Week One:
International business: Any commercial transaction that crosses the borders of two or more nations” Inter-firm vs intra-firm: Intra-firm refers to within company transactions and interaction while inter-firm refers to transactions and interaction between two or more companies.
What is exchanged? Goods
Services Capital Technology
Ideas, know-how (IP) Types of borders: Political (state) Economic Cultural Psychological PEST: Political/Legal
o Political risk and political strategies o Extraterritoriality
o Contractual disputes: Whose laws? In which court?
Economic/financial: e.g. market size, economic risk, foreign exchange risk Socio-cultural: e.g. hofstede’s value dimensions
Technological: e.g. intellectual property, digital divide, WTO TRIPS agreement Regional economic integration:
Types of regional economic integration EU
NAFTA, AFTA, etc
Globalisation of markets: the merging of historically distinct and separate national markets into one huge global marketplace.
Falling barriers to cross-border trade
Tastes and preferences of consumers in different nations are beginning to converge on some global norm
Global market
E.g. Ikea, Coca-Cola, Prada, Sony PlayStation McDonald’s and Nescafe
Market for industrial goods are the most integrated as they serve a universal need e.g. market for commodities, computer software, commercial jet aircraft, financial assets, etc.
Globalisation of production: Sourcing goods and services from locations around the globe to take advantage of national differences in the cost and quality of various factors of production. By doing so, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. E.g. Boeing outsource production of 65% of the total value of the aircraft.
Emergence of Global institutions: As markets globalise and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate and police the global
marketplace, and to promote the establishment of multinational treaties to govern the global busness sytem. General agreement on tariffs and trade (GATT): An international treaty that committed signatories to lowering barriers to the free flow of goods across national borders.
World Trade Organisation (WTO): The organisation that succeeded the GATT and now acts to police the world trading system.
International Monetary Fund (IMF): The international institution set up to maintain order in the
international monetary system. Often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations.
World Bank: The international organisation set up to promote economic development, primarily by offering low-interest loans to governments of poorer nations.
BRIC: Brazil, Russia, India and China, a group of emerging economic powers in the global economy. United Nations (UN): An international organisation made up of 192 countries charged with keeping international peace, developing cooperation between nations and promoting human rights.
FDI: When a firm invests resources in business activities outside its home country, giving it some control over those activities.
FDI Flow: the amount of FDI undertaken over a given time
FDI stock: the total accumulated value of foreign-owned assets at a given time
Outsourcing: The tasks that were previously performed in-house are now purchased from another firm Offshoring: A form of outsourcing, it means that a task previously performed in one country is now being undertaken abroad.
Week two: MNE:
Any business that has productive activities in two or more countries Any firm that engages in international trade or investment
Internationalisation: The process by which firms establish and conduct transactions with firms and customers in other countries, and international operations have an increasing influence on their future.
Measuring internationalisation:
1. Performance: degree of success of foreign operations 2. Structural: what resources are overseas?
3. Attitudinal: International orientations
Transnationality index: Transnationality index is a composite index of the following three ratios: Foreign assets/total assets
Foreign sales/total sales
Foreign employees/total employees Why go international?
React to/pre-empt competition Follow domestic customers Chance factors
Push:
o Market saturation
o Restrictive government regulations Pull:
o New markets for sales growth o Efficiency increase
o Access to key resources o Access to technology, skills MNE globality:
Market presence: the extent to which a firm is targeting customers in all major markets
Supply chain: the extent to which a firm is accessing the globally most optimal locations in its supply chain
Capital base: the extent to which a firm is tapping into the most optimal sources of capital on a worldwide basis
Corporate mind-set: the extent to which a firm understand diversity across cultures and markets and integrates across this diversity.
SME (small and medium-sized enterprise):
Newly started smaller firms that view the world as their market place from their inceptions Challenges the notion that to compete globally you have to be big
Location economies: The economies that arise from performing a value-creation activity in the optimal location for that activity, wherever in the world that may be found, at a cost advantage to the firm.
Experience curve: Systematic reductions in production costs that have been observed to occur over the life of a product.
Modes of Operation:
There is a range of international business operations which firms may choose Firms often use a range of modes simultaneously
The choice of mode depends on firm and market characteristics
Inward (servicing domestic customers through transactions with foreign firms) vs. outward (servicing customers in foreign markets)
Exporting:
Producing in a country and selling to customers in another country, a favoured mode for SMEs and for firms in the early stages of internationalisation.
