8/19/2019 International Business Collier Evans
1/501
International Business 9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
2/501
Chapter 1
Globalization
8/19/2019 International Business Collier Evans
3/501
1-3
What Is Globalization?
Globalization - the shift toward a moreintegrated and interdependent worldeconomy
The world is moving away from self-contained national economies toward aninterdependent, integrated global
economic system
8/19/2019 International Business Collier Evans
4/501
1-4
What Is The
Globalization of Markets?Historically distinct and separate national
markets are merging
It no longer makes sense to talk about the
“German market” or the “American market” Instead, there is the “global market”
falling trade barriers make it easier to sell globally
consumers’ tastes and preferences are converging onsome global norm
firms promote the trend by offering the same basicproducts worldwide
8/19/2019 International Business Collier Evans
5/501
1-5
What Is The
Globalization of Markets?
Firms of all sizes benefit and contribute tothe globalization of markets
97% of all U.S. exporters have less than 500
employees
98% of all small and mid-sized Germancompanies participate in international markets
8/19/2019 International Business Collier Evans
6/501
1-6
What Is The
Globalization of Production?Firms source goods and services from
locations around the globe to capitalize onnational differences in the cost and quality
of factors of production like land, labor,energy, and capital
Companies can
lower their overall cost structureimprove the quality or functionality of their
product offering
8/19/2019 International Business Collier Evans
7/5011-7
Why Do We NeedGlobal Institutions?
Global institutionshelp manage, regulate, and police the global
marketplace
promote the establishment of multinationaltreaties to govern the global business system
8/19/2019 International Business Collier Evans
8/5011-8
Why Do We NeedGlobal Institutions?
Examples include
the General Agreement on Tariffs and Trade(GATT)
the World Trade Organization (WTO)the International Monetary Fund (IMF)
the World Bank
the United Nations (UN)
the G20
8/19/2019 International Business Collier Evans
9/5011-9
What Do GlobalInstitutions Do?
The World Trade Organization (like itspredecessor GATT)
polices the world trading system
makes sure that nation-states adhere to therules laid down in trade treaties
promotes lower barriers to trade and
investment154 members in 2011
8/19/2019 International Business Collier Evans
10/5011-10
What Do GlobalInstitutions Do?
The International Monetary Fund (1944)
maintains order in the international monetarysystem
lender of last resort for countries in crisis
Argentina, Indonesia, Mexico, Russia, SouthKorea, Thailand, Turkey, Ireland, and Greece
The World Bank (1944)promotes economic development via low
interest loans for infrastructure projects
8/19/2019 International Business Collier Evans
11/5011-11
What Do GlobalInstitutions Do?
The United Nations (1945)maintains international peace and securitydevelops friendly relations among nations
cooperates in solving international problemsand in promoting respect for human rightsis a center for harmonizing the actions of
nations
The G20forum through which major nations tried to
launch a coordinated policy response to the2008-2009 global financial crisis
8/19/2019 International Business Collier Evans
12/5011-12
What Is DrivingGlobalization?
Declining barriers to the free flow of goods,services, and capital
average tariffs are now at just 4%
more favorable environment for FDIglobal stock of FDI was $15.5 trillion in 2009
facilitates global production
Technological change
microprocessors and telecommunications
the Internet and World Wide Web
transportation technology
8/19/2019 International Business Collier Evans
13/5011-13
What Does GlobalizationMean For Firms?
Lower barriers to trade and investmentmean firms can
view the world, rather than a single country,
as their market
base production in the optimal location for thatactivity
But, firms may also find their homemarkets under attack by foreign firms
8/19/2019 International Business Collier Evans
14/5011-14
Declining Trade AndInvestment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value
8/19/2019 International Business Collier Evans
15/5011-15
What Does GlobalizationMean For Firms?
Technological change means lower transportation costshelp create global markets and allow firms to
disperse production to economical, geographically
separate locations low cost information processing and communicationfirms can create and manage globally dispersed
production low cost global communications networks
help create an electronic global marketplaceglobal communication networks and global mediacreate a worldwide culture and a global consumer
product market
8/19/2019 International Business Collier Evans
16/5011-16
The Changing DemographicsOf The Global Economy
Four trends are important:
1. The changing world output and worldtrade picture
2. The changing foreign direct investmentpicture
3. The changing nature of the multinationalenterprise
4. The changing world order
8/19/2019 International Business Collier Evans
17/5011-17
How Has World Output AndWorld Trade Changed?
In 1960, the U.S. accounted for over 40%of world economic activity, but by 2009,the U.S. accounted for just 24%
a similar trend occurred in other developedcountries
In contrast, the share of world outputaccounted for by developing nations isrisingexpected to account for more than 60% of
world economic activity by 2020
8/19/2019 International Business Collier Evans
18/5011-18
How Has World Output AndWorld Trade Changed?
The Changing Demographics of World GDP and Trade
8/19/2019 International Business Collier Evans
19/5011-19
How Has Foreign DirectInvestment Changed Over Time?
In the 1960s, U.S. firms accounted forabout two-thirds of worldwide FDI flowsToday, the United States accounts for less
than one-fifth of worldwide FDI flowsOther developed countries have followed a
similar pattern
In contrast, the share of FDI accounted forby developing countries has risenDeveloping countries, especially China, have
also become popular destinations for FDI
8/19/2019 International Business Collier Evans
20/5011-20
How Has Foreign DirectInvestment Changed Over Time?
Percentage Share of Total FDI Stock 1980-2007
8/19/2019 International Business Collier Evans
21/5011-21
How Has Foreign DirectInvestment Changed Over Time?
FDI Inflows 1988-2008
Wh t I A
8/19/2019 International Business Collier Evans
22/5011-22
What Is AMultinational Enterprise?
Multinational enterprise (MNE) - anybusiness that has productive activities intwo or more countries
Since the 1960s
the number of non-U.S. multinationals hasrisen
the number of mini-multinationals has risen
8/19/2019 International Business Collier Evans
23/501
1-23
The Changing World Order
Many former Communist nations in Europe and Asia are now committed to democratic politicsand free market economiescreates new opportunities for international businesses
but, there are signs of growing unrest and totalitariantendencies in some countries
China and Latin America are also moving towardgreater free market reformsbetween 1983 and 2010, FDI in China increased from
less than $2 billion to $100 billion annuallybut, China also has many new strong companies that
could threaten Western firms
8/19/2019 International Business Collier Evans
24/501
1-24
How Will The Global EconomyOf The 21st Century Look?
The world is moving toward a more globaleconomic system…
But globalization is not inevitable
there are signs of a retreat from liberal economicideology in Russia
Globalization brings risks
the financial crisis that swept through South East Asia
in the late 1990s
the recent financial crisis that started in the U.S. in2007-2008, and moved around the world
I A I t d d t Gl b l
8/19/2019 International Business Collier Evans
25/501
1-25
Is An Interdependent GlobalEconomy A Good Thing?
Supporters believe that increased trade andcross-border investment mean lower prices for goods and servicesgreater economic growth
higher consumer income, and more jobsCritics worry that globalization will cause job lossesenvironmental degradation
the cultural imperialism of global media and MNEs Anti-globalization protesters now regularly show
up at most major meetings of global institutions
H D Gl b li ti
8/19/2019 International Business Collier Evans
26/501
1-26
How Does Globalization Affect Jobs And Income?
Critics argue that falling barriers to tradeare destroying manufacturing jobs inadvanced countries
Supporters contend that the benefits ofthis trend outweigh the costs
countries will specialize in what they do most
efficiently and trade for other goods—and allcountries will benefit
8/19/2019 International Business Collier Evans
27/501
1-27
How Does Globalization Affect LaborPolicies And The Environment?
