INTERNATIONAL BUSINESS
// CH1 //
Globalization: shift toward a more integrated and interdependent world economy.
- Globalization of markets: merging of historically distinct and separate national markets into one.
o Falling barriers to cross-border trade and investment
o Global tastes
o Benefits small and large companies
o Significant differences between national markets
o Products that serve universal needs are global
o Competitors may not change among nations
- Globalization of production: souring of goods/services from locations around the globe to take advantage of
national differences in cost and quality of factors of production.
o Factors of production; labor, energy, land and capital.
o Early outsourcing was restricted to manufacturing. Technology now used for outsourcing.
o Obstacles:
▪ Formal and informal barriers to trade
▪ Transportation costs
▪ Political and economic risk
▪ Coordination
Global Institutions:
- General agreement on tariffs and trade (GATT): helps manage, regulate and police the global place and
promote the establishment of multinational treaties to govern the global business system.
- World Trade Organization (WTO): responsible for policing the world trading system and making sure nation-
states adhere to the rules laid down and signed for by member states.
o Facilitates multinational agreements among members
o 164 nations account for 98 percent of world trade.
- International monetary fund (IMF): maintains order in international monetary system.
o Lender of last resort
o Requires nation-states to adopt specific economic policies aimed at returning their economies to
stability and growth.
- World bank: promote economic development.
o Focused on making low-interest loans to cash-strapped governments in poor nations that wish to
undertake significant infrastructure investments.
- United Nations (UN): preserve peace through international cooperation and collective security.
o 193 countries
o UN Charter – four basic purposes:
▪ Maintain international peace and security
▪ Develop friendly relations among nations
▪ Cooperate in solving international problems and in promoting respect for human rights.
▪ Be a center for harmonizing the actions of nations
- Group of Twenty (G20): consists of the finance ministers and central bank governors of the 19 largest
economies in the world, plus representatives from EU and EU central bank.
o Represents 90 percent of global GDP and 80 percent of international global trade.
,Drivers of Globalization:
- Declining trade and investment barriers
o 1920s-30s: Barriers to international trade and foreign direct investment. → High tariffs resulted in
retaliatory trade policies → GATT lowered barriers → Uruguay Round → Established World Trade
Organization (WTO).
o International trade: export goods/services to consumers in another country.
o Foreign direct investment (FDI): when a firm invests resources in business activities outside its home
country.
o Trade agreements and world trade increase.
o Knowledge Society and Trade Agreements • The value of world trade in merchandised goods has
grown consistently faster than the growth rate in the world economy since 1950. • Trade across
country borders is 2.6 times higher than world production. • Knowledge society has produced more
informed consumers, driving demand. • Removal of restrictions to FDI • More trade agreements
- Technological change
o Communications
▪ Development of the microprocessor
▪ Moore’s Law: the power of microprocessor technology doubles and its cost of production
falls in half every 18 months.
o Internet of things (IOT)
▪ Half the world’s population uses the Internet
▪ Global e-commerce sales over $2 trillion
▪ The Internet is an equalizer
o Transportation technology
▪ Commercial jet travel, super-freighters, and containerization
o Implications for the globalization of production; Has become more economical, Worldwide
communications network.
o Implications for the globalization of markets; Convergence of consumer tastes and preferences.
Changing Demographics of Global Economy:
- World output and world trade World trade has grown faster than world output
o U.S. has experienced a relative decline reflecting the faster economic growth of several other
economies
o China and BRIC countries growing more rapidly
o Developing nations may account for more than 60 percent of world economic activity by 2025
- Foreign direct investment
o Stock of FDI: total cumulative value of foreign investments as a percentage% of the country’s GDP.
o Non-U.S. firms are increasingly investing across national borders
o Desire to disperse production activities to optimal locations and to build a direct presence in major
foreign markets
- Nature of multinational enterprise
o Multinational enterprise (MNE): any business that had productive activities in two or more countries.
o Rise of non-U.S. multinationals and growth of mini-multinationals, the rise of mini-multinationals.
