I.B. Flashcards
Module 1: Importance of IB
Lack of knowledge/sensitivity can cause failed negotiations and interactions
42% of international assignments fail
83% of firms experience international assignment failure
Convergence: as we interact across borders, practices shift to becoming more similar
Divergence: more aware of own culture when you see others and then you protect it
Culture is critically important to all IB activities ○ Cross-national negotiations ○ Sales interactions ○ Leading and motivating a workforce ○ HR
Your cultural lens reference point is called a self-reference criterion
Awareness (of your own culture), respect (appreciate differences), reconciliation (adapt/integrate)
Module 1: Are we becoming more culturally similar?
While firms are growing structurally more similar, the behavior of people within the firms is maintaining its cultural uniqueness
People are becoming more adaptable to different cultures but that does not change your own cultural identity.
Awareness makes you focus on your own practices which makes you enhance/maintain that trait.
Module 1: Parochialism
Definition: Viewing the world solely from own perspective (blind to cultural differences)
- Do not recognize different ways of living and working
- Do not believe cultural diversity can offer opportunities/consequences
The greater CQ, the less parochial you are to cultural differences
Canadian culture encourages parochialism by telling us to not place people into groups and only seeing people as individuals
Module 1: Ethnocentrism
Definition: The belief that your way is the best way
Believe cultural diversity has a negative impact on firms
They aim to minimize cultural diversity
You should make a conscious effort to recognize cultural diversity without judging
Your way IS the best way in your own cultural context.
Module 1: Stereotyping
Definition: A form of categorization that organizes our experience and guides our behavior towards various groups in society.
We are programmed to anticipate, categorize and stereotype or else we would be overwhelmed.
Your conscious mind is not a good multitasker (elephant rider) but the unconscious has much more power that can be tamed when identified (elephant)
Stereotyping are the hysterics that guide you through your life.
Do not apply scores or evaluations to individuals, only groups
Ex. avg. Canadian is more individualistic than most Malaysians, however, there are some Malaysians who will be more individualistic than some canadians.
Module 1: Convergence and Divergence, and the answer
- Truth to both arguments
- In a study of Japanese and Korean firms, it found that globalization was a source of convergence of org. structures
- Evidence also exists that suggests effects of culture are more evident at the individual level of personal behaviour
- Countries cultural values and practices continue to exert strong influence on behaviour of ppl within firms (divergence)
- So in a sense, individuals are maintaining or in some cases enhancing cultural distinctiveness
- Effects of culture on specific management functions are particularly noticeable when we attempt to impose our own values and systems on another society
- Vast majority of ppl in world understand and relate to others only in terms of their own culture
- We all view world through own cultural lens
- Self-reference criterion: unconscious reference point of one’s own cultural values
- As global economy continues to grow, clear cultural differences will influence international business and management practices in multiple ways
- Managers must understand they should never assume they can successfully their own on any other culture
- Should strive to identify differences that exist, which matter given circumstances and develop ways to address differences
Module 1: statement by IB managers
Understanding culture affects: ○ How we run business ○ Characteristics we look for ○ How we develop global talent ○ How we conduct meetings and manage employees
Module 1: Stereotypes are helpful when:
They describe a norm for a members of a group not individual behavior
They are consciously held
Accurate (otherwise harmful)
Descriptive not evaluative (aka recognize without judging)
A first best guess (only used when there is no other info)
Modifiable - if it is inaccurate let it go
Module 1: The CQ Wheel
CQ Drive
Drive: your interest and confidence to adapt to multicultural situations (out of your comfort zone)
Believe it can be fun, educational, and beneficial to be around other cultures
Module 1: The CQ Wheel
CQ Knowledge
Knowledge: Understanding how cultures are similar and different
Do’s and don’ts and understand the deeper values and ideas that distinguish cultures
Able to determine if something is affected by personality or by culture
Module 1: The CQ Wheel
CQ Strategy
Strategy: awareness and ability to plan for multicultural interaction
Check your assumptions for stereotypes when dealing with other cultures
Plan work in other cultures that accommodates their behavior/values
Module 1: The CQ Wheel
CQ Action
Action: ability to adapt when working across cultures
Act in a way that is not natural to you or against your own ways without changing yourself
Module 1: CQ Performance
Critical for global mobility for success and can be developed
Individuals with High CQ are better: Strategic decision makers, team leaders, networkers, innovators, negotiators
They report greater enjoyment and satisfaction with intercultural work and relationships
CQ is a stronger driver of success than: Gender, IQ, EQ (emotional intelligence)
Module 1: Cultural Layers:
Surface/outside (visible - dress, food, customs, architecture, gestures, etiquette)
Hidden / middle (values, religions, beliefs)
Invisible (the bases for values and beliefs)
Module 1: Culture (your software):
Shared by all members of a social group
Learned through interactions with the social environment
An organized system of values, attitudes, beliefs and behaviors
Shared mental programs that control a response to the environment
Race relates to hereditary, physical appearance, and genetic markers (your hardware)
Born without culture but with race
Module 1: Mental Programing Levels:
Even within the same sets of groups you will find many differences in individuals
Human Nature - universal, biological
Culture - specific groups, learned
Personality - specific to individuals, both inherited and learned
Module 1: National Culture
set of norms, values and beliefs that exist within the population of a nation
- Composed of many subcultures
Module 1: Environmental Variables and Management Functions
National Variable Drivers: politics, legal system, economic system
Sociocultural variable drivers: religion, language, education
↓ influences
Cultural Components: Norms, values ((general belief of what is right or wrong), beliefs
↓
Attitudes: individualism, time, materialism
↓
Work Behavior: individual and group (motivation, punctuality, commitment)
Module 1:
Cultures Circle of Influence:
Cultural drivers → values → attitudes → behaviours
Ex. Avg. Canadian values time as being precious and should not be wasted, they have a positive attitude towards punctuality and typically arrive on time.
Module 1: Hofstede’s Cultural Dimensions
attitudes most of the time not EVERYONE ALWAYS
Power distance: low (equal) vs. high (steep hierarchy, respect for authority)
CANADA - slightly low, MEXICO - high
Individualism (prioritize own needs/interests), Collectivism - prioritize group, primary loyalty
CANADA - high, MEXICO - low
Masculinity (more distinction, assertiveness, material rewards) vs. Femininity (less gender role distrunction cooperation, caring for weak)
CANADA - moderate, MEXICO - slightly more masc.
Uncertainty Avoidance: Low (resist rules, like ambiguity), High (want guidance/policies)
CANADA - 48 moderate, MEXICO - high
Long-term orientation: Short term (past and present, maintain traditions), Long term (future)
CANADA 36 - somewhat low (short term)
MEXICO - low
Indulgent (have fun, free gratification) vs. restrained (strict norms)
CANADA - 68 (somewhat high)
MEXICO - VERY HIGH
Module 1:
Trompenaars Dimensions:
Universalism: high importance on laws/rules vs. Particularism: rules change by circumstances
CANADA - Highly universalistic
MEXICO - moderately universalistic
Neutral: control emotions vs. Affective: express emotions
CANADA - Neutral
MEXICO - very low (highly emotional)
Specific: separate work and personal lives vs. Diffuse: overlap lives
CANADA - Highly specific
MEXICO - moderately specific
Achievement: respect is earned with accomplishments vs. Ascription (power, title, position)
CANADA - Highly achievement oriented
MEXICO - highly achievement oriented (slightly more than Canada)
Sequential (punctuality, plans) vs. Synchronous (past/present/future interwoven, flexible)
CANADA - Highly sequential
MEXICO - highly synchronous
Internal direction: you control environment to achieve goals vs. Outer: envir. controls you
CANADA - Highly internal
MEXICO - moderately high outer
Being (quality of life) vs. Doing (keeping busy, meeting goals)
CANADA - high (doing), MEXICO - low (being)
Cooperative vs. Competitive
CANADA -moderately competitive, MEXICO - moderately cooperative
Relationship (foster conversations, feelings, goodwill) vs. Task (get down to business)
CANADA -very high task, MEXICO - very relationship
Low Context (VERBAL/words) vs. High (body language) CANADA -very low, MEXICO - very high
Direct (straight shooter) vs. Indirect (subtle hints, general statements, don’t want to look rude)
CANADA -very low, MEXICO - very high
Informal (convo with first names, chill) vs. Formal (titles, ranks)
CANADA - low, MEXICO - high
Module 1: clusters
Nations that have similar value orientations and history/religion/economic/etc.
Arab - Kuwait, morroca, UAE
Near East - turkey and Greece
Far East - (India, Malaysia, Philippines), and (Pakistan, Iran, Indonesia, Thailand)
Confucian Asia - (mainland china, Hong Kong, Singapore Taiwan) and (Japan) and South Korea)
Latin America - (argentina, bolivia), and (brazil, Costa Rica, Gautamala) and (Columbia, ecuador, mexioc, Venezuela) and (chile, El Salvador, peru, Uruguay)
Africa - Nigeria and South Africa
Latin Europe - Belgium, France, Italy, Portugal, Spain, Switzerland (French-speaking) and Isreal
Nordic - Iceland, Norward, Swedan and Denmark, Finland, The Netherlands
Germanic - Austria and Germany, Switzerland
Eastern Europe - Cyprus, Belarus, Bulgaria, Georgia, Russia, Romainia, Ukraine and Hungary, Poland, Slovenia, Slovakia, and Czech Republic, Estonia
Angio - Australia, Canda, Ireland, New zeealen, South Africa, USA, UK
Module 1: Language Translation
Over 6900 languages in the world (+ dialects) - translation is so important.