Critics argue that firms avoid the cost ofadhering to labor and environmental regulationsby moving production to countries where such
regulations do not exist, or are not enforcedSupporters claim that tougher environmental
and labor standards are associated witheconomic progress
as countries get richer from free trade, theyimplement tougher environmental and laborregulations
H D Gl b li ti
8/19/2019 International Business Collier Evans
28/501
1-28
How Does Globalization Affect National Sovereignty? Is today’s global economy shifting economic power away
from national governments toward supranationalorganizations like the WTO, the EU, and the UN?
Critics argue that unelected bureaucrats have the power
to impose policies on the democratically electedgovernments of nation-states
Supporters claim that the power of these organizations islimited to what nation-states agree to grant
the power of the organizations lies in their ability toget countries to agree to follow certain actions
H I Gl b li ti
8/19/2019 International Business Collier Evans
29/501
1-29
How Is Globalization Affecting The World’s Poor? Is the gap between rich nations and poor nations
getting wider?Critics believe that if globalization was beneficial
there should not be a divergence between rich
and poor nationsSupporters claim that the best way for the poor
nations to improve their situation is to reduce barriers to trade and investment
implement economic policies based on free marketeconomies receive debt forgiveness for debts incurred under
totalitarian regimes
H D Th Gl b l
8/19/2019 International Business Collier Evans
30/501
1-30
How Does The GlobalMarketplace Affect Managers?
Managing an international business differs frommanaging a domestic business because
countries are different
the range of problems confronted in an internationalbusiness is wider and the problems more complexthan those in a domestic business
firms have to find ways to work within the limits
imposed by government intervention in theinternational trade and investment system
international transactions involve converting moneyinto different currencies
8/19/2019 International Business Collier Evans
31/501
International Business 9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
32/501
Chapter 2
National Differences
in Political Economy
8/19/2019 International Business Collier Evans
33/501
2-3
What Is A Political Economy?
Political economy of a nation - how the
political, economic, and legal systems of a
country are interdependent
they interact and influence each other
they affect the level of economic well-being in
the nation
8/19/2019 International Business Collier Evans
34/501
2-4
What Is A Political System?
Political system - the system of
government in a nation
Assessed according to
the degree to which the country emphasizes
collectivism as opposed to individualism
the degree to which the country is democratic
or totalitarian
8/19/2019 International Business Collier Evans
35/501
2-5
What Is Collectivism?
Collectivism stresses the primacy ofcollective goals over individual goals
can be traced to the Greek philosopher, Plato
(427-347 BC)Today, collectivism is equated with
socialists (Karl Marx 1818-1883)
advocate state ownership of the basic meansof production, distribution, and exchange
manage to benefit society as a whole, ratherthan individual capitalists
H D M d D
8/19/2019 International Business Collier Evans
36/501
2-6
How Does Modern-Day
Socialism Look? In the early 20th century, socialism split into
1. Communism – socialism can only be achievedthrough violent revolution and totalitariandictatorship in retreat worldwide by mid-1990s
2. Social democrats – socialism is achievedthrough democratic means
retreating as many countries move toward freemarket economies
state-owned enterprises have been privatized
8/19/2019 International Business Collier Evans
37/501
2-7
What Is Individualism?
Individualism refers to philosophy that anindividual should have freedom in his owneconomic and political pursuitscan be traced to Greek philosopher, Aristotle (384-
322 BC)
individual diversity and private ownership aredesirable
individual economic and political freedoms are the
ground rules on which a society should be based implies democratic political systems and free market
economies
8/19/2019 International Business Collier Evans
38/501
2-8
What Is Democracy?
Democracy - a political system in which
government is by the people, exercised either
directly or through elected representatives
usually associated with individualismpure democracy is based on the belief that citizens
should be directly involved in decision making
most modern democratic states practice
representative democracy where citizens periodicallyelect individuals to represent them
8/19/2019 International Business Collier Evans
39/501
2-9
What Is Totalitarianism?
Totalitarianism - form of government in
which one person or political party
exercises absolute control over all
spheres of human life and prohibitsopposing political parties
8/19/2019 International Business Collier Evans
40/501
2-10
What Is Totalitarianism?
Four major forms of totalitarianism exist today1. Communist totalitarianism – found in states where
the communist party monopolizes power
2. Theocratic totalitarianism - found in states where
political power is monopolized by a party, group, orindividual that governs according to religiousprinciples
3. Tribal totalitarianism - found in states where apolitical party that represents the interests of aparticular tribe monopolizes power
4. Right-wing totalitarianism - permits some individualeconomic freedom, but restricts individual politicalfreedom
Wh t I Th Li k B t P liti l
8/19/2019 International Business Collier Evans
41/501
2-11
What Is The Link Between Political
Ideology and Economic Systems?
Political ideology and economic systems
are connected
countries that stress individual goals are
likely to have market based economies
in countries where state-ownership is
common, collective goals are dominant
8/19/2019 International Business Collier Evans
42/501
2-12
What Is An Economic System?
There are three types of economic
systems
1. Market economies - all productive
activities are privately owned and
production is determined by the
interaction of supply and demand
government encourages free and faircompetition between private producers
8/19/2019 International Business Collier Evans
43/501
2-13
What Is An Economic System?
2. Command economies - government plans thegoods and services that a country produces,the quantity that is produced, and the prices aswhich they are sold
all businesses are state-owned, andgovernments allocate resources for “thegood of society”
because there is little incentive to controlcosts and be efficient, command economiestend to stagnate
8/19/2019 International Business Collier Evans
44/501
2-14
What Is An Economic System?
3. Mixed economies - certain sectors of the
economy are left to private ownership
and free market mechanisms while other
sectors have significant state ownershipand government planning
governments tend to own firms that are
considered important to national security
8/19/2019 International Business Collier Evans
45/501
What Are The
8/19/2019 International Business Collier Evans
46/501
2-16
What Are The
Different Legal Systems? There are three types of legal systems1. Common law - based on tradition, precedent,
and custom
2. Civic law - based on detailed set of laws
organized into codes3. Theocratic law - law is based on religious
teachings
How Are Contracts Enforced
8/19/2019 International Business Collier Evans
47/501
2-17
How Are Contracts Enforced
In Different Legal Systems?Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
Contract law is the body of law that governscontract enforcement
under a common law system, contracts tend to be
very detailed with all contingencies spelled out
under a civil law system, contracts tend to be muchshorter and less specific because many issues are
already covered in the civil code
Which Country’s Laws Should
8/19/2019 International Business Collier Evans
48/501
2-18
Which Country s Laws Should
Apply In A Contract Dispute?
The United Nations Convention on Contracts for
the International Sale of Goods (CIGS)
establishes a uniform set of rules governing certain
aspects of the making and performance of everyday
commercial contracts between buyers and sellers
who have their places of business in different nations
Ratified by the U.S. and about 70 countries
but, many larger trading nations including Japan andthe U.K. have not agreed to the provisions of CIGS
and opt for arbitration instead
How Are Property Rights
8/19/2019 International Business Collier Evans
49/501
2-19
How Are Property Rights
And Corruption Related?
Property rights - the legal rights over the
use to which a resource is put and over
the use made of any income that may be
derived from that resource
How Are Property Rights
8/19/2019 International Business Collier Evans
50/501
2-20
How Are Property Rights
And Corruption Related?
Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - ex. excessive
taxation or illegally - ex. bribes orblackmailing
high levels of corruption reduce foreign direct
investment, the level of international trade, and
the economic growth rate in a country
How Are Property Rights
8/19/2019 International Business Collier Evans
51/501
2-21
How Are Property Rights
And Corruption Related?
The Foreign Corrupt Practices Act makes itillegal for U.S. companies to bribe foreigngovernment officials to obtain or maintainbusiness over which that foreign official has
authority facilitating or expediting payments to secure or
expedite routine government action are permitted
Which Countries Are
8/19/2019 International Business Collier Evans
52/501
2-22
Which Countries Are
Most Corrupt?Rankings of Corruption by Country 2010
How Can Intellectual
8/19/2019 International Business Collier Evans
53/501
2-23
How Can Intellectual
Property Be Protected? Intellectual property - property that is the product of
intellectual activity
Can be protected using
1. Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers topublish and disperse their work as they see fit
3. Trademarks – design and names by which merchantsor manufacturers designate and differentiate theirproducts
How Can Intellectual
8/19/2019 International Business Collier Evans
54/501
2-24
How Can Intellectual
Property Be Protected?
