COLLABORATIVE STRATEGIES

COUNTRY EVALUATION AND SELECTION

Business Reserch

Foreign Direct Investement

International Monetary System

Collapse of Bretton Wood

1. Jamaican Agreement 1976

2. Reasons for adopting Floating and Fixed rate system
3. Recent Activities by IMF
4. Implication of Forex on Business

1. Jamaica Agreement 1976

u Floating rates declared acceptable
u Gold abandoned as reserve asset;
– IMF returned its gold reserves to its members at current prices
– Proceeds were placed in a trust fund to help poor nations
– IMF quotas – member country contributions – increased; membership now 182
countries
– Less-developed, non-oil exporting countries given more access to IMF
u IMF continued its role of helping countries cope with macroeconomic and exchange rate
problems

2. Why country went for Floating Exchange Rates

1. Country gets Monetary policy autonomy and can take own decision
2. Trade balance adjustments helped
Why Country went for Fixed Exchange Rates
1. It brougth more Monetary discipline
2. Speculation on curreny was reduced
3. Uncertainty reduced
4. Trade balance adjustment effects on inflation controlled

3. Recent Activities by the IMF

1. Helping in solving Mexican crisis 1995
2. Managing Russian crisis1995
3. Solving Asian crisis 1997/1998
 – The investment boom
– Excess capacity
– The debt bomb
– Expanding imports
– The crisis

4. Implications of Forex for Business

1. Currency management
– The monetary system is not perfect
– Both speculative activity and government intervention affect the system
– Companies must use risk management instruments

2. Business strategy
– Minimize risk by placing assets in different parts of the world, e.g., production
– Contract manufacturing
– Manage company-government relations

Globalization

Globalization Defined
Trend toward greater economic, cultural, political and technological
interdependence among national institutions and economies
The increased freedom and capacity of individuals and firms to:
 undertake economic transactions with residents of other countries
operate on Globalization
 a global scale
Globalization as ‘Deterritorialization’
 Breakdown of borders of Space and Time
GLOBALIZATION = INTERNATIONALIZATION
 Not a new phenomena – Colonization, mercantilism(16th - 18th Century)
 Two Phases:
 1870-1913
 1950 onwards

Examples of price decline in transport and communication

 Between the early 1980's and 1996 real sea freight costs fell 70%
 Real air freight costs have fallen 3-4% a year over a long period.
 Real costs of international phone calls fell 4% a year in the developing countries in the
1990's and 2% a year in the industrial countries.

Measures of Globalization
 Trade integration
 Market Integration
 Financial integration
 Global production networks

Globalization of markets
Convergence in buyer preferences in markets around the world
 • Reduces marketing costs
• New market opportunities
• Levels income stream
Globalization of production
Dispersal of production activities worldwide to minimize costs or maximize quality
• Access low-cost labor
• Acquire technical expertise
• Obtain production inputs

Drivers of Globalization
 Internationalization of Economic Activity
 Trade & Finance
 Global Liberalization
 Domestic and International
 Technological Changes
 IT Revolution (Speed and Cost)
 Improvements in Transportation
 EX: Containerized Shipping, Movement Tracking,
 Globalized Production Structures
 ‘Stateless Corporations’ (Nike)

Four dimensions of globalization: fourtypes of change

1. It involves a stretching of activities across political frontiers, regions and continents.
2. It suggests the intensification, or the growing magnitude, of interconnectedness i.e. flows of
trade, investment, finance, migration, culture etc.
3. The growing extensity and intensity of global interconnectedness can be linked to a speeding
up of global interactions and processes, as the evolution of diffusion of ideas, goods,
information, capital and people.
4. The growing extensity, intensity and velocity of global interactions is associated with their
deepening impact such that the effects of distant events can be highly significant elsewhere and
even the most local developments may come to have enormous global consequences. In this
sense, the boundaries between domestic matters and global affairs become increasingly blurred.

The Debate For and Against Globalization

Jobs and Wages

Opponents
 It Eliminates jobs in developed nations
 It Forces wages lower in developed nations
 It Exploits workers in developing nations
Labor and Environment
Opponents
 Globalization lowers labor standards
 Weakens protection of the environment
 Exploits workers in poor nations
Supporters
 It Increases wealth and efficiency
 It Generates labor market flexibility
 It Creates jobs in developed countries
 It Advances economies of developing
nations
Supporters
 Investment raises labor standards
 Open economies most environment friendly
 Companies concern for future markets
Impact on Culture
Opponents Supporters
 Destroys cultural diversity  Specialize and trade to obtain
 Homogenizes our other goods
world  Import cultural goods from other
 Bankrupts local nations
small businesses  Protects deeper moral and
cultural norms

Income Inequality : An Observation in Support

1. Inequality within nations
Poor people in developing nations benefit most from open economy
2. Inequality between nations
Nations open to world trade and investment grow faster than rich nations
3. Global inequality
Inequality has fallen, but experts disagree on the extent of the decline

International HRM
Major differences between domestic HRM and IHRM
1. Business activities e.g. taxation, international relocation, expatriate remuneration,
performance appraisals, cross-cultural training and repatriation
2. Increased complexities e.g. currency fluctuations, foreign HR policies and practices,
different labor laws
3. Increased involvement in employee’s personal life e.g. personal taxation, voter
registration, housing, children’s education, health, recreation and spouse employment
4. Complex employee mix – cultural, political, religious, ethical, educational and legal
background
5. Increased risks e.g. emergency exits for serious illness, personal security, kidnapping
and terrorism

Why care about international HRM?

• The success of many organizations depends upon their ability to internationalize their
operations.

Stages of Interntionalization
1. Domestic Operation
2. Export Operation
3. Subsidiaries or Joint Venture
4. Multinational Operation
5. Transnational Operation
6. Efficiency and responsive of different type of firms
Stage 1: Domestic Operations
– Firms offer products or services that are designed to primarily serve consumers in
the domestic market (e.g., law firms)
–
Stage 2: Export Operations
– Products and services are opened up to markets in other countries, but production
facilities remain in Canada (e.g., McCain Foods).
 – HRM: Provides sales force with skills and motivation to succeed in these foreign
markets.
–
Stage 3: Subsidiaries or Joint Ventures
• Some operational facilities (e.g., parts assembly) are physically moved to other countries.
• Corporate headquarters in home country has high control over foreign operations.
• HRM: Provides expatriates and local employees with knowledge and skills to succeed in
the foreign country.
•
Stage 4: Multinational Operations
• Much more prevalent international dispersion of production and service provision
facilities.
• Decentralization of decision-making more prevalent, but “major” personnel decisions still
made within home country.
• Expatriates still primarily manage foreign facilities.

Stage 5: Transnational Operations

• Little allegiance to the firm’s country of origin.
• Large-scale decentralization of decision-making.
• Dominant role of expatriates is removed.
• Each business unit across the globe has the freedom to make and implement its own
HRM policies and practices.

