127921029 international business management

8/12/2019 127921029 International Business Management

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CHAPTER 1: GLOBALIZATION

Contents:

Understand what is meant by globalization. Be familiar with the causes of globalization.

Changing international trade patterns, FDI flow, differences in economicgrowth among countries, and the rise of new MCs are changing the natureof the world economy.

Debate o!er the impact of globalization.

umerous opportunities and challenges due to globalization.

Introduction

"hether a business student is studying mar#eting, finance, accounting,strategy, human relations, or operations management, the differences betweencountries in which a firm does business will affect decisions that must be made.

$ fundamental shift is occurring in the world economy. %he world is gettingcloser in terms of cross border trade and in!estment, by distance, time zones,languages and by national differences in go!ernment regulation, culture andbusiness systems and toward a world in which national economies are merginginto one huge interdependent global economic system. &lobalization is affectingfirms that pre!iously operated in a nice, easy, protected national mar#et. It alsoillustrates the increasing importance of thin#ing globally.

What is go!ai"ation#

$e%inition: go!ai"ation is the trend to&ard a 'ore integrated go!aecono'ic s(ste')%he rate at which this shift is occurring has been accelerated recently.

Go!ai"ation has t&o %aces'

Go!ai"ation o% 'ar*ets

Go!ai"ation o% +roduction

Go!ai"ation o% 'ar*ets:

Go!ai"ation o% 'ar*ets re%ers to the %act that in 'an( industrieshistorica( distinct and se+arate nationa 'ar*ets are 'erging intoone huge go!a 'ar*et+ace)

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%here is a mo!ement towards a globalization of mar#ets, as the tastes andpreferences of consumers in different nations are beginning to con!erge uponsome global norm. %he global acceptance of Coca(Cola, )e!i*s +eans, ony"al#mans, and McDonald*s hamburgers are all e-amples. By offering astandard product worldwide, they are helping to create a global mar#et. !ensmaller companies can get the benefits from the globalization of mar#ets.

Despite the global pre!alence of global brands such as )e!is, City Ban#, /epsietc, national mar#ets are not disappearing. %here are still significant differences( &ermany still leads in per capita beer consumption, with a local pub on almoste!ery corner and in some cities, women selling beer out of their front windowsto passers by on the street. %he French lead in wine consumption, and theconsumption of wine is a natural part of life anywhere in France. Italians lead inpasta eaten, and these differences are unli#ely to be eliminated any time soon.0ence, often there is still a need for mar#eting strategies and product featuresto be customized to local conditions.

Go!ai"ation o% +roduction'

The go!ai"ation o% +roduction re%ers to the tendenc( a'ong 'an(%ir's to source goods and ser,ices %ro' di%%erent ocations around thego!e in an atte'+t to ta*e ad,antage o% nationa di%%erences in thecost and -uait( o% %actors o% +roduction) .a!or/ energ(/ and and

ca+ita0

%hrough this companies hope to lower their o!erall cost structure and orimpro!e the 1uality or functionality of their product, thereby allowing them tocompete more effecti!ely against their ri!als. %he e-amples of Boeing and wan2ptical illustrate how production is dispersed.

Boeing company*s commercial +et airliner, Boeing 333 contains 456,788 ma+orcomponents parts that are produced around the world by 797 differentsuppliers. ight :apanese suppliers ma#e parts of fuselage, doors and wings, asupplier in ingapore ma#e the doors for the nose landing gear, three suppliers

in Italy manufacture wing flaps etc.

%he result of ha!ing a global web of suppliers is a !etter %ina +roduct, whichenhances the chances of Boeing wining a greater share of aircraft orders thanits global ri!al Air!us.

"hile part of the rationale is based on costs and finding the best suppliers inthe world, there are also other factors. In Boeing*s case, if it wishes to sellairliners to countries li#e China, these countries often demand that domestic



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firms be contracted to supply portions of the plane ( otherwise they will findanother supplier ;$irbus< who is willing to support local industry.

$ri,ers o% go!ai"ation

T&o *e( %actors see' to underie the trend to&ards the increasinggo!ai"ation o% 'ar*ets and +roduction:

The decine o% !arriers to trade and in,est'ent and

Technoogica change)

The decine o% !arriers to trade and in,est'ent:

$ecine in Trade !arriers'

$e%inition: Internationa trade occurs &hen a %ir' e+orts goods orser,ices to consu'ers in another countr()

Many of the barriers to international trade too# the form of high tariffs onimports of manufactured goods. 0owe!er, this depressed world demand andcontributed to the great depression of the 4=58*s.

$fter "orld "ar II, the industrialized countries of the "est started a process of

remo!ing barriers to the free flow of goods, ser!ices, and capital betweennations. Under &$%%, o!er 498 nations negotiated e!en further to decreasetariffs and made significant progress on a number of non(tariff issues ;e.g.intellectual property, trade in ser!ices


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in,ests to internationa trade acti,ities outside its ho'e countr()

%he growth of foreign direct in!estment is a direct result of nations liberalizingtheir regulations to allow foreign firms to in!est in facilities and ac1uire localcompanies. "ith their in!estments, these foreign firms often also bringe-pertise and global connections that allow local operations to ha!e a muchbroader reach than would ha!e been possible for a purely domestic company.

%he e!idences also suggests that FDI is playing an increasing role in the globaleconomy

as firms increase their cross border in!estments. Between 4=>7 and 4==7 thetotal annual flow of

FDI from all countries increased nearly si- fold to ?457 billion, a growth rate inthe world trade

%he ma+or in!estors has been U., :apanese, and "estern uropean Companiesin!esting in

urope, $sia, ;particularly in China, and India


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3Teeco''unications is creating a go!a audience) Trans+ort iscreating a go!a ,iage) 2ro' Buenos Aires to Boston to Bei4ing/ordinar( +eo+e are &atching 5T6/ the( are &earing Le,i7s 4eans/ andthe( are istening to 8on( Wa*'an as the( co''ute to &or*)9

enato uggiero, Director &eneral of "orld trade 2rganization.

Impro!ed information processing and communication allow firms to ha!e betterinformation about distant mar#ets and coordinate acti!ities worldwide. %hee-plosi!e growth of the "orld "ide "eb and the Internet pro!ide a means torapid communication of information and the ability of firms and indi!iduals tofind out about what is going on worldwide for a fraction of the cost and hassleas was re1uired only a couple of years ago.

5icro+rocessor and teeco''unications: %he single most importantinno!ation has been the de!elopment of the microprocessor, which enabled thee-plosi!e growth of high power, low cost computing, increasing the amount ofinformation that can be processed by indi!iduals and firms. 2!er the past 58years, global communications ha!e been re!olutionized by the de!elopments insatellites, optical fiber, and wireless technology, and internet and "orld "ide"eb. $ll these technologies rely on the microprocessor to encode, transmit anddecode the !ast amount of information that flows along these electronichighways.

A +heno'enon *no&n as 5oore7s a&, which predicts that the power ofmicroprocessor technology doubles and its cost of production falls in half ofe!ery 4> months. %hat means the cost of coordinating and controlling a globalorganization will reduce phenomenally.

%he Internet and "orld "ide "eb' this is the latest e-pression of thisde!elopment. %here are more than 478 million users of the Internet. %his willde!elop into the information bac#bone of tomorrow*s global economy. eal time!ideo conferencing and commercial transactions can be transmitted through""". """ will reduce the costs of global communications and it will create atruly global electronic mar#et place of all #inds of goods and ser!ices. uch asthe soft wares and bulldozers, and this will ma#e it easier for firms of all sizes to

enter the global mar#etplace.

