BME 30 Prelims

Chapter 1

Business has become increasingly global in nature, so that the success of businesses—
big and small—depends not only on the domestic economic environment but also on
developments abroad.

The fundamental basis of globalization represents freer international trade and

investment or the free flow of goods and services (including cultural and belief systems)
between countries. Thus, globalization and international trade and investment are
interlinked.

It includes a process of integrating the nations of the world so that they become more
economically efficient and interdependent.

Changes in national policies that aim to promote private enterprise and reduce or
eliminate economic, cultural, and social barriers between countries. These policies
could include: moving toward strengthening the role of the private sector; supporting
free-market pricing; eliminating barriers to free movement of goods, services, capital,
and information technology; and promoting institutions that enforce transparency,
disclosure, and the rule of law.

While most ascertain that globalization can be good for society as a whole, much of its
value depends upon how the “rules of the game” are implemented: fair trade, flexible
exchange rates, open foreign investment policies, and harnessing the Internet (including
social media out lets such as Facebook), for example, all can influence the results.
These changes could bring about “openness, accessibility, accountability, connectivity,
democracy, and decentralization”—all the “soft” qualities essential to globalization. Yet,
globalization does create “winners” and “losers.”

Globalization: Shrinking Time and Space

 Globalization is the socioeconomic reform process of eliminating trade,

investment, cultural, information technology, and political barriers across
countries.
  It can lead to increased economic growth and geopolitical integration and
interdependence among nations of the world.
 It is no longer simply another word for "Westernization" or "Americanization."
 Leads to the creation of global culture readily available in the Global Cultural
Supermarket (G. Matthews)

o Shrinking – like travelling, you can easily travel because of the technology
o China is from the east, still a big part of globalization
o Filipinos must be challenged to complete globally

Emerging economies

 Are implementing more open trade and free-market policies to "compete with
everyone from everywhere for everything"
 Are becoming the world's center of economic gravity through innovation,
research, and development
 BRICS economies (Brazil, Russia, India, China, South Africa)
 The Pacific Pumas are a political and economic grouping of countries along Latin
America’s Pacific coast that includes Chile, Colombia, Mexico and Peru.
 Business today centers around “competing with everyone from everywhere for
everything,” according to the Boston Consulting Group.
 The world’s center of economic gravity is shifting toward emerging economies
 Emerging economies are no longer sources of inexpensive labor; they are
becoming hotbeds of innovation in diverse fields, such as telecommunications,
automobile manufacturing, biotechnology, and health care.
 Innovation in emerging economies will enrich rather than hinder innovation in rich
countries.

Decoupling and the Move to a Multipolar World Economic Order

 Decoupling - A global shift in which industrialized country dependent developing

economies grow based on their own underlying economic strengths rather than
those of highly developed countries
 o Decoupling countries – shifting of developing countries to become
independent to compete globally
o Requirements
 Export oriented
 Diversifiable
 Highlight their competitive advantage
 Size of the population should not pose as a threat to their
emergence
 Avoid practice of over indulgence (being too obsessed with
something)
 Governments still have the power to erect significant obstacles to globalization,
ranging from protectionist policies to ignoring environmental standards to
immigration restrictions to military hostilities.
 International monetary system - the system of exchange rates and
international payments that enables countries and their citizens to purchase
goods and services from one other
 Multipolar world - A world economy in which the engines of growth are comprised
of both industrialized (e.g., the United States) and emerging market economies
(e.g., BRICS countries)
o Powers in a multipolar world is disbursed among countries

International Monetary Fund

• International Monetary Fund's role in global

financial stability:

 Provides a forum for cooperation on

international monetary problems
 Facilitates international trade that
promotes job creation, economic
growth, and poverty reduction
 Promotes exchange rate stability and an open system of international payments
  Lends countries foreign exchange to help address balance of payment problems
 IMF tracks global economic trends and performance, alerts its member countries
when it sees problems on the horizon, provides a forum for economic policy
dialog, and disseminates information to governments on how to implement
economic reforms to meet global challenges.
 economic reforms - economic policy changes that promote private sector
development, competitive markets, market pricing, freer trade, and deregulation
 The IMF recognizes the fact that the benefits of globalization are not without risks
—such as those arising from the recent global credit crisis

World Bank

• World Bank's initial role was to aid the reconstruction of Europe after World War II.

 The World Bank sees globalization as an opportunity to reach global solutions to

national challenges. Concern for the natural environment coupled with the need
for sustainable economic growth and development in developing countries has
been embedded in the Bank’s work.
 capital markets - a stock exchange where long term financial instruments such as
stocks and bonds can be bought and sold

• Current focus areas:

 Global integration through trade liberalization

 Analysis and national trading policy advice
  Agreements supporting international standards in financial systems
 Information and knowledge transfer to developing countries to support
sustainable development
 Eradicating communicable diseases

World Trade Organization

• The WTO began trading in 1948 under the General Agreement on Tariffs and Trade
(GATT).

 Whereas GATT primarily dealt with merchandise trade, the WTO and its
agreements now cover trade in agriculture, services, inventions, and intellectual
property.
 The first of eight GATT rounds primarily dealt with tariff reductions, but later
negotiations included other areas, such as anti-dumping and nontariff measures.
 Lowering trade barriers has been one of the simplest ways to encourage trade
and globalization.
 the WTO addresses the rules of trade between nations at a near-global
membership level. But more than that, the WTO has been an organization for
liberalizing trade, a forum for governments to negotiate trade agreements, and a
place for member governments to settle trade disputes. It operates a global
system of trade rules.
 At the heart of the system—known as the multilateral trading system—are the
WTO’s agreements, negotiated and signed by a large majority of the world’s
trading nations and ratified in their parliaments.
 They also bind governments to keep their trade policies within agreed limits to
every member’s benefit. WTO agreements are lengthy, complex legal texts
covering a wide range of activities including agriculture, textiles and clothing,
banking, telecommunications, government purchases, industrial standards and
product safety, food sanitation regulations, intellectual property, and much more.
- Liberalized trade by lowering and/or removing trade barriers such as tariffs,
quotas, and subsidies

• WTO promotes global trade by:

- Administering trade agreements

- Acting as a forum for trade negotiations

- Settling trade disputes

- Reviewing national trade policies

- Providing developing countries with technical assistance and training programs

- Cooperating with the IMF and the World Bank

A number of simple, fundamental principles run throughout all these documents; the
following five principles are the foundation of the multilateral trading system.

• Trade without discrimination: Member countries should not discriminate between

their trading partners (giving them equally “most favored nation” or MFN status);
member countries should not discriminate between their foreign products and
services.
• Freer trade: Gradually removing trade barriers through negotiations.

• Predictability: Foreign companies, investors, and governments should be confident

that trade barriers (including tariff and nontariff barriers) will not be raised arbitrarily;
tariff rates and market-opening commitments are “bound” in the WTO.

• Promoting fair competition: Discouraging “unfair” practices, such as export subsidies

and dumping products in the export market below cost.

• Encouraging economic reforms in developing countries: Giving emerging economies

more time to adjust to a free-trade environment, greater flexibility, and special
privileges to meet WTO requirements.

Institutional Structure and Its Impact on Globalization

• What is institutional structure?

- Institutions are the rules, enforcement mechanisms, and organizations that support
market transactions.

 Some countries fail because of lack institutional management

 The problem already became a part of the culture
 As an institution, an independent judiciary can be paramount for interpreting the
rule of law, with courts enforcing the laws, and a free press that can be important
for transparency of business practices.
 Institutions help transmit information, enforce contracts and property rights, and
promote market competition across extremely diverse developed and developing
countries. Building effective institutions takes time and results from a cumulative
process.
 Within each country, institution building may stall or reverse over time because of
political conflicts or economic, social, and cultural conditions. Merely establishing
institutions will not be enough: They must be effective, and people must want to
use them ethically. Successful institutions play three important roles: They
channel information about market conditions, goods, services, and participants;
they define property rights and contracts, determining who gets what and when;
and they promote competition and innovation in markets.

• Impact of globalization:

 Demand for transparency, openness, and disclosure from political institutions

o The foundations of the globalized business world are political—and so are
the biggest threats to the system. Technocrats, especially in the Americas,
Asia, and Europe, are struggling to convince their citizens that
globalization does not just benefit the rich. If these technocrats are unable
to successfully convey the nation
 Wide benefits of globalization in any of the 10 major world economies then
globalization could unravel.
o the poor have suffered as a result of globalization due to increased global
competition and decreased subsidies for basic items, such as cooking
fuels and food.
o The World Bank encourages political institutions and leaders to be
transparent and convince their constituents that while globalization does
create “winners” and “losers,” appropriate policies will be in place to retrain
and uplift the downtrodden. Otherwise, the Bank believes that social
unrest will rise, leading to political instability and ineffective and
inconsistent economic policies. This, in turn, will wreak havoc on markets
and the benefits of globalization will be stalled. Political stability has been
greatest among long-standing democracies.
 Need for adaptive institutions that provide societal stability and incentives for
private investment
o Here, accountability and transparency emerge as key factors for
institutional reform that promotes political stability, sustainable economic
growth, and globalization.
o adaptive institutions - government organizations that create strong
incentives for private investment and operate under a system of checks
and balances
o accountability - a system of responsibility in which an authority, such as
the
o government, is answerable for its actions
o transparency - a system of full disclosure and openness that aims to avoid
any semblance of corruption and cronyism
 Increasing expectations of accountability and responsibility for those who
govern
 Importance of independent judiciary and free press
 o In this regard, the judiciary system in a country remains an extremely
important institution that has a primary responsibility of interpreting the
laws and resolving disputes.
Countries with sound
economic policies will be
more successful in the
global economy,
encouraging further opening
and cross-border
integration. To attract
foreign and domestic private
investments