Protection of intellectual property rights differsfrom country to countryWorld Intellectual Property Organization
Paris Convention for the Protection of Industrial
Property
To avoid piracy, firms canstay away from countries where intellectual property
laws are lax
file lawsuits lobby governments for international property rights
agreements and enforcement
What Is Product Safety
8/19/2019 International Business Collier Evans
55/501
2-25
What Is Product Safety
And Liability?
Product safety laws set certain standards to
which a product must adhere
Product liability involves holding a firm and its
officers responsible when a product causesinjury, death, or damage
liability laws tend to be less extensive in less
developed nations
8/19/2019 International Business Collier Evans
56/501
How Can Managers Determine A
8/19/2019 International Business Collier Evans
57/501
2-27
How Can Managers Determine A
Market’s Overall Attractiveness?
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doingbusiness in that country
Other things being equal, more attractive countries
have democratic political institutions, market based
economies, and strong legal systems that protectproperty rights and limit corruption
8/19/2019 International Business Collier Evans
58/501
International Business
9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
59/501
Chapter 4
Differences
in Culture
How Do Cultural Differences
8/19/2019 International Business Collier Evans
60/501
4-3
How Do Cultural Differences
Affect International Business?
Understanding and adapting to the local culturalis important international companies cross-cultural literacy - an understanding of how
cultural differences across and within nations can
affect the way in which business is practicedcross-cultural literacy is important for business
success
A relationship may exist between culture and the
costs of doing business in a country or regionMNEs can be agents of cultural changeMcDonald’s
8/19/2019 International Business Collier Evans
61/501
4-4
What Is Culture?
Culture - a system of values and norms that are
shared among a group of people and that when
taken together constitute a design for living
wherevalues are abstract ideas about what a group believes
to be good, right, and desirable
norms are the social rules and guidelines that
prescribe appropriate behavior in particular situationsSociety - a group of people who share a
common set of values and norms
8/19/2019 International Business Collier Evans
62/501
4-5
What Are Values And Norms?
Values provide the context within which a
society’s norms are established and
justified and form the bedrock of a culture
Norms include
folkways - the routine conventions of
everyday life
mores - norms that are seen as central to thefunctioning of a society and to its social life
How Are Culture Society
8/19/2019 International Business Collier Evans
63/501
4-6
How Are Culture, Society,
And The Nation-State Related?The relationship between a society and a
nation state is not strictly one-to-one
Nation-states are political creations
can contain one or more cultures
A culture can embrace several nations
8/19/2019 International Business Collier Evans
64/501
8/19/2019 International Business Collier Evans
65/501
4-8
What Determines Culture?
Determinants of Culture
8/19/2019 International Business Collier Evans
66/501
4-9
What Is A Social Structure?
Social structure - a society’s basic social
organization
Consider
the degree to which the basic unit of social
organization is the individual, as opposed to
the group
the degree to which a society is stratified intoclasses or castes
How Are Individuals
8/19/2019 International Business Collier Evans
67/501
4-10
How Are IndividualsAnd Groups Different?
A group is an association of two or morepeople who have a shared sense ofidentity and who interact with each other in
structured ways on the basis of a commonset of expectations about each other’sbehavior
individuals are involved in families, work
groups, social groups, recreational groups,etc.
Societies place different values on groups
How Are Individuals
8/19/2019 International Business Collier Evans
68/501
4-11
And Groups Different?
In Western societies, there is a focus on theindividual individual achievement is common
dynamism of the U.S. economy
high level of entrepreneurship
But, creates a lack of company loyalty andfailure to gain company specific knowledgecompetition between individuals in a company instead
of than team building
less ability to develop a strong network of contactswithin a firm
8/19/2019 International Business Collier Evans
69/501
8/19/2019 International Business Collier Evans
70/501
4-13
What Is Social Stratification?
All societies are stratified on a
hierarchical basis into social categories,
or social strata
individuals are born into a particular stratum
Must consider
1. mobility between strata
2. the significance placed on social strata inbusiness contexts
8/19/2019 International Business Collier Evans
71/501
8/19/2019 International Business Collier Evans
72/501
4-15
What Is Social Stratification?
2. The significance attached to social strata
in business contacts class consciousness - a condition where people
tend to perceive themselves in terms of theirclass background, and this shapes their
relationships with others
an antagonistic relationship between
management and labor raises the cost ofproduction in countries with significant class
differences
8/19/2019 International Business Collier Evans
73/501
How Do Religious And
8/19/2019 International Business Collier Evans
74/501
4-17
gEthical Systems Differ?
World Religions
How Do Religious And
8/19/2019 International Business Collier Evans
75/501
4-18
gEthical Systems Differ?
Ethical systems - a set of moral
principles, or values, that are used to
guide and shape behavior
Religion and ethics are often closelyintertwined
ex. Christian or Islamic ethics
8/19/2019 International Business Collier Evans
76/501
4-19
What Is Christianity?
Christianity
the world’s largest religion
found throughout Europe, the Americas, and
other countries settled by Europeansthe Protestant work ethic (Max Weber, 1804)
hard work, wealth creation, and frugality is the
driving force of capitalism
8/19/2019 International Business Collier Evans
77/501
h d
8/19/2019 International Business Collier Evans
78/501
4-21
What Is Hinduism?
Hinduismpracticed primarily on the Indian sub-continent
focuses on the importance of achieving
spiritual growth and development, which mayrequire material and physical self-denial
Hindus are valued by their spiritual rather thanmaterial achievements
promotion and adding new responsibilitiesmay not be important, or may be infeasibledue to the employee's caste
h ddh
8/19/2019 International Business Collier Evans
79/501
4-22
What Is Buddhism?
Buddhism
has about 350 millions followers
stresses spiritual growth and the afterlife,
rather than achievement while in this worlddoes not emphasize wealth creation
entrepreneurial behavior is not stressed
does not support the caste system, individualsdo have some mobility and can work with
individuals from different classes
8/19/2019 International Business Collier Evans
80/501
What Is The Role
8/19/2019 International Business Collier Evans
81/501
4-24
Of Language In Culture?
Language - the spoken and unspoken (nonverbal communication such as facial
expressions, personal space, and hand
gestures ) means of communicationcountries with more than one language often
have more than one culture
Canada, Belgium, Spain
8/19/2019 International Business Collier Evans
82/501
What Is The Role
8/19/2019 International Business Collier Evans
83/501
4-26
Of Education In Culture?
Formal education is the medium through whichindividuals learn many of the language,conceptual, and mathematical skills that areindispensable in a modern society
important in determining a nation’s competitiveadvantage
Japan’s postwar success can be linked to itsexcellent education system
general education levels can be a good index for thekinds of products that might sell in a country
ex. impact of literacy rates
How Does Culture
8/19/2019 International Business Collier Evans
84/501
4-27
Impact The Workplace?
Management processes and practicesmust be adapted to culturally-determinedwork-related values
Geert Hofstede studied culture usingdata collected from 1967 to 1973 for100,000 employees of IBM Hofstede identified four dimensions that
summarized different cultures
How Does Culture
8/19/2019 International Business Collier Evans
85/501
4-28
Impact The Workplace?
Hofstede’s dimensions of culture: 1. Power distance - how a society deals with the
fact that people are unequal in physical andintellectual capabilities
2. Uncertainty avoidance - the relationshipbetween the individual and his fellows
3. Individualism versus collectivism - the extent towhich different cultures socialize theirmembers into accepting ambiguous situationsand tolerating ambiguity
4. Masculinity versus femininity -the relationshipbetween gender and work roles
How Does Culture
8/19/2019 International Business Collier Evans
86/501
4-29
Impact The Workplace?Work-Related Values for 20 Countries
How Does Culture
8/19/2019 International Business Collier Evans
87/501
4-30
Impact The Workplace?