Trans+ortation technoog(' Impro!ements in transportation technology,including +et transport, temperature controlled containerized shipping, andcoordinated ship(rail(truc# systems ha!e made firms better able to respond tointernational customer demands.

$s a conse1uence of these trends, a manager in today*s firm operates in anen!ironment that offers more opportunities, but is also more comple- and



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competiti!e than that faced a generation ago. /eople now wor# with indi!idualsand companies from many countries, and while communications technology,with the uni!ersality of nglish as the language of business, has decreased theabsolute le!el of cultural difficulties indi!iduals face, the fre1uency with whichthey face inter(cultural and international challenges has increased.

The changing de'ogra+hics o% the go!a econo'(:

In 4=8*s there were four facts described in the demographics of the globaleconomy.

%he U. dominance in the worlds economy and world trade.

U. dominance in the world Foreign Direct In!estment picture.

%he dominance of large multinational U. firms in the internationalbusiness scene.

oughly half of the globe ;communist world


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output4=5 ;G7 ;G8s, the U. position as the world*s leading e-porter wasthreatened. 2!er the last 58 years, U. dominance in e-port mar#ets hasreduced as :apan, &ermany and a large number of newly industrializedcountries such as outh @orea, and %aiwan has ta#en a large share of the worlde-ports. During the 4=8s, the U. accounted for 68G of world e-ports ofmanufactured goods. 0owe!er, this reduced to 46.6G by 4==7. Despite the fallthe United tates remain the world*s largest e-porter, flowed closely b &ermany

and :apan.

apid economic growth rates now being e-perienced by countries such as,China, %hailand and Indonesia, further relati!e decline in the U. share of worldoutput and world e-ports. %he "orld Ban# predicts more future growth byde!eloping nations in ast and outh ast $sia, which includes China, India, andouth @orea.

A changing &ord 2oreign $irect In,est'ent +icture'

%he source and destinations of FDI has also dramatically changed o!er recentyears, with the U and industrialized countries becoming less important;although still dominant< as de!eloping countries are becoming increasinglyconsidered as an attracti!e and stable location for in!estment.

%he U. firms accounted for .5G of the worldwide FDI flow in 4=8s. Britishfirms were

second, accounting for 48.7 G while :apanese firms were a distant third, withonly 6G.



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0owe!er, with the barriers to the free flow of goods and capital fell, and asother countries

increased their shares of world output, non U. firms increasingly began toin!est across national

borders.

%he share of FDI accounted by U. firms declined substantially form around 99percent in 4=>8 to 67 percent in 4==9. Meanwhile the share accounted by:apanese, France, other de!eloped nations and the world*s de!eloping nationsreflects a small but growing trend in FDI.

$nother trend shows an increasing tendency for cross border in!estments to bedirected at de!eloping rather than rich industrialized nations. ;the %o& o%2oreign direct in,est'ent re%ers to the a'ounts in,ested acrossnationa !orders each (ear)= and 4==4 a series of remar#able democratic re!olutions sweptthe communist world. In country after country throughout astern urope ande!entually in the o!iet Union communist go!ernments collapsed. %he o!ietUnion is now history, which is replaced by 47 independent republics.Czechoslo!a#ia has di!ided itself into two states, while Hugosla!ia has dissol!edinto a bloody ci!il war among its successor states.

For about half a century, these countries were closed for western internationalbusiness. %he fall of communism and the de!elopment of free mar#ets inastern urope and the former o!iet Union create profound opportunities,challenges, and potential threats for firms.

%he economic de!elopment of China presents huge opportunities and ris#s, inspite of its continued Communist control. China seems to be mo!ingprogressi!ely toward greater free mar#et reforms. %he southern China pro!incecalled E&uangong now has become the fastest growing economy in the world.Between 4=>5 and 4==7, FDI in China increased from leas than ?6 Billion dollarsto o!er ?5> Billion dollars.

For orth $merican firms, the growth and mar#et reforms in Me-ico and )atin$merica also present tremendous new opportunities both as mar#ets andsources of materials and production.

%he path to full economic liberalization and open mar#ets is not withoutobstruction. conomic crises in )atin $merica, outh ast $sia, and ussia allcaused difficulties in 4==3 and 4==>. In response, much trade was reduced, andsome countries imposed new controls. Malaysia, for e-ample, suspendedforeigners from trading in its e1uity and currency mar#ets to Epre!entdestabilizing influences. "hile firms must be prepared to ta#e ad!antage ofan e!er more integrated global economy, they must also prepare for politicaland economic disruptions that may throw their plans into confusion.

The go!ai"ation de!ate: +ros+erit( or i'+o,erish'ent#

Is the shi%t to&ard a 'ore integrated and interde+endent go!aecono'( a good thing#There are three 'a4or criticis' against go!ai"ations) These are:

Reduced 4o!s and inco'es

It encourages +oor a!or +ractices and en,iron'enta +oicies



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Nationa so,ereignt( o% the countries are getting i'ited

"hile many economists, politicians and business leaders seem to thin# so,

globalization is not without its critics. &lobalization stimulates economic growth,raises the incomes of consumers, and helps to create +obs in all countries thatchoose to participate in the global economy. ome of this growth, howe!er,creates Esweatshop +obs, increases pollution, and draws people from thecountryside into e!er more crowded cities and slums.

Go!ai"ation< 4o!s and inco'es'

2ne ma+or criticism against globalization is that compared to creating +obs itactually destroys manufacturing +obs in the wealthy ad!anced countries li#e U.%hese critics argue that, falling trade barriers allow the firms to mo!e their

manufacturing acti!ities to countries where wage rates are much lower.

In de!eloped countries, labor leaders lament the loss of good paying +obs to lowwage countries. "hen the $F%$ agreement was signed, some politicianswarned of a hearing a Egiant suc#ing sound as +obs left U$ for Me-ico. !en ifthe +obs are not lost, it creates downward pressure on wages in industrieswhere o!erseas production is a !iable option. %he a!ailability of +obs foruns#illed wor#ers is clearly threatened when those +obs can be more efficientlyperformed elsewhere. 2ne solution to this problem is to increase the educationand training of wor#ers in de!eloped countries to maintain employment, andsimply let the uns#illed +obs go to locations where uns#illed wor#ers will accept

lower wages.

Bartlett and teele, two +ournalists form /hiladelphia In1uirer ews paper, citethe case of 0arwood industries, a U clothing manufacturer that closed Uoperations, where it paid wor#ers ?= per hour, and shifted manufacturing to0onduras, where wor#ers recei!e 9> cents per hour. %hey argue because of freetrade, the wage rates of poorer $mericans ha!e fallen significantly o!er theyears.

upporters of globalization reply that these critics miss the essential pointabout free trade( the benefits outweigh the costs. %hey argue that free trade

results in countries specializing in the production of those goods and ser!icesthat hey can produce more efficiently from other countries. !en though thereis dislocation of +obs but the whole economy is better off as a result.

$ccording to this !iew, it ma#es little sense for the U to produce te-tiles athome when they can produce te-tiles at la lower cost in 0onduras or China.Importing te-tiles from China leads to lowering costs for cloths in U, whichresults in U consumers spend less on te-tiles and more on other items.



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$t the same time, the increased income generated in China, from te-tilee-ports increases income le!els in that country, which helps the Chinese topurchase more products produced in U li#e, Boeing :ets, Intel Computers,Microsoft oftware and Motorola cellular phones.

