Table of Contents Part I: The Nature of International Business

Table of Contents Part I: The Nature of International Business
1. The Rapid Change of International Business 2. International Trade and Foreign Direct Investment 3. Theories of International Trade and Investment Part II: Cooperation Among Nations 4. Dynamics of International Institutions 5. Understanding the International Monetary System

Part III: International Environmental Forces
6. Cultural Forces 7. Natural Resources and Environmental Sustainability 8. Economic and Socioeconomic Forces 9. Political Forces 10. Legal Forces 11. Financial Forces 12. Labor Forces

Part IV: The Organizational Environment
13. International Competitive Strategy 14. Assessing and Analyzing Markets 15. Entry Modes 16. Export and Import Practices 17. Marketing Internationally 18. Organizational Design and Control 19. Human Resource Management 20. Financial Management 21. Global Operations and Supply Chain Management

The Nature of International Business
Section One The Nature of International Business by Ball, McCulloch, Frantz, Geringer, and Minor

1 The Rapid Change of International Business International Business
This chapter covers: Internationalization of markets Various names given to firms in multiple countries Effect of the internet on international business Drivers leading firms to globalization of product Differences between domestic and international businesses Three environments of international business The Rapid Change of International Business International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Appreciate the dramatic internationalization of markets. Understand the various names given to firms that have substantial operations in more than one country. Appreciate the profound effect of the Internet on many international business firms. Understand the five kinds of drivers that are leading international firms to the globalization of their operations. Comprehend why international business differs from domestic business. Describe the three environments--domestic, foreign, and international--in which an international company operates 1-2

International Business Experience
Seventy-nine percent of CEOs believe all business majors should have an introductory international business course Seventy percent will consider expertise in foreign language and international exposure in hiring decisions The majority of CEOs consider courses related to international business relevant to their company Managers wanting to advance will need to have foreign experience 1-3

International Business Terminology
The United Nations uses transnational instead of multinational to describe a firm doing business in more than one country. Business people define a transnational as a company formed by a merger of two firms of approximately the same size that are from two different countries Unilever (Dutch-English) Dunlop-Pirelli (English-Italian) 1-4

Definitions International Business
is a business whose activities are carried out across national borders. includes international trade and foreign manufacturing also includes a growing service industry in areas such as transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication. 1-5

Definitions Foreign Business A Multidomestic Company A Global Company
domestic operations within a foreign country A Multidomestic Company has multicountry affiliates, each of which formulates its own business strategy based on perceived market differences. A Global Company attempts to standardize and integrate operations worldwide in all functional areas. International Company describes both global and multidomestic companies 1-6

Global Company- By Whose Definition?
Have a worldwide presence in its market Allen-Edmonds produces all shoes in Port Washington, Wisconsin – ships to over 33 nations Standardize operations worldwide in one or more functional areas P&G has operations in more than 70 countries and sells essentially the same products in over 140 countries Integrate operations worldwide Multicultural multinationals respond to local markets, produce products worldwide, exploit knowledge and technology on a global basis 1-7

History of International Business
Phoenician and Greek merchants sent abroad before time of Christ 1600’s British East India Company established branches in Asia 1700’s American colonial traders begin operations FDI prior to Civil War by Colt Fire Arms and Ford 1800’s Singer Sewing Machine first foreign production 1914 at least 37 American companies producing overseas 1-8

Globalization Economic Globalization
is the international integration of goods, technology, labor, and capital. refers to the implementation of global strategies which link and coordinate a firm’s international activities on a worldwide basis. definition continues to broaden to include political, social, environmental, historical, geographical, and cultural implications 1-9

Globalization Forces There are five major kinds of drivers that are leading international firms to the globalization of their operations. Political Technological Market Cost Competitive 1-10

Globalization Forces Political
There is a trend toward the unification and socialization of the global community. Preferential trading agreements NAFTA European Union 1-11

Globalization Forces Technological
Advancements in computers and communication technology are permitting an increased flow of ideas and information across borders. The Internet and network computing enables small companies to compete globally. Business to business commerce is experiencing significant savings by using the Internet for business exchanges. Web is used to find suppliers Web is used to process purchase orders 1-12

Globalization Forces Market
As companies globalize, they also become global customers. Companies follow customers abroad Saturation of the home market Customer tastes and lifestyles are converging 1-13

Globalization Forces Cost
Economies of scale to reduce unit cost are always a management goal. Globalizing product lines can reduce development, production, and inventory costs can help achieve economies of scale. Companies can also locate production in countries where production costs are lower. 1-14

Globalization Forces Competitive
Competition continues to increase in intensity. Newly industrialized and developing countries Companies are defending their home markets from competitors by entering the competitors’ home markets to distract them. 1-15

Explosive Growth Foreign Direct Investment
One commonly used measure of growth Refers to direct investment into equipment, structures, and organizations in a foreign country sufficient to obtain management control World stock of FDI rose from $519 billion in 1980 to $6.6 trillion in 2001. 1-16

Explosive Growth Exporting
Refers to the transportation of any domestic good or service to a destination outside the home country or region The level of world merchandise exports more than tripled from 1980 to 2002. The level of service exports worldwide more than quadrupled in the same period. 1-17

Number of International Companies
In 2002, the United Nations estimated there were over 63,800 companies with a total of over 866,000 foreign affiliates accounting for two-thirds of world trade. Foreign affiliates’ sales were $17.7 trillion in 2002. Growth due in part to liberalization of government policies toward foreign investment 1-18

2002 Top International Firms
Ranking Nation or Firm United States Japan Germany United Kingdom France China Italy Canada Mexico Spain 1-19 Total Sales for 2002 ($billion) $10,207.0 4,323.9 1,876.3 1,510.8 1,362.1 1,234.2 1,100.7 702.0 597.0 296.5

The Globalization Debate
Supporting Free trade advances economic development Reduces poverty, improves education, health and life expectancy Expanded trade creates more and better jobs Must manage the costs and transition of workers 1-20 Globalization Concerns produces uneven results across nations and people Increases gap between rich and poor has negative effects on labor and labor standards Jobs migrate to developing nations contributes to decline in environment and health conditions

Forces in the Environment
The sum of all forces surrounding and influencing the life and development of the firm. Forces can be classified as External forces Management can exert influence but cannot control Internal forces Management must administer and adapt 1-21

External Environmental Forces
Competitive Kind, number, location Distributive For goods and services Economic GNP, labor cost Socioeconomic Characteristics of population Financial Interest rates, inflation, taxes 1-22 Legal Laws governing business Physical Topography, climate Political Form of government Sociocultural Attitudes, beliefs Labor Skills, attitudes Technological Equipment, skills

Internal Environmental Forces
Factors of production Capital, raw material, and people Activities of the organization Personnel, finance, production, and marketing 1-23

Domestic Environment Managers most familiar
Composed of all the uncontrollable forces originating in the home country that surrounds and influences the life and development of the firm Managers most familiar May affect foreign operations 1-24

Foreign Environment Operates differently than the domestic environment for the following reasons Different force values Changes difficult to assess Particularly political and legal forces Forces interrelated 1-25

International Environment
The International Environment is the interaction between the domestic environmental forces and the foreign environmental forces. the interaction between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another. Decision making is more complex 1-26

International Business Model
International business transactions take place across national borders and may involve three environments. Domestic Foreign International Figure 1.2 here 1-27

United States Commercial Service
The U.S. Commercial Service offers four ways to grow your international sales: world-class market research trade events that promote your product or service to qualified buyers introductions to qualified buyers and distributors counseling through every step of the export process

The Language of Trade (Examples)
AD VALOREM EQUIVALENT — The duty collected under a specific tariff or a compound tariff expressed as a percentage of the value of the imported item. Since a specific tariff is calculated on the basis of units (of volume or weight), rather than value, and since prices can change over time, the ad valorem equivalent could differ when calculated for different time periods. ubs AGREEMENT ON RULES OF ORIGIN — A WTO agreement addressing the rules that determine the country of origin of an imported product. Rules of origin play an important role in international trade due to the fact that the application of duties and other restrictions on entry often depends on the deemed source of the imports. The agreement provides for harmonization in the practices of WTO members in determining the country of origin of products.

Top Five Global Companies*
Europe BP Royal Dutch/Shell Group Daimler Chrysler Total Allianz *According to Fortune 500 Asia Toyota Motor Nippon Telegraph and Telephone Hitachi Honda Motor Sony

Ecommerce Trademark and Patent Services
Trademarks Trademark eBusiness Search File Assign Ownership Search Assignments Status File TTAB Documents Search & View TTAB Proceedings Patents Patent Electronic Business Center Electronic Filing (EFS) Status Information (PAIR) Assign Ownership Search Assignments Patent Searches Sequence Searches (biotech) Software

2 International Trade and Foreign Direct Investment
This chapter covers: International trade and growth Direction of trade Size, growth and direction of FDI Investments in U.S. Reasons for entering foreign markets Dimensions of globalization International Trade and Foreign Direct Investment International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Appreciate the magnitude of international trade.
Identify the direction of trade. Explain the size, growth, and direction of U.S. foreign direct investment. Identify who invests and how much is invested in the U.S. Understand the reasons for entering foreign markets. Comprehend that globalization of an international firms occurs over seven dimensions and that a company can be partially global in some dimensions and completely global in others. 38-2

International Firms Responding to
Global competition Liberalization by host governments Advances in technology Outward FDI reached $119.7 billion in 2002 American exports increased to $1,007 billion in 2003 Factories in every market not feasible Many markets too small Must be served by exports Both FDI and exporting essential 2-3

Small and Medium-Sized Enterprises
United Nations defines as parent companies whose affiliates had assets, sales and net income under $3 million; fewer than 500 employees SMEs accounted for 96.5% of U.S. exports in 1997 Very small companies (less than 20 employees) accounted for 65% of all U.S. exporting firms in 1997 Almost 40% of SME exports went to Canada, Japan and Mexico Majority of SMEs exporting were wholesalers or other nonmanufacturing companies 2-4

Introduction International Business Activities International Trade
includes exports and imports. Foreign Direct Investment (FDI) International companies must make FDI to establish and expand their overseas operations. Foreign Sourcing is the overseas procurement of raw materials, components, and products. 2-5

Volume of Trade In 1990, volume of international trade in goods and services surpassed $4 trillion. In 2003, international trade in goods and services exceeded $9 trillion. One-fourth of everything grown or produced in the world is now exported. 2-6

Volume of Trade Increases in exports to developing countries, especially Latin America Central and Eastern Europe Middle East Asia Quadrupling of world exports in less than 31 years demonstrates that the opportunity to increase sales by exporting is a viable growth strategy 2-7

Direction of Trade Largest exporters and importers of merchandise are generally developed countries Among largest 25 exporters emerging economies of China, Mexico, Malaysia, Thailand, Brazil Among largest merchandise importers China, Mexico, Malaysia, Thailand, India, Turkey 2-8

Direction of Trade - The Exceptions
Reasons Japan exports more to developing nations Japan established extensive distribution in developing nations since early 1900s. Uses “sogo shosha” to import raw materials and components necessary for the Japanese industry, due to lack of local sources for raw materials. Other industrialized nations have imposed import restrictions on Japanese exports to protect their home industries. 2-9 45

Direction of Trade - The Exceptions
Reasons the United States exports more to developing nations The U.S. has significantly more subsidiaries in developing countries than Japanese companies Some customers prefer to buy from American firms 2-10

Focus on Major Trading Partners
Favorable business climate Regulations not insurmountable No strong cultural objections Transportation facilities already established 2-11 Channel members experienced in handling imports Foreign exchange is available Government pressure to buy from countries that are good customers for exports

Major Trading Partners
Major U.S. Trading Partners Mexico and Canada Share common border with the U.S. Freight charges lower Delivery times shorter Contacts easier and less expensive Nations from East and Southeast Asia have become important trading partners. China, South Korea, Taiwan, Malaysia and Singapore supply U.S. with huge quantities of electronic components and manufactured goods 2-12