Governments also actively encourage exports due to the stimulating effect that exporting has on both the national economy and the firms involved.
Export represents additional jobs and a positive trade balance Other benefits based on the multiplier effect
For firms in countries such as Australia and New Zealand with limited domestic markets, exports represent opportunities for expanded markets, profits and future growth
International markets are so much larger than the firm’s domestic market. By expanding the size of the market, exporting can enable a firm to achieve economies of scale, thereby lowering it unit costs Indirect exporting: exporting using an agent located within the home country
Direct exporting: exporting by engaging a customer/agent located overseas
Advantages Disadvantages
Avoids cost of establishing manufacturing operations in the host country
May help a firm achieve experience curve and location economies. By manufacturing the product in a
centralised location and exporting, the firm may realise economies of scale
May not be appropriate if lower-cost locations for manufacturing can be found abroad, however a firm can still export from a country other than the home-country. High transportation cost can make
exporting uneconomical,
particularly for bulk products. This can be addressed by
manufacturing regionally. Tariff barriers can raise costs Often if a firm delegates its
marketing, sales and service to another company, they may not do as good a job.
Contracting: Licensing:
Arrangement whereby licensor grants the rights to intellectual property to another entity for a specified period. In return, the licensor receives a royalty fee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks.
Advantages Disadvantages
development costs and risks associated with opening a foreign market. Attractive when a firm in unwilling to commit substantial financial resources to an
unfamiliar or politically volatile foreign market.
Useful when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment.
Useful when a firm possesses some intangible property that might have business applications but it doesn’t want to develop those applications itself.
over manufacturing, marketing and strategy that is required for realising experience curve and location economies.
Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. However, a licensee is unlikely to allow a multinational firm to use its profits to support a different licensee operating in another country. Losing control of technological
know-how. One way to reduce this risk is cross-licensing
(arrangement where companies both license their know-how)
Franchising: specialised form of licensing arrangement whereby franchisor sells the use of property to franchisee for a fee but still requires franchisee to work the property under supervision/control of franchisor.
Advantages Disadvantages
Similar to those of licensing Lower costs and risks
Can build a global presence quickly and at a relatively low cost and risk
Like licensing, franchising inhibits the firm’s ability to take profits out of one country to support
competitive attacks in another. Quality control, the firm’s brand
name conveys a message to
consumers about the quality of the firm’s product. Foreign franchisees may not be as concerned about quality as they are supposed to be, and the result of poor quality can extend beyond lost sales in a particular foreign market to a decline in the firm’s worldwide reputation. One way around this disadvantage is to set up a subsidiary in each country.
Subcontracting (outsourcing): part/all produced by foreign contractee
Management contracts: international firm provides the managerial expertise to operate another firm in a foreign country for an agreed fee for fixed periods of time
Turnkey projects: a firm designs, builds and equips facilities, then transfers them to the foreign owner on completion.
Advantages Disadvantages
The know-how required to
assemble and run a technologically complex process is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. The strategy is
The firm that enters into a turnkey deal will have no long-term
interest in the foreign country. One way around this is to make a minority equity interest in the operation.
particularly useful where FDI is limited by host-government regulation.
Often less risky than FDI, in a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political or economic risks.
The firm that enters into a turnkey project may inadvertently create a competitor.
If the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential or actual competitors. FDI:
Wholly-owned subsidiaries: A subsidiary in which the firm owns 100% of the shares. Either the firm can set up a new operation in that country, often referred to as a Greenfield venture or it can acquire an established firm in that host nation and use that firm to promote its products.
Advantages: Disadvantages
Reduces the risk of losing control, especially important when a firm’s competitive advantage is based on technological competence.
Tight control over operations in other countries. This is necessary for engaging in global strategic coordination.
May be required if a firm is trying to realise location and experience curve economies.
Most costly method of serving a foreign market.
Risks associated with learning to do business in a new culture (though reduced with an
acquisition rather than Greenfield)
Cooperative ventures (especially joint ventures): jointly owned by two or more independent firms
Advantages Disadvantages
Firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language and political and business systems
Sharing costs and risks with a local partner
In many countries, political
considerations make joint ventures the only feasible entry mode. E.g. joint ventures face lower risk of government interference
Risks giving control of its technology to its partner.