%herefore, supporter of global trade, argue that free trade benefits all countries.

La!or +oices and go!ai"ation

2ne of the criticisms against globalization is that free trade encouragesde!eloped nations to mo!e manufacturing facilities offshore to less de!elopedcountries that lac# ade1uate regulations to protect labor and the en!ironment.%hey feel that free trade can lead to an increase in pollution and e-ploitation oflabor of less de!eloped nations.

)ower labor costs are only one of the reasons why a firm may see# to e-pand inde!eloping countries. %hese countries may also ha!e lower standards onen!ironmental controls and wor#place safety. e!ertheless, since in!estmenttypically leads to higher li!ing standards, there is often pressure to increasesafety regulations to international le!els. o country wants to be #nown for itspoor record on health and human safety. %hus, supporters of globalizationargue that foreign in!estment often helps a country to raise its standards.

%here is also political and economic pressure on firms not to e-ploit labor or theen!ironment in o!erseas operations. "estern firms ha!e been the sub+ects ofconsumer boycotts when it has been re!ealed that they, or their independentsuppliers, operate at standards below that in de!eloped countries.

Nationa so,ereignt( and go!ai"ation'

"ith the de!elopment of the WTO .Word Trade Organi"ation0 and othermultilateral organizations such as the E; .Euro+ean ;nion0 and NA2TA.North A'erican 2ree trade Agree'ent0, countries and localitiesnecessarily gi!e up some authority o!er their actions. If the U$ wanted toEprotect its domestic lumber industry by pre!enting imports of lumber fromCanada, the dispute would li#ely be settled by an international arbitration panel

set up by the $F%$ agreement or the "%2. Because of its trade agreements,the U$ would li#ely be forced to open its mar#ets to importation of lower cost,higher 1uality Canadian lumber. "hile this would clearly be good forconsumers, the domestic lumber industry would protest. "hile clearly someso!ereignty ;independence< has been surrendered, it has been done to protectthe best interests of consumers. If a nation wanted to retreat into a moreprotectionist position, it could clearly choose to withdraw from its internationalagreements.



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3;nder the ne& s(ste'/ 'an( decisions/ &hich a%%ect !iions o%+eo+e/ are no onger 'ade !( oca or nationa Go,ern'ent/ !utinstead/ i% chaenged !( an( WTO 'e'!er nation/ &oud !e de%erredto a grou+ o% uneected !ureaucrats sitting !ehind cosed doors inGene,a/ .H=s o% WTO0> at ris* is the ,er( !asis o% de'ocrac( andaccounta!e decision 'a*ing)9Ra+h Nader/ ;8 en,iron'entaist and consu'er rights ad,ocate)

5anaging in the go!a 'ar*et+ace:

$e%inition: An Internationa !usiness is an( %ir' that engages ininternationa trade or in,est'ent)

$ firm does not ha!e to be a MC in!esting directly in operations in othercountries to engage in International Business. $ll a firm has to do is to starte-porting products or importing products from other countries. $s the worldshift toward a truly integrated global economy, more firms, both the large andsmall, are becoming intentional businesses.

$s their organizations increasingly engage in cross(border trade andin!estment, it means managers need to recognize that the tas# of managing aninternational business differs from that of managing a purely domestic businessin many ways. Countries differ in their cultures, political systems, economicsystems, legal systems, and le!els of economic de!elopment.

%hese differences re1uire that business people !ary their practices country bycountry, recognizing what changes are re1uired to operate effecti!ely. It isnecessary to stri#e a balance between adaptation and maintaining globalconsistency, howe!er. Coca(Cola would not be as successful, nor would Co#e beCo#e, if it tasted li#e ginseng in one country, lemon in another, and rhubarb in athird. Clearly, some adaptations need to be made to correspond with localregulations and distribution systems, but some things need also remainconsistent in order to benefit from economies of scale in ad!ertising andproduction.

$s a result of ma#ing local adaptations, the comple-ity of international businessis clearly greater than that of a purely domestic firm. Firms need to decidewhich countries to enter, what mode of entry to use, and which countries toa!oid. ules and regulations also differ, as do currencies and languages.

Managing an international business is different from managing a purelydomestic business for at least four reasons' ;a< countries differ, ;b< the range ofproblems and manager faces is greater and more comple-, ;c< an internationalbusiness must find ways to wor# within the limits imposed by go!ernmental



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inter!ention and the global trading system, and ;d< international transactionsre1uire con!erting funds and being susceptible to e-change rate changes.

=uestion !an* %ro' 5odue 1:

4. "hat is globalization

2. Discuss the changing demographics of the global economy.;48 mar#s8s and 4==8s. Issues relatingto theocratic and tribal totalitarianism are presently at the root of some unrestin $sia and $frica.

Econo'ic s(ste':

$ good way to understand countries* relati!e political and economic freedom isto draw a diagram with political freedom on one dimension and economicfreedom on the other. ;efer map 6.4 ;page 9< in &lobal Business by Charles0ill< %hen identify the relati!e position different countries on the dimensions ofeconomic and political freedom.

%he political en!ironment of a country matters because' ;4< when economicfreedoms are restricted so may be the ability of an international business tooperate in the most efficient manner, and ;6< when political freedoms arerestricted there are both ethical and legal ris#s concerns that ha!e to beconsidered.

Econo'ic 8(ste's:

There are %our !road t(+es o% econo'ic s(ste's: 'ar*et/ co''and/'ied/ and statedirected.

In reality almost all are mi-ed to some e-tent, for e!en the most mar#etoriented systems ha!e some go!ernmental controls on business and e!en themost command based systems either e-plicitly allow some free mar#ets to e-istor ha!e blac# mar#ets for some goods and ser!ices. Het, all countries can beconsidered to be at some point on a continuum between pure mar#et and pure

command.

5ar*et econo'('

In a +ure 'ar*et econo'(/ the goods and ser,ices that a countr(+roduces/ as &e as the -uantit( in &hich the( are +roduced/ is not+anned !( an(one) Rather +rice and -uantit( are deter'ined !(su++( and de'and)

For a mar#et economy to wor#, there must be no restrictions on either supply or



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demand (( no monopolistic sellers or buyers. %he recent legal battle with thefederal go!ernment and Microsoft is an e-ample of an attempt by go!ernmentto remo!e from Microsoft what it percei!ed to be business restrictions thatresulted in monopolistic operations.

Co''and econo'('

In a +ure co''and econo'(/ the go,ern'ent +ans &hat goods andser,ices a countr( +roduces/ the -uantit( in &hich the( are +roduced/and the +rice at &hich the( are sod. esources are allocated Efor the goodof society. %he go!ernment owns most, if not all, businesses, including e!ensmall businesses li#e the bread ba#ery and the local farm.

Command economies are found in communist countries where collecti!ist goalsare gi!en priority o!er indi!idual goals. France and India ha!e bothe-perimented with e-tensi!e go!ernment planning and state ownership,

although in both countries go!ernment planning has recently fallen intodisfa!or. In this system, state owned enterprises show little interest to controlcosts and be efficient. %here is a general lac# of dynamism and inno!ation incommand economies are !isible, since there is no incenti!es for indi!iduals toloo# for better ways of ser!ing customers.

5ied econo'('

$ mi-ed economy includes some elements of each. In Canada, for e-ample,while most business is pri!ately owned and operated under mar#et principles,health care, electrical power, and li1uor distribution are run by state ownedenterprises in most pro!inces.