Governments need to put in place good governance, competitive markets,

property rights, and assist in the fight against corruption. Taken together,
these provide a baseline measurement for gauging the relative quality of a
country’s economic policies and performance.
 Good governance is needed to promote globalization, it should be a collective
effort
 The quality of administration is also important; fine policies alone do not inspire
respect and confidence without competent administrators and consistency over
time.
 antitrust laws - national laws aimed at maintaining competition in all sectors of
the economy and preventing monopolistic behavior of firms
 The protection of property rights has always been fundamental to market
economies, as this protection enables buyers and sellers to conduct transactions
with a high degree of trust.
Impact of Information Technology on Globalization

 The digital generation

o digital era - the period of transformation that adjusts lifestyles to make the
Internet and wireless technologies a part of everyday life
o The economic, social, and political benefits of new information
technologies, of which the Internet and wireless telecommunications are
by far the most publicly visible forms, are changing the relative
competitiveness of nations as access to those technologies’ spreads
rapidly around the globe.
 The digital divide myth
o digital divide - the perceived economic gap between countries or people
with easy access to digital and information technology (and its benefits)
and those with very limited access, or none at all
 “Leaping frog” into the internet and Cell Phone Era
o Stage skipping
o Path creating
o Because of market saturation in developed economies, the majority of
users will be from developing countries, and they will connect to the
Internet principally via wireless networks.
 Expanding the global use of information technology
o publicly visible forms, are changing the relative competitiveness of nations
as access to those technologies’ spreads rapidly around the globe.
o Bandwidth - the amount of data and other information that can be
transferred in a second via the Internet
o the web - the world wide web, abbreviated “www” and commonly known
as the web; a system of interlinked documents contained and accessed
via the Internet
 o Internet-related technologies help reduce corporate and societal
hierarchies because of greater access to information for everyone
concerned. Therefore, Internet and wireless technologies could make
many authoritarian governments uneasy, thereby restricting public access
to social media.

The Globalization Controversy

 Globalization - can be a force for exploitation and injustice. Some socialist-

leaning citizens and labor unions believe that capitalism exploits man in the
economic sense just as communism exploits man in the political sense.

Arguments against Globalization

- Job losses and income stagnation

o globalization harms the poor through loss of jobs and stagnant, if not
falling, wages.
o open trade and foreign direct investment may take jobs from workers in
advanced industrial economies (blue-collar and, increasingly, white-collar
workers) and transfer them to less expensive workers in developing
countries.
- Sustainable development and environmental degradation
o sustainable development - economic development that meets the needs of
the present generation without compromising the ability of future
generations to meet their own needs, whether environmentally, socially, or
economically
- Loss of local control over economic policies and developments
o Preference of other cultures than their own
- Disappearance of old industries
- Related erosion of communities
Making Globalization work for all

 globalization debate should center on how to best manage the globalization

process—at both national and international levels—so that the benefits are
widely shared and costs are kept to a minimum.

Summary

 Globalization has led to closer integration and interdependence of nations of the

world and has resulted in faster economic growth, rising incomes, and better
living standards in those countries.
 While multilateral institutions could establish the rules of international monetary
and trade systems, they were not designed to be all-encompassing. Therefore,
progressive countries developed key national institutions that set domestic rules,
enforcement mechanisms, and organizations that supported transparency of
political systems, a functioning judiciary, and adaptive market mechanisms.
 While globalization does create “winners” and “losers,” funding well-designed
retraining and educational programs for the adversely affected will lead to better-
paying jobs and increased productivity of displaced workers.

Chapter 2

International business has on blue-collar and white-collar workers in wealthy countries

(such as the United States and in Europe) as relatively low-skill factory jobs as well as
high-skill service profession jobs migrate overseas.

International business all commercial transactions, both private and public between
nations of the world.

Business culture happens when people are involved in international business

 Trade - the two-way flow of exports and imports of goods (merchandise trade)
and services (service trade)
Open trade and investment do create winners and losers and, as discussed later, the
gains from open trade and investment are always greater than the losses. The right to
export and import freely enhances the quality of life and living standards of people in the
countries involved in trade. In addition, trade brings with it cultural and technological
riches; it can also make the
world a more peaceful place
because of national
interdependence.

 foreign direct investment

- inflows of capital from
abroad for investing in
domestic plant and
equipment for the
production of goods
and/or services as well as for buying domestic companies

Subsistence – providing what is enough for survival. Demand of the household

Foreign direct investment (FDI) in a country brings funds and business culture from
abroad, creates new well-paying jobs, introduces innovative technologies, and
enhances the skills of domestic workers.
  Outsourcing - the corporate practice of acquiring or producing quality goods or
services abroad at a lower cost thereby eliminating domestic production

Foreign investment flows are generally based on long-term global or country outlook.

An understanding of how major trade theories have evolved is important. First, these
theories provide an appreciation for the progress made in understanding how trade (and
gains from trade) really works in open economy theories present a rationale why
restriction to trade should be minimized even when domestic economic and business
conditions seem awful.

Benefits of International Trade

• A greater amount of choice in the availability of goods and services

• Competition results in lower prices for goods and services consumed

• Increased quality of life and higher living standards

Major Trade Theories

1. Mercantilism is the oldest form of trade theory

o Practiced during the 1500-1750 period as Europe moved toward
nationalism
o Wealth-both personal and national - largely determined by the amount of
precious metal owned i.e., gold and silver)
 Mercantilists believed that for a nation to be wealthy, it must export as much as
possible and import as little as possible so that the country would have a trade
surplus.
 Mercantilists did not want to see the big picture:
o If all nations increased exports and decreased imports, there would be a
surplus of exports that would lead to unpleasant results.
 Mercantilism - a theory of international trade that supports the premise that a
nation could only gain from trade if it had a trade surplus
 factors of production - endowments used to produce goods and services: land
(quantity, quality, and mineral resources beneath it), labor (quantity and skills),
capital (cost), and technology (quality)
 trade surplus - when the value of exports exceeds the value of imports; the
opposite of a trade deficit

2. Specialization
 absolute advantage - the ability of one country to produce a good or service more
efficiently than another
 comparative advantage - the ability of one country that has an absolute
advantage in the production of two or more goods (or services) to produce one of
them relatively more efficiently than the other
3. factor endowment - the quantity and quality of factors of production (land, labor,
capital and technology) that a country owns

The Heckscher–Ohlin (H–O) theory attributes the comparative advantage of a nation

to its factor endowments:

 land (quantity, quality, and mineral resources beneath it),

 labor (quantity and skills),
 capital (cost), and
 technology (quality).
 Entrepreneurship (skills)

4. factor price equalization theory

a. states that when factors (labor, for example) are allowed to move freely
among trading nations, efficiency further increases, which leads to
superior allocation of the production of goods and services among
countries.
 b. Free mobility of factors will lead to efficient reallocation of resources
(factors of production) until price equilibrium is reached.

With regard to capital, the availability and ability to raise capital at a low cost will be an
important characteristic. Technology becomes crucial in a knowledge-based economy;
therefore, the prevalence and quality of technology and telecommunications are crucial
factor characteristics.

 When domestic demand remains high, the number of suppliers will also be high.
With sizable demand, domestic competition among suppliers will intensify and
result in lower prices as well as sophisticated, innovative new products. This
could lead to product specialization.
 The quality and competitive nature of supplier industries will determine how
successful a country will be.
 Firm strategy deals with the way companies in an industry manage their
operations as well as the structure of the organization. Management style—top
down, bottom up, or consultative—has a large impact on a firm’s performance.
 Firm structure and rivalry address the competitive structure of industries in a
nation.
 a competitive industry will foster innovative, cost-efficient, aggressive firms that
can adjust to changing economic conditions at home and will be well prepared to
compete abroad.
 According to Porter’s “diamond”
model, the success or
competitive advantage of a
nation at the global stage would
crucially depend upon the
interaction of the four groups of
characteristics identified above.
 Chance refers to an external
shock or development that could drastically change or hasten the course of
economic development.
  Government institutions and policies could help or hurt competitiveness of
nations due to the fact that government institutions and policies have the
potential to affect all four sets of characteristics associated with Porter’s
diamond.
 Government policy could also stifle demand through excessive taxation or
perverse incentive programs. Such policies will stifle rational investment and
innovation and hence, national competitiveness. Government policies could also
stunt the growth of related and supporting industries through the implementation
of programs that divert resources to sectors in which companies do not have
core competencies.
 government policies could impact market structure or the level of
competitiveness
in an industry.
 Trade theory clearly shows how free trade has had a positive effect on the
economic well-being of all trading partners. This can be achieved through
improvements in the living standards of people in those countries due to a
greater amount of choice in goods and services and lower prices to the
consumer.

Trade policy - All government actions that seek to alter the size of merchandise and/or
service flows from and to a country

Instruments of trade policy

A. Tariffs (custom duties) - are taxes on imports which generate revenues for the
government

B. Preferential duties - an especially advantageous or low import tariff established by a

nation for all or some goods of certain countries and not applied to the same goods of
other countries

C. Most favored nation status - an agreement among WTO countries in which any tariff
concession granted by one member to any other country will automatically be extended
to all other countries of WTO
D. Nontariff barriers

 the main instrument of trade policy has been importing tariffs; however, more
recently, nontariff barriers and export subsidies have become equally important
in international business.
 In many developing countries, import tariffs are a major source of government
revenue. Tariffs come in two forms: specific and ad valorem.
 custom duties - taxes on imports that are collected by a designated government
agency responsible for regulating imports
 specific tariff - an import tax that assigns a fixed dollar amount per physical unit
 ad valorem tariff - a tax on imports levied as a constant percentage of the
monetary value of one unit of the imported good

some countries also interfere with the free flow of exports by enforcing export subsidies,
or export taxes\

export taxes are meant to discourage exports and to keep production at home.