Doesn’t give a firm the tight control over subsidiaries that it might need to realise experience curves or location economies, now does it give a firm the tight control needed for engaging in coordinated global attacks against rivals.
Shared ownership can lead to conflicts and battles for control if goals or objectives change or if they take different views.
Globalisation: drivers vs. inhibitors Drivers:
Declining trade/investment barriers Technological advances (information revolution)
Ideological shifts (central planning to market driven)
MNEs
Inhibitors:
National differences (e.g. culture, economic development) Protectionism
Organisational culture (ethnocentricism, management myopia) Globalisation and it’s potential impact:
Erosion of national sovereignty; loss of power of state over MNEs Changing of ‘economic map’
Anti-globalisation backlash
Speeding up of internationalisation process
Changing sources of competitive advantage (optimising location, exploiting global presence) Rise of the nationality-less firm
Week three:
Firm’s environment: Sum of all the
conditions affecting any aspect of the firm’s current activities and its future
development
Environmental scanning: a systematic approach by which an MNE assesses external conditions affecting their operations:
A country’s risks and opportunities Relative attractiveness of
alternative countries Future predictions; and Likely impact on firms Varies across firms:
Frequency, scope, sophistication
Contingent on factors, e.g. organisational culture, degree of uncertainty, nature of activities, also perceptions
Sovereignty:
Ultimate authority of state supported by exclusive use of coercive power within its defined territory AND freedom from interference from another state.
Bestows power to control and restrict commercial activities within our borders Influence over internationalisation process
State vs. MNEs?
State: Legitimate goals toward which to direct resources under their command MNEs: subject to conflicting rules of law between home and host country National political differences:
Political system o Collectivism o Democracy o Totalitarianism Theocratic Communist Dominant ideologies o Conservatism o Liberalism o Socialism
Role of government in economy Rule of law/independent judiciary Protection of private property rights Effective implementation of policies/laws
‘Institutional equality’: the traditions and institutions by which authority in a country is exercised for the common good
Political risk
What is Political risk? Governmental or societal actions and policies, originating either within or outside the host country, and negatively affecting either a select group of, or the majority of foreign business
operations/investments
Macro: macro political risk exists when all foreign firms are affected in much the same way, e.g. revolutions, civil wars, protests, etc.
Micro: Micro political risk occurs when changes only affect selected industries, firms or projects, e.g. discriminatory taxes, import restrictions directed as specific foreign firms, etc.
Political ‘agents’
Opposition groups/political parties
Organised interest groups & pressure groups NGOs
Terrorist/guerrilla groups Opinion-makers
Civic action/public opinion Political risk: dimensions
1. Sources:
o Change in political philosophy o Public corruption
o Impending/recent independence o Armed conflict/terrorism
o Worsening economic conditions o Social unrest
o Nationalism 2. Agents:
o Current government o Opposition groups
o Organised interest groups o Terrorist/guerrilla groups o International organisations o Foreign governments 3. Effects: o Expropriation of assets o Indigenisation laws o Loss of earnings o Cancellation/revision of contracts o Loss of earnings, increased taxes
o Restriction of operating and financial freedom o Kidnapping of employees
Public corruption:
Abuse of public office for private gain
Perversion or destruction of integrity in the discharge of public duties by bribery or favour Level of corruption depends on:
o Effectiveness of law enforcement
o Social/cultural attitudes towards corruption Assessing political risk:
International Country Risk Guide (ICRG) model and the Economist intelligence Unit (EIU) model: o 12 risk components
o Scores calculated for each component o Sum of scores provides overall risk rating
Managing political risk:
Lobbying: personal communication of information to public officials, political donations to candidates o Support/pressure from home/host governments
Public advocacy: direct communication to public; support to ‘grassroots’ campaigns Coalition building
o With other firms with similar goals, e.g. business associations, joint venture partner o With diverse national stakeholders
Market responses
o Geographical diversification o Appropriate entry mode choice If all fails, avoid or exit
Legal system: The system of rules and institutions that regulate behaviour and the processed by which the laws of a country are enforced and through which redress of grievance is obtained.
Differences in national legal environments: 1. Type of legal system
o Common law o Civil law o Theocratic law
2. Stability/effectiveness of legal system o Rule of law
o Independence of judiciary
o Principle of equality before the law Common legal risks faced by MNEs
Contractual disputes and enforcement Intellectual property abuses
Conflict of laws (which national law applies?)