In a state(directed economy, the go!ernment plays a significant role in directingthe in!estment acti!ities of pri!ate enterprises through Eindustrial policy. Both:apan and outh @orea are often cited as e-amples of state(directed economies.In both situations, the go!ernment has played a significant role in directingin!estment. %his direction has helped in the creation of some leadinginternational firms. For a state(directed economy to wor# well, statebureaucrats must ma#e better decisions than capital mar#ets on the allocationof resources. "hile state bureaucrats may be able to ta#e a longer(term

perspecti!e than capital mar#ets, they may also pro!e to be intransigent andresistant to ma#ing necessary changes. %he difficulties many outh ast $siancountries faced in 4==3(=> highlight some of the limitations of a state(directedeconomy. esisting whims of the mar#et has both its good and bad points.

Lega 8(ste's

The ega s(ste's o% a countr( re%ers to the rues/ or a&s thatreguate !eha,ior/ aong &ith the +rocesses !( &hich the a&s o% a



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countr( are en%orced and through &hich redress %or grie,ances iso!tained)

%he legal en!ironment of a country is of immense importance to international

business. $ country*s laws regulate business practice, define the manner inwhich business transactions are to be e-ecuted, and set down the rights andobligations of those in!ol!ed in business transactions. Differences in thestructure of law can ha!e an important impact upon the attracti!eness of acountry as an in!estment site andJor mar#et.

Lega s(ste's and +ro+ert( rights' there are three aspects of legal systemsthat affect international business, i.e., a&s o% +ro+ert( rights/ inteectua+ro+ert( rights/ +roduct sa%et( and +roduct ia!iit( a&s and contracta&s)

Pro+ert( rights' is the bundle of legal rights addressing the use to which a

resource is put and the use made of any income that may be deri!ed from thatser!ice.

Control o!er property rights are !ery important for the functioning of business./roperty rights can be !iolated by either +ri,ate action ;theft, piracy,blac#mail, Mafia< or +u!ic action ;go!ernmental bribery and corruption,nationalization


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+a(&rights/ artists and +u!ishers to +u!ish and dis+ose their &or*sas the( see it)

Trade'ar*s: are designs and na'es/ o%ten o%%icia( registers/ !(

&hich 'erchants or 'anu%acturers designate and di%%erentiate their+roducts)

Firms li#e Microsoft, )e!is, Coca(Cola, or McDonald*s would ha!e little reason toin!est o!erseas if other firms in other countries were able to use the samename and copy their products without permission. For e-ample, considerinno!ation in the pharmaceuticals firms an incenti!e to underta#e thee-pensi!e, difficult and time consuming basic research re1uired to generatenew drugs; on a!erage it costs ?488 million in research and de!elopment andta#es 46 years to get a new drug to the mar#et.


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consumers may not be assured of the same le!els of safety in differentcountries 2ne serious e-ample in!ol!es the flame retardant nature ofchildren*s pa+amas. In many countries, restrictions on the le!el of flameretardency are !ery low and e!en none-istent, thus it is legal to manufacturethat product without protecti!e standards. hould international firms continueto manufacture to higher protection le!els, with resulting increased costs thatmay put them at a competiti!e disad!antage

Contract a&s'$ contract is a document that specifies the conditions, under which ane-change is to occur, and details the rights and obligations of the parties to acontract. Contract law is the body of law that go!erns contract enforcement.%he parties can resort to contract law in case of !iolations.

%here are two legal traditions that are found in world today. The co''on a&

s(ste' and the ci,i a& s(ste'.The co''on a& s(ste'e!ol!ed in ngland o!er hundred s of years ago. Itis now found in most of Britain*s former colonies including U. Common law isbased on tradition, precedent and custom.

Ci,i a& s(ste'is based on !ery detailed set of laws that are organizes intocodes. %hese codes define the laws that go!ern business transactions. %his isused in ore than >8 countries, including &ermany, France, :apan and ussia.

Differences in contract law force firms to use different approaches whennegotiating contracts. In countries with common law traditions, contracts tendto be much more detail oriented and need to specify what will happen under a

!ariety of contingencies. Common law tends to interpret legal statutesaccording to the past decisions and rulings of courts. %he United tates uses acommon law system. Under ci!il law systems, contracts tend to be muchshorter and less specific since many of the issues relating to contracts areco!ered in the ci!il code of the country. Under common law, ownership isestablished by useK under ci!il law, ownership is determined by registration.%herefore, another firm may register a product first and pre!ail in a bid forownership, e!en though the competition had been using the product for a longtime but had failed to register it.

The $eter'inants o% Econo'ic $e,eo+'ent:

The 'a4or 'easures o% econo'ic de,eo+'ent o% courtiers are G$P/PPP/ and H$I)

Different countries ha!e dramatically different le!els of de!elopment. &D/ isoften regarded as a good measure of economic acti!ity of a country. G$P'easures the tota ,aue o% the goods and ser,ices +roduced annua(.G$Pca+ita is aso a good (ardstic* o% econo'ic acti,it(/ as it



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'easures a,erage ,aue o% the goods and ser,ices +roduced !( anindi,idua);efer map showing &D/ J per capita,643, whereas China has only ?53= andIndia ?583. ;4==58 areclassified as ha!ing medium human de!elopment while those countries thatscore abo!e >8 are classified as ha!ing high human de!elopment. 2ne of thereasons of low human de!elopment inde- is hea!y and e-panding population.

"hat is the relationship between political economy and economic progress%his is a difficult issue. 2ne thing that is generally accepted is that inno,ation

is the engine o% ongrun econo'ic gro&th. Inno!ation is the processthrough which people create new products, new processes, mew organizations,new management practices and new strategies. $nother thing is that a freemar#et economy is better at stimulating inno!ation than a command economythat does not ha!e the same types of incenti!es for indi!idual initiati!e.

Inno!ation also depends on a strong protection of property rights, as inno!atorsand entrepreneurs need some le!el of assurance that they will be able to reapthe benefits of their initiati!e.



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"hile it is possible to ha!e inno!ation and economic growth in a totalitarianstate, many belie!e that economic growth and a free mar#et system wille!entually lead a country to becoming more democratic.

&eography can also affect economic de!elopment. $ landloc#ed country with aninhospitable climate, poor soil, few natural resources, and terrible diseases isunli#ely to de!elop economically as fast as country with the oppositecharacteristics on each of these attributes.

"hile it can be hard to do much about unfa!orable geography, education issomething that go!ernments can affect. umerous studies suggest thatcountries that in!est more in the education of their young people de!elop fastereconomically. -amples include :apan, outh @orea, and many $sian countries.

8tates in Transition

ince the late 4=>8s, there ha!e been two ma+or changes in the politicaleconomy of many of the world*s nations. First, a wa!e of democratic re!olutionsswept the world, and many of the pre!ious totalitarian regimes collapsed.econdly, there has been a mo!e away from centrally planned and mi-edeconomies towards free mar#ets.

Eastern Euro+e and 8o,iet ;nion'

Following the econd "orld "ar, o!iet bac#ed Communist &o!ernments too#

power in eight astern uropean sates' /oland, Czechoslo!a#ia, 0ungary,Bulgaria, $lbania, omania, Hugosla!ia and ast &ermany. %his set the scenefor 98 years of ideological conflict between the Communist bloc, dominated bythe o!iet Union and the democratic west.