Strategies Of Different Types of Organization

1. International Company
2. Multinational Company
3. Global Organization
4. Transnational Organization

1.International company –
– transports its business outside home country
– each of its operations is a replication of the company's domestic experience
– structured geographically
– involves subsidiary general managers
• Companies offering multiple products often find it challenging to remain organized e.g.
need to have a common information systems for accounting, financial and management
controls, and marketing. Most evolve to become multinational companies

2.Multinational company –
– grows and defines its business on a worldwide basis,
– but continues to allocate its resources among national or regional areas to
maximize the total.

3.Global organizations –
– treat the entire world as though it were one large country
– may be the entire company or one or more of its product lines
– may operate with a mixture of two or more organizational structure
simultaneously.

4.Transnational organization –
 – Use specialized facilities to permit local responsiveness
– more complex coordination mechanism to provide global integration

How Different types of Organization manage IHRM

1. International organsiation
2. Multinational organsiation
3. Global Organsaition

1. Australian organization with international operations

– All senior and many middle management positions held by Australians
– Highly centralized in Australia, large head office
– Instruction and advice from Australian head office to subsidiaries
– HR policies and practices are predominantly Australian with some modification
to satisfy foreign requirements
– Australian corporate culture

2. Australian multinational organization

– Localization of some management positions but all top corporate positions held
by Australians
– Some decentralization to regional or area headquarters
– Regional headquarters is the main source of communications; instructions from
Aust head office to regional headquarters
– HR policies and practices are mixed
– Mix of Australian and host country culture

3. Australian global organization

– All management positions are open to everyone regardless of nationality
– Decentralized decision making
– Two-way or multiple-way communication between headquarters
– HR policies and practices are benchmarked on best international practices
International
– corporate culture
– Expatriates

 Approaches to expatrite
 When their use Increases
 Rason for failure of international assigment
 Reason for Quitting job on return
Use of Expatriates
• At Stage 3, the firm must decide what presence expatriates will have in managing the
foreign facilities.
• Three approaches can be taken:
– Ethnocentric (all expatriates)
– Polycentric (all local country citizens)
– Geocentric (citizenship is ignored in favour of “best person for the job”); typical
of transnational firms.

Use of Expatriates – Increases when

• Poor or insufficient local talent
 • There is a need to ensure a strong corporate-wide vision (and culture).
• When domestic and foreign operations are highly interdependent.
• The political situation in the foreign country is unstable
• There are significant culture differences.
• Bottom line: When the home country does not TRUST the abilities and/or intentions of
local labour force.

Reason for Failure of International Assignments

• Career blockage (“the home office has forgotten about me”)
• Culture Shock, resulting in frustration and poor cooperation abroad.
• Family problems, due to poor adjustment and/or lack of contact if family is left behind.
• Over-emphasis on technical qualifications.
• Getting rid of a problem employee.

Reason for Quitting job on return

20-40% of repatriates quit after returning home. Why?
– Lack of respect for acquired skills/knowledge (especially firms at Stage 3)
– Loss of status
– Poor planning for return position
– Reverse culture shock

Role of IHRM in Expatriate

1. Selection
2. Training
3. Career Development and Compensation

1. Selection
• Provide realistic country preview.
• Measure ability to be sensitive to different cultures and/or comfort with specific foreign
country’s culture.
• Have successful expatriates make the selection decisions.
• Require previous international experience (pay attention to specific country worked in).
• Assess family’s willingness to live or work abroad.
2. Training
Cross-cultural training, which can address:
• Major cultural differences
• Foreign expectations regarding polite behaviour
• Foreign expectations regarding business behaviour
• How to avoid feeling insulted when no insult is made
→ Video and role-play approaches to training delivery are critical for cross-cultural training.
3. Career Development & Compensation
Ensure expatriates know that an international assignment helps in terms of advancement
within the firm
• Disposable income abroad should be the same (if not more) than what is given at home.
• Provide incentive to work abroad (bonus, pay increase).
• Ensure pay equity within foreign facilities.
IHRM
» Lessons for Global firm
» Main challenges in IHRM
Important lessons for global firms
• The need to manage change
• The need to respect local cultures
• The need to understand a corporation’s culture
• The need to be flexible
• The need to learn

Main challenges in IHRM

• High failure rates of expatriation and repatriation
• Deployment – getting the right mix of skills in the organization regardless of
geographical location
• Knowledge and innovation dissemination – managing critical knowledge and speed of
information flow
• Talent identification and development – identify capable people who are able to function
effectively
• Barriers to women in IHRM
• International ethics
• Language (e.g. spoken, written, body)
• Different labor laws
• Different political climate
• Different stage(s) of technological advancement
• Different values and attitudes e.g. time, achievement, risk taking
• Roles of religion e.g. sacred objects, prayer, taboos, holidays, etc
• Educational level attained
• Social organizations e.g. social institutions, authority structures, interest groups, status
systems

Strategies for managing a global workforce

1. Aspatial career Strategy
2. Awareness Building Assignment Strategy
3. SWAT Team Strategy
4. Virtual Solution Strategy

(1) Implement the aspatial career strategy

– Get people from everywhere (geocentric approach)
– Expats work in multiple countries during the course of their career
Advantages Disadvantages
– Gain a lot of knowledge about – Extremely high cost
different cultures & operations – Mainly managers, not
– Develops in-depth knowledge technicians
– Use previous knowledge for
new assignment

(2) Implement the awareness-building assignment strategy

– Expose a candidate to cultural training exercises
– Usually for short term (3 months to one year)
Advanatges
– Family members usually not required to relocate
– Learn from foreign assignment and bring experience back to HQ
When Used
 – Usually used to train candidates for future assignments

(3) Implement the SWAT team strategy

– Highly mobile teams for short term assignments
– Deployed throughout the organization to different parts of the world
When Used
– No development agenda, plain troubleshooting
Advanatges:
– Transfer technical knowledge to locals as they fix problems
– E.g. technical troubleshooters

(4) Implement the virtual solutions strategy

– Collection of practices that exploit electronic communication
– E.g. internet, intranet, videoconferencing, electronic databases, email, electronic
expert systems
Advantages:
– Low cost and very fast in terms of disseminating knowledge
– Used by Xerox and Ford

International Business – Lec 1

 What is International Business

 Domestic Vs International Business
 Relevance of the Study of International Business
 Evolution of International Business
 Nature of International Business
 Reasons for going international

What is International Business?

International business: all commercial transactions between parties in two or more
countries
– Private firms are profit-oriented.
– Government organizations may or may not be profit-oriented.

Defination:
“International Business consists of transactions taking place across national borders for
the purpose of satisfying the objectives of individuals and organizations.”

What is International Business?

u The international business environment is more complex and diverse than the domestic
business environment.
u International Business also includes a growing service industry in areas such as
Information technology, transportation, tourism, advertising, construction, retailing,
wholesaling, and mass communication.

