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INTERNATIONAL BUSINESS ENVIRONMENT

(Political Economy of International Business)

Session 1Globalisation, Business and Governments

INTRODUCTION TO THE COURSE

Section 1

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Learning goals

This political economy class aims to:

Expose students to contemporary trends, issues and debates in international business

Provide a theoretical framework to the analysis of international business operations

Analyse forces affecting international business both at international and national levels

Show how business take the above-mentioned issues and forces into account when defining an international strategy

Prepare readings and assignments

Oral presentations and debates

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Political economy: a definition

Political economy is the social science that deals with political science and economics as a unified subject. It is the study of interrelationships

between political and economic processes.

It analyses in particular policies, both domestic and international, adopted by governments all over the world.

Based upon

http://www.economywatch.com/political-economy/political-economy-definition.html

http://www.thefreedictionary.com/political+economy

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Structure of the course

1. International business, globalisation and governments

2. International trade: theories and realities

3. Regulating international trade [1]: intergovernmental bodies

4. Regulating international trade [2]: regional trade blocs

5. International business and the International Monetary System

6. International business and the political economy of nations

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Readings

DANIELS John D. (2008), International Business : Environment and

Operations (12th ed.), Pearson (140.35 DAN)

DUNNING, J.H. (Ed.) (1999), Governments, Globalization, and

International Business, Oxford University Press (DUN)

HILL Charles W. L. (2002), Global Business Today (2nd ed.), McGraw-

Hill (665 HIL)

HILL Charles W. L. (2009), International Business : Competing in the

Global Marketplace (7th ed.), McGraw-Hill (665 HIL)

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Today's learning goals

1. Define international business and outline its main drivers

→ Identify the essential forms of international business activities

2. Define globalisation, discuss its causes and consequences

3. Understand how the global economic and financial crisis affects

globalisation, international business and governments

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International business: a definition

Any business transaction crossing national borders at any stage of the transaction

International trade

Alliances

Foreign direct investment

Greenfield – Brownfield –Joint venture

Licensing, franchising

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Accounting for international business transactions

Current account

Exports / imports of goods

Exports / imports of services

Investment income

Gifts, remittances

Capital account

Foreign direct investment (in-out)

Short-term Portfolio

investment (in-out)

Long-term portfolio

investment (in-out)

Foreign reserves

Gold

Convertible currencies

Special drawing rights (SDRs)

Reserve position at the IMF

Errors and omissions

Flight capital, illegal activities,

...

The balance of payments

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Various cases of current account balance (USD, CIA data)

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Business internationalisation drivers

Supply factors

Natural resources

Production (labour) costs

Distribution costs

Key technologies

Location externalities

Demand factors

New markets(incl. economies of scale)

Response to customer's mobility

Response to trade barriers

Economic incentives

Strategic rivalry

Advantage to 1st mover - Bandwagon effect/Herd behaviour - Multipoint competition

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International business issues

The range of problems confronted is wider and the problems more

complex than those in a domestic business

Firms have to work within the limits imposed by government

intervention in the international trade and investment system (trade

policies)

International transactions involve converting money into different

currencies, that may be subject to government manipulation

Countries differ with regards to their population, culture, economic

performance, as well as their institutional (legal, political)

environment

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GLOBALISATION, BUSINESS AND GOVERNMENTS

Section 2

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Economic globalisation: a definition (CW Hill)

Economic globalisation refers to the shift toward a more integrated and interdependent world economy

Globalisation of marketsMerging of historically distinct and separate national markets into one

global marketplace

Globalisation of productionSourcing of goods and services from locations around the globe to take

advantage of national differences in the cost and quality of factors of production like

land, labor, and capital

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Indicators of globalisation

FDI Outflows 1982-2006 (USD Bn)(CW Hill)

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Globalisation drivers

Reduced transport, communication and organisation costs

Declining barriers to the free flow of goods, services and

capital

Technological change in information-processing,

transport and telecommunications

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Declining trade and investment barriers (CW Hill)

Average Tariff Rates on Manufactured Products as % of Value

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Technological change: the case of containers

Although having its origins in the late 1780s or earlier, the global standardisation of containers and container handling equipment was one of

the important innovations in 20th century logistics. […]

The development of containers [in the 1970s] resulted in vast improvements in port handling efficiency, thus lowering costs and helping lower freight

charges and, in turn, boosting trade flows. Almost every manufactured product humans consume spends some time in a container.

