1. INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS?

International Business Performance of trade and investment activities by firms across national borders  cross-border business
(companies)
 firms, governments and international agencies organize, source, manufacture, market and conduct other value-adding
activities on an international scale
 IB has gained much speed and complexity over the past 4 decades
 even daily chores (e.g. shopping, listening to music) involve international business transactions  IB = access to products and
services from around the world and affects the quality of life and economic well-being
Globalization of markets ongoing economic integration and growing interdependency of countries worldwide
(interconnectedness between countries)
 compression of time and space
 allows and compels firms to internationalize, however internationalization is easier to accomplish, even for little companies
 increase in volume and variety of cross-border transactions
 evidence: 1. substantial growth of cross border trade, 1960: $100 billon/year, today:
$10 trillion/year 2. flows of capital, technology and knowledge between nations 3. development of highly sophisticated global
financial systems and mechanisms to facilitate cross-border flow 4. collaboration among nations WTO, IMF
Internationalization refers to the tendency of companies to deepen their international business activities systematically.  diffusion of
products, technology, and knowledge worldwide

What are the Key Concepts in International Trade and Investment?

International trade exchange of products and services across national borders; typically through exporting and importing
exporting sale of products or services to customers located abroad, from a base in the home country or a third country (outbound)
importing or global sourcing procurement of products or services from suppliers located abroad for consumption
in the home country or a third country
 goods cross borders (inbound)
international investment the transfer of assets to another country or the acquisition of assets in that country
 factors of production: assets like capital, technology, managerial talent, manufacturing infrastructure Pr/ serv. Crosses
border.
 Investment= the company itself crosses borders! 2 types:
1. international portfolio investment passive ownership of foreign securities such as stocks and bonds for the
purpose of generating financial returns  no active mgmt or control over assets, short-term interest
2. foreign direct investment FDI an internationalization strategy in which the firm establishes a physical presence
abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment 
gives the investor partial or full ownership of productive enterprise. Involves extensive planning.

The Nature of International Trade

3 Factors explain why trade growth outpaced CDP growth
1. rise of EM durin past 3 dec.
2. Advanced economies source from low-cost manufact
3. Advances in information and transport tech, less barriers, liberalization

After recession trade returned to normal lvl in 2012

Since 1970 exports grew thirty-fold and GDP tenfold
 difference partly due to advanced economies such as Canada and Japan now sourcing many of the products that they
consume from low-cost manufacturing locations such as China and Mexico
Total annual value of products trade (exports + imports in billions of $: US, Germany, Japan, China, France, UK, Italy,
Netherlands, Canada, Belgium
Total Annual value of products trade (exports + imports) as a percentage of nation’s GDP: Belgium, Netherlands, Germany,
Canada, France, UK, Italy, Japan US, China  dependent on international trade (also true for Singapore, Hong Kong, South Korea,
Malaysia)

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entrepôt economies: they import a large volume of products, some of which they process into higher value-added products, and
some they simply re-export to other destinations,
e.g. Singapore receives petroleum products from the Middle East, which it then export to China and other destinations in Asia

The Nature of International Investment

FDI is the ultimate stage of internationalization, and encompasses the widest range of international business involvement
strategic reasons for FDI:
 to set up manufacturing or assembly operations, or other physical facilities
 to open a sales or representative office or other facility to conduct marketing or distribution activities
 to establish a regional headquarters
 establishing a new legal business entity, subject to the regulations of the host government
FDI is especially common among large, resourceful companies with substantial international operations
 European and US firms invest in China, India and Russia taking advantage of low- cost labor and other resources
 companies from these rapidly developing economies have begun to invest in western markets
the $ volume has increased immensely since the 80s, especially into advanced/ developed economies such as Japan, Europe and the
US
interruptions in after 9/11
growth of FDI into developing economies (nations with lower incomes, less-developed industrial base, and less investment capital
than advanced economies)  due to international trade, wider selection of products and services at lower prices, better living
standards. growing importance of developing economies and emerging markets as target markets and sourcing bases

Services as Well as Products

international trade and investment have been regarded as the domain of companies that make and sell tangibles. ¼ of int. trade is
services.
services face greater challenged and barriers in cross-border trade than merchandise goods and not all services can be exported,
most services can be offered internationally only by establishing a physical presence abroad (FDI!)
big diversity of service sectors that are internationalizing (architectural, banking, education, entertainment, transportation, travel
and tourism, construction,…)
services = deeds, performances, efforts performed directly by people working in banks, consulting firms, hotels, airlines,
construction companies, retailers, and countless other firms in the service sector
international trade in services accounts for about ¼ of all international trade and is growing rapidly, in recent years it has been
growing fast than products trade
Total annual services trade (export + imports) in billion $: US, Germany, UK, France, Japan, Italy, Netherlands, Spain, China,
Canada  larger advanced economies, because these tend to be postindustrial, service-based economies
Total annual value of services trade (exports + imports) as a % of nation’s GDP: Netherlands, UK, Germany, Spain, France,
Canada, Italy, Japan, US, China
Although growing rapidly, value of merchandise trade is larger. (bc of more barriers)

The International Financial Services Sector

International banking and financial services are among the most internationally active service industries
explosive growth of investment and financial flows beginning in the 70s  development of capital markets worldwide  growth
due to 2 factors

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 1. money flowing across national borders into portfolio investments and pension funds, and the internationalization of banks
2. the activities of banks and other financial institutions help increase economic activity in developing economies by
increasing the amount of cheap, local investment capital, stimulating development of local financial markets and
encouraging people to save money
especially flourishing in the Middle East, e.g. Saudi Arabia; banks bypass Islamic rules against paying interest by structuring loans
as partnerships
Local investment capital stimulates dev of financial markets and locals save more money

How Does International Business Differ from Domestic Business?

business environments characterized by unique economic conditions, political systems, laws and regulations, and national culture
 firm does not only find itself in less familiar surroundings than it does domestically, it encounters many uncontrollable variables
 new or elevated types of business risks for the firm

The Four Risks in International Trade

Cross-Cultural risk a situation or even where a cultural miscommunication puts some human value at stake
 differences in language, lifestyle, mindsets, customs and/or religion
 a country’s values tend to be long-lasting and transmitted from one generation to the next, they influence the mindset and
work style of employees and the shopping patterns of customers
 language is a critical dimension of culture, not only a means communicate, also a window on people’s value system and living
conditions (e.g. Eskimos have various words for “snow”)  while translating it is difficult to find words that convey the same
meanings; miscommunication gives rise to inappropriate business strategies and ineffective relations with customers
Country risk/Political risk potentially adverse effects on company operations and profitability caused by developments in the
political, legal, and economic environment in a foreign country
 possibility of foreign government intervention in firm’s business activities  restrict access to markets, impose bureaucratic
procedures on business transactions, limit the amount of earned income that firms can bring home from foreign operations
 degree of government intervention varies
 Singapore, Ireland = economic freedom  fairly liberal economic environment; unlike Chinese and Russian governments
 laws and regulations that potentially hinder company rights, intellectual property protection, product liability and taxation
policies
 potentially harmful economic conditions due to high inflation, national debt, unbalanced international trade
Currency risk/Financial risk risk of adverse fluctuations in exchange rates
 arise because international transactions are often conducted in more than one national currency
 when currencies fluctuate significantly, the value of the firm’s assets, earnings, and operating income can be reduced. Exports
are often paid in receiving currency.
 inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange
rates due to the growing interconnectedness of national economies
Commercial risk firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures
 poor choices when selecting business partners, timing of market entry, pricing, creation of product features, and promotional
themes
 consequences are usually more costly when committed abroad

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 these 4 risks cannot be avoided, but they can be anticipated and managed  research to anticipate potential risks, understand their
implications, and take proactive action to reduce their effects
national differences require managers to formulate approaches tailored to conditions in each country where the firm does business
 alter products and services

Who Participated in International Business?

In IB, organizations with motives work together, contributing expertise&input.

4 categories of participants (supply side of IB transactions)

1. focal firm = The initiator of an international business transaction, which conceives, designs, and produces offerings intended for
consumption by customers worldwide. primarily MNEs and SMEs. (see below). Either private, public, stockowned, or
stateowned. Manufacturing/service sector.
2. distribution channel intermediary = A specialist firm that provides various logistics and marketing services for focal firms as part
of international supply chains, both in the home country and abroad. Ex. independent distributors, sales representatives.
3. Facilitator = A firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services
that assists focal firms in the performance of international business transactions.
4. Governments/ public sector = suppliers, buyers, regulators. recent global financial crisis  more involvement in business as
regulators.

Freight forwarder = A specialized logistics service provider that arranges international shipping on behalf of exporting firms.
Demand side: customers, buyers. Types:
a. Individual consumers and households
b. Retailers. Purchase finished goods for resale
c. Organizational buyers. Purchase as inputs to run business.

TYPES OF FOCAL FIRMS

Multinational Enterprise MNE

MNE a large company with substantial resources that performs various business activities through a network of subsidiaries and
affiliates located in multiple countries
 tend to carry out R&D, procurement, manufacturing, and marketing activities wherever in the world in makes most
economic sense
 in addition to a home office or headquarters, MNE owns a worldwide network of subsidiaries
 collaboration with suppliers and business partners abroad  affiliates
 geographically, most of them are located in the US (revenue $6.645 billion, 170 MNEs)
 oil, automotive, retailing
 best known for FDI. Most profit through crossborder, operate in Asia, Europe, north am.(adv. Economies)
 Chinas top firms are stateowned
SME a manufactor/service company with 500 or fewer employees in the US, although this number may need to be adjusted
downward for other countries
 limited managerial and other resources, primarily using exporting to expand internationally
 less bureaucratic, more adaptable, more entrepreneurship and innovation
 SMEs constitute between 90% and 95% of all firms
 due to the globalization of the markets and advances in various technologies, and other facilitating factors, more SMEs are
pursuing business opportunities around the world
 SMEs account for 1/3 of exports from Asia and ¼ of exports from the affluent countries in Europe and the US; in some
selected countries (I, South Korea, China) more than 50%!
 Limited financial resources, more export as strategy for foreign markets, less FDI, nicheproducts
 Rely on intermediaries and facilitators, information and communications technologies
born global firm a young entrepreneurial company that initiates international business activity very early in its evolution,
moving rapidly into foreign markets
 found in advanced economies (Australia, Japan) and in emerging markets (China, India)
 scarce resources  usually internationalize within 3 years of their founding
 export to 20+ countries, generating over 25 % of their sales from abroad. facilitated by information and communication
technologies, and globe- spanning transportation systems
 leading-edge products with international potential

Governments and NGOs

 charitable groups, NGOs
 pursue special causes and serve as an advocate for the arts, education, politics,
religion, and research
 operate internationally to either conduct their activities or raise funds

international business requires specialized knowledge, commitment of resources, and considerable time of develop foreign business
partnerships  how do SMEs succeed?
 compared to MNEs, smaller firms are often more innovative, more adaptable, and have quicker response times when it comes
to implementing new ideas and technologies and meeting customer needs
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 SMEs are better able to serve niche markets around the world that hold little interest for MNEs
 smaller firms are usually avid users of new information and communication technologies, including the internet
 as they usually lack substantial resources, SMEs minimize overhead or fixed investments, instead they rely on external
facilitators (e.g. FedEx and DHL), as well as independent distributors in foreign markets

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 SMEs tend to thrive on private knowledge that they possess or produce; they access and mobilize resources through their
cross-border knowledge networks, or their international social capital

Why Do Firms Pursue Internationalization Strategies?

often more than one motive for international expansion, some motives are strategic/proactive (to tap foreign market opportunities or
acquire new knowledge), some reactive (the need to serve a key customer who has expanded abroad)
9 specific motivations
1. Seek opportunities for growth through market diversification: many firms derive more than half of their sales from
abroad; internationalization can also extend the marketable life of products or services that have reached their maturity in the
home country e.g. ATMs
2. Earn higher margins and profits: market growth in mature economies is flat, competition is intense  slim profit margins;
most foreign markets may be underserved (typical of high-growth emerging markets) or not served at all (typical of
developing economies)  less intense competition & strong market demand  higher margins
3. Gain new ideas about products, services, and business methods: learn sth from your competitors/partners abroad and
apply it yourself at home to organize your business processes more effectively, e.g. Toyota and just-in-time inventory
4. Better serve key customers that have relocated abroad
5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products:
e.g. where raw materials are located (extractive industries such as petroleum, mining and forestry), gain a grater flexibility
from a greater variety of supply bases (e.g. Dell has several assembly facilities that allow mgmt to quickly shift production
from one region to another  competitive advantage = a distinctive competency that provides the firm with superior
competitive positioning, in particular it allows the firm to skillfully manage currency exchange rate fluctuations)
6. Gain access to lower-cost or better-value factors of production: access capital, technology, managerial talent, labor, and
land at lower costs, higher quality, or better overall value at locations worldwide. e.g. relocation to US for low-cost capital;
relocation to China in search of skilled and low-cost labor
7. Develop economies of scale in sourcing, production, marketing, and R&D:
Economies of scale = reduction of per unit costs due to operating at high volume
By expanding internationally, the firm greatly increases the size of its customer base
 increasing the volume of products that in manufactures
8. Confront international competitors more effectively or thwart the growth of competition in the home market: a firm
can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a
competitor’s home markets to destabilize and curb its growth.
9. Invest in a potentially rewarding relationship with a foreign partner: long-term- strategic reasons e.g. JVs or project-
based alliances with key foreign players can lead to the development of new products, early positioning in future key markets,
or other long-term, profit-making opportunities

At the broadest level, companies internationalize to enhance competitive advantages and to seek growth and profit
opportunities

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 Why Should You Study International Business?

reasons from different perspectives: global economy, national economy, the firm, the future manager (me!)