Similarity Between Domestic & international Business

 Generating revenue – Either by creating opportunities or optimizing strengths
 Building a corporate image
  Focusing on customer satisfaction and building loyalty as patronage buyers
 Carrying out their operations while respecting and adhering to local regulations
 Generating employment opportunities
 Both are subject to a set code of conduct and ethics that included corporate
governance
 Mass Production through cost reduction and achieving economies of scale.
 Building a strong network in order to make products and services available in any
part of the nation or the world.
 Adapting new standards and changes in style and function.

Factors on which Domestic and International Business can be compared.

 Dimensions  Organisational Vision and
 Plan & Strategy objectives
 Competitive Forces  Legal Aspects
 Currencies  Investment & Sourcing
 Business Risks  Pricing Strategy
 Research  Distribution Channels
 Human Resource  Promotion
 Product & Usage  Logistics

The Relevance of the study of International Business?

Academic: For students to gain knowledge, and better understanding of how trade is done.
Functional: For members of society, and traders in particular to know how they can use
international trade to their benefit.

Evolution of International Business

 Cross-country trade has been taking place since pre-historic times.
 Post world war-II, the growth of international & multinational companies took place
 International trade to International marketing
 International marketing to International Business

Nature of International Business

 Variations in political, social, cultural and economic factors in countries
 Accurate and timely information requirement
 Larger size of Business
 Geographical market segmentation
 Increased potential for business because of broader market perspective.
 Wider scope for business activities
 Inter-country comparative study

Reasons for Engaging in International Business

1. To expand sales
F Volkswagen [Germany] F IBM [USA]
F Ericsson [Sweden] F Seagram [Canada]
F Michelin [France] F Sony [Japan]
F Nestlé [Switzerland]
2. To acquire resources
 F Products, components, F Technologies
services F Information
F Foreign capital
3.To minimize risk
– Take advantage of business F Diversify suppliers across
cycle differences amongst countries
countries F Counter competitors’
advantages

Reasons to Enter International Business

(From an Individual Company’s Angle)
 Managing the Product Life Cycle
 Geographic expansion as a growth strategy
 Adventurous spirit of younger generation
 Technological Advantage
 Building corporate image
 Incentives and Business Impact
 Labour advantage
 New Business Opportunities
 Emergence of SEZs, EPZs, and EOUs

Reasons to Enter International Business

(From the Government's Angle)
u Earning valuable foreign exchange
u Interdependency of Nations
u Trade theories and their impact
u Diplomatic relations
u Core competency of nations
• Investment for infrastructure
• National Image
• Foreign trade policy and targets
• WTO and international agencies

Stages of Internationalization
Stage-1 :Domestic Company
Stage 2 : International Company
Stage 3 : Multinational Company
Stage 4 : Global Company
Stage 5 : Transnational Company

International Business Approaches

1. Ethnocentric approach
– Sales of domestic products in int. markets.
– Domestic orientation
– International Market secondary
– Firm seeks markets similar to domestic.
– Little adaptation of product or marketing mix.
– Usually produced domestically
2. Polycentric approach
– Recognition of difference in overseas markets
 – Decentralization of operations
– Country by country basis
– Local marketing input and control
3. Regiocentric approach
– Different regions as different markets
– Strategies formulated for a region
4. Geocentric approach
– Develop product and marketing strategies for world markets.
– Standardize as far as possible, adapt where necessary.
– Economies of scale transfer of knowledge and technology, global image, and
better competitive position.
– The world is viewed as the market

Stages of domestic to global evolution

Management Stage one Stage two Stage three Stage four Global
emphasis Domestic Domestic Multinational
Focus Domestic Ethnocentric Polycentric Geocentric
Marketing Domestic Extension Adaptation Extension
strategy
Management Domestic Centralised top Decentralised Integrated
style down bottom up
Manufacturing Mainly domestic Mainly domestic Host country Lowest cost
stance worldwide
Investment Domestic Domestic used Mainly in each host Cross subsidization
policy worldwide country
Performance Domestic market Against home Each host country Worldwide
evaluation share country market market share
share

Advantages
1. Higher living standards 2. Increased socio-economic welfare
 3.
Wider market 9. Division of labor and specialization
4.
Reduced effects of business cycles 10. Economic growth of the world
5.
Reduced risks 11. Optimum and proper utilization of
6.
Large scale economies World resources
7. Potential untapped markets 12. Cultural transformations
8. Provides opportunities for 13. Knitting the world into a closely
challenges to domestic market 14. interactive traditional villages
Problems
1. Political factors 7. Bureaucratic practices of
2. Huge foreign indebtedness government
3. Exchange instability 8. Technological pirating
4. Entry requirements 9. High cost
5. Tariff, quotas and trade barriers 10. Cultural sensitivities
6. Corruption

Current Trends in International Business

 Capital movements rather than trade have become the driving force.
 Production has become uncoupled from employment.
 Primary products have become uncoupled from the industrial economy.
 The world economy and not the macroeconomics of nation-state controls economic
outcomes.
 Capitalist system has proved to be successful over the communist centrally planned
model.
 Emergence of Free Trade agreement (FTAs) and regional trade agreements
 Emergence of developing countries’ growth through investments and trade
 Innovative approach of LDCs.

International Business Environment

TYPES OF ENVIRONMENT

1. Economic Environment
2. Cultural Environment
3. Demographic Environment
4. Political – Legal Environment
5. Natural Environment
6. Technological Environment
7. Trading Environment

1. THE ECONOMIC ENVIRONMENT

The Global Economic Scene – When discussing the global economic scene we will look
at:
a. Recent trends
b. Economic Systems
c. Economic Structure
d. Stages of Economic Growth
b. - Economic Systems
 Since World War II, countries have been classified according to their economic system.
They were classified as follows, depending upon who allocates the resources:
1. Market Allocation System - Relies upon the consumer to allocate resources - economic
democracy.
2. Command Allocation - resource allocation decisions are made by the government
planners.
3. Mixed System
c. - Economic Structure
Economic structure of a country shapes its product and service needs, income levels, and
employment levels.
Types of Economic Structures
1. Subsistence economies: Produce only for self no export
2. Raw material exporting economies: Export only raw material, no finished goods (African
countires)
3. Industrializing economies: Setting more industries and going towards development
(India)
4. Industrial economies: Fully mechnaised and developed econmy (America)
d. - Stages of Economic Grwoth
Countries differentiated as per their GNP per capita as under:.
1. Low income countries
2. Lower middle income countries
3. Upper middle income countries
4. High income countries

Factors of - Economic Policies

1. Industrial policy: Regarding the industries of the country
2. Foreign exchange policy: Country decides how to manage its Foreign Exchange
3. Foreign Investment & Technology policy: Each ministry decides, in where the
companies can invest and technological details
4. Fiscal policy: Decided by Government of India every year when giving budget
5. Monetary policy: Decided by Reserve Bank of India

What to see to find out Economic Condition of the country?