Many errors go unnoticed to the communicator and can have severe impacts on relationships, contracts, etc.
Module 1: Key Criteria For Translators
Loyalty:
Paid by your firm: counterparts (ex. Business partner) paying for the services enhances the likelihood of information leakage to them
Is an in-house employee: enhances dedication to the company and your task in addition to greater understanding
Competence
- Professionally trained: had completed a certification as there is more than just being fluent
- Technically experienced: understands the jargon and practices of the profession of those whom they are working for
Module 1: Webinar: Interpret/translator assistance
- Brief them in advance: complicated material should be studied beforehand to note potential translation challenges.
- Provide written material as far before the meeting as possible - Provide additional breaks: it is very tiring, alertness requires more rest
- Provide double the number of breaks as normal - Write difficult to interpret info: clarity is critical - small errors (numbers, dates, times) can be very costly
- Write the information in an explicit and complete format - Use extra care when joking - may be offensive across cultures / not translate well
Keep your sense of humor but avoid sensitive topics (ex. Politics, religion) - Do not talk excessively: overwhelms interpreter and undermines your ability to build a relationship with your counterpart
- Have the interpreter stand behind you and speak directly to your counterpart - Check quality of their work: even the best translation will not always be perfect
- Use back-translation to check quality
Module 1: Back-Translation
- Translator A independently translates a document
- Translator B independently translates the new version back into original language
- Compare original and back-translated to note differences and agree on wording
Module 1: (reading) Communicated across cultures
Low/High Context,
direct/indirect,
informal/formal,
task/relationship
Module 1: Peach vs. Coconut
Peach: friendly with strangers - smile, use names, share info, but hard to dive deep (pit)
Lead people to believe they want to be friends, which is disappointing
Can be offensive if too personal
Coconut: guarded with strangers, ask less questions or share, less smiling (hard exterior but long lasting relationships)
Can come across as rude/cold
Lecture 4: U-Curve of Cross Cultural Adjustment:
HONEYMOON (First 3 months):
Enthusiasm and fascination abroad; friendly but superficial contact with locals.
CULTURE SHOCK (4-6 Months)
- Frustration and fear from language, values and behavioral differences; ending contract is sought
- Culture Shock term implies something immediate and sudden, but it is not.
ADJUSTMENT (after 6 months)
Improvement of language skills, dealing with environment, attitude towards local culture
MASTERY (varies)
Acceptance of local culture and customs
Module 1: Global Managers
Often experience the greatest culture shock because they immerse themselves in the local culture but they effectively manage it.
Module 1: Reading: Successfully Managing Multicultural Teams
- Understand the differences
- Minimize parochialism - understand preferences/practices of the other cultures - Build Bonds: have social events
- Establish Trust: most important for team success
- Team purpose and access (all info and resources)
- Team membership: culturally intelligent, and needed skills for the task
- Team protocols and norms (from all cultures) - Actively Learn and Teach (about other cultures) - be culturally sensitive and open
- Be Inclusive
- Elicit Ideas (different comfort levels, establish norms to make it easy)
- Address and Be Creative with Conflict
- Be confident and positive
- Do not obsess over culture
Module 1: Multicultural Team (MCT) performance, Benefits of diversity
Culturally diverse teams have the potential to be more effective than single culture teams
Allows for creativity due to existence of divergent ideas and ability to avoid groupthink
Module 1: Multicultural Team (MCT) performance, Groupthink
Groupthink: striving for consensus while setting aside personal beliefs to adopt others opinion of others.
Symptoms:
- Overestimating the teams power and morality
- Close mindedness
- Pressures towards uniformity
Module 1: Multicultural Team (MCT) performance, Performance Determinants
Team Effectiveness is most dependant upon: team management and task type.
- Routine tasks: repetition - done in same way every time (ex. Assembly line)
- Innovative tasks: creativity (designing a new product)
Degree of Team Effectiveness:
- LOW: poor managed cultural teams with routine tasks
- LOW - MED: poorly managed single culture teams with innovative tasks
- MED-HIGH: well managed single culture teams with routine tasks
- HIGH: well managed culturally diverse teams with innovative tasks
Culturally diverse teams are most effective well managed with innovative tasks
- Single culture is better at routine so cultural diversity does not always mean better
- The diversity should fit the task at hand and be well managed.
Module 1: International Assignee Local Credibility. Enhancement tools and Practices
Identify 2+ cultural translators
- An assignee with lots of experience in the host country. A effective guide and can introduce you to others, which can enhance your local credibility.
- A native with lots of experience working with assignees. These individuals have insight and connects and understand what and who you would need to know.
Develop and Share an Entry Plan
- With 1. Local HR staff, 2. Host country boss, 3. Home boss.
- All 3 people must understand your goals in the host context so they can best assist you
Go to the front lines right away
- Get out of the office - important for those that you might not meet/see on a regular basis.
- Shows you are interested in them/working with them, makes them take you seriously.
Ask questions, avoid statement
- Be open and eager to learn. Locals do not expect you to be an expert on local issues.
- Lessens the chance of appearing ethnocentric.
- You must comprehend local context before you can apply your knowledge there
Focus on the positive (not the problems)
- Stops you from appearing ethnocentric while encouraging others to engage with you and share insight.
- You do not know everything / the savior of all
Module 1: 2nd Year commerce Students vs. the average Canadian
2nd Year Commerce Student vs. the Average Canadian
Much more collectivistic (moderately high)
Higher power distance (moderate)
Higher uncertainty avoidance (moderately high)
About same competitiveness (high)
More long-term oriented (moderate to high)
Much higher context (dead centre)
Even more doing (very high)
Module 1: International Assignment selection
Career Advancement: To what extent will the assignment benefit or hinder your career?
Compensation: What are the financial benefits and costs of the assignment to you?
Job Characteristics: Do you find the job that you will hold during the assignment interesting?
Living and Working Abroad Interest: Are you interested in living and working abroad?
Host Country and Culture Interest: Are you interested in and likely a good fit for the host country and culture? (living, distance, etc)
Family’s View and Fit: Are your accompanying family members interested in and do they fit w the host country and culture? (ex. Schools, jobs, socially, etc)
Others: existence of cultural translator/bridge in assigned country, safety
Module 1: Culture Shock Management
Stability Zones
- Example: home themed pubs or familiar locations. They provide home country’s food, opportunities to speak your language, view the sports teams, etc.
- Purpose: provide a feeling or sense of home and in doing so provide a temporary escape to deal with the stresses of the local culture
Language Study
- Example: informal and formal; daily use beyond textbook (slang))
- Purpose: Helps to better manage daily activities by enhancing their communication with locals and ability to identify cultural differences.
Stress Reduction tactics
- Example: exercise, yoga, meditation, art classes, or others to help stress
- Purpose: by reducing culture shock-driven stressors one is better able to manage those on a continual basis
Journal Keeping
- Example: recording one’s experiences and feelings upon which they can reflect on and observe their progress.
- Purpose: provides insight to you and future assignee’s which enhances their ability to anticipate and deal with differences that might cause
culture shock.
Problem Solving Tactics
- Example: Actively develop tactics to handle the cultural differences and challenges that exist to use going forward proactively.
- Purpose: Helps anticipate potential problems and reduce culture shock.
Compatriot Use
- Example: interacting with others in host country that are from your home country. Experienced assignees are very helpful and should be sought after.
- Purpose: Provides valuable opportunity to gain insight, guidance, and support to manage culture shock.
Module 1: webinar: International Assignee Mentors
Key Practices and Characteristics
- Home and host country mentors are a key driver of international assignment success.
- Both can offer insight, knowledge, and support.
Home Country Mentor
- Validation: Find suitable post-position that fits with their career trajectory and interests.
- Evaluated: on their performance as a mentor (take it seriously)
- Communicate: Keep them informed of home country changes while abroad
- Be senior: Has confidence, power and capital to stand up for assignee. Helps when finding a new position after they return.
- Represent: Voice the assignees interests (prevents “out of sight, out of mind”) - should constantly touch base to know what they want communicated
Host Country Mentor:
- Validation: Aid with local difficulties. Formally responsible for directing/assisting as official part of job description
- Evaluated: Be evaluated on performance as a mentor (makes them take it seriously
- Communicate: Keep assignee informed of local initiatives (in and out of office)
Module 1: International Assignee Selection: Criteria
International Assignee Selection Criteria
Emotional Intelligence: identify, assess, and control emotions of self, others and groups.
- 5 components: empathy, self-awareness, motivation, social skills, self-regulation
Culturally Intelligence: Degree you function effectively across variety of cultural contexts
- 4 components: drive, knowledge, strategy, action
Candidates Motivation
- Beyond career orientation and compensation
- Interest in the culture, country and job is critical
International Experience
- Breadth (number of countries) and depth (number of years) of experience
Family’s View and Fit
- Partners view of the assignment and location; family’s ability to adjust
Host Country Language Proficiency
- Not just textbook, but everyday use (slang) knowledge and serious about learing
- Does candidate already have working knowledge of the local language? If no, are they serious around learning?
Module 1: International Assignee Selection: Stress tolerance
High tolerance for and ability to manage stress. Regardless of destination and assignment, it always has challenges and stress.
Module 1: International Assignee Selection: Selection Process Dangers
Subjectivity - Use objective measures (tests, scales), subjectivity clouds judgement and appoint based on fondness not fit
Soft Skills - Don’t overly emphasize technical skills and home country performance
- Often soft skills determine IB success, superstar at home does not guarantee same abroad.