Hofstede later expanded added a fifthdimension called Confucian dynamism orlong-term orientation
captures attitudes toward time, persistence,ordering by status, protection of face, respectfor tradition, and reciprocation of gifts andfavorsJapan, Hong Kong, and Thailand scored high on
this dimension
the U.S. and Canada scored low
W H f t d Ri ht?
8/19/2019 International Business Collier Evans
88/501
4-31
Was Hofstede Right?
Hofstede’s work has been criticized for severalreasons
made the assumption there is a one-to-one
relationship between culture and the nation-state
study may have been culturally bound
used IBM as sole source of information
culture is not static – it evolves
But, it is a starting point for understanding howcultures differ, and the implications of those
differences for managers
D C lt Ch ?
8/19/2019 International Business Collier Evans
89/501
4-32
Does Culture Change?
Culture evolves over timechanges in value systems can be slow and
painful for a society
Social turmoil - an inevitable outcome ofcultural change
as countries become economically stronger,cultural change is particularly common
economic progress encourages a shift fromcollectivism to individualism
globalization also brings cultural change
What Do Cultural Differences
8/19/2019 International Business Collier Evans
90/501
4-33
Mean For Managers?
1. It is important to develop cross-cultural literacy companies that are ill informed about the practices
of another culture are unlikely to succeed in thatculture
To avoid being ill-informed consider hiring local citizens
transfer executives to foreign locations on a regularbasis
Managers must also guard againstethnocentrism a belief in the superiority of one's own culture
What Do Cultural Differences
8/19/2019 International Business Collier Evans
91/501
4-34
Mean For Managers?
2. There is a connection between cultureand national competitive advantage
suggests which countries are likely to
produce the most viable competitors has implications for the choice of countries
in which to locate production facilities and do
business
8/19/2019 International Business Collier Evans
92/501
International Business
9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
93/501
Chapter 5
Ethics in
International Business
What Is Ethics?
8/19/2019 International Business Collier Evans
94/501
5-3
What Is Ethics?
Ethics - accepted principles of right or wrong thatgovern
the conduct of a person
the members of a profession
the actions of an organization
Business ethics - accepted principles of right or
wrong governing the conduct of business people
Ethical strategy - a strategy, or course of action,that does not violate these accepted principles
Which Ethical Issues Are Most
8/19/2019 International Business Collier Evans
95/501
5-4
Relevant To International Firms?
The most common ethical issues inbusiness involve
1. employment practices
2. human rights
3. environmental regulations
4. corruption
5. the moral obligation of multinationalcompanies
How Are Ethics Relevant
8/19/2019 International Business Collier Evans
96/501
5-5
To Employment Practices?
Suppose work conditions in a host nationare clearly inferior to those in the
multinational’s home nation
Which standards should apply?home country standards
host country standards
something in between
How Are Ethics Relevantl
8/19/2019 International Business Collier Evans
97/501
5-6
To Employment Practices?
Firms shouldestablish minimal acceptable standards that
safeguard the basic rights and dignity of
employeesaudit foreign subsidiaries and subcontractors
regularly to ensure they are meeting the
standards
take corrective action as necessary
How Are Ethics Relevanth
8/19/2019 International Business Collier Evans
98/501
5-7
To Human Rights?
Basic human rights are taken for grantedin developed countries
freedom of association
freedom of speech
freedom of assembly
freedom of movement
Question: What are the responsibilities offirms in countries where basic humanrights are not respected?
How Are Ethics RelevantT H R h ?
8/19/2019 International Business Collier Evans
99/501
5-8
To Human Rights?
Question: Is it ethical for companies to dobusiness with countries with repressive
regimes?
Myanmar
Nigeria
Question: Does multinational investment actually
help bring change to these countries and
ultimately improve the rights of citizens?China
How Are Ethics RelevantT E i l R l i ?
8/19/2019 International Business Collier Evans
100/501
5-9
To Environmental Regulations?
Some parts of the environment are a public good that noone owns, but anyone can despoil
What happens when environmental regulations in hostnations are far inferior to those in the home nation?
Is it permissible for multinationals to pollute indeveloping countries simply because there are noregulations against it?
legal versus ethical behavior
The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overusedby individuals, resulting in its degradation
How Are Ethics Relevant T C i ?
8/19/2019 International Business Collier Evans
101/501
5-10
To Corruption?
The U.S. Foreign Corrupt Practices Act outlawedthe practice of paying bribes to foreigngovernment officials in order to gain business
amended to allow for facilitating payments
The Convention on Combating Bribery ofForeign Public Officials in International BusinessTransactions was adopted by the Organizationfor Economic Cooperation and Development(OECD)
obliges member states to make the bribery offoreign public officials a criminal offense
How Are Ethics Relevant T C i ?
8/19/2019 International Business Collier Evans
102/501
5-11
To Corruption?
But, is it permissible for multinationals topay government officials facilitating
payments if doing so creates local income
and jobs?is it ok to do a little evil in order to do a greater
good?
does grease money actually improveefficiency and help growth?
How Are Ethics RelevantT M l Obli i ?
8/19/2019 International Business Collier Evans
103/501
5-12
To Moral Obligations?
Social responsibility refers to the idea thatmanagers should consider the social
consequences of economic actions when
making business decisionsthere should be a presumption in favor of
decisions that have both good economic and
good social consequences
it is the right way for a business to behave
How Are Ethics RelevantT M l Obli i ?
8/19/2019 International Business Collier Evans
104/501
5-13
To Moral Obligations?
Advocates argue that businesses need torecognize their noblesse oblige -
honorable and benevolent behavior that is
the responsibility of successful companiesgive something back to the societies that have
made their success possible
But, are multinationals morally required touse their power to enhance local welfare?
What Are Ethical Dilemmas?
8/19/2019 International Business Collier Evans
105/501
5-14
What Are Ethical Dilemmas?
Ethical dilemmas - situations in which none ofthe available alternatives seems ethically
acceptable
real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear
cut
the right course of action is not always clear
Why Do ManagersB h U thi ll ?
8/19/2019 International Business Collier Evans
106/501
5-15
Behave Unethically?
Several factors contribute to unethical behaviorincluding
1. Personal ethics - the generally acceptedprinciples of right and wrong governing the
conduct of individuals expatriates may face pressure to violate their
personal ethics because they are away from theirordinary social context and supporting culture
managers fail to question whether a decision oraction is ethical, and instead rely on economicanalysis when making decisions
Why Do ManagersB h U thi ll ?
8/19/2019 International Business Collier Evans
107/501
5-16
Behave Unethically?
2. Decision-making processes - the values andnorms that are shared among employees of anorganization
organization culture that does not
emphasize business culture encouragesunethical behavior
3. Organizational culture - organizational culturecan legitimize unethical behavior or reinforcethe need for ethical behavior
4. Unrealistic performance expectations -encourage managers to cut corners or act inan unethical manner
Why Do ManagersB h U thi ll ?
8/19/2019 International Business Collier Evans
108/501
5-17
Behave Unethically?
5. Leadership - helps establish the culture of anorganization, and set the examples that othersfollow when leaders act unethically, subordinates may act
unethically, too6. Societal culture – firms headquartered in
cultures where individualism and uncertaintyavoidance are strong are more likely to stress
ethical behavior than firms headquartered incultures where masculinity and power distancerank high
8/19/2019 International Business Collier Evans
109/501
What Are The PhilosophicalA h T Ethi ?
8/19/2019 International Business Collier Evans
110/501
5-19
Approaches To Ethics?