Fallbeispiel Vodafon
Major product units:
- Consumer services Europe and EM
- Enterprise services
- Unified communications
- e.g. Vodafone: internationalization mainly through FDI; took advantage of important trends in the globalization era; as
emerging markets develop, they leapfrog technologies  good for Vodafone; emphasis on standardized products and
services; to minimize costs and project a global image, many of Vodafone’s cell phones are largely identical worldwide, with
adaptations made to accommodate local regulations and telephone standards (facilitated by convergence of buyer lifestyles);
spends considerable resources on advertising to develop and maintain a global brand
 strategy: product standardization, global branding, and maximizing sales to customers worldwide

Facilitator of the Global Economy and Interconnectedness

 unprecedented growth following GATT (1947)

 emerging markets/market (ca 30) globalization: fast-growth developing economies (Brazil, India, China, Poland,…) 
market liberalization, privatization, and industrialization, which are fueling global economic transformation. Collectively,
these emerging markets are home to the largest proportion of world population and participate increasingly in foreign trade,
 greatest jobs (every 1 bil  20k new jobs). Provide better pay.
 advances in technology: information and communication technologies, production and process technologies, internet and e-
commerce have reduced the costs of conducting business with customers located abroad, for firms of all sizes and resource
levels
 advances in technology allow globalization to progress more rapidly and in turn, globalization accelerates the development of
the latest technologies

Contributor to National Economic Well-Being

IB contributes to economic prosperity and standards of living, provides interconnectedness to the world economy an access to a
range of valuable intermediate and finished products and services, and helps countries use their resources more efficiently.
Generally, exporting firms create jobs faster than nonexporting ones and wages and benefits for export-related jobs are better.
There is a strong relationship between a nation’s level of prosperity and its participation in cross-border trade and investment 
growing prosperity is accompanied by gains in literacy rates, nutrition, and health care; trade and investment promote freedom and
democracy and may reduce the likelihood of cross-border conflict
EU makes it easier to make international trade and investment for European businesses. Cross-border business helps integrate
world economies, e.g. NAFTA, DR-CAFTA

A Competitive Advantage for the Firm

 to generate favorable outcomes for the firm in terms of sales, profit margins, growth, and new knowledge.
 to maximize the efficiency of their operations through IB e.g. through cost-effective factor inputs
 to get access to critical resources that may be unavailable at home
 to reduce the costs of new product development, after-sales service,..
 to broaden the options for dealing with competitors, offering opportunities to make globally strategic moves and countermoves
that help the firm compete more efficiently with domestic and foreign rivals

An Opportunity for Global Corporate Citizenship

 firms have to be responsive to the needs of different groups of shareholder; in foreign markets they have to meet local
expectations with respect to labor and environmental standards, accepted codes of conduct, and the overall welfare of the
society that hosts them
 as businesses operate in a foreign country they are always under public scrutiny, they may become favorite targets of public
protests and actions of internationalizing firms can raise nationalistic sentiments  firms are proactively developing socially
responsible policies and practices instead of being caught red-handed  they embed

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 corporate citizenship into their strategic decisions, as well as their ongoing processes and practices

A Competitive Advantage for You

Managers of big firms travel the world and are confronted with different cultures,… and various unusual challenges. Managers with
extensive international experience are generally more confident, cosmopolitan, and better suited to meet the variety of challenges
they may encounter throughout their careers  acquiring knowledge and managerial skills in international business is not only
exciting, challenging and fun, but it is also a unique professional development opportunity

2. GLOBALIZATION OF MARKETS AND THE INTERNATIONALIZATION OF THE FIRM

SMEs make up the majority of all country and often account for more than 50 percent of national economic activity

Bangalore: The New Silicon Valley

 number of people working in outsourced IT services in India surpassed 1 million in 2008
o are paid ¼ of what Westerners receive for similar work
o do a better job
o many highly educated knowledge workers
o English is widely spoken
o different time zone  take advantage of time-sharing
 Globalization’s implications
o it is increasingly difficult to distinguish where you are in the world based on the products and services that you consume
o the most important technologies can be developed in most locations worldwide
o jobs in the knowledge sector are being performed wherever the firm can extract maximal advantages, anywhere in the
world
o in the long run, by emphasizing free trade and global sourcing, globalization allows consumers worldwide to receive
maximum quality at minimum price. Buyers in both producer and consumer nations increase their discretionary
income and quality of life

2 megatrends that have altered business environment: globalization of markets & technological advances
 permit firms to more readily engage in marketing and procurement activities on a global scale
 serve to transform national economies
 greater choice of products and services at lower prices
 job creation  higher living standards
 disseminate values from liberalized economies about free trade and respect for intellectual property rights to an ever-widening
international audience

globalization of markets gradual integration and growing interdependence of national economies  world as an integrated
marketplace

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  initially, the term referred to the emergence of global markets for standardized products and services and the growth of world-
scale companies that serve those markets
 however it also refers to the interconnectedness of national economies and the growing interdependence of buyers, producers,
suppliers, and governments in different countries  producing and marketing of branded products and services worldwide 
unified market
 contributing factors: decline trade barriers, ease with which international business transactions take place due to the Internet
and other technologies

technological advances
 developments in information, manufacturing, and transportation technologies, as well as the emergence of the Internet, have
facilitated rapid and early internationalization of countless firms
 modern technology is promoting a higher level of international business activity than ever before
 advances in transportation and communication technologies have greatly aided to serve clients around the world

Why Globalization Is Not a New Phenomenon

 not new, but accelerated and gained complex character

 globalization evolved out of a common, shared international heritage of all civilizations, no matter where they developed, to
reach out and touch one another  exchange gave societies the opportunity to expand and grow

Phases of Globalization  4 distinct phases

1. began 1830, peaked 1880; IB became widespread due to growth of railroads,
efficient ocean transport, and the rise of large manufacturing and trading companies; invention of the telegraph and
telephone facilitated information flows and aided early effort to manage companies’ supply chains
2. beginning 1900, until 1930; rise of electricity and steel production; emergence and dominance of early MNEs (Nestlé,
Shell, BASF, Siemens, British Petroleum)
3. began after WWII; pent-up demand after war; US became the world’s leading economy; government aid stimulated
economic activity in Europe; reduction of barriers to trade 
1947 Bretton Woods Conference 23 nations created GATT  liberalization of trade, reduce barriers, which
would eventually stimulate industrialization, modernization and better living standards transformation into WTO a
multilateral governing body empowered to regulate international trade and investment, aims to ensure fairness
and efficiency, 150 members
Global cooperation also led to: International Monetary Fund& World Bank.
MNEs originated from the US, Western Europe and Japan
early subsidiaries by Unilever, Philips, Royal Dutch-Shell, Bayer,…
development of internationally recognized trade names: Nestlé, Kraft, Kellogg, Caterpillar, Coca Cola, Chrysler, Levi’s
MNEs began to seek cost advantages by locating factories in developing countries
substantial increases in international trade and investment  cross-border flow of money  integration of global financial
markets
MNEs in Europe and Japan began to challenge the American global dominance
4. beginning 1980s; enormous growth in cross-border trade and investment; key trends: commercialization of the PC,
development of the Internet and web browser, advances in communication and manufacturing technologies, collapse of
the Soviet Union, market liberalization in central and Eastern Europe, industrialization and modernization efforts of East
Asian economies (China);

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 growing international prosperity began to reach emerging markets; increases in FDI, especially in capital- and technology-
intensive sectors
technological advances globalization of the service sector
merger of major firms
death of distance  the geographic and cultural distances that separate nations are shrinking

An Organizing Framework for Market Globalization

 interactive relationship between market globalization and its consequences

 keep in mind: firms do not pursue internationalization strategies solely as a reaction to market globalization; adverse conditions
in the home market, such as regulation or declining industry sales, compel firms to proactively seek international expansion
 firms that engage in IB proactively (as a strategic move) tend to be more successful in global competition than only firms
reacting to IB

Driver of Market Globalization

1. Worldwide reduction of barriers to trade and investment: acceleration of global economic integration, emergence of
regional economic integration blocs (a key dimension of market globalization
2. Market liberalization and adoption of free markets:
 fall of the Berlin Wall
 collapse of the Soviet Union
 China’s free-market reforms. Former command economies global ones
 end of the Cold war  1/3 of the world opened to freer international trade and investment
Privatization of previously state-owned industries in these countries encouraged economic efficiency and attracted massive
foreign capital into their national economies.
3. Industrialization, economic development, and modernization: Industrialization  emerging markets are moving from
being low value-adding commodity producers, dependent on low-cost labor, to sophisticated competitive producers and
exporters of premium products e.g. Brazil, Czech Republic, India
Economic development is enhancing standards of living and discretionary income GNI (Gross National Income) =
perhaps most important measure of economic development
 Africa is home to the lowest-income countries, along with India and a few other countries in Asia and Nicaragua 
these areas are also characterized by low levels of market globalization
the adoption of modern technologies, improvement of living standards, and adoption of modern legal and banking practices
are increasing the attractiveness of emerging markets as investment targets and facilitating the spread of ideas, products, and
services across the globe
4. Integration of world financial markets: SWIFT (Society for Worldwide Interbank Financial Telecommunication
network connects over 7.800 financial institutions in some 200 countries, facilitating the exchange of financial
transactions
the globalization of finance contributes to firms’ ability to develop and operate world-scale production and marketing
operations  pay suppliers and collect payments from customers worldwide
5. Advances in technology: remarkable facilitator of cross-border trade and investment. Requires elaborations.

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Technological Advances as a Driver of Market Globalization

 technological advances in communications, information, manufacturing, and transportation = most important drivers of
market globalization  providing the means for internationalization (to interact with each other or to more efficiently adapt
products for international markets)
 lower cost of international operations  many SMEs have internationalized

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 cost of international communication has plummeted; number of Internet users has grown
MNEs use collaboration software to connect distant product development teams
Smaller firms  design and produce customized products to target to narrow, cross-national market niches
 development of new products and services that appeal to a global audience; emerging markets benefits from technological
advances partly due to leapfrogging
 China & India are the new beachheads of technological advances
 innovation  mainly resulting from R&D; industries most dependent on technological innovation: biotechnology,
information technology, new materials, pharmaceuticals, robotics, medical equipment and devices, lasers and fiber optics, and
various electronics-based industries
 technological advances have had the greatest impact in several key areas: information technology, communications,
manufacturing, and transportation

Information Technology

IT = science and process of creating and using information resources

 cost of computer processing has been and is falling
 remarkable performance of the US economy in the 90s partly due to integration of IT into value-chain activities (accounted
for 45% of total business investments at that time)
 IT alters industry structure and, in so doing, changes the rules of competition  giving companies new ways to outperform
rivals  IT creates competitive advantages e.g. distant subsidiaries connected by an intranet, development team scattered all
over the world can work together, easier to target narrow cross-national market niches
 access to unlimited data in order to research markets, customers, competitors, and countries’ economic conditions  supports
managerial decision making

Communications

 sharp decline in call costs, mobile phones most transformative technology, infrastructure easy
 banking transactions = easy cheesy and virtually for free handed over the internet
 the Internet and Internet-dependent communication services connect the whole world; Internet access nearly 100% in South
Korea
 widespread availability of the Internet and e-mail makes company internationalization cost-effective  the Internet opens up
the global marketplace to companies that would normally not have the resources to do international business
 the Internet is stimulating economic development and a massive global migration of jobs, particularly in the services sector
 connecting knowledge pools Manufacturing

 computer aided design (CAD) of products, robotics, and production lines managed and monitored by microprocessor-based
controls are transforming manufacturing, mainly by reducing the costs of production  permit low-scale and low-cost
manufacturing
 allows efficient adaption of products to individual foreign markets, niche markets, and compete more effectively with
foreign competitors

Transportation

 cost of transporting raw materials, components, and finished products important for managers’ decision making
 cost of transportation as a proportion of the value of products shipped internationally has declined substantially  spurred
rapid growth in cross-border trade
 reduction of the costs of international travel

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6 Dimensions of Market Globalization

 Value chain = The sequence of valueadding activities the firm performs in the course of developing, producing, marketing, and
servicing a product.
 broad phenomenon that has been investigated from the perspective of various disciplines
 in terms of IB, market globalization can be viewed simultaneously as a
o consequence of economic, technological and government policy trends
o driver of economic, political, and social phenomena
o driver and consequence of firm-level internationalization
 6 dimensions
1. Integration and interdependence of national economies: internationally active firms devise multicountry operations
through trade, investment, geographic dispersal of company resources, and integration and coordination of value chain
activities (the sequence of value-adding activities performed by the firm in the process of developing, producing, marketing,
and servicing a product)  aggregate activities of these firms give rise to economic integration ( = increased trade among
the nations of the world)
governments’ contribution: gradually lower barriers to trade and investment, increasingly harmonized monetary and fiscal
policies within regional economic integration blocs, they devise and supervise supranational institutions (World Bank, IMF,
WTO) and seek further reduction in trade and investment barriers
2. Rise of regional economic integration blocs: = groups of countries that facilitate reduced trade and investment
barriers among themselves. emergence since 1950s, e.g. NAFTA, APEC, Mercosur  trade and investment flows are
facilitated through the reduction of trade and investment barriers
more advanced: “common market”  barriers to the cross-border flow of factors of production (mostly labor and capital)
are removed
the EU additionally harmonizes fiscal and monetary policies and adopts common business regulation
3. Growth of global investment and financial flows: free movement of capital extends economic activities across the glove
and fosters interconnectedness among world economies
international bond market= source of debt financing for govs and firms

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 information and communications networks facilitate heavy volumes of financial transactions, integrating national markets
negative effects: due to integration a financial crisis can spread to other economies
4. Convergence of consumer lifestyles and preferences: consumer goods and industrial markets are dominated by
standardized products  they are very similar in design and structure; they also promote the loss of traditional lifestyles and
values in individual countries. Also in industrial markets  goods are standardized
5. Globalization of production: intense global competition  companies try to reduce the cost of production and marketing
 economies of scale and standardization; shift activities to foreign locations in order to take advantage of national
differences in the cost and quality of factor inputs
6. Globalization of services Firms increasingly outsource business processes and other services abroad. Or many
people go abroad to get services.

Firm-Level Consequences of Market Globalization: Internationalization of the Firm’s Value Chain

value-chain concept = what activities are performed where in the world. Ex exporting firms do most upward activities in home country,
downward abroad.
Offshoring = firm relocates a major value-chain activity by establishing a factory or other subsidiary abroad
Global outsourcing = firm delegates performance of a value-adding activity to an external supplier or contractor located abroad
 globalization has opened up countless new business opportunities, however firms must accommodate new risks and
intense rivalry from foreign competitors
 buyers are more demanding and shop for the best deals from suppliers worldwide
 managers need adopt a worldwide orientation
 companies need to proactively internationalize; internationalization may take the form of global sourcing, exporting, or
investment in key markets abroad; the more proactive firms seek a simultaneous presence in all major trading regions; they
concentrate their activities in those countries where they can achieve and sustain competitive advantage
 globalization has a direct implication on the firm’s value chain, because it compels firms to organize their sourcing
manufacturing, marketing, and other value-adding activities on a global scale
 typical stages of value chain:
o R&D
o Procurement (Sourcing)
o Manufacturing
o Marketing (pricing, promotion, selling)
o Distribution
o Sales & Service
 value chains vary in complexity and across industries and product categories
 helps to clarify what activities are performed where in the world, e.g. exporting firms perform most “upstream” value-chain
activities (R&D and production) in the home market and most “downstream” activities (marketing and after-sales service)
abroad
 each value-adding activity is subject to internationalization  it can be performed abroad instead of at home, reasons for
relocating: reduce R&D and production costs or to gain closer access to customers
 offshoring = the practice of internationalizing the value chain, where the firm relocates a major value-chain activity by
establishing a factory or other subsidiary abroad
 global sourcing = the firm delegates performance of value-adding activity to an external supplier or contractor located abroad

Societal Consequences of Market Globalization

Globalization poses challenges to individuals, organizations, and governments

low-income countries have not been able to integrate with the global economy as rapidly as others  unintended consequences:

1) Contagion
Contagion= The tendency of a financial or monetary crisis in one country to spread rapidly to other countries due to the ongoing
integration of national economies.
Strong legal/ regulatory framework helps economic wellbeing. During 2008 crisis, consumer confidence dropped, so they spent less
on investments. Trade slowed and global growth declined. Living standards dropped, more poverty. 2012 recovery began, but
many remain sluggish.

