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Block-1.pptxBIN3022-N Global Economics and Business Operations
Lecture 1: International Business
and Globalization
Dr Dongna Zhang
Textbooks for Global Economics
Harrison, A., 2013. Business environment in a global context. Oxford University Press.
Rugman, A.M. and Collinson, S., 2009. International business. Pearson Education.
Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P., 2018. International business: Environments and operations. Pearson Education.
Krugman, P.R., 2008. International economics: Theory and policy. Pearson Education.
Learning Objectives (1 of 2)
1-1 Relate globalization and international business (IB) to each other and explain why their study is important
1-2 Grasp the forces driving globalization and IB
1-3 Discuss the major criticisms of globalization
Learning Objectives (2 of 2)
1-4 Assess the major reasons companies seek to create value by engaging in IB 1-5 Define and illustrate the different operating modes for companies to accomplish their international objectives 1-6 Recognize why national differences in companies’ external environments affect how they may best improve their IB performance
The Globalized Business of sports
Factors in IB Operations
Objective 1-1
Figure 1.1 Factors in IB Operations
Learning Objective 6: Recognize why national differences in companies’ external environments affect how they may best improve their IB performance.
The conduct of a company’s international operations depends on two factors: its objectives and the means by which it intends to achieve them. Likewise,
its operations affect, and are affected by, two sets of factors: physical/social and competitive, as you can see from this chart.
Globalization and IB
Objective 1-1
What is Globalization?
Why Globalization?
The connection between Globalization and IB.
Why study IB?
Learning Objective 1: Relate globalization and international business (IB) to each other and explain why their study is important.
Globalization is the widening and deepening of interdependent relationships among people from different nations. The term sometimes refers to the elimination of barriers to international movements of goods, services, capital, technology, and people that influence the integration of world economies.
Globalization enables us to get more variety, better quality, or lower prices.
The global connections between supplies and markets result from the activities of IB, which are all commercial transactions.
Why study IB? Simply, it makes up a large and growing portion of the world’s business. There is a good chance each and every one of you will be involved in IB in some way or another, depending on the type of companies you work for. Studying IB is important because
• Most companies are either international or compete with international companies.
• Modes of operations may differ from those used domestically.
• It helps managers to decide where to find resources and
to sell.
• The best way of conducting business may differ by country,
• An understanding helps you make better career decisions.
• An understanding helps you decide what governmental policies to support.
The Forces Driving Globalization and IB
Objective 1-2
Globalization
Has been growing.
Is less pervasive than generally thought.
Has economic and noneconomic dimensions.
Is stimulated by several factors.
Learning Objective 2: Grasp the forces driving globalization and IB.
Although hard to measure, Globalization:
• Has been growing.
• Is less pervasive (unwelcome effects are less than what was thought) than generally thought. Fifteen percent of US consumption comes from other countries—many would think this number is much higher.
• Has economic and noneconomic dimensions (such as ease of travel, people to people contacts, use of technology).
• Is stimulated by several factors.
Currently, about a quarter of world production is sold outside its country of origin, compared to about 7 percent in 1950.
Studies beyond economic factors for the driving force of globalization state:
Size of countries—Smaller countries tend to be more globalized than larger ones, mainly because their smaller land masses and populations permit a lower variety of production.
Per capita incomes—Countries with higher per capita incomes tend to be more globalized than those with lower ones because their citizens can better afford foreign products, travel, and communications.
Variance among globalization aspects—Although a country may rank as highly globalized on one dimension, it may be low on another, such as the United States being high on technological scales but low on economic ones.
Case: Dubai Ports World
Factors in increased Globalization
Objective 1-2
Factors in increased Globalization
Rise in and application of technology
Liberalization of cross-border trade and resource movements
Development of services that support IB
Growth of consumer pressures
Increase in global competition
Changes in political situations and government policies
Expansion of cross-national cooperation
Learning Objective 2: Grasp the forces driving globalization and IB
Factors in increased Globalization:
Rise in and application of technology
Many of the proverbial “modern marvels” and efficient means of production have come about fairly recently. These include new products, such as handheld mobile communications devices, as well as new applications of old products, such as Indian guar beans in oil and natural gas mining. Thus, much of what we trade today either did not exist or was unimportant in trade a decade or two ago.
Strides in communications and transportation now allow us to discover, desire, and demand goods and services from abroad.
