Chapter1:

THE ROLE OF TECHNOLOGICAL CHANGE

Lower transportation costs:
• Make a geographically dispersed production system more economical
• Allow firms to better respond to customer demands
• Low-cost communications networks help create electronic global marketplaces
Low-cost transportation:
 Enables firms to create global markets
 Facilitates the movement of people promoting a convergence of consumer
tastes and preferences

Changing World Output and World Trade Picture

In the early 1960s:
➤ U.S. - dominant industrial power accounting for about 38.3% of world
manufacturing output
By 2011:
➤ U.S. accounted for only 23.1%
➤ Other developed nations experienced a similar decline
➤ Rapid economic growth now in countries like China, India, and Brazil
➤ Further relative decline by the U.S. is likely so companies may find both new
markets and new competitors in the developing regions of the world

Changing FDI Picture

The share of world output generated by developing countries has been steadily
increasing since the 1960s

➤The stock of foreign direct investment (total cumulative value of foreign

investments) generated by rich industrial countries is declining
➤Cross-border flows of foreign direct investment are rising
➤The largest recipient of FDI is China
A multinational enterprise is any business that has productive
activities in two or more countries
Since the 1960s:
➤ There has been a rise in non-U.S. multinationals
➤ There has been a rise in mini multinationals
Small and medium-size firms are now expanding internationally
➤ Easier to build international sales via the Internet

The Changing World Order

The collapse of communism in Eastern Europe
➤ Export and investment opportunities
Economic development in China
➤ Huge opportunities despite continued government control
Free market reforms and democracy in Latin America
➤ New markets and new sources of materials and production

THE GLOBAL ECONOMY IN THE 21ST CENTURY

A more integrated global economy
➤New opportunities for firms
➤ But political and economic disruptions can throw plans into disarray

The Emergence of Global Institutions

Global institutions:
➤ Manage, regulate, and police the global marketplace
➤ Promote the establishment of multinational treaties to govern the global business
system

The World Trade Organization (WTO) - polices world trading system

and ensures nations adhere to the rules established in WTO treaties. In 2012, its
155 members accounted for 97% of world trade
The International Monetary Fund (IMF) maintains order in the
international monetary system

The World Bank - promotes economic development

The United Nations (UN)

➤ Maintains international peace and security
➤ Develops friendly relations among nations
➤ Cooperates in solving international problems
➤ Promotes respect for human rights
➤ Is a center for harmonizing the actions of nations international trade occurs when
a firm exports goods or services to consumers in another country

DECLINE TRADE AND INVESTMENT BARRIERS

International trade occurs when a firm exports goods or services to consumers in
another country.

Chapter2:

Political Systems
- the system of government in a nation
Political systems can be assessed in terms of the degree to which they:
➤ Are democratic or totalitarian
➤ Emphasize collectivism as opposed to individualism

Collectivism and Individualism

Collectivism
- a system that stresses the primacy of collective goals over individual goals
➤ Can be traced to the Greek philosopher Plato
➤Today, socialists support collectivism
-When collectivism is emphasized, the needs of the society as whole are generally
viewed as being more important than individual freedoms

Socialism
Modern socialists trace their roots to Karl Marx
➤ Advocated state ownership of the basic means of production, distribution, and
exchange
➤The state then manages the enterprises for the benefit of society as a whole
In the early 20th century, socialism split into communists and social democrats:
➤Communists - collectivism could only be achieved though revolution and
totalitarian dictatorship ➤ Social democrats worked to achieve the same goals by
democratic means
Many state-owned enterprises failed to succeed, and today, many nations are
implementing privatization programs

Individualism

- suggests individuals should have freedom over their economic and political
pursuits
➤ Can be traced to Aristotle who argued that individual diversity and private
ownership are desirable
Individualism stresses:
➤ Individual freedom and self-expression
➤ Letting people pursue their own self-interests to achieve the best overall good for
society
➤ Democratic systems and free markets

Democracy and Totalitarianism

In most totalitarian regimes:

➤There is widespread political repression
➤There are no free and fair elections
➤Media is censored
➤ Basic civil liberties are denied
➤Challenges to the regime are prohibited