Module 1: International Assignee Selection: International Assignment HR M Preparation initiatives
Meetings with repats: multiple meetings before the assignment.
- Initial meetings should be supervised by HR staff to ensure that key issues are discussed.
Mentors: suitable home and host mentors before assignment
- Provides a connected and informed support team
Host Country Visit: if justified, send spouse and assignee to country to assess fit and make preparations
- Justification factor: length of assignment
- Helps them make an informed decision and lower stress levels
Language Training - mandatory to be fully completed (tied to job performance)
- Goes towards establishing goodwill with locals and managing culture shock
Cross-Cultural training - mandatory for most involved
- Includes assignee, partners, and host country staff.
- P&G sends assignee and partner to Beijing for 2 months for training!
Module 2:
New Structural Economics: A framework for rethinking development and policy (Lin, J.Y.)
18th century - all economies were poor and based on agriculture
GDP growth 0.05% for millennia, 1% in 19th century, 2% in 20th century
Initial growth in UK and related countries
After WW2 most countries had economic and political independence
High growth rates in China, Brazil and India have reduced poverty
Economic growth happens with structural changes
Poor countries are unable to get away from agriculture and traditional goods into manufacturing and other modern activities.
Module 2:
Paths of Development: An Overview (Engerman & Sokoloff)
Favoured lands by European settlers fell behind economically
- The marginal economic gain in North America vs. Caribbean/South America
Barbados and Cuba had much higher incomes than North America
Divergence occurred in industrialization - North America pulled ahead
Economists and historians have not been able to know why
Module 2: The radio that changed the world: Asia’s miracle (Schuman)
Matthew Perry completed a treaty with Japan and USA that unlocked 2 trade ports
Perry forced them to trade but they decided to fight back and industrialize
Political rebellion - Meiji Restoration - took place fighting for Japan to catch up with the economic, tech, and military powers of the West
Tech, banking, university systems, railroads, communications were imported Japan took what they needed but maintained their culture
The Meiji efforts worked - Japan was the first non-western nation to industrialize
By WW2 Japan’s industrial and tech capabilities matched Europe so their defeat was further motivation
After the war they wanted economy moving ASAP and all of the energy into the war was put into the economy
Module 2: PwC - The World in 2050 Video
China will be the dominant economy, India and USA tied for 2nd then Indonesia, Brazil
- All are current emerging markets
The tUK down to 10th, France out of top 10, Italy out of top 20
The rise of emerging markets presents opportunity and challenges
Module 2: lecture class 8 introduction
Rest of the world such as India and China have unfulfilled demand, growth, large populations (size matters in business)
Industrialized nations (North America, Western Europe, Australia, Japan) account for about 15% of the world’s population
Most populated countries: China, India, US, Indonesia, Brazil, Pakistan, Nigeria, Bangladesh, Russia, Mexico
Module 2: The World in 1868:
West vs. the Rest
- Western countries were wealthy —> UK (most powerful!), Canada, Germany, France, USA
The beginning of Japan’s Meiji Restoration
India and China were wealthy before the 1800’s
In 1800’s Western World got ahead because of:
- Industrialization - using energy for power, mass production, move away from manual labour and agriculture
- Colonization
- Age of Discovery (of the new world)
Module 2: 1869 to 1900: Growing divergence between West and Rest
India life expectancy goes down (war), overall life expectancy goes up
Europe knew a lot about Asia (silk trade)
Christopher Columbus went West to find Asia for a trade route and found N. America
There was no labour there which led to slave imports from Africa
New World (USA, Canada, Argentina) emerges
New World gave wheat and beef to Europe for industrialized goods
Module 2: 1900 to 1938: the Continued divergence between West and Rest
The US emerges as a leader, surge of Germany and Japan
Meiji Revolution in Japan started when they were forced by Michael Perry to trade and decided to industrialize and then invade and take colonies
Eve of WW2 - Germany invades Poland 1939
Module 2: 1938 to 1978: same gaps between West and Rest
Progress in Asia, Latin America, Middle East
Japan continues to rise
The decline of Argentina: have good land but fail to industrialize
Rest begin to catch up to the West
Module 2: Drivers of Economic Development
- Political (gov)
- Economic (structure and system)
- Cultural
Module 2: reading - Comparative Advantage Summary Note: (Bu)
Overview:
- Law of comp. Advantage says that if all international trade barriers were removed countries will gravitate towards their comp. ad. And everyone will be better off
- Assumes that workers are mobile across industries which is false
- Globalization (free trade) is unpopular in developed countries because of the comp. Ad. workers will do well but the other industries will face hardship
Import Substitution:
- The decade after 1929 was bad (Black Tuesday, Great
Depression, raised tariffs). Latin American countries exports of agriculture demand declined due to tariffs.
- Raul Prebisch - LDC (less developed) have an advantage in primary sectors and would be confined to this and dependant industrialized nations for manufactured goods so the economic gap would never close
- Import substitution would promote industrialization and development by putting high barriers on imports so internal manufacturing would occur but FAILED
Export-Led Industrialization:
- Used in East Asia and led by Japan helped countries focus on their advantages as well as with economies of scale they were cost-effective globally
- Countries in the East Asia region would make low-high valued items based on their developmental stages and labour costs
New Structural Economics:
- The NEW school of thought headed up Justin Lin (World Bank)
- Even though LDC must promote industrialization away from primary sectors to manufacturing/modern ignoring comp. Advantages have a heavy cost
- Indivisible hand of market forces must be allowed for resource allocation during the transformation.
- Gov. should encourage industrialization and diversification but should focus on its advantage industries.
Module 2: reading - Comparative Advantage and Trade
Absolute advantage: the country that requires least inputs to produce one unit of output
- Does not account for opportunity costs
Comparative Advantage: the country that has a lower opportunity cost per unit of output
- Countries only have a certain amount of resources so they face trade-offs
- Divide the outputs by each other - how much of B could you make instead of one unit of A? Compare the countries.
- Impossible to have a comparative advantage in all goods
- Opp cost of one good is the inverse of the other
Specialization: with dif. Opp. costs they can profit from specialization and trade
- If both produce their comparative advantage combined output will increase
Benefits of Trade: additional output can be traded but not everyone will be left better off
Module 2: reading - Import Substitution Made Countries Such as Argentina Poorer (Roberts, James 2017)
After WW2 in Latin America, “Import Substitution” was intended to help developing countries industrialize and reduce costly imports
- Dependency Theory: Prebish said free trade hurt “Rest” who depended on selling raw goods to West who sold manufactured goods back at inflated prices
- Import Substitution countries relied even more on imports as their goods were worse quality and not competitive globally
1930 Argentina was top 10 wealthiest, now 87th
USA admin - wants to raise trade barriers to favour USA industries and increase jobs
- The new type of “Dependency Theory” however the US gain a lot from imports
- By importing basic goods the USA can focus on innovation
Japan’s flying geese (Romm, J., 1992)
1992 Japan thinks and plans long-term
Wants to integrate Asian economies with an economic flock
- Japan at the head then Four Dragons (Hong Kong, Singapore, S Korea, Taiwan) then ASEAN (Indonesia, Malaysia, Philippines, Thailand), China, India, Vietnam and Bangladesh.
Japan has leadership and valued products and domination of investment
Four dragons have rising wages so higher valued items are more profitable
ASEAN are primary suppliers of basic materials and make low-value products
New Asian Industrial Development Plan: Japan moved high value (cars) to high wage places, low value (labour intensive) to low wages
Japan aids in all areas, infrastructure, management, production, tech, marketing, R&D, etc to improve Asian economics to boost Japanese investments
The USA is far behind Japan in their trades with other Asian countries
Taiwan became a very advanced industrialized nation
Module 2: Lecture:
Law of Comparative Advantage:
For less developed countries, this law prevents them from industrializing/gaining wealth
Module 2: Lecture:
Structural transformation
2-3 decades after WW2 was the 2nd wave of industrialization (L. America, S/E Asia, some Africa)
Globalization is unpopular in the Western World
- Job loss is painful and concentrated in certain areas (Midwest)
- The benefits of products at lower prices (from China) is widely shared and taken for granted
Best way to transform structurally:
- Move from agrarian to industrialized
- Developing globally competitive modern sectors that follow closely the nation’s comparative advantage
Module 2: Lecture: Import Substitution (ISI)
Import Substitution (ISI): replace imports of industrial products with domestic production by imposing high tariffs
- Incurring very high costs of production, experience high opportunity cost
- Used by most Latin America and most other LDC
- 1945-1970’s - worked for a bit, GDP increased
- 1980’s CRISIS - ISI countries experienced so much debt that could not repay
- 1980-2003 - GDP declines
Module 2: Lecture:
Export-Led Industrialization
Export-led industrialization: export goods where a nation has a comparative advantage
- 1945-present (East Asia)
- DO NOT start with capital-intensive industry where you borrow money
- Start with labour intensive to use your low wages
- Necessary Conditions: cost advantage, capital (infrastructure and goods), expertise (for production tech and foreign market)
- East Asian Path:
1. began with labour-intensive sectors
2. Mobilize domestic sources of capital
3. Flying Geese Paradigm (welcome foreign capital) - –> Japan forced the countries with the threat of war and takeover
- –> Over time as countries advance they move up a level of sophistication and innovation and reallocate the previous industries to a less developed country
Module 2: Jones Act
Water transportation between US ports must be on US flag, constructed and owned by US citizens, and a primarily American crew
Makes shipping from USA VERY expensive, most US import from other countries even when their own has the product
Creates lots of truck and road traffic
Was to protect USA shipping but they are now one of the worst in the world
Protectionism has unintended consequences
Module 2: reading: Economic Takeoff - Manuel A (2016)
Qing dynasty - 1/3 of the world economy was in China
19th century and on, China struggled and population created lack of jobs and land
After the Cultural Revolution, Mao in China banned foreign and private companies from operating in China and controlled production and distribution.
