CHAPTER 1: GLOBALIZATION national markets into one huge

marketplace.
GLOBALIZATION
• the tastes and preferences of of
• process by which this transformation is consumers in different nations are
occurring beginning to converge on some
• the shift toward a more integrated and global norm, thereby helping to
interdependent world economy. create a global market
• used to describe how trade and technology • these are the markets for industrial
have made the world into a more goods and materials that serve
connected and interdependent place. universal needs all over the world
• the process of interaction and integration • these include the markets for
among people, companies, and commodities such as aluminum, oil
governments worldwide and wheat; for industrial products
such as microprocessors, computer
• the spread of the flow of financial
products, goods, technology, information memory chips (DRAMs) and
and jobs across national borders and commercial jet aircraft; for
computer software; and for
cultures
financial assets
ADVANTAGES 2. globalization of production
• refers to the sourcing of goods and
1. Increases economic growth
services from locations around the
2. Makes production more affordable
globe to take the advantage of
3. Promotes working together
national differences in the cost and
4. Brings opportunities to poorer countries
quality of factors of production
DISADVANTAGES • companies hope to lower their
overall cost structure or improve
1. Unequal economic growth the quality or functionality of their
2. Lack of local businesses product offering, thereby allowing
3. Increases potential global recessions them to compete more effectively
4. Exploits cheaper labor markets • FACTOR OF PRODUCTION -
5. Causes job displacement inputs into the productive process
IMPEDIMENTS OF GLOBALIZATION of firm
▪ labor
▪ formal and informal barriers to trade ▪ management,
between countries, ▪ land,
▪ barriers to foreign direct investment ▪ capital
▪ transportation costs ▪ technological know-how
▪ issues associated with economic and
political risk, The Emergence of Global Institutions
▪ the shear managerial challenge of Global Institutions are needed to help manage,
coordinating a globally dispersed supply regulate and police the global marketplace and to
chain promote the establishment of multinational
facets of globalization treaties

1. globalization of markets General Agreement on Tariffs and Trade(GATT)

band its successor, the World Trade
• refers to the merging of
Organization(WTO); the International Monetary
historically distinct and separate
Fund(IMF) and its sister institution, the World • is often seen as the lender of last
Bank; and the United Nations(UN). resort to nation-states whose
economies are in turmoil and whose
All these institutions were created by voluntary
currencies are losing value against
agreement between individual nation-states and
those of other nations
their functions are enshrined in international
treaties