Medium- and small-sized businesses. Internet is lowering barriers
o In 2003, 38.8 percent of the world’s 2000 largest multinationals were U.S. firms. By 2017, 27 percent
of the top 2000 global firms are now U.S. multinationals, a drop of 236 firms.
2
, - World order
o Politics, debt and inflations, etc.
o Former communist countries present export and investment opportunities
o Signs of growing unrest and totalitarianism
o China moving to industrial superpower
o Latin America debt and inflation are down, more private investors, expanding economies.
Globalization is not inevitable → • Countries may pull back • Risks are high.
Globalization debate: is the shift toward a more integrated and interdependent global economy a good thing?
Critics:
- Falling barriers to international trade destroy manufacturing jobs in wealthy advanced economies (firms
move to countries with lower wage rates). Services also outsourced.
- Free trade encourages firms from advanced nations to move manufacturing facilities to less developed
countries that lack adequate regulations to protect labor and the environment from abuse.
- Labor and environmental regulations → Lack of regulation can lead to abuse
- Adhering to regulations increases costs
- As countries get richer, they enact tougher environmental and labor regulations
- Today’s increasingly interdependent globally economy shifts economic power away from national
governments and toward supranational organizations like WTO, EU and UN.
- Despite the supposed benefits with free trade and investment, the gap between the rich and poor nations of
the world has gotten wider.
o Totalitarian governments
o Poor economic policies
o Corruption and lack of property rights
o Expanding populations in developing countries
o Debt burdens..
Support:
- Benefits outweigh the costs. Free trade will result in countries specializing in the production of goods and
services that they can produce most efficiently, while importing goods and services that they cannot produce
as efficiently. As a result, the whole economy is better off.
o Companies can reduce their cost structure, and consumers benefit.
- Tougher environmental regulations and stricter labor standards go hand in hand with economic progress
- The power of supranational organizations is limited to what nation-states collectively agree to grant. These
organizations exist to serve the collective interests of member states.
- The best way to change the situation is to lower barriers to trade and investment and promote free market
policies.
Data suggests the share of labor in national income has declined. The share of national income enjoyed by skilled
labor has increased, suggesting that the fall in labor’s share has been due to a fall in the share by unskilled labor.
3
, The weak growth rate in real wage rates for unskilled workers is likely due to a technology-induced shift within
advanced economies. Technological change has a bigger impact than globalization on declining share of national
income enjoyed by labor.
Managing an international business differs from managing a purely domestic business; need to vary practices from
country to country. More complex decisions required; need to understand the international trading and investment
system, currency exchange.
// CH2 //
Political economy: the political, economic and legal systems of a country are interdependent.
Socialists: If the state owned the means of production, it could ensure that workers were fully compensated for their
labor. Benefit society as a whole rather than individual capitalists.
- Communists: achieving socialism through violent revolution and totalitarian dictatorship.
- Social democrats: achieving socialism by democratic means.
Privatization: political parties that sell state-owned enterprises to private investors.
Individualism: philosophy that an individual should have freedom in his economic pursuits. Should take precedence
over the interests of the state (contrast to collectivism).
Democracy: government consists of elected representatives by citizens.
Safeguards of a representative democracy:
- Individual’s right to freedom of expression, opinion and organization
- Free media
- Regular elections
- Universal adult suffrage (kiesrecht)
- Limited terms for elected representatives
- Fair court system that is independent from the political system
- Nonpolitical state bureaucracy
- Nonpolitical police force and armed service
- Relatively free access to state information
Totalitarianism: one person/political party exercises absolute control over all spheres of life.
- Communist totalitarianism, e.g. China, Vietnam, Cuba.
- Theocratic totalitarianism: states where political power is monopolized by a party/group/ individual that
governs according to religious principles. E.g. Iran, Saudi Arabia.
- Tribal totalitarianism: when a political party represents interests of a particular tribe (not always the
majority tribe) monopolizes power. E.g. Kenya, Zimbabwe.
- Right-wing totalitarianism: permits some individual economic freedom but restricts individual political
freedom, e.g. Latin America, Taiwan, South Korea.
4