There are several different approaches tobusiness ethics
Straw men approaches deny the value of
business ethics or apply the concept in anunsatisfactory way
Others approaches are favored by moral
philosophers and are the basis for currentmodels of ethical behavior
8/19/2019 International Business Collier Evans
111/501
What Are The Straw MenApproaches To Business Ethics?
8/19/2019 International Business Collier Evans
112/501
5-21
Approaches To Business Ethics?
3. Righteous moralist - a multinational’s homecountry standards of ethics should be followed
in foreign countries
4. Naïve immoralist - if a manager of a
multinational sees that firms from other nations
are not following ethical norms in a host nation,
that manager should not either
All approaches offer inappropriate guidelinesfor ethical decision making
What Are Utilitarian AndKantian Approaches To Ethics?
8/19/2019 International Business Collier Evans
113/501
5-22
Kantian Approaches To Ethics?
Utilitarian ethics - (David Hume, JeremyBentham, John Stuart Mills) - the moral worth of
actions or practices is determined by their
consequences
actions are desirable if they lead to the best possible
balance of good consequences over bad
consequences
but, it is difficult to measure the benefits, costs, and
risks of an action
the approach fails to consider justice
8/19/2019 International Business Collier Evans
114/501
8/19/2019 International Business Collier Evans
115/501
8/19/2019 International Business Collier Evans
116/501
How Can ManagersMake Ethical Decisions?
8/19/2019 International Business Collier Evans
117/501
5-26
Make Ethical Decisions?
1. Hire and promote people with a wellgrounded sense of personal ethics
refrain from promoting individuals who haveacted unethically
try to hire only people with strong ethics
prospective employees should find out asmuch as they can about the ethical climate in
an organization prior to taking a position
How Can ManagersMake Ethical Decisions?
8/19/2019 International Business Collier Evans
118/501
5-27
Make Ethical Decisions?
2. Build an organizational culture that places ahigh value on ethical behavior
articulate values that place a strongemphasis on ethical behavior
emphasize the importance of a code ofethics - formal statement of the ethicalpriorities a business adheres to
implement a system of incentives andrewards that recognize people who engagein ethical behavior and sanction those whodo not
How Can ManagersMake Ethical Decisions?
8/19/2019 International Business Collier Evans
119/501
5-28
Make Ethical Decisions?
3. Make sure that leaders within thebusiness articulate the rhetoric of ethical
behavior and act in a manner that is
consistent with that rhetoric give life and meaning to words
make sure that leaders emphasize the
importance of ethics verbally and through
their actions
8/19/2019 International Business Collier Evans
120/501
8/19/2019 International Business Collier Evans
121/501
How Can ManagersMake Ethical Decisions?
8/19/2019 International Business Collier Evans
122/501
5-31
Make Ethical Decisions?
Step 2: Determine whether a proposed decisionwould violate the fundamental rights of any
stakeholders
Step 3: Establish moral intent - place moral
concerns ahead of other concerns in
cases where either the fundamental rights
of stakeholders or key moral principles
have been violated
How Can Managers
M k E hi l D i i ?
8/19/2019 International Business Collier Evans
123/501
5-32
Make Ethical Decisions?
Step 4: Engage in ethical behavior
Step 5: Audit decisions and review them to
make sure that they are consistent
with ethical principlesthis step is often overlooked even
though it is critical to finding out
whether a decision process is working
What Is An Ethics Officer?
8/19/2019 International Business Collier Evans
124/501
5-33
What Is An Ethics Officer?
Many firms now have ethics officers toensure
all employees are trained in ethics
ethics is considered in the decision-makingprocess
the company’s code of conduct is followed
How Can Managers
M k E hi l D i i ?
8/19/2019 International Business Collier Evans
125/501
5-34
Make Ethical Decisions?5. Develop moral courage enables managers to walk away from a decision
that is profitable, but unethical
gives an employee the strength to say no to a
superior who instructs her to pursue actions that areunethical
gives employees the integrity to go public to themedia and blow the whistle on persistent unethicalbehavior in a company
How Can Managers
M k E hi l D i i ?
8/19/2019 International Business Collier Evans
126/501
5-35
Make Ethical Decisions?
In the end, there are clearly things that aninternational business should do, and
there are things that an international
business should not doBut, it is important to remember that not all
ethical dilemmas have a clean and
obvious solutionin these situations, firms must rely on the
decision making ability of its managers
8/19/2019 International Business Collier Evans
127/501
International Business
9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
128/501
Chapter 6
International
Trade Theory
Why Is Free Trade Beneficial?
8/19/2019 International Business Collier Evans
129/501
6-3
y
Free trade - a situation where agovernment does not attempt to influencethrough quotas or duties what its citizenscan buy from another country or what they
can produce and sell to another countryTrade theory shows why it is beneficial for
a country to engage in international tradeeven for products it is able to produce for
itself
Why Is Free Trade Beneficial?
8/19/2019 International Business Collier Evans
130/501
6-4
y
International trade allows a countryto specialize in the manufacture and export of
products and services that it can produceefficiently
import products and services that can beproduced more efficiently in other countries
limits on imports may be beneficial toproducers, but not beneficial for consumers
Why Do CertainPatterns Of Trade Exist?
8/19/2019 International Business Collier Evans
131/501
6-5
Patterns Of Trade Exist?
Some patterns of trade are fairly easy toexplain
it is obvious why Saudi Arabia exports oil,Ghana exports cocoa, and Brazil exports
coffee
But, why does Switzerland exportchemicals, pharmaceuticals, watches, and
jewelry?Why does Japan export automobiles,
consumer electronics, and machine tools?
What Role DoesGovernment Have In Trade?
8/19/2019 International Business Collier Evans
132/501
6-6
Government Have In Trade?
The mercantilist philosophy makes a crude casefor government involvement in promoting
exports and limiting imports
Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
New trade theory and Porter’s theory of national
competitive advantage justify limited and
selective government intervention to support thedevelopment of certain export-oriented
industries
What Is Mercantilism?
8/19/2019 International Business Collier Evans
133/501
6-7
Mercantilism (mid-16th century) suggeststhat it is in a country’s best interest tomaintain a trade surplus -to export morethan it imports
advocates government intervention to achievea surplus in the balance of trade
Mercantilism views trade as a zero-sum
game - one in which a gain by one countryresults in a loss by another
What Is Smith’s TheoryOf Absolute Advantage?
8/19/2019 International Business Collier Evans
134/501
6-8
Of Absolute Advantage?
Adam Smith (1776) argued that a countryhas an absolute advantage in the
production of a product when it is more
efficient than any other country inproducing it
countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these goods for
goods produced by other countries
8/19/2019 International Business Collier Evans
135/501
How Does The TheoryOf Absolute Advantage Work?
8/19/2019 International Business Collier Evans
136/501
6-10
Of Absolute Advantage Work?
In South Korea it takes 40 units ofresources to produce one ton of cocoa
and 10 resources to produce one ton of
riceSouth Korea could produce 5 tons of cocoa
and no rice, 20 tons of rice and no cocoa, or
some combination in between
How Does The TheoryOf Absolute Advantage Work?
8/19/2019 International Business Collier Evans
137/501
6-11
Of Absolute Advantage Work?
Without tradeGhana would produce 10 tons of cocoa and 5
tons of rice
South Korea would produce 10 tons of rice
and 2.5 tons of cocoaWith specialization and tradeGhana would produce 20 tons of cocoa
South Korea would produce 20 tons of rice
Ghana could trade 6 tons of cocoa to SouthKorea for 6 tons of rice
How Does The TheoryOf Absolute Advantage Work?
8/19/2019 International Business Collier Evans
138/501
6-12
Of Absolute Advantage Work?
After tradeGhana would have 14 tons of cocoa left, and
6 tons of rice
South Korea would have 14 tons of rice left
and 6 tons of cocoaIf each country specializes in the
production of the good in which it has anabsolute advantage and trades for the
other, both countries gaintrade is a positive sum game
How Does The TheoryOf Absolute Advantage Work?
