1. INTERNATIONAL BUSINESS IN THE TWENTY-FIRST CENTURY

2. What is Globalization? What is International Business? Globalization: The deepening relationship and broadening interdependence among people from different parts of the world, and especially among different countries. International Business: All commercial transactions between two or more countries, whether they involve private or public parties. The International environment is more complex and diverse than a firm ’ s domestic environment.

3. Modes of International Business Importing and exporting Tourism and transportation Licensing and franchising Management contracts Direct and portfolio investment

4. Levels/Terms of International Companies Multinational Enterprise (MNE): global approach to markets and production Multinational Corporation (MNC) Transnational Company (TNC) Globally integrated company(GIC): integrated operations located in different countries Multidomestic company(MDC): multinational companies that allow local responsiveness

5. National Operations for International Companies Multidomestic strategy: countries operate autonomously Global strategy: integrate various country operations into an international headquarters control Transnational strategy: integrate various country operations while dispersing the location of control

6. Political System The role of the political system is to integrate the various parts of its society into a viable, functioning whole. It also influences the extent to which government intervenes in business, and the way in which business is conducted domestically and internationally. 6

7. Totalitarianism A political system in which a single agent, whether an individual, group, or party, monopolizes all political power. Aims to subordinate all aspects of the day-to-day life of people to the power of the state. Merging the concepts of the state and the people. Order is often imposed through military power. 7

8. Authoritarianism: a political system that aims to rule completely all affairs of all citizens. Fascism: to control people ’ s minds and souls through the supremacy of the state. Secular Totalitarianism: using the power of the state or the army to enforce control of all aspects of the business environment. Communism and total government ownership and control of the factors of production. Theocratic Totalitarianism: religious leaders are the political leaders, 8

9. Political Risks for International Business Political Risk: The chance that political decisions, events, or conditions in a country will affect the business environment in ways that lead investors: - To lose some or all of the value of their investment, or - Be forced to accept a lower than expected rate of return. 9

10. Sources of Political Risk  Systemic : Political risk created by shifts in public policy, such as a new political leadership that may adopt a different approach than its predecessor.  Procedural : Political actions can sometimes create frictions that interfere with the procedural transactions between units. (Government corruption, labor disputes, a partisan judicial system)  Distributive : Political actions that aim to claim a greater share of rewards.  Catastrophic : Random political developments. 10

11. Legal Environment Common law systems (tradition/precedent) United States United Kingdom Civil law: based on a systematic and extensive codification of laws. Political officials prepare a written collection of laws. Judges apply existing laws instead of creating them. Germany France Japan Theocratic law (based on religious principles and rules) Islamic Law that is based on the Qur ’ an, the practices of the prophet, the writings of scholars, and consensus of the community. Sudan Pakistan  A Customary Law System: follows the wisdom of daily experience.  A Mixed Legal System. 11

12. Intellectual Property Rights (IPRs) Now, countries are competing on the strength of their brainpower to create might, prestige, and wealth. The output of this brainpower is called intellectual property – books, designs,brand names, software. Problems occur because IP is hard to conceive but easy to copy. (Piracy) IPRs refer to the right to control and derive the benefits from writing (copyrights), inventions (patents), processes (trade secrets),and identifiers (trademarks). 12

13. Intellectual Property Rights (IPRs) Legal problems arise because countries because not all countries formally support the various conventions that protect IPRs. The Paris Convention for the Protection of Industrial Property The Berne Convention for the Protection of Literary and Artisitic Works. The Trade Related Aspects of Intellectual Property Rights (TRIPS) code of the WTO. 13

14. Economics: Managers need to understand economic environments to predict trends that might affect their company’s performance. A country’s economic policies are a leading indicator of the government’s goals and its planned use of economic tools and market reforms. The subject of economic development is important to citizens, managers, policymakers, and institutions, 14

15. Key Economic Forces General economic framework Economic size and stability Existence and influence of capital markets Factor endowments Indicators Growth Inflation Surpluses Deficits Market Size Availability of economic infrastructure 15

16. Factor Conditions Inputs to the production process Human resources Physical resources Knowledge Capital Infrastructure Factor conditions are especially critical for the production of goods 16