Today, approximately 90% of non-bulk cargo worldwide moves by containers stacked on transport ships; 26% of all containers originate from China. As of 2005, some 18 million total containers make over 200 million trips per year.

http://www.hbs.edu/bhr/archives/bookreviews/80/shamilton.pdf

http://en.wikipedia.org/wiki/Containerization

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Globalisation and business

GLOBALISATION

Increasing number of multinational

companies (MNCs)

New competitors

Increased profitability pressure

More risk / Instability

New funding sources

New business opportunities

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The age of hypercompetition

According to Mr. Richard D'Aveni, professor of business strategy, business has entered a new era of hypercompetition, shifting dramatically from slow-moving

stable oligopolies to an environment characterized by a quick-strike mentality on the part of companies aimed specifically at disrupting the competitive

advantage of market leaders.

[F]our driving forces are contributing to this new era of hypercompetition: customer changes, including fragmenting tastes; rapid technological change;

falling geographic and industry boundaries as markets globalize, and deep pockets among competitors due to the rise of giant global alliances in a raft of

industries.

The old goal [of strategy] was to increase profitability by legally restraining the level of competition in an industry. Companies avoided price wars, segmented

the market to avoid head-to-head competition and tried to keep the number of competitors low by putting up entry barriers around their industries. Today, he points out, this strategy is "literally impossible." "The way to go about winning

today is to obsolete the current advantages of the leader".

Based upon http://www.strategy-business.com/press/16635507/14886

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Corporate strategies in a globalisation context

Economic globalisation

Market opportunities

Competitive pressure

Profitability pressure

Concentration

Internationalisation Innovation

Outsourcing

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Globalisation and governments

GLOBAL COMPETITION

Loss of sovereignty and legitimacy

Competitive pressure among nations

Strain on social cohesion/stability

Pressure on government policies

Loss of autonomy

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A convergence of economic systems? [1]

Since the fall of the Berlin Wall, all numerate people have known that there is only one way to run country, economy and corporation- on the US model. Europe and

Japan still reflect much of the top-down thinking that puts the state at the apex as the major driver of the economy. The US puts the individual and the consumer on top. The UK is closer to the US model, as are such countries as Ireland, where the

state historically lacked legitimacy.

As the US has the most efficient corporate sector and the biggest economy, the thrust towards globalization and the export of this model to the US's comparative

advantage has become the most potent cultural force around. Now corporations and economies can only survive if they can compete on the global stage.

It is no secret that this conflict will be resolved in favour of the US globalized model. People are greedy and it makes them richer, while empowering the individual

consumer. But conflict resolution will take years and the more years, the deeper the historical roots of successful alternative models run. That is why it is easier for

Mexico, Argentina, Brazil or Philippines to go with the global flow than for much of continental Europe.

Euromoney, Sept. 2001 Issue 389

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A convergence of economic systems? [2]

Today, many emerging markets, from Indonesia to Mexico, are told that there is a certain code of conduct to which they must conform if they are to be successful. The message is clear: here is what advanced industrial countries do, and have done. To

join the club, you must do the same. The reforms will be painful, vested interests will resist, but with enough political will, you will reap the benefits.

Each country draws up a list of what's to be done, and each government is held accountable in terms of its performance. Balancing the budget and controlling

inflation are high on the list, but so are structural reforms. In the case of Mexico, opening up the electricity industry […] has become the structural reform of the day

[…]

Those in Mexico, Brazil, India and other emerging markets should be told a different message: do not strive for a mythical free-market economy, which has never existed. Do not follow the encomiums of US special interests because, although they preach

free markets, back home they rely on the government to advance their aims. Instead, developing economies should look carefully, not at what the US says, but at what it

did in the years when it emerged as an industrial power, and what it does today.

J. Stiglitz, in The Guardian, Wednesday 29 October 2003

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A new role for governments ...