Deng Xiaoping - moved China to a modern prosperous market economy
Farms and factories used to have yearly production targets, Xiaoping allowed them to sell the surplus on the open market while some were not allowed.
Farmers were up before dawn now that they could keep their surplus, efficiency soared
Private sector firms could produce what they liked, the unemployed became entrepreneurs
China slowly industrialized from the coast inwards
China finally harnessed its strengths: cheap, plentiful labour and high savings rate
Module 2: China’s Challenge to Democracy (Runciman, 2018)
Western democracy - delivered general prosperity, rising standard of living, respect as a person, and personal dignity through your opinion.
Argued that democracy is necessary for human desire for recognition
Since 1980’s non democratic China has made use progress in GDP and life expectancy
The driver has been collective national dignity - wanting China to get more respect, unlike in West where the respect is your individual opinion
China authoritarians can target/manage growth and share benefits and can plan long-term
China is growing industrially, but also with environmental sustainability.
Trump’s pitch was very pragmatic authoritarian - delivering collective dignity.
Democratic politics restrict these pragmatic abilities to create better equality
As citizens find less personal dignity in politics and politicians become less able to manage prosperity, democracy becomes less attractive.
China model has no personal dignity, with a temptation to extend the policy to express choice
China monitors and manages social networks
Module 2: CNN Video: No wallet, no problem (2016)
In China, you can scan QR code by phone to pay at small vendors or big businesses
You can pay rent, utilities, buy food, hail taxis, etc.
They skipped credit cards and just pay with their phones
Government monitors and sensors mobile apps including the ones for payment
Module 2: Lecture 10: history
1839 - China stopped opium, lost war against British for HK and opened trade ports
1939-1949 - Eve of Humiliation for China as they were carved up by other countries
Module 2:
Mao & His Legacy: 1949-1978
Communist leadership in China
Rapid industrialization (ISI) - self-sufficient
Gov. banned foreign investment and took over all businesses
- “Centrally planned” economy - state-owned enterprises (SOE)
- State tells you where to work, controls income
Very successfully, did not improve GDP but massively improved life expectancy and social society
- Gov. invested in resources - education, healthcare
Module 2: Economic Reform - 1978 –> Now
“Dengism” leader Deng Xiaoping came into power
- A mix of capitalism and communism
Followed Export-Led industrialization model
- Has cost advantage but missing capital and expertise
- Too poor to join flying geese
- Needed infrastructure but had no money!
- 5 Child Policy
- Helps families save as well as government on health and education
- Saved 5% of GDP
Special Economic Zones
- The 5% GDP would not be enough to update all of China, so they strategically chose zones close/across shore from other more developed countries (HK, Macau, Taiwan)
- Very successful! China received lots of foreign Direct investment
- FIF’s helped transfer manufacturing technology to China
Helped distribute Chinese exports to western buyers
State-Owned Businesses
- Xiaoping got rid of lots of SOE and laid off many employees
- Allowed private enterprises who hired these people
- Private Sector boomed
- Could now join Flying Geese!
Flying Geese in 1980’s:
- China was able to join the flying geese with their FDI and infrastructure
- Overtime they moved up in level of sophistication in their products
Now:
- One of the most developed road infrastructure
- 7/10 of the top 10 shipping ports are in China
- GDP increased by 20x!
Module 2: Beneficial Impact of China’s Entry to Global Market:
Low-cost Chinese products allow other countries to get extra spending
Investments into China are now very valuable
Low-Cost Chinese imports allowed other countries to
focus on innovation
Leader in drone market - DJI has 70% of market!
A Chinese dairy processor is building a development in Kingston
Module 2: The missing Middle class - India
The top 1% class equates to Hong Kong, next 9% to Europe
Next 40% is equal to poor neighbors - Bangladesh/Pakistan then rest with Africa
Large firms believe there is middle class prosperity in India There is growing inequality between their classes - high earners are multiplying, low are barely increasing
Reasons:
- Unproductive workforce due to poor quality education
- Turning small businesses into productive larger one is impossible due to bureaucracy
- Less than a quarter of women work which is declining
- Manufacturing jobs are limited due to automation
India does not have a rich middle class - companies need to stop hoping they will buy their products which they can not afford
Ex. Netflix subscription costs a weeks income
Companies must adjust their prices for india!
Find “enablers” products that allow Indians to access more goods (Ex. phones for streaming)
Businesses hoping the Indian middle class will provide a growth spurt are wrong
Module 2: India, China and United States (Manuel, 2016). Past and Current Government
Past:
India used to prosperous, higher living standards and leading manufacturing
25% of world’s output in 1700, 4% after independence
Brits forced India to deindustrialize (cottom, jute) and import manufactured goods
Indians were not given any technological developments
PM Jawaharlal Nehru believed that foreign trade and investment led to their poverty
Pessimistic about india’s ability to compete globally - closed economy
Import substitution
Gov. owned economic sectors (air, rail, post, TV)
Stopped large companies from competing in small scale industries
So many regulations - “license raj”
1990 CRISIS - half percentage of world trade, rising oil prices
Finance Minister Manmohan Singh: cuts in gov. Spending and revalued rupee.
- IMF and World Band pledged billions in new loans
- OPened Indian economy by getting foreign investment (FOrd, IBM)
- Slashed import duties, encouraged exports, timmed license raj
Success! Economy grew, stock market boomed, GDP and exports quadrupled
Singh became PM and did not do much… economy stalled
Current Government:
Modi became PM - growth in 2015, GDP increased, inflation halved, good stock market
India’s large young population will be in workforce for coming decades, gov. Must implement reforms to take advantage of that.
India’s competing politics make it very hard to make changes
GDP growth was due to productivity not investments like China
India lags in manufacturing and infrastructure, needs investment in both for incoming young, low-skilled workers and more education
Infrastructure is a mess - Modi promises 52 billion to fix this but not enough
State owned companies begin to get privatized
Infrastructure is slowly improving
Labor ministry working on relaxing policies and simplify Tax.
“Makde in India” campaign is good but unlikely to be successful
Module 2: Brazilian Agriculture (2010)
Brazilian land is transformed
Dry bush and shrubs have been cut and leveled for farming
- Some rainforest was cut, but most is cerrado
This will help the poverty parts of Brazil’s backland.
Turned itself from food importer to worlds great breadbasket and caught up with the big five grain exporters (US, Can, Aus, Arg. Europe)
First tropical food giant
Increased beef export, largest exporter of poultry, sugar cane and ethanol.
Done without gov. Subsidy
More spare farmland and water than any other country which is important for increasing population
Embrapa - Brazilian Agricultural Corp. did research about tropical farming
- Breeds new foods (seeds, cattle), makes wrapping, technology, etc.
- Wants to turn cerrado (dry areas - bad nutrients) green for farming
- Didn’t just plow the land, it made the land for farming!
- Continuing to make improvements
Brazil had rain in the cerrado, expertise, and cattle
- All interventions worked together - they want to help Africa
Module 2: Lecture 11: The Case of India
1947 - 1964
First PM of India (followed by Daughter and Grandson)
Self-sufficient (ISI), Centrally-Planned economy (state control of key sectors)
- Private sectors heavily regulated by License Raj
Did not nationalize the whole economy (like China did)
1991 - Now
Indian economy did not do well - very slow growth “Hindu Rate of Growth”
Start of India’s Economic Liberation Program
2017: India is the top IT-BPM outsourcing (55% of total share)
- Employed 4 million Indians
- Contributed to 7.7% of GDP
Post 1991 (Economic Liberalization Program) - China vs. India: Automation took away manufacturing jobs from India
Official Indian language is english which was a big advantage over China
China has high literacy due to Mao enforcing that
India has much higher university enrollment than China until 2000
After 2000 China massively increased their university enrollment
2017: China GDP (Purchasing power) is 2.5x India, or 4.7x without PPP
1st 26 years of Economic Reform for China vs. India
- China grew at 6.43%, India at 5.19%
- India is forecasted to grow faster than China moving forward
Module 2: CHina vs. india
- China is 1st followed by USA then India
- India’s GDP for purchasing power will not surpass that of China
Module 2: Poverty reduction and middle class
China has large upper class, medium middle class, small poverty
- They have MASSIVELY reduced poverty level
India has small upper class and very large middle and poverty
- Poverty has declined, however not significantly
- Have trouble breaking people into middle class
- Small part of economy is IT who have university education
- —> Small industry, won’t be able to employ the masses anyways
- Rest are low-skilled (good for manufacturing), but there are few of these jobs available due to automation
Global Wealth Distribution (2017)
- China has huge share of middle class
- India has huge share of the poorest
Annual Job Creation
- China: 13 million, India: 1 million
Module 2: Made in India
India wants firms to make products in India
Does not have enough infrastructure to exports goods efficiently
- Rail - takes almost 4x as long due to sped
- Power supply, internet issues
- Transportation costs by road are very high due to time constraints
- Modi gov. Is pushing to improve infrastructure
Regulations and policy limit investment
- Labor laws make it difficult to make low-skilled manufacturing
- Very small factories in informal sector
- Advanced manufacturing
- —-> Use more automation than labour due to regulations
- —–> Hurts the population as it increases unemployment
Module 2: Secrets of Successful Structural transformation
Building and constantly upgrading a robust manufacturing sector during early stages of development
Module 2: Factors on Economic Development
Cultural Factors
Economic Factors
- Economic structure - proportions of various economic sectors (agriculture vs. industry)
- Economic System: system or production, resource allocation, distribution of goods (market economy vs. command vs. mixed)
Political Factors:
- The system of gov. (democracy vs. autocracy)
The political economy is made up of economic and political factors
Module 2: Brazil’s Agricultural Miracle
Brazil is the world’s farm
They rapidly increased their output in many areas
In 1973 Nixon admin in USA limited soybean export to Japan
- Japan was mad at USA since they imported 3 tons of Soybeans
- Japan massively invested in Brazil’s agricultural sector
2017: Trump admin put tariffs on soybean exports so China bought soybeans from Brazil which increased their market share further
Module 2: The resource curse: Causes and Cures (Bu, 2019)
Resource curse: countries with lots of natural resources tend to have less economic growth than countries with fewer natural resources (fossil fuels/minerals)
Ex. Venezuela, many African
countries
Poor Stewardship of National Resource Wealth:
- Extracting has become a large part of developing country economies
- 2003-2012 Commodity Super Cycle: prices of oil, metals, food surged
- They should have used proceeds for investment in infrastructure and human capital as savings
- They spent crazy amounts on social benefits, subsidies, low taxes, etc.