Extraterritoriality (the application of a country’s laws beyond its borders) Risk of product liability and other forms of litigation
Lack of legal harmonisations (scope of international agreement still limited) Liability/negligence:
Rise in negligence/product liability claims against parent companies for actions by subsidiaries Lifting of the ‘corporate veil’ between multinational units and the fiction of limited liability. Political Risk exposures
Ownership-control risk: The risk that government actions will require a counterproductive change to the preferred ownership or corporate governance structure of the business
Operational risk: the risk that government actions will impose counterproductive constraints on how a business wished to operate
Transfer risk: the risk that government actions will limit the transfer of resources and funds across international borders
Week Four: Culture:
A learned, shared, compelling interrelated set of symbols whose meanings provide a set of orientations for members of society.
A system of values and norms that are shared among a group of people and that when taken together constitute a design for living
Values: abstract ideas about what a group believes to be good, right and desirable
Norms: the social rules and guidelines that prescribe appropriate behaviour in particular situations Layers of culture:
2. Expressed values, beliefs and attitudes (espoused, e.g. work ethic, gender equality, etc) 3. Cultural artefacts, behaviour (visible, e.g. dress codes, greeting rituals, etc)
Basic assumptions
1. View of human nature - Good vs. evil, e.g. belief in change (training and development) 2. Relationship with nature (control vs. fatalism)
3. Human relationships (collectivism vs. individualism) 4. Activity mode (doing vs. being)
5. Spatial focus (private vs. public)
6. Temporal orientation (linear vs. holistic) Context:
Low-context: A culture in which the speaker’s message is conveyed explicitly by the spoken words, e.g. Australia, New Zealand, the US, Canada and most of Western Europe
High-context: A culture in which the context of a discussion is as important as the actual words spoken, e.g. most countries in Asia, the Middle East, Latin America and Africa.
Hofstede’s value dimensions
Power distance: Extent to how much a society allows inequalities of physical and intellectual capabilities between people to grow into inequalities of power and wealth
Uncertainty avoidance: Extent to which cultures socialise members to accept ambiguous situations and to tolerate uncertainty
Individualism vs. collectivism: extent to which a society teaches individuals either to prize personal achievement or conversely to look after the interests of their collective first and foremost.
Masculinity vs. femininity: Masculine cultures' values are competitiveness, assertiveness, materialism, ambition and power, whereas feminine cultures place more value on relationships and quality of life. Long vs. short-term orientation: describes a society’s time horizon
Trompenaars’ dimensions: Universalism vs. particularism Diffuse vs. specific Achievement vs. Ascription Attitudes to time Attitudes to environment Communitarianism vs. individualism Neutral vs. affective
Low context vs. High context
Dealing with culture: individual level: Recognition of cultural differences Avoidance of
o Ethnocentrism: a belief that one’s own group is superior to others
o Self-reference criterion: unconscious use of one’s own culture to assess new environments Cross-cultural literacy
Making cultural adjustments Dealing with culture: firm level
External
o Negotiations with governments, other firms o Understanding different consumer preferences o Using local expertise
Internal
o Managing a cross-cultural workforce o Cross-border communication
o Expatriate management o Management orientation o Cross-cultural training
Implications for MNEs
Pre-entry assumptions need to be examined Learning from experience/from insiders is vital
Operating in foreign countries requires adaption at individual and organisational levels Ethnocentrism can contribute to failure
Cultural sensitivity must be taught; technical and business skills are not enough Cross-cultural understanding involves relationship building
Culture and competitive advantage: The values and norms of a country influence the costs of doing business in that country, which in turn influence the ability of firms to establish a competitive advantage. The connection between culture and competitive advantage has important implications for the choice of countries in which to locate production facilities and do business.
