Cases Int Management Flashcards
What is globalisation?
The widening set of interdependent relationships among people from different parts of a world divided into nations.
What does international business consist of?
All commercial transactions that take place between two or more countries, including sales, investments and transportation
What is leading to increasing globalisation?
TLCCCCS
- Increase in and expansion of technology
- Liberalisation of cross-border trade and resource movements
- Growing consumer pressures (bring that product here too!)
- Increased global competition
- Changing political situation and government policies
- Expanded cross-national cooperation – EU, NAFTA
- Development of services that support international business (agents…)
What are the costs of globalisation?
Threats to national sovereignty
Economic growth and environmental stress (argument for global growth and global cooperation)
Growing income inequality and personal stress (24H work cycle, the rich get richer, the poor get poorer)
How is globalisation a threat to national sovereignty?
Local objectives and policies: companies go elsewhere if conditions aren’t right, e.g. Germany leather industry due to high regulations
Small economies’ overdependence
Cultural homogeneity (McDonalds, H&M, Zara…)
What objectives lead countries to engage in international business?
Expand sales (increase potential market and profits)
Acquiring resources (lower cost, new/better products, additional operating knowledge)
Minimising risk
How does engaging in international business minimise risk?
- Smoothing sales and profits: less dependent on current context through geographical diversification - one economy goes bust, the other is going well.
- Preventing competitors from gaining advantages (competitor cross-subsidising markets to undercut prices)
What modes of operations exist for international business?
- Importing and exporting
- Tourism and transportation
- Asset use: licensing and franchising
- Service performances: turnkey operations and management contracts
- Investments: Foreign direct investment (including joint ventures) and portfolio investment
What is a foreign direct investment?
Investor takes a controlling interest in a foreign company
e.g. Joint Venture
What is a Portfolio Investment?
A non-controlling financial interest in another entity.
E.g. Mutual funds often include international companies.
What are some importing and exporting modes of operations?
Merchandise exports and merchandise imports (for goods) = visible exports and imports
Service exports and service imports
What kinds of collaborative arrangements between companies are there?
- Joint ventures
- Licensing arrangements
- Management contracts
- Minority ownership
- Long-term contractual arrangements
What are the characteristics of a strategic alliance?
- Companies work together, and the agreement is critical to at least one partner
- Agreement does not involve joint ownership.
What are multinational enterprises (MNEs)?
They take a global approach to markets and production or have operations in more than one country.
Also called:
- multinational corporations (MNCs)
- multinational companies (MNCs)
- transnational companies (TNCs)
Why and how companies adapt their typical methods of doing business?
Why: foreign conditions may dictate a particular method (e.g. need to at least assemble there, highly automated/manual)
How: Operating modes may be different from those used domestically
What does culture refer to?
The learned norms based on values, attitudes and beliefs of a group of people.
It affects every business function (e.g. when pay for goods)
What is the advantage of fostering cultural diversity?
Global competitive advantage through people with diverse backgrounds and experiences (so better access to market, broader range of ideas)
What is the disadvantage to cultural diversity?
Cultural collision can occur when:
- A company implements practices that are less effective or
- An employee has difficulty in accepting or adjusting to foreign behaviours
What hinders building cultural awareness?
- No foolproof method to do so
- Most agree cultures differ, but not on what the differences are
- Subconscious reactions to circumstances
- Assumption that all societal subgroups are identical (e.g. many subcultures in Spain, USA, Germany…)
What are the shortcomings of cultural approaches?
- What people say about their own attitudes may be coloured by their culture, which they are trying to explain.
- Specific variations within countries get overlooked when researchers focus on national differences in terms of averages
- Cultures evolve => behaviour reflecting current attitudes may change in the future. E.g. post DDR, particularly younger generations have changed.
What are the advantages and disadvantages of using a nation as a point of reference to delineate cultures?
Pros:
- Similarity is a cause and effect of national borders
- Laws apply primarily along national lines
Cons:
- Not everyone in a country is alike; variation within some countries is great
- Similarities link groups from different countries more than with their own country (e.g. urban people in big cities, Finance workers in Frankfurt and London)
How do cultures form?
- Cultures are transmitted in various ways: from parent to child, teacher to pupil, social leaders to follower, but particularly from peer to peer
- Language as a diffuser (spreader) and stabiliser of culture
- Religion as a cultural stabiliser (many strong values are the result of a dominant religion)
- By age 10, most children have a basic value system that is firmly in place and not easily changed.