There are four major forms of totalitarianism today:

1. Communist totalitarianism: advocates achieving socialism through

totalitarian dictatorship

2. Theocratic totalitarianism: political power is monopolized by a party, group,

or individual that governs according to religious principles

3. Tribal totalitarianism: a political party that represents the interests of a

particular tribe monopolizes power

4. Right wing totalitarianism: individual economic freedom is allowed but

individual political freedom is restricted in the belief that it could lead to
communism

Economic Systems

Political ideology and economic systems are connected

the market economy, the

There are three types of economic systems:
command economy, and the mixed economy
➤ A free market system is likely in countries where individual goals are given
primacy over collective goals
➤State-owned enterprises and restricted markets are common in countries where
collective goals are dominant

Market Economy
On a pure market economy the goods and services that a country produces, and the
quantity in which they are produced is determined by supply and demand
➤Consumers, through their purchases, determine what is produced and in what
quantity
➤The role of government is to encourage free and fair competition between private
producers
Command Economy
On a pure command economy, the goods and services that a country produces, the
quantity in which they are produced, and the price at which they are sold are all
planned by the government
➤All businesses are state owned, and so have little incentive to control costs and be
efficient ➤Because there is no private ownership, there is little incentive to better
serve consumer needs

Mixed Economy
A mixed economy includes some elements of a market economy and some
elements of a command economy
➤Governments tend to take over troubled firms that are vital to national interests
The number of mixed economies in the world today is falling

Legal Systems
The legal system of a country refers to the rules, or laws, that regulate behavior,
along with the processes by which the laws of a country are enforced and through
which redress for grievances is obtained
A country's legal system is important because laws:
➤ Regulate business practice
➤ Define the way business transactions are to be executed
➤ Set down the rights and obligations of those involved in business transactions

Different Legal Systems

There are three main types of legal systems:
1. Common law - based on tradition, precedent, and custom
➤ Found in most of Great Britain's former colonies, including the United States
2. Civil law - based on a very detailed set of laws organized into codes
➤ Found in over 80 countries, including Germany, France, Japan, and Russia
3. Theocratic law - based on religious teachings
 ➤ Islamic law is the most widely practiced

Differences in Contract Law

Question:
How do common law and civil differ?
The two-systems approach contract law (the body of law that governs contract
enforcement) in different ways
➤ A contract - specifies the conditions under which an exchange is to occur and
details the rights and obligations of the parties involved
In a common law state, contracts are very detailed with all contingencies spelled
out
In a civil law state, contracts are shorter and much less specific

Property Rights and Corruption

Property rights
- the legal rights over the use to which a resource is put and over the use made of
any income that may be derived from that resource
Property rights can be violated by:

➤ Private action (theft, piracy, blackmail, and the like by private individuals or
groups

➤ Public action (public officials extort income or resources from property

holders)
➤ Excessive taxation, requiring expensive licenses or permits from property
holders, or taking assets into state ownership without compensating the owners

Corruption is present in all countries to some degree, however when a country has
a high level of corruption:
➤ Foreign direct investment falls
➤International trade falls
➤ Economic growth falls
The Foreign Corrupt Practices Act limits corruption in the U.S
 ➤It is illegal to bribe a foreign government official to obtain or maintain business
over which the foreign official has authority
➤All publicly traded companies must keep detailed records so that it is clear
whether a violation of the act has occurred
➤ Facilitating or expediting payments to secure the performance of routine
government actions are permitted

The Protection of Intellectual Property

Intellectual property
- property that is the product of intellectual activity
Intellectual property rights include:
➤ Patents - give the inventor exclusive rights to the manufacture, use, or sale of
that invention
➤ Copyrights - exclusive legal rights of authors, composers, playwrights, artists, and
publishers to publish and dispose of their work as they see fit
➤ Trademarks - designs and names, often officially registered, by which merchants
or manufacturers designate and differentiate their products

The Protection of Intellectual Property

The protection of intellectual property rights differs greatly from country to country
➤Paris Convention for the Protection of Industrial Property agreement signed by 170
countries to protect intellectual property rights
➤Trade Related Aspects of Intellectual Property Rights (TRIPS) - requires WTO
members to grant and enforce patents lasting at least 20 years and copyrights
lasting 50 years

Product Safety and Product Liability

Product safety laws set certain safety standards to which a product must adhere
Product liability involves holding a firm and its officers responsible when a product
causes injury, death, or damage
➤Liability laws are usually least extensive in less developed countries
Implications for Managers
Question: What are the implications of the political
economy for international businesses?