Asian Importers Rising standard of living Further industrial expansion
Import of raw materials to be assembled Government pressure to lower trade surpluses 2-13

Foreign Investment Two components of foreign investment
Portfolio investment Purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested. Direct investment Investors participate in the management of the firm in addition to receiving a return on their money. Applies when investors equity participation ratio is 10 percent or more. 2-14

Volume of FDI End of 2002 worldwide nearly $6.9 trillion
Largest investors United States 1.45 times next largest investor United Kingdom followed France third largest investor Total annual outflow 2002 $647 billion Much FDI associated with mergers, acquisitions and other investments result of increased global competition 2-15

Trade Leads to FDI Foreign direct investment historically follows trade Trade less costly and less risky Can expand business in small increments Use domestic or foreign agents to export Hire sales representatives to live in overseas market Establish own sales company Today many international firms disperse activities to locations close to available resources 2-16

FDI in United States Nearly 82% of stock owned by firms from
United Kingdom France Netherlands Japan Germany Switzerland Canada 2-17

Acquire or Build Majority of FDI acquisitions because
Corporate restructuring put many businesses on market Foreign companies want to gain rapid access More success with known brand names Pursuit of economies of scale has led to restructuring and consolidation 2-18

New Markets New Markets Factors Other Considerations
Saturated home market Find markets with Rising GDP per capita Need reliable data Must compare purchasing power Evenly distributed income preferable 2-19 Other Considerations Population growth Preferential Trading Agreements Fast growing economy Improved communications

Why Enter Foreign Markets?
Obtain Greater Profits Less competition, better price Greater sales volume Lower costs of goods sold Government inducements Higher profit margins Test market 2-20

To protect domestic market Follow customers overseas Attack in competitor’s home market Use foreign production to lower costs Protect from lower-priced foreign imports In-bond plants (maquiladoras) Caribbean Basin Initiative Andean Trade Preference Act Growth Triangles Export Processing Zones 2-21

To protect foreign market Lack of foreign exchange Local production by competitors Follow suit or risk losing the market Downstream markets Protectionism Government erects barriers to protect local industry Guarantee supply of raw materials Acquire technology and management know-how Geographic diversification Satisfy management desire for expansion 2-22

Changing Environment Changes affect trade and FDI
Governments liberalized flows of goods, people, technology, capital Improvements in information technology Increased global competition 2-23

Global Dimensions Product Markets Promotion
Where value is added to product Competitive strategy Use of non-home- country personnel Extent of global ownership of firm

Exports of Cereals Source: www. ese.export.gov

U.S. Exports to Asia Source: ese.export.gov

U.S. Trade Source:

Global FDI Structure Source: UNCTAD

The Top U.S. Investors in Poland (December 1998)
Company Value of Investments (USD millions): Polish-American Enterprise Fund IPC Philip Morris PepsiCo Citibank Epstein Procter and Gamble Mars Incorporated Enron Int'l 132.0 Source: Systems Holding Inc Goodyear Mc Donald's D.Chase Enterprises Curtis J.P.Morgan Central European Media Schooner Capital Corp/ White Eagle Industries Sheraton Warsaw Texaco Inc F & P Holding Co. Inc. 66.8

3 Theories of International Trade and Investment
This chapter covers: Why goods are traded internationally Arguments for imposing trade restrictions Kings of import restrictions Weakness of GNP/capita as economic indicator Characteristics of developing nations Theories of foreign direct investment Theories of International Trade and Investment International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Understand the theories of international trade.
Comprehend the arguments of imposing trade restrictions. Explain the two basic kinds of import restrictions. Appreciate the relevance of the changing status of tariff and non tariff barriers. Recognize the weaknesses of GNP/capita as an economic indicator. Understand the new definition of economic development. Understand why governments change from import substitution to export promotion. Explain some of the theories of foreign direct investment. 3-2

International Trade Theory
Mercantilism Believed nation’s welfare was in accumulation of stock of precious metals. Trade surplus created by import restrictions and government subsidies to exporters. Mercantilist era ended in 1700s. 3-3

Modern Day Mercantilism
Economic Nationalism Industrial policy based on state intervention France nationalized key industries and banks to use the power of the state as Stockholder and financier Customer and marketer to revitalize the nation’s base In 1986, little growth and high unemployment led government to reverse “mercantilist” policy Japan called “fortress of mercantilism” by some Nearly impenetrable market Effort to maintain a cheap yen 3-4

Theory of Absolute Advantage
“The capacity of one nation to produce more of a good with the same amount of input than another country.” Adam Smith claimed that market forces, not government controls should determine the direction, volume, and composition of international trade. Each nation should specialize in producing goods it could produce most efficiently In absolute advantage, both nations would gain from trade. Assumptions Perfect competition and no transportation costs in a world of two countries and two products. 3-5

Theory of Comparative Advantage
“A nation having absolute disadvantages in the production of two goods compared to another nation, has a comparative advantage in producing the good in which its absolute disadvantage is less.” Theory of comparative advantage demonstrated by Ricardo in 1817. 3-6

Production Possibility Frontiers
The following two graphs illustrate Chinese and U.S. production possibility frontiers using constant cost for simplicity. These curves, in the absence of trade, also illustrate the possible combinations of goods for consumption. 3-7

Offshoring Service Jobs to India
Approximately 1 Billion people Comparative advantage in production of goods or services that require large amounts of labor Citizens speak English Low labor costs due to large workforce Internet and telephone communications much less expensive Industries offshoring include software engineering, telemarketing, banking, medical services, claims processing, IT jobs, financial services, insurance Jobs created overseas generate jobs at home 3-8

Heckscher-Ohlin Theory of Factor Endowment
States that international and interregional differences in production costs occur because of differences in the supply of production factors. Therefore, India should export labor intensive goods. Germany, with relatively more capital than labor should specialize in capital intensive products. 3-9 Assumptions The price of factors depend only on the factor endowment. Not a perfect market Legislated wages and benefits Tax credits Given technology is universally available. Always a lag between intro of new technology and world application

Leontief Paradox Study in 1953 by economist Wassily Leontief disputed the usefulness of the Heckscher-Ohlin Theory as a predictor of the direction of trade. Found that the U.S., one of the most capital-intensive countries in the world, was exporting labor intensive products. 3-10

Effect of Money on Trade
Exchange Rate The price of one country’s currency stated in terms of the other. Influence of Exchange Rates European companies pressured to incraese prices of exports to maintain Euro profits Currency devaluation Lowering of a country’s currency in terms of other currencies. Example is tourism and currency rates in Mexico during 1980s

Newer Explanations of the Direction of Trade
Economies of Scale and the Experience Curve As output increases cost per unit decreases Larger and more efficient equipment Volume discounts Fixed cost allocation Drop in learning curve 3-12 First Mover Theory Gain market share Discourage foreign entrants The Linder Theory of Overlapping Demand Customers’ tastes determined by income levels Trade greater between nations with similar per capital incomes

International Product Life Cycle (IPLC)
Four stages of the IPLC in the U.S. 1) U.S. exports 2) Foreign production begins 3) Foreign competition in export markets 4) Import competition in the U.S 3-13

Stages of the International Product Life Cycle
Exports May be only manufacturer of new product Overseas customers learn of product, export market develops Foreign production Export volume grows Production technology becomes stable Reduced costs for transportation Exports diminish 3-14 Foreign competition Foreign manufacturers gain experience Compete in export markets Import competition Foreign producers obtain economies of scale Compete in quality and undersell domestic company in domestic market

International Technology Life Cycle
Initial Stage Development of new technology in an industrialized country Subsequently exported to other developed countries Increasing cost of labor make it no longer profitable to use in developed nation Technology exported to developing nation Technology produced abroad for domestic consumption 3-15

Porter’s Competitive Advantage of Nations
Porter claims that four kinds of variables will impact a local firm’s ability to use a country’s resources to gain a competitive advantage. Demand conditions Factor conditions Related and supporting industries Firm strategy, structure, rivalry 3-16

Porter’s Competitive Advantage of Nations
Demand Conditions Nature of domestic demand. If customers are demanding, firms will produce high-quality and innovative products gaining competitive advantage Factor Conditions Level and consumption of factors of production Lack of natural endowments has caused nations to invest in the creation of advanced factors 3-17 Related and supporting industries Suppliers and industry support services tend to form a cluster in a given location Firm Strategy, Structure, Rivalry Extent of domestic competition, The existence of barriers to entry The firm’s management style and organization.

Trade Restrictions Arguments for National Defense
Certain industries need protection Imports may not be available during wartime Prevent valuable technologies from being used to strengthen competition, especially militarily Sanctions to Punish Offending Nations Inflict economic damage to encourage to modify behavior Protect Infant or Dying Industry In the long run will have a comparative advantage Meant to be temporary for emerging industry or to protect jobs of dying industry 3-18

Trade Restrictions Arguments for
Protect Domestic Jobs from Cheap Foreign Labor Productivity per worker greater in developed countries Fails to consider cost of other factors of production Scientific Tariff or Fair Competition Bring cost of imported goods up to domestically produced goods to prevent unfair advantage Retaliation Import restrictions placed by another country may result in similar restrictions by domestic government EU ban on hormone treated U.S. beef 3-19

Other Reasons for Retaliation
Dumping is the selling of a product abroad for less than The average cost of production in the exporting nation The market price in the exporting nation The price to third countries Result of Excess production Cyclical or seasonal factors Attempt to force domestic producers out of business 3-20

Sanctions Justified Dumping for which sanctions are considered justified Social dumping Lower labor costs and poorer working conditions Environmental dumping Lax environmental standards Financial services dumping Low requirements for bank capital/asset ratios Cultural dumping Cultural barriers aid local firms Tax dumping Differences in corporate tax rates or special breaks 3-21

Other Reasons for Retaliation
Subsidies Government provides to domestic firm to encourage exports or protect from imports Can be Cash payment Government participation in ownership Low-cost loans Preferential tax treatment Countervailing Duties Set by importing nation to offset effects of subsidy Equal to the subsidy amount 3-22

Types of Restrictions - Tariffs
Ad Valorem Percentage of invoice value Specific Fixed sum of money per unit Compound duty Combination of the above 3-23 Official Prices Minimum import duty regardless of invoice price Variable Levy Calculated daily based on world market price Lower Duties for Local Input Encourages some local production

Types of Restrictions - Nontariff
Quantitative Quotas Voluntary Export Restraints Orderly Marketing Arrangements Nonquantitative Nontariff Direct government participation in trade Customs and other administrative procedures Government and private standards 3-24

Levels of Economic Development
Developed Classification for all industrialized nations, which are mostly technologically developed. Developing Classification for world’s lower income nations, which are less technically developed. Newly Industrialzing Countries (NICs) Fast-growing, middle-income or higher economies Heavy concentration of foreign investment Exported large quantities of manufactured goods, including high-tech products 3-25

Levels of Economic Development
Newly Industrialized Economies (NIEs) Primarily used to refer to the four tigers Taiwan, Hong Kong, Singapore, South Korea IMF combines NIEs with Industrialized Nations to form “advanced economies Emerging Market Economies Chile, Malaysia, China, Thailand, Indonesia Transition Countries or Eastern Europe Former communist countries 3-26

The World Bank Classification System
Based on GNP/capita Low income ($735 or less) Lower middle income ($736 - $2935) Upper middle income ($2,936 - $9,075) High income ($9,076 or more) 3-27

GNP/Capita as an Indicator
Concerns GNP/Capital data does not include Underground Economy Undeclared legal production Production of illegal goods and services Concealed income – barter Underground Economy larger if Higher level of taxation Oppressive government red tape Currency conversion Local currency converted to the dollar by using exchange rate Conversions do not reflect domestic purchasing powers of currencies, must use purchasing power parity (PPP) World Bank uses Atlas methodology 3-28

Characteristics of Developing Nations
GNP/capital less than $9,075 Unequal distribution of income Technological dualism Regional dualism Majority of population working in agricultural sector Disguised unemployment or underemployment High population growth 3-29 High rate of illiteracy and insufficient educational facilities Widespread malnutrition and health problems Political instability High dependence on a few products Inhospitable topography Low savings rates and inadequate banking facilities