%he conflict started melting in 4=>7 when Mi#hail &orbache! became &eneralecretary of the o!iet Communist party and began his program of &lasnostand /erestroi#a. During 4=>=, communist go!ernments fell globally. %hebiggest change occurred in 4==4 in the o!iet Union. By 4==4, the U hadalready mo!ed significantly down the road toward political freedom, but noteconomic freedom. 2n :anuary 4, 4==6, the Union of o!iet ocialist epublicspassed into history, to be replaced by 47 independent republics, 44 of whichelected to remain associated as a commonwealth of independent states.

%he post communist history has not been easy. %he mo!e toward greaterpolitical and economic freedom has often been accompanied by economic andpolitical chaos. %hese countries stated dismantling decades of price controls,allowed pri!ate ownerships of businesses and permitted much greatercompetition and pri!atization of its sate owned enterprises. But, most of theseenterprises were inefficient and the pri!ate in!estors were not interested. %he



30/141

new democratic go!ernments continued supporting these loss ma#ingenterprises to sa!e from massi!e unemployment*s. the resulted subsidiesresulted in budget deficits that was balanced by Eprinting money. $long withlac# of price controls, this led to inflation. In 4==5, the inflation rate was 64percent in 0ungary, 5> percent in /oland, >94 percent in ussia and 48,888percent in U#raine. &D/ also fell. 0owe!er, there is impro!ement in economicconditions in /oland, Czech etc.

%he re!olutions in the U and astern urope ha!e ;in general< mo!ed thesecountries towards democracy ;away from totalitarianism8*s Britain has mo!ed to pri!atization of these state ownedenterprises. ate owned industries ha!e been pri!atized;sold to pri!atein!estors< and restricti!e regulations were lifted.

Asia'

During the 4=>8*s and early 4==8*s a shift toward greater political democracyoccurred in the /hilippines, %hailand, %aiwan and outh @orea. In ietnam, theruling communist party remo!ed many price controls and began to shift towarda mar#et economy. In orth @orea, also situation is changing to better relationswith outh @orea, which was their archri!al. In India, in 4==4, under the&o!ernment of /.. arasimha ao, began a reform program aiming to freemar#et economy.



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In China too, the communist go!ernment started the shift from a purecommand economy to a mi-ed economy. /ri!ate ownership was allowed. %hemost important of them was the creation of a number of special economiczones in which free mar#ets were allowed to operate without any restrictions,pri!ate ownership was allowed and foreign companies were permitted to in!est.China*s economy as a whole has been growing at o!er 48 percent per yearduring 4==8*s. :apan*s growth after econd "orld "ar also is phenomenal.

Latin A'erica'

During the 4=>8s, most )atin $merican countries changed from being run bydictatorship to democratically elected go!ernments. "hile most countriespre!iously had erected high barriers to imports and in!estment ;to #eepmultinationals from Edominating their economies


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I'+ications%or Business

%hese transitions are creating huge opportunities for international business, aswell as creating huge ris#s. It is not clear what direction future changes willta#e, and if these will be entirely fa!orable for business.

%he shift toward a mar#et(based economic system typically in!ol!es at leastthree distinct acti!ities' deregulation, pri!atization, and legal enforcement ofproperty rights. Deregulation in!ol!es remo!ing restrictions on the freeoperation of mar#ets. /ri!atization transfers the ownership of state propertyinto the hands of pri!ate in!estors. In order to attract in!estment and protectthe interests of the pri!ate enterprise encouraged by the first two acti!ities,changes typically need to be made to legal systems to protect the propertyrights of in!estors and entrepreneurs.

Attracti,eness o% a countr(

%he political, economic, and legal en!ironment of a country clearly influencesthe attracti!eness of a country. $ country*s attracti!eness can be beste!aluated by loo#ing at the benefits, costs, and ris#s of doing business in thatcountry.

%he long run monetary benefits of doing business in a country are a function ofthe size of the mar#et, the present wealth ;purchasing power< of consumers,and the li#ely future wealth of consumers. By identifying and in!esting early ina potential future economic star, firms may be able to gain %irst 'o,erad,antages .ad,antages that !eong to an ear( entrants into the!usiness 'ar*et0 and establish loyalty and e-perience in a country. %wofactors that are reasonably good predictors of a country*s future economicprospects are its economic system and property rights regime.

Cost o% doing !usiness' $ number of political, economic, and legal factorsdetermine the costs o% doing !usiness in a country. Poitica costs canin!ol!e the cost of paying bribes or lobbying for fa!orable or fair treatment.Econo'ic costsrelate primarily to the sophistication of the economic system,

including the infrastructure and supporting businesses. egarding ega costs,it can be more costly to do business in countries with dramatically differentproduct, wor#place, and pollution standards, or where there is poor legalprotection for property rights.

Ris*s o% doing !usiness' Poitica ris*is the li#elihood that political forceswill cause drastic changes in a country*s business en!ironment that ad!erselyaffects the profits or other goals of the business. Econo'ic ris* is theli#elihood the economic mismanagement will li#ewise affect a business. Legaris* is the li#elihood that a trading partner may opportunistically brea# a



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contract or e-propriate intellectual property rights.

$s a general point, it should be noted that the costs and ris#s associated withdoing business in a foreign country are typically lower in economically ad!ancedand politically stable democratic nations, whereas the ris#s are greater in lessde!eloped and politically unstable nations. %he assessment is complicated,howe!er, by the fact that the potential long(run benefits bear little relationshipto a nation*s current stage of economic de!elopment or political stability.ather, they are dependent upon li#ely future economic growth rates. In turn,among other things, economic growth appears to be a function of a free mar#etsystem and a country*s capacity for growth ;which may be greater in lessde!eloped nations


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go,ern'enta o%%icias or !usiness +artners in echange %or !usinessaccess)hould paying bribes be completely a!oided, or are bribes +ust anothercost of doing business that Egrease the wheels and lead to benefits for boththe firm and consumers. If bribes are an integral part of business transactions ina country, is a firm being culturally insensiti!e and elitist if it finds bribesrepulsi!e and refuses to pay them 2ne answer is that bribes are illegal,according to the regulations of the U go!ernment. $gain, these considerationsare not faced by e-ecuti!es in domestic firms as they only occur in internationalbusiness.

%a#e for e-ample the challenges in!ol!ed in Microsoft*s entry into China.$lthough the use of pirated software was out of control in China, the companyfound little solace in the courts when its tried to stop that piracy, despiteprolonged, e-pensi!e attempts. 2ne of the ob!ious problems is that the price ofmost of Microsoft*s products far e-ceeds the financial ability of Chinese. Bysteadfastly adhering to its principles of intellectual ownership, Microsoft ga!ebirth to a competitorNthe )inu- operating system that appeared to be a good,cheap alternati!e to the Chinese.