E.g. Eritrea – long coast line and starvation, but due to culture don’t eat fish => can only convince children under 10 to eat it.
What are sources of changing a culture
Choice - e.g. decide to move
Imposition - e.g. refugees –> more difficult to change
Why does English travel so well?
Although only 8% have English as a first language, 33% of the world’s output come from countries where English is the primary language.
What behavioural practices affect business?
CRRIMS
- Communications
- Relationship preferences
- Risk-taking behaviour
- Information and task processing
- Work motivation
- Issues in social stratification
What issues in social stratification affect business?
PAGOOFA
- Performance orientation (USA)
- Ascribed vs acquired group memberships
- Gender based groups: egalitarian?
- Open and closed societies: how easy to enter?
- Occuption: is occuption or income more important? Wealth as positive or negative?
- Family based groups: Arabic - a good family?
- Aged based groups: how seen? Promotion by seniority or performance? Don’t send a young person to an Asian country (not accepted)
What issues in work motivation affect business?
AHEMP
- Assertiveness - the Masculinity/Femininity Index
- Hierarchy of Needs indicates that people try to fulfil lower-level needs before moving on to higher-level needs –> don’t target too high or low?
- Expectation of success and reward –> motivation depends on success and reward
- Materialism and motivation: is income important?
- Productivity/leisure tradeoff
What is the Hierarchy of Needs?
Physiological, Security, Afiliation, Esteem, Self-actualisation
What issues in relationship preferences affect business?
Power distance - Hofstede (between managers and employees)
Individualism vs collectivism
What issues in risk taking behaviour affect business?
TUF
- Trust
- Uncertainty avoidance
- Future orientation v fatalism (who do pick to write the strategy?)
What issues in information and task processing affect business?
- Perception of cues/hints
- Obtaining information: low context (facts) v high context cultures - e.g. ad for car with beautiful woman
- Information processing:
- – Idealism vs pragmatism
- – Monochromic (one thing after the other like Germany) vs polychromic (multitasking) cultures.
What issues in communications affect business?
- Spoken and written language: lost in translation?
- Silent language: offer food or not, distance (personal space, in Islam men don’t shake hands with women)
- Time and punctuality
- Body language
- Prestige – hierarchy? Power distance?
What cultural considerations should a business consider when determining their strategy for how much to adapt a business to the host culture?
- The extent to which a culture is willing to accept anything foreign: host cultures do not always expect foreigners to adjust to them.
- Whether key cultural differences are small or great: cultural differences in seemingly homogeneous countries may be overlooked
- Ability of individuals to adjust: culture shock and reverse culture shock
- The general management orientation of the company
What are the possible general management orientations of a company in relation to culture?
- Polycentrism: business units abroad should act like local companies
- Ethnocentrism: home culture is superior to local culture, overlook national differences
- Geocentrism: integrate home and hot practices
What rational elements should be considered when devising a strategy to institute change?
VCR PORTL • Value systems • Cost-Benefit Analysis of change • Resistance to too much change • Participation (in decisions): doesn’t work for some decisions, e.g. who has to be fired => can explain the decision at least • Opinion Leadership => sometimes you have to win over some opinion leaders, e.g. customers => they will spread the idea • Reward sharing • Timing • Learning abroad
What is a legal system?
The mechanism for creating, interpreting and enforcing the laws in a specified jurisdiction.
What types of legal systems are there?
- Common law
- Civil law
- Theocratic law (religion, e.g. Islam)
- Customary law
- Mixed systems
What is the bases of rule in a country?
Totalitariam system: the rule of man - legal rights derive from the individual who commands the power to impose them.
Democratic system: the rule of law - systematic and objective laws applied by public officials who are held accountable for their administration
How does the political system work, and what are its functions?
• Interaction between the international environment and domestic environment
1. Inputs: interest articulation by: politicians, individuals, business, and interest groups
2. → Interest aggregation
3. →Policy alternatives formulated (e.g. incentive to buy an electric car)
4. →implementation and adjudication (e.g. legality)
5. Outputs: New policies by: political parties, bureaucracies, legislatures, courts
• Outputs feeds back to each previous stage.
How do you formulate and implement political strategies?
- Identify the issue
- Define the political aspect of the issue (Is it a political issue? Behind it could be culture, poverty….)
- Assess the potential political action of other companies and special-interest groups
- Identify important institutions and key individuals
- Formulate strategies
- Determine the impact of implementation
- Select the most appropriate strategy and implement it.