Import quotas are generally worse than import tariffs because when a quota is reached,
that particular good can no longer be imported or purchased.

 generalized system of preferences (GSP) - an agreement where a large number

of developed countries permit duty-free imports of a selected list of products that
originate from specific countries
 export subsidy - a negative tariff or tax break aimed at boosting exports
 export taxes - taxes meant to raise export cost and divert production for home
consumption

Non-tariff barriers

 import quotas - also known as Quantitative Restrictions (QRs) are regulations

that limit the amount or number of units of products that can be imported to a
country
  voluntary export restraint (VER) - a nontariff barrier in which an efficient exporting
nation agrees to limit exports of a product to another country for a temporary
period
 domestic content provisions - regulations requiring that a certain percentage of
the value of imports be sourced domestically

Managed trade aims to replace global market or economic forces with government
actions to determine trade outcomes. Under a managed trade regime, policymakers
may use various socioeconomic or geopolitical rationales to protect specific companies
or industries and achieve particular strategic objectives.

socioeconomics addresses the study of the relationship between business or economic

activity and the social life of residents in a nation.

socioeconomics explores the relative negative impact of free trade upon society’s
welfare, as well as government policy measures that are implemented to minimize the
negative outcomes to society in a country.

Countertrade can be extremely inefficient. Countries participate in countertrade,

especially when they do not have adequate amounts of foreign currencies (U.S. dollars,
euros, etc.) to pay for their imports. Countries may also pursue countertrade because
they may not be capable of producing goods of international quality or because a
banking embargo has been imposed on them.

 managed trade - agreements, sometimes temporary, between countries (or a

group of countries) that aim at achieving certain trade outcomes
 countertrade - agreement in which an exporter of goods or services to another
country commits to import goods or services of corresponding value from that
country
 export cartels - a group of countries that could effectively control export volume
to keep their export prices, revenues, and economic growth stable or high
 infant industry argument - temporary provision of protection to nascent industries
that have good prospects of becoming globally competitive in the medium term
Current Practice of “Managed" Trade

Socioeconomic Rationale

 Countertrade
 Export cartels
 Protection of infant industries
 Questionable labor practices
 Environmental considerations
 Health and safety

Geopolitical Rationale

 National security
 Protection of critical (strategic) industries
 Embargoes

Some countries provide protection to strategic industries that have a significant

employment impact on certain sectors of an economy—the so-called “national
champions”—when these champions are unable to compete globally.

 Embargoes - trade sanctions that are imposed upon a nation to restrict trade with
that country

Trade has influenced culture, shaped history, affected living standards, and opened
society to new ways of thinking. Open trade and investment create “winners” and
“losers,” but the gains from open trade and investment are always greater than the
losses.

The disruptive nature of trade can be softened by retraining and reeducating the
negatively affected workforce and enabling workers to learn new skills in order to
become more productive and gainfully employed.
Mercantilism, the oldest, was based upon the idea of wealth accumulation (i.e.,
countries striving to generate trade surpluses so that their holdings of gold and silver
would increase, making them rich and powerful).

theories based on specialization in the production of goods and services include the
theories of absolute and comparative advantage.

H–O and factor price-equalization theories emphasize factor abundance as the

fundamental reason behind exports and trade.

The robustness of Porter’s model can be attributed to his integration of the theory and
structure of a firm’s behavior to trade theory.

Porter’s hybrid model was designed to operate within an environment of government

actions and unforeseen external events—external shocks, positive or negative.

Trade policy refers to government actions that seek to alter the free flow of merchandise
or services from and to a country.

Managed trade aims to replace free global-market forces with government actions to
determine trade outcomes.

Geopolitical justification could include considerations of national security, strategic

industries, and embargoes.

Chapter 3

Regional Integration

- The process by which two or more nation-states agree to cooperate and work
closely together to achieve peace, stability and wealth
- Implementation of a multitude of economic and/or political steps by member
states to increase their global competitiveness, including preferential trade
access
- Helps countries - esp. small and medium-size countries through spatial and
economic transformations
regional integration is an ongoing process, and the reasons for regional integration are
many and varied; they may be purely economic, purely political, or a combination of
both.

regional integration can bridge barriers between national borders and increase
interdependence within a region and the rest of the world.

Regional integration helps countries—especially small and medium-sized countries—

scale up their supply capacity through regional production networks and become more
globally competitive.

Stages of regional integration

1. Free-trade area - An area in which two or more countries agree to eliminate all
barriers to trade while at the same time keeping their own external tariffs (within
WTO guidelines) against nonmembers
2. Customs Union - Group of free-trade member countries that have adopted a
common external tariff with nonmember countries
3. Common (or single) market - Formed when member countries of a customs
union remove all barriers to allow the movement of capital and labor within the
customs union
4. Economic and Monetary Union - Formed when members of a common market
agree to implement common social programs and coordinated macroeconomic
policies that would lead to the creation of a single regional currency and a
regional apex central bank
5. Political Union - Work closely with one another to arrive at common defense and
foreign policies and behave as a single country

Economic integration occurs when two or more countries join together to form a larger
economic bloc.
economic gain; that is, to work together rather than separately to increase economic
growth and efficiency to raise employment, skills, and the quality of life for the citizens of
the region and to promote peace and prosperity as well.

Economic integration can take several forms, representing varying degrees of

integration;

 regional integration - implementation of a multitude of economic and/or political

steps by member states to increase their global competitiveness, including
preferential trade access
 spatial transformations - the process of allowing efficient geographic distribution
of business activities within and among countries
 free-trade area - an area in which two or more countries agree to eliminate all
barriers to trade, such as tariffs, quotas, and nontariff barriers like border
restrictions, while at the same time keeping their own external tariffs (within WTO
guidelines) against nonmembers
 customs union - a group of free-trade member countries that have adopted a
common external tariff with nonmember countries
 common market or single market - a market formed when member countries of a
customs union remove all barriers to allow the movement of capital and labor
within the customs union
 economic and monetary union - a union formed when members of a common
market agree to implement common social programs (on education, employee
benefits and retraining, health care, etc.) and coordinated macroeconomic
policies (such as fiscal and monetary policies) that would lead to the creation of a
single regional currency and a regional apex central bank
 political union - the union created when member countries of an economic and
monetary union work closely with one another to arrive at common defense and
foreign policies and behave as a single country
The removal of tariff and nontariff barriers across national borders can enable small and
medium-sized firms to consolidate, specialize, and gain economies of scale in
production that will help them achieve competitiveness on a regional and global scale.

institutions that unify the markets, infrastructure that efficiently connects these markets,
and lower economic barriers to facilitate trade.

Benefits of Regional Integration

 Creating a larger pool of consumers with growing incomes and similar culture,
tastes, and social values
 Encouraging economies of scale in production, increasing the region's level of
global competitiveness, and enhancing economic growth through investment
flows
 Freeing the flow of capital, labor, and technology to the most productive areas in
the region
 Increasing cooperation, peace, and security among countries in the region
 Encouraging member states to enhance their social welfare to match that of the
most progressive states

Costs of Regional Integration

 Undermining the most-favored-nation status rule. An essential principle of the

WTO
 Imposing uniform laws
and regulations that at
times do not take into
account national
economic, cultural, and
social differences
  Eliminating jobs and increasing unemployment in protected industries
 Losing sovereignty, national independence, and identity
 Reducing the powers of the national government
 Increasing the problems of illegal drugs and terrorism due to the ease of cross-
border labor movement

Economic geography - the study of principles that govern the efficient spatial allocation
of economic resources and the resulting consequences

Steps to Regional Integration

1. Start small
2. Think global
3. Compensate the least fortunate

The primary problem is to identify the roadblocks to regional integration so that

appropriate institutions and policies can be put in place, which would eliminate the
roadblocks and lead to economies of scale and specialization of production. Lowering or
eliminating trade barriers between neighbors is important to achieving this goal.

regional integration is more than just cross-border trade liberalization.

Glocalization: Cultural Integration

 Combination of global and local culture

Regional integration should have clear goals and initially address a narrow, well-defined
area of cooperation in which the costs and benefits are easily defined.

Regional integration should not create unconnected or isolated countries. Instead, it

should help countries gain access to world markets that they may not have access to
otherwise.

Concentration of economic activity generally follows regional integration, because firms

will want to specialize by increasing the scale of production in fewer places.
As people migrate to the efficient regions, they will spread their benefits by sending
remittances home.

explicit compensation programs may be required to ensure access to social services

and basic infrastructure in lagging areas.

The European Union (EU)

 EU is most highly evolved regional integration:

o EU grew out of European Coal and Steel Community (ECSC).
o The Treaty of Rome in 1957 established the European Economic
Community (EEC).
o The Maastricht Treaty in 1992 created the EU as a full economic union
with free movement of labor among its member countries.
o The euro was adopted as a common currency in 1992
o UK, Denmark, Sweden (not using EU)
o BREXIT

The North American Free-Trade Agreement (NAFTA)

Canada, United States, and Mexico reached a comprehensive trade agreement in 1994.

Major NAFTA objectives:

1.) Trade expansion through the phased elimination of all trade barriers

2.) Protection of intellectual property rights

3.) Creation of institutions to address unfair trade practices, trade disputes,

environmental protection, worker's rights, competition policies, and implementation of
NAFTA rules and regulations

ASEAN

• ASEAN's objectives:

1.) To accelerate economic growth, social progress, and cultural development in the
region
2.) To promote peace and stability through the rule of law in relationships among
countries in the region.