2) Loss of National Sovereignty

Sovereignty = the ability of a nation to govern its own affairs globalization can threaten national
sovereignty in various ways
 MNE activities can interfere with the sovereign ability of governments to control their own economies, social structures, and
political systems
 some corporations are bigger than the economies of many nations  these large MNEs can exert considerable influence on
governments through lobbying or campaign contributions e.g. lobby for devaluation or influence the legislative process and
extract special favors from government agencies
 however, even the largest firms are constraint by market forces; intense competition
 company’s success depends on the firm’s skill at winning customers, working with suppliers, and dealing with
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 competitors; gradual integration of the global economy and increased global competition, combined with privatization of
industries in various nations, are making some companies less powerful with their national markets
 globalization creates incentives for governments to pursue sound economic policies and for managers to manage their firms
more effectively; governments should emphasize a liberalized economic regime: freedom to enter and compete in markets,
protection of persons and intellectual property, rule of law, and voluntary exchange imposed by markets rather than through
political processes; transparency in the affairs of businesses and regulatory agencies is critical
 sometimes, governments need to scrutinize corporate activities; e.g. the Sarbanes- Oxley Act (Public Company Accounting
Reform and Investor Protection Act of 2002)
 new or enhanced standard for all US public company boards, management, and public accounting firms

3) Offshoring and the Flight of Jobs

 Globalization has created countless jobs and opportunities, but it has also cost many people their jobs, e.g. major automobile
manufacturers have transferred manufacturing facilities from Germany to Eastern Europe due to shorter working hours,
benefits, and high wage levels
 offshoring = relocation of manufacturing and other value-chain activities to cost- effective locations abroad  job losses in
numerous mature economies
o 1. wave 1960s and 70s: the shift of US and European manufacturing of cars, shoes, electronics, textiles, and toys
to cheap-labor locations such as Mexico and Southeast Asia
o 2. wave began in the 90s: exodus of service sector jobs in credit card processing, software code writing,
accounting, health care, and baking services
 High-profile plant closures and relocation of manufacturing facilities to low-cost countries have received ample media
attention in recent years. Critics have labeled many MNEs as “runaway” or “footloose” corporations  quick to relocate
production to countries that offer more favorable access to inputs

4) Reshoring
= return of manufacturing and services back to the home country.
- Reasons: Rise of wages/ costs in EM; desire to be close to customers

5) Effect on the Poor

 MNEs are criticized for paying low wages, exploiting workers, and employing child labor (denies children educational
opportunities)200Million children working
 In persistent poverty, abolishing formal sector jobs does not ensure that children leave the workforce and go to school.other
choices?  finding a low-paying job may be better than finding no work at all; eliminating child labor can worsen living
standards for children
 formal economic sector = sector regulated and monitored by public authorities
 informal economic sector = underground sector
 work conditions tend to improve over time  improving the lives of millions of workers and their families 
globalization tends to support a growing economy
 GDP growth rate
o China and India  fastest growing large economies
o World bank: 2$/1.25$ a day  threshold for poverty/ extreme poverty
o Chile, Ireland, and Vietnam as well
o former Soviet Union countries suffered from setbacks as they transitioned to market-based economic systems
o most African countries continue to suffer low or negative GDP growth an alarming poverty
 legislation to increase minimum wage levels can also reduce the number of available jobs  countries loose their
attractiveness as a low-cost labor provider
 globalization is associated with higher wage growth over time  countries that liberalize international trade and
investment enjoy faster per capita economic growth
 governments are responsible that all citizens have access to improved welfare, living standards, and higher-value-adding,
higher-paying jobs
 proactive measures to reduce poverty (taken by developing countries):
o improve conditions for investment and saving
o liberalize markets
o promote trade and investment
o build strong institutions and government to foster good governance
o invest in education and training to promote productivity and ensure worker- upward mobility
 advanced economies can help by
o making their markets more accessible to low-income countries
o facilitating the flows of direct investment, other private capital, and technology into low-income countries
o providing debt relief to heavily indebted nations

6) Effect on the Natural Environment

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- globalization can harm the environment by promoting increased manufacturing and economic activity that result in pollution,
habitat destruction, and deterioration of the ozone layer
- harm tends to decline over time  globalization stimulates rising living standards  people focus on improving their
environment  governments pass legislation that promotes improved environmental conditions
- evolving company values and concern for corporate reputations also lead most firms to reduce or eliminate practices that harm
the environment

7) Effect on National Culture

- globalization exerts strong pressures on national culture  globalization can alter people’s norms, values and behaviors
 “McDonald-ization” or “Coca-Colonization”
- the public sector in some states (Canada, France, Germany) attempts to prevent US ideals from diluting local tradition
- IT and communication technologies  people worldwide are exposed to same sources that promote lifestyles of
people in the US and other advanced economies
- people want Western products and services, which are seen to signal higher living standards
- flow of cultural influence goes both ways e.g. sushi
- cultural values change very slowly, even if people from different nations appear similar on the surface, they usually
hold traditional attitudes, values, and beliefs

16
 - rooted in the history and culture of the country where they live  tangibles are becoming universal, but people’s behavior and
mindsets remain stable, religious differences, different languages,…
- while a degree of cultural imperialism may be at work, it is offset by the countertrend of nationalism  people are insisting
on their national identity and taking steps to protect it e.g. laws in Belgium, F, Canada to protect national language and culture

8) Globalization of Africa
- area least integrated into the world economy and accounts for less than 3 percent of world trade
- abundant resources, but remains underdeveloped due to many factors, including an inadequate commercial infrastructure, lack of access to
foreign capital, high illiteracy, government corruption, wars, and the spread of AIDS
- foreign aid achieved little success  more businessbased models of development
- major supplier of petroleum to Europe and the US. Chinese companies invest in Africa

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 3. ORGANIZATIONAL PARTICIPANTS THAT MAKE INTERNATIONAL BUSINESS HAPPEN

Born Global Firms

o SMEs make up the majority of all firms in a typical country and account for about 50% of economic activity
- fewer financial and human resources than an MNE
o Since the 80s, companies that internationalize at or near their founding, born-global firms, have been springing up
all over the world
o these managers tend to see the world as their marketplace
o the period from domestic establishment to initial foreign market entry is often three years or less
o development of a borderless corporate culture
o being an SME provides born globals with a high degree of flexibility, which helps them serve their foreign
customers better
o they usually internationalize through exporting
o reasons for an early internationalization
 big demand for the firm’s products abroad
 mgmt. has a strong international orientation
 firm is specialized in a particular product category for which demand in the home market is too
small
 this trend shows that any company, regardless of its size, age, or resource base, can participate
actively in IB  need to revisit the traditional view of the large multinational corporation as the
dominant player in IB  interesting for students, because SMEs provide many new job
opportunities as they aggressively pursue international ventures

- Three Types of Participants in International Business

- the participants vary in terms of their motives for going international, modes of entry, and types of operations
- focal firm = the initiator of an international business transaction, including MNEs and SMEs, that conceives, designs, and
produces the offerings intended for consumption by customers worldwide, including MNEs, SMEs, public and private
companies, enterprises owned by governments, manufacturing businesses, others are in the service sector  all kinds of
business types!
- distribution channel intermediary = a specialist firm that provides a variety of logistics and marketing services for focal
firms as part of the international supply chain, both in the home country and abroad e.g. distributors and sales representatives
o usually located abroad
o they are independent businesses in their respective markets, and work for focal firms on a contractual basis
- facilitator = firm or an individual with special expertise in legal advice, banking, customs clearance, or related support
services, that assists focal firms in the performance of international business transactions e.g. logistics service providers,
freight forwarders, banks, and other support firms that assist focal firms
o freight forwarder = a specialized logistics service provider that arranges international shipping on behalf of
exporting firms, much like a travel agent for cargo
o facilitator are found in both home and foreign markets

o IB transactions require the participation of all these parties  their activities may overlap
o IB transaction take place within political, legal, and regulatory environments 
- strong influence over a nation’s own economic development and the progress of

18
- their industries and firms; governments create commercial environments that encourage the development of strong industries
and technological prowess
o most nations have a trade infrastructure that consists of industry associations, chambers of commerce, universities,
and helpful government agencies

o focal firms, intermediaries and facilitators = supply side

o customers/buyers = demand side
o customers
 individual consumers and households
 retailers (businesses that purchase finished goods for the purpose of resale)
 organizational buyers (business, institutions, and governments that purchase goods and services as inputs
to a production process, or as supplies needed to run a business or organization)
o major international customer groups: governments, NGOs such as CARE and UNICEF

- Participants Organized by Value-Chain Activity

o these 3 participants are all involved in one or more critical value-adding activities
o market research
 facilitators: consultant, market research firm, lawyer
o R&D
o distribution channel intermediaries: innovation fairs
o facilitators: universities, research labs
 Sourcing
o distribution channel intermediaries: trading company, broker, importer
o facilitators: commercial bank, logistics service provider, insurance company, customs
broker
 Production
facilitators: commercial bank
 Marketing
o distribution channel intermediaries: export management company, sales representative, distributor
o facilitators: consultant, market research firm
 Distribution
o distribution channel intermediaries: export management company, trading company, sales representative,
distributor, broker, importer, retailer
o facilitators: lawyer, tax accountant, logistics service provider, freight forwarder, insurance company,
consolidator, carrier, customs broker
 After Sales service
o distribution channel intermediaries: retailer
o facilitators: designated customer service firm

 exporting firms  much of the value chain is concentrated within one nation
 highly international firms  mgmt. may perform a variety of value-chain activities within several countries
 highly internationalized focal firms  value chain is configured in numerous countries and often from multiple suppliers
 primary suppliers = tier one supplier

An Illustration of an International Value Chain: Dell Inc. see page 65

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Focal Firms in International Business

The Multinational Enterprise

 Multinational Enterprise a large company with substantial resources that performs various business activities through a
network of subsidiaries and affiliates located in multiple countries
 Fortune Global 500 – list of leading MNEs e.g. Nestlé, Sony, Unilever, Citibank,…
 usually enter a foreign market through direct investment activities  setting up production plants, marketing
subsidiaries, and regional headquarters
 they often derive more than 50% of their total sales and profits from cross-border operations
 e.g. service sector: airlines, construction companies, management consultancies like Citibank, CIGNA, Accor, Bouygues,
Disney, Nextel, Best Buy
retailers, usually classified as intermediaries, but large ones are considered focal firms themselves: IKEA, Wal-Mart, Gap
Internet-mediated businesses just entered the ranks of global focal firms: Amazon, Netflix
 in developing countries and centrally planned economies, some focal firms are partly or wholly owned by the government,
e.g. Lenovo, CNOCC, China Mobile
 MNEs have played a major role in the current phase of globalization, especially after WWII, when they went abroad in
search of raw materials, production efficiencies, and foreign-based customers

Small and Medium-Sized Enterprises

 SMEs a company with 500 or fewer employees in the US, although this number may be adjusted downward for other
countries
 usually manufacturers or service providers
 SMEs = majority of firms active in IB
 more flexible and quicker to respond to global business opportunities, because they have less bureaucracy and fewer fixed
assets; also more innovative, more adaptable, and more entrepreneurial  backbone for E&I in national economies
 however: constrained by limited financial and human resources  rather choose exporting, they leverage the services of
intermediaries and facilitators to succeed abroad; some gradually establish company-owned sales offices or subsidiaries
abroad
 often target specialized products to market niches
 internationally active SMEs are typically avid users of information and communication technology
 rise of small firm in Eastern Europe due to
o recent, growing access to the affluent market of the EU
o interest on the part of foreign direct investor in such liberalizing countries Born Global Firms

 Born Global Firms a young entrepreneurial company that initiates IB activity very early in its evolution, moving rapidly
into foreign markets
 new reality in IB  their emergence is associated with international entrepreneurship, in which innovative, smaller firms
increasingly pursue business opportunities everywhere, regardless of national borders
 other factors: communications and transportation technologies, falling trade barriers, emergence of nice markets worldwide
 in countries like Australia, Denmark, Ireland and the US, born globals account for a substantial proportion of international
exports
 often offer leading-edge products

20
 typically avid users of the Internet and other modern communication technologies 
facilitate their early and efficient international operations
 implies that any firm, regardless of size or experience, can succeed in IB

Foreign Market Entry Strategies of Focal Firms

larger MNEs tend to expand abroad through FDI SMEs tend to be exporters
both rely on contractual relationships such as franchising and licensing A Framework for Classifying Market

Entry Strategies

see exhibit 3.5, page 70

Nature of International Transaction

 3 categories of IB transactions
o trade of products
o contractual exchange of services or intangibles
o transactions based on investing equity ownership in foreign-based enterprises
 firms are generally involved in one or more of 3 major types of cross-border transactions
o buying or selling products
o buying or selling services
o producing or selling products or services abroad by establishing a foreign presence through direct investment
Types of Focal Firm
 Licensor a firm that enters a contractual agreement with a foreign partner that allows the latter the right to use certain
intellectual property for an specified period of time in exchange for royalties or other compensation
 Franchisor a firm that grants another the right to use an entire business system in exchange for fees, royalties, or other
forms of compensation
o they are sophisticated licensors
o e.g. McDonald’s, Hertz Car Rental
 Turnkey contractors focal firms or a consortium of firms that plan, finance, organize, manage, and implement all phases
of a project and then hand it over to a foreign customer after training local personnel
o construction, engineering, design, or architectural industries Foreign Market Entry Strategy
 the manner in which the focal firm internationalizes: exporting, importing, licensing, FDI
 depends on the nature of the business, nature of the focal firm, its products, and goals
o dealing in intangibles  agency relationship with a foreign partner e.g. banks, advertising agencies, market
research firms
o licensing and franchising common in the international transfer of intangibles
 outsourcing: strong trend in recent years away from fully integrated operations toward the delegation of certain noncore
functions to outside vendors

Focal Firms other Than the MNE and SME

 entering a foreign market through a contractual relationship e.g. franchising, licensing

 Licensing allows companies to internationalize rapidly while remaining in their home market

21
 Like licensors, the franchisor remains in its home market and permits its foreign partner to carry on local activities. The
franchisor assists the franchisee in setting up its operation, and then maintains ongoing control over aspects of the franchisee’s
business, such as operations, procurement, quality control, and marketing. The franchisee benefits by gaining access to a
proven business plan and substantial expertise.
 franchising is popular among many types of service industry firms e.g. Subway, KFC
 China: Subway third-largest US fast good chain

 Turnkey contractors specialize in international construction, engineering, design, and architectural projects, typically
involving airports, hospitals, oil refineries, and campuses. In a typical turnkey contract, the contractor plans, finances,
organizes, manages, and implements all phases of a construction project. The contractors provide hardware and know-how to
build a factory, power plaint, railway, or some other integrated system that is capable of producing the products or services
that the project sponsor requires hardware includes buildings, equipment, and inventory that comprise the tangible aspects of
the system. Know-How is the knowledge about technologies, operational expertise, and managerial skills that the contractor
transfers to the customer during and upon completion of the project.
 usually open bidding
 some are highly publicized megaprojects, e.g. European Channel Tunnel, Three Gorges Dam in China, and the Hong
Kong Airport
 typical examples: upgrades to public transportation networks such as bridges, roadways, and rail system
 financed largely from public budgets
 most metro projects are in Asia and Western Europe, where demand is driven by intensifying urbanization and worsening
congestion; one of the worlds largest  Delhi Metro
 build-own transfer venture: an increasingly popular type of turnkey contract in developing economies
o the contractors acquire an ownership in the facility for a period of time until it is turned over to the client
o the contractors provide ongoing service in the form of advice, training, and assistance navigating regulatory
requirements and obtaining needed approvals from government authorities
o after a successful period of operation the contractors will divest their interest in the project
 top construction contractors: highly global nature of the large-scale construction industry; the top firms in this industry come
from various European countries, Japan, China and the US

 international collaborative ventures: a cross-border business alliance where partnering firms pool their resources and
share the costs and risks of the new venture
o middle ground between FDI-based foreign market entry and home country- focused operations such as exporting
o this agreement allows the focal firm to externalize some of its value-chain activities
o e.g. JV; project-based, nonequity ventures
 Joint venture partner: a focal firm that creates and jointly owns a new legal entity through equity investment or pooling
of assets
o share costs and risks, gain access to needed resources, gain economies of scale, and pursue long-term strategic
goals
o e.g. Hitachi & MasterCard promote a smart card system for banking and other applications  Multos smart card