Argu'ents %or and against !ri!er(

2or against

ecessary to dobusiness

Common practice $ccepted practice

Form of commission,ta-, or compensation

"rong

Illegal

Compromise personalbeliefs

/romotes go!ernmentcorruption

/rohibits ta#ing a standfor honesty

Benefits recipient only

Creates dependence oncorruption

Decei!es stoc#holders

2our Actions %or I'+ro,ing Internationa Business Ethics

Create global codes of conducto &lobal codes and standards set by corporationso &lobal Codes and standards set by international organizations

Integrate ethics into a global strategy

uspend acti!ities in host country



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Create ethical impact statements

Go!a Codes and 8tandards $e,eo+ed !( Internationa Organi"ationsO Cau- /rinciplesO &lobal eporting Initiati!eO &lobal ulli!an /rinciplesO 2CD &uidelines for Multinational nterprisesO /rinciples for &lobal Corporate esponsibility' Benchmar#sO U &lobal Compact

2unda'enta Internationa Rights'4. %he right to physical mo!ement6. %he right to ownership of property

5. %he right to freedom from torture9. %he right to a fair trial7. %he right to nondiscriminatory treatment. %he right to physical security3. %he right to freedom of speech and association>. %he right to minimal education=. %he right to political participation48. %he right to subsistence

8e,en 5ora Guideines %or 5NCs

Inflict no intentional or direct harm

/roduce more good than bad for the host country

Contribute to host country*s de!elopment

espect the human rights of their employees

/ay their fair share of ta-es

espect local cultural beliefs that do not !iolate moral norms

Cooperate with the go!ernment to de!elop and enforce bac#groundinstitutions

Nationa di%%erences o% India:

India !e%ore the re%or's:

$fter independence, India adopted a democratic system of &o!ernment. 2ureconomic system is a mi-ed economy with a hea!y dose of state ownedenterprises, centralized planning and subsidies.



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%his system constrained the growth of pri!ate sector, which could e-pand onlywith the &o!ernment permission ;)icense a+


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=uestions !an* %ro' 'odue

4. 0ow different political systems affect the international business6. -plain the role of ethics in International business.3. Country differences gi!e rise to contentious ;contro!ersial< issues called

ethical issues. "hat are they9. "hat are the implications of political, economical and legal differences

among difference countries ;:une(:uly 6885(48 mar#s3. %he ingle uropean $ct called for the remo!alof border controls, mutual recognition of standards, open public procurement, abarrier free financial ser!ices industry, no currency e-change controls, free and


)u-embourg

Malta

etherlands

/oland

lo!a#ia

lo!enia

pain

weden


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open freight transport, and freer and more open competition.

%he Management Focus on the U and the media industry mergers shows thepower that the U has ac1uired in controlling and regulating mergers ofinternational companies. %hrough the use of concessions, the U has been ableto dramatically change the shape of an entire industry.

%he Treat( o% 5aastrichttoo# the U one step further, by specially spellingout the steps to economic union and partial political union. In addition to simplyspelling out the steps needed, the %reaty also laid out the future outlines of acommon foreign policy, economic policy, defense policy, citizenship, andcurrency, as well as strengthened the role of the uropean /arliament. %hesingle currency will eliminate e-change costs and reduce ris#, ma#ing C firmsmore efficient.

%he Euro &as o%%icia( aunched on anuar( 1/ 1. It became into fulluse 2n :anuary 4, 6886. Member states that ha!e entered into monetary unionha!e fi-ed e-change rates with the uro, and hence with each other. %he uroreduces both e-change rate costs and ris#s, and has been used for manybusiness transactions. %he use of national currencies was discontinued in 6886in fa!or of the euro, although many member ban#s will accept their nationalcurrency in e-change for the euro. $doption of the uro will help citizens moreeasily compare prices, should increase cross border competition, and lead tolower costs for consumers.

Britain, Denmar#, and weden ha!e chosen to opt out of +oining MU for now.2ne reason is a concern o!er losing control o!er monetary policy to theuropean Central Ban#. ome belie!e that currency union should only ta#eplace after political union.

$ number of countries ha!e applied for membership in the U, particularly fromastern urope. &i!en the profound differences in income, de!elopment, andsystems, howe!er, ma#es near term integration of these countries into the Udifficult.

Many firms and countries ;including the F%$ countries< are concerned that the

U will result in a Efortress urope, where insiders will be gi!en preferentialtreatment o!er outsiders. %hat clearly already e-ists in agriculture, althoughwhether it will be e-tended to other areas is a matter of debate.

Regiona Econo'ic Integration in the A'ericas

efer map to see the primary areas of integration in the $mericas.%hese are'



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The North A'erican 2ree Trade Agree'ent .NA2TA0

The Andean Pact

5ERCO8;R

Other Latin A'erican trade +acts i*e Centra A'erican co''on'ar*et/ CARICO5 etc)

The North A'erican 2ree Trade Agree'ent .NA2TA0

In 4=>>, the ;8A and Canadaagreed to form a free trade area, with the goalof gradually eliminating all barriers to the trade of goods and ser!ices betweenthe countries. In 4==4 the ;8/ Canada/ and 5eicosigned an agreementaimed at forming a free trade area between all three countries #nown as$F%$.

%he agreement became law in :anuary 4, 4==9. it contains the flowing actions.

$bolishes within 48 years tariffs on == percent goods traded betweenMe-ico, Canada and United tates.

emo!es barriers on cross border flow of ser!ices, e.g., allowing financialinstitutions unrestricted access to Me-ican mar#ets by 6888.

/rotects intellectual property rights.

emo!es restrictions on FDI between three member countries

$llow each country to apply its own en!ironmental standards, lowering of

standards to lure in!estments is described as inappropriate and establishtwocommissions with the power to impose fines to protect these standards.

In all three countries the political and economic conse1uences of the agreementare still being felt, and politicians in all countries are able to stri#e a cord withwor#ers who percei!e that they lost their +obs as a result of the agreement.

Argu'ents %or NA2TA

/roponents of $F%$ argue that it will pro!ide economic gains to all countries'Me-ico will benefit from increased +obs as low cost production mo!es south, and

will attain more rapid economic growth as a result. %he U and Canada willbenefit from the access to a large and increasingly prosperous mar#et and fromthe lower prices for consumers from goods produced in Me-ico. In addition, Uand Canadian firms that ha!e production sites in Me-ico will be morecompetiti!e on world mar#ets.

Argu'ents against NA2TA

2pponents of $F%$ argue that +obs will be lost and wage le!els will decline in



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the U and Canada, Me-ican wor#ers will emigrate north, pollution will increasedue to Me-ico*s more la- standards, and Me-ico will lose its so!ereignty.

ince $F%$ is an ongoing process, and the implications are still unclear, itli#ely will be another decade before the true costs and benefits are #nown.e!ertheless, recent articles in the popular press help illustrate manyopportunities and some concerns.

The Andean Pact:

%he $ndean /act, originally formed in 4==, when Boi,ia/ Chie/ Ecuador/Coo'!ia and Perusigned the Cartagena agree'ent. %he $ndean pact waslargely based on C model, and reformed and renegotiated se!eral times, hasmade little progress due political and economic turmoil in most of the countries.

%he integration steps begun in 4== included an internal tariff reductionprogram, a common tariff, a transportation policy, ac common industrial policyand special concessions for the smallest members Boli!ia and cuador.

0owe!er, by the mid 4=>8*s the $ndean pact had collapsed. It has failed toachie!e any of its stated ob+ecti!es. In 4==8, the heads of %i,e current'e'!ers o% the Andean grou+Boi,ia/ Ecuador/ Peru/ Coo'!ia and6ene"uea met in &alapagos Islands. %he resulting &alapagos declarationeffecti!ely relaunched the $ndean group.

%he countries are ma#ing another strong attempt again, and their initial

progress on remo!ing trade barriers is promising. 0owe!er, the tremendousdifferences between the countries will ma#e agreement on many issuesdifficult.

5ERCO8;R

MC2U originated in 4=>> as a free trade pact between Bra"i andArgentina. In 4==8, it was e-panded to include Paragua( and ;rugua(.MC2U has been ma#ing progress on reducing trade barriers between

member states. %oday, most goods go tariff free within MC2U, e-ceptsugar and cars. %rade among MC2U*s four core members grew from ?9billion in 4==8 to ?49.7 billion in 4==7.