Pressures for cultural change
Economic development/industrialisation Demographic shifts International migration Globalisation/westernisation Media penetration Week Five: Economic/financial environment: National:
o Assessing national economic performance and country risk o National financial risk
o Comparing economic systems International:
o Regulating international trade at multilateral and regional levels o International monetary systems and exchange rates
Economic Environment: relevance to MNE: Demand conditions:
o Market size/potential
o Important for MNEs selling goods/services in local market o Quantity of demand
o Composition of demand Factor conditions:
o Important for investors producing in local markets
o Consists of inputs to production (e.g. human, physical, knowledge) Market size (common measures)
Population size/growth/age distribution Economic size/growth
o GDP o GNI
o Growth of GNI and GDP Income/PPP
Income distribution (gini coefficient)
Economic Risk: Likelihood that changes arising from economic mismanagement or from external forces adversely affect the operations of a firm in the host country. Economic risks are not independent of political or financial risk
Economic endowments Size
Geography: the natural resources and features of a country affect the level and patterns of market demand and production e.g. mineral deposits, climatic patterns, the distribution of soil types, and the topography of a region
People: help define potential market or as a potential location for production o Population distribution
o Income distribution o Human capital
Infrastructure and institutions Productivity and competitiveness Economic performance
Economic stability Economic growth Inflation
External viability and the balance of payments Foreign debt
Economic development (e.g. compare HDI)
Market economy: An economic system in which the interaction of individual decision makers on questions of supply and demand determines the quantity in which goods and services are produces
Command economy: An economic system where the allocation of resources, including determination of what goods and services should be produced and in what quantity is planned by the government
Mixed economy: An economic system where certain sectors are left to private ownership and free market mechanisms, while other sectors have significant government ownership and government planning
Emerging/developing markets
Possible negatives Possible attractions
Low income, high foreign debt Small industrial sector
Inadequate infrastructure Poor living conditions
High inequality, weak middle class Weak institutions, especially ‘rule of
law’
Higher degree of risk
Rapidly growing population Many experiencing rapid
industrialisation Cheap labour
Potential ‘first mover’ advantage for MNEs
Low average incomes conceal pockets of wealth
Assessing economic risk
Economic stability Role of government International economic relations
Economic growth rate Business cycle
Inflation (CPI) Unemployment Productivity
Gross domestic investment Business/consumer confidence Fiscal policy Monetary policy Institutional framework Balance of payments Current accounts Capital accounts
Financial risk rating:
Inability of a country to finance its official, commercial and trade debt obligations. Adverse events can include; currency devaluation, payment defaults, political controls
Foreign exchange risk: The risk that changes in exchange rates will hurt the profitability of a business deal Types of foreign exchange risk:
Transaction exposure: The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Occurs when you have a contract (in foreign currency) that needs to be settled in the future.
Translation exposure: The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values. Results from the need to restate foreign subsidiaries’ financial statements, usually stated in foreign currency, into the parents’ reporting currency for consolidated statements
Economic exposure: The extent to which a firm’s future international earning power is affected by changes in exchange rates. Occurs when currency fluctuations affect pricing, operation costs, i.e. economic impact.
Managing FX risk
Hedging through use of instruments in forward exchange market (e.g. forward contracts, options, currency swaps). This doesn’t remove all risks and can prove costly.
Diversifying markets (natural hedging): spreading risk by earning in multiple currencies
Adjusting operational decisions, e.g. move production offshore, make productivity gains, differentiate product on quality not price
Responses to economic/financial risk: Do nothing
Change investment level Change investment timing Reduce costs
Change target group Change marketing mix Exit market
Week six:
Commercialising knowledge:
Intellectual property (IP): products of the human mind, ownership of which is protected by law Common forms of IP rights (IPR):
o Patent o Trademarks o Copyrights
Patents: legal right granted by the government to inventor, for a fixed period of years, to exclude other persons from making, using or selling a patented product or using a patented method or process. A patent is valid only within the territory of the state granting it.
There is no global patent
There are variations in national patent laws
E.g. Cadbury attempt to trademark the colour purple in the chocolate category in Australia
Trademarks: used to distinguish the goods and services of one trader from another. A trademark can be a word, phrase, logo etc. The laws prevent other traders from adopting similar marks.
Copyrights: Exclusive legal rights of authors, composers, playwrights, artists and publishers to publish and dispose of their work as they see fit.