Answer: • The political, economic, and legal systems of a country raise

important ethical issues that have implications for the practice of international
business

CHAPTER 4:
Cross-cultural literacy
- an understanding of how cultural differences across and within
nations can affect the way in which business is practiced
There may be a relationship between culture and the costs of doing
business in a country or region
Culture is not static

Values and Norms

Values
- provide the context within which a society's norms are established
and justified
Norms
- the social rules that govern the actions of people toward one
another
➤Folkways - the routine conventions of everyday life
➤Mores - norms that are seen as central to the functioning of a
society and to its social life
Culture, Society, and the Nation-
State
Society
- a group of people who share a common set of values and norms
➤Nation- states are political creations that can contain a single
culture or several cultures
➤ Some cultures embrace several nations

Determinants of Culture
The values and norms of a culture evolve based on:
➤ Prevailing political and economic philosophies
➤ A society's social structure
➤The dominant religion, language, and education

Social Structure
A society's social structure is its basic social organization
Two dimensions to consider:
➤The degree to which the basic unit of social organization is the
individual, as opposed to the group
➤The degree to which a society is stratified into classes or castes

Individuals and Groups

Group
- an association of two or more individuals who have a shared sense
of identity and who interact with each other in structured ways
based on a common set of expectations about each other's behavior
➤Groups are common in many Asian societies
➤ Many Western countries emphasize the individual

In societies where the individual is dominant:

➤Individual achievement and entrepreneurship are promoted
➤ Encourages job switching, competition between individuals rather
than team building, and a lack of loyalty to the firm

In societies where the group is dominant:

➤Cooperation and teamwork are encouraged and lifetime
employment is common ➤Individual initiative and creativity may be
suppressed

Social Stratification
All societies are stratified on a hierarchical basis into social
categories, or social strata
➤ Usually defined by characteristics such as family background,
occupation, and income
Societies differ in terms of:
➤The degree of mobility between social strata
➤The significance attached to social strata in a business context

Social mobility
- the extent to which individuals can move out of the strata into
which they are born ➤Caste system - social position is determined
by the family into which a person is born, and change in that
position is unlikely
➤Class system - the position a person has by birth can be changed
through achievement or luck
Religious and Ethical Systems

Religion
- a system of shared beliefs and rituals that are concerned with the
realm of the sacred
Religions with the greatest following are:
➤ Christianity (1.7 billion adherents)
➤ Islam (1 billion adherents)
➤ Hinduism (750 million adherents)
➤ Buddhism (350 million adherents)
➤ Confucianism shapes culture in many parts of

Asia Religious and Ethical Systems

Ethical systems
- a set of moral principles, or values, that are used to guide and
shape behavior
➤The ethical practices of individuals within a culture are often
closely intertwined with their religion

Christianity

Christianity is the most widely practiced religion

Question: What are the economic implications of Christianity?
Answer: In 1904, Max Weber suggested that it was the Protestant
work ethic (focus on hard work, wealth creation, and frugality) that
was the driving force of capitalism

Islam
Islam is an all-embracing way of life that governs one's being
➤ One true omnipotent God
Question: What is Islamic fundamentalism?
Answer: In the Western media, Islamic fundamentalism is associated
with militants, terrorists, and violent upheavals

Hinduism

Hinduism - focuses on the importance of achieving spiritual growth

and development, which may require material and physical self-
denial
Question: What are the economic implications of Hinduism?
Answer: Hindus are valued by their spiritual rather than material
achievements
Promotion and adding new responsibilities may not be the goal of
an employee, or may be infeasible due to employee's caste