Human Needs Approach to Economic Development
Defines economic development as the reduction of poverty, unemployment, and inequality in the distribution of income. Less illiteracy, less malnutrition, less disease and early death, shift from agricultural to industrial production Human Development Index (HDI) based on A long and healthy life Ability to acquire knowledge Access to resources for a decent standard of living Measured by life expectancy, adult literacy, and GDP/capita adjusted for PPP 3-30

Development Theory No generally accepted theory
Economists concentrating on Population growth Income distribution Unemployment Transfer of technology Role of government Investment in human capital The education of people 3-31

Contemporary Theories of FDI
Monopolistic Advantage Theory FDI occurs largely in oligopolistic industries Product and Factor Market Imperfections FDI typically from companies with heavy product research and marketing efforts International Product Life Cycle FDI normal state in life of a product Other Theories Follow-the-leader theory Cross investment Internalization theory Theory of International production 3-32

Current U.S. Trade Sanctions
Balkans Burma (Myanmar) Cuba Diamond Trading Iran Iraq Liberia Source: Libya Narcotics Trafficking Nonproliferation North Korea Sudan Syria Terrorists Zimbabwe

Export Screening Guidelines
Screening Elements Element 1: Denied Persons Screen Element 2: Product Classification/License Determination Screen Element 3: Diversion Risk Screen Element 4: Sensitive Nuclear End-Uses/End-Users Screen Element 5: Missile End-Use/End-Users Screen Element 6: Chemical and Biological Weapons End- Uses/End-Users Screen Element 7: Antiboycott Screen Element 8: Informed Letter/Entity List Screen Source:

Department of Commerce Transshipment Country Export Control Initiative (TECI)
TECI is a multi-faceted, cooperative initiative that seeks to strengthen the trade compliance and export control systems of those countries and companies that constitute global transshipment hubs. By working to strengthen those systems, the DOC seeks to enhance security and confidence in international trade flows. Source:

GDP Growth Source:

AIDS Crisis Source:

Antidumping Measures The United States maintains 54 of its outstanding 288 antidumping measures against products from China. In 2003, new cases against China were initiated at the brisk pace of one per month. These actions hit consumable products like honey, apple juice concentrate, mushrooms, and pencils, as well as raw material inputs like creatine monohydrate, polyvinyl alcohol, barium carbonate and ferrovanadium. Source:

Cooperation Among Nations
Section Two Cooperation Among Nations International Business by Ball, McCulloch, Frantz, Geringer, and Minor

4 The Dynamics of International Institutions International Business
This chapter covers: The influence of international institutions The structure of the United Nations The importance of the WTO The European Union and NAFTA OECD OPEC Economic Integration Regional Trade Agreements The Dynamics of International Institutions International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Understand the influence of international organizations Discuss the structure and activities of the United Nations Understand the World Trade Organization Understand the European Union, NAFTA and other regional trade agreements Know about the Organization for Economic Cooperation and Development Describe the major purpose and effectiveness of OPEC Outline the four major levels of economic integration agreements 4-2

The United Nations (UN)
The UN is possibly the best- known worldwide organization Established at the end of WWII Mission peacekeeping Created many international entities around the world Highly decentralized 4-3

United Nations Bodies UN work carried out through five main bodies
The General Assembly The Security Council The Economic and Social Council The International Court of Justice The Secretariat 4-4

The General Assembly All UN member-nations are members of the General Assembly Each nation has one vote regardless of its size, wealth, or power General assembly decisions have no legally binding force for governments or citizens UN charter was signed in San Francisco, California in 1945 Today there are 191 members 4-5

U.N. Security Council Composed of 15 members
5 permanent and 10 chosen members The 5 permanent members include the People’s Republic of China, France, Russia, the United Kingdom, and the United States. Each permanent member has the power to veto any measure. Insert Figure UN SC in session 4-6

Economic and Social Council
Concerned with economic problems including trade, transport, industrialization, economic development, and social issues Makes recommendations on how to improve education and health conditions Promotes respect for and observation of human rights and freedoms of people everywhere 4-7

International Court of Justice
Also called the “World Court” Only nations may be parties to litigation before the “World Court” The International Court of Justice has 15 judges who must come from 15 different countries Judges serve nine-year terms

Secretariat Carries out day-to-day administrative functions
Headquartered in New York City Services the other principle UN organs Administers the UN’s programs and policies Current Secretary-General Kofi A. Anna Received Nobel Peace Prize December 2001 4-9

History of Global International Trade
GATT Established in 1947, negotiations are conducted in “rounds” 1947 to 1986, eight “rounds” have taken place Uruguay Round highly successful January 1, 1995, the WTO replaced GATT World Trade Organization Designed to deal with rules of trade between nations Currently 147 members Headquarters Geneva, Switzerland Challenges World Trade Agreements Protests and demonstrations Relies on goodwill 4-10

Organization for Economic Cooperation and Development
OECD Rich man’s club 30 wealthiest nations Publishes extensive research on international business and economic subjects Members work to coordinate domestic and international policies 4-11

Organization of Petroleum Exporting Countries (OPEC)
Eleven member nations Most members are in the Middle East Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates Three members are in Africa Algeria, Libya, and Nigeria Two members are elsewhere in the world Indonesia and Venezuela Non-OPEC oil producing countries Mexico, Norway, Russia and the United Kingdom 4-12

Economic and Political Integration
Free Trade Area Tariffs are abolished among members-countries Each member-country maintains its own external tariffs on imports from nonmember countries Customs Union A Free Trade Area where member-countries add a common external tariff Common Market A Customs Union plus the abolition of restrictions on the mobility of capital and labor among member- countries Complete Economic Integration Involves a high degree of political integration as member-countries surrender important elements of their sovereignty 4-13

European Union Background Europe in shambles after WWII
Marshall Plan implemented by OEEC 1948 Benelux and Western European Union formed 1970’s UK, Ireland and Denmark joined EU 1991 Maastricht Treaty 4-14

European Union A supernatural entity, meaning that it is a regional government In order to join the EU, member-nations give a certain amount of their sovereignty to the EU “Fortress Europe” Currently 25 members Ten new members in 2004 The largest import and export market in the world 4-15

Institutions of the EU European Commission Guardian of the Treaty
Brussels, Belgium Council of Ministers Policy-setting institution Representative from each country Parliament of the EU Elected by popular vote every 5 years Strasbourg, France 732 members European Court of Justice Decides Treaty of Rome cases 4-16

EU Problems Cannot agree on system of power
Presence and expense of fraud Financial scandal at Eurostat 2003 Low voter turnout Disagreement on constitution EU regulations impact US because of size 4-17

The European Monetary Union (EMU)
Twelve EU nations currently participate in the EMU The 12 participating member-nations make up an area often called the “euro zone” The three countries that do not participate are Denmark, Sweden, and the United Kingdom The EMU created a new currency, the euro, which became the official currency of the euro zone countries on January 1, 1999 4-18

Sources of FDI in the US by Region

North American Free Trade Agreement
Established on January 1, 1994 Created a free trade area among Canada, Mexico, and the United States Purpose is to eliminate trade barriers among the three countries, creating a free trade area Import duties have been eliminated or reduced among the three countries 4-20

Other Regional Groupings
Association of Southeast Asian Nations (ASEAN) Created in 1967 Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam European Free Trade Association (EFTA) Created in 1960 Most now members of EU 4-21 African Trade Agreements Economic Community of West African States Common Market for Eastern and Southern Africa Southern African Development Community The African Union Central American Free Trade Agreement

Other Regional Agreements
Organization of American States An organization of 35 countries formed in 1948 in the Western Hemisphere, dedicated to promoting cooperation in the region Asia-Pacific Economic Cooperation Established in 1989 in response to the growing response of the economies of Pacific Rim countries Mercosur Created in 1991, this economic FTA consists of Argentina, Brazil, Paraguay, and Uruguay 4-22

Principle Offices of U.N.

U.N. President H.E. Mr. Julian Robert Hunte, President of the fifty- eighth session of the United Nations General Assembly, is Minister for External Affairs, International Trade and Civil Aviation of Saint Lucia, a Senator and Member of Parliament, a Justice of the Peace and a business executive

WTO Facts Functions: Location: Geneva, Switzerland
Established: 1 January 1995 Created by: Uruguay Round negotiations ( ) Membership: 147 countries (on 23 April 2004) Budget: 162 million Swiss francs for 2004 Secretariat staff: 600 Head: Supachai Panitchpakdi (director- general Functions: Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for developing countries Cooperation with other international organizations

Regional Trade Agreements
The vast majority of WTO members are party to one or more regional trade agreements. The surge in RTAs has continued unabated since the early 1990s. Some 250 RTAs have been notified to the GATT/WTO up to December 2002, of which 130 were notified after January 1995. Over 170 RTAs are currently in force; an additional 70 are estimated to be operational although not yet notified. By the end of 2005, if RTAs reportedly planned or already under negotiation are concluded, the total number of RTAs in force might well approach 300.

Top 10 States for EU Foreign Direct Investment 2001
USD billion Texas 67.3 California 57.0 Michigan 38.8 New York 36.5 Illinois 26.4 Pennsylvania 24.5 New Jersey 20.7 Ohio 18.7 Louisiana 18.5 Indiana 18.4

Top 10 States Exporting to European Union, 2002
Total value, USD billion % California 18.58 -18.5 New York 9.5 -12.9 Texas 9.46 -11.6 Washington 7.89 -9.3 Massachusetts 6.47 -8.9 Illinois 6.02 -8.8 New Jersey 5.08 -13.9 Ohio 4.65 -10.6 Michigan 4.27 -0.7 Pennsylvania 3.71 -19.3 Source: U.S. Census Bureau, Foreign Trade Division/ MISER Figures are for 2002.

Office of NAFTA and Inter-American Affairs
Our Mission One of the primary objectives of the Office of NAFTA and Inter-American Affairs (ONIA) is to increase access to foreign markets for U.S. exports, through the elimination of tariff and nontariff barriers to trade. Our approach is three-fold: heavily contribute to the coordination and development of U.S. trade policy in the Western Hemisphere for the Department of Commerce. advise the U.S. business community, policy-makers, and Congress concerning market access to Canada and Mexico under NAFTA, by providing accurate and timely information. assist U.S. companies experiencing problems gaining access to Canadian and Mexican markets.