2. Liberalization of cross-border trade and resource movements
Barriers to trade are reduced. To protect its own industries, every country restricts the entry and exit of not only goods and services but also the resources—workers, capital, tools, and so on—needed to produce them. Such restrictions, of course, set limits on IB activities and, because regulations can change at any time, contribute to uncertainty. Over time, however, most governments have reduced such restrictions, primarily for three reasons:
Their citizens want a greater variety of goods and services at lower prices.
Competition spurs domestic producers to become more efficient.
3. They hope to induce other countries to lower their barriers in turn.
3. Development of services that support IB
Companies and governments have developed services that facilitate global commerce. For example, because of bank credit agreements—clearing arrangements that convert one currency into another and insurance that covers such risks as nonpayment and damage en route—most producers can be paid relatively easily for their sales abroad.
4. Growth of consumer pressures
More consumers know more today about products and services available in other countries, can afford to buy them, and want the greater variety, better quality, and lower prices offered by access to them. However, this demand is spread unevenly because of uneven affluence, both among and within countries as well as from year to year
5. Increase in global competition
Increased competitive pressures can persuade companies to buy or sell abroad. For example, a firm might introduce products into markets where competitors are already gaining sales, or seek supplies where competitors are getting cheaper or more attractive products.
6. Changes in political situations and government policies
Governments support programs, such as improving airport and seaport facilities, to foster efficiencies for delivering goods internationally.
For nearly half a century after World War II, business between Communist countries and the rest of the world was minimal. Today, only a few countries are heavily isolated economically or do business almost entirely within a political bloc. In fact, political changes sometimes open new frontiers, such as diplomatic relations between the United States and Cuba.
7. Expansion of cross-national cooperation
Governments have come to realize that their own interests can be addressed through international cooperation by means of treaties, agreements, and consultation. The willingness to pursue such policies is due largely to these three needs:
1. To gain reciprocal advantages
2. To attack problems jointly that one country acting alone cannot solve
3. To deal with areas of concern that lie outside the territory of any nation
Criticisms of Globalization and IB
Objective 1-3
Threats to sovereignty
Environment
Income equality
Increase to personal stress
Learning Objective 3: Discuss the major criticisms of globalization.
• Countries sovereignty is diminished.
Local objectives and policies may be negatively affected with pressure from globalization. In other words, countries may feel more pressure to confirm to global standards rather than stick with their own objectives and policies.
Smaller economies may have more dependence on larger countries
Cultural homogeneity—that is the change to everyone being the “same” across cultures and losing things like language.
The resultant growth hurts the environment.
Greater carbon footprint as products travel from country to country
Greater carbon footprint as a result of increased travel.
However, increased cooperation between countries to be concerned with environment may be an upside some people lose both relatively and absolutely.
Income inequality in that the disparity of incomes may grow more as globalization occurs greater insecurity increases personal stress.
Stress results from real and perceived economic social positions by individuals. Being able to see what others have/don’t have with the click of a button (TV, Internet) can cause stress.
Why engage in IB?
Objective 1-4
Sales expansion
Resource acquisition
Risk reduction
Learning Objective 4: Assess the major reasons companies seek to create value by engaging in IB.
Why do companies engage in IB:
Sales expansion: more potential customers worldwide
A company’s sales depend on consumers’ demand. Obviously, there are more potential consumers in the world than in any single country. Now, higher sales ordinarily create value, but only if the costs of making the additional sales don’t increase disproportionately.
Resource acquisition: lower costs, new or better products, additional operating knowledge.
Producers and distributors seek out products, services, resources, and components from foreign countries—sometimes because domestic supplies are inadequate (such as industrial diamonds in the United States). They’re also looking for anything that will create a competitive advantage. This may mean acquiring any resource that cuts costs.
Risk reduction: differences in business cycles, preventing competitors from gaining advantage
Selling in countries with different timing of business cycles can decrease swings in sales and profits (e.g., increasing sales stability through operations in countries that enter and recover from recessions at even slightly different times). Moreover, by obtaining supplies of products or components both domestically and internationally, companies may be able to soften the impact of price swings or shortages in any one country.
IB Operating Modes
Objective 1-5
Merchandise Exports and Imports
Service Exports and Imports
Investments
Learning Objective 5: Define and illustrate the different operating modes for companies to accomplish their international objectives.