8/19/2019 International Business Collier Evans
139/501
6-13
Of Absolute Advantage Work?
Absolute Advantage and the Gains from Trade
What Is Ricardo’s TheoryOf Comparative Advantage?
8/19/2019 International Business Collier Evans
140/501
6-14
Of Comparative Advantage?
David Ricardo asked what happens when onecountry has an absolute advantage in theproduction of all goods
The theory of comparative advantage (1817) -
countries should specialize in the production ofthose goods they produce most efficiently andbuy goods that they produce less efficiently fromother countries
even if this means buying goods from othercountries that they could produce moreefficiently at home
How Does The Theory OfComparative Advantage Work?
8/19/2019 International Business Collier Evans
141/501
6-15
p g
Assume Ghana is more efficient in theproduction of both cocoa and rice
In Ghana, it takes 10 resources to produceone ton of cocoa, and 13 1/3 resources to
produce one ton of riceSo, Ghana could produce 20 tons of cocoa
and no rice, 15 tons of rice and no cocoa,or some combination of the two
How Does The Theory OfComparative Advantage Work?
8/19/2019 International Business Collier Evans
142/501
6-16
p g
In South Korea, it takes 40 resources toproduce one ton of cocoa and 20
resources to produce one ton of rice
So, South Korea could produce 5 tons ofcocoa and no rice, 10 tons of rice and no
cocoa, or some combination of the two
How Does The Theory OfComparative Advantage Work?
8/19/2019 International Business Collier Evans
143/501
6-17
p g
With tradeGhana could export 4 tons of cocoa to South
Korea in exchange for 4 tons of rice
Ghana will still have 11 tons of cocoa, and 4
additional tons of riceSouth Korea still has 6 tons of rice and 4 tons
of cocoa
if each country specializes in the production ofthe good in which it has a comparativeadvantage and trades for the other, bothcountries gain
8/19/2019 International Business Collier Evans
144/501
How Does The Theory OfComparative Advantage Work?
8/19/2019 International Business Collier Evans
145/501
6-19
p gComparative Advantage and the Gains from Trade
Is Unrestricted Free TradeAlways Beneficial?
8/19/2019 International Business Collier Evans
146/501
6-20
ays e e c a
Unrestricted free trade is beneficial, but the gains maynot be as great as the simple model of comparativeadvantage would suggest immobile resources
diminishing returns
dynamic effects and economic growth the Samuelson critique
But, opening a country to trade could increase a country's stock of resources as increased supplies become
available from abroad
the efficiency of resource utilization and so free up resources forother uses
economic growth
Could A Rich Country BeWorse Off With Free Trade?
8/19/2019 International Business Collier Evans
147/501
6-21
Paul Samuelson - the dynamic gains from trademay not always be beneficial
free trade may ultimately result in lowerwages in the rich country
The ability to offshore services jobs that weretraditionally not internationally mobile may havethe effect of a mass inward migration into theUnited States, where wages would then fall
but, protectionist measures could create amore harmful situation than free trade
What Is TheHeckscher-Ohlin Theory?
8/19/2019 International Business Collier Evans
148/501
6-22
y
Eli Heckscher (1919) and Bertil Ohlin(1933) - comparative advantage arises
from differences in national factor
endowments the extent to which a country is endowed with
resources like land, labor, and capital
The more abundant a factor, the lower itscost
What Is TheHeckscher-Ohlin Theory?
8/19/2019 International Business Collier Evans
149/501
6-23
y
The pattern of trade is determined byfactor endowments
Heckscher and Ohlin predict that countries
willexport goods that make intensive use of
locally abundant factors
import goods that make intensive use of
factors that are locally scarce
Does The Heckscher-OhlinTheory Hold?
8/19/2019 International Business Collier Evans
150/501
6-24
y
Wassily Leontief (1953) theorized that since theU.S. was relatively abundant in capital comparedto other nations, the U.S. would be an exporterof capital intensive goods and an importer of
labor-intensive goods.However, he found that U.S. exports were
less capital intensive than U.S. imports
Since this result was at variance with the
predictions of trade theory, it became known asthe Leontief Paradox
What Is TheProduct Life Cycle Theory?
8/19/2019 International Business Collier Evans
151/501
6-25
y y
The product life-cycle theory - as productsmature both the location of sales and the
optimal production location will change
affecting the flow and direction of tradeproposed by Ray Vernon in the mid-1960s
At this time most of the world’s new products were
developed by U.S. firms and sold first in the U.S.
What Is TheProduct Life Cycle Theory?
8/19/2019 International Business Collier Evans
152/501
6-26
y y
According to the product life-cycle theory the size and wealth of the U.S. market gave U.S.
firms a strong incentive to develop new products
initially, the product would be produced and sold in
the U.S.as demand grew in other developed countries, U.S.
firms would begin to export
demand for the new product would grow in other
advanced countries over time making it worthwhile forforeign producers to begin producing for their home
markets
What Is TheProduct Life Cycle Theory?
8/19/2019 International Business Collier Evans
153/501
6-27
y y
U.S. firms might set up production facilitiesin advanced countries with growingdemand, limiting exports from the U.S.
As the market in the U.S. and other
advanced nations matured, the productwould become more standardized, andprice would be the main competitiveweapon
What Is TheProduct Life Cycle Theory?
8/19/2019 International Business Collier Evans
154/501
6-28
y y
Producers based in advanced countries wherelabor costs were lower than the United Statesmight now be able to export to the United States
If cost pressures were intense, developingcountries would acquire a production advantage
over advanced countriesProduction became concentrated in lower-cost
foreign locations, and the U.S. became animporter of the product
What Is TheProduct Life Cycle Theory?
8/19/2019 International Business Collier Evans
155/501
6-29
The Product Life Cycle Theory
Does The Product LifeCycle Theory Hold?
8/19/2019 International Business Collier Evans
156/501
6-30
y y
The product life cycle theory accurately explainswhat has happened for products likephotocopiers and a number of other hightechnology products developed in the United
States in the 1960s and 1970smature industries leave the U.S. for low cost
assembly locations
Does The Product LifeCycle Theory Hold?
8/19/2019 International Business Collier Evans
157/501
6-31
y y
But, the globalization and integration of theworld economy has made this theory lessvalid today
the theory is ethnocentric
production today is dispersed globally
products today are introduced in multiplemarkets simultaneously
What Is New Trade Theory?
8/19/2019 International Business Collier Evans
158/501
6-32
New trade theory suggests that the ability offirms to gain economies of scale (unit costreductions associated with a large scale ofoutput) can have important implications forinternational trade
Countries may specialize in the production andexport of particular products because in certainindustries, the world market can only support alimited number of firms
new trade theory emerged in the 1980s Paul Krugman won the Nobel prize for his
work in 2008
What Is New Trade Theory?
8/19/2019 International Business Collier Evans
159/501
6-33
1. Through its impact on economies of scale, tradecan increase the variety of goods available toconsumers and decrease the average cost ofthose goods without trade, nations might not be able to produce
those products where economies of scale areimportant
with trade, markets are large enough to support theproduction necessary to achieve economies of scale
so, trade is mutually beneficial because it allows for
the specialization of production, the realization ofscale economies, and the production of a greatervariety of products at lower prices
What Is New Trade Theory?
8/19/2019 International Business Collier Evans
160/501
6-34
2. In those industries when output required toattain economies of scale represents asignificant proportion of total world demand,the global market may only be able to supporta small number of enterprises
first mover advantages - the economic andstrategic advantages that accrue to earlyentrants into an industry
economies of scale
first movers can gain a scale based costadvantage that later entrants find difficult tomatch
What Are The Implications OfNew Trade Theory For Nations?
8/19/2019 International Business Collier Evans
161/501
6-35
Nations may benefit from trade even when theydo not differ in resource endowments or
technology
a country may dominate in the export of a good
simply because it was lucky enough to have one ormore firms among the first to produce that good
Governments should consider strategic trade
policies that nurture and protect firms and
industries where first mover advantages andeconomies of scale are important
What Is Porter’s Diamond OfCompetitive Advantage?