1. World Trade Organization 3. United Nations

• primarily responsible for policing • was established October 24, 1945,
the world trading system and by 51 countries committed to
making sure nation-states adhere to preserving peace through
the rules laid down in trade treaties international cooperation and
signed by WTO member states collective security.
• responsible for facilitating the • UN Charter, an international
establishment of additional treaty that establishes basic
multinational agreements among principles of international relations.
WTO member-states • UN has four purposes:
• the WTO has promoted the i. to maintain international
lowering of barriers to cross-border peace and security;
trade and investment ii. to develop friendly relations
• the WTO has been the instrument among nations;
of its member-states, which have iii. to cooperate in solving
sought to create a more open global international problems and
business system unencumbered by in promoting respect for
barriers to trade and investment human rights;
between countries iv. and to be a center for
2. International Monetary Fund & World harmonizing the actions of
Bank nations.
• they were both created in 1944 by • UN is perhaps best known for its
44 nations that met at Bretton peacekeeping role
Woods, New Hampshire 4. Group of Twenty (G20)
• significant players in the global • Established in 1999, the G20
economy comprises the finance ministers and
World Bank central bank governors of the 19
• was set up to promote economic largest economies in the world,
development in the world's poorer plus representatives from the
nations European Union and the European
Central Bank. e
• it has focused on making low-
interest loans to cash strapped • established to formulate a
governments in poor nations that coordinated policy response to
wish to undertake significant financial crises in developing
infrastructure investments (such as nations,.
building dams or roads) DRIVERS OF GLOBALIZATION
International Monetary Fund
• was established to maintain order • used to describe on who are the main
in the international monetary system operator for globalization
 • refers on what empowers globalization and • Over the past 30 years, global
on how it continuously works communications have been
1. DECLINING TRADE AND revolutionized by developments in
INVESTMENT BARRIERS satellite, optical fiber, wireless
• International Trade occurs when a firm technologies, and the Internet
exports goods or services to consumers in • Moore’s law predicts that the
another country power of microprocessor
• Foreign Direct Investment (FDI) occurs technology doubles and its cost of
when a firm invests resources in business production falls in half every 18
activities outside its home country months
• Many of the barriers to international trade The Internet
took the form of high tariffs on imports of • The explosive growth of the
manufactured goods. The typical aim of Internet since 1994 when the first
such tariffs was to protect domestic web browser was introduced is the
industries from foreign competition latest expression of this
2. THE ROLE OF TECHNOLOGICAL development
CHANGES • The Internet has developed into
• refers to as "the spread of technology the information backbone of the
across global economy" global economy
• The lowering of trade barriers made • The Internet makes it much easier
globalization of markets and production a for buyers and sellers to find each
theoretical possibility. Technological other
change has made it a tangible reality Transportation Technology
• Since the end of World War II, the world • the development of commercial jet
has seen major advances in aircraft and superfreighters and the
communication, information processing, introduction of containerization,
and transportation technology, including which simplifies transhipment from
the explosive emergence of the Internet one mode of transport to another
• the role of technological change: • Containerization-has
(1) Microprocessors and revolutionized the transportation
Telecommunications; business, significantly lowering the
(2) The Internet; costs of shipping goods over long
(3) Transportation Technology ; distances
(4) Implications for the Globalization Implications for the Globalization of
of Production; Production
(5) Implications for the Globalization • As transportation costs associated
of Markets. with the globalization of production
Microprocessors and have declined, dispersal of production
Telecommunications to geographically separate locations has
• enabled the explosive growth of become more economical
high-power, low-cost computing, • These developments make it
vastly increasing the amount of possible for a firm to create and then
information that can be processed manage a globally dispersed production
by individuals and firms system, further facilitating the
• microprocessor also underlies globalization of production.
many recent advances in • A worldwide communications
telecommunications technology network has become essential for many
international businesses
 Implications for the Globalization of (1) the rise of non-U.S. multinationals
Markets and
• Low-cost global communications (2) the growth of mini-multinationals.
networks, including those built on top Non-U.S. Multinationals
of the Internet, are helping to create The Rise of Mini-Multinationals
electronic global marketplaces • Another trend in international business
• low-cost transportation has made has been the growth of medium-size
it more economical to ship products and small multinationals (mini-
around the world, thereby helping multinationals).
create global markets 4. THE CHANGING WORLD ORDER
• low-cost jet travel has resulted in • are high, but so may be the returns.
the mass movement of people between 5. THE GLOBAL ECONOMY OF THE
countries. This has reduced the cultural TWENTY-FIRST CENTURY
distance between countries and is
The Globalization Debate
bringing about some convergence of
consumer tastes and preferences. • Many influential economists, politicians,
• At the same time, global and business leaders seem to think that the
communications networks and global shift toward a more integrated and
media are creating a worldwide culture interdependent global economy a good
• media are primary conveyors of thing
culture; • They argue that falling barriers to
international trade and investment are the
The Changing Demographics of the Global
twin engines driving the global economy
Economy
toward greater prosperity
• This evolution will have a big impact on • They say increased international trade and
the global economy cross-border investment will result in
• A shrinking labor pool limits an economy's lower prices for goods and services
growth potential as fewer people can • They believe that globalization stimulates
produce goods and services economic growth, raises the incomes of
• The growth slowdown in the global consumers, and helps create jobs in all
working population is a major cause of the countries that participate in the global
decline in potential economic growth trading system
1. THE CHANGING WORLD OUTPUT AND 1. ANTI-GLOBALIZATION PROTESTS
WORLD TRADE PICTURE
2. THE CHANGING FOREIGN DIRECT 2. GLOBALIZATION, JOBS, AND INCOME
INVESTMENT PICTURE • The critics argue that falling trade barriers
• The stock of foreign direct investment allow firms to move manufacturing
(FDI) refers to the total cumulative activities to countries where wage rates are
value of foreign investments much lower
3. THE CHANGING NATURE OF THE 3. GLOBALIZATION, LABOR POLICIES,
MULTINATIONAL ENTERPRISE AND THE ENVIRONMENT
• A multinational enterprise (MNE) is • A second source of concern is that free
any business that has productive trade encourages firms from advanced
activities in two or more countries. nations to move manufacturing facilities to
Since the 1960s, two notable trends in less developed countries that lack adequate
the demographics of the multinational regulations to protect labor and the
enterprise have been
 environment from abuse by the ➢ They affect the level of economic well-
unscrupulous being in the nation
4. GLOBALIZATION AND NATIONAL POLITCAL SYSTEM - the system of
SOVEREIGNTY government in a nation.
• Another concern voiced by critics of
Assessed according to:
globalization is that today’s increasingly
interdependent global economy shifts 1. the degree to which the country
economic power away from national emphasizes COLLECTIVISM as opposed
governments and toward supranational to INDIVIDUALISM
organizations such as the World Trade 2. the degree to which the country is
DEMOCRATIC or TOTALITARIAN
Organization, the European Union, and the
United Nations COLLECTIVISM AND INDIVIDUALISM
5. GLOBALIZATION AND THE WORLD’S
COLLECTIVISM– refers to a political
POOR system that stresses the primacy of collective
• Critics of globalization argue that despite goals over individual goals.
the supposed benefits associated with free
➢ Manage to benefit society as a whole,
trade and investment, over the past
rather than individual capitalists.
hundred years or so the gap between the
rich and poor nations of the world has
gotten wider ➢ traced to the Ancient Greek philosopher
Plato (427 – 347 B.C.).
Managing in the Global Marketplace
Karl Marx
• An international business is any firm that
engages in international trade or ➢ He argued that the few benefit at the
expense of the many in a capitalist society
investment where individual freedoms are not
• In sum, managing an international restricted.
business is different from managing a ➢ postulated that the wages earned by the
purely domestic business for at least four majority of workers in a capitalist society
reasons: would be forced down to subsistence
(1) countries are different levels.
➢ argued that capitalists expropriate for
(2) the range of problems confronted by a
their own use the value created by
manager in an international business is workers, while paying workers only
wider and the problems themselves more subsistence wages in return.
complex than those confronted by a ➢ the pay of workers does not reflect the full
manager in a domestic business value of their labor.
(3) an international business must find ➢ He advocate state ownership of the basic
ways to work within the limits imposed by means of production, distribution, and
exchange.
government intervention in the
international trade and investment system HOW DOES MODERN-DAY SOCIALISM
(4) international transactions involve LOOK?
converting money into different currencies socialism split into broad camps.