Merchandise exports and imports.
Tangible products—goods—that are respectively sent out of and brought into a country.
Service exports and imports and are referred to as invisibles.
The provider and receiver of payment makes a service export; the recipient and payer makes
a service import. Services constitute the fastest growth sector in international trade and take
many forms.
For example:
• Tourism and transportation.
• Service performance—services such as banking who charges fees.
• Asset use—Royalties from licensing agreements.
Investments
Direct (FDI) In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company.
Portfolio Investments: a noncontrolling financial interest in another entity. It consists of shares in or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor.
Types of International Organizations
Objective 1-5
Multinational Enterprise
Collaborative Arrangements
Strategic Alliance
Learning Objective 5: Define and illustrate the different operating modes for companies to accomplish their international objectives.
Multinational enterprise or MNE (sometimes called MNC or TNC) is a company with foreign direct investments.
Basically, an “international company” is any company operating in more than one country, but a variety of terms designate different ways of operating.
Collaborative arrangements denotes companies’ working together, for example:
Joint ventures.
Licensing agreements.
Management contracts, minority ownership.
Long-term contractual arrangements.
Strategic Alliance is sometimes used to mean the same as collaborative arrangement, but it usually refers either to an agreement that is of critical importance to a partner or one that does not involve joint ownership.
Factors Affecting Ability to Operate Abroad
Objective 1-6
Physical factors
Institutional factors
Competitive factors
Learning Objective 6: Recognize why national differences in companies’ external environments affect how they may best improve their IB performance.
Physical factors.
Geographic: Geographic barriers—mountains, deserts, jungles, and land-locked areas—often affect communications and distribution channels. And the chance of natural disasters and adverse climatic conditions can make business riskier in some areas than in others while affecting supplies, prices, and operating conditions in far-off countries.
Demographic: Finally, countries’ populations differ in many ways, such as density, education, age distribution, and life expectancy. These differences impact IB operations, such as market demand and workforce availability.
Institutional factors.
Institutions refer to “systems of established and prevalent social rules that structure social interactions. Language, money, law, systems of weights and measures, table manners and firms (and other organizations) are thus all institutions. Examples include:
Culture
Politics
Law
Economy
Competitive factors (such as the number and strength of suppliers, customers, and rival firms)
Products compete by means of cost or differentiation strategies, the latter usually by developing a favorable brand image, usually through advertising or from long-term consumer experience with the brand; or developing unique characteristics, such as through R&D efforts or different means of distribution
BIN3022-N Global Economics and Business Operations
Lecture 2: Trade Protectionism
Dr Dongna Zhang
Learning Objectives (1 of 2)
1 Recognize the conflicting outcomes of trade protectionism
2 Assess governments’ economic rationales and outcome uncertainties with international trade intervention
3 Assess governments’ noneconomic rationales and outcome uncertainties with international trade intervention
Learning Objectives for the chapter.
Learning Objectives (2 of 2)
4 Describe the major instruments of trade control
5 Classify how companies deal with governmental trade influences
Learning Objectives for the chapter.
The trade war
Protectionism
Objective 1
What is protectionism?
Learning Objective 1: Recognize the conflicting outcomes of trade protectionism.
Governmental actions to influence international trade are known as protectionism.
This figure illustrates the variety of factors that can affect trade restrictions and trade enhancements.
Protectionism
Objective 1
Why do governments intervene in trade?
Stakeholders and protectionism
Learning Objective 1: Recognize the conflicting outcomes of trade protectionism.
Despite free-trade benefits, governments intervene in trade to attain economic, social, or political objectives
Proposals on trade regulations often spark fierce debate among people who believe they will be affected—the so-called stakeholders. Of course, those most directly affected are most apt to speak out, such as workers, owners, suppliers, and local politicians whose livelihoods depend on the actions taken.
Economic Rationales for Trade Restrictions
Objective 2
To fight unemployment
To protect infant industries
To develop an industrial base
Economic relationships with other countries
Learning Objective 2: Assess governments’ economic rationales and outcome uncertainties with international trade intervention.
Import restrictions to create domestic employment
may lead to retaliation by other countries,
affect large and small economies differently,
reduce import handling jobs,
may decrease jobs in another industry, or
may decrease export jobs because of lower incomes abroad.
The infant-industry argument says that production becomes more competitive over time because of
increased economies of scale, and
greater worker efficiency.
