International Business Relations: Understanding the Global Environment

Posted on Aug 15, 2024 in Economy

ISIBCO1

INTRODUCTION TO INTERNATIONAL BUSINESS RELATIONS
(Prelim)

Part I: Lecture

International Business in the Twenty-First Century: Awareness – understanding the environment on two levels:

  • Specific
  • Broad

Environment:

  • Setting, situation, atmosphere
  • Surroundings, condition, location

Specific Environment:

  • Customer/supplier
  • Investor requirements
  • Workplace issues
  • Individual financial/operational requirements

Broader Environment:

  • Economy
  • Political/technological/world

Major Factors Influencing Business Behavior

  1. Politics
  2. Economics
  3. Technology

1. The Political Environment

  1. The integration of Less Developed Countries (LDCs) and formally centrally planned economies into the international economy.
  2. The difficulties (and opportunities) raised by economic inequalities across the world.
  3. The sheer size of the world’s largest multinational companies (MNCs): where the center of control over international business actually resides – in the boardroom or the government.
  4. The role of major world institutions such as the OECD, World Bank, WTO, the European Commission, and the IMF in relation to the direction of international trade and investment.
  5. The twentieth-century division of the world into geographic areas which were the”home countries of MNC” and those which were”hos” countries is now disappearing.
  6. Environmental Concerns
  • Environmental pollution: market/regulatory mechanism

Political Issues: Basic problem of inequalities

  • Entrepreneurial opportunities
  • Control over decision making
  • Access to markets
  • The benefits of environmental improvements
  • Basic level of personal wealth

2. Economics

Globalization (free trade)

  • Redrafted the world economic map (last 35 years) How?

International economic agreements which have both liberalized trade and capital flows and led to the establishment of regional economic groupings.

  1. GATT – General Agreement on Tariff and Trade (1947)
  • Implemented to further regulate world trade to aid the economic recovery following the war.
  • Main objective was to reduce the barriers of international trade through the reduction of tariffs, quotas, and subsidies.
WTO (1995) replaced GATT
  • A regulatory body which now defines and enforces rules which cover 90 percent of world trade.
  • Freer world trading environment/growing international financial markets
  • Increasing movement of goods and capital across the world has led to the emergence of regional trading blocs which operate alongside the multilateral trade encouraged by WTO. (3 major trading blocs: North America, Europe, East and South East Asia)
Challenges to be faced by organizations seeking to expand their international operations:
  • The increased competition arising from greater freedom of world trade.
  • The changing distribution of economic activity across the globe arising from the importance of regional trading blocs.
  • The threat created by increased levels of foreign direct investment, made easier by highly efficient international financial markets.
  • The need to devise strategies which take maximum advantage of trading and investment opportunities.
  • Acceptance of changes to incorporate structures.

3. The Technological Environment

  1. Transportation: led to global shrinkage
  • 19th century the railways and steamship made it easier for goods to be transported over long distances relatively quickly.
  • Jet engine and containerized shipping
Impact of transportation technology on international business has therefore been to aid industrial relocation on a global scale.International Communication Technology has been revolutionized over the last fifty years, firstly by satellites and more recently by the use of optic fiber and digital systems.

Technological Environment

  1. Technology also has an effect on both production processes and product design and specification.
  • Key change in production technology has been the progress from traditional automated mass production systems via numerically controlled methods (CMC).

Technological Environment

Computer Aided Design and Manufacturing (CAD-CAM) into flexible manufacturing systems (FMS).

The use of FMS also offers benefits in terms of product design because it makes design modification easier and lower costs.