How does political ideology affect management decisions?
- Political risk
- Government intervention in the economy
What is a political ideology?
A body of constructs (complex ideas), theories, and aims that constitute a socio-political program.
Nb. Most modern societies are pluralistic - several ideologies exist in one society.
What are the basic political ideologies?
It is a political spectrum from democracy to totalitarianism.
Different ideologies, but effect can be similar without a system of checks and balances → a selected few decide what is good for everybody.
Describe democracy.
Can be reactionary, conservative, liberal, radical
Ideology:
• All citizens are politically and legally equal
• All are equally entitled to freedom of thought, opinion, belief, speech and association
• All equally command sovereign power over public officials
Waht are the indicators of democracy?
- Freedom of opinion, expression, press and freedom to organize
- Election: voters decide who represents them
- Limited terms of elected officials (E.g. US president can only be elected twice)
- An independent and fair court system, with regard to individual rights and property
- A non-political bureaucracy and defense infrastructure
- Accessibility to the decision-making process.
Name some prominent types of democracy
- Representative
- Multiparty
- Parliamentary
- Social
Nb: democracy can be direct (Switzerland) or indirect.
Describe totalitarianism.
- Totalitarian system subordinates the individual to the interests of the collective → dissent is eliminated through propaganda, indoctrination, surveillance, censorship, persecution and violence.
What are some prominent types of totalitarianism?
- Authoritarianism (similar to reactionary)
- Fascism
- Communist
- Dictatorship (similar to radical)
There are secular and theocratic types of totalitarianism
If thinking about dealing with countries that are not “free”, what should a company consider?
- product category
- safety of workers
- ideology –
• ban/boycott (trade will stabilise the current system) v
• Trade will open up the country - consequences for inhabitants.
Nb: Map of Political Freedom can be useful, but what is defined as free? Democracy?
What is political risk?
A risk that occurs because of political instability
What are the types and causes of political risk?
- Opinions of political leadership
- Civil disorder
- External relations
What is the difference between micro and macro political risks?
Micro: political actions are aimed at specific foreign investments
Macro: political actions affect a broad spectrum of foreign investments
What are the general categories of political risk?
Nb: you need to address these each in a different way.
- Systemic political risk: assume laws and political leaders will change over time
- Procedural political risk: bureaucracy doesn’t work without pushing for a decision, e.g. bribe → raises cost, not following international law, bribes affect donors, receivers and third parties.
- Distributive political risk: if exploiting natural resources and business is successful, local want a share (taxes, work) – although they may not have wanted a part of the initial risk!
- Catastrophic political risk: riots, civil unrest, civil war, everything is out of control.
What types of Government Intervention paradigms are there?
- Individualistic paradigm: Minimal government intervention in the economy
- Communitarian paradigm: The government defines needs and priorities and partners with business in a major way.
What criteria should you use to select countries to invest?
- Demand conditions or market potential (preferred approach to start with, particularly if looking for a market; you could find out that it’s best to produce there too)
- Factor conditions or production factors (if looking to produce there)
What does looking at the demand conditions or market potential include?
- Composition of demand (homogeneity) (quality)
- Size and growth of demand (quantity)
- Internationalisation of demand
What does looking at factor conditions or production factors include?
Human PICK
- Human resources
- Physical resources
- Infrastructure
- Capital
- Knowledge resources (expertise in an area)
What is economic freedom, and where is it measured?
- People have the right to work, produce, consume, save and invest the way they prefer (with limitations so as not to harm others).
- Measured across: labour freedom, business freedom, trade freedom, property rights, financial freedom, investment freedom, freedom from corruption, government size, fiscal freedom and monetary freedom.
How can Economic freedom be measured?
Vertical axis: Index of Economic Freedom (higher = more freedom)
Horizontal axis: Region
Size of bubble: population
How can countries be classified by income?
- GDP
- Gross National Income (GNI)
- Purchasing Power Parity (PPP)
- Human Development Index
- Green measures of Gross National Product (GNP): Green economics, sustainable development and happynomics
What is Gross National Income (GNI)
Market value of final goods and services produced by domestically owned factors of production (including overseas)
How can countries be classified according to GNI?
GNI per capita adjusted for purchasing power parity
World Bank classifications:
• Low income (31) - $1,025 or less – developing countries
• Lower middle income (52) - $1,026 - $4,035 developing
• Upper middle income (55) - $4,036 - $12,475 developing
• High income (79) – $12,476 or more (developed countries)
What is GDP?