To develop an industrial base: Since the industrial revolution, countries increasing their industrial bases grew their employment and economies more rapidly. This observation led to protectionist arguments to spur local industrialization. These arguments have been based on the following assumptions:
Surplus workers can increase manufacturing output more easily than agricultural output.
Import restrictions lead to foreign investment inflows, which provide jobs in manufacturing.
Prices and sales of agricultural products and raw materials fluctuate widely, which is a detriment to economies that depend heavily on them, especially if the dependence is on just one or a few commodities.
Markets for industrial products grow faster than markets for both agricultural and raw material commodities.
Economic Relationships with other countries: Nations monitor their absolute economic situations and compare their performance to other countries. Among their many practices to improve their relative positions, four stand out: making balance-of-trade adjustments, gaining comparable access to foreign markets, using restrictions as a bargaining tool, and controlling prices.
Noneconomic Rationale for Trade Restrictions
Objective 3
Maintain essential industries
Promoting acceptable practices abroad
Maintain or extend spheres of influence
Preserve national culture
Learning Objective 3: Assess governments’ noneconomic rationales and outcome uncertainties with international trade intervention.
Maintaining essential industries (especially defense): not dependent on foreign supplies during hostile political periods.
Promoting acceptable practices abroad: Governments limit exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies. They also limit exports and imports to compel a foreign country to change some objectionable policy or capability. The rationale is to weaken the foreign country’s economy by decreasing its foreign sales and by limiting its access to needed products, thus coercing it to amend its practices on some issue such as human rights, environmental protection, military activities, and production of harmful products.
Maintaining or extending spheres of influence: Governments use trade to support their spheres of influence—giving aid and credits to, and encouraging imports from, countries that join a political alliance or vote a preferred way within international bodies.
Preserving national culture: To help sustain a collective identity that sets their citizens apart from other nationalities, governments prohibit exports of art and historical items deemed to be part of their national heritage. In addition, they limit imports that may either conflict with or replace their dominant values.
China’s rare earth elements strategy
Instruments of Trade Control: Tariffs
Objective 4
Tariff (Duty)
Types of Tariffs
Why are Tariffs levied?
Learning Objective 4: Describe the major instruments of trade control.
Tariff barriers directly affect prices, and nontariff barriers may directly affect either price or quantity. A tariff (also called a duty) is a tax levied on a good shipped internationally. That is, governments charge a tariff on a good when it crosses an official boundary— whether it be that of a nation or a group of nations that have agreed to impose a common tariff on goods crossing the boundary of their bloc.
Tariffs may be levied:
on goods entering, leaving, or passing through a country,
for protection or revenue, or
on a per-unit basis, a value basis, or both.
A tariff assessed on a per-unit basis is a specific duty, on a percentage of the item’s value an ad valorem duty, and on both a compound duty
How the trade war hurts US farmers
Instruments of Trade Control: Non-tariff
Objective 4
Subsidies
Aids and Loans
Quotas
Buy Local Legislation
Specific Permission Requirements
Administrative Delays
Learning Objective 4: Describe the major instruments of trade control.
Subsidies offer direct assistance to companies to boost their competitiveness. Although this definition is straightforward, disagreement on what constitutes a subsidy causes trade frictions. In essence Governmental subsidies may help companies be competitive.
But there is little agreement on what a subsidy is.
Agricultural subsidies are difficult to dismantle. Especially to overcome market imperfections because they are at least controversial
The one area in which everyone agrees that subsidies exist is agriculture especially in developed countries. The official reason is that food supplies are too critical to be left to chance. Although subsidies lead to surplus production, they are argued to be preferable to the risk of food shortages.
Aid and Loans: When governments require foreign aid and loan recipients to spend the funds in the donor country, a situation known as tied aid or tied loans, some otherwise noncompetitive output can compete abroad. For instance, tied aid helps win large contracts for infrastructure, such as telecommunications, railways, and electric power projects.
A quota limits the quantity of a product that can be imported or exported in a given time frame, typically per year. Import quotas normally raise prices because they (1) limit supplies and (2) provide little incentive to use price competition to increase sales. A specific type of quota that prohibits all trade is an embargo. As with quotas, a country or group of countries may place embargoes on either imports or exports, on particular products regardless of origin or destination, on specific products with certain countries, or on all products with given countries.