The knowledge Gap:
Most of the world’s R&D based in developed countries; MNEs tend to locate R&D in home country or other developed countries
Differences in knowledge infrastructure The internet widens the ‘digital divide’
Countries vary according to the structures and institutions used to support and facilitate innovation activities
The effectiveness of an innovation system depends on: o Education system
o Resources devoted to R&D
o Industrial structure: firm size/sectors o Cooperation between organisations Tacit knowledge vs. explicit knowledge Means for international technology transfer:
FDI: direct investment by MNEs is a major source of technology for developing countries, potentially causing positive ‘spill over effects’
Cross-border joint ventures and strategic alliances: are a means to share the costs and risks of innovation
Technology licensing: producing under licence is a means of accessing patented technology Capital goods trade: imitation or ‘reverse engineering’ of existing goods.
IP: Wide national variations Legal systems
Cultural values Influence of history
Level of economic development
Trade Related Aspects of International Property Rights (TRIPS): The Trips regulations obliged WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Developing countries initially were given some leeway in regards to how long they had to implement this agreement.
Criticisms that TRIPS does not offer sufficient protection Strengthened by bilateral agreements
In 2001, TRIPS was relaxed to allow developing countries easier access to more affordable pharmaceuticals to counter life threatening diseases
S. Africa VS Pharmaceutical Manufacturers Association in 2001 TRIPS and developing countries
For Against
Stronger IP protection in developing countries will stimulate FDI and technology transfer
Will encourage local firms to create/adapt knowledge
May lead to a higher cost of acquiring knowledge
Pace of imitation may be slowed Shift in bargaining power from users to
producers of knowledge High compliance costs How do Companies Protect their IP?
Transfer outdated rather than state-of-art technology Withhold crucial components
Restrict access to key internal documentation Set up monitoring system to notify IP infringements Technology Transfer Decisions
MNE Developing country Firm
What to transfer? What should remain in-house?
How to protect IP?
What degree of control over transfer? What choice of operation mode?
How to harvest knowledge from foreign operations?
How to create knowledge linkages? How to absorb knowledge? How to
gain tacit knowledge?
How to adapt existing knowledge to local requirements?
How to create new knowledge? Week eight:
Refers to a level of political authority above the nation state. It implies a shift in sovereignty away from states and toward an international institution
Supranational regulations impacting firm strategy by shaping national laws/regulations
Trade liberalisation: Government measures to introduce freer trade by reducing barriers to the flow of goods, service, capital, labour and intellectual property
Protectionism: Government use of trade policies to promote domestic producers and curtail foreign competition
Factors influencing international trade policy: Industrialisation
Employment Consumers Strategic interests National culture
Governmental tools of trade control:
Tariff: tax levied on a good shipped internationally Subsidy: government payment to a domestic producer
Quota: direct restriction on the quantity of a good that may be imported
Voluntary export restraint: quota on trade imposed by exporting government, usually at the request of importing government
Local content requirements: requirements that a specific fraction of a good be produced domestically Administrative policies: bureaucratic rules that make importing difficult (e.g. customs delays,
technical standards, import licences)
Antidumping policies: rules designed to prevent dumping Impact of trade policy on firms:
Affect location decisions:
o Sales: may increase costs of exporting, make foreign firms uncompetitive, restrict access o Production: may need to locate production inside a market, due to problems in servicing from
outside
Affects marketing decisions, e.g. antidumping regulations limit aggressive pricing World Trade Organisation (WTO)
International organisation (successor to GATT) dealing with rules of trade between nations. Aims to: o Ensure trade flows as freely as possible
o Provide forum for trade negotiations o Settle trade disputes
o Monitor/enforce agreements Structure of WTO Agreements Organisation GATT (goods) GATS (services) TRIPS (IP)
DSU (dispute settlement)
Ministerial conference
General council/dispute settlement body/trade policy review body
Councils for Trade in Goods, IP, Services Secretariat
GATT
Relates to goods including agriculture Non-discrimination principles
o Most favoured nation (MFN): requires a member of the WTO to extent to all its trading partners the same trading concessions that it gives to its most favoured trading partner
o National treatment: requires that national and foreign trade and investment are treated equally Reciprocity: a country’s trade liberalising measures matched by trading partners
Further trade liberalisation WTO dispute settlement
1. Consultations
Dispute triggered when a TWO member feels another member is violating the WTO rules A WTO member may then decide to request consultations of another WTO member Only WTO member governments may initiate disputes (i.e., not companies)
If no resolution within 60 days, the complainant may request the establishment of a panel 2. Panel appointment and hearings
Panels consist of 3-5 experts from countries not party to the dispute