 Trends in the GNP growth rate & per capita income
 Trends in foreign trade
 Domestic demand & supply conditions

Protectionism – Every country wants to protect own companies from foreign competition
Historically, countries have been dominated by a desire to protect domestic industry from
foreign competition.
There have been many attempts to regulate the international economic environment in
the interests of freeing up trade between countries.
In recent years, trade barriers have fallen in most countries, however they have been
replaced by non-tariff barriers.
Justifications for protectionism:
1. Protection of an "infant" industry: Industry is very small like SME in India so they cant
compete with foreigner so protects them
2. Intervention into a temporary trade balance: If suddenly export becoming very less than
import, then BAN import for sometime to balance them out
 3. Maintenance of domestic living standards and preservation of jobs. To protect domestic
jobs, and hence the standard of living of domestic people
4. Retaliation: Now there is World trade organization earlier countries used to keep doing as
they wanted. If India stops import from China, China would also stop import from India

TRADE BARRIERS
Governments restrict trade to protect industries from foreign competition by using two main
tools:
– Tariffs
– Nontariff barriers
Tariff: is a tax on a good that is imposed by the importing country when an imported good
crosses its international border.
Nontariff barrier: is any action other than a tariff that restricts international trade. For example,
a quota.

Factors use to evaluate Domestic Economy of a Foreign Country

 Size of the market
 Nature of the economy
 Foreign Involvement in the economy
 Impact of economic environment on social development

Domestic Economy of Foreign Nations

Market Characteristics
1. Population
– Population growth rate
– Distribution of population - Age distribution, life expectancies, household size,
urbanization
2. Income
– Distribution of low, medium, and high incomes
– Gross domestic product per capita
– Purchasing power parity
3. Consumption patterns
– Income spent on necessities and luxuries
– Product saturation or diffusion
– Product form differences
Nature of the economy evaluated based on:
a. Physical endowment
i. Natural resources
ii. Topography
iii. Climate
b. Availability and quality of infrastructure
i. Rail traffic networks for distribution capabilities
ii. Communication systems for marketing
iii. Energy (electrical and fuel) consumption

Foreign involvement in the economy

 Degree of foreign direct investment in country or in a specific
industry
 Rules governing foreign investment
 Impact of the economic environment on social development
– Urbanization, life expectancy, literacy rates, etc.

2.Socio – Cultural Environment

• Definition
• Elements of culture
• Cultural Traits

Definition: Culture prescribes the forms of behaviour that are acceptable to people in a specific
community. It is an integrated sum total of learned behavior …traits that are shared by members
of any given society.
– Culture is learned
– Culture is dynamic
– Culture is subjective
The Elements of Culture
1. Material Elements 5. Religion
2. Language - verbal and non-verbal 6. Values and Attitudes
3. Aesthetics 7. Manners and Customs
4. Education u Social Institutions

Cultural Traits
1. High Context & Low Context Culture
2. Masculine & Feminine Culture: Give more importance to Men/ women
3. Monochronic & Polychronic Culture: Do one work at a time/ many at a time
4. Universalism Vs Particularism:
5. Individualism Vs Communitarianism: Live individually or in groups
6. Neutral Vs Emotional: Do not show emotion of show lot of Emotion
7. Achievement Vs Ascription: Status of person based on work done/ position held
8. Cultural Stereotypes

3. Political Environment
• Introduction
• Role of Government in the Economy
• Sources of political instability
• Political risks
• Managing overseas political environment

INTRODUCTION
u An important part of any business decision is assessing the political environment in
which the firm operates.
u Civil wars, assassinations, kidnapping of foreign businesspeople, and expropriation of a
firm’s property are dangerous to the viability of a firm’s foreign operations

Role of Government in the Economy

1. Participator - commercial activities undertaken by government to some degree
2. Facilitator - overseas governments may attract new foreign investment and
technology
3. Regulator - Regulation may be thru taxes; embargoes; boycotts; import/export
controls; and joint venture law
Marketing is affected by nationalism
 Where nationalism is high, foreign firms tend to be regarded with suspicion and their
products discriminated against

Sources of Political Instability

1. Degree of social unrest
2. Frequency of changes in the regime
3. Extent to which the country is divided culturally and/or ethnically
4. Religious division
5. Linguistic diversity
6. Political sovereignty
7. Political conflict
8. Political intervention

Political risks
u Political risks: any changes in the political environment that may adversely affect the
value of the firm’s business activities
u Three types of political risks:
1. Ownership risk, where the property of the firm is threatened through confiscation
or expropriation
2. Operating risk, in which the ongoing operations of the firm and/or the safety of
its employees are threatened
3. Transfer risk, in which the government interferes with the firm’s ability to shift
funds into and out of the country

Managing the Overseas Political Environment

 Political neutrality:
 Find out which party public likes, and support it.
 Contribute to local infrastructure development.
 Political risk in home country vs. foreign country (e.g. sanctions)
 Lobbying to influence political decisions
 Awareness of impact of a firm’s operations on alternative government’s policies
 The linking of a firm’s commercial activities to the host nation’s economic interests and
planned developments
 It nothing works then disengage from the country by following means:
i. Leave the country altogether
ii. Totally indigenize operations to become a local company
iii. Negotiate an arrangement under the new law
iv. Take pre-emptive action in advance of announced changes
v. Generate sizable exports for the country to step up the host government
dependency on the operation

Legal Environment
• Types of Legal systems
• Legal Issues
• Marketing laws
• Methods used for Contract and Dispute Resolution
Types of Legal Systems
– Common law- based on tradition, past practices, legal precedent, and
interpretation via court decision
 – Code law- based on an all-inclusive system of written rules of law
– Islamic law- based on the Koran, and applied by Islamic countries
– Other legal codes- include tribal (or indigenous) law, and socialist laws

Legal Issues for Global Marketers

 Jurisdiction
 which country’s laws apply?
 Dispute Resolution (Int’l Court of Justice)
 Intellectual Property
 Patents, Trademarks and Copyright issues
 Antitrust Laws
 Licensing and Trade Secrets
 Marketing Laws
 Bribery and Corruption

Marketing Laws
u Does the product comply with national rules regarding:
– technical regulations, standards, labeling, packaging restrictions, etc.
u Advertising
– product claims, comparative advertising
u Promotional restrictions
– coupons, contests, gifts, etc
u Government price controls
– often motivated by a desire to protect consumers’ interests or control inflation
– a desire to ensure price competition in the market
u Laws on distribution
F Shipping
F Regulation of airline services
F Rights of carriage by air and sea
F Liabilities for loss and damage to cargo
u Channel activities
– Foreign/local agency termination arrangements

Methods used for Contracts and Dispute Resolution

1. Conciliation
– The best approach Least likely to close the door on future business
– Saves face for both parties in a dispute
2. Arbitration
– Advantages of arbitration :
F Increases the ability of parties to enforce judgements
F Sensitive matters remain confidential to the parties concerned
F Likely to be quicker than litigation
F ‘Judges’ may be chosen by both parties
F An arbitration judgement is unlikely to be appealed and more likely to be
treated as final
3. Litigation
a. Should be used only as a last resort
b. Disadvantages of litigation are:
i. Usually closes the door on future business
 ii. Can create a poor image and damage public relations
iii. There is the risk of unfair treatment at the hands of a foreign court
iv. There may be difficulty in collecting the judgement
v. There is considerable opportunity cost
Regulatory Environment Consists of a variety of agencies that enforce laws or set
guidelines for conducting business (WHO, Food & Agriculture, UN, etc.)