Buddhists

- stress spiritual growth and the afterlife, rather than achievement

while in this world Question: What are the economic implications of
Buddhism?
Answer: Buddhism does not support the caste system, so individuals
do have some mobility and can work with individuals from different
classes
➤ Entrepreneurial activity is acceptable

Confucianism

- attain personal salvation through right action

Question: What are the economic implications of Confucianism?
Answer: Three key teachings of Confucianism - loyalty, reciprocal
obligations, and honesty - may all lead to a lowering of the cost of
doing business in Confucian societies

Language

Countries differ in terms of language or means of communication

There are two forms language:
➤ Spoken
➤ Unspoken
Language is one of the defining characteristics of culture

Spoken Language
Countries with more than one spoken language often have more
than one culture
➤ Chinese is the mother tongue of the largest number of people in
the world
➤ English is the most widely spoken language in the world, and is
becoming the language of international business

Unspoken Language
Unspoken language - nonverbal cues
➤ Examples include facial expressions and hand gestures
➤ Can be important for communication
Many nonverbal cues are culturally bound and because they may be
interpreted differently, can result in misunderstandings

Education
Formal education is the medium through which individuals learn
many of the language, conceptual, and mathematical skills that are
indispensable in a modern society
The knowledge base, training, and educational opportunities
available to a country's citizens can also give it a competitive
advantage in the market and make it a more or less attractive place
for expanding business
The general education level of a country is a good indicator of the
types of products that might sell in that location or the type of
promotional materials that might be successful

Cultural Change
Culture evolves over time, although changes in value systems can
be slow and painful for a society
➤ Social turmoil is an inevitable outcome of cultural change
➤Cultural change is particularly common as countries become
economically stronger

Culture and the Workplace

Question: How does a society's culture impact on the values found
in the workplace? Answer: Geert Hofstede isolated four dimensions
that summarized different cultures 1. Power distance
2. Individualism versus collectivism
3. Uncertainty avoidance
4. Masculinity versus femininity

Culture and the Workplace

1. Power distance - how a society deals with the fact that people are
unequal in physical and intellectual capabilities
2. Individualism versus collectivism - the relationship between the
individual and his or her fellows
3. Uncertainty avoidance - the extent to which different cultures
socialize their members into accepting ambiguous situations and
tolerating ambiguity
4. Masculinity versus femininity - the relationship between gender
and work roles
Hofstede added Confucian dynamism - captures attitudes towards
time, persistence, ordering by status, protection of face, respect for
tradition, and reciprocation of gifts and favors

CHAPTER 5:
International trade theory:
➤ Explains why it is beneficial for countries to engage in international trade
➤ Helps countries formulate their economic policy
➤ Explains the pattern of international trade in the world economy
Overview of Trade Theory
Question: What is free trade?
Answer: Free trade refers to a situation where a government does not
attempt to influence through quotas or duties what its citizens can buy from
another country or what they can produce and sell to another country

The Benefits of Trade

Question: Why is it beneficial for countries to engage in free trade?
Answer: International trade allows a country to:
• Specialize in the manufacture and export of products that can be produced
most efficiently in that country
• Import products that can be produced more efficiently in other countries

Pattern of International Trade

Ricardo's theory of comparative advantage

➤ Trade patterns reflect differences in labor productivity
Heckscher and Ohlin
 ➤ Trade reflects the interplay between the proportions in which the factors
of production are available in different countries and the proportions in which
they are need for producing goods
Ray Vernon
➤ Trade patterns reflect a product's life cycle
Paul Krugman's new trade theory
➤The world market can only support a limited number of firms in some
industries
➤Trade will skew toward those countries that have firms that were able to
capture first mover advantages
Michael Porter's Diamond
➤ Country factors explain a nation's dominance in the production and export
of certain products

Implications for Managers

Question: What are the implications of international trade theory for
international businesses?
Answer: There are at least three main implications for international
businesses
1. Location implications
2. First-mover implications
3. Policy implications

Trade Theory and Government Policy

Mercantilism makes a case for government involvement in promoting

exports and limiting imports
Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade
New trade theory and Porter justify limited and selective government
intervention to support the development of certain export- oriented
industries
Mercantilism