Gross Domestic Product = Market value of final goods and services newly produced domestically.
What is Purchasing Power Parity (PPP)
Number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as $1 would buy in the USA.
What is the Human Development Index?
Gives a more comprehensive measure of economic development. It combines indicators of:
- Purchasing power: standard of living as measured by GNI per capita expressed in PPP for US dollars
- Education: Adult literacy rate and the combined primary, secondary and tertiary gross enrolment ratio
- Health: Longevity (life expectancy at birth)
What is green economics?
Green economics aims to gauge economic performance in terms of the effect of current choices on long-term sustainability.
No consensus how to adjust GDP for green concerns, but candidate:
- Green Net National Product (adjusts for depreciation of country’s physical assets)
- Genuine Progress Indicator (adjusts for resource depletion, cost of crime…)
- Gross National Happiness (sustainable development, cultural values, natural environment and good governance)
- Happy Planet Index (environmental efficiency in supporting well-being)
What is sustainable development?
Meet the needs of the present without compromising the ability of future generations to meet their needs.
What is Happynomics?
The importance of emotional propserity in addition to financial prosperity.
Measures =
- Genuine Progress Indicators
- Gross National Happiness
- Happy Planet Index
How can you classify countries by economic system?
Look at who owns the resources engaged in economic activity - it could be the public sector, private sector or both.
Market economy: resources primarily owned and controlled by private sector:
- Consumer souvereignty (consumer decides)
- Freedom for companies to operate in the market.
Command Economy (centrally planned economy) e.g. N Korea, increasingly Venezuela, perhaps still Cuba
Mixed economy:
- Market socialism (e.g. France): state owns significant resources, but allocation comes from the market price mechanism. E.g. China: strategic industry –> Govt invests. Gvermany: social market economy –> protect employees
In addition to considering the country’s income level and economic system, what economic considerations should managers consider?
- Inflation
- Unemployment (If 0% –> hard to find workers. If high –> limited ability to consumer, less access to debt, less market)
- Debt (govt) and balance of payments (net exports) –> business conditions could change
- Income distribution and poverty
- Labour cost and productivity
How can inflation affect business strategy?
Inflation = measure of the increase in the cost of living.
Nb: problems of measuring inflation (some things get more expensive, other things get cheaper)
Problems in comparing inflation with other countries, as countries use different indexes; e.g. CPI v EU’s Harmonised Index of Consumer Prices
Hyperinflation issues.
What is reflation?
Increasing the money supply and reducing taxes to accelerate economic activity and increase real GDP.
What is the unemployment rate?
Unemployed workers seeking employment for pay
—————————————————
total civilian labour force
What is the Misery Index?
The sum of a country’s inflation and unemployment rates
What kinds of debt are there?
Debt = the total of a government’s financial obligations. This includes:
- internal debt (to locals)
- external debt (to other countries) –> not so independent in their decision making, e.g. Greece.
What does growing public debt signal?
- Tax increases (to pay interest on debt), which also reduces consumption
- Reduced government spending (increasing austerity)
- Which leads to reduced growth in real GDP.
How can I measure income distribution?
The Gini coefficient:
- This measure assesses the degree of inequality in the distribution of family income in a country.
- The more nearly equal a country’s income distribution, the lower the Gini coefficient (0.2 = very equal; 0.6 = very unequal)
Is income distribution an issue in wealthy countries?
Uneven income distribution has grown strongly in wealthy countries over the last 20 years.
E.g. China shows strong differences between rural and urban areas in income.
What is poverty?
Income perspective: when income is below the threshold considered a minimum to satisfy specific needs and wants.
World Bank perspective: average PPP income less than $3,740 p.a., which is 78% of the World population. Extreme poor = less than $1.90 PPP per day.
What is the potential of the poor?
There is immense market potential of today’s poor consumers. E.g. mobile phones in India: from 2002 to 2006, increase from 15m to 136m subscribers.
How does labour cost and productivity play a role in business strategy?
For many goods and services, the cost of labour is a key element of total cost, so companies scan the world for the best deal.
The best deal is influenced by worker productivity, or the efficiency with which goods and services are produced. Better technology can lead to higher productivity.
How can you measure economic freedom?
Economic Freedom Index
What does transitioning to a market economy involve?