- This makes the politicians popular but impossible to maintain
- Some developing countries do manage this wealth wisely and are less impacted by external shocks (Botswana)
Lack of Economic Diversification:
- Law of comp. Ad. encouraged resource-based countries to focus on that and rely on industrialized nations for manufactured goods
- Lacked structural transformation to diversify the economy beyond resource exports
- Does not generate as many good jobs/economic returns as manufacturing
- Exception if a country has an insane level of these resources GDP will rise.
- Diversification is always wise in case of commodity price fluctuation or dwindling demand
- Very hard to alter economic structure - Chile has and Sub Saharan Africa is trying to.
Module 2:
Retire at 55? Brazil’s norm to Fiscal Crisis: (Darling, 2018) New York Times
Brazilians can retire at 55 with 70% salary earnings (⅓ of gov. spending)
This pension is unsustainable and contributes to their economic struggles
President Temer promised to help but did nothing except scandals
- Tried to set min. Retirement age at 65 for men, 52 for women.
- Currently, there is no min. Age requirement
- Put a military intervention in Brazil which prevents legal changes being made
- He did not have the votes or court opinion to approve the reform
- He was embarrassed to lose in court
Brazilians are angry - they paid into it and don’t want it taken away
The rich get the most of the pension, poor get the least
Module 2:
Botswana: Next diamond capital? (Thomas, 2017)
Could run out by 2050 despite Gov. Optimism
Trying to diversify by polishing and cutting instead of exporting rough diamonds
Reduced diamond demand led to the closing of companies and jobs in Botswana 2014
There are by productivity and cost issues that led to a decline in Botswana
African companies struggle competing with India (low-cost high skill labour)
The government needs to help with policy and
- Currently launched tax breaks
- Companies based on Botswana are eligible for a higher allocation from De Beers
- Imposes no mandatory commitment on companies to add value to the country
- Companies trade there but do not put down roots
China producing factory diamonds are entering the market
Should Botswana focus on education, agriculture and also retain mineral value?
Botswana advantage - knows diamonds last in the future and can plan in advance
Moudule 2: An awakening giant: Manufacturing in Africa (Economist, 2014)
Buffalo bikes are investing in Ethiopia - would create 100+ manufacturing jobs
Manufacturing has been steady 10-14% in Africa and industrial output is the world’s fastest-growing continent
H&M sources from Ethiopia, General Electric is building a plant in Nigeria, Chocolatier is adding workers to Madagascar plant, Kenyan firm is building a cheap durable car for rough African road
Domestic manufacturing is growing too - mobile phones, fashion, handbags, etc.
Retail shops encourage light industry and many goods are made locally (expensive to transport)
Construction boom leads to power, mobile phones and banking to minimize supplier costs
Human Capital through education is booming in Africa
Chinese workers are investing in African manufacturing by working on mining and infrastructure projects
World Bank says many Asian manufacturing jobs could migrate to Africa (low labour costs and high productivity, infrastructure improves, trade barriers decrease
1990s Asian manufacturing hurt African firms and could not compete with low-cost Asia
Gov. had neglected industry needs for roads and electricity but it is now trying to industrialize (infrastructure, business climate, urbanization, emerging middle class)
Kenya won’t become the next South Korea, Africa will follow a diverse path from the growth of small and medium firms and will generate jobs and wealth than in manufacturing
Module 2: Lecture notes: the resource curse
Poor stewardship of national resource wealth
- Lack of plans for commodity price volatility
Over-reliance of raw material export
- The production of raw material typically does not command as high a return as mid stream or downstream activities
- The price of raw material is more volatile than processed goods
- A raw material resources can face depletion
Module 2: Lecture notes: Ways to “cure” the curse:
Establish a well-managed national stabilization fund (or sovereign wealth fund)
- Save during periods of commodity boom (avoid long-term liability)
- Make an investment in long-term growth (infrastructure)
Transition into a more diversified economy
- Invest in physical and human capital to enable the transition
- Attract foreign expertise to facilitate the transition
Diversify into midstream and/or downstream business
- Bring mid/downstream businesses into the country
- Invest in these businesses
- Ex. Diamond polishing in Botswana (should negotiate higher rough diamond price and let India do the polishing, they are wasting human capital)
Module 2: Lecture notes: Brazilian Wealth Management
The Boom-Year Resource Wealth went to the pension fund
Most of Brazil’s population is still very young, when they get older they will use up all of the pension and the country will go bankrupt.
Brazil desperately needs infrastructure but did not invest in it
China wants to import Soybean from Brazil but the infrastructure is so bad so the
Chinese are investing in Brazil infrastructure themselves and building a port
Module 2: Lecture notes: Chile wealth Management
Economic and Socialization Stability Fund: uses the money from their resource wealth to save and invest in this fund
Exports copper and grapes
- WINE is a great downstream export for Chile!
Module 2: Lecture notes: Ivory Coast Chocolate Africa
They export Cocoa beans but have never tried the chocolate
They are very poor yet export ⅓ of world cocoa beans
Proves raw material exports do not get a good return
Module 2: Lecture notes: Commodity Price Changes (eg. Oil Prices)
Supply
- New supply sources
- OPEC Production Quota
- The geopolitical tension surrounding major oil-producing nations
Demand
- Price Swings
- Alternative energy sources
- Economic cycle
Africa Growth:
- Kenya, Tanzania, Ethiopia –> growing rapidly!
Module 2: flying geese model
The flying geese (FG) model intends to explain the catching-up process of industrialization of latecomer economies from the following three aspects:
Relevant aspect envisioned a regional division of labor in East Asia based on the law of comparative advantage
East asia could catch up with the west by forming regional hierchy where the production of export products would move from more advanced countries to less advanced ones, through capital and tech. transfer
Countries would upgrade from making low value-added products to making high value- added products in the order of their different developmental stages
East asia followed this in general
Japan’s Flying Geese
- Goal: integrate the Asian economies into an economic flock, with Japan at the head followed by Ho Kong, Singapore, South Korea, and Taiwan, Indonesia, Malaysia, Philippines and Thailand
- Japan provides leadership and direction and produces the highest value added products
- The 4 Asian dragons are following Japan’s lead by expanding in higher value added items
- This means that if the US wants to prosper, it must continue to export and Japan’s domination of investment in Asia makes Japan more formidable competitor on world market
Module 2: lecture 12 video: CNBC “heres what drives the price of oil”
What drives oil prices
- most investors usually follow WTI (west Texas Intermediate) or Brent Crude to monitor the flow of oil prices
Brent Crude : refers to oil from the North Sea, used as international bench mark for oil prices
WTI: one type of light crude thats drilled in the US, Benchmark for US prices
In general - oil prices are influenced by 3 major factors: Supply (how much available) , Demand (how much people want it), and Geopolitics
Supply: determined by OPEC
(organization of the Petroleum Exporting countries). now American’s are playing a bigger role due to American Shale fields
More oil than the market needed - oil prices crash (OPEC was blamed, but it was really shale fields)
1973 Oil embargo against the US to cut back productions (now, demand was so high and supply was so low)
renewable energy: still more expensive than hydrocarbons
Geopolitics: if theres tension (war) could through off supply of oil - changes price (raise), risk of supply being disrupted or transportation of oil
- Trump pulled out of Iran nuclear deal (hit high’s)
Module 2: lecture 13: Opportunities for Africa from China’s Rise (Lin, 2018)
China’s growth used their labour and wages increased, income is rapidly increasing
They should relocate labour intensive industries to low-income countries (Africa)
China has lots of foreign direct investment in Africa (manufacturing, mining)
China is building economic and trade cooperation zones and many African countries
By moving up on the industry chain, China is opening great opportunities for countries to produce the labour intensive manufacturing goodes
Africa even though it is further is the only one who will be able to absorb all of China’s manufacturing due to this large population
Africa needs to address poor infrastructure and business environment to attract China
Module 2: lecture 13: Sub-Saharan Africa Economy
Beijing Summit: China becomes a key African partner for finance, investment and trade
Debate if China’s loans to African countries are sustainable which leaves questionable long term benefits
Concerns: countries are heavilty reliant on these Chinese loans (could lead to sovereignty and falling under Chinese power - Sri Lankan had to give China a port for debt)
Kenya shows that relying on sovereign bonds is a bigger threat to sustainability (more expensive)
Chinese trade w Africa grew rapidly until 2014 then declined due to downturn in imports because of pommodity price trends but are now rising again
Chinas interest in Africa is due to self-interest as they need commodities and export finished goods, however China does not want power over them and Africa also benefits
USA protectionism will deepen the Africa-China partnership
Module 2: lecture 13: Planet China (2018, the economist)
Chinese leader - Xi Jinping called it “Project of Century” aka Belt and Road initative
Goal was to build infrastructure that are needed in countries in Asia, Africa, and Europe
Chinese moeny and expertise could help spread wealth and prosperity to anyone who joins
Wants to help Central Asian countries prosper and avoid Islamist Terrorism
Concers: people rarely say bad things about it making mistakes likely, will Chinese cash come with power or corruption?