&i!en some high tariffs for goods from other countries, it would appear that insome industries MC2U is trade di!erting rather than trade creating, andlocal firms are in!esting in industries that are not competiti!e on a worldwidebasis.



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Other Latin A'ericans trade +acts

%he countries of Central $merica are trying to re!i!e their trade pact. In the

early 4=8*s Costa ica, l al!ador, &uatemala, 0onduras and icaraguaattempted to set up Centra A'erican co''on 'ar*et. it collapsed in 4==when the war bro#e out between 0onduras and l al!ador. ow fi!e countriesare trying to re!i!e their agreement.

$ Customs Union was to ha!e been created in 4==4 between nglish spea#ingCaribbean countries under the name of Caribbean community. %his is refereedto as CARICO5, was established in 4=35.

$ttempts at the creation of trade pacts between Central $merican andCaribbean countries ha!e not been particularly successful thus far. %here has

been a goal to create a Free %rade $rea of the $mericas that would encompassmost nations in orth and outh $merica. %hus far, there has been littleprogress.

Regiona Econo'ic Integration Ese&here

"hile there was clearly economic integration with C2MC2, the Eagreementbetween the U and most of astern urope, had little rational economicbasis and has collapsed with the collapse of the central planning system.

Association o% 8outheast Asian Nations .A8EAN0

Formed in 4=3, $$ currently include Brunei, Indonesia, Malaysia,/hilippines, ingapore, %hailand and ietnam. %hese countries are characterizedby an abundance of natural resources, large international trade sectors mostsuccessful economic policies.%he basic ob+ecti!es of $$ are to foster free trade between membercountries and to achie!e some cooperation in their industrial policies.

%he $$ pact has had little impact on trade and integration, although most ofthe countries ha!e grown !ery 1uic#ly.

Asia Paci%ic Econo'ic Coo+eration .APEC0

$/C is a broader /acific organization that meets yearly and includes the U,:apan, China, and 47 other countries. %hese 4> countries account for half of theworld*s &D/, 9 percent of world trade and most of the growth in the worldeconomy. %he stated aim of $/C is to increase multilateral cooperation in !iewof the economic rise of the pacific nations and the growing interdependencewithin the region. %hus far, the goals of $/C and the photo opportunities forthe leaders ha!e been far loftier than the success.



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I'+ications %or Business

conomic integration creates a number of significant opportunities for business.)arger mar#ets can now be ser!ed, additional countries open to trade, andgreater economies of scale achie!ed.

%he greatest implication for Ms is that the free mo!ement of goods acrossborders, the harmonization of product standards, and the simplification of ta-regimes, ma#es it possible for them to realize potentially enormous costeconomies by centralizing production in those locations where the mi- of factorcosts and s#ills is optimal. By specialization and shipping of goods betweenlocations, a much more efficient web of operations can be created.

%he lowering of barriers to trade and in!estment between countries will befollowed by increased price competition, re1uiring firms to rationalizeproduction and reduce costs if they are to remain competiti!e.

$s other firms become more competiti!e in their home mar#ets ;nowe-panded


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5odue :5utinationa cor+oration @ Organi"ation/ design andstructures @ Head -uarters and su!sidiar( reation in

5NCs)

THE 8TRATEG O2 INTERNATIONAL B;8INE88

Contents: ho& %ir's can increase their +ro%ita!iit( !( e+anding theiro+erations in %oreign 'ar*ets/ di%%erent strategies that %ir's can+ursue &hen co'+eting internationa(/ and the +ros and cross o%these strategies) In addition/ ,arious %actors a%%ecting the %ir's7 choiceo% strateg()

Introduction

"hen we thin# of international businesses, we often focus on the big Ms

;Multinational nterprises


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8trateg( and the 2ir'

Firms are in the business of ma#ing profits by !alue creation (( being able to sellwhat they ma#e for more than it costs to ma#e it. %hus, they create !alue byeither lowering the costs of production or raising the !alue so that consumerswill pay more. $ firm can add more !alue to a product when it impro!es theproduct*s 1uality, pro!ides a ser!ice to the consumer or customize the productto consumer needs in such away that the consumers will pay more for it.

Firms can lower the costs of !alue creation when they find ways to perform!alue creation

acti!ities more efficiently. %hus, there are ttwo basic strategies for impro!ing afirm*s profitability( a di%%erentiation strateg( and a o& cost strateg(.

%o e-tend this, it is useful to use the !alue creation approach, as shown inFigure.upport acti!ities

Primary activities

2ir' as ,aue chain

Firm is !alue chain composed of a series of distinct !alue creation acti!ities,including production, mar#eting, materials management, RD, human

resources information systems and the firmsK* infrastructure.

%hese !alue creation acti!ities are classified into primary acti!ities and supportacti!ities.

Pri'ar( acti,ities' these ha!e to do with creating the +roduct/ 'ar*etingand dei,ering the +roduct to !u(ers and +ro,iding su++ort and a%tersaes ser,ice to the !u(ersof the product. fficient production can reducethe costs of crating !alue ;by realizing scale economies< and can add !alue by

International Business Management

Infrastructure ;structure andleadership8 grains of gold X 4 ounce of goldi.e., 4 ounce of gold X ?68.3 ;9>8J65.66< or, 4 ounce of gold X 9.67 pounds ;9>8J4453 ;?68.3J9.67 pounds6 countriestaff' $ppro-imately 6,88 from 448 countriesManaging Director' Michel Camdessus assumed office in 4=>3&o!erning Bodies' Board of &o!ernors, Interim Committee, -ecuti!e

Board%otal Quotas' D 497 billion ;U ?4=7 billion


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Ho& the I52 Ca'e A!out

%he International Monetary Fund ;IMF or Fund< and the International Ban# foreconstruction and De!elopment ;IBD or "orld Ban#< were both established atthe United ations Monetary and Financial Conference, held at Bretton "oods,ew 0ampshire, on :uly 4(66, 4=99. %he two were created to o!ersee stability ininternational monetary affairs and to facilitate the e-pansion of world trade.Membership in the "orld Ban# re1uires membership in the IMF, and they areboth specialized agencies of the United ations. %he "orld Ban# was gi!endomain o!er long(term financing for nations in need, while the IMFVs missionwas to monitor e-change rates, pro!ide short(term financing for balance ofpayments ad+ustments, pro!ide a forum for discussion about internationalmonetary concerns, and gi!e technical assistance to member countries. %hesefunctions are still generally true of both organizations, although the policies

determining how they are carried out ha!e been modified and amplified o!ertime.

%he FundVs legal authority is based on an international treaty called the $rticlesof $greement ;$rticles or the $greement< which came into force in December4=97. %he first $rticle in the $greement outlines the purposes of the Fund and,although the $rticles ha!e been amended three times in the course of the last93 years prior to 4==>, the first $rticle has ne!er been altered.

%he IMF started financial operations on March 4, 4=93. Drawings on Fundreser!es were made by 44 countries between 4=93 and 4=9>, although there

were no drawings in 4=78 and !ery few in the following years. During this timethe Fund wor#ed on its drawings policies. 2ne outcome was the stand(byarrangements, established in 4=76, modified in 4=7, and re!iewed periodicallysince then. tand(by arrangements pro!ide a procedure for drawing on Fundresources with conditions based on a structural ad+ustment program for theborrower country. tand(by arrangements became the model for other lendingprocedures designed by the Fund to meet the needs of its members.