It involves:
- liberalising economic activity (privatisation, deregulation, property rights protection)
- reforming business activity (antitrust legislation for competition)
- establishing legal and institutional frameworks (including fiscal and monetary reform, e.g. clear rules on tax, when money can be printed…)
What about MNEs cause concern for some countries?
Their large size
What influences an MNE to choose FDI (Foreign Direct Investment)?
Pick mode of operation inline with its objectives and strategy.
Home-country and host-country enhancements and restrictions–> FDI
MNEs have things to offer in five areas. What are they?
- Trade
- Investment
- Technology
- Human resources
- Environment
What do MNEs have to offer in terms of investment?
- Increased productivity and efficiency
- Links to local companies
- Capital formation (capital accumulation)
What do MNEs have to offer in terms of Human Resources?
- Training (train staff in new techniques)
- Employment
- Managerial skills
What do MNEs have to offer in terms of Technology?
- R and D (know-how)
- Industrial upgrading
- New capital equipment
What do MNEs have to offer in terms of Trade?
- Export expansion
- Lower-cost imports (supply-chain network)
What do MNEs have to offer in terms of the Environment?
- Pollution-abatement skills
- Access to clean technologies
- Company-wide standards
What factors are relevant when considering the relationship between those who make foreign direct investments (MNEs) and possible effects on receiving countries?
- Stakeholder trade-offs
- Cause-and-effect relationships
- Individual and aggregate effects
What is the economic impact of the MNE?
Balance of payments effects:
- Net import effect
- Net capital flow
Growth and emplowment effects:
- Home country losses
- Host-country gains and losses.
Why do companies care about ethical behaviour?
- To develop a competitive advantage
- To avoid being perceived as irresponsible
Also, unethical and irresponsible behaviour could:
- result in legal sanctions
- result in consumer boycotts
- lower employee morale
- cost sales because of bad publicity.
How is culture, the law and ethical behaviour of companies related?
- Laws embody cultural values, but legality may not sufficient; not everything that is unethical is illegal.
- NB: Laws will become similar in different countries.
So what is ethical? - Respecting cultural identity
- Negotiating between evils?
- Relativism vs Normativism: do truths depend on the values of the groups, or are there universal standards? (a bit of both)
What is bribery, and what is it used for?
Bribes = payments or promises to pay cash or anything of value to:
- get government contracts, or
- get officials to do what they should be doing anyway
What is the problem with bribery?
- Affects performance of company and country (morale…)
- Erodes government authority
- Damages reputations when disclosed
- Increases cost of doing business
What are the sources of pressure for ethical behaviour towards workers?
G TuNIC
- Government
- Trade Unions
- NGOs, media
- Individual and corporate investors (e.g. Pension Funds - Norway)
- Consumers
How big is the problem with child labour?
ILO estimates 250 million children aged 5-17 years work.
What are some approaches for MNEs to behave ethically with respect to labour?
- Join the Ethical Trading Initiative (an alliance of companies, trade unions and NGOs that promotes respect for workers’ rights around the globe)
- Comply with the UN Global Compact: establishes guidelines for appropriate behaviour in human rights for: labour, the environment, anti-corruption
- Avoid operating where child labour is common, or establish responsible policies in those countries (IKEA)
- Some companies refuse to hire individuals who want to work long hours (concerned about exploitation)
- Company code of conduct
What does an effective company code of conduct achieve?
- It sets global policy that must be complied with
- Communicates the code to employees, suppliers and subcontractors
- Ensures that policies are carried out
- Reports results to external stakeholders
Why study trade theory?
Trade theory helps managers and government policy makers focus on the questions:
- what products should we import and export
- how much should we trade
- with whom should we trade
What does trade theory look at?
- Trade: Importing and exporting goods and services
- Transferring production factors, such as labour and capital, internationally
What are descriptive and prescriptive trade theory?
Descriptive: Trade theories explain trade patterns that exist in the absence of government interference.
Prescriptive: Trade theories explain what government actions should strive for in trade.
What are the categories of trade theory (not descriptive/prescriptive)
- Interventionist (so prescriptive): Mercantilism and Neomercantilism
- Free-trade theories: Absolute advantage, comparative advantage
- Explaining trade patterns: country size, factor proportions, country similarity
- Trade competitiveness (explains why 1 country is particularly competitive): Product life cycle theory, Porter diamond.
What does mercantilism say, and what does it explain?
States:
- Countries should export more than they import (gives a favourable balance of trade) - stems from colonial time.
- Government should control trade –> incentives to industries that export.
Further explains:
- How much should be traded, what products, and with whom.