3 Pillars:

- ASEAN Security Community

- ASEAN Economic Community

- ASEAN Sociocultural Community

Regional Integration Blocs in Latin America

 The Treaty of Montevideo in 1960 created the Latin American Free Trade
Association (LAFTA).
 Bolivia, Chile, Colombia, Ecuador, and Peru created the Andean Group in 1969.
 Treaty of Asunción in 1991 among Argentina, Brazil, Paraguay, and Uruguay,
created the Southern Cone Common Market, or MERCOSUR (Mercado Común
del Sur)
 DR-CAFTA (Dominican Republic and Central American Free Trade Agreement)
became effective in 2005.

 developed countries seek these regional trading blocs to (1) expand their growth
potential abroad as domestic markets mature, and (2) deliver low-cost
manufacturing platforms for locally based firms.
 A large local market gives countries the advantage of attracting industrial
activities. If the country’s infrastructure is also well connected to world markets,
this advantage is reinforced.
 International integration is most difficult for countries in regions that are divided,
far from world markets, and lack the economic size of a large local economy.
These regions, which Paul Collier5 (2007) calls the “bottom billion,”
 Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan)
has the highest proportion of landlocked countries.
 Regional integration is paramount for resource-led economic growth and to more
broadly spread the benefits of this growth. This will require institutional reform;
increasing infrastructure investments to improve market access; and incentives
such as preferential access to world markets, liberalized rules of origin, and skills
development.
 Economists are concerned that as a result of these negotiations, the prospects of
creating a truly open global economic system that benefits all countries may
recede
a. First is the expansion of trade in goods and services through the phased
elimination of all trade barriers including tariffs, quotas, and licensing
restrictions, among the parties.
b. Second is the protection of intellectual property rights (enforcement of
patent and copyright laws for software, music recordings, etc.).
c. Third is the creation of institutions to address potential problems (unfair
trade practices, disputes between companies or governments,
environmental protection, worker’s rights, competition policies, and the
implementation of NAFTA rules and regulations).
 Two or more countries could join together to form a regional integration bloc. The
main objectives for integration could be economic, geopolitical, social, and/or
regional security.
 When the goal is purely economic, then the unification process is called regional
economic integration.
a. First, and most basic, is a free-trade area, which essentially calls for the
elimination of tariffs, nontariff barriers and quotas among member
countries.
b. Second is a customs union, in which a free-trade area would impose a
common external tariff on nonmembers.
c. Third is a common or single market that builds on a customs union by
allowing free movement of labor and capital among member states.
d. Fourth, an economic union calls for convergent social, economic, and
monetary policies among member states.
 e. And, finally a political union will call for common foreign and defense
policies where the regional group of countries behaves as a single
country.
 Economic geography attempts to explain international trade flows as well as the
degree of success and segmentation of regional integration blocs.
 The European Union is the world’s most advanced and largest (from the
standpoint of GDP/GNI) form of a regional integration bloc because it is totally
integrated economically and almost moving to a political union.
 NAFTA, on the other hand, is only in the first stage (free trade) of the economic
integration process and has a long way to go—if there is political will at all—to
catch up with the EU.
 Latin America offers tremendous potential. It is rich in natural resources, and
Argentina, Brazil, and Chile have significant quality human resources as well.
 If multilateral trade and investment liberalization fails to continue, regional
integration blocs are likely to be the way of the future.

Chapter 4

Balance of Payment

1. Record of all transactions between one country and the rest of the world for a given
period of time

2. Objective: To show how well the country's economy and government policies are
performing

3. It reveals whether a country saves enough to pay for its imports. (IMPORT)

Note: Avoiding Trade Deficit

4. It shows whether a country produces enough economic output to fund for its growth
(EXPORT)

Note: Supporting Trade Surplus

  consumers, businesses, and governments must convert from one currency to
another at market exchange rates to make payments for internationally traded
goods, services, and financial instruments.
 Major changes in the world monetary system have had an impact on foreign
exchange (also called forex) markets over the years.
 Resulting currency fluctuations led to a variety of efforts by countries to manage
currency values, including pegging, dollarization, and adoption of regional
currencies, such as the European euro.
 Currency values can change for many reasons.
a. Currency values can change for many reasons.
b. Price imbalances could be due to mispricing or due to differential inflation
across countries.
c. varying interest rates across countries.
 A country’s balance of payments is an objective standard that shows how well
the country’s economy and government policies are performing.
 BOP is generally split into two major components with major business
implications: (1) the current account, and (2) the financial account

Components of BOP

A. Current Account

-driven by activities of consumers and business

A.1. Trade Balance - net of merchandise exports and merchandise imports

A.2. Services Balance - net of export of services and import of services

A.3. Income Balance - net of investment income from abroad and investment income
paid to foreigners

A.4. Balance of Transfer - net of transfer of payments between countries based on

outflows and inflows

 The sum of these four subaccounts equals the current account balance, which is
more important than the trade balance
* Capital Surplus Country - a country with a current account surplus (e.g., China,
France, Japan, Singapore, and Switzerland)

 In flow of funds analysis, money moving into a country is a credit (plus sign),
while money leaving the same country is a debit (negative sign).
 The current account of the BOP is largely driven by activities of consumers and
business. It consists of four subaccounts:
a. (a) trade (or goods) balance, (b) services balance, (c) income balance,
and (d) net transfers.
 balance of payments (BOP) - a statement of account that shows all transactions
between the residents of one country and the rest of the world for a given period
of time
 current account - the activities of consumers and businesses in the economy with
respect to the trade balance, services balance, income balance, and net
transfers
 A country with a current account surplus is called a capital surplus country
 The financial account describes the second half of a country’s balance of
payments, which shows how the country’s current account balance is finance
 Foreign countries (investors) will be less willing to continue investing in current
account deficit countries for extended periods of time because of the perceived
risk of nonpayment of debt.
 income balance - the net of investment income from abroad and investment
payments to foreigners
 balance of transfers - the net of transfer payments going overseas and inflows
from abroad
 financial account - consists of domestic-country owned assets abroad, foreign
owned assets in the domestic country, and net financial derivatives
 risk premium - the added return required by investors for risk associated with a
security or asset
 foreign direct investment (FDI) - encompasses purchases of fixed assets (such
as factories and equipment) abroad used in the manufacture and sales of goods
and services

 FDI decisions have important implications to consumers, businesses,

government, and society.
 Consumers gain through greater choice of products (or services) at competitive
prices, businesses face increased competition as well as profit opportunities,
governments reap additional tax revenues, and society benefits through
increased employment opportunities and corporate social responsibility.
 Security investments also have a significant impact on the BOP’s financial
account. Financial capital flows between countries in search of higher rates of
return on foreign stocks and bonds.
 individuals and firms hold foreign financial assets in order to diversify their
investments beyond domestic stocks and bonds only.
 Capital flows generally represent investments for the long term (more than one
year).
 Central banks (such as the U.S. Federal Reserve and Germany’s Deutsche
Bundesbank) hold foreign exchange, or currencies, of major countries (U.S.
dollar, euro, yen, etc.) as part of their reserves in addition to their local currency.
To earn interest on their foreign exchange reserves, central banks deposit some
of their reserves with foreign central banks.
 statistical
discrepancy -
reconciles any
imbalance between
the current account
and financial account
 to ensure that all debit and credit entries in the balance of payments statement
sum to zero
 Over the past 65 years, the growth of international trade has been driven by
world economic growth, as well as the elimination of barriers to trade such as
tariffs, nontariff import and export quotas, and other restrictions.
 The foreign exchange market is a 24-hour market with international financial
institutions connected by means of sophisticated telecommunications systems
that enable instant, real-time exchange rate quotations.
 The function of the foreign exchange market is to facilitate international trade (in
goods and services) and investment (FDI, security investment, and short-term
money market flows).
 foreign exchange markets - a global network of international banks and currency
traders that trade different countries’ currencies
 exchange rate - the price at which one currency can be converted to another
currency
 independent floating exchange rate system - system that sets the values of major
currencies based on their demand and supply in world currency markets
 managed floating exchange rate system - system that determines the value of
some currencies partly by demand and supply in the foreign exchange market
and partly by active government intervention in the foreign exchange market
 fixed exchange rate system - system in which the country pegs its currency at a
fixed rate to a major currency or basket of currencies, while the exchange rate
fluctuates within a narrow margin around a central rate
 spot market - exchange that trades currencies on a real-time basis for immediate
delivery
 bid-ask spread - the difference between bid and ask prices of a currency; the
transaction fee earned by the bank
 various international monetary systems have developed to facilitate international
trade.
 governments around the world have worked together to promote stable
exchange rates and world trade.
  direct quotes - prices of a foreign currency in dollars or the number of dollars per
one unit of foreign currency $1 = 59
 indirect quotes - the reciprocal of the direct quote or the prices of a dollar (for
example) in foreign currency terms

Kinds of Foreign Exchange Market

Spot

 Exchange that trades currencies on a real-time basis for immediate delivery.

 The currency price at the time of the trade

Forward

 Enables purchases and sales of currencies in the future with prices established
at a previous time
 Agreement to exchange currencies at an agreed-upon price on a future date

Futures

 Is an auction market in which participants buy and sell commodity and futures
contracts for delivery on a
specified future date
 Contracts are standardized
and trading is centralized

 forward market - exchange

that enables purchases and
sales of currencies in the future with prices (or the forward rate) established at a
previous time
 forward rate - the price at an earlier time of a currency in terms of another
currency established for future delivery in the forward market
 discount - in the forward market, the selling of a currency at a spot rate that is
less than the forward rate
  premium - in the forward market, the selling of a currency at a spot rate that is
more than the forward rate
 hedge - insurance that reduces future risk
 inflation - an increase in the prices of goods and services caused by the supply of
money exceeding the demand for goods and services
 gold standard - monetary system that pegs currency values to the market value
of gold

Development of the Flexible Rate System

Bretton Woods Agreement

 The 1944 decision to establish a global currency system with the U.S. dollar
pegged at a fixed rate of exchange to gold, and the currencies of 43 other
countries fixed to the dollar
 Creation of IMF

Smithsonian Agreement

 The 1971 decision allowing the United States to devalue the dollar against other
countries' currencies