8/19/2019 International Business Collier Evans
162/501
6-36
Michael Porter (1990) tried to explain why anation achieves international success in aparticular industry
identified four attributes that promote orimpede the creation of competitive
advantage1. Factor endowments - a nation’s position in
factors of production necessary to compete ina given industry
can lead to competitive advantage can be either basic (natural resources, climate,
location) or advanced (skilled labor, infrastructure,technological know-how)
What Is Porter’s Diamond OfCompetitive Advantage?
8/19/2019 International Business Collier Evans
163/501
6-37
2. Demand conditions - the nature of homedemand for the industry’s product or service influences the development of capabilities
sophisticated and demanding customers pressurefirms to be competitive
3. Relating and supporting industries - thepresence or absence of supplier industries andrelated industries that are internationallycompetitive
can spill over and contribute to other industries successful industries tend to be grouped in clustersin countries
What Is Porter’s Diamond OfCompetitive Advantage?
8/19/2019 International Business Collier Evans
164/501
6-38
4. Firm strategy, structure, and rivalry - theconditions governing how companies arecreated, organized, and managed, and thenature of domestic rivalry
different management ideologies affect thedevelopment of national competitive advantage
vigorous domestic rivalry creates pressures toinnovate, to improve quality, to reduce costs, and toinvest in upgrading advanced features
What Is Porter’s Diamond OfCompetitive Advantage?
8/19/2019 International Business Collier Evans
165/501
6-39
Determinants of National Competitive Advantage: Porter’s Diamond
Does Porter’s Theory Hold?
8/19/2019 International Business Collier Evans
166/501
6-40
Government policy canaffect demand through product standards influence rivalry through regulation and antitrust laws
impact the availability of highly educated workers andadvanced transportation infrastructure.
The four attributes, government policy, andchance work as a reinforcing system,complementing each other and in combinationcreating the conditions appropriate for
competitive advantageSo far, Porter’s theory has not been sufficientlytested to know how well it holds up
8/19/2019 International Business Collier Evans
167/501
What Is TheBalance Of Payments?
8/19/2019 International Business Collier Evans
168/501
6-42
A country’s balance of payments accounts keep track of the payments to and receiptsfrom other countries for a particular time period
double entry bookkeeping
sum of the current account balance, thecapital account and the financial accountshould be zero
What Is TheBalance Of Payments?
8/19/2019 International Business Collier Evans
169/501
6-43
There are three main accounts
1. The current account records transactions of goods,services, and income, receipts and payments
current account deficit - a country imports morethan it exports
current account surplus – a country exports morethan it imports
2. The capital account records one time changes in thestock of assets
3. The financial account records transactions that involve
the purchase or sale of assets net change in U.S. assets owned abroad
foreign owned assets in the U.S.
What Is TheBalance Of Payments?
8/19/2019 International Business Collier Evans
170/501
6-44
United States Balance of Payments Accounts, 2010
Is A CurrentAccount Deficit Bad?
8/19/2019 International Business Collier Evans
171/501
6-45
Question: Does current account deficit in theUnited States matter?
A current account deficit implies a net debtor
so, a persistent deficit could limit futureeconomic growth
But, even though capital is flowing out of theU.S. as payments to foreigners, much of it flowsback in as investments in assets
Yet, suppose foreigners stop buying U.S. assets
and sell their dollars for another currencya dollar crisis could occur
8/19/2019 International Business Collier Evans
172/501
International Business
9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
173/501
Chapter 8
Foreign Direct
Investment
What Is FDI?
8/19/2019 International Business Collier Evans
174/501
8-3
Foreign direct investment (FDI) occurswhen a firm invests directly in newfacilities to produce and/or market in aforeign country
the firm becomes a multinational enterpriseFDI can be in the form of greenfield investments - the establishment of
a wholly new operation in a foreign country
acquisitions or mergers with existing firms inthe foreign country
What Is FDI?
8/19/2019 International Business Collier Evans
175/501
8-4
The flow of FDI - the amount of FDIundertaken over a given time period
Outflows of FDI are the flows of FDI out of acountry
Inflows of FDI are the flows of FDI into acountry
The stock of FDI - the total accumulatedvalue of foreign-owned assets at a giventime
What Are The Patterns Of FDI?
8/19/2019 International Business Collier Evans
176/501
8-5
Both the flow and stock of FDI haveincreased over the last 30 years
Most FDI is still targeted towards developednations
United States, Japan, and the EU
but, other destinations are emerging
South, East, and South East Asiaespecially China
Latin America
What Are The Patterns Of FDI?
8/19/2019 International Business Collier Evans
177/501
8-6
FDI Outflows 1982-2010 ($ billions)
What Are The Patterns Of FDI?
8/19/2019 International Business Collier Evans
178/501
8-7
FDI Inflows by Region 1995-2010 ($ billion)
What Are The Patterns Of FDI?
8/19/2019 International Business Collier Evans
179/501
8-8
The growth of FDI is a result of1. a fear of protectionism want to circumvent trade barriers
2. political and economic changes deregulation, privatization, fewer restrictions on
FDI3. new bilateral investment treaties designed to facilitate investment
4. the globalization of the world economy
many companies now view the world as theirmarket need to be closer to their customers
What Are The Patterns Of FDI?
8/19/2019 International Business Collier Evans
180/501
8-9
Gross fixed capital formation - the totalamount of capital invested in factories,stores, office buildings, and the like
the greater the capital investment in aneconomy, the more favorable its futureprospects are likely to be
So, FDI is an important source of capital
investment and a determinant of the futuregrowth rate of an economy
8/19/2019 International Business Collier Evans
181/501
What Is The Source Of FDI?
8/19/2019 International Business Collier Evans
182/501
8-11
Since World War II, the U.S. has been thelargest source country for FDI
the United Kingdom, the Netherlands, France,Germany, and Japan are other importantsource countries
together, these countries account for 60% ofall FDI outflows from 1998-2010
8/19/2019 International Business Collier Evans
183/501
Why Do Firms Choose Acquisition
Versus Greenfield Investments?
8/19/2019 International Business Collier Evans
184/501
8-13
Most cross-border investment is in theform of mergers and acquisitions ratherthan greenfield investments
between 40-80% of all FDI inflows per annumfrom 1998 to 2009 were in the form ofmergers and acquisitions
but in developing countries two-thirds of
FDI is greenfield investmentfewer target companies
8/19/2019 International Business Collier Evans
185/501
Why Choose FDI?
8/19/2019 International Business Collier Evans
186/501
8-15
Question: Why does FDI occur instead ofexporting or licensing?
1. Exporting - producing goods at homeand then shipping them to the receivingcountry for sale exports can be limited by transportation
costs and trade barriers
FDI may be a response to actual orthreatened trade barriers such as importtariffs or quotas
Why Choose FDI?
8/19/2019 International Business Collier Evans
187/501
8-16
2. Licensing - granting a foreign entity the right toproduce and sell the firm’s product in return fora royalty fee on every unit that the foreignentity sells
Internalization theory (aka market imperfections
theory) - compared to FDI licensing is less attractive firm could give away valuable technological know-
how to a potential foreign competitor does not give a firm the control over manufacturing,
marketing, and strategy in the foreign country
the firm’s competitive advantage may be based onits management, marketing, and manufacturingcapabilities
What Is The Pattern Of FDI?
8/19/2019 International Business Collier Evans
188/501
8-17
Question: Why do firms in the same industryundertake FDI at about the same time and thesame locations?
Knickerbocker - FDI flows are a reflection of
strategic rivalry between firms in the globalmarketplacemultipoint competition -when two or more enterprises
encounter each other in different regional markets,national markets, or industries
Vernon - firms undertake FDI at particular stagesin the life cycle of a product
What Is The Pattern Of FDI?