OECD Member Countries Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States

5 Understanding the International Monetary System
This chapter covers: Historical and present uses of gold Developments shaping the world monetary system Balance of payments Purchasing power parity theory Major foreign currency markets Currency conflict and SDR The euro Understanding the International Monetary System International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Understand the historical and present uses and attractiveness of gold Explain the developments shaping the world monetary system Explain activities of the International Monetary Fund Explain the purposes of the World Bank and its IFC Understand balance of payments Compare relative strengths and weaknesses of currencies Identify the major foreign exchange markets of the world Understand changes being caused in the FX markets Understand the central reserve asset/national conflict of the U.S. dollar Discuss the euro and its present state of acceptance by EU countries 5-2

Convertible Currencies
Currencies readily convertible in the market Also called “hard” currencies Most developing countries are not convertible 5-3

Gold Standard History From about 120 to present price of gold generally up Rise in value interrupted around 1980 Early 2002 gold regained safe haven status Most trading and industrial countries adopted the gold standard Each country set a certain number of units of its currency per ounce of gold Comparison of the numbers of units from country to country known as exchange rate Gold standard ended during World War I 5-4

Bretton Woods and the Gold Exchange Standard
In 1944, representative of the major Allied powers met at Bretton Woods, New Hampshire to plan for the future. General consensus Stable exchange rates were desirable. Floating or fluctuating exchange rates had proved unsatisfactory. The government controls of trade, exchange, and production, that had developed through WWII were wasteful and discriminatory. 5-5

Bretton Woods and the Gold Exchange Standard
To achieve its goals, the Bretton Woods Conference established The International Monetary Fund (IMF) The IMF Articles of Agreement entered into force in December 1945. From , IMF agreement was the basis of the international monetary system. The US$ was agreed to be the only central reserve asset. An ounce of gold was agreed to be worth US$35 5-6

International Monetary Fund
Abandoned objective of fixed exchange rate 1970s Exercises “firm surveillance” over exchange rate policies of members Board of governors regularly examine policies and performance Board reviews economic outlook and exchange rate developments Coordinates with the World Bank to correct economic problems 5-7

World Bank International Bank for Reconstruction and Development (IBRD) Consists of International Finance Corporation (IFC) International Development Association (IDA) Multilateral Investment Guarantee Agency (MIGA) International Center for Settlement of Investment Disputes (ICSID) Other Multilateral Development Banks African, Asian, European, Inter-American 5-8

Bank for International Settlements
Located in Basel, Switzerland Functions Forum for international monetary cooperation Center for research Banker for central banks Agent with regard to various international financial arrangements Chair of U.S. Federal Reserve represents U.S. 5-9

Balance of Payments A country’s BOP is a very important indicator of what may happen to the country’s economy. If country’s BOP is in deficit Inflation is often the cause. A company doing business there must adjust its pricing, inventory, accounting, and other practices to inflationary conditions. The government may take measures to deal with inflation and the deficit. 5-10

Balance of Payments Actions the government may take to deal with inflation and the BOP deficit include Market measures Deflating the economy Devaluing the currency Nonmarket measures Currency controls Tariffs Quotas 5-11

International Transactions
Debits involve payments by domestic residents to foreign residents Dividend, interest and debt repayment services Merchandise imports Transportation services Foreign investments Gifts to foreign residents Imports of gold 5-12 Credits involve payments by foreign residents to domestic residents The BOP is presented as double-entry accounting statement Total credits and debits are always equal.

BOP Accounts Current Account Goods or merchandise Services
Unilateral transfers Capital Account Direct investments Portfolio investments Short-term capital flows 5-13 Official Reserves Account Gold imports and exports Increases or decreases in foreign exchange held by government Decreases or increases in liabilities to foreign central banks

Balance of Payment Deficit
Temporary BOP deficit Can be corrected by the country’s monetary policies or fiscal policies. May be corrected by short-term IMF loans and advice. Fundamental BOP deficit too severe to be repaired by monetary or fiscal policies IMF permits countries’ currencies to be devalued 5-14

Gold Exchange Standard
Gold and dollars go abroad From 1958 through 1971, United States cumulative deficit was $56 billion. Deficit was financed partly by use of the U.S. gold reserves. Deficit partly financed by incurring liabilities to foreign central banks. The gold standard ends By 1971, many more dollars were in the hands of foreign central banks than the gold held by the U.S. Treasury could cover. 5-15

Currency Exchange Rates
Two attempts made to set fixed currency exchange rates December 1971 and February 1973 Speculators felt banks had pegged rates incorrectly March 1973 floating currency exchange rates developed Clean float depends on competition with no government intervention Dirty float governments intervene and manage currency market to smooth irregularities 5-16

Group of Seven (G7) Plaza Accord
Result of concern over U.S. trade deficit Group of Five included Britain, France, Germany, Japan, U.S. Met in 1985 to set the US$ at the “right” exchange rate Canada and Italy added to become G7 Meet yearly to coordinate economic policy 5-17

Currency Areas Most currencies of developing countries are pegged (fixed) In value to one of the major currencies. To a currency basket such as the special drawing rights. To some specially chosen currency mix or basket. In Europe during the mid-1970 a currency grouping called the “snake” was created led by German deutsche mark The snake was so called because of how it appeared on a graph showing the member currencies floating against nonmember currencies. System’s inflexibility led to ultimate demise. 5-18

Experience with Floating
Fears that banking and money systems would not be able to handle amounts and directions of currency flows were unfounded January 1999 new major currency, the euro, joined the world market Floating exchange rates create big uncertainties for international business managers Asian financial crisis in 1997 reduced Asian reliance on U.S. economy Forecasting float direction includes measuring inflation with purchasing power parity (PPP) 5-19

Big MacCurrencies 5-20

Money Markets, Foreign Exchange
London is the world’s largest foreign exchange market. It has 30 percent share of foreign exchange turnover. New York is the second largest foreign exchange market. Asia, Tokyo, Hong Kong, and Singapore are fighting for foreign exchange supremacy 5-21

Money Markets, Foreign Exchange
Asian currencies are no longer thought of as exotic since their markets have emerged. The more liquid currencies include the Singapore dollar Thai baht Indonesian rupiah Malaysian ringgit Hong Kong dollar Singapore fourth largest currency trading center 5-22 Most traded currency US$ Busiest currency trades US$ - euro first, then US$ - yen US$ - British sterling US$ - Swiss franc Euro – yen Virtually all Asian trade is through the US$ Rates not quoted in US$ are called cross rates

Special Drawing Rights (SDRs)
SDRs in the future May be a step toward a truly international currency. The US$ has been the closest thing to such a currency since gold in the pre-WWI gold standard system. The objective was to make the SDR the principal reserve asset in the international monetary system. Value based on a basked of four currencies US dollar, euro, Japanese yen, British pound Percentage of each changes periodically Calculated daily by the IMF 5-23

Uses of SDR The SDR’s value remains more stable than that of any single currency. Holders of SDRs include The International Monetary Fund (IMF) Most of the 181 members of the IMF 16 official institutions These institutions typically regional development or banking institutions prescribed by the IMF. Not likely to become principal reserve asset 5-24

European Monetary System
European countries prefer fixed exchange rates EMS created in 1979 Replaced the snake with a more flexible system European Currency Unit (ECU) established as bookkeeping currency more popular than the SDR Euro has replaced ECU and 12 national currencies Euro is supervised by the European Central Bank 5-25

Transition to the Euro Began on January 1, 1999
Coins and notes of 12 countries replaced Circulated side by side until January 1, 2002 Exchanged old for new at commercial banks Twelve countries now called the “eurozone” All under European Central Bank Figure 5.6 5-26

Fast Facts on the IMF Current Membership: 184 countries
Staff: approximately 2,690 from 141 countries Total Quotas: $316 billion (as of 12/31/03) Loans Outstanding: $107 billion to 87 countries, of which $10 billion to 60 on concessional terms (as of 12/31/03) Technical Assistance provided: 356 person years during FY2003 Surveillance Consultations concluded: 136 countries during FY2003, of which 96 voluntarily published their staff reports

IMF Loans

Canada’s BOP Data

Country GDP - per capita
Afghanistan purchasing power parity - $700 (2003 est.) Albania purchasing power parity - $4,500 (2003 est.) Algeria purchasing power parity - $5,900 (2003 est.) American Samoa purchasing power parity - $8,000 (2000 est.) Andorra purchasing power parity - $19,000 (2000 est.) Angola purchasing power parity - $1,900 (2003 est.) Anguilla purchasing power parity - $8,600 (2001 est.) Antigua and Barbuda purchasing power parity - $11,000 (2002 est.) Argentina purchasing power parity - $11,200 (2003 est.) Armenia purchasing power parity - $3,900 (2003 est.) Aruba purchasing power parity - $28,000 (2002 est.) Australia purchasing power parity - $28,900 (2003 est.) Austria purchasing power parity - $30,000 (2003 est.)

Warning Signs of Foreign Currency Exchange Fraud
Stay Away From Opportunities That Sound Too Good to Be True Avoid Any Company that Predicts or Guarantees Large Profits Stay Away From Companies That Promise Little or No Financial Risk Don't Trade on Margin Unless You Understand What It Means Source: Question Firms That Claim To Trade in the "Interbank Market" Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise Currency Scams Often Target Members of Ethnic Minorities Be Sure You Get the Company's Performance Track Record Don't Deal With Anyone Who Won't Give You Their Background

Two Types of SDRs General allocations of SDRs
Have to be based on a long-term global need to supplement existing reserve assets. General allocations are considered every five years, although decisions to allocate SDRs have been made only twice. Source: Special one-time allocation of SDRs Approved by the IMF's Board of Governors in September Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund subsequent to have never received an SDR allocation.

Euro Coins Euro coins have one common side and one national side. They can be used anywhere within the euro area, regardless of the country of issue. There are coins in denominations of €2, €1, 50 cent, 20 cent, 10 cent, 5 cent, 2 cent and 1 cent. There are 100 cent to €1. Euro coins are also available for Monaco, San Marino and Vatican City (example). Source:

International Environmental Forces
Section Three International Environmental Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor

6 Sociocultural Forces International Business
This chapter covers: The significance of culture for business The sociocultural components The significance of religion Cultural aspects of technology Trends of formal education The importance of language Classes of society and cultural dimensions Sociocultural Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Understand the significance of culture for international business Understand the sociocultural components of culture Appreciate the significance of religion to businesspeople Comprehend the cultural aspects of technology Grasp the pervasiveness of the Information Technology Era Understand why businesspeople must follow the trends of formal education Appreciate the importance of the ability to speak the local language Recognize the importance of unspoken language in international business Discuss the two classes of relationships within a society Discuss Hofstede’s four cultural value dimensions 6-2

Rules of Thumb for Cross Culture Business
Be prepared Slow down Establish trust Understand the importance of language Respect the culture Understand the components of culture 6-3

What is Culture? Culture
The sum total of beliefs, rules, techniques, institutions, and artifacts that characterize human populations. Consists of learned patterns of behavior common to the members of a given society. The unique lifestyle of a particular group of people. Ethnocentricity Considering your culture superior to all others 6-4

Living with Other Cultures
First, realize that there are many different cultures. Then, learn the characteristics of those cultures. Spend a lifetime in a country. Undergo an extensive, highly sophisticated training program that covers the main characteristics of a culture. 6-5

Culture Affects All Business Functions
Marketing Variation in attitudes and values requires firms to use different marketing mixes P&G Japanese Camay commercials Disneyland Paris 6-6 Human Resource Management Evaluation of managers Production and Finance Attitudes toward authority Attitudes toward change

Sociocultural Components
Components of Culture Aesthetics Attitudes and beliefs Religion Material Culture Education Language Societal organization Legal characteristics Political structures 6-7

Aesthetics Art Music and Folklore
Colors, symbols, numbers convey meaning Nike air symbol Architectural styles different Feng shui Music and Folklore Musical tastes vary Folklore discloses way of life Cowboys in Chile or Argentina Mexican singing cricket 6-8

Attitudes and Beliefs Directness and drive Deadlines
Attitude Toward Time Problem for Americans Americans always prompt Mañana attitude Siestas Directness and drive Perceived to be rudeness Deadlines Liability in Asian cultures 6-9 Attitudes toward Achievement and Work “American live to work, Germans and Mexicans work to live.” Demonstration effect Result of having seen others with desirable goods. Job prestige Disdain for physical labor

Attitudes and Beliefs Attitude Toward Change
The American firm is accustomed to the rapid acceptance by Americans of something new. Europeans are fond of reminding Americans that they are a young nation lacking traditions. The more consistent a new idea is with a society’s attitudes and experiences, the more quickly it will be adopted. 6-10

Religion Responsible for many of the attitudes and beliefs affecting human behavior. Work Ethic Protestant work ethic Europeans and Americans generally view work as a moral virtue and look unfavorably on the idle. Confucian work ethic In Asian countries, this is the same as Protestant ethic. 6-11

Asian Religions Hinduism
Caste system is basis of the social division of labor. Buddhism Jainism Sikhism (Indian) Confucianism Inseparable from Chinese culture Taoism Shintoism (Japan) 6-12

Islam About 1.3 billion followers
This youngest faith is the second largest after Christianity (2 billion adherents). Founder of Islam is Muhammad Muhammad was not only the prophet of God but also the head of state. In Muslim nations, there is no separation of church and state. Holy Book Koran 6-13 Five Pillars of Faith Confession of faith Five daily prayers Giving charity Ramadan fast Pilgrimage to Mecca Jihad – holy war Two divisions Sunni and Shiites Conflict gives rise to violent clashes

Religious Population of the World
Insert Figure 6.1

Material Culture Refers to all human-made objects
Concerned with how people make things and who makes what and why. Technology Mix of usable knowledge that society applies and directs toward attainment of cultural and economic objectives 6-15

Material Culture - Technology
Importance to International Companies Enables a firm to be competitive in world markets. Can be sold, or be embodied in the company’s products. Can give a firm confidence to enter a foreign market. 6-16 Enables the firm to obtain better than usual conditions for a foreign market investment. Enables a company with only a minority equity position to control a joint venture. Can change the international division of labor. Is causing major firms to form competitive alliances.