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 partners in a project-based, nonequity venture: focal firms that collaborate through a project, with a relatively narrow
scope and a well-defined timetable, without creating a new legal entity
o less formal
o intended for a fixed duration
o partners perform some mutually beneficial business task, such as R&D or marketing, but they don’t form a new enterprise
o firms often form project-based ventures to share the enormous fixed costs involved in knowledge-intensive research and
development projects  develop a new technological standard

Distribution Channel Intermediaries

 second category of international business participant

 physical distribution and marketing service providers in the value chain for focal firms
 perform key downstream functions in the target market on behalf of focal firms
 many different types, ranging from large international companies to small, highly specialized operations
 a low-cost way to enter foreign markets
 intermediary has knowledge, contacts, and services in the local market  provides a strong support system for exporters that
are inexperienced or too small
 3 major categories: those based in the foreign target market, those based in the home country, and those that operate
through the Internet

Intermediaries Based in the Foreign Market

 most intermediaries are based in the target market

 they provide a range of services and can function like the exporter’s local partner, handling all needed local business
functions

 foreign distributor: a foreign market-based intermediary that works under contract for an exporter, takes title to, and
distributes the exporter’s products in a national market or territory, often performing marketing functions such as sales,
promotion, and after-sales services
o independent wholesalers that purchase merchandise from exporters (at a discount) and resell it after adding a profit margin
o take title to the goods  merchant distributors
o provides financing, technical support, and after-sales service, relieving the exporter of these functions abroad
o may carry a variety of noncompeting complementary products
o for consumer goods, the distributor usually sells to retailers
o for industrial goods, to other business and/or directly to end users
o compared to sales representatives, distributors are usually a better choice for firms that seek a more stable, committed
presence in the target market
o key advantage: substantial knowledge of the exporter’s products and the nature of the local market

 agent: an intermediary (often an individual or a small firm) that handles orders to buy and sell commodities, products, and
services in international business transactions for a commission
o also known as a broker, an agent may act for either buyer or seller
o does not take title to the goods
o compensated by commission, expressed as a percentage of the price of the product sold
o brings buyers and seller together
o operate under contract for a definite period of time, which is renewable by mutual agreement

23
 o contact defines territory, terms of sale, compensation, grounds and procedures for terminating the agreement
o agents are especially important in markets made up of many small, widely dispersed buyers and sellers
o common in the international trade of commodities, especially food products and base minerals
o in the service sector, agents often transact sales of insurance and securities
o e.g. brokers on the London Metal Exchange LME

 manufacturer’s representative: an intermediary contracted by the exporter to represent and sell its merchandise or
services in a designated country or territory
o go by various names, depending on the industry they are working in: agents, sales representatives, or service
representatives
o they act as contracted sales personnel in a designated target market on behalf of the exporter, but usually with broad
powers and autonomy
o may handle various noncompetitive, complementary lines of products or services
o do not take title to the goods
o compensated by commission
o exporter usually ships merchandise directly to the foreign customer or end user
o manufacturer’s representatives do not maintain physical facilities, marketing, or customer support capabilities

 retailers
o consumer markets
o located in the foreign market
o last link between distributors and end-users
o major retail store chains: Seibu, Carrefour, Tesco, Sainsbury, Royal Ahold
o often, a traveling sales representative facilitates such transactions
o IKEA, largest furniture retailer
o dealing directly with foreign-based retailers is efficient because it result sin a much shorter distribution channel and
reduced channel costs

Intermediaries Based in the Home Country

 variety of wholesaler importers bring in products or commodities from foreign countries for the purpose of selling them in
the home market, re-exporting them, or for use in the manufacture of finished products
 retailers
 importing

 trading company an intermediary that engages in import and export of a variety of commodities, products, and services
 for exporting firms that prefer to minimize the complexity of selling internationally
 assumes the international marketing function on behalf of producers
 typically, they are high-volume, low-margin resellers
 compensated by adding profit margins
 large trading companies operate much like agents and may deal in thousands of products that they sell in markets
worldwide
 very common in commodities and agricultural goods such as grain
 many of the largest trading companies are based in Japan  have historically played an important role
 in Japan, large trading companies are know as sogo shosha
o usually involved in exporting and importing
o specialists in low-margin, high volume trading
o may also supply a range of manufacturing, financial, and logistical services
o in the 90s, total trade of the nine top sogo shosha averaged about 25% of Japan’s total GDP

24
 in the US, trading companies have had a relatively negligible impact on the volume of export activity
 Export Trading Company Act ECT
o passed by the US Congress
o providing firms with 2 important incentives to engage in joint exporting through the formation of export trading
companies
1. immunity from antitrust legislation could allow firms to collaborate for export marketing purposes without the fear
of being prosecuted
2. US bank holding companies could hold equity interest in ECTs and facilitate the formation of financially strong trading
companies
 however, US firms prefer to pursue IB expansion independently of other firms

 export management company EMC an intermediary that acts as an export agent on behalf of a (usually
inexperienced) client company
o more common type of domestically based intermediary in the US
o commission
o finds export customers on behalf of the client firm
o negotiates terms of sale
o arranges for international shipping
o typically smaller than a trading company
o because of the indirect nature of the export sale, the manufacturer runs the risk of losing control over how its products
are marketed abroad, with possible negative consequences for its international image

Online Intermediaries

 internet has triggered much disintermediation

 especially SMEs use the internet to sell their goods directly to the customers 
cheaper & faster
 reintermediation: a new firm – usually an online intermediary – injects itself between buyers and suppliers in the online
buying and selling environment
 intermediaries survive by adding value in the distribution process
 intermediaries as well as focal firms and facilitators employ the internet and other IT tools to achieve various tasks, like
transforming, managing, and communicating within value chains
 easy accessibility of the internet has also led many shady online marketers to cause harm to unsuspecting consumers

Facilitators in International Business

 3rd category of participant

 make it possible for international business transactions to occur efficiently, smoothly, and in a timely manner
 independent individuals or firms
 e.g. banks, international trade lawyers, freight forwarders, customs brokers, consultants
 more important due to the complexity of IB operations, intense competition, and technological advances
 conduct market research, identify potential business partners, provide legal advice

 logistics service provider a transportation specialist that arranges for physical distribution and storage of products on
behalf of focal firms, also controlling information between the point of origin and the point of consumption
 DHL, FedEx, UPS, TNT
 also increasingly provide traditional distributor functions such as warehousing, inventory management, and order tracking

25
common carriers: companies that own the ships, trucks, airplanes, and other transportation equipment used to transport goods
around the world
consolidator: type of shipping company that combines the cargo of more than one exporter into international shipping containers
for shipment abroad

 freight forwarder
 usually based in major port cities
 arrange international shipments for the focal firm to a foreign entry port, and even to the buyer’s location in the target foreign
market
 experts on transportation methods and documentation for international trade, export rules and regulation s of the home and
foreign countries
 arrange for clearance of shipments through customs on the importing side of the transaction
 they are an excellent source of advice on shipping requirements such as packing, containerization, and labeling

 customs broker specialist enterprises that arrange clearance of products through customs on behalf of importing firms
 prepare and process the required documentation
 they are to importing what freight forwarder are to exporting
 also known as customs house brokers
 specifically licensed to transact customs clearance procedures
 usually, the freight forwarder, based in the home country, works with a customs house broker based in the destination
country

various other facilitators

 commercial banks facilitate the exchange of foreign currencies and provide financing to buyers and sellers who usually
require credit to finance transactions
o provide introduction letters and letters of credit to travelers, supply credit information on potential representatives or
foreign buyers, and collect foreign invoices, drafts, and other foreign receivables
 Export Import Bank: SMEs in the US turn to the Ex-Im Bank, a federal agency that assists exporters in financing sales of
their products and services in foreign markets
o provide direct loans, working capital loans, loan guarantees, and other financial products aimed at supporting the
exporting activities of smaller firms
 development banks and agencies: particularly in the developing world, it is commonplace for governments to provide
financing
o money is routinely available in developing countries to finance the construction of infrastructure projects such as dams
and power plants
o host governments provide loans  new jobs, technology transfer, substantial foreign exchange
 international trade lawyers help navigate international legal environments
 insurance companies provide coverage against commercial and political risks
 international business consultants
 tax accountants
 market research firms

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 3.THE CULTURAL ENVIRONMENT OF INTERNATIONAL BUSINESS

Example China: think of themselves in terms of their group memberships and societal connections and focus on social norms and
family integrity. Edward Hall defined China as a “high-context, relationship-oriented” culture. Communication is subtle and
characterized by emotional appeals.
Guanxi refers to informal personal relationships that emphasize reciprocal obligations  big role in business

The Challenges of Crossing Cultural Boundaries

Cross-cultural risk = a situation or an event where a cultural miscommunication puts some human value at stake
culture = The values, beliefs, customs, arts, and other products of human thought and work that characterize the people of a given
society. e.g. greeting ceremonies are deeply embedded cultural marker and evolve over many centuries.
Aspects= cross cult. Risk, dimensions, language, religion, models and explanations, managerial implications.
- Socialization = process of learning the rules and behavioral patterns appropriate to one’s OWN society
- Acculturation = The process of adjusting and adapting to a culture other than one’s own.

Dimensions of culture
 iceberg concept of culture, using three layers of awareness: high culture, folk
culture, and deep culture

a) Values and attitudes. Values represent a person’s judgments about what is

good or bad etc. Attitudes are similar to opinions but are often unconsciously
held and may not be based on logical facts.
b) Manners and customs = ways of behaving and conducting oneself in public
and business situations
c) Perception of time
- Monochronic = A rigid orientation to time, in which the individual is
focused on schedules, punctuality, and time as a resource. (in young
countries). They view time as linear, like a river flowing into the future,
carrying workers from one activity to the next. Company profitability is
measured on a quarterly basis.
- Polychronic= A flexible, nonlinear orientation to time, in which the
individual takes a long-term perspective and emphasizes human
relationships. instead of performing single tasks serially, people do many things at once. In this way, members of
polychronic cultures are easily distracted. long delays are sometimes needed before taking action. time commitments
flexible.
- Japan/ China: more future-oriented (decade view), lifetime employment
- Islam: downplay importance of future planning
d) Perception of space. Workspace and distance in communication.
e) Symbolic productions = letters, figures, colors, or other characters that communicate a meaning. trademarks, logos, and brands.
f) Material productions and creative expressions. artifacts, objects, and technological systems that people construct to function within
their environments. Most important ones: material infrastructure that supplies energy, transport, communication. Social, financial,
marketing infrastructure.
g) Education. Higher-educated regions higher paying jobs
h) Social structure = the pattern of social arrangements and organized relationships that characterize a society. how a society is
organized in terms of individuals, families, groups, and socioeconomic strata
- Individualism: western cultures, more worker mobility and entrepreneurs can reduce eff. Of teams
- Family: ownership and successors (china)
- Reference groups: social status defined by group or employer affiliation rather than by individual performance (Japan)
- Social stratification: individuals are classified within classes or social layers depending on their occupation, income level, or
family history. Ex. senior business and government leaders occupy the highest social strata. The middle strata consist of business
managers and medical or scientific professionals. lowest strata work in manual labor, basic services such as retailing, or lower-
level administrative positions.
- Social mobility: the ease with which a person can move up within social strata. Most rigid system: caste System (India) OR Class
system (adv. Economies) is more flexible. Influences ppls attitudes.

Role of Language & Religion in Culture

- Language: verbal and nonverbal.
- Verbal: 7000 active languages, most have only few thousand speakers. Chinese, Spanish, English, hindi, Arabic.
- An idiom is an expression whose symbolic meaning is different from its actual or literal meaning

Nonverbal communication
- is unspoken and includes facial expressions and gestures
- Side by side = cooperation. Face2face= confrontation
Religion
- a system of common beliefs or attitudes concerning a being or a system of thought that people consider sacred, divine, or the
27
 highest truth and includes the moral codes, values, institutions, traditions, and rituals associated with this system
- ISLAM Less values  economic decay. Religion alone insufficient to support eco dev
- Sharia, the Islamic law based on the Qur’an, covers all aspects of daily life, economic activity, and public governance
- Non-secular societies do not distinguish between church and state
- Islam encourages free trade through rules that prohibit restraints on market-based exchange such as monopolies and price fixing.
Islam encourages the free flow of information that facilitates efficient demand and supply. The Qur’an condemns charging interest
for money loaned
- MNEs are allowed to operate as long as they abide by Sharia law, do not exploit people, and earn profits fairly
- HINDUISM has caster system which hinders eco growth and social advancement
- High power distance
- BUDDHISM cooperation, harmony, stability, responsibility. Spirituality might hinder entrepre. Action

Culture’s effect in international business

 effective handling of the cross-cultural interface is a critical source of a firm’s competitive advantage
 cross-cultural proficiency is paramount in many managerial tasks, including:
o developing products and services
o communicating and interacting with foreign business partners
o screening and selecting foreign distributors and other partners
o negotiating and structuring international business ventures
o interacting with current and potential customers from abroad
o preparing for overseas trade fairs and exhibitions
o preparing advertising and promotional materials
 specific examples of how cross-cultural differences ma complicate workplace issues:
o teamwork: nationals don’t get along with each other; solutions: sensitize each group to differences and develop an
appreciation, common goals, reward joint work
o lifetime employment: paternalistic relationship in Asia; how to motivate employees who expect lifetime employment
regardless of the quality of their work
o pay-for-performance system: promotion because of your performance and not your age (like in Japan and China)
o organizational structure: decentralized structure vs autocratic structures; entrepreneurial vs bureaucratic
o union-management relationships: worker and management status
o attitudes toward ambiguity: capacity to tolerate ambiguity; how much guidance does a employee need? important to take
independent actions
 in Japan “the customer is God”, most important Japanese values: tradition, patience, respect, politeness, honesty, hard work,
affiliation, group consensus, and cooperation
 good from, top product quality, and after-sale service are the keys to success for doing business in Japan; emphasis on
excellent customer service
 Japan, small country, densely populated, homogenous society  cohesive and polite culture, focus on interpersonal
relationships to avoid conflict and preserve harmony
 key element: amae = indulgent dependence  critical part of child-rearing,
Japanese mothers instill a sense of emotion-laden dependence
o filial piety – respect for one’s parents and elders – foundation of Confucian ethic
o provide basis for all other relationships
 workers often live together, job training is very detailed, fix problems in teams, emphasis on customer feedback
 Japan is slowly changing  attentive personnel or lowest possible prices

National, Professional, and Corporate Culture

 we cannot attribute all difficulties to differences in national culture

 national culture
o nationality, ethnicity, gender, religion, social institutions, social class, educational systems
 professional culture

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 o academe, business, banking, engineering, legal, medical,…
 the influence of professional and corporate culture tends to grow as people are socialized into a profession and
workplace
 companies have a distinctive set of norms, values, beliefs, and modes of behavior
 influenced by product portfolio, age of company
 cultural layer represent yet another challenge for the manager
 to what extent is a particular behavior attributable to national culture?
 strong organizational culture  hard to determine where the corporate influence begins and the national influence ends,
e.g. L’Oreal
 the tendency to attribute all differences to national culture is simplistic

Interpretations of Culture

Cultural Metaphors

 Cultural metaphor = a distinctive tradition or institution strongly associated with a particular society (Martin Gannon)
 e.g. bullfighting for Spain, American football, Swedish stuga (cottage summer home), Brazilian concept of jeito for creative
problem-solving (manipulation isn’t seen negatively in Brazil)
 guide to deciphering a person’s attitudes, values, and behaviors
 2 interpretations of national culture: Hall and Hofstede
o Hall = distinction between high- and low-context cultures.
o Hofstede’s = distinguish important dimensions of culture.