International Economic Institutions

1. Bretton Woods Agreement
2. GATT
3. WTO
4. IMF
5. World Bank
6. UNCTAD

1. Bretton Woods Aggrement

– What happened
– What was proposed

Bretton Woods Agreement what happened

• Agreement coming out of WWII (1945) to stabilize the world economy.
• Determined not to repeat the mistakes that had caused World War II, Western diplomats
desired to create a postwar economic environment that would promote worldwide peace
and prosperity.
• In 1944 representatives of forty-four countries met at a resort in Bretton Woods, New
Hampshire, with that objective in mind.

Bretton Woods Agreement what was proposed

Proposed the establishment of
– The International Monetary Fund (IMF) - lending and “consulting”
organization for member nations
– The International Bank for Reconstruction & Development (IBRD),
Popularly known as the World Bank, to assist in the post-war reconstruction and
development of the member countries
– An International Trade Organization (ITO) to be the focal point of
cooperation in trade matters.
• The ITO was never implemented. However, later in 1948, GATT was formed.
• WTO is successor to GATT (General Agreement on Tariffs and Trade)

2. GATT (General Agreement on Tariffs and Trade)

» Introduction
» 5 key Principles
» Objectives
» Rules
» Major GATT Negotiation Rounds
» Urugay Round 1986-93

GATT (General Agreement on Tariffs and Trade) - Introduction

 • GATT was born in 1948 to ensure a stable trade and economic world environment.
• It was started as a set of rules to ensure nondiscrimination, transparent procedures, the
settlement of disputes, and the participation of the lesser-developed countries in
international trade.
• GATT was beginning of large-scale multilateral trade negotiations
• First “round” in 1947 in Geneva - Eight rounds altogether through 1993

Five Key Principles in GATT:

1. trade barriers should be lowered in general and quotas should be eliminated
2. trade barriers should be applied on MFN basis – no discrimination among trading
partners
3. national treatment – imported goods treated same as domestic goods
4. tariff concessions, once made, cannot be withdrawn without compensating trade
partners, and new barriers cannot be erected in place of lowered tariffs
5. trade disputes to be settled by consultation

GATT - Objectives
• Prime objective of GATT was to liberalize trade.
• Raising standard of living
• Ensuring full employment and a large & steadily growing volume of real income &
effective demand.
• Developing full use of the resources of the world.
• Expansion of production & International trade.

GATT - Rules
1. Any proposed change in the tariff , or other type of commercial policy of a
member country should not be undertaken without consultation of other parties to
the agreement.
2. The members should work towards the reduction of the tariff & other barriers to
international trade, which should be negotiated under the framework of GATT

Major GATT Negotiating Rounds

• First Round, Geneva, 1947, 21% Average Cut in Tariffs
• Kennedy (6th) Round, Geneva, 1964-67, 36% Average Cut in Tariffs
• Tokyo (7th) Round, Geneva, 1974-79, 30% Average Cut in Tariffs
• Uruguay (8th) Round, Geneva, 1986-93, 33% Average Cut in Tariffs

Uruguay Round, 1986-93

• Over 100 Nations Participated
• Issues Went Far Beyond Tariff Reduction
– Non-tariff Barriers, Intellectual Property Rights, Services Trade, Agriculture
Polices, Improving How GATT Functions
• Created WTO as successor to GATT, beginning in 1995

3. WTO – World Trade Organization

» Introductiom
» Member & memebership
» Goals and Principles
» Functiomns
» Difference between GATT & WTO
World Trade Organization - Introduction
• WTO continues with all five key principles of GATT
• WTO continues two main roles of GATT
1. enforcing existing trade agreements and
2. serving as forum for new talks to liberalize trade
• The WTO is headquartered in Geneva, Switzerland, includes 144 members as of 1
January, 2002 and about two dozen more nations negotiating for membership.
• It is directed by a ministerial conference that meets at least once every two years and its
regular business is overseen by General Council.

Member & membership

• Member Countries Account for Over 90 Percent of World Trade
• Membership Requires Acceptance of All Agreements and Rules From Uruguay Round

WTO – Goals & Principles

The WTO has three primary goals:
a. Promote trade flows by encouraging nations to adopt nondiscriminatory,
predictable trade policies.
b. Reduce remaining trade barriers through multilateral negotiations.
c. Establish impartial procedures for resolving trade disputes.
Other fundamental Principles include:
1. Non-discrimination
2. Freer trade, predictable policies, encouraging competition
3. Extra provision for less developed countries.

Functions of WTO
1. Administering the WTO Agreements.
2. Providing the forum for negotiation among its members concerning their multilateral
trade relations.
3. Administering the mechanism for settling trade disputes between the member
countries.
4. Monitoring national trade policies.
5. Providing technical assistance and training for developing countries
6. Cooperating with other international organizations like the IMF & IBRD and its
affiliated agencies with a view to achieving greater coherence in global economic
policy making

Difference between GATT & WTO

GATT WTO
GATT was adhoc & provisional WTO and its agreements are permanent.
GATT had contracting parties WTO has members
GATT system allowed existing domestic legislation to WTO doesn’t permit this
continue even if it violated a GATT agreement
GATT was less powerful, dispute WTO is more powerful than GATT,
settlement was slow and less efficient, dispute settlement mechanism is
and its ruling could be easily blocked. faster, very difficult o block the
rulings

4. IMF- International Monetary Fund

» Introduction
» Objectives
» Functions
» When IMF helps a country
» Vision
» Global Financial Crisis and IMF

International Monetary Fund - Introductiom

• IMF was established on December 27, 1945 with 29 countries and started its financial
operation on March 1, 1947.
It is a central institution of the international monetary system.
– 184 members in August 2002.

The objectives of the IMF

1. To promote international monetary cooperation
2. To facilitate the expansion and balanced growth of international trade
3. To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation
4. To assist in the establishment of a multilateral system of payments
5. To give confidence to members by making the general resources of the Fund
temporarily available to them
6. To help equalize the international balance of payments of members.

Functions of IMF
• Oversees exchange rate policies
• Monitors international payments imbalances
• Provides temporary loans for balance-of-payments financing.
• Provides the government and central banks of its member countries with technical
assistance and training in its areas of expertise.

