million people 7.3%+ of World population 20% of global imports & exports Supranational body with regional government

EU Impact on IB The Changes: The Results: LO6 The Changes: Harmonized national standards, labeling laws, testing procedures & consumer protection issues Eliminated shared border taxes and customs laws of member nations Common currency – the € The Results: The World’s largest trading economy FDI outflow = 26% of World output Cost of Doing Business in EU is reduced EU regs set new global standards EU market access means firms play by ER rules globally AND within the EU!