BRI countries end up with lots of debt - is this so China gets power over them?
Security risks: what if Chinese navy wants to attack countries with these roads and belts?
Many Asian and Western countries are very worried, but even if it is a political tool to beat Western influence china will face issues with debt repayment and reputation
If all countries, world bank and IMF contribute to this will help it be successful and fair
If USA stays engaged then many of the dangers and risks of BRI are mitagted and more people will benefit
Module 2: lecture 13: The World is Coming to Africa - where is USA?
Countries are forging close partnerships with Africa because they see openings for trade and investment as well as reducing harmful threats
Like China, many countries believe Africa is important for economic, security and political goals
The influx of partnerships and resources have reshaped Africas lanscape
USA is stepping back while everyone else is leaning in which reduces opportunities for USA trade and investment as well as reduces their say in the outcomes of this region
Countries are opening up dozens of new forign embarassies in Africa
These partnership are due to trade and investment, getting security cooperation and military sales in African countries, getting diplomatic engagement (new embassies, changing African polocies)
Economic Opportunties in Africa
- Growing Consumer base (population is rapidly increasing)
- Mineral Wealth (energy resources, oil, gas, battery, cobalt)
- Telecommunications: this industry is booming in Africa
Global Food Industry - growing population in Africa will buy basic agricultural products and processed foods. African farmers struggle to increase output.
- Also an outlet for excess capacity and could absorb some labor intensive manufacturing and infrastructure sectors.
Security Threats Rising
- Terrorism - countries are worried African countries will get taken over my terrorist and IS brances
- Piracy and Dug Trade: many attacks and kidnappings as well as peristant drug traffiking problem in Africa brings issues into surrounding Countries
- Global Health: Ebola epidemic is concerning, world wants to help prevent disease in Africa to protect their own people
- Irregular migration: many migrate to other countries who want to help Africa be better so these people stay
Gloabl Influences:
- Being on good terms with Africa increases political sway in the UN
- Winning over African votes is important to make changes in UN
- These partnerships are excellerating African economic growth and they also help humanitarian issues and security
Challenges: high potential for disputes, the more countries invest financial, diplomatic, and military resources in Africa the more likely disagreement will occur
- The USA is cutting foreign assiance (miltary) and reduced trade and investment
Recommndations?
- USA must step up doplomacy and communicate their objectives in Africa
- Start talking to everyone - broaden partnerships with other countries
- Serve as an honest broker: USA could referee disagreements to protect their own interests
- Define USA strategic advances: USA has lots of service, finance, energy… they could take on defense and strengthen logistical capacity in Africa
- Establish a Division of Labor: has finite resources to spend in Africa so by embracing new countries they could invest new reoucres into fighting criminality and bring different skillsets, talents and experiences to prevent local African problems from becoming a global crisis.
Module 2: Lecture 13 notes; Summary
China is number one infrastructure financer for Africa
Japan was resource hungry - they offered China a line of credit (to build infrastructure, expertise, manufactured goods, etc) in return for their resources
- Chinas rise was not possible without Japan
Later, China did the same thing to Africa
- China’s intentions were out of self-interest however it is not malicious
- Africa benefits greatly from this partnership
Africa needed capital (infrastructure and capital goods) but it was very hard to mobilize domestic sources of capital - yay foreign capital
- BUT hard to get foreign capital because Western firms were wary
Module 2: Lecture 13 notes; China can help Africa Make the structural transformation
China’s economic involvement has helped Africa overcome capital shortage and make necessary investments in infrastructure & industrial technology
- Increased revenue from commodity export - China has a HIGH demand for these resources
- Increased private-sector savings by providing low priced consumer goods
- ——> Africa wants cell phones but can’t afford it, Chinese give them Transsion
- ——-> This is selling very well in less developed countries (cheap & functional)
- ——–> These savings can be diverted to investment!
Decreased cost for capital goods and infrastructure resulting from the involvement of low-cost Chinese firms
- Huawei updated internet cables underground along the African coast
Fund infusion through Chinese loan/aid for infrastructure, etc.
- China spends $4bil. To fund a railway that will reach -landlocked Ethiopia
- Helped improve expertise in construction and manufacturing
Module 2: Lecture 13 notes; African Strategy:
Create Partnerships with as many countries as possible
Use Brazilian expertise to convert Mozambique’s subsistence agriculture into commercial agriculture
- Brazil successfully developed their agriculture business, Africa wants help!
- Form alliance with other African countries (African union)
- Pan-African Free Trade Agreement
- ——> Too many countries were small and landlocked, this gives equal opp.
Ethiopia (2011) became a shoe manufacturer, showed leadership, vision, and willingness to change
- They did not want money, they wanted expertise and guidance
African development will improve global market and security
Module 3: reading: From Comparative Advantage to Competitive Advantage (Bartholomew)
Factor Proportions Theory (Heckschner-Ohlin Theory)
- Countries specialize in production/exports where they have abundance and import where they have a short supply.
- Factor proportions theory show that other factors beyond simply endowment of a country (land, capital, etc) but also be considered
- Ex. of other factors: technology, government, transportation, scale, etc.
Product Life Cycle Theory
- New innovations from industrialized nations are exported, eventually, they get copied and exported by less industrialized countries at a lower price
- Consistent in 1960-70’s when the USA dominated but less relevant now as firms globally innovate rapidly
New Trade Theory:
- Extends Factor Proportions by considering the other production factors
Module 3: reading: Technology in Israel
Forefront of as entrepreneurs who completed military service bring back expertise
Many high tech startups (WAZE) - Strong eng and tech university programs
Israel’s education gets lots of participation and eagerness to learn as kids and university
Mandatory military service drives high achievement, risk acceptance, and rights to ideas
Many international companies are coming to Israel
Module 3: Reading: Cosmetic Valley (France regions)
Innovator for fragrance and cosmetics (1/10 companies come from this region)
Cosvapex: a project to increase collaboration/pool logistics resources for the cosmetic valley
Is a key base for R&D (LVMH Research expanded here)
Japanese (Shiseido) took advantage of collaboration here and became a member
The government and post-secondary support and encourage cosmetic innovation and offer many specialized training programs to stimulate development
Module 3: The Role of Clusters in Global Competition
Clusters: geographic concentrations f firms focused on a particular industry, field or sector (across the supply chain vertically and horizontally to complementary industries)
- Includes that develop specific skills for industries in that area
Competition: Porter 1998
- Increase productivity of firms in the cluster
- Drive direction and pace of innovation
- Stimulate new related businesses (thus strengthening the cluster)
Productivity:
- Benefits: access, trend awareness, complementaries ( for wine but also eat cheese), reputation, benchmarking and comp. Motivation
- Clusters give access to:
- —-> The talent pool, supplies (close by), specialized info, public goods (gov. Investment and specialized infrastructure)
Innovation benefits:
- Capacity to react quickly to market pressure with collective resources
- Pressure from sophisticated customers near the cluster
- Can experiment at low cost
- Knowledge synergies - close proximity brings R&D ease and collaboration between firms, education, etc.
New Business Formation with clusters:
- Easy to see gaps (in the market or value chain) where a new business can help
- Low barriers to entry - necessary inputs are plentiful and high quality
Moduel 3: Importance of country Analysis
Helps firm understand home nation advantages, sources of competitor advantages, and where to conduct different aspects of your business based on this
Helps execute strategic choice in location for business segments or functions
- Ex. Intel and Apple R&D centers are in Israel, Beauty in France, etc.
Module 3: Porters Diamond Model - Determinants of National Competitive Advantage
- Factor Conditions
- Demand Conditions
- Related and Supporting
Industries - Firm Strategy, Structure and Rivalry
* * Added factors - Government
- Culture
Module 3: Porters Diamond Mode Example - technology in Japan
- Factor Conditions - skilled, engineering programs
- Demand Conditions - (limited space), compact machines, integrated/multi-purpose tech, accuracy in replication (language characters)
- Culture - formal communication, hierarchical structure, respect for elders, more handwritten (more personal/respectful/indicates intelligence)
- Firm Strategy, Structure and Rivalry - rivalry, increased gov. investment in R&D, vertically integrated
Module 3: geography impact
It does matter to some extent - clusters
What if the industry does not have a geographical cluster?