STATES

Support national businesses

Monitor change

Address global risks

Provide safety net

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Regulating / governing globalisation

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Non-governmentalorganisations, civil society

Businesses

Governments

Inter-governmental bodies

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FROM GLOBALISATION TO GLOBAL CRISIS

Section 3

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Since the 1980s, a series of crises

Latin American debt crisis (1980s)

Black Monday (October 19, 1987): global stock market crash

Japanese real estate bubble collapse (1990s)

EMS currency crises (1992-93)

Mexican currency crisis (1994)

Southeast Asian financial crisis (1997)

Russian debt crisis (1998), leading to the collapse of LTCM

Turkish financial crisis (2001)

Dotcom bubble burst (2001)

Argentine currency crisis (2002)

"Subprime" crisis ... leading to global recession (2007-2009)

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Today's global crisis

Financial crisis Banking crisis

Credit crunchDepreciation of assets

Investment and production cuts Depressed global demand

Economic crisis

Social crisis

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Today's global crisis

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International business in troubled times

Global economic crisis

Depressed global demand

Credit crunch

Intensified competition

State intervention, regulation

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Contradictory trends

GLOBAL CRISIS

MacroeconomicGovernment-driven de-globalisation

MicroeconomicBusiness-driven globalisation

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The de-globalisation trend (XERFI)

Amplified government intervention

Protectionist measures

Increased public spending

(Welfare State)

Industrial bail-out(i.e.: car industry)

Self-centred national

economies

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The protectionist temptation ...43

Pascal Lamy, the director-general of the WTO, said trade would shrink by 10% in 2009 but said countries should resist the temptation to put barriers around

their domestic markets.

"A seemingly attractive short-term solution of keeping production and consumption at home soon becomes a millstone around a nation's neck, the

more so when trading partners retaliate in kind", Lamy said as he launched the WTO's annual world trade report. "Many governments have affirmed their

intention to keep markets open, Lamy added. "But significant risks remain, and call for vigilance."

Despite the avowed commitment of policy makers to keep markets open, research by the WTO and the World Bank has shown that at least 40 countries

have resorted to protectionist measures permitted under WTO rules. Lamy said that while the erection of tariff barriers was not the cause of the Great

Depression of the 1930s "a protectionist response to the pain of contraction is the recipe for deepening and prolonging an economic crisis."

http://www.guardian.co.uk/business/2009/jul/22/wto-lamy-globalisation-recession

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An increasing number of trade disputes (WTO / XERFI)

Complaints launched by emerging economies

Complaints launched by developed economies

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An on-going globalisation trend (XERFI)

Competitive business environment

Focus on emerging / dynamic markets

(esp. Asia)

Offshoring of production

Disintegration of the value chain

(R&D, design, marketing and sales)

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Moving East: the steel industry case (XERFI)

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The steel industry in 2008

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Rank Company Production2007 2008 (million metric tonnes)

1 1 ArcelorMittal 101.6 116.42 2 Nippon Steel 37.5 35.73 6 Baosteel Group 35.4 28.64 4 Hebei Steel Group 33.3 31.15 3 JFE 32.4 34.06 5 POSCO 31.7 31.17 11 Wuhan Steel Group 27.7 20.28 7 Tata Steel 24.4 26.59 8 Shandong Steel Group 23.8 23.810 10 U.S. Steel 23.2 21.5

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A rebalancing world economy (CW Hill)

FDI Inflows 1988-2006

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China, a booming domestic market

China's auto sales surged past those in the United States in 2009 to make the Asian nation the world's biggest car market, industry data showed Monday, but analysts

warned sales would slow this year. The China Association of Automobile Manufacturers said more than 13.64 million units were sold last year, marking an

increase of 46.15 percent from the 9.4 million units sold in 2008, Xinhua news agency reported. […] In the US, auto sales fell 21.2 percent to 10.43 million vehicles in 2009,

according to Autodata figures released last week.

China's car sales -- which outstripped those of the United States for the first time in January

last year, making the nation the world's biggest auto market -- soared in 2009 due partly to

government incentives.

http://www.france24.com/en/20100111-china-overtakes-united-states-worlds-largest-car-market-

automobile-industry-sales-detroit

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China, top global exporter

Germany’s crown as the world’s top exporter has been passed to China, new figures released by the German national statistics office have shown.

According to the Destatis figures, German exports from the 11 months from January to November were worth €734.6bn (US$1.05tr). However, during the

same time period Chinese exports were worth a total of US$1.07tr […].

According to Bloomberg, German exporters are unconcerned that they have lost their export crown to China. The President of the BGA, the Federation of German Wholesale and Foreign Trade, told the agency in an interview that the fact China had overtaken Germany in the exports stakes is “good news because they’re not

taking anything away from us”. Anton Boerner noted that China needs to develop itself and for that “they need some German know-how, German machines and plants”. He also highlighted the emergence, along with the country’s economic

success, of a Chinese middle class with purchasing power. The richer the customer, the better our business,” Boerner said.

http://www.businessandleadership.com/leadership/news/article/18880/leadership/germany-loses-crown-of-top-global-exporter-to-china

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