Jamaica Agreement

1. Members could adopt their own exchange system

2. A global fixed exchange rates

3. Abolition of the gold standard

4. Special Drawing Right

 Bretton Woods Agreement - the 1944 decision to establish a global currency

system with the U.S. dollar pegged at a fixed rate of exchange to gold, and the
currencies of 43 other countries fixed to the dollar
 The International Monetary Fund (IMF) was established under the Bretton Woods
Agreement to help ensure the stability of the international monetary and financial
system.
 Subsequently, major nations met to consider abandoning the Bretton Woods
Agreement, including pegging the dollar to gold. Under the resulting Smithsonian
Agreement on December 17–18, 1971, the United States devalued the dollar
against other countries’ currencies.
 “Snake-in-the-tunnel,” an exchange rate precursor to the euro.
 Jamaica Agreement
a. (1) members could adopt their own exchange systems;
b. (2) a system of global fixed exchange rates (as under Bretton Woods)
would only be implemented if approved by a vote of 85 percent of
membership;
c. (3) gold would no longer be a common denominator of the monetary
system; and
d. (4) the special drawing right (SDR) created by the IMF was recommended
as the primary reserve asset of the international monetary system.
 Today, the SDR is a basket of currencies consisting of dollars, euros, pounds,
and yen,
 To promote stability in the international monetary system, the IMF in cooperation
with the World Bank work to assist member countries with exchange rate,
liquidity,
economic development, and structural issues.
 a flexible exchange rate system began to emerge with market forces of supply
and demand determining the prices of different currencies
 Currency values can be affected by a variety of forces, including current account
balance, economic conditions, inflation and interest rates, and other factors.
 currencies that freely float in forex markets on a daily basis may be subject to a
managed float at times
  A large depreciation of the currency could cause difficulties in making debt
payments denominated in foreign currencies and thereby damage the domestic
financial system and economy.
 Dollarization can be unofficially adopted by citizens in a country or officially
approved by a country as legal tender in transactions (e.g., the sole domestic
currency).
 The European community established the European Exchange Rate Mechanism
(ERM) in 1979. Under the ERM, a weighted basket of European currencies
known as the ECU (European Currency Unit) was defined based on a managed-
float system with fixed exchange rates varying within 2.25 percent margins.
 International Monetary Fund (IMF) - financial authority established under the
Bretton Woods Agreement in 1944 to help ensure the stability of the international
monetary and financial system
 Smithsonian Agreement - the 1971 decision allowing the United States to
devalue the dollar against other countries’ currencies, thereby beginning the
breakdown of the 1944 Bretton Woods Agreement
 Jamaica Agreement - the 1976 international monetary order that allowed
countries to adopt different exchange rate systems including floating their
currencies in world markets

Valuing (or Devaluing) Currencies

 special drawing right (SDR) - a basket of currencies consisting of dollars, euros,

pounds, and yen created by the International Monetary Fund (IMF) for use as a
benchmark to value the currencies of different countries
 clean float currency - monetary system with minimal government intervention;
largely market determined
 dirty float currency - monetary system with varying degrees of government
intervention to maintain a range of acceptable values against other currencies
 dollarization - the practice of using the dollar or some other foreign currency
together with, or instead of, a domestic currency in a country
  hard currencies - leading world currencies of developed industrialized countries,
including the U.S. dollar, European euro, Japanese yen, and British pound
sterling
 soft currencies - emerging market countries’ currencies that are less stable in
value than hard currencies and are sometimes pegged to hard currency values

Economic Theories on Exchange Rate Determination

1. law of one price - principle stating that identical goods should sell for the same price
in different countries according to local currencies

 arbitrage - buying goods in a lower priced market and selling them in a higher
priced market to make profits

2. purchasing power parity (PPP) - theory stating that a basket of goods should have
approximately the same prices across different countries

 the number of units of a foreign country's currency required to purchase the

identical quantity of goods and services in the local developing country market as
S 1 would buy in the US

3. interest rate parity (IRP) - theory stating that interest rates on bonds in different
countries should be the same, as investors would buy and sell these bonds to make
arbitrage profits until this condition holds

 big mac index - calculation using the cost of a McDonald’s restaurant sandwich
to assess the relative values of currencies

The cost of McDo Big Mac in the Philippines is 200 pesos. Taking the dollar rate at 50
pesos per dollar. The same Big Mac in the US should cost $ 4. If the costs are identical
in both the countries for the same commodity, it is term as equilibrium in purchasing
power parity.

If you want to live inexpensively, and you can move to any country in the world,
compare prices of a McDonald's Big Mac.
  A variety of problems could explain the failure of PPP for shorter durations of
time.

Why can’t we live in a PPP society

- Transportation costs and trade barriers

- Government intervention in trade and exchange rates

- Multinational firms with

pricing power

- Non-tradable goods

- Indigenous materials

- Taboos

 transportation costs and trade barriers cause some discrepancies in prices

between countries.
 Government intervention in trade and exchange rates (e.g., trade restrictions and
prohibitions on conversions of local currencies for foreign currencies),
multinational firms with pricing power on a global basis
 the value of a country’s currency is probably attributable to more than differences
in price levels between countries.
 Under the law of one price, if an investor purchases government bonds in the
United States and comparable maturity and risk government bonds in Europe,
the rates of return on both should be the same for an individual investor
 covered interest rate parity - principle implying that forward exchange rates and
spot exchange rates set interest rates on bonds in different countries equal to
one another
 uncovered interest rate parity theory, it is possible that the expected future spot
rate is not equal to the forward exchange rate. This difference is possible if a risk
premium exists in expected future spot rates due to risk adverse investor
behavior.
 IRP argues that the interest rate earned on assets in different countries will tend
toward equality after taking into account exchange rate changes.
 If IRP does not hold, global capital flows will take place to arbitrage away excess
profit opportunities in international investments.
 Transactions cost is one possible impediment to IRP
 market psychology can play a role in exchange rate movements, as forex traders
speculate in currencies
 market efficiency due to traders seeking arbitrage profits would tend to cause
relative interest rates and exchange rates between countries to change in
integrated financial markets.
 central bank intervention is another reason that IRP may not hold at all points in
time.
 international investors may globally diversify their investments and behave
passively toward arbitrage activities.
 uncovered interest rate parity - principle implying that expected future spot
exchange rates and spot exchange rates set interest rates on bonds in different
countries equal to one another
 The balance of payments (BOP) account provides details about the flows of
funds over time between a country and the rest of the world.
 It is affected by foreign direct investment (FDI) and security investments across
borders.
 As world trade has expanded over time, an international monetary system has
developed to enable payments to be made in multiple national currencies.
 The foreign exchange market is a global network of international banks and
currency traders that trade currencies around the clock. Exchange rates give the
price of a currency relative to another currency.
 Money evolved over time from coins made of precious metals to paper money
issued by countries as a national symbol of sovereignty and identity
 The euro has reduced currency fluctuations, inflation, and related economic
downturns in Eurozone countries.
  PPP states that the prices of similar goods in different countries should be the
same after converting one currency into another currency. Differences in prices
will be eliminated by traders that buy and sell goods between countries to make
arbitrage profits.
 IRP says that interest rates on bonds across countries should be the same after
converting currencies at exchange rates over time.
 A puzzle in financial economics is that, despite the ease with which investors can
buy and sell bonds in different countries due to integrated financial markets,
empirical evidence only weakly supports IRP theories.

Chapter 5

Cultural understanding plays a major role in global business success.

 culture is “learned behavior; a way of life for one group of people living in a
single, related, and independent community”

Characteristics of culture

a. First, culture is not inherited; rather it is learned

b. it is nearly impossible to change an entire country’s culture; culture is
relatively static and not easily modified
c. Third, it is the responsibility of the global firm to ascertain the level of
importance of various aspects of culture in the foreign markets it serves
and recognize these aspects when doing business overseas.
d. companies’ operations, chiefly marketing and management, need to
recognize and adjust to the cultural environment existing in the
countries the global company serves.
 Acculturation is the term used to describe the ability of a firm to adjust to a
culture different from its own.
 Enculturation is learning culture inside, or within the firm
 Assimilation – you are forgetting your culture, and taking in what’s new

Elements of Culture
 Language
a. Verbal communication refers to the message’s actual content
b. Nonverbal-communication involves tone of voice as well as the gestures,
body position, facial expressions, eye contact, and any other body
language that accompanies verbal communication.
c. Language is important to managers when evaluating employees,
communicating on an intra-company basis with overseas divisions, and
helping to interpret the circumstances (context) in which language occurs.
d. Language is also crucial when providing access to local markets through
advertising.
e. backward translation. In this technique, a message is translated from
English into another language, then someone skilled in that foreign
language translates it back into English; this second translation can then
be compared to the original English version.
 Religion
a. Religion is a powerful cultural aspect that must be recognized as
companies manage their overseas operations and market their products in
foreign cultures.
b. Affects
 Business operations
 Manufacturing and marketing of products
 Observance of holidays
 Working days and working hours
 Values and Attitudes
a. Values are basic beliefs or philosophies that are pervasive in a society
b. Attitudes are feelings or opinions. Attitudes toward change must be
considered by international businesses.
 Manners and Customs
a. manners and customs, the way a society does things that prevail in
foreign countries.
 b. Gift-giving is one aspect that describes manners and customs. In general,
small gifts are appropriate, whereas large gifts may be viewed as a bribe
that contravenes international law.
 Material Elements
a. Material culture in a society is often a direct result of technology. It is
perhaps best demonstrated by a country’s infrastructures; that is, the
basic economic, social, financial, and marketing frameworks that enable
the society to function.
b. Economic infrastructure involves transportation, energy, and
communications.
c. Social infrastructure refers to housing, medical services, and educational
institutions.
d. Financial infrastructure consists primarily of banks, and marketing
infrastructure refers to marketing research and advertising firms.
 Aesthetics
a. Color is an important packaging variable. Companies plying international
markets must carefully choose colors, as colors often represent different
things in different countries.
b. Color, form, and music are the major components of aesthetics-what is
perceived as taste and beauty by a society
 Education
a. The level of education held by people in foreign countries is a major factor
in explaining economic growth.

1. Some countries emphasize

different educational specialties:

- South Korea and Japan stress education in sciences and engineering
- Russia is strong in mathematics and computer programming.
- India emphasizes engineering and software development.