Buy local legislation sets rules whereby governments give preference to domestic production in their purchases.
Specific Permission Requirements: Countries may require that importers or exporters secure governmental permission (an import or export license) before transacting trade.
Administrative delays: Closely akin to specific permission requirements are administrative customs delays that may be caused by intention or inefficiency.
How Companies Deal with Governmental Influences
Objective 5
Threats from import competition
Options for companies:
Convincing decision-makers
Involving the industry and stakeholders
Preparing for changes in the competitive environment
Learning Objective 5: Classify how companies deal with governmental trade influences.
When companies are threatened by import competition, they have several options, four of which stand out.
Move operations to another country.
Concentrate on market niches that attract less international competition.
Adopt internal innovations, such as greater efficiency or superior products.
Try to get governmental protection.
BIN3022-N Global Economics and Business Operations
Lecture 3: Forms and Ownership of Foreign Production I
Dr Dongna Zhang
Learning Objectives (1 of 2)
1 Comprehend why export and import may not
suffice for companies’ achievement of IB
objectives
2 Explain why and how companies make wholly owned foreign direct investments
3 Ascertain why companies collaborate in
international markets
Learning Objectives for the chapter.
Learning Objectives (2 of 2)
4 Compare different international collaborative arrangements
5 Grasp why IB collaborative arrangements succeed
Learning Objectives for the chapter.
Foreign Expansions
Objective 1
Foreign Expansions: Alternative Operating Modes
Learning Objective 1: Comprehend why export and import may not suffice for companies’ achievement of IB objectives.
This figure shows alternate foreign expansion (as opposed to export).
Why Export and Import May Not Suffice
Objective 1
Advantages to locate production in another country as opposed to exporting:
Production costs
Transportation costs
Domestic capacity
Product alterations
Trade restrictions
Country of origin
Learning Objective 1: Comprehend why export and import may not suffice for companies’ achievement of IB objectives.
Companies may find more advantages to locate production in foreign countries than export to them. The advantages occur under six conditions, when,
production abroad is cheaper than at home,
transportation costs are too high for moving goods or services internationally,
companies lack domestic capacity,
products and services need to be altered substantially to gain sufficient consumer demand abroad,
governments inhibit the import of foreign products, or
buyers prefer products originating from a particular country.
Why Wholly-Owned FDI?
Objective 2
Market Failure
Internalization Theory
Appropriability Theory
Freedom to Pursue Global Objectives
Learning Objective 2: Explain why and how companies make wholly owned foreign direct investments.
Recap: foreign direct investments (FDI): . It is an operation in which an investor holds a controlling interest in a foreign company.
There are four primary explanations for companies to make a wholly owned FDI.
Market Failure Collaboration is appealing as an entry strategy because it is a means whereby a firm may reduce its liability of foreignness. But this works only if management can find an associate knowledgeable about the host country at acceptable terms, which may be impossible since such companies may be inadequately equipped to deal efficiently with the entry company’s technology.
Internalization Theory: Internalization is control through self-handling of operations. The concept comes from transactions cost theory, which holds that companies should seek the lower cost between self-handling of operations and contracting another party to do so for them.
Appropriability Theory: The idea of denying rivals access to resources is called the appropriability theory. Companies are reluctant to transfer vital resources—capital, patents, trademarks, and management know-how—to another organization for fear of their competitive position being undermined.
Freedom to Pursue Global Objectives. A wholly owned foreign operation permits a company to more easily participate in a global strategy.
Acquisition versus Greenfield
Objective 2
Acquisition
Greenfield Investments
Leasing
Learning Objective 2: Explain why and how companies make wholly owned foreign direct investments.
Acquisition: One reason for a company to invest abroad via acquisition is to obtain some vital resource that may otherwise be slow or difficult to secure.
Making Greenfield Investments: Foreign companies may face local roadblocks to acquisitions. For example, local governments may want more competitors in the market because of fearing market dominance. In addition, a foreign company may find that development banks prefer to finance new operations because they create new jobs.
Leasing: This mode is much like an acquisition, but one that forgoes the need to invest. While common in the hospitality industry, it is not common in others. Although companies in other industries might lease certain assets abroad—computers, vehicles, buildings—such arrangements are quite different from leasing an entire operating facility.
Foreign Investments in Hotel Industry
Questions?