When IMF helps a Country

• Crisis occurs when country runs out of foreign exchange reserves – a major currency or
gold that can be used to pay for imports and international borrowings
• IMF conditionality – requirement for the borrowing member to carry out economic
reforms in exchange for a loan

Vision of IMF
IMF would:
• Strive to promote sustained non-inflationary economic growth that benefits all people of
the world.
• Be the centre of competence for the stability of the international financial system.
• Focus on its core macroeconomic and financial areas of responsibility, working in a
complementary fashion with other institutions established to safeguard global public
goods
• Be an open institution, learning from experience and dialogue, and adapting continuously
to changing circumstances.

Global Financial Crises and the IMF

IMF bailouts for troubled economies
• Mexico (1995)
• Thailand, Indonesia, Korea (1997)
• Russia, Brazil (1998)
• Turkey (2001)
• Argentina (2001-present)

5. World Bank
» Introduction
» World Bank Group
» Functions
World Bank
• Founded as the International Bank for Reconstruction and Development (IBRD)
• World Bank’s initial goal was to help finance reconstruction of the war-torn European
economies.
• Over 180 members

The World Bank has created three affiliated organizations, which along with the
World Bank, constitute the World Bank Group:
1. The International Development Association
2. The International Finance Corporation
3. The Multilateral Investment Guarantee Agency

World Bank Group

– 1956 International Finance Corporation (IFC): Ischarged with promoting the
development of the private sector in developing countries.
– 1960 International Development Association (IDA): The IDA offers soft loans,
loans that bear some significant risk of not being repaid.
– 1988 The Multilateral Investment Guarantee Agency (MIGA): To overcome
private-sector reluctance to invest in developing countries because of perceived
political risk.

World Bank- Functions

• Main functions: provide loans to developing countries for projects aimed at:
– poverty reduction
– improvement of health and education systems
– infrastructure for private sector development (bridges, dams, etc.)

6. UNCTAD - United Nations Conference on Trade & Development

» Introduction
» What it Does
» Functions
UNCTAD
 United Nations Conference on Trade & Development (UNCTAD) was established in
1964 as a permanent organ of the UN General Assemble.
The UNCTAD was designed to
• reduce the trade gap of developing countries
• serve as a forum in which trade related development issues could be
discussed and analyzed.

UNCTAD
• Aims at the development-friendly integration of developing countries into world
economy.
• Is the focal point within the UN for the integrated treatment of trade and development
and the interrelated issues in the areas of finance, technology, investment, and sustainable
development.
• Is the forum for inter-governmental discussions and deliberations, supported by
discussions with experts, aimed at consensus-building. UNCTAD undertakes research,
policy analysis, and data collection in order to provide inputs for discussion of experts
and government representatives.
• In cooperation with other organizations and donor countries, provides technical
assistance to developing countries, with special attention towards least developed
countries and the countries with economy in transition.

Functions
1. To promote international trade with a view to accelerating economic
development.
2. To formulate principles of and policies on international trade and related
problems of development.
3. To negotiate multinational trade agreements.
4. To make proposals for putting its principles and policies into effect.

International Banking

Off shore banks

International Capital markets
International Banking Regulations

Off Shore Banks

1. Defination
2. Why to set up Offshore banks
3. How they started
4. Their Operation
5. Benefit to host country from them
6. Major setback for Offshore banking caused by economic
downturn
7. International scrutiny of these banks
8. Competitive business of these baks
9. Positive result from competition amongst these banks
1. Defination
 u Banking units set up by foreign banks in territories where the restrictions and
regulations are limited and there is minimal intervention by the host country.
u Efficient and convenient system for safe banking for the purposes of saving and
borrowing funds for international business opertaions.

2.Why to set-up Offshore Banks

1. Need for fund in foreign country by many international business units
2. Restrictions in the home country to fund overseas due to strict regulations,
interest rates or taxes.
3. Need to search for attractive investment opportunities abroad.
4. Need for fund in foreign country by many international business units
5. Restrictions in the home country to fund overseas due to strict regulations,
interest rates or taxes.
6. Need to search for attractive investment opportunities abroad.

3. How they started

u Originated with the concept of “tax haven”. Example of such countries are Bahamas,
Bermuda, Hong Kong, The Netherlands, Panama and Switzerland.

4. Their Operations
u Integral part of foreign currency markets. The operations comprise of:
– Foreign Currency transactions
– Acceptance and placement of funds in foreign currency outside the country of
issue.
– Issuance and placement of foreign currency certificates of deposits, loans/credits
and bonds.

5. Benefits to the Host country

1. Generation of foreign currency loans and bonds at reasonable interest rates.
2. Increase in foreign exchange income through local operating expenses of the offshore
banking units.
3. Speeding up of the communication and transportation network – in turn upgrades the
local skills and technologies.
4. Increases efficiency and competitiveness of the local banking units.
5. Development of human capital through exposure to international banking skills.

6. Major Setback For Offshore Banking Caused By Economic Downturns

 Asian economic crisis 1977
 Some banks reduced or closed down their operations in these locations
 The government of both Hong Kong and Singapore implemented a series of
measures to improve the regulatory framework and the infrastructure to improve
the attractiveness of their centres
 Singapore identified new growth areas, like wealth management, to be developed
 This in turn attracts more banks to locate operations in these centres and expand existing
operations

7. International Scrutiny On Offshore Banks

 Business practices
 Contribution to international efforts such as fights against money laundering and
terrorism financing
  Their role in international financial stability
 Compliance with other international standards set by G10, OECD, etc institutions

8. Competitive Business
 Centres with poor reputation are less likely to attract business
 Centres must have an available talent pool
 Government policies must be supportive to the continuing development of the centres
 Banks operating in reputable jurisdictions stand a better chance of success provided they
 Have skilled professionals
 Product offering that continues to meet the needs of their clients

9. COMPETITION between off shore banks = POSITIVE RESULTS

 Lower “onshore” tax rates
 Development of new financial products
 Efficient international capital flows
 Financing of the industrial development of South East Asian countries in the
1980’s and 1990’s
 Current financing of the development of China and India

International Capital Markets

1. Main players in
2. Reason for its Growth
3. Its Functions
4. Instruments used in it
5. Reasons for growth of Eurocurreny trading
1. Main Players
F Commercial banks
F Corporations
F Nonbank financial institutions
F Central banks and other government agencies

2. Reason for its Growth

– The removal of barriers to private capital flows across countries’ borders has
contributed to rapid growth in the international capital market.
– A policy “trilemma” refers to three available options:
F Fixed exchange rate
F Monetary policy oriented toward domestic goals
F Freedom of international capital movements

3. Its Functions
1. Offshore banking
F The business that banks’ foreign offices conduct outside of their home
countries
F Banks operate offshore though any of three types of institution:
– Agency office
– Subsidiary bank
– Foreign branch
2. Offshore currency trading
 F Trade in bank deposits denominated in currencies of countries other than
the one in which the bank is located
F It is referred to as Eurocurrency trading.