- National “disadvantage” in a particular industry
Example: beer in Japan:
Transitioned into the pharmaceutical industry
There was a biotechnology revolution where technology is used for biology
Weak factor conditions: weak focus on life sciences in Japanese universities
Strong related and supporting industries: strong pharmaceutical and chemical firms looking to absorb new scientific discoveries
Invested in a knowledge cluster (San Diego)
- Acquired US biotech firms, LT joint ventures w these firms, establish Gemini Science (new name!), created non-profit in San Diego
- Exposed their scientists to the inner workings of San Diego to bring the knowledge and experience back home
- Knowledge and cultural spillover from San Diego to Japan Kirin
Module 3: Reading: Case - The Globalization of the Wine Industry
Old world (Italy, France, Spain) vs. New World (Chile, USA, Australia and NOW China) The old world is constrained by traditions and regulations
A new world has developed new innovations to meet changing tastes and demands
Module 3: the early Dominance of the old world
Roman Empire wine was for peasants and religious purposes than a nobility in Middles Ages
The bulk wine was distributed but very expensive cross borders making wine a luxury item
New innovations in France (good bottles and corks) made it easier to age and transport
Government regulations were put into place to control winemaking and classifications
Producers and customers liked the rules due to a belief of quality but that was not always the case
A disease broke out in France in 1885 devastating stock so they exported to California
Module 3: Paris and Changing Consumer Perceptions
Wine drinking was not common in the New World until more recently
American wines began competing successfully with Old World
Changes in consumer tastes, consolidation, distribution and laws were opportunities for New World to address
Module 3: New world (AUS) (Australian wines)
Innovative technologies developed in Australia (drop irrigation - forbidden in France)
Sunny climate in AUS doubled density and new fertilizers improved quality and flavour
AUS has lots of inexpensive large tracts of land, new barrels, etc.
AUS developed wine in a box, plastic corks and screw caps (cheaper and less spoilage)
Marketed towards unsophisticated wine consumers and simple palates
Most wine companies controlled the whole value chain, unlike France who had crazy laws - this increased control, quality, less inventory, bargaining power, etc.
Was much cheaper as AUS grapes were much cheaper
Module 3: china Vinyards
Used to be low consumption in China, now increasing after easing Communist rule in 1978, GDP and household wealth increased
Vineyards in China focused on volume, not quality and imported bulk from AUS and Chile to fix the flavour
France began exporting to Hong Kong but lack of experience caused lots of wine to spoil
China also had an uneducated consumer base and poor brand recognition = high markups and counterfeits
China improved this AUS invested in wine education in China as they began exporting
Chinese economy slowed in 2012 and stopped importing wine, fine wine prices dropped, entry-level consumers now looked for mid-priced wines
Moduel 3: Strategic Responses in a Changing Industry
Consumption decreased in France so they exported to
China who was growing in affluence
Chinese producers invested in
French wineries to gain knowledge and reputation
French Bordeaux winemakers invest in Napa Valley
French and AUS wine industries partner with tourism to attract Chinese tourists
Climate change threatens winemaking, AUS is investing in climate change research
Module 3: Lecture: Wine Industry Analysis
AUS low-middle market is challenged with increasingly more low-cost producers in other
The Chinese market is central to AUS Wine industry
Why is Bordeaux investing in Napa?
- Learn the technologies
- Regulations in the USA are different so they will learn these strategies in case regulations shift
- Close to the US market (for shipping and meeting needs/wants)
- Variety of sourcing (different soil)
- Scale (land is tight in France, more available in Napa)
- Diversifying risk (especially climate risk)
Key Trends:
- Diversify risk (different climate locations)
- Invest in technology to improve drought resistance of grapes
- Use aerial photography to match grape varieties with optimal climate (Isreal)
- AUS makes major investments at the industry level (cluster) on climate change impact on wine research
Module 3: Concepts from the Case
National Competitive Advantage over time:
- Advantages based on quality and reputation will persist longer than based on cost (ex. France vs. AUS)
Importance of Continued Investment in the National Diamond
- Ex. Partnering with related and supporting industries, factor conditions (university programs), etc.
Module 3: International Expansion of the Firm - key drivers and challenges:
Reading: Internationalization of the Firm - strategic drivers
Market Growth Driver: market push (current market too saturated, needs to find new markets abroad to increase sales/growth) and pull (rapidly growing demand needs)
Cost Driver:
internationalization brings two cost benefits
- Lower input costs (land/ labour) - aka Arbitrage strategy
- Economies of scale - increased market/production lowers overall costs
Competition driver:
may be reactive if others are entering a certain market, or they could enter it first to get an advantage
- You have quicker market sensing skills to the needs of foreign customers when you have globalized value chains
- Globalizing brings market growth, economies of scale, cost arbitrage which might eliminate competitors who do not do this
Government Driver:
home and host gov regulations and support (taxes, financing, rules)
Resource Driver:
natural resources especially but also labour resources - move where there is an abundance of a resource you need!
Knowledge Drivers:
certain regains gain an advantage in industries
- Knowledge and innovation advantage in countries human resources, firms, specialized education and research are important to tap into if home country does not have the same level
Module 3: International Expansion of the Firm - key drivers and challenges:
Case: Polytex - Entering Thailand
Joint venture with Thai partner to build a factory and import French equipment
French company would supply cost saving advanced tech and train the cheap Thai workforce
Thailand brought a good distribution system and local knowledge/gov. Connections
Polytex already has operations in Europe and Latin America
Polytex was decentralized with lots of middle management responsibility, Yipsoon in Textiles was a small family-owned company with strop top-down leadership
Yipsoon was successful with Japanese and German partners
Module 3: International Expansion of the Firm - key drivers and challenges:
Case: Joe Fresh
Positioned for affordable, fast fashion in a convenient shopping environment (Loblaws)
Entered the US market in 2011 in New York through JC Penny but closed down New York in 2016
They underestimated the intensity of fast fashion market competition, chose the wrong partner and did not understand the differences between US and CAN consumers
Now expanding to South Korea and Philippines then Africa, Asia, Middle East and Europe
Module 3: Reading: Distance still matters
Companies overestimate the attractiveness of foreign markets (underestimate costs)
CPA (country portfolio analysis) focuses on national GDP and consumers while ignoring costs and risks of new markets and other distances (CAGE)
** CAGE = Cultural, Administrative, Geographic and Economic differences)
Module 3: Lecture: The Central Challenge of International Management:
Understanding and managing the impact of “distance”
CAGE framework of the concept of distance or country differences
CAGE analysis will influence
decisions of which markets to enter, how to enter, impacts on a market entrance/internal operations/products, necessary adaptations to chain
Cultural Distance
- Languages, ethnicities, religions, social norms, beliefs
- Influences the choices between substitutes because of preferences for features (ex. Colors have different meanings in each culture)
- Ex. Lays in China needed to develop a hygienic/clean package
Administrative Distance
- Political hostility, shared monetary association, colonial ties, shared currency, policies and enforcement
Geographic Distance
- Remoteness, common border, sea/river access, country size, transportation lines, different climates/topography
- Ex. Nestle - baking changes at different altitudes so they opened an R&D firm in Ecuador
Economic Distance
- Consumer income, cost and quality of (resources, finances, human resources, infrastructure, info/knowledge)
- Ex. Unilever in India - consumers wash more by hand
Module 3: Reading: A framework for International Market Selection
- Strategic Importance of the Market:
Market potential: market size and growth expectation for a line of business
Learning potential:
- Presence of sophisticated and demanding consumers for a product/service:
- —–> Puts pressure on the firm to raise standards for quality, the speed of development, cost competitiveness, etc.
- ——> Forces constant innovation and the development of competitive skills
- The pace of relevant technology development
- ——> Includes strength of research institutions/universities
- ——> Competitor involvement in tech development enhances learning potential
- Ability to Exploit the Market
Market Distance Barriers: CAGE
- Height of entry barriers - distance between home and target market on CAGE
- The specific knowledge and capabilities of the firm can affect these barriers
The intensity of Local Competition
- Both local firms and established global competitors in the market
Key Take-Away:
In international market selection decisions the relative weight of the strategic importance of the market vs. the ability to exploit the market is shaped by many factors including:
- Size, experience, capital, resources of the firm
- Number of international market entries being considered
- Risk propensity of decision makers (make sure you have diverse group!)
Framework:
Ignore for now (low strategic, low ability to exploit the market)
Opportunistic entry (low strategic, high ability to exploit the market) - Shorter term, steady revenue to fund more strategic entries
Phased-in entry (high strategic, low ability to exploit the market)
- Focus on a smaller subset of the market and expand over time
Rapid entry (high strategic, high ability to exploit the market)
Module 3: Case: IQ Food Co - International Expansion
Australia:
- Demanding high quality, healthier FAST food
- Easy to source ingredients in AUS due to massive land and 3 dif. Sub-climates allow for lots of agriculture and animals
- Transportation is also well developed with low costs
- Restaurants are highly regulated - licenses, etc.
- Large distance between iQ headquarters in TO and AUS so they would need to get a new supply chain and expand their menu
- There is lots of competition in AUS so they need to grow venues and develop their brand
name.
Germany
- Health is becoming very popular and consume lots of organic foods
- No local healthy fast food competition but bakeries are starting to try
- GER has the climate to grow the necessary agriculture over importing
- Have heavy gov. Policy about starting new firms (high taxes)
Hong Kong
- Dense, high dining exposure, REALLY likes sustainable/nutritious products
- High return on investment due to population
- Small land mass but good for organic farming however would be hard for iQ Food to source ingredients locally
- Industry is highly competitive with local and global chains
- Local restaurants use english/western brands/names to leverage credibility making iQ Food less unique in HK
United Arab Emirates
- Large affluent population who like premium quality and healthy food
- High Diabetes rates locally but also has lots of tourists
- iQ Foods does not offer much meat which is good for Halal, but there are some tensions between Can and UAE gov but that might not be a concern
- Ingredients can be sourced locally!