17. Gross National Income Tool to measure one country against another Size Demand Gross National Income (formerly the Gross National Product) GNI is the market value of final goods and services newly produced by domestically owned factors of production. Countries with high populations and high per capita GNI are most desirable in terms of market potential 17

18. Gross Domestic Product GDP: the value of production that takes place within a nation ’ s borders, without regard to whether the production is done by domestic or foreign factors of production Example - Both a Ford and a Toyota manufactured in the United States counts towards US GDP. A Ford produced in Mexico would not. 18

19. Purchasing Power Parity PPP is the number of units of a country ’ s currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States PPP is a useful measure since it accounts for international differences in price Example: China has a higher PPP than Japan 19

20. A country ’ s degree of human development, in terms of both economic and social factors, us studied in order to estimate its current and future economic activity. Complementing economic indicators by also analyzing the overall quality of life in a country. The Human Resource Index: Longevity: life expectancy at birth. Knowledge: adult literacy rate and primary, secondary and tertiary gross enrollment ratio. Standard of Living: GNI per capita measured expressed in PPP. 20

21. 1. Inflation: the pervasive and sustained increase in the aggregate level of prices as measured by a cost of living index. Results when aggregate demand grows faster than aggregate supply (too many people trying to buy too few goods; prices increase faster than incomes) High inflation leads to: - setting higher interest rates - Installing wage and price controls - Imposing protectionist trade policies and currency controls. 21

22. The Consumer Price Index (CPI) measures the average change in consumer prices over time in a fixed market basket of goods and services. 2. Unemployment: represents the number of workers who want to work but do not have jobs. The unemployment rate is: The number of unemployed workers / The total civilian labor force (all those wiling and able to work for pay) The Misery Index: the sum of a country ’ s inflation and unemployment rates. 22

23. 3. Debt: the sum total of a government ’ s financial obligations. The state ’ s borrowing from its citizens, from foreign organizations, from foreign governments, and from international institutions. Internal Debt: is the portion of the government debt that is denominated in the country ’ s own currency and is held by domestic residents. External Debt: is the portion of the government debt that is denominated in foreign currencies and is owed to foreign creditors. 23

24. Heavily Indebted Poor Countries (HIPCs) Poor countries with large debts that are the target of initiatives to alleviate the severe external debt burdens of less developed countries, as a means of assisting their development. 4. Income Distribution: describes what share of a country ’ s income goes to various segments of the population (each segment ’ s share of GNI per capita). 5. Poverty: the state of having little or no money, few or no material possessions, and little or no resources with which to enjoy a reasonable standard of living. 24

25. Poverty 6. The Balance of Payments: Officially known as the Statement of International Transactions, and records a country ’ s international transactions among companies, governments, and/or individuals. Reports the total of all money flowing into a country minus all money flowing out of that country to others, during a given period. 25

26. The two primary accounts under the Balance of Payments: a. The Current Account: tracks all trade in goods and services, as well as income from assets abroad. b. The Capital Account: tracks transactions in real or financial assets between countries, as well as loans given to foreigners and loans received by citizens. 26

27. Free-market (capitalistic) economies are built upon: The private ownership and control of the factors of production. Freedom of market entry and exit. Determination of prices according to the laws of supply and demand. The Laissez-Faire Principle Non-intervention by government in a country ’ s economic activity. Results in effective and efficient allocation of resources 27

28. 1. Privatization: the sale and/or legal transfer of government-owned resources to private individuals. Benefits: - Reduces government debt. Increases market efficiency. Private enterprises must compete in open for materials, labor, and capital; thus, they succeed or fail on their own merits. 2. Deregulation: the relaxation or removal of restrictions on the free operation of markets and business. 28

29. Economic Factors International Businesses Must Address Inflation Surpluses Deficits Balance of Payments External Debt Internal Debt Privatization 29

30. The Technological Environment Technological changes drove the first industrial revolution in the 19 th century. And, seems set to drive a second one some two centuries later. The impact of technology upon international business can be classified under three separate headings: 1- Transportation. 2- Communication. 3- Product and process innovation, and sales and marketing.