Cultural Aspects of Technology Includes skills in marketing, finance, and management People not always ready to adapt to changes technology brings Technological Dualism The side-by-side presence of technologically advanced and technologically primitive production systems. 6-17 Appropriate Technology Choose the technology that most closely fits the society using it Can be labor-intensive, intermediate or capital- intensive Bommerang Effect Technology sold to copanies in another nation used to produce competing goods

Information Technology Era By the year 2000 the Internet economy Already reached $850 billion. Exceeded the size of the automobile and truck and life insurance industries. Consumption Japanese wide use of automation 6-18

Education Equips a person to take his or her place in adult society
Yardsticks Literacy rate Must verify definition used Kinds, quality and enrollment of schools Amount per capita spent on education Vocationally trained groups Study trends 6-19

Educational Mix European business schools patterned on American model because of Increased competition in the EU Return to Europe of American business school graduates Establishment of American-type schools with American faculties Trend in less developed countries to emphasize humanities, law and medicine 6-20

Education Brain Drain The emigration of highly educated professionals to industrialized nations Reverse Brain Drain The return of highly educated professionals to their home countries. Korea and Taiwan are luring home engineers and scientists 6-21 Women’s Education Fall in illiteracy rate Most governments now provide education for both genders Educated women have fewer, healthier, and better educated children Educated women achieve higher labor force participation and wages

Spoken Language Language is the key to culture, and without it, people find themselves locked out of all but a culture’s perimeter Spoken languages demarcate cultures Switzerland four separate cultures Many languages can exist in a single country, but one usually serves as communication vehicle Lingua franca or link language English primary language of business 6-22

Language Must speak the local language Still need translators
Use back translations to avoid errors Technical words do not exist in all languages Usually resort to English Many cultures avoid saying anything disagreeable 6-23

Unspoken Language Nonverbal communication, such as gestures and body language. Gestures vary tremendously from one region to another Closed doors convey different meanings Office size different in various cultures Conversational distance small in East Gift giving has specific etiquette in each culture Gift or bribe? 6-24

Questionable Payments
Necessary in some countries to obtain action from the government Foreign Corrupt Practices Act prohibits American firms from making questionable payments 6-25

Societal Organization
Kinship Extended family Includes blood relatives and relatives by marriage. This is a source of employees and business connections. Member’s responsibility Although the extended family is large, each member’s feeling of responsibility to it is strong. 6-26 Associations Social units based on age, gender, or common interest, not on kinship. Age Manufacturers of consumer goods are well aware of the importance of segmenting a market by age groups. This segmentation often cuts across cultures.

Societal Organization
Associations Gender As nations industrialize, more women enter the job market and assume greater importance in the economy Free association people joined together by a common bond: political, occupational, religious or recreational 6-27

Understanding National Culture
Hofstede’s Dimensions of Culture Individualism versus Collectivism Large versus Small Power Distance Strong versus Weak Uncertainty Avoidance Masculinity versus Femininity 6-28

World Bank Anti-Corruption Program
We believe that an effective anticorruption strategy builds on five key elements: 1. Increasing Political Accountability 2. Strengthening Civil Society Participation 3. Creating a Competitive Private Sector 4. Institutional Restraints on Power 5. Improving Public Sector Management Source:

Business Culture in Brazil
Brazilians conduct business only through personal connections. There must also be an implicit understanding that the business relationship will be long-term. In Brazil, people quickly move to a first-name basis. Do not, however, use first names until you are invited to do so. Maintain steady eye contact at all times; it is considered impolite to break eye contact. Source: Do not give anything that is obviously expensive. Your generosity will only cause embarrassment or be misinterpreted as a bribe. Avoid giving items in black or purple, since these are the colors of mourning. Moreover, handkerchiefs are also associated with funerals. Brazilians also consider themselves Americans. Consequently, don't use the phrase 'in America' when referring to the United States.

USAID The ability to read and write — or literacy — is a basic skill for people to live and work in today’s world. Yet more than 900 million adults are not literate, primarily in developing countries. More than 125 million children who should be in school are not. For this reason, USAID emphasizes programs of support for basic education and places a special emphasis on improving opportunities for girls, women and other underserved and disadvantaged populations. Source:

FCPA The FCPA covers all entities and individuals engaging in acts within the territory of the United States in furtherance of the prohibited conduct, and it covers U. S. citizens, resident aliens, entities established under U. S. law, and publicly held corporations, including their officers, directors, employees, shareholders and agents, whether foreign or domestic, that are registered with the SEC as an issuer that participates in corrupt practices in any fashion outside the United States. Source:

Buddhism As of June 2001, Buddhists in Taiwan had registered 4,037 temples, 39 seminaries, five universities, three colleges, four high schools, 45 kindergartens, 30 nurseries, five orphanages, five retirement homes, one center for the mentally retarded, 64 institutions for proselytizing, three hospitals, four clinics, 118 libraries, and 28 publishing houses with 26 publications. There were also around 9,866 Buddhist clergy serving the million Buddhists of Taiwan. Source:

World Illiteracy Rates
Source:

7 Natural Resources and Environmental Sustainability
This chapter covers: Business relevance of geography Importance of a country’s location The contribution of a country’s surface features Importance of waterways Discovery and use of mineral resources and energy sources Impact of industrial disasters Natural Resources and Environmental Sustainability International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Appreciate the relevance of four elements of geography Understand the importance of a country’s location in political and trade relationships Comprehend the importance of inland waterways Recognize that climate exerts a broad influence on business Understand why managers must monitor changes in the discovery and the use of energy sources and changes in a nation’s infrastructure Appreciate the impact of industrial disasters Describe major issues of the relationship between environmental sustainability and international business Develop a working definition of a environmentally sustainable business 7-2

Why Switzerland Makes Watches
Mostly mountainous Close to populated lowlands of Western Europe Transportation across mountains expensive Has no mineral resources 7-3

Natural Resources Location Topography Climate Sources of Energy
Non-fuel Minerals Environmental sustainability 7-4

Location Political Relationships
Austria took advantage of its location to Increase trade with the East. Become the principal financial intermediary between Western and Eastern Europe. Strengthen its role as the regional headquarters for international businesses operating in Eastern Europe. Passive processing 7-5

Trade Relationships Geographical proximity
Often the major reason for trade between nations. Delivery faster, freight costs lower The two largest trading partners of the United States—Canada and Mexico—lie on its borders Major factor in formation of trade groups such as EU, NAFTA Southern hemisphere opposite growing season 7-6

Topography The surface features of a region
Differences in topography may require products to be altered Cake mixes Internal combustion engines 7-7 Includes Mountains and Plains Deserts and Tropical Forests Bodies of Water

Mountains and Plains Mountains Divide Markets in Spain Switzerland
China Colombia Population Concentration Mountains also create concentrations of population Insert Fig 7-2 Swiss Map 7-8

Deserts and Tropical Forests
Separate markets Increase the cost of transportation Create concentrations of population 7-9

Deserts and Tropical Forests
Australia Continent the size of the U.S. but with only 19 million inhabitants. Population concentrated Along the coastal areas in and around the state capitals. In the southeastern fifth of the nation 7-10 Tropical Rain Forests Brazilian Amazon Occupies one-half of Brazil Four percent of population Canadian Shield A massive area of bedrock covering one- half of Canada’s land mass

Bodies of Water Attracts people and facilitates transportation
Inland waterways Provide inexpensive access to markets Rhine Waterway Main transportation artery of Europe Carries a greater volume of goods than do the combined railways that run parallel to it Insert Rhine photo 7-11

Bodies of Water Other Significant Waterways
The Amazon River in South America The Parana and Paraguay Rivers in the Mercosur region. The Yangtze (China), the Ganges (India), and the Indus (India) Rivers is Asia. The Great Lakes--St. Lawrence and the Mississippi River in the United States. 7-12

Outlets to the Sea Permit low-cost transportation of goods and people
Africa has 14 of world’s landlocked developing countries Must construct costly, long truck routes Port countries exert considerable political influence 7-13

Climate Climate (temperature and precipitation)
Perhaps the most important element of physical forces Sets the limits on what people can do both physically and economically Climate has some influence on economic development Climate impacts product mix Climate can impede distribution 7-14

Natural Resources Anything supplied by nature on which people depend.
Principal types of natural resources important to businesspeople include Energy Non-fuel minerals 7-15

Energy Non-renewable Fossil fuels Petroleum Coal Gas Renewable
7-16 Renewable Hydroelectric Wind Solar Geothermal Waves Tides Biomass and ocean thermal energy

Energy Petroleum Conventional sources - Oil
Estimates of oil consumption change because New discoveries continue to be made in proven fields. Governments open up their countries to exploration and production. New techniques enable producers to obtain greater output from wells already in operation. Automated, less expensive equipment lowers drilling costs. 7-17

Energy World energy consumption expected to increase by 54 percent from 2001 to 2025 Dramatic increases as countries industrialize, such as China Oil expected to remain dominant source, though non-renewable Will have to commit to alternative energy source when supplies run out 7-18 Insert figure 7-8 energy consumption

Energy Petroleum Unconventional sources Oil sands
Located primarily in Athabasca, Alberta, Canada. Oil-bearing shale Largest source is in Utah, Colorado, and Wyoming. Coal Used primarily in South Africa Natural gas Has been fastest growing source of energy 7-19

Energy Sources of Renewable Energy
Of the eight types, hydroelectric has had an extensive application. Improved technology has resulted in new support for wind and solar energy Wind energy fastest- growing energy technology in the world 7-20

Non-fuel Minerals Nearly all of the world’s chrome, managanese, platinum, and vanadium are produced by South Africa and the former Soviet Union The United States depends on South Africa To supply 79 percent of its platinum, 78 percent of its chromium, 41 percent of it manganese, and 20 percent of its vanadium 7-21

Changes Make Monitoring Necessary
Mineral Resources One of the most fascinating discoveries is the fuel cell. First used by NASA in space capsules Chemically converts fuel directly to electricity without having to burn it 7-22 Natural Resources Modifications of infrastructure of great significance to business New highways and railways reduce delivery times Chunnel connects England and France Oresund Bridge links Denmark and Sweden

Destruction of Natural Resources
Historically nations have paid little attention to contamination and destruction of natural resources Tragedies have forced officials to recognize Ixtoc 1 Well Blow Out Chernobyl Nuclear Disaster Alaskan Oil Spill Eco-Terrorism in Gulf War Aurul Mine Collapse Events have led to “green approach” 7-23

Sustainable Business An economic state where demands placed on environment can be met without reducing capacity of environment for future generations Three characteristics of sustainable business practices Limits Interdependence Equity in distribution 7-24 Economic Challenges Trade and market liberalization Eco-efficiency Financial impact Subsidies New production materials Production and consumption patterns

Stakeholder Based View
Insert Fig 7-16

China Oil Production and Consumption
7-27

U.S. Oil Imports 7-28

World Energy Consumption
7-29

European Wind Capacity
7-30

8 Economic and Socioeconomic Forces International Business
This chapter covers: The purpose of economic analysis Economic and socioeconomic dimensions Consumption patterns and purchasing power Labor costs The significance of foreign debt Birthrate trends and its implications Indicative plans Economic and Socioeconomic Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Understand the purpose of economic analysis
Recognize the economic and socioeconomic dimensions of the economy Understand the importance of a nation’s consumption patterns and the significance of purchasing power parity Understand the degree to which labor costs can vary from country to country Understand the significance for businesspeople of the large foreign debts of some nations Ascertain the reasons for the worldwide downward trend in birthrates and its implications for businesspeople 8-2

International Economic Analyses
Economic Analysis When a firm enters overseas markets, economic analyses become more complex Should provide data on both actual and prospective markets 8-3

International Economic Analysis
Sources for Economic Information Reports from central or international banks American chambers of commerce Commercial officers in U.S. embassies The United Nations and the World Bank The International Monetary Fund The Organization for Economic Cooperation and Development 8-4

Dimensions of the Economy
Important Economic Indicators Gross National Product Distribution of income Private consumption expenditures Personal ownership of goods Private investment Unit labor costs Exchange rates Inflation rates Interest rates 8-5

Gross Domestic Product (GDP) Or Gross National Income (GNI) The total of all goods and services produced in a country in a given year, including production by foreign firms within a country’s borders 8-6 In order to compare the purchasing power of nations managers need to know among how many people GDP is divided GDP Or GNI/Capita Generally the higher the value, the more advanced the economy.