- Very highly competitive and saturated industry
Module 3: Lecture 18: Modes of Foreign Market Entry
Reading: Overview of Modes of Foreign Market Entry
Arms Length Modes - do not involve foreign direct investment
- Exporting - sale of goods and services in another country than where produced
- Licensing - rights to intangible property to another entity for a royalty fee (ex. Disney licenses rights to use Mickey Mouse on clothing)
- Franchising: licensing but has strict rules about how to run the operation
- Manufacturing or Service Contract: outsourcing activities
Foreign Direct Investment Modes: involves ownership of international operations
- Wholly Owned Subsidiary: firm owns 100% of of foreign operations through:
- —-> Greenfield: starting from scratch in new market (new facilities, employees)
- ——> Acquisition: establish foreign subsidiary by purchasing an existing firm for their physical and intangible assets (knowledge, people)
- Joint Venture - establish new firm that is owned by 2+ independent firms (parents)
- ——> Equity can be split a variety of ways
Module 3: reading: the mode of entry decision
You must determine how to enter the country/market of choice. Consider:
Decision 1: Extent of local production - production vs. exporting in parts or full products
Decision 2: Extent of ownership: licensing, franchising, partial, or full
Module 3: Extent of local productions
more is good when:
- Size of local market is larger than min. Efficient scale of production
- Shipping to target costs are higher than the benefit of producing in the home country
- Taxes on exporting to target market are higher than benefit of producing at home
- Input costs are sufficiently lower in target than at home
- Need for local customization of product is high - being local allows you to respond to market needs accurately/efficiently!
- Strict local content requirements - some countries require a percentage of a products content to come from local sources
Module 3: extent of Ownership
Full ownership gives greater control/profit but more costs/risk
Arms length - lower cost/risk of expansion but low control/less profit
Partial - shared costs/risks, added knowledge, connections, reputation but hard to manage/high conflict risk
Find alliance when:
- CAGE distance is high - would benefit from a local partner’s knowledge/networks
- Firm is short of capital
- New foreign subsidiary will have low integration with the rest of the multinational operations
- If they are tightly integrated all their subsidiaries/HQ must constantly align goals/activities which is hard with many partners - Low risk of asymmetric learning between partners
- Each brings complementary skills and distinct knowledge - if one learns faster than the other it might dissolve partnership which is less likely if both constantly evolve and add value - Government regulations require local equity participation
Module 3: Greenfield vs. Acquisition?
Greenfield: gives freedom to implement management, culture, operations from scratch
- Cons: lower speed of entry and increased local competition, expensive and lengthy process to start everything from scratch
Acquisition: quicker entry and gets the assets, human capital and knowledge of local market. Also removes a competitor from the market.
- Cons: post-merger cultural and operational integration can take a long time, often pay a huge premium
- Other reasons: product diversification (Nestle & pet food), positioning in a specific market, supply chain integration (vertical), knowledge/position acquisition
The role of finance changes based on the circumstances so you must evaluate
Greenfield is better when the following occurs otherwise acquisition is:
- Company culture is unique or operations are very specific
- The more unique processes are the more they will want to have greater control - When market growth rate is high or competition is low
- If demand is growing there is less concern with adding new capacity
Module 3: Lecture 19: Modes of Foreign Market Entry (part 2)
Starbucks Case
- USA
- Japan
- UK
- China
- Australia
- And the global Challenges for Starbucks
Starbucks Case: originally focusing on North America and then internationally in the 2000’s
USA - Organic Growth Model
- Offered new value prop so was not able to fuel expansion with acquisitions
- Centralization and full control was key to maintain uniform practices
- They were very patient with waiting for great locations that would make more in the long run
Japan - Joint Venture
- Attractive market and taste for coffee but Starbucks lacked local knowledge and human resources in Japan.
- Operating costs were double, shipping coffee from Seattle to Japan was expensive, retail space is 3x as expensive
- Joint venture with Sazaby - Starbucks had full decision power for brand, product, ads, communication, Sazaby dealt with real estate, operative and human resources
- Decision cons: shared profits
- Today? - Product adaptation (to local tastes and niches), learning potential (sophisticated trend focused consumers), move to full ownership (recently bought out Sazaby)
United Kingdom - Acquisition (Seattle Coffee Company)
- Culture, language, gov., management, economics, etc. were similar in UK to what Starbucks already had
- Seattle Coffee was good because of its focus, small market cap. And existing locations
- UK competition was strong but it used a similar organic growth strategy in UK as USA
- Decision pros: low CAGE, eliminated competition, quick entry
- Today? Failed to innovate for UK, not all USA practices translated, need to carefully introduce USA innovations as they are not always well-received
China - Licensing
- Untapped market but risky culture and politics, concerns with operations and staff
- Sending recruits to USA for training helped attract qualified people which is essential to maintain the uniform customer experience and coffee quality
- Increased equity ownership in China
- Decision pros: low risk entry, high risk environment
- Today? aggressive market growth, HR adaptation, strategic resource opportunity
Australia - Company Owned Stores
- Existing coffee culture, high competition with a preference for local small cafe’s over chains
- Starbucks opened and did not customize product enough or target an already sophisticated coffee drinker and they struggled to stay afloat
- Problem: launched too rapidly, too many locations, no organic growth, underestimated barriers to entry and local competition (specifically consumer preference for cafe’s)
Global Challenges for Starbucks:
- Forced to compete in international market and was not a first mover like it was in the US
- It was initially very successful in Japan as it reached an untapped coffee market but then Japanese coffee drinkers began going to other stores whos taste better suited preferences
- Many of their entries were joint ventures which bring lower profits and uncontrollable costs regardless of the increased local knowledge and lowered risk.
Module 3: types of MNC’s (multinational corporations) - Impacting of trading environment and culture
Reading: Multinational Corporation Strategy and structure
Every MNC faces: pressure for global integration but also local responsiveness
- Different industries and developmental stages of a firm are impacted differently by these pressures (ex. Food vs. util.)
Forces for global integration: pressure to coordinate international activities
- Pressure to lower costs / increase efficiencies through communication across activities
- When following this firms view the world as a single unified market and focus on standardization of products, services, and operations
Forces for local responsiveness: pressure to respond to the unique needs and conditions of each market and the CAGE differences of the entire country
- When following this strategy, firms view all country markets independently and focus on local adaptation
- Localization of product attributes (consumer behavior), service (hiring), promotion
Administrative Heritage: one of the many factors that shape which pressure they follow
- Social/political era when the firm internationalized
- Home country of firm (size, location, culture, etc)
- Values of the founders and early management
Module 3: MCN Models
- Multinational organization Model:
Multinational Organizational Model:
Firm views each market as an independent business
High local responsiveness - strategy of adaptation
Assets, responsibilities and decisions are decentralized to foreign subsidiaries (high autonomy and power)
High use of local managers
who know local culture
Ex. TV programming
Pros: economies of scale, efficiency, coordination, sharing knowledge
Cons: responding to consumer needs, locally relevant management, using local knowledge, innovating for the local market
Module 3: MCN Models
- Global organization model:
Global organization model:
Firm views foreign operations as implementers of their strategies / one big global market
Focus on standardization, aggregation, economies of scale - strategy of aggregation
Centralized hub: tight control of assets, responsibilities and decisions from headquarters of operations and culture
High use of expatriate managers who know culture of home country
Ex. Commodities, Automotive
Pros: economies of scale, bringing new innovations quickly to global markets
Cons: responding to local market needs, innovation at subsidiary level
Module 3: MCN Models
- Transnational Organization Model
Transnational Organization Model:
Treats all markets as equal players to contribute to local and corporate goals
Worldwide learning: using cost differences, knowledge and capabilities to benefit entire firm (knowledge developed jointly and shared worldwide)
Integrated network structure: assets, decisions and power is specialized, geographically distributed
Power balance between HQ and subsidiaries, high communication and coordination across all locations/functions
Global and local perspective and culture in HQ and each subsidiary
Many firms are moving towards this approach
Ex. consumer packaged goods
Module 3: Case: Panasonic & Philips - Key values
Frederik Philips: shared leadership with his brother (eng and commerce)
- Specialized in lightbulbs vs. diversifying like others
- Used physics and chem labs to solve many scientific problems
- Export manager - sold in global markets and used joint ventures
Konosuke Matsushita
- Over 5000 products
- Employees get “7 Spirits” based on cultural and spiritual training
- Goal was to supply high quality & quantity at low prices
Module 3: Takeaways from MCN models and strategies
MNC strategy is influenced by Admin. Heritage:
Factors: socio-political era when internationalized, home country demographics, founders and early management
Admin Heritage reinforces certain organizational capabilities and constraints others
Module 3: Lecture 21: Integrative Case - Midea Refrigerators Global Journey
Global powerhouse in appliances and tech centre in Silicon Valley
15 years ago Chinese appliance industry was bad
- Used flying geese paradigm - product development in a country grows from:
- ———> Import, domestic production, export phases
China WTO:
- Few competitive domestic firms - foreign firms take advantage of low input costs
- Domestic appliance firms begin to emerge
- International firms increase presence in china - scale economies!
- ——> Led to domestic price battle, local firms struggled and internationalized