What does the free-trade theory of absolute advantage say?
Government should not control trade.
Says focus shifts to particular products because:
- Some countries produce some goods more efficiently than others. A country’s resources shift to the efficient industries, because otherwise it can’t compete.
- Effects of specialisation: Labour becomes more skilled by repetition of tasks, no lost time from switching production, incentivises more effective working methods.
Why does the free-trade theory of absolute advantage say some countries produce particular goods more efficiently than other?
- Natural advantage: climate, natural resources, labour force availability: e.g. wine is better in some climates
- Acquired Advantage: product or process technology: passing on knowledge from generation to generation –> quality skill sets.
What assumptions of the theory of specialisation do policy makers question?
FED STMPS
- Full employment
- Economic efficiency (people enjoy doing something different)
- Division of gains (more skilled party reaps more or the gains)
- Services (the theory may not apply for services, as they mostly need to be produced on site)
- Transport costs (the theory doesn’t consider transport costs)
- Mobility (people move for better conditions)
- Production networks (everything is done everywhere (Airbus))
- Statics and dynamics (costs do not stay the same)
What do trade pattern theories look at?
Country size, Factor-Proportions, Country Similarity Theories
- What types of products countries will export and import (all theories)
- With which partners countries will primarily trade (Factor Proportions and Country Similary only)
- How much a country will depend on trade if it follows a free trade policy (Country size only)
What does the Country Size theory of trade say?
A Trade Pattern theory
Bigger countries tend to export a smaller portion of outpout and import a smaller part of consumption than small countries.
Why does the Country Size theory of trade say bigger countries trade less?
(A Trade Pattern theory)
Bigger countries:
- have higher transport costs for foreign trade, as their production and market centres are likely to be further from other countries (cf. Belgium’s distance to France and Germany)
- can handle large-scale production
- haver varied climates and natural resources, so are generally more self-sufficient
What does the Country-siilarity theory of trade say?
A Trade Pattern theory
Most trade today occurs among high-income countries because they:
- share similar market segments, and
- produce and consume much more than emerging economics.
Much of the pattern of two way trading partners may be explained by:
- cultural similarity (historic colonial relationships –> culture and language)
- Geographic distance between them
- Similarity of location (similar political and economic interests)
Example of opposite: Cuba and USA
What does the Factor-Proportions theory of trade say?
A Trade Pattern theory
- A country’s relative endowments of land, labour and capial will determine the relative costs of these factors (Factors in relative abundance are cheaper than factors in relative scarcity).
- Factor costs will determine which goods the country can produce most efficiently.
What are the critiques against Factor-Proportions theory of trade?
- Production factors are not homogenous, especially labour.
- There are clear relations between labour and capital, as labour skills strongly depend on education.
- Products can be produced by different technical methods, e.g. with capital or labour.
What is the relationship between trade and factor mobility?
Production factors (capital and workers) move for:
- political motives (lack of freedom, refugees…), and
- economic motives
Factor mobility may substitute trade:
- pressures for the most abundant factrs to move to an area of scarcity.
- lowest costs occur when trade and product factors are both mobile.
- Both finished goods and production factros are partially mobile internationally.
Complementary - factor mobility may stimulate trade because of:
- the need for components
- the parent’s ability to sell complementary products
- the need for equipment for the subsidiary.
What are managers’ incentives to export and import?
Incentives to export:
- Use excess capacity
- Economies of scale
- Increased mark-up
- Spread the risk (if one market gets worse)
Incentives to import:
- Cheaper supplies
- Additions to product line
- Reduction of supply risk
What physical and social factors affect the flow of goods and services between countries
Country A and Country B’s:
- Political policies and legal practices
- Cultural values, attitudes and beliefs
- Economic forces
- Geographic influences
Trade enhancements and restrictions between the countries
Companies’ competitive environment
What are the economic rationales for government intervention
- Prevent unemployment
- Protect infant industies
- Promote industrialisation
- Improve comparative position (often with the idea to enter new markets too)
What are the possible impacts of import restrictions designed to create domestic employment?
May lead to retaliation by other countries (Nb: less likely if small economy implements restrictions, and retaliation by small economies is less effective)
May decrease export jobs because of:
- price increases for components (retaliations, wages increase from lower unemployment), and
- lower incomes abroad.
What does the economic rationale of protecting infant industries mean?
Government prevention of import competition is necessary to help certainindustries move from high-cost to low-cost production.