4. Instruments used in It
– Eurodollars
F Dollar deposits located outside the U.S.
– Eurobanks
F Banks that accept deposits denominated in Eurocurrencies
– Eurocurrency trading has grown for three reasons:
F Growth in world trade
F Evasion of financial regulations like reserve requirements
F Political concerns

5. Reason for Growth of Eurocurrency Trading

– London is the leading center of Eurocurrency trading.
– The early growth in the Eurodollar market was due to:
F Growing volume of international trade
F Cold War
F New U.S. restrictions on capital outflows and U.S. banking regulations
F Federal Reserve regulations on U.S. banks (e.g., the Fed’s Regulation Q)
F Move to floating exchange rates in 1973
F Reluctance of Arab OPEC members to place surplus funds in American
banks after the first oil shock

International Banking Regulation

1. International Banking Facilities
2. Problem of bank Failure
3. Difficulty in Regulating International Banking
4. International regulatory Co operation
5. Current Trends in International Banking
1. International banking facilities (IBFs)
F Accept deposits
F Give loans to foreign customers.
F International banks are not subject to reserve requirements or interest rate
ceilings.
F They are exempt from state and local taxes.

2. The Problem of Bank Failure

– A bank fails when it is unable to meet its obligations to its depositors
– Governments attempt to prevent bank failures through extensive regulation of
their domestic banking systems.

3. Difficulties in Regulating International Banking

– Deposit insurance is essentially absent in international banking.
– The absence of reserve requirements reduces the stability of the banking system.
– Bank examination to enforce capital requirements and asset restrictions becomes
more difficult in an international setting.
– There is uncertainty over which central bank is responsible for providing LLR
(Lender of last resort) assistance in international banking.
4. International Regulatory Cooperation
– Offshore banking is largely unprotected by the safeguards national governments
have imposed to prevent domestic bank failures.
– Basel Committee
F It is a group of central bank heads from 11 industrialized countries.
F It enhances regulatory cooperation in the international area.
F Its 1975 Concordat allocated national responsibility for monitoring
banking institutions and provided for information exchange.

5. Current Trends
– rapidly growing importance of new emerging markets as sources and
destinations for private capital flows.
– The trend toward securitization has increased the need for international
cooperation in monitoring and regulating nonbank financial institutions.

Multinational Corporations

MNC & FDI

1. Defination
2. Importance
3. Economic Size of some MNC’s
4. MNC & National Sovereignty
1. Definitions
u Multinational corporation (MNC): firm that owns and manages productive facilities in 2
or more countries
u Foreign direct investment(FDI): ownership of productive assets by foreign residents for
purposes of controlling uses of those assets.
– Control distinguishes FDI from “portfolio investment” (bank loans or bond
lending).
u Summary: MNCs engage in FDI

2. Importance of MNCs
u In 2000, world’s largest 500 MNCs had sales of $13.7 trillion--nearly half the value of all
goods and services produced in the world
u Largest MNCs have revenues greater than the GDP of all but about 20 nations
u MNCs are also important in int’l trade
– About 1/3 of all world trade is between
u branches of MNCs located in different countries; this is known as “intrafirm” trade.

3. Economic Size (assets to GDP)

4. MNCs and National Sovereignty

u Sheer size of MNCs creates potential problems for national governments on a range of
issues:
– location of production, jobs, technology, managerial expertise
u Tension arises because goals of MNCs may conflict with the goals of governments
 Multi National Corporation
1. Few Pointers
2. Defiantion
3. Issues
4. Structures
5. Related Personnels
6. The MNC Phenomenone
7. MNC stages
8. Motives and Goals of MNC
9. Goals of the Host cOuntry
10. MNC and Corruption

1. Multinational Corporations
 Multinational corporations do substantial business in several countries.
 Multinational corporations can be controversial at home and abroad.
 Multinational corporations face a variety of ethical challenges.
 Planning and Controlling are complicated in multinational corporations.
 Organizing is complicated in multinational corporations.
 Leading is complicated in multinational corporations.

2.Multinational Corporations -Defination

u Multinational Corporation (MNC)
– A business with extensive foreign operations in more than one county.
u Transnational Corporation
– A MNC that operates worldwide on a borderless basis.
“Fortune’s” Top 10 Multinational Corporations
1. Wal-Mart Stores 6. DaimlerChrysler
2. BP 7. Toyota Motor
3. Exxon Mobil 8. General Electric
4. Royal Dutch Shell Group 9. Total
5. General Motors 10. Chevron

3. MNC Issues
 u Protectionism
– A call for tariffs and special treatment to protect domestic firms from foreign
competition.
u Corruption
– Illegal practices to further one’s business interests.
u Transparency International gives these countries its poorest corruption scores:
• Indonesia • Nigeria
• Tajikistan • Bangladesh
• Haiti • Paraguay
• Myanmar
u Sweatshops
– Employ workers at very low wages, for long hours, and in poor working
conditions.
u Child labor
– The full-time employment of children for work otherwise done by adults.
u Sustainable Development
– Development that meets the needs of the present without hurting future
generations.
u Currency Risk
– The possible loss of profits because of fluctuating exchange rates.

Example: Understanding Currency Risk in International Business

U.S. exporter makes a sale in France for Euro 100,000.
Scenario 1: Weak dollar
.95 Euros = 1 $US
Take home revenue = $105,263
Scenario 2: Strong dollar
1.25 Euros = 1 $US
Take home revenue = $80,000

4. MNC Structures
5. MNC Related Personnels
u Expatriate
– An employee who lives and works in a foreign country.
u Global Manager
– A person who is culturally aware and informed on international affairs.
– Personal Attributes for Expatriate Success
F High degree of self-awareness
F Cultural sensitivity
F Desire to live and work abroad
F Family flexibility and support
F Technical job competence

6. The Multinational Corporation Phenomenon

u The Largest Industrial Corporations, 1996:
– 1) General Motors
– 2) Ford
– 3) Royal Dutch/Shell Group
– 4) Exxon
– 5) Toyota Motor
– 6) Wal-Mart
– 7) General Electric
– 8) Nippon Telephone and Telegraph
– 9) IBM
– 10) Hitachi

7. MNC Stages
1. Exports products to foreign countries.
2. Establishes sales organizations abroad.
3. Licenses use of patents and technology to foreign firms that make and sell the MNCs
products.
 4. Establishes foreign manufacturing facilities, but important decisions about such matters
as product design, marketing and finance are made at the home office.
5. Gives foreign production facilities substantial autonomy but still reserves some important
decisions for the home office.
6. Decentralizes authority throughout the company so that functions at home and abroad are
done by executives from different countries.