 Low-context cultures = a culture that relies on elaborate verbal explanations, putting much emphasis on spoken words
o get down to business first
o expertise and performance are valued
o agreements emphasize specific, legalistic contract
o negotiations are as efficient as possible
o primary function of speech is to express one’s ideas and thoughts as clearly, logically, and convincingly as possible
o communication is direct, explicit, and meaning is straightforward
o if negotiating, they come to the point and do not beat around the bush

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 o German, Swiss, Scandinavian, North American
 High-context cultures = a culture that emphasizes nonverbal messages as a means to promote smooth, harmonious
relationships
o establish social trust first
o personal relations and goodwill are valued
o agreements emphasize trust
o negotiations are slow and ritualistic
o indirect and polite face-saving style that emphasizes a mutual sense of care and respect for others
o on guard not to embarrass or offend others
o showing impatience, frustration, irritation, or anger disrupts harmony and is considered rude and offensive
o sensitive to context and nonverbal cues (body language)
o Chinese, Korean, Japanese, Vietnamese
o Japanese don’t say “no”
 Hall’s work has gained renewed importance because of the explosion of business interaction between East Asia
 plays even a role in communications between people who speak the same language
e.g. Americans and British
In the middle: Spanish, Italian, arab

Hofstede’s Research on National Culture

 widely accepted
 tool to interpret cultural differences  a general guide, useful for a deeper understanding in cross-national interactions with
business partners, customers, and value-chain members
 foundation for classifying countries
 empirical studies have also found relationships between the 4 cultural orientations and geography  suggesting that nations
can be similar (culturally close) or dissimilar (culturally distant) on each of the 4 dimensions
 116.000 IBM employees  single company, single industry
 2 surveys, one 1968, one 1972  much has changed since then (globalization, transnational media, technological
advances, role of women in workforce)
 data were collected using questionnaires – not effective for the deep issues that surround culture
 with the 4 dimensions he did not capture all potential dimensions of culture  addedth
a5
 Individualism vs collectivism = describes whether a person functions primarily as an individual or within a group
o individualistic cultures
 ties among people are relatively loose
 each person tends to focus on his or her own self-interest
 competition for resources is the norm
 those who compete best are rewarded financially
 Australia, Canada, UK, US
o collectivist societies
 this among individuals are more important
 business is conducted in the context of a group in which others’ views are strongly considered
 group is all-important, as life is fundamentally a cooperative experience
 conformity and compromise help maintain group harmony
 China, Panama, South Korea
 Power distance = describes how a society deals with the inequalities in power that exist among people
o high power distance
 relatively indifferent to inequalities
 allow inequalities to grow over time
 substantial gaps between the powerful and the weak

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  firms are autocratically organized
 Guatemala, Malaysia, Philippines, several Middle East
o low power distance
 gap is minimal
 governments institute tax and social welfare systems that ensure their nationals are relatively equal in terms of
income and power
 management and employees cooperate to achieve goals
 Scandinavian countries, (US)
o social stratification affects power distance
o in Japan, nearly everybody belongs to the middle class   India
 Uncertainty Avoidance = the extent to which people can tolerate risk and uncertainty in their lives
o high uncertainty avoidance
 institutions that minimize risk and ensure financial security
 stable careers
 many rules to regulate worker actions and minimize ambiguity
 managers may be slow to make decisions; investigate the nature and potential outcomes of several options
 Belgium, France, Japan
o low uncertainty avoidance
 society socializes its members to accept and become accustomed to uncertainty
 managers are entrepreneurial and relatively comfortable about taking risks
 make decisions relatively quickly
 people accept each das as it comes
 take their jobs in stride, because they are less concerned about ensuring their future
 they tend to tolerate behavior and opinions different from their own, because they do not feel threatened by them
 India, Ireland, US
 Masculinity vs Femininity = a society’s orientation, based on traditional male and female values
o masculine cultures
 value competitiveness, assertiveness, ambition, accumulation of wealth
 people are assertive, focused on career and earning money
 care little for others
 in business: self-confidence, proactiveness, leadership
 Australia, Japan, Hispanic cultures (US)
o feminine culture
 men and women emphasize nurturing roles
 interdependence among people
 care for less fortunate people
 welfare systems are highly developed
 education is subsidized
 Scandinavian countries
 Long-Term vs Short-Term Orientation = the degree to which people and organizations
defer gratification to achieve long-term success
o long-term orientation
 long view to planning and living
 focus on years and decades
 Asian values – traditional cultural orientations of several Asian societies, party based on the teachings of the Chinese
philosopher Confucius
 discipline, loyalty, hard work, regard for education, esteem for the family, focus on group harmony, control over one’s
desires
 (scholars often credit these values for the East Asian miracle, the remarkable economic growth and modernization of
East Asian nations during the last several decades

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 o short-term orientation
 US, Western countries

Deal vs Relationship Orientation

 deal-oriented cultures
o managers focus on the task at hand and want to get down to business
o may even avoid small talk and other preliminaries
o prefer to seal agreements with a legalistic contract
o follow an impersonal approach to settling disputes
o Australia, northern Europe, the US
 relationship-oriented cultures
o managers value affiliations with people
o it is important to build trust, rapport, and get to know the other party in business interactions
o trust is valued in business agreements
o in China, guanxi (literally “connections”) is deeply rooted in ancient Confucian philosophy, which values social hierarchy
and reciprocal obligations, it stressed the importance of relationships within the family and between superiors and
subordinates
o China, Japan, Latin America

Cultural orientations

cross-cultural risk is exacerbated by ethnocentric orientation = using our own culture as the standard for judging other cultures belief that
one’s own race, religion, or ethnic group is somehow superior to others “home-country orientation”
• Polycentric orientation = a host-country mindset where the manager develops a greater affinity with the country in which he conducts business
• Geocentric orientation = a global mindset where the manager is able to understand a business or market without regard to country boundaries

Managerial Guidelines for Cross-Cultural Success

- Workers are socialized by 3 cultures

a. National culture
b. Professional culture
c. Corporate culture

 keeping an open mind, being inquisitive, and not rushing to conclusions about others’ behaviors
 skills are more important than pure information
 every culture is unique, however basic guideline are appropriate for consistent cross- cultural success:
o Acquire factual and interpretive knowledge about the other culture, and try to speak their language
 base of knowledge about the values, attitudes, and lifestyles
 political and economic background, their history, current national affairs, and perceptions about other cultures
 such knowledge facilitates understanding about the partner’s mindset, organization, and objectives
 helps establish trust and respect
 higher levels of language proficiency pave the way for acquiring competitive advantages
o Avoid cultural bias
 the leading cause of culture-related problems is the ethnocentric assumptions managers may hold
 ethnocentric assumptions lead to poor business strategies and distort communications with foreigners
 odd situations may interfere with the manager’s ability to interact effectively with the foreigner, even leading to
communication breakdown  cultural bias can be a significant barrier to successful interpersonal communication
 self-reference criterion = the tendency to view other cultures through the lens of one’s own culture
 understanding the self-reference criterion is a critical first step to avoiding cultural bias and ethnocentric
reactions
 critical incident analysis (CIA) = an analytical method for analyzing awkward situations in cross-cultural
interactions by developing empathy for other points of view
 an approach of avoiding the trap of self-reference criterion in cross- cultural encounters
 encourages a more objective reaction to cultural differences by helping managers develop empathy for other
points of view
o Develop cross-cultural skills
 each culture has its own ways of carrying out business transactions, negotiations, and dispute resolute  high levels
of ambiguity (concepts and relationships that can be understood in a variety of ways)
 cross-cultural proficiency is characterized by 4 key personality traits:
 Tolerance for ambiguity – the ability to tolerate uncertainty and apparent lack of clarity in the thinking and
actions of others
 Perceptiveness – ability to closely observe and appreciate subtle information in the speech and behavior of
others
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  Valuing personal relationships – the ability to recognize the importance of interpersonal relationships, which
are often much more important than achieving one-time goals or winning arguments
 flexibility and adaptability – the ability to be creative in devising innovative solutions, to be open-minded
about outcomes, and to show grace under pressure
o managers function better with a geocentric or cosmopolitan view of the world
o managers with this view believe they can understand and accommodate similarities and differences among cultures
o multinational firms instill a geocentric cultural mindset in their corporate culture
o a way to determine the skills managers need to approach cultural issues is to measure their cultural intelligence =
capability to function effectively in situations characterized by cultural diversity

5. Ethics, Corporate Social Responsibility, Sustainability, and Governance in International Business

- Buyer-driven value chains: usually noticed in industries where production is labor intensive, non-specialized and
requires low fixed cost. Entry barriers high in design and low in production.  price determining powers
Ethical behaviour and its importance

- do the right things for company and stakeholders, be fair and hones
Ethics= Moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong
Corp. social responsibility = A manner of operating a business that meets or exceeds the ethical, legal, commercial, and public expectations of
customers, shareholders, employees, and communities
Sustainability = Meeting humanity’s needs without harming future generations.
Corporate governance = The system of procedures and processes by which corporations are managed, directed, and controlled. Means by
which top 3 are undertaken.

Value of ethical behaviour

- Why behave ethically? It’s the right thing, prescribed in laws, stakeholders demand it, enhances corporate image
- Public protests, firms need to operate at public interest. Ex EU prescribes use of chemicals and garbage
Unethical behaviour results when…
- Pressure to deliver results
- Managers tolerate lower ethical standards in value chain supplies or third parties
- Small unethical practices accumulate
- Bad means are justified by good ends
Ethical standards and dilemmas around the world
- Ethical standard vary by level of eco development
- Ethical problems arise when requirements are ambiguous, inconsistent, or based on multiple legal or cultural norms, conflicting
laws and regulations.
- ethical dilemma = predicament concerning major conflicts among different interests when determining the most appropriate course
of action is confounded by a set of solutions that are equally justifiable and often equally imperfect.
- Pyramid of ethical behavious: 1. Complying with laws&regulations 2. Ethical behaviour 3. CSR
Relativism and Normativism
- Relativism = The belief that ethical truths are not absolute but differ from group to group passive acceptance of values in
countries where u do business
- Normativism = The belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them
around the world.
- Most companies apply a combination & strike a balance between corp. home country values and host values
- In low standard countries  keep superior values for more goodwill. Educate employees, suppliers and intermediaries.

Ethical challenges in int. business

Corruption
- = practice of obtaining power, personal gain, or influence through illegitimate means and usually occurs at others’ expense
- C influences our social, eco and political environment, diminishes trust in public inst., undermines law and challenges democracy.
- Lowers development by discouraging investments and hurts small businesses
- cost of corruption = more than 5% of global GDP annually (more than $2.6 trillion) and increases global business costs by up to 10
%.
Different ways:
- Bribery occurs when a person offers or gives another person a gift, cash, or favor to act dishonestly in exchange for personal gain.
- Embezzlement (veruntreuung) is the theft or misuse of funds typically placed in one’s care or belonging to one’s employer.
- Fraud (betrug) involves wrongfully deceiving a person or other party to give up assets or cash.
- Extortion (Erpressung) and blackmail involve threats of harm against another person or party unless payment is received or some
other demand is met. Threats can include physical harm, false imprisonment, exposure of an individual’s secrets or past, or other
harmful outcomes.
- Money laundering is the concealment of the origins of funds obtained through illegal means, typically by transferring the funds
illicitly through banks or other legitimate businesses.
- Often corruption is political, officials abuse public power or profit from gov resources. In firms across range of value chain
activities.
- Corruption perception index (by Transparency int.) = surveys business executives every year regarding their perceptions of
bribery, embezzlement, and other illicit behavior in the public sector in 180 countries. The result ranks countries on a scale from 1
to 100.
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Bribery
- Most notable form of corruption in int. business. 1 trillion dollars are paid in bribes yearly
- OECD made an anti-bribery convention
- In US FCPA can charge firms up to 2$ and managers 5y of prison
- Grease payments r excluded = small amounts to make services quicker
- In many dev ecos (Egypt, Indonesia, Pakistan, Nigeria) bribery is normal and necessary
Unethical mgmt. practices
- especially in countries that lack adequate regulation and professional standards
- Financial crisis: safety was neglected against bad loans and high-risk securities
- Misinformation, favouring certain ppl or suppliers, harassment
Harmful global sourcing
- = procurement of products or services from suppliers located abroad
- Sweatshop factories, children work, harsh conditions, pollution
Illicit products and marketing
- market defective or harmful products or engage in unethical marketing practices
- public health and safety, excessive packaging
- false claims about quality or functions of product
Intellectual property infringement
- Int. prop. = Ideas or works that individuals or firms create, including discoveries and inventions; artistic, musical, and literary
works; and words, phrases, symbols, and designs. Trademarks, copyrights, and patents.
- Int. property rights = The legal claim through which the proprietary assets of firms and individuals are protected from
unauthorized use by other parties
- Laws offer no protection abroad
- Infringement arises in form of piracy and counterfeiting = the unauthorized reproduction or use of copyrighted or patented work,
for financial gain.s
- most counterfeited goods are jewelry, consumer electronics, and pharmaceuticals. China and Hongkong big sources.

Corporate Social Responsibility

- companies aim to do more than required. Double win: shared value for share&stakeholders
Settings of CSR
- Workplace CSR = employees, diversity, recruitment, salary, safety, health, working conditions.
- Marketplace CSR = interactions with customers, competitors, suppliers, and distributors
- Environmental = firm’s activities to minimize or eliminate the creation of pollutants as well as efforts to improve the natural
environment.
- Community CSR = firm’s activities aimed at benefiting the community and society. It includes employee volunteering programs
and philanthropy.

Sustainability
- pay fair wages, ensure worker safety, and avoid emitting toxic
- Other practices: beneficial agriculture, water conservation, Air quality protection, reduced energy and fuel consumption, regulation
of fossil fuel usage and government incentives to use renewable energy sources. More solar/wind energy, improved work
processes.
- Sustainable businesses pursue eco, social and environmental interests:
- Economic interests refer to the firm’s economic impact on the localities where it does business. Management considers the effect
of the firm’s activities on such local concerns as job creation, wages, tax flows, disadvantaged communities, public works, and
other areas where the firm can contribute positively to local economic interests.
- •
- Social interests refer to how the firm performs relative to societies and social justice, often termed social impact. The firm with a
strong social interest optimizes work conditions and diversity in hiring. It avoids using sweatshops, child labor, and other practices
that harm workers. Instead, the sustainable firm provides safe work environments, health insurance, retirement benefits, and
educational opportunities for employees.
- •
- Environmental interests refer to the extent of the firm’s contribution to preserving environmental quality, commonly known as
environmental impact. This concept refers to reducing the effect of the firm’s value-chain activities on the natural environment.
The sustainable firm maximizes its use of recycled or renewable raw materials and environmentally friendly energy. It minimizes
pollutants, designs production lines to use waterand energy efficiently, and constantly seeks ways to reduce waste. Many firms
establish a green purchasing policy, through which they procure inputs that support environmental interests.

MNE Role in Sustainability: Because of their size, MNEs are among the most important stewards of the environment

The role of corp. gov

Leading companies implement corporate governance by creating
(a) a set of values that serve as a guide for employees; and
(b) a set of ground rules for guiding behavior, which include criteria for acceptable decision-making, used by all employees.

Code of ethics= A document that describes the values and expectations that guide decision making by all employees in the firm. Employees
should see whats right/ wrong. General for any challenge, daily decisions & interactions. Written by senior mgmt. in all languages.