Why do countries seek protection to promote industrialisation?
Because industrialisation:
- brings faster growth than agricultrue
- brings more income than primary products do
- brings in investment funds
- diversifies the economy
- reduces imports and promotes exports
- helps the nation-building process (creating national identity)
How do trade controls improve a country’s comparative position?
Export subsidy:
- improve balance of payments (higher net exports to reduce debt to other countries)
- gain fair access to foreign markets
Import tax:
- lower profit margins for foreign producers and prevent foreign monopoly prices
- improve balance of payments
Import subsidy or export tax:
- ensure domestic consumers get low prices
- raise prices for foreign consumers
What are the non-economic rationales for government intervention in trade?
- Maintain essential industries
- Deal with unfriendly countries (trade embargoes)
- Maintain or extend spheres of influence (prevent them from getting stronger (weapons), put access to natural resources as a condition for something…)
- Preserve national identity (e.g. French wine, German beer, Swabian Maultaschen).
What do countries need to consider when determining to protect essential industries.
- Determine which industries are essention (military, agriculture, energy?)
- Consider costs and alternatives
- Consider political consequences - how will other countries react if you do that? Your own country?
How to trade controls help governments deal with “unfriendly countries”?
- Prevent political enemies from gaining goods that would help them achieve their objectives - oil, gas, minerals
- Political concerns - don’t sell them weapons they can use against you.
- Maintain domestic supplies of essential goods.
How can governments use trade controls to maintain or extend their spheres of influence?
Coerce governments to follow certain political actions or punish companies whose governments do not.
E.g. Give aid and credits to, and encourage imports from, countries in a political alliance or who vote a preferred way in international bodies.
Why would governments use trade controls to preserve national identity?
Sustain the collective identity that sets their citizens apart from those in other nations –> limit foreign products and services in certain sectors.
e.g. German beer
French wine
Countries with a strong rice culture…
What trade controls directy affect price and indirectly affect quantity?
- tariffs
- subsidies (milk is subsidised in Germany)
- customs-valuation methods (e.g. 20% on value of the good –> discussion on value of products)
- special fees (fees for an inspection, e.g. FDA)
What trade controls directly affect quantity and indirectly affect price?
- quotas
- voluntary export restraint
- “buy local” legislation –> authorities buy local products
- standards and labels
- licensing arrangements (to be able to sell it there)
- specific permission requirements
- administrative delays
- reciprical requirements (between countries - if you do A, I’ll agree to do B)
- restrictions on services (not allowed to operate there without a country-specific qualification - e.g. lawyers operating overseas).
What can companies do when facing import competition?
- Move operations to another country
- Concentrate on market niches
- Adopt internal innovations, such as greater effiiciency or superior products
- Try to get protection (short term solution only)
What types of integration are there?
- Economic
- Bilateral
- Regional
- Global integration
What is Economic integration?
The political and/or monetary agreements among nations and world regions in which preference is given to member countries.
At what different scales can there be economic integration
- Bilateral
- Regional
- Global integration
What are bilateral agreements?
Agreements between two individual countries, or between one country and a group of other countries, e.g. China and the EU.
Also known as:
- Preferential trade agreements (PTAs)
- Free trade agreements (FTAs)
What are regional trade agreements?
Integration confined to a region and involving more than two countries, e.g. North American Free Trade Area NAFTA
What are the four types of regional economic integration?
- Free trade area (FTA): no internal tariffs
- Customs union: no internal tariffs plus common external tariffs
- Common market: customs union plus factor mobility (labour and capital), e.g. EU
- Economic integration: coordinate fiscal and monetary policy, e.g. Eurozone
What are the resasons for alliances among neighbouring countries?
- Short distances for goods and people
- Similar customer tastes
- Often common history and interests
What does the WTO do?
World Trade Organisation (WTO):
- continues the most favoured nation clause of the GATT (General Agreement on Tariffs and Trade) –> no discrimination between trading partners; grant someone a special favour and you have to do the same for all other WTO members.
- provides a mechanism for dispute settlement
What is the WTO criticised for?
- Failing to pay enough attention to labour and environmental concerns
- Undermining global diversity
- Benefitting rich at the expense of the poor
What are the static and dynamic effects of integration?
Static effects of integration = the shifting of resources from inefficient to efficient companies.
The following have a static effect:
- Trade barriers drop for member countries
- Trade barriers remain higher for non-member countries
Dynamic effects of integration = the overall gorwth in the market and the impact on a company caused by expanding production and economies of scale.