The panel conducts hearings from both parties to the dispute and compiles a report
If the panel decides the respondent’s trade measure does violate WTO rules, it recommends the measure be made to conform with WTO rules
The panel process should be completed within 6-9 months 3. Appeal
Respondent may appeal
Each appeal is heard by members of a permanent appellate body
The appellate body’s report becomes the Dispute Settlement Body’s (DSB) ruling, unless there is a consensus of countries against it
The appeals process is allowed a maximum of 90 days 4. (Non-) Implementation
if it ‘loses’ the respondent must notify the DSB how it intends to implement the panel’s recommendations
the respondent may request a ‘reasonable period of time’ in which to comply
if the respondent fails to comply within the specified period, it must enter into negotiations over compensation
if no agreement on compensation is reached, the complainant may ask the DSB for permission to impose limited trade sanctions
WTO achievements
Significantly reduced tariffs on manufactured goods Covers services
Covers intellectual property
Greater enforcement powers, more effective dispute settlement process New members, e.g. China in 2001, Russia in 2012
Multilateralism vs. Regionalism
Multilateral trading system Regional Trading Blocs Goal of freer trade
Trade liberalisation governed by principles of
non-discrimination
Broad membership of nations
Goal of freer trade
Trade liberalisation takes preferential forms: many benefits extended to member states only Restricted membership, e.g. EU: must be
European country Week nine:
Regional Trade Agreement (RTA): agreement among countries in a geographic region to enhance cooperation in order to bring down trade barriers among themselves. RTAs involve greater integration of member economies.
Regional Economic Integration: This arises from agreements among countries in a geographic region to reduce to varying degrees the barriers to the free flow of goods, services and factors of production between each other.
Free trade area: an area in which all barriers to the trade of goods and services among member countries are removed
Customs union: a group of countries committed to eliminating trade barriers and adopting a common external policy
Common/single market: a group of countries committed to eliminating trade barriers, adopting a common external trade policy, and allowing factors of production to move freely between members
Economic union: A group of countries committed to removing trade barriers, adopting a common currency, harmonising tax rates, and pursuing a common external trade policy
Political union: A central political apparatus coordinating the economic, social and foreign policy of its member states.
What is the European Union? Economic: the EU is
o An economic and monetary union in transition to a political union? o Most advanced form of economic integration in today’s world
Political: the EU is a shift in sovereignty from national to regional level (supranationalism), i.e. partial political integration
EU’s progress
Single Market Europe (1992)
o Europe in 1980s: already a customs unions, but many non-tariff barriers remained
o 300 legislative measures introduced by end of 1992 to eliminate physical, technical and fiscal barriers to trade
o Programmes regarded as largely successful
o Required a form of majority voting by member countries to be introduced Economic and Monetary Union (EMU)
o With the signing of the Maastricht Treaty in 1991 to further integrate the market Introduction of a single currency in 12 member countries
1 Jan 1999: conversion rates of participating members’ currencies irrevocably fixed; European Central Bank began operation; euro for non-cash transactions
1 July 2002: national currencies withdrawn, euro sole legal tender Euro: key features
Timetable and conditions set out in Maastricht Treaty (1992): states must meet convergence criteria Entails single monetary policy administered by independent central bank (ECB) as part of European
System of Central Banks (ESCB) Not all EU members qualified/opted in
Some coordination of economic policy involved (stability and growth pact which aims to cap budget deficits)
EU’s progress:
Single market liberalisation incomplete, some outstanding sectors
Trade liberalisation with external countries a concern in the area of agriculture (Common Agricultural Policy)
Challenge of enlargement
Countries in crisis, e.g. Ireland, Club Met, Latvia, Cyprus, Slovenia Implications of EU integration for MNEs:
Advantages Disadvantages
Lower cost of cross-border operations More locational choices
Efficiency gains: standardisation/scale economies
Reduction in protectionism
Increased competition from pan-European operators
Pressure on prices due to introduction of Euro
Many differences still remain e.g. culture
Week ten:
Transition economies:
Moving from command to market economies
Examples include:
o Central Europe, Baltic states, southeast Europe
o Former Soviet Union: e.g. Russia, Ukraine
o Asia: e.g. China, Vietnam, Mongolia
Process of economic transition:
Political change: introduction of liberal democracy, especially multi-party system and protection of political/civil rights
Marketisation:
o Price liberalisation o Privatisation, enterprise-level efficiency gains
o Liberalisation of foreign trade (internationalisation of economy) Macroeconomic stabilisation:
o Reducing budget deficits o Controlling inflation o Stabilising currencies Institutional development:
o Establishing/protecting private property rights o Ensuring freedom of enterprise
o Enforcing rule of law
Deregulation: the process of removing legal restriction to the free play of markets, the establishment of private enterprises and the manner in which private enterprises operate.