Code of conduct= A document that translates the code of ethics into specific rules regarding behaviors and practices that are prohibited or
required. Identifies consequences. Different ones for diff. countries, bc one worldwide is difficult  crossfunctional teams can develop. Senior
mgmt. needs to commit.

Embracing ethical behaviour

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  Manageres undertake these measures:
- Build internal and external capabilities (to enhance the firm’s contribution to the local community and global environment)
- Ensure that diverse voices are heard (by creating organizational structures that employ managers and workers from around the
world)
- Develop global ethical standards and objectives that are communicated and implemented across the firm worldwide
- Train managers in global ethical principles and integrate these into managerial responsibilities.
- Develop closer relations with foreign stakeholders to understand their needs better and jointly work toward solutions.

Ethical Standard Approaches for Corporate Governance

- Utilitarian approach. Best action provides most good and least harm.
- Rights approach. Best action protects moral rights of everyone. Human dignity.
- Fairness approach. Ba treats everyone equally and fairly.
- Common good approach. Ba emphasizes the welfare of the entire community or nation.
- Virtue approach. Ba emphasizes virtues that provide for the full development of our humanity.  lead to similar solutions

A Global Consensus
- International Chamber of Commerce: Rules of Conduct to Combat Extortion and Bribery
- United Nations : Declaration against Corruption and Bribery in International Commercial Transactions
- (OECD) : anti-bribery agreement, which was signed by its 30 member nations (essentially, all the advanced economies) plus
several Latin American countries.
- The United Nations Global Compact : policy platform and practical framework for companies committed to sustainability and
responsible business practices. seeks to align business operations and strategies with universally accepted principles in the areas
of human rights, labor, corruption, and the natural environment. world’s largest voluntary corporate citizenship initiative,
representing thousands of businesses in more than 135 countries.
- The Global Reporting Initiative : sustainability reporting framework.--> sets out the principles and indicators that organizations
can use to measure and report their economic, environmental, and social performance. Today, most large MNEs produce
sustainability reports, many following the GRI guidelines.

Going Deep: institutionalizing appropriate behavior in the organization’s culture so it becomes part of strategy
Wide: continuous effort to understand how CSR and sustainability affect every aspect of the firm’s operations worldwide
and Local: examine local issues that affect worldwide

Benefits of Corporate Governance: Employee commitment, customer loyalty, reputation and brand image, reduced gov intervention, less costs,
better financial performance and greater growth

A framework for making ethical decisions

1. Identify the problem
2. Examine the facts
3. Create alternatives (with pyramid of ethical beh.) & evaluate them with the 5 approaches
4. Implement course of action
5. Evaluate results

6. THEORIES OF INTERNATIONAL TRADE AND INVESTMENT

 theories = logical explanations

 comparative advantage superior features of a country that provide it with unique benefits in global competition typically
derived from either natural endowments or deliberate national policies
o also know as country-specific advantages
o include acquired resources, such as labor, climate, arable land, or petroleum reserves; other types of comparative
advantages evolve over time,
such as entrepreneurial
orientation, availability of
venture capital, and innovative
capacity
 focus shifted from countries to
companies
 competitive advantage Assets
or capabilities of a firm that are
difficult for competitors to imitate.
They are typically derived from
specific knowledge, competencies,
skills, or superior strategies.  firm-
specific advantage
 business executives and academics
such as Porter have used the term
competitive advantage to refer to the
advantages possessed both by nations
and individual firms

2 theory groups

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Why Nations Trade

 trade allows countries to use their national resources more efficiently through
specialization
 trade allows industries and worker to be more productive
 trade allows countries to achieve higher living standards and keep the cost of many everyday products low  higher liv.
Stand.

Classical Theories

1. The Mercantilist View/Mercantilism = the belief that national prosperity is the result of a positive balance of trade,
achieved by maximizing exports and minimizing imports
 earliest explanation of international business in the 1500s; gold and silver were the most important sources of wealth and
nations sought to amass as much as possible
 it argues that the nation’s power and strength increase as its wealth increases
 rationale for a nation’s attempt to run a trade surplus
 neo-mercantilism = even today many people believe that running a trade surplus is beneficial: labor unions, farmers,
certain manufacturers
 mercantilism tends to harm the interests of firms that import, especially those that import raw materials and parts used in
the manufacture of finished products
 it also harms the interests of consumers, because restricting imports reduces the choices of products they can buy  may
lead to higher prices  inflation
 “beggar thy neighbor” policies, promoting the benefits of one country at the expense of others

Free Trade = relative absence of restrictions to the flow of goods and services between nations
 consumers and firms can more readily buy the products they want
 the prices of imported products tend to be lower than for domestically produced products (increased competition, access to
world-scale supplies, production in lower-cost countries
 lower-cost imports help reduce the expenses of firms  higher profits (may be passed on to workers in the form of higher
wages)
 lower-cost imports help reduce the expenses of consumers  higher living standards
 unrestricted international trade generally increases the overall prosperity of poor countries

2. Absolute Advantage Principle = The idea that a country benefits by producing only those products it can produce using
fewer resources, in which it has an abs. adv.

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  1776: An Inquiry into the Nature and Causes of the Wealth of Nations – Adam Smith
 If every nation follows this practice, each can consume more than it otherwise could, generally at lower cost.
 attacked the mercantilist view by suggesting that nations benefit most from free trade
 mercantilism robs individuals to benefit from voluntary exchanges
 minimizing imports  waste of national resources in the production of goods that it is not suited to produce efficiently
 mercantilism reduces the wealth of the nation as a whole while enriching a limited number of individuals and interest
groups
 later studies revealed that countries benefit from international trade even when they lack an absolute advantage 
comparative advantage

3. comparative advantage principle = it can be beneficial for two countries to trade without barriers as long as one is
more efficient at producing goods or services needed by the other. What matters is not the absolute cost of production, but
rather the relative efficiency with which a country can produce the product
 1817: The Principles of Political Economy and Taxation – David Ricardo
 important: ratio between how easily the 2 countries can produce the products
 the principle remains today as the foundation and overriding justification for international trade
 countries can create/ acquire comp. costs
 opportunity cost – value of a foregone alternative activity
 the concept contends that trade depends on differences in comparative cost, and any nation can profitably trade with
another even if its real costs are higher in every product that it produces
 it is generally advantageous for all countries to participate in international trade

Limitations  concepts of absolute and comparative advantage provided the rationale for international trade, but they did not
capture factors that make contemporary trade complex, including:
 cost of international transportation
 government restrictions (tariffs), import restrictions, and regulations
 large-scale production  scale economies  lower prices which offset weak national comparative advantages
 public sector can target and invest in certain industries, build infrastructure, or provide subsidies, all of which serve to boost
firms’ competitive advantages
 global telecommunications and the Internet facilitate virtually costless trade in some services and global flows of capital
 contemporary cross-border business includes many services that cannot be traded in the usual sense and must be
internationalized via foreign investment  complex products, strong branding & diff. features (ex. Banking, retailing)
 the primary participants in cross-border trade are individual firms  some firms may have a greater need to trade
internationally if their home markets are too small to support their growth or revenue objectives

theories that consider how these factors affect trade:

4. Factor Proportions Theory/Factor Endowments Theory = Premises:

- products differ in the types and quantities of factors (labor, natural resources, capital) that are required for their
production
- countries differ in the type and quantity of production factors that they possess
 each country should export products that intensively use relatively abundant factors of productions, and import goods that
intensively use relatively scarce factors of production
 it emphasizes the importance of each nation’s factor of production  in addition to the differences in the efficiency of
production, differences in the quantity of factors of production determine international trade patterns  per-unit-cost
advantage
Leontief paradox
 empirical findings that seem to contradict factor proportions theory  US has abundant capital  it should be an exporter of
capital-intensive products, however its exports are labor-intensive
 main contribution: international trade is complex and cannot be fully explained by a single theory

5. International Product Cycle Theory

 explanation of the evolutionary process that occurs in the development and diffusion of products around the world
 technical innovations typically originate from advanced countries that possess abundant capital and R&D capabilities
 each product and its associated manufacturing technologies go through 3 stages of evolution
• introduction  produced at home and enjoying a temporary monopoly
• growth  mass production, exporting
• maturity  standardized product, foreign competition, narrow profit
• standardization  mass production, cheaper inputs/labor, production to low-income countries
 in the end, the original innovating and exporting country may be a net importer of the product  exporting the product has
caused its underlying technology to become widely known and standardized around the world
 as the product goes through its life cycle, comparative advantage in its production tends to shift from country to country
 today cycles are much quicker

6.New trade theory

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  1970, Paul Krugman  observed that trade was growing fastest among industrialized countries with similar factors of production  no
clear comp. adv.
 argues that economies of scale are important for superior international performance in industries that succeed best as their production
volume increases
 firms/ small industries can solve this problem by exporting and gaining access to the much larger global marketplace  trade is
beneficial even for countries that produce only a limited variety of products

How Nations Enhance Their Competitive Advantage: Contemporary Theories

The Competitive Advantage of Nations

 national competitiveness = the sum of national comparative advantages and competitive advantage of a nation’s firms
collectively

3 perspectives explain dev. Of nat. Competitive adv:

1. the competitive advantage of nations
- Michael Porter 1990
- this relationship is reciprocal: the competitive advantages held by the nation tend to drive the development of new firms
and industries with these same competitive advantages

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 - an individual firm has a competitive advantage when it possesses one or more sources of distinctive competence
relative to others, allowing it to perform better than its competitors
- at both, the firm and the national levels, competitive advantage grows out of innovation  the aggregate innovative
capacity of a nation is derived from the collective innovative capacity of its firms.
- industries most dependent on technological innovation: biotechnology, IT, new materials, pharma, robotics, medical
equipment, fiber optics, and various electronics
- R&D in host countries to gain access to talent, cut costs and insights 2 target markets
- innovation also promotes productivity, the value of the output produced by a unit of labor or capital
a. the more productive the firms in a nation are, the more efficiently the nation uses its resources
b. at the national level, productivity is a key determinant of the nations long-run standard of living and a basic
source of national per-capita income growth

2. the 4 determinants of national competitiveness (Michael Porter Diamond Strategy)

a. Demand conditions in home market
b. Firm strategy, structure, domestic rivalry  push companies to innovate
c. Factor conditions  Each nation has relative abundance of certain factor endowments
d. Related and supporting industries  presence of clusters of suppliers, competitors, and skilled workforce

Industrial Cluster = a concentration of businesses, suppliers, and supporting firms in the same industry at a particular location,
characterized by a critical mass of human talent, capital, or other factor endowments
 today, knowledge and skills determine where MNEs will locate economic activity around the world  knowledge workers
 info and knowledge exchange  cost-saving in eco of scale & scope
 e.g. Bangalore
 some argue that knowledge is the only source of sustainable long-run competitive advantage  future national wealth will go
to those countries that invest the most in R&D, education and infrastructure that support knowledge-intensive industries

3. national industrial policy

 Porter: national competitive advantage does not derive entirely from the store of natural resources
 inherited national factor endowments are relatively less important than in the past
 countries can successfully create new advantages
 any country regardless of its initial circumstances, can attain economic prosperity by systematically cultivating new and
superior factor endowments
 nations can develop these endowments through national industrial policy = a proactive economic development
plan initiated by the public sector, often in

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 collaboration with the private sector, that aims to develop or support particular industries within the nation
o policies emphasize the development of high-value adding industries that generate substantial wealth in terms of
corporate profits, worker wages, and tax revenues
o historically, nations have favored more traditional industries (automobiles, shipbuilding, heavy machinery)
o e.g. Ireland, Japan, Singapore, South Korea, Dubai
o Governments can influence demand conditions and related and supporting industries through regulations.
o or influence factor conditions by supporting educational initiatives and capital markets.
o Government tax policies and regulations can influence firm strategy, structure, and rivalry.
o Features of national industrial policies
 tax incentives to encourage citizens to save and invest, which provide capital for public and private investment
in plant, equipment, R&D, infrastructure, and worker skills
 monetary and fiscal policies, such as low-interest loans that provide a stable supply of capital for company
investment needs
 educational system for high-value-industries
 strong national infrastructure in areas such as IT, communication systems, and transportation
 strong legal and regulatory systems stability of the national economy

National Industrial Policy in Practice: An Example

New Trade Theory

 Paul Krugman et al contended that classical theories failed to anticipate or explain some international trade patterns
 e.g. they observed that trade was growing fastest between industrial countries that held similar factors of production  no
clear comparative advantage
 solution: new trade theory, which argues that increasing returns to scale, especially economies of scale, are an important
factor in some industries for superior international performance
 e.g.. commercial aircraft industry, automobile industry
 national markets are too small  exporting  gaining access to the much larger global marketplace
 the effect of increasing returns to scale allows the nation to specialize in a smaller number of industries in which it may not
necessarily hold factor or comparative advantages  the nation then imports the products that it does not make from other
countries
 results:
o increases the variety of products that the nation consumes
o nation obtains these products at lower cost, both due to international trade and the economies of scale of its domestic
industries
 trade is beneficial even for countries that produce only a limited variety of products

Why and How Firms Internationalize

theories about the managerial and organizational aspects of firm internationalization

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1. Internationalization Process of the Firm
internationalization process model 1 9 7 0 describes how firms expand abroad
 internationalization is a gradual process that takes place in incremental stages over a long period of time
 first only exports (easiest market entry strategy)  then FDI
 very slow bc managers are uncertain, further comes more risk and control
 stages in the internationalization process
o domestic focus: acquiring business in the home market; firm is unable or unwilling to engage in IB, because of
concerns over its readiness, or perceived obstacles
o pre-export stage: firm receives product orders from abroad; management investigates the feasibility of undertaking IB
o experimental involvement: limited international activity, typically through basic exporting
o active involvement: management begins to view foreign expansion more favorably; systematic exploration of
international options; commitment of top management time and resources toward achieving international success
o committed involvement: genuine interest and commitment of resources to making IB a key part of the firm’s profit-
making and value-chain activities; firm targets numerous foreign markets via various entry modes, especially FDI

2. Born Globals and International Entrepreneurship

 Not all firms internationalize slowly: born globals

 reasons for this shift:
o growing intensity of international competition
o advances in communication and transportation technologies that have reduced the cost of venturing abroad
o globalization made it easier
 trends show globals will become the norm in international trade  international entrepreneurship

How Firms Gain and Sustain International Competitive Advantages

 importance of internationalization of early MNEs since 1950s major event in modern history

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FDI-Based Explanations

FDI stock = total value of assets that MNEs own abroad via their investment activities
entrepôt ports= In such ports, merchandise can be imported without paying import duties.
 total FDI stock constitutes some 30% of global GDP
 historically, most of the world’s FDI was invested both by and in Western Europe, the US and Japan
 in recent years: emerging markets e.g. China, Mexico, Brazil, Eastern Europe
 stock of inward FDI: EU Total, US, Asia Total, UK, Latin America total, France, Hong Kong, Netherlands
 stock of outward FDI: EU total, US, UK, Germany, France, Asia total, Netherlands

3 theories of how firms can use FDI to gain and sustain competitive advantage:
(see page 113)

Monopolistic Advantage Theory

 firms that sue FDI as an internationalization strategy tend to control certain resources and capabilities that give them a degree
of monopoly power relative to foreign competitors
 key assumption: to be successful, an MNE must possess monopolistic advantages over local firms in foreign markets
 the firm must keep these advantages to itself by internalizing them  these advantages are specific to the MNE rather than to
the location of its production and not easily available to its competitors
 most important advantage is superior knowledge  allows to create unique value
 2 conditions: 1) returns accessible in the foreign market should be superior to those available in the home market. 2) returns
achievable in the foreign market should be superior to those earned by existing domestic competitors in the foreign market.

