A Generalized Survey of International Business January 25,2010

The Scoop on International Business International business is the performance of trade and investment activities by firms across geographic borders In 1960, international trade was valued at $100 billion per year. By 2008, it was $10 trillion. International trade utilizes a broad range of units of commerce: Physical products Services Capital Technology Know-how Labor International trade became important as a result of the globalization of markets Economic forces result in the direction of resources to the markets where they are most highly valued and most efficiently consumed The Scoop on International Business

Key International Business Concepts International business activities can take one or more of several forms. Exporting Importing Global sourcing International investment Portfolio investment Foreign direct investment (FDI) All of these businesses involve some level of risk Cross cultural risk – Any error puts human value at stake Country risk – political, legal, or economic changes affect the profitability of transactions or company survival Currency risk – fluctuations in monetary value (exchange worth) affects the profitability of transactions Commercial risk – poor execution of strategies or tactics affect the profitability of transactions or company survival Key International Business Concepts

Who Are the Players and Why are They Here? Participants in international business Multinational enterprises (MNE) Operate through affiliates and subsidiaries in multiple companies, usually developed through DFI or acquisition/merger activities Small and medium enterprises (SME) Companies with fewer than 500 employees that generally engage in international commerce through import and export activities Born global firm Entrepreneurial firms that expand rapidly into foreign markets Internationalization drivers Growth through diversification Seek greater profits Find new products or business ideas or methods Better service global customers Closer access to supply and suppliers Attain lower cost factors of production Land, capital, technology, and labor Attain greater economies of scale Confront international competition Establish relationships with foreign partners Who Are the Players and Why are They Here?

International Business Developments Millions have joined the world economy .... as producers Cheap labor draws investment/production away from industrial nations Markets are overcrowded with goods Exports from developing nations are rapidly growing Downsizing continues Boost productivity Cut costs cost cutting is (can be) a powerful survival tool cost cutting IS NOT a growth strategy New products, new ideas, new technologies drive sales and revenues International Business Developments

Politics and Foreign Direct Investment Radical View Pragmatic Nationalism Free Market Politics and Foreign Direct Investment

Marxist view: MNE’s exploit less-developed host countries Extract profits Give nothing of value in exchange Instrument of domination, not development Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology By the end of the 1980s radical view was in retreat Collapse of communism Bad economic performance of countries that embraced the radical view Strong economic performance of countries who embraced capitalism rather than the radical view The Radical View

Pragmatic Nationalism FDI has benefits and costs Allow FDI if benefits outweigh costs Block FDI that harms indigenous industry Court FDI that is in national interest Tax breaks Subsidies Many of the most successful developing countries – past and present – followed a pragmatic nationalistic stance Japan South Korea China Economists note that Hong Kong, which followed the free market approach, was even more successful Pragmatic Nationalism

The Benefits of FDI to Host Countries Four main benefits of FDI for a host country Resource-transfer effect Employment effect Balance-of-Payments effect Effect on competition and economic growth In a free market view Many economists argue that the benefits of FDI so outweigh the costs associated with pragmatic nationalism that it is misguided The best policy would be for countries to forgo all intervention in an MNE’s investment decisions The Benefits of FDI to Host Countries

Costs of FDI to the Home Country Can drive out local competitors or prevent their development Profits brought home ‘hurt’ (debit) a host’s capital account Parts imported for assembly hurt trade balance Can affect sovereignty and national defense Costs of FDI to the Home Country

Nations specialize in goods and services that they can produce most efficiently Resource transfers benefit and strengthen the host country Positive changes in laws and growth of bilateral agreements attest to strength of free market view All countries impose some restrictions on FDI The Free Market View

Concepts of Economic Freedom Economic Freedom means that people are free to trade with others, compete in markets, buy what they want, earn a living in a job they choose, keep what they earn, and own things privately. Creative Destruction An economy undergoes continuous change – some industries fail, others are born Capitalism critically relies on entrepreneurship and the profit and loss system to direct this process This process cannot be centrally planned or directed effectively - it must be discovered within the marketplace Concepts of Economic Freedom

Countries with the highest levels of economic freedom have the highest standard of living - trade policy - taxation - govt. intervention - monetary policy - capital flows - banking policy - foreign investment - property rights - wage/price controls - black market - regulation Wealthy countries tend to reintroduce economic restrictions over time Freedom and Growth

Economic Freedom Economic freedom is on the rise Poverty is still with us A majority of the world’s economies are not free Some formerly Communist countries have policies that have achieved some level of economic freedom European Monetary Union; same standards for all members Success of capitalism in promoting economic freedom Most Free 1. Hong Kong 2. Singapore 3. New Zealand 4. Bahrain Luxembourg U.S. Least Free 161. North Korea 160. Iraq 159. Libya 158. Somalia 157. Cuba Economic Freedom

North Korea vs. South Korea Per Capita Income = $1,800 Per Capita Income = $24,200 North Korea vs. South Korea

Map of Economic Freedom

Zimbabwe (in Africa)

Life in Zimbabwe (Africa)

Life in Zimbabwe (Africa)

Romania (in Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

Life in Romania (Europe)

India (in Asia)

Life in India

Life in India

Mexico (in North America)

Life in Mexico

Life in Mexico

Hong Kong (in Asia)

Life in Hong Kong

Life in Hong Kong

Life in Hong Kong

United States (in North America)

United States (in North America)