8. Motives and Goals of the MNC

1. The fundamental motive of going abroad is, of course, profit.
2. Their goals, among others, include:
– Obtain a high and rising return on investment
– Achieve greater sales
– Hold risks within reasonable limits in relation to profits
– Maintain and improve technological and other company strengths

9. Goals of the Host Country

1. Achieve economic growth
2. Achieve full employment of people and resources
3. Improve managerial and worker skills
4. Develop a favorable balance of trade
5. Achieve a more equitable distribution of income among the population
6. Retain a fair share of profits made by MNCs in their country
7. Improve technological development
8. Retain hegemony over the economic system
9. Control national security decisions
10. Develop and maintain social and political stability
11. Advance the quality of life of the people of the country

10.Multinational Corporations: Corruption

Cultural differences, practices and laws where MNCs do business create extremely difficult
moral, ethical and legal problems for MNCs.
– Raises the costs of doing business
– Distorts government allocation of expenditures
– Can slow the development of a free market
– Can have a corrosive impact on both government service and business efficiency
– Distorts competition
– Can undermine political legitimacy

MNC and Less Developed Countries (LDC)

• Resentment
• MNC response to it

LDCs: Resentments
1. Giving up of some power and independence
2. Struggle to meet membership standards of World Trade Organization (WTO)
3. They want tariff reductions in developed countries to admit more of their exports
4. They want cheaper medicines and the right to reproduce them
5. They resent policies made by MNC managers in far-off home countries
6. They deplore “cultural imperialism” of MNCs
MNC Response to LDCs
1. Provide employment
2. Improve technical skills
3. Raise standard of living
4. Introduce new technology
5. Provide access to international markets
6. Raise GNP and increase productivity
7. Help build foreign exchange reserves
8. Encourage development of new industries
9. Assume investment risk for projects that might not otherwise be undertaken

Foreign Direct Investment

1. Types of FDI
2. Why to Choose FDI
A. Location Advantage
B. Market imperfection
i. Intangible Assets
ii. Specific Assets
3. Regulation on MNC
4. Reason for FDI
A. Host – Country Perspective
i. Positive
ii. Negative
B. Home – Country Perspective
i. Positive
ii. Negative
1. Two Types of FDI
u Horizontal FDI: when a MNC produces the same product in multiple national markets
– Example: Coca Cola is made in over 200 countries; 70% of its revenues are
overseas
u Vertical FDI: when a MNC owns and controls different stages of a worldwide production
process
– E.g. oil company that owns everything from crude oil field wells, to
transportation pipelines, to refining firms, to storage and distribution facilities, to
retail gasoline stations.

Vertical Integration of a Multinational Car Company

2. Why to choose FDI
u To choose FDI, there must be both a
A. “locational advantage”
B. and a “market imperfection.”

A. Locational Advantages
u Natural Resource Investments
– Raw materials are spread unevenly around the world. MNCs may need to locate
abroad to obtain them
u Market Oriented Investments
– Nations with large consumer markets are attractive to MNCs
u Efficiency Oriented Investments
– MNCs “outsource” portions of the production process to different nations based
on different factor prices (e.g, low labor costs)
u But Locational Advantages are not enough to explain FDI! (firms could license)

B. Market Imperfections
u Market imperfections exist when the price mechanism fails to yield mutually beneficial
transactions
i).One type of imperfection involves “Intangible Assets (“knowledge” assets that are
difficult to price)
– e.g. managerial skills, knowledge about production processes, reputation
– intangible assets are quite valuable but hard for firms to protect: once out there,
they can be had by any competitor at no cost
ii). Specific Assets
u A second market imperfection involves “specific assets ”
 u Specific assets are non-redeployable physical and human investments that are specialized
and unique to a task
– e.g, the production of a certain component may require investment in specialized
equipment, or the distribution of a certain product may necessitate unique
physical facilities

u In short, specific assets are investments that are dedicated to a particular use

3.Types of Regulations on MNCs

u export performance requirements
u restrictions on profit repatriation
u technology transfer requirements
u employment requirements
u local content requirements
u ownership restrictions (foreigners allowed to own only so much—e.g. 49%)
u In the limit, expropriation

4. Reasons for Foreign Direct Investment:

– Marketing Factors
– Barriers to Trade
– Cost Factors
– Investment Climate

A. The Host-Country Perspective on Foreign Direct Investment

i) The Positive Impacts:
1) Technology transfer
2) Capital Formation
3) Transfer of technology and management skills
4) Regional and sectorial development
5) Internal competition and entrepreneurship
6) Favorable effect on balance of payments
7) Increased employment
8) In the advanced stages of globalization.
ii) The Negative Impacts:
1) Brain drain
2) Industrial dominance
3) Technological dependence
4) Disturbance of economic plans
5) Cultural change
6) Interference by home government of multinational corporation

B. The Home-Country Perspective

i) Positive Impacts
u Increase in GNP
u Stimulation of economic growth
u Serve political motives
ii) Negative Impacts
u Domestic job loss
u Giving away competitive advantage due to technology transfer
u Negative impact on the behavior of the firms abroad
 Off- Shoring of Services
u Until recently, off shoring involved sending manufacturing jobs overseas, to take
advantage of lower labor costs
u Now, information and communications technology (internet, video conferencing, etc) has
made it possible to deliver a wide array of services from afar:
– low-skilled services like call centers, transcription and telemarketing.
– high-skilled services such as programming, accounting, radiology, architecture,
and engineering
u Entry of 1.5 billion “new” workers into the world economy (China, India, Russia) means
that there are plenty of people willing to provide services from afar…and not all are low
skilled!
u Phone call centers in Bangalore already serve millions of customers in the United States
u Medical x-rays are now transmitted digitally from hospitals in the U.S. to be analyzed by
radiology labs in Bombay
u There is deep anxiety in the U.S. about all this job loss

Factor to Consider when doing International PEST Analysis

Political
1) ecological/environment 7) government term and
al issues change
2) current legislation home 8) trading policies
market 9) funding, grants and
3) future legislation initiatives
4) European/international 10) home market
legislation lobbying/pressure groups
5) regulatory bodies and 11) international pressure
processes groups
6) government policies 12) wars and conflict
Economic
1) home economy situation 8) specific industry factors
2) home economy trends 9) market routes and
3) overseas economies and distribution trends
trends 10) customer/end-user drivers
4) general taxation issues 11) interest and exchange
5) taxation specific to rates
product/services 12) international
6) seasonality/weather issues trade/monetary issues
7) market and trade cycles
Socio-Cultural
1) lifestyle trends 6) brand, company,
2) demographics technology image
3) consumer attitudes and 7) consumer buying patterns
opinions 8) fashion and role models
4) media views 9) major events and
5) law changes affecting influences
social factors 10) buying access and trends
11) ethnic/religious factors
 12) advertising and publicity 13) ethical issues
Technological
1) competing technology 7) information and
development communications
2) research funding 8) consumer buying
3) associated/dependent mechanisms/technology
technologies 9) technology legislation
4) replacement 10) innovation potential
technology/solutions 11) technology access,
5) maturity of technology licencing, patents
6) manufacturing maturity 12) intellectual property
and capacity issues
13) global communications