Internalization Theory
 which specific benefits do MNEs derive from internationalizing via FDI?
 internationalization theory = An explanation of the process by which firms acquire and retain one or more value-chain
activities inside the firm. This minimizes the disadvantages of dealing with external partners and allows for greater control
over foreign operations
 internalizing  the firm, rather than its products, crosses the border
 FDI allows management to control and optimally use the firm’s proprietary knowledge in foreign markets and avoid
additional foreign value-chain activities

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Dunning’s Eclectic Paradigm
 framework for determining the extent and pattern of the value-chain operations that companies own abroad  most
comprehensive
 Dunning draws from various theoretical perspectives, including the comparative advantage and the factor proportions,
monopolistic advantage, and internalization advantage theories
 3 conditions that determine whether or not a company will internationalize via FDI
o ownership-specific advantages (unique to the firm): needs the firm to successfully enter and conduct business in a
foreign market
 these consist of the knowledge, skills, capabilities, processes, relationships, or physical assets, they all amount to
the firm’s  competitive advantages
 these must not be readily transferable to other firms
 e.g. proprietary technology, managerial skills, trademarks or brand names, economies of scale, access to
substantial financial resources
 the more valuable the firm’s ownership-specific advantages, the more likely it is to internationalize via FDI
o location specific advantages: comparative advantages that exit in individual foreign countries
 natural resources, skilled labor, low-cost labor, inexpensive capital
 managers seek to benefit from the host country advantages
 a location-specific advantage must be present for FDI to succeed
 it must be profitable to the firm to utilize its ownership-specific advantages in conjunction with at least some
location-specific advantages
o internalization advantages: advantages the firm derives from internalizing foreign-based manufacturing,
distribution, or other stages of its value chain
 FDI decision depends on which is the best option: internalization vs utilizing external partners
 internalization advantages include: ability to control how the firms products are produced or marketed, the ability
to control dissemination of the firm’s proprietary knowledge, and the ability to reduce buyer uncertainty aobut the
value of products the firm offers

Non-FDI Based Explanations

FDI became a popular entry mode in the 60s and 70s. In the 80s, firms began to recognize the importance of collaborative
ventures and other flexible entry strategies.

International Collaborative Ventures

 cooperation between 2 or more firms
 horizontal collaboration: between partners at the same level of the value chain
 vertical collaborations: between partners at different levels of the value chain
 2 major types:
o equity-based joint venture  formation of a new legal entity
o project-based strategic alliances  do not require equity commitment, but simply a willingness to cooperate in R&D,
manufacturing, design, or any other value-adding activity
 the collaborating firms pool resources and capabilities and generate synergy
 share risks of their joint effort, reducing vulnerability for any one partner
 to achieve international business goals, the firm sometimes has no choice but to reach out to resources and capabilities that are
not available within its own organization
 occasionally a foreign government restricts the firm from entering its national market via wholly owned FDI
 the firm may gain access to foreign partners’ know-how, capital, distribution channels, marketing assets, or the ability to
overcome government-imposed obstacles

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Networks and Relational Assets = stock of the firm’s economically beneficial long-term relationships with other business entities
(manufacturers, distributors, suppliers, retailers, consultants, banks, transportation suppliers, governments,…)
 firm-level relational assets  distinct competitive advantage in IB
 Japanese keiretsu
o predecessors of the networks and alliances now emerging in the Western world
o complex groupings of firms with interlinked ownership and trading relationships that foster inter-firm organizational
learning
 neither formal organizations with clearly defined hierarchical structures nor impersonal decentralized markets
 the International Marketing and Purchasing IMP research consortium in Europe has driven much of the theory development
on networks
o network theory was proposed to compensate for the inability of traditional organizational theories to account for much of
what goes on in business markets
o in networks, actors (buyers and sellers) become bound to one another through ongoing exchanges and linkages of
products, services, finance, technology, and know-how
o these linkages from stable relationships and create value and competitive advantages for firms, even among competitors
o network linkages are a key route by which many firms expand their business abroad, develop new markets, and develop
new products
o mutually beneficial and enduring strategic relationships provide real advantages to partners and reduce uncertainty and
transaction costs
o contemporarily, companies opt for more flexible collaborative ventures with independent business partners than making
more permanent, direct investment in host countries

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 7. POLITICAL AND LEGAL SYSTEMS IN NATIONAL ENVIRONMENTS

What Is Country Risk?

 political and legal system

 managers must adhere to laws and regulations that govern business transactions
 e.g. government-imposed import tariffs lead many firms to enter foreign markets through FDI instead of exporting
 at the same time, the political and legal context presents opportunities
 e.g. preferential subsidies, government incentives, and protection from competition
 numerous governments encourage domestic investment from foreign MNEs
 country (political) risk = exposure to potential loss or adverse effects on company operations and profitability caused by
developments in a country’s political and/or legal environments
 Many laws favor host-country interests—that is, interests in foreign countries where the firm has direct operations
 intellectual property = ideas or works created by people or firms such as patents, trademarks, and copyrights

How Prevalent is Country Risk?

 level of risk
o high: Iraq (war), Zimbabwe (ongoing corruption – bribery and fraud - and
political turmoil), Argentina, Venezuela, Philippines, Indonesia
o low: Singapore, Hong Kong, Chile, Taiwan, South Korea, Malaysia
 risk is measured using various indicators, such as government debt, fiscal and monetary,
and political stability
 country risk may affect all firms in a country equally, or it may affect only a subset
 India: Hindu nationalists came to political power in 96, opposed foreign investment and foreign influence on Indian society 
some Indians are threatened by perceived cultural invasion from abroad e.g. bodyguards were needed in front of KFC
 as countries develop stronger economic ties with foreign trading partners, and become better integrated with the global
economy, they tend to liberalize their markets and eliminate restrictions on foreign business (happened in India as well)
 relationship between country risk and the degree of legal and political freedom
 country risk ratings are higher in countries with excessive regulatory burdens and political instability

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 What Are Political and Legal Systems?

 political system = a set of formal institutions that constitute a government

o it includes legislative bodies, political parties, lobbying groups, and trade unions; the political system defines how these
groups interact with each other
o Functions: Provide protection from external threats. • Ensure stability based on laws. • Govern the allocation of valued resources
among the members of a society • Define how a society’s members interact with each other.
o Constituents are the people and organizations that support the political system and receive government resources
 legal system = a system for interpreting and enforcing laws
o the laws, regulations, and rules establish norms for conduct
o institutions and procedures for ensuring order and resolving disputes in commercial activities, and protecting intellectual
property and taxing economic output
 these systems are both dynamic and constantly changing
 the 2 systems are interdependent
 adverse developments in political and legal system give rise to country risk
 these can result from installation of a new government, shifting values or priorities in political parties, new directions or
initiatives devised by special interest groups, and the creation of new laws or regulations
 change may be gradual or sudden; gradual change is usually easier for the firm to accommodate; sudden change is harder to
deal with and poses greater risk to the firm
 country risk is always present, but its nature and intensity vary over time and from country to country
 in disputes between local and foreign firms, governments are often inclined to protect local interests
 even where Western firms obtain favorable judgments in the courts, enforcement may be difficult to achieve

Political Systems

 world either totalitarianism, socialism, and democracy

 principal functions: establish stability based on laws, provide protection from external threats, and govern the allocation of
valued resources among the members of a society
 each political system evolves as a function of constituent demands (demands from the people and organizations that support he
political regime and that are the recipients of government resources) and the evolution of the national and international
environment
 to address sluggish eco cond.  socialistic policies (nationalizing firms)

Totalitarianism

 China (1949-1980s), Germany (1933 – 1945), Soviet Union (1918 – 1991), Spain
(1939 – 1975)
 today, some states in the Middle East and Africa entail elements of totalitarianism
o Cuba
o North Korea
o Africa (Eritrea, Libya, Sudan, Equatorial Guinea, Zimbabwe)
 the state attempts to regulate most aspects of public and private behavior
 a totalitarian government seeks to control not only the economic and political matters, but the attitudes, values, and beliefs of
its citizenry
 the entire population is mobilized in support o f the state and a political or religious ideology
 totalitarian states a generally either theocratic (religion-based) or secular (non- religion-based)
 state party led by a dictator

46
 party membership is mandatory for those who wish to advance within the social and economic hierarchy
 power is maintained by means of secret police, propaganda disseminated through state-controlled mass media, regulation of
free discussion and criticism, and the use of terror tactics
 no tolerance for the activities by individuals or groups such as churches, labor unions or political parties that are not directed
toward the state’s goals
 over time, most of the world’s totalitarian states have either disappeared or shifted their political and economic systems toward
democracy and capitalism
 however this transition (privatization, entrepreneurs gain the right to establish their own businesses) is not easy, and former
totalitarian states continue to maintain strong political control, including government intervention in business
 today Africa, asia, middle east

Socialism

 capital and wealth should be vested in the state and used primarily as a means of production for use rather than for profit
 based on a collectivist ideology in which the collective welfare of people is believed to outweigh the welfare of the individual
 socialists believe that, because the pay of workers does not represent the full value of their labor, government should control
the basic means of production, distribution, and commercial activity
 socialism has manifested itself in much of the world as social democracy, and has been most successful in western Europe
e.g. France, Sweden, and Norway (and Brazil and India)
o government does intervene in the private sector and in business activities
o corporate income tax rates are also relatively higher
o even robust economies like Germany have experienced net outflows of FDI as businesses seek to escape extensive
regulation
 Bolivia, China, Egypt, India, Romania, Russia, Venezuela Democracy

 prevailing political system in much of the world’s advanced economies

 characterized by 2 key features
o Private property rights: ability to own property and assets and to increase one’s asset base by accumulating private
wealth.
Property = tangibles (land, buildings) and intangibles (stocks, contracts, parent rights, intellectual assets)
these rights are important because they encourage individual initiative
o Limited government: government performs only essential functions that serve all citizens (national defense, maintain law
and order, and the construction and maintenance of infrastructure such as roads, schools, and public works)
state control and intervention in the economic activities of private individuals or firms is minimal
market forces determine economic activity  resources are allocated with maximal efficiency
 individual pursuits of people and firms are sometimes at odds with equality and justice, because people have differing
levels of personal and financial resources
 when these inequalities become excessive, government should step in to level the playing field
 each society balances individual freedom with broader social goals
 most democracies include elements of socialism, such as government intervention in the affairs of individuals and firms
 socialistic tendencies emerge because of abuses or negative externalities that occur in purely democratic systems

47
  many countries (Australia, Canada, US, and those in Europe) are best described as having a mixed political system –
characterized by a strong private sector and a strong public sector

Democracy’s Link to Economic Freedom

 democracy is associated with greater economic freedom and, usually, higher economic living standards
 economic freedom flourishes when governments support the institutions necessary for that freedom, such as freely operating
markets and rule of law
 the more political freedom in a nation, the more citizens enjoy economic freedom
 political freedom is characterized by free and fair elections, the right to form political parties, fair electoral laws, existence of a
parliament or other legislative body, freedom from domination by the military, foreign powers, or religious hierarchies, and
self-determination for cultural, ethnic, and religious minorities
 economic freedom is related to the extent of government interference in business, the strictness of the regulatory environment,
and the ease with which commercial activity is carried out according to market forces
 openness = lack of regulation or barriers to the entry of firms in foreign markets
 relatively free: Israel, Taiwan, Chile, South Korea, South Africa, EU countries, Canada, US , Australia, Switzerland, NZ
 relatively “not free”: North Korea, Belarus, Turkmenistan, Uzbekistan, Iran, Syria, Libya, Zimbabwe, China, Vietnam, Cuba

The Relationship Between Political Systems and Economic Systems

 each political system tends to be associated with a particular type of economic system
 totalitarianism – command economies
 democracy – market economies
 socialism – mixed economies

Command economy
 centrally planned economy
 state is responsible for making all decisions with respect to what goods and services the country produces, the quantity of their
production, the prices at which they are sold, and the manner of their distribution
 the state owns all productive wealth, land, capital
 the government allocates resources based on which industries it wants to develop
 a large bureaucracy with central planners manages the nation’s affairs
 command economies were common in the 20th century, but proved to be inefficient and most of them died out
 today, some countries that embrace socialism exhibit some characteristics of command economies  China, India, Russia, and
certain countries in Central Asia, Eastern Europe, and the Middle East

Market Economy
 decision making on levels of production, consumption, investment, and savings results from the interaction of supply and
demand  market forces
 economic decisions are left to individuals and firms
 government intervention in the marketplace is limited
 closely associated with capitalism; means of production are privately owned and operated
 market-oriented mentality and entrepreneurial spirit
 the task of the state is to establish a legal system that protects private property and contractual agreements within which people
and firms can carry out their economic activity

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 the government may also intervene to address the inequalities that market economies sometimes produce

Mixed economy
 exhibits the features of both a market economy and a command economy
 it combines state intervention and market mechanisms for achieving production and distribution
 most industries are under private ownership, and entrepreneurs freely establish, own, and operate corporations
 government also control certain functions, such as pension programs, labor regulation, minimum ware levels, and
environmental regulation
 the state usually funds public education, health care, and other vital services
 there are usually state-owned enterprises in key sectors such as transportation, telecommunications, and energy
 the last century saw a substantial increase in the number of mixed economies and a concurrent rise in government
involvement in economic matters
 France, Germany, japan, Norway, Singapore, Sweden, US

Legal Systems

 provide a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and
organizations, and provide punishments for those who violate these rules and norms
 laws require or limit specific actions, while empowering citizens to engage in certain activities, such as entering into contracts
and seeking remedies for contract violations
 regulations mandate what procedures citizens and firms follow in a given context
 legal systems are dynamic, they evolve to represent each nation’s changing social values and the evolution of their social,
political, economic, and technological environments
 prevailing political systems tend to influence their respective legal systems as well
 democracy: market forces and free trade; laws are widely known and understood, they are legitimate, because applied to all
citizens equally, issued by means of formal procedures applied by recognized government authorities, and enforced
systematically and fairly by police forces and formally organized judicial bodies
 in these countries, a culture of law exists, where citizens consistently respect and follow the rule of law  rule of law = legal
system where rules are clear, publicly disclosed, fairly enforced, and widely respect by individuals, organizations, and the
government
 international business flourishes in those societies where the rule of law prevails 
security for firms conducting business there
 Securities and Exchange Act (US) encourages confidence in business transactions by requiring public companies to
frequently disclose their financial indicator to investors

5 Types of Legal Systems

Primarily Common Primarily Civil Law Primarily Primarily Socialist Mixed Systems
Law Religious Law Law
Australia Much of western Middle East Russia Much of eastern
Ireland Europe and North Africa China Europe
NZ Latin America A few countries in Cuba Philippines
UK Turkey Asia North Korea Puerto Rico
Canada Japan Kazakhstan South Africa
US Mexico Uzbekistan Thailand
India Ukraine Sri Lanka
Pakistan Azerbaijan Ethiopia
Ghana Moldova Hong Kong
Nigeria Tajikistan Bahrain

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Zimbabwe Kyrgyzstan Qatar
Malaysia Singapore
Morocco
Tunisia
Vietnam
Egypt

Common Law
 also known as case law
 originated in England and spread to Australia, Canada, the US,…
 the basis of common law is tradition, past practices, and legal precedents set by the nation’s courts through interpretation of
statutes, legislation, and past rulings
 the national legislature (Parliament in Britain and Congress in the United States) holds ultimate power in passing or
amending laws
 US: because the Constitution is very difficult to amend, the Supreme Court and even lower courts enjoy considerable
flexibility in interpreting the law
 because common law is more open to interpretation by courts, it is more flexible
 judges in a common-law system have substantial power to interpret laws based on the unique circumstances of individual
cases