Mercantilism (mid-16th century)

- it is in a country's best interest to maintain a trade surplus - to export more
than it imports ➤ Advocated government intervention to achieve a surplus in
the balance of trade ➤Viewed trade as a zero-sum game (one in which a gain
by one country results in a loss by another

Absolute Advantage

Smith (1776)
- countries differ in their ability to produce goods efficiently
A country has an absolute advantage in the production of a product when it
is more efficient than any other country in producing it
According to Smith:
➤ Trade is not a zero-sum game
➤ Countries should specialize in the production of goods for which they have
an absolute advantage and then trade these goods for the goods produced
by other countries

Comparative Advantage

Ricardo (1817)
- what happens when one country has an absolute advantage in the
production of all goods?
Proposed the theory of comparative advantage
➤A country should specialize in the production of those goods that it
produces most efficiently and buy the goods that it produces less efficiently
from other countries
The Gains from Trade

The theory of comparative advantage - trade is a positive sum game in which

all gain ➤Potential world production is greater with unrestricted free trade
than it is with restricted trade
➤ Provides a strong rationale for encouraging free trade

Qualifications and Assumptions

The simple example of comparative advantage assumes:

➤ Only two countries and two goods
➤Zero transportation costs
➤Similar prices and values
➤ Resources are mobile between goods within countries, but not across
countries ➤Constant returns to scale
➤ Fixed stocks of resources

New Trade Theory

New trade theory (1970s) suggests:

1. Trade can increase the variety of goods available and decrease the
average cost of those goods because of economies of scale (unit cost
reductions associated with a large scale of output)
2. When the output required to attain economies of scale represents a
significant proportion of total world demand, the global market may only be
able to support a small number of firms

Increasing Product Variety and Reducing Costs

Without trade

➤ A small nation may not be able to support the demand necessary for
producers to realize required economies of scale, and so certain products
may not be produced

With trade
➤ A nation may be able to specialize in producing a narrower range of
products and then buy the goods that it does not make from other countries
➤ Each nation then simultaneously increases the variety of goods available
to its consumers and lowers the costs of those goods

Economies of Scale and First Mover Advantages

Firms with first mover advantages (the economic and strategic advantages
that accrue to many entrants into an industry) will develop economies of
scale and create barriers to entry for other firms
➤The pattern of trade we observe in the world economy may be the result of
first mover advantages and economies of scale

Implications of New Trade Theory

New trade theory suggests

Nations may benefit from trade even when they do not differ in resource
endowments or technology
A country may predominate in the export of a good simply because it was
lucky enough to have one or more firms among the first to produce that good
So, new trade theory provides an economic rationale for a proactive trade
policy that is at variance with other free trade theories

THE PORTER’S DIAMOND

Factor Endowments

(factors of production) can lead to competitive advantage

➤Can be either basic or advanced
➤ Basic factors can provide an initial advantage that is extended by
investment in advanced factors

Demand Conditions
- the nature of home demand for an industry's product or service
Influence the development of capabilities
Sophisticated and demanding customers pressure firms to be more
competitive and to produce high quality, innovative products

Related and supporting industries

- the presence of supplier industries and related industries that are

internationally competitive
➤Investing in these industries can spill over and contribute to success in
other industries

Firm Strategy, Structure, and Rivalry

Firm strategy, structure, and rivalry

- the conditions in the nation governing how companies are created,
organized, and managed, and the nature of domestic rivalry
➤There is a strong association between vigorous domestic rivalry and the
creation and persistence of competitive advantage in an industry

CHAPTER 3:
Differences of Economic Development
A country's level of economic development affects its attractiveness as a
possible market or production location for firms
➤A common measure is gross national income (GNI)
➤A purchasing power parity (PPP) adjustment provides a more direct
comparison of living standards in different countries