Privatisation: transfer in ownership of state property into the hands of private individuals.
Institution development: the development of institutions such as the legal and financial systems that underpin a market-based economy.
Why Invest?
Opportunities Risks
High-growth potential Emergence of middle class;
adoption of Western style consumption patterns (e.g. Fast food and McDonalds) Access to skilled but
lower-cost labour
‘first-mover’ advantages
Government’s arbitrary and inconsistent political decisions
Barriers to investment
Restrictions on foreign ownership Financial controls
Local content requirements
Restrictions on foreign employment Lack of rule of law/enforcement
Lack of managers with experience in the market system
Corruption Week eleven:
Ethics concerns systems of values by which judgement of right and wrong behaviour are made. Not governed by law
Focus on the human consequences of actions
Business ethics are the ‘accepted principles of right and wrong that govern the conduct of business people’. Ethical universalism postulates that there is an ethical standard(s) that applies equally to all cultures and contexts
What MNEs can do to Manage/Solve Ethical conflicts Avoiding
Forcing: force its will on the other, often used by a party in a stronger position
Education-persuasion: convert others to its position through providing information, reasoning or appeal to emotion
Infiltration: introduces its cultural values to another society hoping that an appealing idea will spread Negotiation-compromise: both parties give up something to negotiate a settlement
Accommodation: adapts to the ethics of the other
Collaboration-problem solving: work together to achieve a mutually satisfying solution, a win-win outcome meeting the needs of both
Corporate Social Responsibility (CSR) refers to the role of the firm in society, encompassing obligations to stakeholders in local communities and to the environment
International CSR includes the expectation that MNEs concern themselves with the social and economic effects of their decisions
Arguments for CSR
Traditional economic arguments (shareholder orientation) Socio-economic arguments
o Shift away from narrow focus on shareholders o Multiple shareholders
Who are Stakeholders? Shareholders Employees Customers Consumers Communities Society Ecological environment Suppliers Governments Approaches to CSR: CSR as a differentiation strategy
o Products made from sustainable resources
o Products made through CSR-related processes, e.g. organic food Codes of practice
o Rules designed to guide CSR, ethical and environmental practices Third-party verification
o Use of outside specialist or certification to monitor CSR
o E.g. certification on use of sustainable palm oil; on non-use of child labour in cocoa production International standards for MNEs
OECD guidelines for MNEs
ILO tripartite Declaration of principles concerning MNEs and Social Policy The UN global compact
UN Global Compact Human rights
o Support protection of human rights o Prevent human rights abuses Labour
o Freedom of association, right to collective bargaining o Elimination of forced/compulsory labour
o Abolition of child labour
Environment
o Precautionary approach to environmental challenge o Initiative to promote greater environmental responsibility Anti-corruption
o Elimination of corruption, including bribery
CRS Dimensions
Economic Legal Ethical Philanthropic
Perform in a manner consistent with maximising earnings per share Committed to being as profitable as possible Maintaining a strong competitive position A successful firm should be defined as one that is consistently profitable Perform in a manner consistent with expectations of government and law Important to comply with various federal, state and local regulations Important to be a law-abiding corporate citizen A successful firm should be defined as one that fulfils its legal obligations Should provide
goods and services that at least meet the minimum legal requirements
Perform in a manner consistent with
expectations of societal mores and ethical norms Important to recognise
and respect new or evolving ethical/moral norms
Importance of
preventing ethical norms from being compromised in order to achieve corporate goals Importance of good
corporate citizenship being defined as doing what is expected morally and ethically
Recognise that corporate integrity and ethical behaviour go beyond mere compliance with laws and regulations
Perform in a manner consistent with the philanthropic and
charitable expectations of society
Importance of assisting the fine and performing arts
Importance of managers and employees
participating in voluntary and charitable activities within their local communities
Importance of providing assistance to private and public educational institutions
Importance of assisting voluntarily those projects that enhance a
community’s quality of life.