2. Some countries have tiered system of higher education with prestigious colleges and
universities.
1. Social institutions - The way people in a society relate to one another within group
settings

2. Reference groups - Groups that are important to individuals

3. Social stratification - The extent to which groups at the top of the social pyramid exert
control over others at lower levels of the pyramid

Egalitarian - equality

 Social Institutions
a. Social institutions refer to the way people relate to one another within
group settings in a society
b. Sociologists refer to groups that are important to individuals as reference
groups
c. social stratification, meaning that groups at the top of the social pyramid
exert a great deal of control over others at lower levels of the pyramid.

There have been several attempts to group countries and regions of the world together
according to their cultural dimensions and similarities. The purpose is to provide
international managers with cultural clusters that would allow for similar marketing and
management strategies.

 Individualism vs.
collectivism involves the
worth of an individual
versus the worth of the
groups of which that person
is a member (“me versus
the group”).
  Power distance refers to egalitarianism (equality) versus authority
a. High power distance countries are those where superiors and elders are
treated with deference and respect, in contrast to low power distance
countries, where relationships are more egalitarian.
 masculine vs. feminine the extent to which a society minimizes gender inequality
 Uncertainty avoidance examines the extent to which societies tolerate risk or are
risk averse.
 time orientation the extent to which a society emphasizes short-run or long-run
time horizons
 Universalism vs. particularism refers to the importance of rules versus
relationships in a society.
 The neutral vs. emotional variable involves the extent to which persons within a
society emotionally express themselves.
 The specific vs. diffuse variable refers to the compartmentalization of roles. For
example, are men in a society depicted in multiple roles (diffuse), such as
business executive, father, husband, or president of a social club? Or are men
generally depicted on only one dimension, such as businessman (specific)? Are
women who work and have children depicted in both roles, mother and manager,
or in one, mother?
 achievement vs. ascription, how rewards in a society are handed out:
performance vs. place in society

Martin Gannon believes that it is extremely difficult for executives of companies

conducting business overseas to learn much about the cultures of a number of
countries through dos and don’ts.”

Gannon's Cultural Metaphors

1. Gauge a specific culture by using an image ("metaphor") that depicts how people in a
specific culture think and behave:
Companies considering conducting business overseas and those already doing
business abroad, have a number of sources they can access to learn more about the
culture of various foreign countries

The Importance of Culture for Managing and Marketing in Overseas Markets

1. A country's culture affects its attitudes toward work.

2. Management styles can give rise to challenges or lead to success.

3. When developing new products, management styles must be considered along with
many other aspects of marketing.

4. Advertising campaigns must be carefully tailored to local cultures.

5. Culture has an impact on communication styles.

individual countries have specific business customs that are worth learning

The overriding cultural aspect of doing business in China is guanxi (“gwanshe”). Foreign
business representatives who ignore guanxi are less likely to be successful in the
Chinese market.

 Guanxi refers to the relationship between subordinates and superiors. It denotes

friendship among unequal involving unlimited exchanges of favors;

When doing business in Latin America, it is important to understand that potential

customers want to develop a personal relationship before doing business with foreign
executives.

Latin Americans are not as immersed in their work as the businesspeople in the United
States. Their motto is: “We work to live,” not “We live to work.”

When managing people and resources in a foreign country, close attention to host
countries’ cultures is critical. Failure to do so can severely damage a company’s
performance in these markets.

A country’s culture affects its attitudes toward work. These attitudes can have an impact
on workers from other countries who come into the country to work as well as expatriate
managers who need to recognize the norms surrounding work in their adopted countries
and must be reluctant to arbitrarily change them.

Various Management Styles

 “Master of destiny” philosophy: the idea that workers and companies can
influence the future. Hard work, a commitment to company goals, and effective
time management are important aspects of this managerial orientation.
 A company is an independent enterprise. It is a vital social institution. Workers
will do what is best for the company instead of what is best for their government
or their families.
 Rewards are based on merit. This management style may be problematic in
other cultures, where friendships and family ties may be more important.
 Decisions are based upon objective analysis. Accurate information and its
timeliness are important aspects of decision making. In some cultures, judgment
and intuition may be viewed as being more vital.
 Wide-sharing in decision making. Effective decisions are often viewed as the
primary way to evaluate subordinates. Decision making, thus, is decentralized
and delegated to lower levels of management. In other cultures, such as the
Middle East, only top executives will make the most important decisions.
 An internal quest for improvement. This often involves a company’s need to
adjust to change in its environment in order to achieve higher sales, profits, and
market shares. This style may be problematic in other cultures that are more
interested in maintaining the status quo.
 Competition is necessary. This is reflected in competition among workers and
competition among companies. In China and Japan, however, cooperation is
emphasized over competition

advertising campaigns must be carefully tailored to local cultures.

Communication is a key function in business, and culture has an impact on

communication styles whether a firm is small or large, multinational or domestic.
The use of jargon is usually inappropriate, as it greatly increases the risk of
misunderstanding.

 Companies conducting business overseas need to be in harmony with the

prevailing cultures in those countries. Culture is learned, and it is almost
impossible for a foreign company to change.
 The major elements of culture include language, religion, values and attitudes,
manners and customs, material elements, aesthetics, education, and social
institutions.
 Along with various consulting firms, there are a number of secondary sources
available for learning about cultures of other countries. Some examples include
the U.S. Department of Commerce Country Commercial Guide, Country Reports
from The Economist’s Intelligence Unit, and Price Waterhouse Coopers’ Doing
Business in 118 Countries.’
 Japanese firms tend to make group decisions; they want to deal with people of
high rank who have decision-making authority and have been referred by third
parties.
 Korean culture stresses a reverence for older people, a group orientation rather
than an individualistic one, inwha (harmony among equals), superiors’
responsibility for the well-being of subordinates, and the development of personal
relationships before business relationships can occur.
 Guanxi is the most important cultural aspect of doing business in China; it
denotes friendships among unequals. Because low-ranking people in Chinese
firms may have a guanxi relationship with superiors who have decision-making
authority, foreign businessmen may need to cultivate the favor of lower-echelon
personnel in Chinese companies.
 Management of overseas personnel and resources, product development, and
advertising are significantly affected by foreign countries’ cultures. Clear
communication can improve the outcomes of management decisions in these
three areas.
Chapter 6: The Legal and Political Environment of Global Business

VUCA – volatility, uncertainty, complexity and ambiguity

Democracy

 rule of the people; all citizens have the right to vote

a. Athenian democracy – purest form of democracy, in which all adult
citizens vote directly on matters affecting the community
b. Representative democracy – form of government in which citizens vote
to elect given individuals to serve as their representatives for a certain
period of time (popular or electoral)

Totalitarian

 include all the features of authoritarianism but are even more repressive as they
try to regulate and control all aspects of citizen’s aspects of citizen’s lives and
fortunes
 all aspects of citizen’s aspects of citizen’s lives and fortunes are controlled
 yung namumuno lang ang mayaman the rest pantay pantay na
 system of government in which individuals govern without the support or consent of the
citizenry; for example, a military dictatorship
a. Absolute Monarchy – king and queen holds political power; rare but still exists
 North Korea – controlled talaga ng government

Authoritarian

 an individual or a group of individuals holds power, restricts or prohibits popular

participation in governance, and repress dissent
 Martial Law

Monarchy
  a Family (hereditary) or Group (elective) rules a country
 Divine right – may blessing from above (choosen one)
 hindi napaparamdan sa mga tao na sila ay constricted kasi ang pinaparamdam
nila is may basbas sila so hindi masama ginagawa nila
a. Absolute Monarchy – control everything and don’t have a constitution
(Kingdom of Saudi Arabia and Brunei)
b. Constitutional Monarchy – serves for ceremonial services; figureheads
only; hindi sila yung nagiimplement ng law (Parliamentary – Prime Minister
ang pinaka law); (Great Britain)

Economic Ideologies (Operating Principle ng kanilang Economies)

Communism

 government or state owns and controls all major factors of production and is
philosophically an economically classless society
 COWConomics – you own two cows and the government gives you milk
 Classless Society – walang mahirap, walang mayaman
 workers are the one who operates; need ng revolution para maging successful
ang pagiging communism ng isang country (terrorism)
 gustong ma eliminate ang class ng mga owners (Bourgeouis) gustong ipalit ay
class ng mga workers

Socialism

 government plays a strong role in the economy and may own stakes in certain
businesses
 you have two cows and you give one to your neighbor
 maging mapagbigay hindi maging ganid

Capitalism
  businesses are privately owned strong individual incentives exists, and the
government plays very little role
 profitability
 pag business ka pipiliin mo to

Economic Risks

 are the risks that economic problems or mismanagement in a given country will
have a meaningful negative impact on the conduct of business in that country

3 Factors affecting Development

1. Income
2. Health
3. Education

*higher index mas better

*better education better people better salary

Economic Risks Include:

 restrictions on transfer or exchange of a country’s currency, or devaluation of the

currency
 questionable ability to repay loans
 human resource and labor relations problems
 inflation and corruption (Brazil and Peru) – can dramatically increase the costs of
doing business in a given country
1. Companies can mitigate risks through careful planning
2. Economic risks are not independent of political risks

Political Risks

 risks that political forces or problems in a given country will have a meaningful
negative impact upon the conduct of business in that country
a. Macro Political
 political risk that essentially affects all businesses in a given country
  example: military mugta kinakalaban ang certain groups of muslim;
dinidiscriminate nangyayari sa myanmmar
 Thailand – taken over by democratic government
 di naaaprubahan ang CHACHA because of transition in
government; maraming need iadjust
b. Micro Political
 political risk that only affects a certain industry or set of firms in a
given country

Terrorism

 involves unlawful acts or violence threatening the safety of the other

a. Physical Terrorism – banging of new tower in the US
b. Cyber Terrorism – hacker
 White Hat – good
 Gray Hat – in the middle
 Black Hat – bad

Corruption

 situation where businesses are able to illegally alter relevant private and/or public
decision making by way of bribes, kickbacks, blackmail, extortion, and related
activities
a. Private Corruption – inside the company
b. Public Corruption – government