  1. E-commerce (electronic selling)

International Trade and Foreign Direct Investment

A. International Trade: The Theory of Mercantilism

  • Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring prosperity and military security of the state.
  • Dominated Western Europe economic policy and discourse from the 16th to late 18th centuries.
  • Was a cause of frequent European wars in that time and motivated colonial expansion.
  • Mercantilist policies have included:
    • Building a network of overseas colonies
    • Forbidding colonies to trade with other nations
    • Monopolizing markets with staple parts
    • Promote accumulation of gold and silver
    • Forbidding trade to be carried in foreign ships
    • Export subsidies
    • Maximizing the use of domestic resources
    • Restricting domestic consumption with non-tariff barriers to trade

A Mercantilist Nation

was one that strove to maximize its exports and minimize its imports.

B. International Trade: THE PRACTICE Trade Barriers and Protectionism

Reasons for Protectionism

  1. The need to protect a country’s infant industries.
  2. Protect domestic industries from unfair foreign competition.
  • Dumping – the practice of selling goods on export markets at less than on home markets.
  • Commercial policy of price discrimination
Health/social reasons
  • For health reasons, you cannot normally import fresh fruit into the USA or live animals into the UK.
  • Firearms, drugs, and pornography are also typically subject to strict import controls for reasons which again have little or nothing to do with economics but nonetheless reflect a form of protectionism.
Protection of local culture or national identity.Politics
  • Political reasons for not wishing to trade with particular countries include compliance with international sanctions and a desire not to be reliant on overseas suppliers for strategically important goods such as defense equipment.
Protection from cheap foreign labor.

B. Forms of Protectionism

  1. Tariffs – taxes or duties typically levied ad valorem on imports as they enter the country.
  2. Import quotas – restrictions on the quantity of goods which may be imported perhaps from specific countries.
  3. Embargoes
  4. Export subsidies
  5. Foreign exchange controls
  6. Other non-tariff barriers such as laws, regulations, and commercial practices.

GATT and the World Trade Aftermath of the Second World War

•

General Agreement on Tariff Trade (GATT) was established in 1947 with twenty-three founder members although the agreement eventually extended to 100 countries.

  • Aim to promote trade and reduce/eliminate tariffs.

GATT AND WORLD TRADE ORGANIZATION

was instrumental in achieving three major rounds of reductions in tariffs and other protectionist measures:

  • The Kennedy Round mid 1960’s
  • The Tokyo Round in mid 70’s
  • The Uruguay Round in 1993

further cuts in import duties and other tariffs world-wide and created a new framework for international trade under the WTO.

•

GATT and WTO

WTO (1995)

The WTO, and GATT as its predecessor, have set a number of important international trading rules, which serve to underpin the principle of free trade between member countries.

Key Trading Principles under GATT and WTO

  • Restrictions on the use of quotas.
  • Allowing of retaliation against”unfai” trading practices.
  • A requirement to grant most favored nation concessions to all member countries.
  • Members not allowed to treat imported goods less favorably than the domestic production (except under GATTS).

Changes in the World Distribution of Production and Wealth

  • A shift in the location of world manufacturing production.
  • A rate of growth of international trade which is below that of Foreign Direct Investment.
  • Increases in wealth for those nations that have benefited from favorable changes in the terms of trade.
  • A general shift towards regional trade, rather than global patterns of trade.

Foreign Direct Investment (FDI)

• •

•

Factors which influence FDI are related to factors that stimulate trade

A firm invests directly

A firm that engages in FDI becomes a multinational enterprise (MNE)

Multinational =“more than one country”

Foreign Direct Investment

•

•

Involves ownership of entity abroad for – production
– Marketing/service
– Research and Development (R&D)

– Access of raw materials or other resource Parent has direct managerial control

-depending on its extent of ownership

Forms of FDI Purchase of assets : why? Why not?

•

New investment: why? Why not?

•

quick entry, local market know-how,local financing maybe possible, eliminate competitor, buying problems

No local entity is available for sale, local financial incentives, no inherited problems,long lead time to generation of sales

Forms of FDI International joint- venture

•

•

Shared ownership with local and or other non- local partner

Shared risk

• • • •

Increased profit
New markets
Protectionism
Extending the product life cycle

Reasons for FDI