8/19/2019 International Business Collier Evans
189/501
8-18
Question: But, why is it profitable for firms toundertake FDI rather than continuing to exportfrom home base, or licensing a foreign firm?
Dunning’s eclectic paradigm - it is important toconsider
location-specific advantages - that arise from usingresource endowments or assets that are tied to aparticular location and that a firm finds valuable tocombine with its own unique assets
externalities - knowledge spillovers that occur when
companies in the same industry locate in the samearea
What Are The TheoreticalApproaches To FDI?
8/19/2019 International Business Collier Evans
190/501
8-19
The radical view - the MNE is an instrument ofimperialist domination and a tool for exploitinghost countries to the exclusive benefit of theircapitalist-imperialist home countries in retreat almost everywhere
The free market view - international productionshould be distributed among countries accordingto the theory of comparative advantage
embraced by advanced and developing nationsincluding the United States and Britain, but no countryhas adopted it in its purest form
What Are The TheoreticalApproaches To FDI?
8/19/2019 International Business Collier Evans
191/501
8-20
Pragmatic nationalism - FDI has both benefits(inflows of capital, technology, skills and jobs)and costs (repatriation of profits to the homecountry and a negative balance of paymentseffect)
FDI should be allowed only if the benefits outweighthe costs
Recently, there has been a strong shift towardthe free market stance creatinga surge in FDI worldwidean increase in the volume of FDI in countries with
newly liberalized regimes
How Does FDI BenefitThe Host Country?
8/19/2019 International Business Collier Evans
192/501
8-21
There are four main benefits of inwardFDI for a host country
1. Resource transfer effects - FDI brings
capital, technology, and managementresources
2. Employment effects - FDI can bring jobs
How Does FDI BenefitThe Host Country?
8/19/2019 International Business Collier Evans
193/501
8-22
3. Balance of payments effects - FDI can help acountry to achieve a current account surplus
4. Effects on competition and economic growth -greenfield investments increase the level of
competition in a market, driving down pricesand improving the welfare of consumers
can lead to increased productivity growth, productand process innovation, and greater economic
growth
What Are The Costs OfFDI To The Host Country?
8/19/2019 International Business Collier Evans
194/501
8-23
Inward FDI has three main costs:1. Adverse effects of FDI on competition
within the host nation
subsidiaries of foreign MNEs may havegreater economic power than indigenouscompetitors because they may be part of alarger international organization
What Are The Costs OfFDI To The Host Country?
8/19/2019 International Business Collier Evans
195/501
8-24
2. Adverse effects on the balance of payments when a foreign subsidiary imports a substantial
number of its inputs from abroad, there is a debit onthe current account of the host country’s balance of
payments3. Perceived loss of national sovereignty and
autonomy
decisions that affect the host country will be made
by a foreign parent that has no real commitment tothe host country, and over which the host country’s
government has no real control
8/19/2019 International Business Collier Evans
196/501
What Are The Costs OfFDI To The Home Country?
8/19/2019 International Business Collier Evans
197/501
8-26
1. The home country’s balance of paymentscan suffer
from the initial capital outflow required tofinance the FDI
if the purpose of the FDI is to serve the homemarket from a low cost labor location
if the FDI is a substitute for direct exports
What Are The Costs OfFDI To The Home Country?
8/19/2019 International Business Collier Evans
198/501
8-27
2. Employment may also be negatively affected ifthe FDI is a substitute for domestic production
But, international trade theory suggests thathome country concerns about the negative
economic effects of offshore production (FDIundertaken to serve the home market) may notbe valid may stimulate economic growth and employment in
the home country by freeing resources to specializein activities where the home country has acomparative advantage
How Does GovernmentInfluence FDI?
8/19/2019 International Business Collier Evans
199/501
8-28
Governments can encourage outward FDIgovernment-backed insurance programs to
cover major types of foreign investment risk
Governments can restrict outward FDIlimit capital outflows, manipulate tax rules, or
outright prohibit FDI
8/19/2019 International Business Collier Evans
200/501
How Do InternationalInstitutions Influence FDI?
8/19/2019 International Business Collier Evans
201/501
8-30
Until the 1990s, there was no consistentinvolvement by multinational institutions inthe governing of FDI
Today, the World Trade Organization ischanging this by trying to establish auniversal set of rules designed to promotethe liberalization of FDI
What Does FDIMean For Managers?
8/19/2019 International Business Collier Evans
202/501
8-31
Managers need to consider what tradetheory implies about FDI, and the linkbetween government policy and FDI
The direction of FDI can be explainedthrough the location-specific advantagesargument associated with John Dunning
however, it does not explain why FDI ispreferable to exporting or licensing, mustconsider internalization theory
What Does FDIMean For Managers?
A Decision Framework
8/19/2019 International Business Collier Evans
203/501
8-32
A Decision Framework
What Does FDIMean For Managers?
8/19/2019 International Business Collier Evans
204/501
8-33
A host government’s attitude toward FDI isimportant in decisions about where tolocate foreign production facilities andwhere to make a foreign direct investment
firms have the most bargaining power whenthe host government values what the firm hasto offer, when the firm has multiple
comparable alternatives, and when the firmhas a long time to complete negotiations
8/19/2019 International Business Collier Evans
205/501
International Business
9e
By Charles W.L. Hill
McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.
8/19/2019 International Business Collier Evans
206/501
Chapter 9
Regional Economic
Integration
What Is RegionalEconomic Integration?
8/19/2019 International Business Collier Evans
207/501
9-3
Regional economic integration - agreementsbetween countries in a geographic region toreduce tariff and non-tariff barriers to the freeflow of goods, services, and factors of
production between each otherQuestion: Do regional trade agreements
promote free trade?
In theory, yes, but the world may be moving toward a
situation in which a number of regional trade blockscompete against each other
What Are The Levels OfRegional Economic Integration?
8/19/2019 International Business Collier Evans
208/501
9-4
1. A free trade area eliminates all barriers tothe trade of goods and services amongmember countries
European Free Trade Association (EFTA) -Norway, Iceland, Liechtenstein, andSwitzerland
North American Free Trade Agreement
(NAFTA) - U.S., Canada, and Mexico
8/19/2019 International Business Collier Evans
209/501
What Are The Levels OfRegional Economic Integration?
4 An economic union has the free flow of
8/19/2019 International Business Collier Evans
210/501
9-6
4. An economic union has the free flow ofproducts and factors of production betweenmembers, a common external trade policy, acommon currency, a harmonized tax rate, anda common monetary and fiscal policy
European Union (EU)5. A political union involves a central political
apparatus that coordinates the economic,social, and foreign policy of member states the EU is headed toward at least partial political
union, and the U.S. is an example of even closerpolitical union
What Are The Levels OfRegional Economic Integration?
Levels of Economic Integration
8/19/2019 International Business Collier Evans
211/501
9-7
Levels of Economic Integration
Why Should CountriesIntegrate Their Economies?
8/19/2019 International Business Collier Evans
212/501
9-8
All countries gain from free trade and investment regional economic integration is an attempt to exploit
the gains from free trade and investment
Linking countries together, making them more
dependent on each othercreates incentives for political cooperation and
reduces the likelihood of violent conflict
gives countries greater political clout when dealing
with other nations
What Limits EffortsAt Integration?
Economic integration can be difficult because
8/19/2019 International Business Collier Evans
213/501
9-9
Economic integration can be difficult becausewhile a nation as a whole may benefit from a regional
free trade agreement, certain groups may lose it implies a loss of national sovereignty
Regional economic integration is only beneficial
if the amount of trade it creates exceeds theamount it diverts trade creation occurs when low cost producers within
the free trade area replace high cost domesticproducers
trade diversion occurs when higher cost supplierswithin the free trade area replace lower cost externalsuppliers
8/19/2019 International Business Collier Evans
214/501
8/19/2019 International Busine
Top Related