By the mid(4=38s, the Fund found itself becoming more of a lending institutionthan originally en!isioned. %he FundVs ability to meet the needs of its memberswas tested when the 2rganization of the /etroleum -porting Countries ;2/C8. %his altered the international flow of funds as the 2/CcountriesV monetary reser!es accumulated rapidly. $t the same time, theindustrial countries e-perienced strong inflationary pressures. %hese pressureswere addressed by an increase in interest rates and a reduction of imports. %hisresulted in balance of payments deficits for many of the de!eloping countries,which were paying more for oil, paying higher interest rates on the loans fromthe industrial countries, and finding reduced mar#ets for their e-ports. Inresponse to this situation, the IMF created an 2il Facility in 4=39, and enlarged



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it in 4=37, to aid members in balance of payments difficulties. In addition, an 2ilFacility ubsidy $ccount was established for the poorest countries to alle!iatethe cost of borrowing under the 2il Facility. During the 4=38s, although the oilprice shoc#s placed more countries in balance of payments difficulties andforced many of the de!eloping countries to borrow not only against the Fund,but also against pri!ate ban#s which were recei!ing a surplus of 2/Cpetrodollars, it was generally percei!ed at the time that the debt cads would beshort(li!ed. It was not until Me-ico threatened to default on its loans in 4=>6that the world monetary community realized the e-tent and depth of the crisis.%hroughout the 4=>8s the Fund played an increasingly larger role, not only asPlender(of(last(resort,P but also as mediator with debtor countries in relation tocreditor nations and pri!ate ban#s.

In the mid(4=>8s the FundVs lending operations increased dramatically. tand(by arrangements are typically for one to three years, but the e-igency of thedebt crisis caused the Fund to de!ise programs for ad+ustment o!er longerperiods. %hese are #nown as e-tended arrangements and, with other medium(term programs, can be arranged through the tructural $d+ustment Facility orthe nhanced tructural $d+ustment Facility. %he terms of a structuralad+ustment program, or stabilization program, are #nown as conditionality./rograms include 1uantified targets or ceilings for ban# credit, the budgetdeficit, foreign borrowing, e-ternal arrears, and international reser!es. %heyalso include statements of policies that the member intends to follow.Conditionality came under detailed scrutiny during the 4=>8s as more and morede!eloping countries adopted structural ad+ustment programs and later wereunable to meet the terms of the agreement. %he philosophy of the Fund wascriticized as being too oriented to the industrial economies and not adapted tode!eloping economies. During the late(4=>8s se!eral plans were put forth,in!ol!ing not only the Fund but the creditor nations and commercial ban#s aswell, to reduce the debt and the debt ser!ice payments of the debtor nations. In4=>= the Fund de!eloped new debt reduction guidelines, pro!iding Fundsupport for commercial ban# debt and debt ser!ice(reduction operations bymember countries. %he debt strategy is still being assessed and its success orfailure has not been determined.

Training and Technica Assistance

$ssistance is e-tended to members in the form of training and technicalassistance. Beginning in 4=78, the Fund offered training courses on balance ofpayments statistics and on international economics. In 4=9 the IMF Institutewas established fortify these training acti!ities. %he IMF Institute pro!idestraining courses for officials from member countries in such sub+ects as financialanalysis and policy, balance of payments methodology, public finance, andgo!ernment finance statistics.



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%he technical assistance program is operated through the Monetary and-change $ffairs Department, the Fiscal $ffairs Department, and the Bureau oftatistics. %he )egal Department, the Bureau of Computing er!ices, and thearea departments may also participate. $ssistance is pro!ided mainly throughstaff missions, field assignments by staff members or outside e-perts, andstudies and recommendations prepared at head1uarters. In pro!iding technicalassistance, the IMF emphasizes training go!ernment officials in macroeconomicmanagement, reforming the ta- system and ta- administration de!elopingcentral ban#ing and financing systems, and impro!ing statistical data. $d!ice isalso pro!ided on money and capital mar#ets, central and general ban#inglegislation, the structure of interest rates, regional cooperation among centralban#s, and the use of !arious instruments in monetary management. %echnicalassistance is most in e!idence in the transformation of the centrally plannedeconomies of astern urope and the states of the former o!iet Union tomar#et oriented economies. %he IMF is assisting the new members in the choiceof currency, de!eloping import and e-port sectors, agreeing on ground rules forsetting interest rates, reser!e re1uirements, and credit guidelines, and inma#ing structural reforms.

I52 8tatistica Acti,ities

Under $rticle III of the $greement members are re1uired to furnish the Fundsuch information as it deems necessary for its acti!ities, including national dataabout their economic and financial condition. $rticle III also dates that theFund shall act as a center for the collection and e-change of information on

monetary and financial problems, thus facilitating the preparation of studiesdesigned to assist members in de!eloping policies which further the purposes ofthe Fund. %he Fund uses these statistics, in consultation with the member, aspart of the fulfillment of the FundVs regulatory function, to assess the memberVs1uota, and as part of the FundVs role in assessing the world economic outloo#. Inaddition, the Fund has de!eloped standards for the classification andpresentation of balance of payments statistics and go!ernment financestatistics. It is concerned with maintaining the accuracy and consistency in thereporting of the data. %he IMF compiles and publishes these statistics in a!ariety of publications.

=;E8TION BAN

4. Define absolute and comparati!e ad!antage.6. "hat are the different instruments of trade policies that affect

International business -plain.5. Discuss the foreign e-change determination process.



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9. Distinguish between mar#et economy and command economy7. Discuss the distribution strategy in International business.. 0ow the companies increase their profitability by e-panding globally in

ways not a!ailable to purely domestic enterprises3. Differentiate patent and copyrights.>. Discuss the different strategic choices a!ailable to compete in the

international business.=. "hat are the costs and benefits of foreign direct in!estments to a host

country -plain.48. "hat is globalization44. Describe the porter*s Diamond theory of ational Competiti!e

$d!antage.46. Discuss the changing demographics of the global economy.45. "hat is balance of payment49. -plain the nature and functions of foreign e-change mar#et.47. Discuss the salient features of uropean union and $$.4. -plain the !arious le!els of economic integration. &i!e suitable

e-amples.43. "hich are factors to be considered to locate its manufacturing

acti!ity of an international firm so as to minimize the costs and impro!ingthe product 1uality.

4>. "hat is a turn#ey pro+ect4=. "hat are the implications for international business from the

floating e-change rate system.68. 0ow different political systems affect the international business64. Define International business.66. -plain the different modes of carrying out International business.65. Discuss the forces dri!ing companies towards International

business.69. "hat is a strategic alliance in International business67. Distinguish between foreign direct in!estment and portfolio

in!estments.6. "hat is a totalitarian system63. -plain the arguments for regional economic integration.6>. "rite a note on the deliberations at the recently held Cancun

ummit of "%2.

6=. "hat do you mean by dumping58. Discuss the ob+ecti!es and achie!ements of uropean Union.54. "hat is global management56. "hat are the factors to be considered in designing an organization

structure of a MC55. -plain the role of ethics in International business.59. "hat is -change rate57. -plain the nature and functions of foreign e-change mar#et.5. Discuss the funding strategies and facilities of International



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Monetary Fund.53. Discuss the implications of &o!ernment policy on currency

con!ertibility on International business.5>. "rite note on $F%$.5=. "rite notes on ' a< &$%% b< "%298. -plain the )eontief parado-.94. "hat is eo mercantilism96. "hat is counter trade -plain with an e-ample.95. "hat is meant by purchasing power parity

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