Income Distribution A measure of how a nation’s income is apportioned among its people Data gathered by the World Bank Published yearly in the World Development Indicators Income is more evenly distributed in richer nations Income redistribution proceeds very slowly Income inequality increases in early stages of development but reverses in later stages 8-7

Private Consumption Disposable income After-tax personal income Discretionary income Disposable income less essential purchases Data available from UN and World Bank 8-8

Unit labor costs Total direct labor costs divided by units produced. Countries with slower-rising unit labor costs attract management’s attention. 8-9 Reasons for relative changes in labor costs Compensation Productivity Exchange rates International firms must keep a close watch on labor rates around the world

Example of how large foreign debts affect an international firm If a large part of the foreign exchange a nation earns cannot be used to import components used in local products, then Local industries must manufacture the part or companies that import the part must stop production in the home country

Socioeconomic Dimensions
Total Population Most general indicator of potential market size First characteristic of the population that analysts examine Population size, used alone, is not a good indicator of economic strength and market potential 8-11

Total Population and GNP Where GNP increases faster than the population Probably an expanding market. Where population increases faster than GNP Possible market contraction. This situation may suggest a potential area of political unrest may be present. Example is Egypt

Age Distribution Generally, because of high birth and fertility rates Developing countries have more youthful populations than do industrial countries Birthrates are decreasing worldwide Population of developing countries account for over three-quarters of the world’s population 8-13

Population Growth Figure 8.3 8-14

Forces Reducing Birthrates
Government supported family planning programs Improved levels of health, education and status for women More even distribution of income Greater degree of urbanization 8-15

Concern in Developed Nations Declining birthrates are causing concern in the governments of industrialized nations. An increasing number of young Europeans are not marrying. Those who are marrying, do so later and are having fewer children. By the year 2025, the present 9 percent unemployment rate in the EU will be replaced by a shortage of workers. 8-16

Concern in Developed Nations (Japan) By 2025, Japan’s population age 65 and older will make up 26.8 percent of its total population. This proportion compares to 18.5 percent of this age group in the U.S. By the year 2025, Japan will have twice as many old people as it has children. 8-17

Population Density A measure of the number of inhabitants per area unit. Densely populated countries tend to make product distribution and communications simpler. Less costly than less densely populated countries 8-18 Population Distribution A measure of how the inhabitants are distributed over a nation’s area. Changing population distribution Rural-to-urban shift as people move to cities in search of higher wages and more conveniences.

Rural-to-Urban Shift Table 8.6 8-19

Increase in the number of working women May require marketers to alter the promotional mix. Results in larger family incomes. Results in a greater market for convenience goods. 8-20

United States R&D % of GDP
8-23

Consumption Groups in Hungary
8-24

Georgia State Average Annual Pay
8-25

10 Places With the Lowest Birth Rates Worldwide
Average number of children per woman, Source: United Nations, World Population Prospects: The 2002 Revision (medium scenario), 2003. 8-26

9 Political Forces International Business by Ball, McCulloch, Frantz,
This chapter covers: Ideological forces that affect business Privatization Sources and reasons for terrorism Steps a traveling business executive should take The importance of government stability Power sources of international organizations Country risk assessment Political Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Identify the ideological forces that affect business Understand that although most governments own businesses, they are privatizing them in growing numbers Explain the changing sources and reasons for terrorism Explain steps that traveling international business executives should take to protect themselves from terrorists Understand the importance to business of government stability and policy continuity Discuss the power sources of international organizations, labor unions, and international companies Understand country risk assessment 9-2

Ideological Forces Communism
The belief that the government should own all the major factors of production. With exceptions, all production in these countries is done by state- owned factories and farms. Labor unions are government-controlled 9-3

Communism Conceived by Karl Marx as “classless society”
Typically involves seizure of power and maintenance of power by stern suppression Government will take over private business Compensation for expropriated property rare Generally confiscated versus expropriated 9-4 Basic reasons for collapse of communism include production focused on military not consumer needs Centrally planned production goals not related to customer demand Enterprises lied regularly to report desired outputs

Ideological Forces Capitalism
The capitalist, free enterprise ideal is that all the factors of production should be privately owned. Under ideal capitalism Government is restricted to those functions that the private sector cannot perform. National defense. Police, fire, and other public services. Government-to-government international relations 9-5

Ideological Forces Socialism
Advocates government ownership or control of the basic means of production, distribution, and exchange Profit not an aim Socialist governments frequently perform in ways not consistent with the doctrine Many European countries have practiced socialism Great Britain, France, Spain, Greece, Germany 9-6

Socialism Socialism in Developing Countries
Government typically owns and controls most of the factors of production Shortages of capital, technology, and skilled management and labor are common Many of the educated citizens connected with government 9-7

Conservative or Liberal
A person who wishes to minimize government activities and maximize private ownership and business. Right wing is a more extreme conservative position. 9-8 Liberal In the U.S., a person who urges greater government involvement in most aspects of human activities. Left wing is a more extreme liberal. Terms have entirely different or opposite meanings outside the U.S.

Government Ownership of Business
Why Firms are Nationalized To extract more money from the firms. The government suspects that the firms are concealing profits The government believes it could run the firms more efficiently and make more money Ideological—when left-wing governments are elected, they sometimes nationalize industries To save dying industries and maintain jobs Because government money has been put into the firm 9-9

Unfair Competition? Private-owned companies complain that government owned companies Can cut prices unfairly. Get cheaper financing. Get government contracts. Get export assistance. Can hold down wages with government assistance. Receive direct subsidies. 9-10

Privatization Britain’s Margaret Thatcher leader of privatization movement Airports, Garbage, Postal Services frequent examples Even China is allowing state-run enterprises to diversify ownership Trend all over the world – except in the United States In most cases the buyers have financial success 9-11

Privatization Anywhere Any Way
Privatization does not always involve ownership transfer from government to private entities. Activities previously conducted by the state may be contracted out. Governments may lease state-owned plants to private entities. Governments may combine a joint venture with a management contract with a private group to run a previously government-operated business 9-12

Privatizations by Region
9-13

Government Protection
Terrorism Since the 1970s, the world has been plagued by terrorism. A common denominator of these terrorist groups has been hatred of the social, religious, economic, and political orders they find in the world. 9-14

World Wide Terrorist Groups Al Qaeda, IRA, Hamas, ETA, Japanese Red Army, German Red Army Faction Government-Sponsored Terrorism: An Act of War In addition to the Soviet Union and its European satellites, other countries have financed, trained, and protected terrorists These countries include Iran, Iraq, Libya, Syria, Afghanistan, Cuba, Lebanon, North Korea, and Sudan 9-15

Kidnapping for Ransom By 1986, Colombia and Peru had become the most dangerous places for American executives. Top executives from the U.S. practice “commando management” to avoid the risk of being kidnapped. They arrive in Bogota or Lima as secretly as possible, meet for a few days with local employees, and fly off before kidnappers learn of their presence. Possible protection being tried in Mexico is a chip implant 9-16

Countermeasures by Industry
K&R Insurance The world’s largest kidnapping and extortion underwriting firm is located in London Antiterrorist Schools Companies to handle negotiations with kidnappers Checklists for executives 9-17

Terrorism Changes Ethnoterrorism
Tribe against tribe, race against race, religion against religion Nuclear Terrorism Failing security standards at former Soviet installations permit uranium to be stolen, then sold to terrorists 9-18 Chemical and Biological Terrorism Recipes can be downloaded from the internet Islamic Fundamentalist Terrorism Hatred of Christians, Hindus, Jews, secularists, democrats and the West is unrelenting

Government Stability Stable Government
Maintains itself in power and its fiscal, monetary, and political policies are predictable and not subject to sudden, radical changes. Unstable Government Cannot maintain itself in power or makes sudden, unpredictable, or radical policy changes Instability can be caused by revolution, invasion from abroad, or racial conflict

Traditional Hostilities
Long-standing enmities between tribes, races, religions, ideologies, or countries. Arab Countries—Israel Hutus and Tutsis in Burundi and Rwanda Tamils and Sinhalese in Sri Lanka Albanians, Bosnians, Croats, and Serbs in the Former Yugoslavia South Africa 9-20

International Organizations
United Nations (UN) UN personnel advise member-countries on such matters as tax, monetary, and fiscal policies. The UN is active in the harmonization of laws affecting international trade. The UN has drafted a code of conduct for multinational business. The UN Conference on Trade and Development Credited with having influenced the International Monetary Fund to ease its restrictions on loans to developing countries. 9-21

International Organizations
IMF Influence on fiscal and monetary policies WTO Lowered barriers to trade OPEC EU Organization for Economic Cooperation and Development (OECD) Labor Unions 9-22

Country Risk Assessment (CRA)
Types of Country Risks Political Wars, revolutions, coups Economic Financial BOP deficits Labor Low productivity, militant unions Legal Laws may be changed Terrorism 9-23 Information for CRA depends on Nature of business Length of time required Consulting and Publishing firms perform CRA BERI Control Risks Information Services EIU Euromoney Strategic Forecasting, Inc.

Country Risk

Lessons of International Debt Crisis
First, many developing countries are vulnerable to external shocks. Second, the development of the debt crisis has shown that the economic polices of debtor countries have a decisive impact on default risk. Third, sustained economic growth is a major requirement for high-debt countries to service their debt and reduce its burden. Fourth, the social and potential political costs of overindebtedness combined with austerity are proving high. Fifth, is the global ripple effect of seemingly independent risks of economic shock. 9-25

Current Communist Countries
China - Population: 1,286,975,468 (July 2003 est.) Capital: Beijing; GDP per capita: purchasing power parity - $4,400 Cuba – Population: 11,263,429 (July 2003 est.) Capital: Havana; GDP per capita: purchasing power parity - $2,300 Laos - Population: 5,921,545 (July 2003 est.) Capital: Vientiane GDP per capita: purchasing power parity - $1,700 North Korea - Population: 22,466,481 (July 2003 est.) Capital: Pyongyang GDP per capita: purchasing power parity - $1,000 Vietnam - Population: 81,624,716 (July 2003 est.) Capital: Hanoi GDP per capita: purchasing power parity - $2,250 9-26

Privatization Revenues in Developing Countries, by Region, 1990-99 ($US billions)
9-27

Privatization Revenues in Developing Countries, by Sector, 1990-99 ($US billions)

Motivations for Bioterrorism

10 countries which are the locations for 90 percent of all executive kidnappings
Colombia Italy India Mexico Pakistan Peru Philippines Spain Brazil Venezuela 9-30

10 Legal Forces International Business by Ball, McCulloch, Frantz,
This chapter covers: Legal forces that confront international business The importance of foreign law International contracts Protection of intellectual property Purposes of taxes Enforcement of antitrust laws Product liability Legal Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Appreciate the complexity of the legal forces that confront international business Recognize the importance of foreign law Understand contract devices and institutions that assist in interpreting international contracts Anticipate the need and methods to protect your intellectual properties Understand that many taxes have purposes other than to raise revenue Discuss enforcement of antitrust laws Appreciate the risk of product liability legal actions Discuss U.S. laws that affect international business operations 10-2