The following have a dynamic effect:
- Market size increases
What is impact on trade and investment from trade barriers dropping for member countries?
Trade barriers drop for member countries (static effect)
–> Trade impact = Trade creation:
Production shifts to more efficient producers due to comparative advantage, allowing consumers access to more goods at a lower price
–> Investment impact:
Investment shifts to more efficient firms, possibly leading to FDI.
What is the impact on trade and investment from trade barriers remaining high for non-member countries?
Trade barriers remain higher for non-member countries (static effect)
–> Trade impact = Trade diversion:
Trade shifts to countries in the group at the expense of trade with countries not in the group (e.g. NAFTA –> trade from USA diverted to Mexico)
–> Investment impact: FDI increases from firms outside the free trade agreement to avoid barriers.
How does the market size increase through trade agreements?
Trade barriers drop for member countres (static effect) + Trade barriers remain higher for non-member countries (static effect)
–> Market size increases (dynamic effect)
What is the impact on trade and investment from the market size increase?
Market size increases (dynamic effect)
–> Trade impact = Trade Creation
Production shifts to more efficient producers due to comparative advantage, allowing consumers access to more goods at a lower price
–> Investment impact: Home-country firms increase FDI to achieve economies of scale
What is the impact of economies of scale?
The cost per unit falls as the number of units produced rises; occurs in regional integration because fo the growth in market size.
What is strategy?
The efforts of managers to build and strengthen the company’s competitive position within its industry to create superior value (profitability and growth)
What is the role of strategy, and how does it interact with what external influences?
Management vision –> Strategy –> Value creation –> firm performance
These affect and are affected by the following external influences:
- Industry structure and drivers
- Competitive dynamics
- Economic conditions
- Political, legal and regulatory environment
- Technology standards and trends
- Cultural orientations
- Customer expectations
What is firm performance influenced by?
- Structure of the company’s industry
- Insight of managers’ strategic decision making
(estimates vary on the degree of influence of both factors)
When making strategy, what do managers need to be familiar with?
Industry- and firm-level conditions.
What is the Five Forces Model of industry structure?
(Porter’s Five Forces):
- Rivalry among competing sellers battling for market share
- The efforts of other companies outside the industry to convince buyers to buy their substitute products instead
- The threat of new rivals seeking market share
- The push by input suppliers to charge more for their inputs
- The push by output buyers to pay less for products
What can change industry structure?
- Competitors’ moves
- Government policies
- Changes in economics
- Shifting buyer preferences
- Technological developments
- Rate of market growth
Describe the value chain framework.
Primary activities:
- Purchased supplies and inbound logistics –> operations –> distribution and outbound logistics –> sales and marketing –> service –> Profit margin.
Secondary activities:
- Procurement
- Technology and systems development
- Human resources management
- Firm infrastructure
What is orientation in the context of value chain analysis?
Whether the particular activity takes place upstream or downstream.
What are the dimensions of the value chain?
- Primary activities
- Support activities
- Profit margin
- Orientation.
What can managers do with the value chain?
Managers can deconstruct the general idea of “create value” into a series of discrete activities.
Managers can:
- configure value activities = the way managers arrange the activities of the value chain, paying close attention to lcoation economics
- coordinate value activities: the way managers connect the activities of the value chain, leveraging a firm’s core competencies.
What asymmetric pressures do companies operating internationally face?
The asymmetric pressures of global integration versus local responsiveness.
Describe the integration-responsiveness (IR) Grid (II).
x-axis: Low/high pressure for national responsiveness
y-axis: Low/high pressure for global integration
Strategies suggested:
- High global integration, low national responsiveness: Global strategy
- High global integration, high national responsiveness: Transnational strategy
- Low global integration, low national responsiveness: International strategy
- Low global integration, high national responsiveness: Multidomestic strategy.
What is a global strategy?
high global integration, low national responsiveness
Views the world as a single market. Tightlz controls global operations from headquarters to preserve focus on standardisation.
What is a transnational strategy?
high global integration, high national responsiveness
Prefers a flexible value chain to facilitate local responsiveness. Adopts complex coordination mechanisms to facilitate global integration.
What is an international strategy?
low global integration, low national responsiveness
Uses existing core competence to exploit opportunities in foreign markets.
What is a multidomestic strategy?
low global integration, high national responsiveness
Relies of foreign subsidiaries operating as autonomous units to customise products and processes for local markets.