Broader Conceptions of Development

Amartya Sen - development should be assessed less by material output and

more by the capabilities and opportunities that people enjoy
The United Nations created the Human Development Index based on life
expectancy, education attainment, and whether average incomes are
sufficient to meet the basic needs of life in a country
Question: What is the relationship between political economy and economic
progress?
Answer: Economic freedom in a market economy creates greater incentives
for innovation and entrepreneurship than in either a planned or mixed
economy

Innovation and Entrepreneurship are the Engines of

Growth

For a country to sustain long term economic growth, the business

environment needs to be conducive to innovation and entrepreneurial
activity
Innovation
- new products, new processes, new organizations, new management
practices, and new strategies
-Entrepreneurs first commercialize innovative new products and processes
Innovation and Entrepreneurship Require a Market
Economy

Countries with high economic freedom have high economic growth and
richer citizens ➤Hong Kong, Singapore, the U.S., Canada, and Germany
Countries that lack economic freedom also fail to achieve respectable
economic growth

Innovation and Entrepreneurship Require Strong

Property Rights

Strong legal protection of property rights is another requirement for a

business environment conducive to innovation, entrepreneurship, and
economic growth ➤Individuals and businesses must have the opportunity to
profit from innovative ideas

The Required Political System

Democratic regimes tend to be more conducive to long-term economic

growth than dictatorships even the benevolent kind
➤ Limiting human freedom also suppresses human development and
therefore limits progress

Economic Progress Begets Democracy

Democracy is often a consequence of economic growth
➤ South Korea and Thailand
This has contributed to the attitude of many Western governments towards
human rights violations in China
➤ If China establishes a free market system, it is hoped that greater
individual freedom and democracy will follow

Geography, Education, and Economic Progress

Other factors influencing a country's rate of economic development include:

1. Geography
- influences economic policy, and thus economic development
➤ Countries with favorable geography are more likely to engage in trade
which can promote economic growth
2. Education levels
➤ Countries that invest more in the education of their young people
develop faster economically

States in Transition

Since the late 1980s, a wave of democratic revolutions has swept the
world, and many of the previous totalitarian regimes collapsed
There has been a move away from centrally planned and mixed
economies towards free markets

The Spread of Democracy

Democracy has spread to new countries because:

Many totalitarian regimes failed to deliver economic progress to the
majority of their population
New information and communication technologies have broken down the
ability of the state to control access to uncensored information
Economic advances of the last quarter century have led to the emergence
of increasingly prosperous middle and working classes who have pushed
for democratic reforms

The New World Order and Global Terrorism

The end of the Cold War and the "new world order" that followed the
collapse of communism in Eastern Europe and the former Soviet Union,
taken together with the collapse of many authoritarian regimes in Latin
America, have given rise to intense speculation about the future shape of
global geopolitics
Geopolitical forces can affect how companies operate in certain countries

The Spread of Market-Based Systems

Since the late 1980s there has been a transformation from centrally
planned command economies to market-based economies
➤Command and mixed economies failed to deliver the sustained
economic performance achieved by countries that had adopted market-
based systems
➤ Many countries shifted to a market-based system

THE NATURE OF ECONOMIC

TRANSFORMATION

The shift toward a market-based economic system involves:

1. Deregulation
2. Privatization
3. The creation of a legal system to safeguard property rights
Deregulation

Deregulation
– involves removing legal restrictions on the free play of markets, the
establishment of private enterprises, and the way private enterprises
operate
Removing price controls
Abolishing laws limiting private enterprise
Removing restrictions on foreign investment and trade

Privatization

Privatization
- transfers the ownership of state property into the hands of private
investors
Because private investors are motivated by potential profits to increase
productivity, privatization should increase economic efficiency
Privatization efforts are more successful when they are accompanied by
more general deregulation and opening of the economy

LEGAL SYSTEM
Market economies require a well-functioning legal system
➤It should protect property rights and the machinery to enforce that
system
➤ Many countries have made significant strides toward creating a strong
legal system, but more work is necessary

Implications of Changing Political

Economy Markets that were formerly off-limits to Western business are

now open
➤ China (population of 1.3 billion) could be a bigger market than the U.S.,
the EU, and Japan combined
➤India (population 1.2 billion) is also a potentially huge market
However, just as the potential gains are large, so are the risks