International Legal Forces
Rule of law allows foreign businesses to know interests will be protected Public International Law Legal relations between governments Private International Law Laws governing transactions of individuals and companies 10-3

Sources of International Law
The most important source is found in bilateral and multilateral treaties between nations. Treaties are agreements between countries and also may be called conventions, covenants, compacts, or protocols United Nation’s International Court of Justice creates law when it decides disputes U.S. Congress determines whether treaties have precedence over other federal laws and treaties International rules derived from customs and usage 10-4

Extraterritoriality The attempt to enforce domestic laws outside of a country’s borders Practiced by many countries including the U.S. and EU Not done through force, but by traditional legal means 10-5

International Dispute Settlement
Litigation in the United States The U.S. has well-developed court systems that facilitate litigation. These court systems handle both criminal and civil matters. One reason many people outside the U.S. dislike litigation in the U.S. is the process of discovery. Unlike most other countries, the U.S. has two major court systems. The federal court system and the system of state courts. 10-6

Issues Surrounding Performance of Contracts
A major problem usually involved in cross-border litigation is The question of which jurisdiction’s law should apply and in which location the litigation should occur. Each country has laws to determine this Final decision rests with the courts 10-7 United Nations Solutions Many countries, including the U.S., have ratified the UN Convention on Contracts for International Sales of Goods (CISG) CISG established uniform legal rules to govern international sales contracts CISG is automatically applied

Issues Surrounding Performance of Contracts
Private Solutions, Arbitration Instead of going to court in any country, companies may opt for arbitration. Quicker Less expensive More private Many cases handled in Paris, London and NY 10-8

Enforcement of Foreign Arbitration Awards
The UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards The U.S. and most UN member-countries of industrial importance have ratified this convention Binds ratifying countries to compel arbitration when the parties have so agreed in their contract and to enforce the resulting awards 10-9

Intellectual Property
Intellectual property includes Patents Trademarks Trade names Copyrights Trade secrets All result from the exercise of someone’s intellect. Each country protects in their own fashion 10-10

Patents (Protection) International Convention for the Protection of Industrial Property European Patent Organization The World Intellectual Property Organization 10-11 Trademarks Protection varies from country to country which may be from 10 to 20 years. Madrid Agreement of 1891 General American Convention for Trademark and Commercial Protection. European Trademark Office

Trade Names Trade names are protected in all countries that adhere to the Convention for the Protection of Industrial Property Copyrights Protection is provided under the Berne Convention of adhered to by 77 countries Universal Copyright Convention of 1954 adopted by 92 countries 10-12

Common Law or Civil Law Common Law
Courts made common law as they decided individual cases Judges in a common law jurisdiction have the power to interpret the law 10-13 Civil Law Civil law was made by king, princes, or legislatures issuing decrees or passing bills Judges in a civil law jurisdiction have the power only to apply the law

Differences between the U.S. and England
England has a split legal profession with barristers and solicitors No jury for civil court actions No contingency fee in court cases The losing party in England must pay most of the court costs of the winning party In England, parties generally are entitled to receive a list of witnesses with a brief explanation of the expected testimony. 10-14

Standardizing Laws Many attempts have been made to standardize laws among various nations International business flows much better with a uniform set of rules Attempts include Tax conventions and treaties Antitrust cooperation International Center for Settlement of Investment Disputes UN Convention on International Sale of Goods International Organization for Standardization (ISO) International Electrotechnical Commission (IEC) 10-15

Taxation Nonrevenue tax purposes Redistribute income
Discourage consumption of certain products Encourage the purchase of domestic rather than imported products To discourage investment abroad To achieve equality of taxes paid 10-16

National Differences of Approach
Tax Levels Range from relatively high in some Western European countries to zero in tax havens Some countries have capital gains taxes, and some do not A capital gain is realized when an asset is sold for an amount greater than its cost 10-17 Tax Types Capital gains tax Income tax Common in industrialized countries Value-added tax Tax based on the value of goods and services Used in Europe WTO permits rebate on VAT Unitary tax

Tax Laws and Regulations
From country to country, the complexity of tax systems differ Many consider tax laws and regulations of the U.S. the most complex Compliance with tax laws and their enforcement vary widely Germany and U.S. strict, Italy and Spain relatively lax Other differences include Tax incentives, exemptions, costs, depreciation allowances, foreign tax credits, timing, and double corporate taxation 10-18

Taxation Tax Treaties or Conventions
Differences between nations’ tax practices have resulted in many signing tax treaties with each other. The presence or absence of a tax treaty is often a factor in international business and investment location decisions. The U.S. has tax treaties with over 50 countries. 10-19

Taxation Ecommerce and the ease of shifting operations and residences is making it easier to avoid taxes U.S. applies National Tax Jurisdiction, taxing citizens regardless of where they live and work Almost all other countries apply Territorial Tax Jurisdiction which exempts citizens who neither work nor live in the country 10-20

Antitrust Laws Antitrust laws are intended to prevent monopolies
The U.S. antitrust laws are strict vigorously enforced The EU is becoming more active in the antitrust field Differences between U.S. and other nations’ antitrust laws include the per se concept and the application of both civil and criminal penalties The U.S. and the EU have attempted to enforce their antitrust laws extraterritorially Japan’s Fair Trade Commission has been nicknamed the “toothless tiger”, but the Japanese companies are incorporating antitrust thinking into their strategies 10-21

Tariffs, Quotas, and Other Trade Obstacles
Purposes of tariffs To raise revenue for the government To protect domestic producers Quotas limit the number or amount of imports For protection U.S. can impose retaliatory barriers 10-22 Other protection obstacles include Health requirements Packaging requirements Language requirements Weak patent or trademark protection Quarantine periods Voluntary Restraint Agreements

Product Liability Product Liability
Holding a company and its officers and directors liable and possibly subject to fines or imprisonment when their product causes death, injury, or damage Strict Liability Holds the designer/manufacturer liable for damages caused by a product without the need for a plaintiff to prove negligence in the product’s design or manufacture 10-23

Product Liability Differences in U.S. law
No restrictions on amount of money damages that can be awarded Rigid enforcement of strict liability, no need to prove negligence U.S. lawyers take cases on a contingency fee basis Outside the U.S., when a defendant wins, the plaintiff must pay all court costs U.S. Product liability cases are heard by juries Discovery available in U.S. 10-24

Currency Exchange Controls
Exchange Control Generalities In countries where hard foreign currency is scarce, a government agency allocates it. People entering such a country must declare how much currency of any kind there are bringing in and also how much they are taking out. The intent is twofold To discourage travelers from bringing in the host country’s national currency brought abroad at a better exchange rate To encourage travelers to bring in hard foreign currency 10-25

U.S. Laws That Affect U.S. Firms International Business
Federal Employment Laws Title VII of the CRA of 1964 ADEA and ADA Foreign Corrupt Practices Act (FCPA) Questionable or dubious payments by American companies to foreign officials revealed in 1970’s Congress passed FCPA outlawing bribery, but not “grease” payments Accounting Law – Sarbanes-Oxley Act Established reporting requirements 10-26

Current International Court of Justice
President Shi Jiuyong (China) Vice-President Raymond Ranjeva (Madagascar) Judges Gilbert Guillaume (France) Abdul G. Koroma (Sierra Leone) Vladlen S. Vereshchetin (Russian Federation) Rosalyn Higgins (United Kingdom) 10-27 Gonzalo Parra-Aranguren (Venezuela) Pieter H. Kooijmans (Netherlands) Francisco Rezek (Brazil) Awn Shawkat Al- Khasawneh (Jordan) Thomas Buergenthal (United States of America) Nabil Elaraby (Egypt) Hisashi Owada (Japan) Bruno Simma (Germany) Peter Tomka (Slovakia)

KEY EVENTS IN A MULTILATERAL TREATY
10-28

Facts and figures on International Court of Arbitration in 2003
580 Requests for Arbitration were filed with the ICC Court; those Requests concerned 1,584 parties from 123 different countries and independent territories; in 11% of cases at least one of the parties was a state, parastatal or public entity; the place of arbitration was located in 47 different countries throughout the world; arbitrators of 69 different nationalities were appointed or confirmed under the ICC Rules; the amount in dispute exceeded one million US dollars in 55,3% of new cases; 369 awards were rendered 10-29

International Standards Organization
10-30

President Lyndon B. Johnson signs the Civil Rights Act of 1964, July 2, 1964
10-31

11 Financial Forces International Business by Ball, McCulloch, Frantz,
This chapter covers: The foreign exchange markets Foreign exchange quotations Currency exchange risks Currency exchange controls How financial forces affect business Sovereign debt Small business in a developing country Financial Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Realize that money is made, and lost, in the foreign exchange markets Understand foreign exchange quotations, including cross rates Recognize currency exchange risks Understand currency exchange controls Understand financial forces that affect business Explain sovereign debt, its causes, and its solutions Recognize the role of small business in a developing country 11-2

Uncontrollable Financial Forces
Foreign Currency Exchange Risks National Balances of Payment Taxation Tariffs National monetary and fiscal policies Inflation National business accounting rules 11-4

Fluctuating Currency Values
Most currencies in the world are free to fluctuate against each other Fluctuations may be quite large Financial managers must understand how to protect against losses or optimize gains Another risk is encountered when a national suspends or limits convertibility of its currency International currency exchange quotes can be found in business publications 11-5

Foreign Exchange Quotations
In the world’s currency exchange markets the U.S. dollar is the common unit being exchanged for other currencies Reasons for the continued central position of the U.S. dollar include that the U.S. dollar is the main central reserve asset of many countries is the most used vehicle currency and intervention currency is in great demand worldwide as a result of its safe haven aspect and its universal acceptance 11-6

Foreign Exchange Quotations
Exchange Rates By using the reciprocal of the US$ equivalent rate, the currency per US$ rate can be reached and vice versa. 1 US$ equivalent rate = currency per US$ rate currency per US$ rate = US$ equivalent rate 11-7

Exchange Rates Spot rates Forward rate
The exchange rate between two currencies for delivery within two business days Forward rate The exchange rate between two currencies for delivery in the future. Commonly 30, 60, 90, or 180 days 11-8

Exchange Rates Trading at a premium
When a currency’s forward rate quotes are stronger than spot Trading at a discount When a currency’s forward rate quotes are weaker than spot Premium or a discount depends on the expectations of the world financial community, businesses, individuals, and governments about what the future will bring 11-9

Exchange Rates Cross Rates
Currency exchange rates directly between non-U.S. dollar currencies Use of the Japanese yen and European euro is increasing 11-10

Currency Exchange Controls
Government controls that limit the legal uses of a currency in international transactions Value of currency is arbitrarily fixed at a rate higher than its market value If you see “official rate” next to a currency rate quotation, that country has currency exchange controls in place 11-11 A black market typically surfaces as a result of currency exchange controls However, this type of currency exchange transaction is illegal The black market is rarely able to accommodate transactions of the size involved in a multinational business

Balance of Payments (BOP)
The state of a nation’s BOP can tell about the state of that country’s economy. If the BOP is slipping into deficit the government is probably considering one or more market or nonmarket measures to correct or suppress that deficit Currency devaluation or restrictive monetary or fiscal policies to induce deflation are likely Currency or trade controls may be near 11-12

BOP If BOP slipping into deficit
Companies may want to start shopping for export incentives Export incentives include tax breaks, lower-cost financing, foreign aid, and other government related incentives to make exporting easier and more profitable 11-13

Taxation Tariffs and duties used interchangeably
Taxes on imported goods Important for business to minimize them Many tariffs have been lowered or abolished world wide If a business can lower taxes, it can lower prices to customers 11-14 Taxation in different countries Income tax is generally the biggest revenue earner for governments Other types of taxes include sales or value-added taxes on goods or services capital gains taxes, property taxes, and social security

Inflation Inflation’s Effects on Interest Rates
The inflation rate determines the real cost of borrowing Real interest rates are found by subtracting inflation from the nominal interest rates When borrowed money is repaid in the future after inflation, it is worth that much less to the lender 11-15