The Most Peaceful Countries

a) Netherlands
b) New Zealand
c) Portugal

Least Peaceful Countries

a) Russia
 b) Hongkong
c) India

Legal environment

A. Civil Law
 based on a comprehensive listing of legal rules in sets of written codes of
law
 main lawmaking body ay legislatives system
 low uncertainty
B. Common Law
 legislatives bodies enact less specific legal rules giving judges/ courts
considerable authority in interpreting these rules based on precedent and
other factor
 ang gumagawa ng batas ay legislative branch that are subject to
interpretation of courts which is unconstitutional
C. Theocratic Law
 based on a religious document and religious teachings
 Islamic law

Types of Laws

1. Criminal law – establishes which violations of a nation's laws are crimes

punishable by possible incarceration.
o Actions that constitute crimes may differ widely in countries throughout the
world, and may also change considerably overtime in any specific country.
o Historically, possession and sale of marijuana were crimes, but today
about half of the states in the United States have legalized sale and use of
marijuana.
2. Contract law – Is the body of law governing legally enforceable agreements
between parties to engage in economic exchange.
 o Contracts are essentially meaningless unless they can be successfully
enforced.
o Companies and individuals engaging in global business need to become
familiar with the contract law in the countries where they may operate.
o hindi legally binding sa ibang bansa pag may nalabag ka kunwari yung
halal
3. Tax law – Is the body of law dealing with governmental levying of taxes on
individuals and corporations.
o Tax rates and regulations vary widely throughout the world and play a
considerable role in location decisions by global businesses
o Some companies establish operations in tax haven countries that have
little or no tax transparency as a way of avoiding taxes.
4. Antitrust laws – are designed to promote "fair competition" among businesses.
o Antitrust laws typically prohibit companies from engaging in collusion, the
practice of companies acting in a manner which secretly thwarts
competition amongst themselves.
o Antitrust laws are also known as "antimonopoly laws”
o Monopoly is a situation where there is only a single seller of a product in
an industry and there are very high barriers to enter that industry.

Market Allocation – naguusap na mga businesses like ikaw jan ka na magoperate ako
na dito sa lugar ko

Bid Rigging – pag sa government pababaan; sa business pataasan ng offer

 happens when pinaguusapan na prior the event so rigged na ang result di na

dadaan sa process

Product safety law – establishes the standards of product safety to which the
manufacturers and sellers of products are held.

 Caveat emptor ("buyer beware")

o Places the burden of determining product safety on consumers
 o Example: sri lanka walang restrictions a government about Tobacco
walang retsrictions sa packaging (pro-company)
 Caveat venditor ("seller beware")
o Places on manufacturers or sellers the burden of making sure their
products are safe or at least clearly and explicitly warning consumers
about the potential safety risks of their products
o PH in tobacco industry kasi they are burden to meet so much restrictions

Dispute settlement – law governs how disputes that arise in the course of global
business are settled.

o The public option is to resolve a case through litigation by bringing a

dispute to a publicly or governmentally run court of law.
o An alternative dispute resolution process involves arbitration, where
disputing parties designate a neutral private person or group of persons to
hear and decide the case.

Intellectual property – Is the product of intellectual rather than physical activity.

 Intellectual property protections

o The limited monopoly rights legally granted by a nation to the creator of
intellectual property
 Intellectual property protection
o Patents
o Trademarks
o Copyrights

Intellectual Property Protections

Patent

 The right granted to the inventor of a product or process that excludes other from
selling, making, or using the invention for a certain period of time
Trademark

 A distinctive phrase, name, word, picture, symbol, or design, or a combination of

these, that identifies a given business's service or product and is owned by said
business
 distinct and not deceptive

Copyright

 The exclusive legal right that authors, playwrights, publishers, artists, and
composers have to publish and disseminate their work as they see fit

Loss of Intellectual Property Protection

Genericized trademark

 A trademark that has become so well known or colloquial that it now describes a
general class of product or service, as opposed to a specific product or service
as intended by the trademark’s owner
 google, band aid, bubble wrap
Chapter 7: Corruption and Ethics in Global Business

Ethics

 knowing what is right from wrong

 specific regard to the “rightness” and “wrongness” of actions and to the “goodness” and
“badness” of the intent and results of such actions

Integrity

 adherence to moral and ethical principles; soundness of moral character: honesty

 a person of integrity knows what is right and has the courage to do it.

Unethical Behavior

 rarely the result of not knowing the right thing to do

 often the result of lacking courage to do what is right

Philosophical Principles of Ethics

Imperative Principle

 Do what is right

Generalization Argument
  Do what is right but filter action by considering consequences

Utilitarian Principle

 Do what produce the greatest good

BASIC STEPS IN ETHICAL DECISION MAKING

1. Define all the facts and circumstances, including who, what, where, when, and
how
2. Identify the people affected by the situation and their rights and obligations.
3. Identify the alternative decisions and consequences.
4. Make the decision: determine the right thing to do and then do it.
5. Choose the reflection or evaluation.

“choosing the lesser evil”

PRINCIPLES IN MAKING AN ETHICAL DECISION

Consistency

 considering what would be the consequences if everyone made the same choice
that you are about to make
 making choices na consistent sa paniniwala mo
 dapat firm ka sa mga nagiging desisyon mo, huwag pabago bago

Respect

 choosing the alternative that treats people with the greatest respect

Fundamentals of Ethics education

1. Personal Integrity
2. Responsibility of Business in Society
3. Ethical Decision-Making
4. Ethical Leadership
5. Corporate Governance

HOW DO YOU MEASURE SUCCESS?

Many people think of fame and fortune when they measure success. However, at some
point in life, most people come to realize that inner peace and soul-deep satisfaction
come not from fame and fortune, but from having lived a life based upon integrity and
noble character. President Lincoln put it this way: "Honor is better than honors."

At a Congressional Hearing on ethics in July 2002, Cathy, founder of Chick-Fil-A,

quoted Proverbs 22 1: "A good name is more desirable than great riches; to be
esteemed is better than silver or gold." In the final analysis, living an honorable life really
is more satisfying than fame and fortune. How do you measure success?

THE BBB CODE OF BUSINESS PRACTICES (Better Business Bureau)

1. Build Trust: Establish and maintain a positive track record in the marketplace.
2. Advertise Honestly: Adhere to established standards of advertising and selling
3. Tell the Truth: Honestly represent products and services, including clear and
adequate disclosures of all material terms
4. Be Transparent: Openly identity the nature, location, and ownership of the
business, and clearly disclose all policies, guarantees, and procedures that
influence a customer’s decision to buy.
5. Honor Promises: Abide by all written agreements and verbal representations.
6. Be Responsive: Address marketplace disputes quickly, professionally, and in
good faith
7. Safeguard Privacy: Protect any data collected against mishandling and fraud,
collect personal information only as needed, and respect the preferences or
customers regarding the use of their information
8. Embody Integrity: Approach all business dealings, marketplace transactions, and
commitments with integrity (it will start from you)

Ethics in Business and Society

1. For ethical business activity to occur, mutual trust, fair dealings, and honest
communication are essential.
2. Ethics and economics
  unethical behavior (e.g. inside information) destroys fair investment markets
 Commonly-shared positive ethical values regarding respect for individuals.
their lives, their property, and their freedoms promote individual integrity and
doing the “right thing.”

invisible hand -
3. Corruption Perceptions Index (CPI) is published each year by Transparency
International, providing metrics to the potential corruption risk for most of the
world's countries.

What Is Corporate Social Responsibility?

Corporate social responsibility (CSR)

 A company's obligations to society, including the welfare of people and places

affected by company activities

CSR mandates that a company should try to:

— Provide quality products or services

— Provide an appropriate return on investment to the company's stockholders

— Treat its employees with dignity and respect

— Take care of the environment

— Meet its legal obligations

— Deal fairly with suppliers, lenders, and other business parties

Corporate Social Responsibility

o setting goal
o long term
 o sincerity
o market (efficient and non-discriminatory)
o responsibility
o ethics
o sustainability
o resources

Internal controls

- A system of rules and procedures designed to ensure the accuracy and reliability
of financial and accounting information

Internal control procedures

- Preventing accidental errors and intentional misrepresentations (irregularities)

- Identifying errors and irregularities for corrective action (you need to correct para
maprevent silang magresurface ulit)
o Preventive Controls – proactive; wala pa yung problema pero nagseset ka
na ng mechanism para pagdating ng problema isasalpak mo na lang agad
o Feedback Controls – reactive; continuous evaluation

Computer Security of Accounting Information

- Basic threats to computer security

— Natural disasters
— Dishonest employees
— Disgruntled employees
— Persons external to the organization
— Accidental errors and omissions

Common Cybercrimes in Business

PHISHING. using take email messages to get personal information from internet users

IDENTITY THEFT. misusing personal information

HACKING. Shutting down or Misusing websites or computer networks

CYBERTERRORISM. spreading and inciting terrorism

CYBERLIBEL. when someone has posted or emailed something that is untrue aro
damaging about someone else

ONLINE ESTAFA/ SCAM. a person defrauds another by unfaithfulness, deceit, abuse

of confidence or fraudulent means

estafa – intentional

be vigilant and observant

Chapter 8: Entry Strategies in Global Business

emerging economies – countries newly industrialized (ex. South Africa)

Strategy Choice and Implementation: Going International

Lear of Faith – gap that you are willing to jump (Pag going international you are unsure
or uncertain ka sa mga mananarasan mo since hindi ito ang kinalakihan mo)

• Risk profile

— The potential financial loss that entrepreneurs are willing to take in a business

• Risk—return trade-off

— The greater the risk (loss of capital invested) entrepreneurs are willing to take,
the greater the rewards (profit) they are likely to reap (you need to weigh things)