Civil Law
 also known as code law
 originates from Roman law and the Napoleonic Code
 based on an all-inclusive system of laws that have been codified – clearly written an accessible
 civil law divides the legal system into 3 separate codes: commercial, civil, and criminal
 complete as a result of catchall provisions
 rules and principles form the starting point for legal reasoning and administering justice

 bot common law and civil law systems originated in western Europe
 both represent the common values of western Europeans
 a key difference between the 2 systems is that common law is primarily judicial in origin and based on court decisions,
whereas civil law is primarily legislative in origin and is based on laws passed based on laws passed by national and local
legislatures
 they pose various differences for international business  see exhibit on page 170
 the two systems contain element of each other

Religious Law
 strongly influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being
 the most important religious legal systems are based on Hindu, Jewish, and Islamic law
 the most widespread is Islamic law  Middle East, North Africa, Indonesia
o derived from interpretations of the Qur’an and teachings of the Prophet Mohammed
o also knows as shariah
o Islamic law is nonsecular – adherents do not differentiate between religious and secular life
o it governs relationships among people, between people and the state, and between people and a supreme being  it
encompasses all possible human relationships
o static and absolute  evolves little over time
o most Muslim countries maintain a dual system, where both religious and secular courts coexist

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 o traditional views of religious law are opposed by modern liberal movements within Islam  strict interpretation of
Islamic law prohibits interest on loans and investments
o Indonesia, Bangladesh, and Pakistan: secular constitutions and laws
o Turkey: strongly secular constitution
o Saudi Arabia, Iran: religious courts have authority over all aspects of jurisprudence

Socialist law
 mainly found in the independent states of the former Soviet Union, China, and a few states in Africa
 based on civil law with elements of socialist principles that emphasize state ownership of property
 rights of the state are emphasized over those of the individual
 property and intellectual property rights are seen more loosely
 is gradually becoming westernized  China and former Soviet countries are adopting free-market principles  their legal
systems increasingly incorporate additional elements of civil law

Mixed Systems
 a variation of 2 or more legal systems operating together
 in the process of evolving, legal systems adopt elements of one systems or another that reflect their unique needs
 the contrast between civil and common law has become particularly blurred as many countries combine both systems
 Eastern Europe: civil law & socialist law
 Lebanon, Morocco, and Tunisia: code law & Islamic law

 linkage between legal systems and political systems

o socialism – socialist law, but may include elements of common law and civil law
o totalitarianism – religious law and socialist law
o democracy – common law, civil law, mixed systems and sometimes socialist law
 democracy tends to be views as a flexible political system

5 Actors in Political and Legal Systems

1. Government

 government = public sector

 most important actor, operating at national, state, and local levels
 have the power to enact and enforce laws
 influential in how firms enter host countries and how they conduct business there
 regulate iB activity through the exercise of complex systems of institutions, agencies, and public officials
 e.g. in the Us: Trade Representative and the International Trade Administration
 Canada: Ministry of Foreign Affairs, Ministry of Finance, Export and Import Controls Bureau

2. International Organizations, Regional Trade Organizations

 regional trade organizations  EU, NAFTA, ASEA aim to advance the economic and political interests of their members
 Regional economic integration refers to the growing economic interdependence that results when two or more countries within a
geographic region form an alliance whose goal is to reduce barriers to trade and investment
 EU: especially well developed, with its own executive, legislative, and bureaucratic bodies
 EU enacts and enforces laws and regulations that directly affect business

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 .
3. Special Interest Groups

 serve the interests of particular countries, industries, or causes

 e.g. OECD supports the economic developmental and business goals of advanced economies; OPEC powerful cartel that
controls global oil prices (Saudi Arabia, Kuwait, Iran, Venezuela, Nigeria, and Indonesia)
 engage in political activity to advance specific cause
 often influence national political processes and produce outcomes with fair-reaching consequences for many businesses
 many groups target particular industries and affect individual firms
 operate not only in host countries but also in the home country
 4. Competing Firms

 rival domestic firms with a strong presence in the host

country naturally have an interest in opposing the entry
of foreign firms into the local market and may lobby
their government for protection
 e.g. host-country competitors often complain when
foreign firms receive financial support from the parent or
host-country governments

Types of Country risk Produced by the Political System

1) Government Takeover of Corporate Assets

 confiscation = seizure of foreign assets without compensation

 expropriation = seizure of corporate assets with compensation. Creeping, when laws are made after one made a big investment
 nationalization = government takeover of not a firm but an entire industry, with or without compensation
 in recent decades, numerous governments have engaged in privatization, the selling of state-owned enterprises to private
interests
 most with natural resources, utilities, manufacturing

2) Embargoes and Sanctions

 most countries are signatories to international treaties and agreements that specify rules, principles, and standards of
behavior in international business
 governments may unilaterally resort to sanctions and embargoes to respond to offensive activities of foreign countries
 sanctions = is a type of trade penalty imposed on one or more countries by one or more other countries. tariffs, trade
barriers, import duties, and import or export quotas. Often don’t end in desired outcome
 embargoes = official bans on exports or imports of specific products or specific modes of transport with particular
countries
o often issued during wartime or in the wake tensions between nations
o amount to regulations that forbid trade in specific goods with specific countries
o US against Cuba, Iran and North Korea, because of terrorism
o EU against Belarus, Sudan and China, because of human rights and weapon- trading violations

3) Boycotts against Firms or Nations

 consumers and special interest groups occasionally target particular firms perceived to have harmed local interest
 boycott = voluntary refusal to engage in commercial dealings with a nation or a company. result: lost sales and
increased costs related to PR in order to improve the firm’s image

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4) War, Terrorism, Insurrection, and Revolution

 pose big problems for business operations

 Terrorism is the threat or actual use of force or violence to attain a political goal through fear, coercion, or intimidation (transport and
retail affected)
 do not affect companies directly, but their indirect effects can be disastrous
 in order to minimize losses  war risk insurance

Types of Country Risk Produced by the Legal System

 commercial law is relevant to international business, since it covers business transaction

 and private law, which regulates relationships between persons and organizations (contracts, liabilities that may arise due
to negligent behavior)
 in many countries, the legal system favors home-country nationals Country Risk Arising from the Host

Country Legal Environment

1. Foreign Investment Laws

 affect the type of entry strategy firms choose, as well as their operations and performance
 e.g. restrictions on inward FDI

2. Controls on operating forms and practices

 how firms should conduct production, marketing, and distribution activities
 such restrictions may reduce firms’ efficiency and effectiveness
 e.g. host countries may require companies to obtain permits to import or export, may devise complex regulations that
complicate transportation and logistical activities or limit the options for entry strategies
 China’s telecommunications market: foreign investors have to seek JV with local firms

3. Marketing and distribution laws

 determine which practices are allow in advertising, promotion, and distribution
 e.g. Finland, France, Norway, NZ: no cigarette advertising on TV
 Germany: no comparative advertising
 many countries cap the pricing of critical goods and services (food, health care)
 product safety and liability laws hold manufacturers and sellers responsible for damage, injury, or death caused by defective
products
 product liability laws are generally weak in developing countries  some firms take advantage of these weaknesses

4. Laws regarding income repatriation

 companies seek ways to transfer funds back to their home country  some countries devise laws that restrict such transfer

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  often taken to preserve hard currencies, €, $ or yen
 limit the amount of net income or dividends that firms can remit to their headquarters
 such constraints often discourage inward FDI

5. Environmental laws
 laws to preserve natural resources, to combat pollution and the abuse of air, earth, and water resources, and to ensure health
and safety
 e.g. recycling regulations in Germany  recycling product packaging = burden for manufacturers and distributors
 governments attempt to balance environmental laws against the impact that such regulations may have on employment,
entrepreneurship, and economic development

6. Contract laws
 rights, duties, and obligations for the contracting parties
 contracts are used in 5 main types of business transactions
1. sale of goods or services, especially large sales
2. distribution of the firm’s products through foreign distributors
3. licensing and franchising
4. FDI, especially where this is done in collaboration with a foreign entity, in order to create and operate a foreign subsidiary
5. JV and other types of cross-border collaborations
 some convergence is occurring toward an international standard for international sales contracts
 Convention on Contracts for the International Sale of Goods (CISG), 1980, UN: a uniform text of law for international
sales contracts
o more than 70 countries are party to the CISG
o covering about ¾ of all world trade
o supersedes applicable domestic law regarding international sales transactions (Vorrang!)

6. Internet and e-commerce regulations

 new frontier in legal systems
 still evolving
 firms that undertake e-commerce in countries with weak laws face considerable risk
 China: many consumer-privacy laws have yet to be enacted, and progress has been delayed on the development of methods to
protect private data from criminal or competitive eyes; protection for online contracting methods have been implemented with
the recent adoption of e-signature laws

7. inadEqUatE OR UndERdEVELOPEd LEGaL SyStEMS

- safeguards for intellectual property are often inadequate. Regulations to protect intellectual property may exist on paper but not be
adequately enforced
- firms abandon JV or investments (ex Russia)
- developing & developed countries
- financial crises emerged partly from it
- banks/ govs are looking to be more transparent  not more, rather more intelligent regulations & better supervision

Country Risk Arising from the Home-Country Legal Environment

 extraterritoriality = application of home-country laws to persons or conduct outside of national borders
 Patriot Act = authorizing the US government to seize funds held by non-US banks in the US
 businesses generally oppose extraterritoriality because it increases transaction costs and compliance and regulatory costs, and
causes considerable uncertainty

The Foreign Corrupt Practices Act (FCPA)

 illegal for a firm to offer bribes to foreign parties for the purpose of securing or retaining business
 requires firms with securities listed in the Us to meet its accounting provisions
 definition of a bribe is not clearly specified in the FCPA  the act draws a distinction between bribery and facilitation
payments
 many countries do not have antibribery laws for international transactions
 US manager argue that the FCPA harms their interests, and competitors are not constrained
 firms can be fined up to $2 million, individuals up to $ 100.000 and face imprisonment

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 Antiboycott regulations
 these home-country regulations prevent companies from participating in restrictive trade practices or boycotts imposed by
foreign countries against other countries
 firms are not allowed to participate in boycotts to the extent they discriminate against others on the basis of race, religion,
gender, or national origin
 e.g. the antiboycott regulations passed by the US Congress in 1977 effectively prohibit US firms from participating in the
boycott of Israel when operating in these Arab nations

Accounting and reporting laws

 differ greatly around the world
 these differing standards pose difficulties for firms, but can create opportunities as well
 e.g. valuing asset at lower of cost or market, or use historical cost,…

Transparency in financial reporting

 timing and transparency of financial reporting vary widely around the world
 transparency = degree to which firms regularly reveal substantial information about their financial condition and accounting
practices
 e.g. in the US, public firms are required to report financial results to stockholders and to the Securities and Exchange
Commission every quarter
 greater transparency improves the environment for business decision making and the ability of citizens to hold companies
accountable
 Recently, the U.S. Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act,
o to increase transparency in the United States financial sector.
o oversight board that monitors banking activities.
o reduces financial risk-taking by restricting certain banking activities and requiring bank executives to be responsible for compliance.
o To avoid rigid financial requirements, some European banks are reducing their banking activities in the United States.
Recently, the EU introduced the Basel III global regulatory standard,  increases the quality and transparency of the capital base of
European banks. U.S. banks will be required to comply with the new Basel III

Managing Country Risk

 country risk is more common in nations with substantial government intervention, but can occur everywhere
 seasoned managers attempt to anticipate and systematically manage country risk
 they take proactive measures to minimize harmful exposure and adverse effects Proactive Environmental Scanning

1. advance research. managers develop a comprehensive understanding of the political and legal environment in target
countries
2. scanning to asses potential risks
3. sources: employees working in the host country, embassy, trade association officials, consulting firms, Business
Entrepreneurial Risk Intelligence
4. it then develops and implements strategies to facilitate effective management of relations with policymakers and other helpful
contacts in the host country
5. the firm then take steps to minimize its exposure to country risk that threaten its performance

Strict Adherence to Ethical Standards

 helps insulate the firm from some country risks that other firms otherwise encounter
 companies that engage in questionable practices, or operate outside the law, naturally invite redress from the governments of
the host countries where they do business
 improving ethical business standards  CSR = operating a business in a manner that meets or exceeds the ethical, legal,
commercial, and public expectations of stakeholders
 firms should behave not just to maximize their profits but in ways that benefit society. corporations should be good citizens
 behaving responsibly: complying with local and international laws, not discriminating in hiring or promoting, providing fair
and adequate wages, ensuring health and safety in the workplace, instituting a fair system of regular and overtime work hours,
avoiding the use of child labor, and providing adequate protection of the environment

Allying with Qualified Local Partners

 qualified partners are better informed about local conditions and better situated to establish stable relations with the local
government e.g. in China, Russia

Protection through Legal Contracts

 rights and obligation of each party and is especially important when relationships go awry
 contract law varies widely from country to country
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 3 approaches to resolve international contractual disputes
o conciliation:
 the least adversarial method
 formal process of negotiation whose objective is to resolve differences in a friendly manner
 parties in a dispute employ a conciliator, who meets separately with each
 parties can also employ mediation committees (groups of informed citizens) to resolve civil disputes
o Arbitration:
 process in which a neutral third party hears both sides of a case and decides in favor of one party or the other,
based on an objective assessment of the fact
 saves time and expense, while maintain the confidentiality of proceeding
 is often handled by supranational organizations, such as the International Chamber of Commerce in Paris or the
Stockholm Chamber of Commerce
o Litigation:
 most adversarial approach
 occurs when one party files a lawsuit against another in order to achieve desired ends
 most common in the US, but is eschewed (avoided) in most other countries, typically in favor of arbitration of
conciliation

Safeguarding Intellectual Property Rights

 intellectual property = industrial property & copyrights

o industrial property = patents, inventions, trademarks, and industrial design
o copyrights = works of literature, music, art, books, films, TV shows
 basis of firm’s competitive advantage and long-term performance
 companies go to great expense to protect their intellectual assets in order to maintain their ability to develop and offer
competitive products to customers
 government’s safeguards: patents confer the exclusive right to manufacture, use, and sell products or processes
 copyright laws protect music, published work, and certain types of software
 trademarks remain in force for many years from their date of registration
 WTO and other organizations have devised strict standards for IP protection such as the International Convention for the
Protection of Industrial Property Rights and the Burton Convention for the Protection of Literary and Artistic Works
 intellectual property rights = the legal claim through which the proprietary assets of firms and individuals are protected
from unauthorized use by other parties
 the protection of intellectual property rights is not guaranteed in much of the world
 laws enacted in one country are enforceable only within that country  no protection aboard
 many countries are not member of WIPO (World Intellectual Property Organization) or other treaty organizations
 practical mechanisms for ensuring protection may be lacking or poorly enforced
 individual country laws and practices differ widely  firms risk local loss of their property and a decline in the value that such
holding provide
 protection of IP rights is a perennial problem, especially for companies that internationalize through FDI, licensing, and
collaborative modes
 particularly susceptible are firms in the pharmaceuticals, software, publishing and music industries
 companies may file for protection under the Paris Convention for the Protection of Industrial Property (international agreement
intended to protect proprietary assets in many countries simultaneously, but the protection is limited)
 firms must apply for protection on a country-by-country basis

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 the nature and enforcement of patent, trademark and copyright laws depend on national laws, administrative practices,
and treaty obligations
 enforcement is a big challenge and depends on the attitude of local courts and law enforcement agencies

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