Inflation Monetary and Fiscal Policies Affect Inflation
Monetary policies control the amount of money in circulation, whether it is growing, and, if so, at what pace Fiscal policies address the collecting and spending on money by governments 11-16

Inflation and the International Company
High inflation rates Encourage borrowing because the loan will be repaid with cheaper money Bring high interest rates Discourage lending Make capital expenditure planning more difficult Cause the cost of goods and services to rise Tend to cause BOP deficits Could lead to more restrictive fiscal or monetary policies, currency controls, export incentives, and import obstacles 11-17

Accounting Practices Vary widely from country to country
Must use host country’s practices then translate into home country practices U.S. uses Financial Accounting Standards Board Establishes GAAP Rule based Rest of the world follows International Accounting Standards Board Principle based 11-18

Countries Went Bust The sovereign debt crisis surfaced during the 1980s Poland’s sovereign debt crisis occurred in 1981 The sovereign debt crisis for Mexico, Brazil, Argentina, and others occurred in 1982 and later IMF took lead in resolving these crises, BIS made bridge loans in the interim The immediate causes of the growing country debts were the jumps in oil prices 11-19

Debt Problem Solutions
Short-Term Solutions Rescheduling of debts that countries were unable to pay as they came due Renegotiations are becoming more difficult BIS, commercial banks, and central banks are reluctant to come up with more money IMF’s resources are limited 11-20 Long-Term Solutions The Baker Plan Market-oriented strategies to encourage growth and bring inflation under control The Brady Plan Private banks with money backed by funds from IMF, World Bank, and developed country governments

The three mechanisms of the Brady debt relief The exchange of old debt for new at a discount The exchange of old debt for new at a lower interest rate The buying back of debt from creditor banks at a discount This mechanism has resulted in debtor countries buying their own debt and retiring it 11-21

The Paris Club, which is a group of Western creditor governments forgave half of Poland’s debt ($17.5 billion) The U.S. forgave the Egyptian debt as an expression of thanks for Egypt’s support in the war against Iraq 11-22 The World Bank, the IMF, and the Paris Club approved a plan to relieve the massive debt load of some of the world’s most heavily indebted poor countries (HIPC) Assistance can be defended on a humanitarian basis Most of these countries are in sub-Saharan Africa

United States in Debt Net negative international investment position
is the difference between the value of overseas assets owned by Americans and the value of U.S. assets owned by foreigners Differences in U.S. debt First, over $300 billion of the U.S. foreign-owned assets are obligations of the U.S. Treasury or U.S. corporations traded daily in world financial markets Second, U.S. foreign assets are often measured at book value which results in an estimated undervaluation of up to $200 billion Third U.S. assets abroad reportedly earn more in interest and dividend per dollar of investment than foreign holdings earn in America Fourth, It is denominated in U.S. dollars 11-23

Sample Rates Bid vs. Offer
AUD/USD BID 0.6979 OFFER 0.6989 EUR/CHF 1.5447 1.5457 EUR/CZK EUR/DKK 7.4375 7.4395 EUR/GBP EUR/JPY 133.68 133.78 EUR/USD GBP/CHF GBP/JPY 196.57 196.77 11-24

Australian Currency 11-25

BOP Data -- 2000 ($millions)
U.S. BOP 2002 Category Receipts Payments Net I. Current Account A. Merchandise Account (Exports/Imports) 848,678 -1,224,417 -375,739 B. Income Account (Rents, Interest, Profits) 352,866 -367,658 -14,792 C. Transfers -54,136 Current Account Balance -444,667 II. Capital Account A. Foreign Investment in the U.S. 1,024,218 B. U.S. Investment Abroad -580,952 C. Statistical Discrepancy 1,401 Capital Account Balance 444,667 III. Balancing Account (Official Reserve Transfers) Source: Economic Report of the President 2002

U.S. Inflation Rates per CPI & RPI
Retail Price Index Consumer Price Index 11-27

List of 41 highly indebted poor countries
Angola Benin Bolivia Burkina Faso Burundi Cameroon Central African Republic Chad Congo Congo, Dem Rep. Côte d'Ivoire Ethiopia The Gambia Ghana Guinea Guinea-Bissau Guyana Honduras Kenya Lao PDR Liberia Madagascar Malawi Mali Mauritania Mozambique Myanmar Nicaragua Niger Rwanda Sierra Leone São Tomé Principe Senegal Somalia Sudan Tanzania Togo Uganda Vietnam Yemen, Rep. of Zambia

12 Labor Forces International Business by Ball, McCulloch, Frantz,
This chapter covers: Forces that affect availability of labor Reasons people leave their home countries Guest workers The U.S. immigration system Labor productivity Women’s labor Labor unions Labor’s voice in management Labor Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Recognize forces beyond management control that affect the availability of labor Understand the reasons that cause people to leave their home countries Discuss guest workers Understand the basics of the immigration system in the U.S. Discuss labor productivity Understand women’s labor, employment and social roles Discuss differences in labor unions among countries Understand how labor is getting a voice in management 12-2

Introduction Quality, quantity, and composition of labor force of great importance to an employer Labor Quality Refers to the attitudes, education, and skills of available employees Labor Quantity Refers to the number of available employees with the skills required to meet an employer’s business needs 12-3

Labor Mobility Labor Mobility
The movement of people from country to country or area to area to get jobs Immigration Refers to the process of leaving one’s home country to reside in another country For people who are not citizens of the U.S., the U.S. can be a difficult country to enter 12-4 The Immigration and Naturalization Service (INS) in 2003 became The Bureau of U.S. Citizenship & Immigration Services (USCIS) as part of the Department of Homeland Security (DHS) USCIS has two conflicting missions Allow legal immigrants in Keep illegal immigrants out

Immigration The U.S. is a nation of immigrants
Immigration is a federal matter in the U.S. The first law limiting immigration passed in 1921 Congress amended the immigration laws many times through the years In 1965 Congress adopted a system based on family reunification and employment skills In 1986 Congress passed the Immigration Reform and Control Act making it a crime to hire unauthorized immigrants Employment eligibility is verified by completion of an I-9 form 12-5

Nonimmigrant Visas Nonimmigrant Visas Major visa categories
Issued to those coming to the U.S. for temporary visit Usually no more than six years Most (96 percent visitors to the U.S.) come for temporary visits Major visa categories The B visa is issued for short-term stay 12-6 The E visa is for noncitizens coming to the U.S. to carrying on trade between the U.S. and a noncitizen’s home country The F visa is for students The H visa is for workers The I visa is for members of the media The J visa is for exchange scholars The L visa is for intracompany transferees

Immigrant Visas For individuals who want to remain permanently in the U.S. Individuals receiving immigrant visas are classified as permanent residents Often called a “green card” Two main categories for the issuance of immigrant visas Family reunification Employment-based immigration 12-7

Refugees/Asylum Seekers
People fleeing persecution may request asylum The reasons people move include Economic globalization Population growth in developing countries New technology that allows immigrants to maintain contact with family Technological improvements in transportation For political reasons To escape adverse situations 12-8

Standard for Admission
For asylum, must establish a well-founded fear of persecution based on Race Religion Nationality Membership in a particular group United Nationals High Commission for Refugees (UNHCR) created by UN Assists refugees 12-9 Refugees are not welcome in many countries Poor Uneducated Hard to find work Refugees, however, supported U.S. economic growth Many U.S. business rely on non-U.S. citizen workers Many high-tech workers come under H-1B visa

Brain Drain Record numbers of immigrants are moving to OECD countries in search of jobs When skilled workers migrate from developing countries they do so for professional opportunities and economic reasons This “brain drain” has become a serious problem for developing countries Reverse “brain drain” The growth of outsourcing and the movement of highly educated, technologically skilled employees and research scientiests to other countries 12-10

Guest Workers People who go to a foreign country legally to perform certain types of jobs Guest workers provide the labor host countries need Guest workers are desirable as long as the economies are growing However, when economies slow, fewer workers are needed and problems appear 12-11

Labor Force Productivity
Measures how many acceptable units are produced by a worker during a given time and the cost per unit U.S. led other industrialized countries in rise in labor productivity Up to a quarter of income growth per worker in the U.S. can be attributed to better education Greater productivity results in greater investment in Research & Development (R&D) 12-12

Considerations in Employment Policies
Social Status Culture important with respect to labor force India operates rigid caste system Level established at birth Cannot change during lifetime Impacts employment Japan still maintains caste system Great Britain classifies based on accents 12-13 Sexism Acceptability of women as full participants in the work force ranges from Relatively advanced in the U.S. and Western Europe to virtually nonexistent in many countries In Japan and the Middle East women are encountering major problems in making or retaining progress

Women’s Education Studies show a direct correlation between women’s education and Birthrates Child survival Family health A nation’s overall prosperity Low levels of education are present where girls are forced into prostitution or brutalized 12-14

Minorities Traditional Societies Minorities
Tribal, nomadic states of people before they turn to organized agriculture or industry Minorities Usually a relatively smaller number of people Identified by race, religion, or national origin who live among a larger number of different people Such minorities may be immediately available, bringing financial and managerial skills to the employer However, minorities are often unpopular with the majority and discrimination is common 12-15

Employer-Employee Relationships
Labor Market The pool of available potential employees with the necessary skills within commuting distance from an employer A company must study the labor market when considering whether to invest in a country Sources include Foreign Labor Trends Handbook of Labor Statistics Yearbook of Labor Statistics 12-16

Labor Strikes Questions to ask Was the period of the strike abnormal?
Were the strikes peaceful? Were the strikes industry wide? Were the strikes wildcat? Do the unions and workers abide by the labor agreements? 12-17

Labor Unions European Labor Unions
Identified with political parties and socialist ideology U.S. Labor Unions Unionism in the U.S. has been more pragmatic than political Also more concerned with the immediate needs of workers 12-18 Japanese unions are enterprise-based rather than industry wide As a result, unions tend to identify strongly with the interests of the company However, Japanese workers are reported to be the least satisfied with their jobs in the developed world

Labor Legislation Collective Bargaining in the U.S.
The process in which a union represents the interests of everyone in a bargaining unit in negotiations with management Labor Legislation in Europe Government’s role is more active Wages and working conditions are frequently legislated 12-19

Labor Legislation Labor Legislation in Latin America
Governments are very active in employer- employee relationships Frequently because the unions are weak and the union leaders are inexperienced or uneducated Labor Legislation in Germany and France Labor negotiations are conducted on national or at least regional levels 12-20

Labor Trends Strikes or labor disputes have fallen dramatically in the last 10 years Union membership has been in steady decline Employers have made efforts to keep union-free More women and teenagers in workforce Unions have been successful Industrial jobs are declining 12-21

Multinational Labor Activities
Internationalization of companies creates opportunities for them to escape the reach of unions To combat this danger unions have begun to Collect and disseminate information about companies Consult with unions in other countries Coordinate with those unions’ policies and tactics Encourage international companies’ code of conduct Multinational unionism is developing 12-22

The U.S. union federation, the AFL-CIO Cooperates with labor organizations worldwide International Labor Organization (ILO) Purpose is to promote social justice and internationally recognized human and labor rights worldwide Trade Union Advisory Committee to the OECD An international trade union organization with consultative status with the OECD and its various committees 12-23

Worker Participation in Management
Codetermination Participation by workers in a company’s management Began in Germany Has spread to other European countries and Japan Referred to as worker participation in the U.S. European Union requires Works Councils 12-24

Female labor force participation rates by age group, selected economies
12-25

Annual hours worked per person, selected developed (industrialized) economies
12-26

Percentage change in real wages, selected economies

Labor productivity, total economy, selected developed (industrialized) economies
12-28

Top 10 States With Most Union Members in 2000 (in thousands)
California 2,295 New York 1,958 Illinois 1,046 Michigan 938 Ohio 879 Source: U.S. Bureau of Labor Statistics Pennsylvania 870 New Jersey 762 Texas 505 Washington 471 Wisconsin 446 Total 10,170 12-29