• Sources of risk

— Ownership, operation, or asset transfer

if you to enter into another country you need to

- investigate kung anong current situation doon

- matter of timing
 First Mover Advantage - first to introduce the product
o Benefits – establish strong brand recognition
o Disadvantage – mas mahal ang pioneering cost dahil siya ang first
 Important ang research and development team dhail may
rapid changing of events
- commitment – dahil sa pagpasok mo may mabubuong relationship
- scale of entry – the lower the risk the lower the return

Strategies That Minimize Financial Risk

Export-Import Business

- Penetrating foreign markets by exporting or importing merchandise at

competitive prices for domestic consumption

Licensing
 - Providing a foreign partner with the rights and/or technology to manufacture and
sell products or services in a target country for an annual license fee (royalty
fees)
- intangible property

Franchising

- A franchisor provides specialized equipment, service, and/or startup costs to a

franchisee in return for an annual fee for rights to manufacture/sell its products
- not only tangible property but also manner of doing business 9dapat magaya mo
yung processes para kamukhang kamukha)

Strategies That Share Financial Risks (middle)

Strategic Alliances

- An agreement between two or more firms that do not involve the creation of a
separate entity with joint ownership and in which the firms stand to gain revenues
and maximize profits through cooperation for a given period of time

International Joint Ventures

- A business jointly owned and operated by two or more firms (one local host
country and one foreign) that pool their resources to penetrate the host country's
markets, share in profits, and share commercial risk
- local host country and international
- fuji and Xerox

Higher Risk Strategies

Foreign Acquisitions

- Acquisition is the purchase of established firms abroad with the goal of using
the existing production, marketing, and distribution networks and of having
instant access to foreign markets that fit the purchasing firm's global strategy.
- SM may na acquire na sa To Go na courier
 - Universal Robina Corporation binenta ang shares ng hans para makafocus sa
jack and Jill tas c2

Wholly Owned Foreign Subsidiaries

- Subsidiaries are new facilities built and operated overseas that require large
investment of capital because these new establishments are tailored to the exact
needs of the home country firm.

Multinational enterprises (MNEs) are firms that are headquartered in one country, but
own and control significant manufacturing, services, R&D (research and development)
facilities, or other business entities in other countries (they are slowly penetrating the
small parts of the globe – because they wanted to create production na lesser cost or
naghahanap kung san sila magiincur ng lesser cost)

ayaw nila biglaan gusto nila paunti unti

MNEs and their Global Strategic Motives

- In a free enterprise system, the overriding objective of firms wanting to invest

abroad is to maximize shareholder wealth.
- Three strategic motives for companies that invest abroad:

— To increase revenues

— To cut costs

— To diversify operations to minimize risk

*Outsourcing from other countries specially sa countries na nagooffer ng less wage cost

Strategies for Going Abroad

 Revenue maximizing strategies include

— Entering high-growth markets

— Entering stable, high-income markets

— Entering countries with monopolistic market structures

 — Entering trade-restricted sectors

 Cost minimizing strategies include

— Gaining economies of scale in overseas production

— Minimizing factor input costs by relocating overseas

— Reacting to exchange rate movements to take advantage of

long- term appreciation of FDI assets

Strategies for Going Abroad (continued)

• Risk minimizing strategies include

— Diversification to minimize risk and foster stability in global

corporate cash flows and eamings

— Correlation of returns to identify overseas projects with

performance levels that are not highly correlated to domestic cash

flows or project retums over time

— Diversifying to gain foreign consumption that helps maximize

overall corporate profitability during the maturity stage of the life

cycle of firm's products

Eclectic – maraming idea

Internaliztaion – how do they create value over your products

VRIN/ VRIO Analysis

Host Country Perspective of Foreign Direct Investment

Benefits of FDI

 Generation of significant financial inflows

 Creation of new jobs
 Access to new technologies
 Facilitation of the transfer of management and employee skills
  Increased domestic competition and choice
 Generates tax revenues for economic development

Costs of FDI

 Environmental pollution that results from exploitation of natural resources by

MNEs
 Exploitation of the host country labor force reduces human capital development
 MNE's lack of corporate social responsibility for the social consequences of their
decisions
 Political interference by MNEs in the host country’s affairs

Sweat Shop – risky (walang protective equipments ang mga employees, walang
ventilation)

Improving Host Country's Investment Climate

Attractive Investment Climate Characteristics

 Proper economic reforms

 Transparent governance structure
 Rule of law

Contributions of Domestic Firms and MNEs

 Invest profitably
 Create jobs
 Contribute to economic growth
 Reduce poverty

Chapter 9: Control of Global Business

Strategy Formulation

 Mission statement

— A written statement of why a company exists and what it plans to

accomplish

— Provides general guidelines for the firm's strategy formulation and

decision-making processes

— Useful in monitoring the firm's performance against its stated mission

and goals

What you do? bakit ka nag eexist

How you do it?? ito ang gusto mo pero di moa lam ang gagawin (technical
know how)

Why are you doing it? sino ang recipient yung may concern sa company
mo

 Shareholder model of strategy formulation

— The key strategic purpose of a business is to maximize financial returns

for its owners/shareholders

 Stakeholder model of strategy formulation

— Businesses exist to benefit not just their shareholders, but also various
groups, such as employees and customers, that have a meaningful stake in their
operations.
 firms don’t operate on vacumm they need to look out in the window dapat open
sa possibilities outside the company and they should also be keen s achanges sa
business na pinasok niya
Strategy Implementation
Operational Plans
 Very short-term (less than one year) plans that support annual goals
 day-to day operations
Tactical Plans
 One to three year plans formulated for implementing strategic goals
Strategic Plans
 Long-term plans (five or more years) for achieving strategic goals
Miles and Snow Typology
Prospectors
- extend their success through global expansions and finding new market
opportunities
- risk takers
- invest in new
Defenders
- concentrate on existing operations and defend their home turfs
Reactors
- respond to strategic actions initiated by competitors
- preserving the status quo (prevailing situations)
Analyzers
- take a middle ground between being prospectors and defenders
- in the middle of prospectors and defenders
Impediments to Coordination (Barriers)
1. Legal
2. Political
3. Economic
4. Technological
5. Other Impediments
Knowledge Managements and Systems
Tacit Knowledge
- knowledge that is informal in nature and difficult to communicate
- sticky information
- meron at merong knowledge na di mo mapapasa sa succesors mo
Explicit Knowledge
- knowledge that is modifiable and easy to communicate or write down
- can be modified, kayang irecord
Absorptive Capacity
- the ability of organizations to recognize, assimilate, and apply new knowledge
Control Systems
1. Bureaucratic controls
— Systems of rules and regulations promulgated within a global business
 kung anong order sa taas iimplement sa baba
2. Interpersonal controls
— Involves executives engaging in personal contact with subordinates as
a way of managing an organization
3. Output controls and measurement
— Involves establishing specific goals on given metrics and then
measuring to what extent these goals are being achieved at certain time intervals

Organzational culture – personality of a company

Organizational Culture and the Change Control Function
 Organizational culture
— The PERSONALITY of a given organization, its shared norms and values
Types of organizational culture:
 — Strong cultures can either support or resist change.
— Weak cultures provide little guidance to employees
 Organizational change
— Involves implementation of a different business or cultural path for
an organization
Chapter 10:
The Stateless Corporation
 Stateless corporation
— A new phase in the evolution of the multinational corporation, where work is
sourced wherever it is most efficient and the corporation transcends nationality
altogether
 Is a stateless corporation a realistic possibility?
— To which government or international organization could a stateless
corporation properly appeal for assistance if its assets are expropriated by a
particular country?

amorphous – liquid walang label or title

Organizing Global Business

. Organization
— A tool that people use to coordinate their actions to obtain
something they seek or value
• Organizational structure
— The formal system of task and authority relationships that control
how people coordinate their actions and use resources to achieve
organizational goals
• Division
— A business subunit that consists of a collection of functions or
departments that share responsibility for producing a particular
product or service

International Division
• As the volume of exports arows, the export department may
become an international cfivision.
• An international division is advantageous because
— It permits global businesses to concentrate all international efforts
and expertise in one location-
— It signals to international customers their importance to the company.
— It fosters a global mindset in those who work within the division.
— It facilitates designing products that cater to local tastes of overseas
cultures.
Organizational Structures for Global Business
Functional
• Groups people together because they hold similar
positions, perform similar tasks, or use the same
Structure
kinds of skills
Divisional
• Groups functions together to serve the needs of
Structure
Hybrid
Structure
Matrix
Structure
products, markets, or geographical regions
• A combination of different organizational
structures
• Groups people simultaneously by function and by
division

Functional Structure
• Most domestic firms start with a functional structure.
promotes of economies of scale
• Businesses that use a functional structure typically have a
narrow product line or a highly integrated product mix.
• Advantages of the functional structure:
— Promotes economies of scale
— Promotes in-depth employee skill development
— Encourages collaboration, efficiency, and quality within the function
• Disadvaniages of the functional structure:
— Inability to respond to environmental changes that require
coordination betvveen functional areas
— Employees have a restricted view of the firm's primary goals
— Accountability is diffused
76
Divisional Structure
• Divisional structure is organized according to various
outputs of the global business.
• Advantages of divisional structure:
— Functions are able to focus their activities on a specific kind of
product, market, or geographical region-
— Divisions develop a common identity and approach to problem
solving.
— Divisions can respond to needs of products, markets, or regions
and adapt quickly as needs change.
• Disadvantages of divisional structure:
— Requires high operating and managing costs
— Communication problems may arise among division managers.
— Divisions may start to compete for organizational resources.
Matrix Structure
Matrix structure is useful in special cases, when a company may
need to coordinate across demands of function, products, and
geographical locations.
• Advantages of the matrix structure:
— Allows theco an to meet multiple demands from the environment;
resour can* flexibly allocated-
— Facilities innovation and creativity
• Disadvantages of the matrix structure:
— Determining responsibility and authority relationships can be problematic.
— There is role ambiguity by design.
Opportunities for promotion are limited because employees move laterally
from division to division.