CHAPTER 2 ➢ COMMUNISM- believed that socialism

can only be achieved through violent
POLITICAL ECONOMY of a nation - how the revolution and totalitarian dictatorship.
political, economic, and legal systems of a country ➢ SOCIAL DEMOCRATS - socialism is
are interdependent. achieved through democratic means

➢ They interact and influence each other

INDVIDUALISM - Refers to philosophy that an ➢ Commonly refers to the political system
individual should have freedom in his or her own that identifies itself as democratic in nature
economic and political pursuits. but in reality, offers no real choice for the
citizens.
▪ traced to ancient Greek philosopher,
Aristotle WHAT IS AN ECONOMIC SYSTEM?
➢ Individual diversity and private ownership
are desirable. three types of economic systems

• two central tenets A. MARKET ECONOMY- all productive

activities are privately owned and
o guaranteeing individual freedom production is determined by the interaction
and self-expression. of supply and demand.
o The welfare of society is best ➢ For a market to work in this manner,
served by letting people pursue supply must not be restricted. A supply
their own economic self-interest. restriction occurs when a single firm
➢ Individual economic and political monopolizes a market
freedoms are the ground rules on which a
society should be based B. COMMAND ECONOMIES -
government plans the goods and services
DEMOCRACY AND TOTALITARIANISM that a country produces, the quantity that is
DEMOCRACY - is a political system in produced, and the prices as which they are
which government is by the people, exercised sold.
either directly or through elected ➢ the objective of a command economy is
representatives. for government to allocate resources for
“the good of society.”
➢ is based on the belief that citizens ➢ all businesses are state owned, the
should be directly involved in decision rationale being that the government can
making. then direct them to make investments that
are in the best interests of the nation
TOTALITARIANISM - is a form of ➢ mobilize economic resources for the public
government in which one person or political good, the opposite often seems to have
party exercises absolute control over all occurred.
spheres of human life, and opposing political ➢ dynamism and innovation are absent
parties are prohibited from command economies.
FOUR MAJOR FORMS OF
TOTALITARIANSIM C. MIXED ECONOMIES - certain sectors
of the economy are left to private
1. COMMUNIST TOTALITARIANISM ownership and free market mechanisms
▪ advocates achieving socialism through while other sectors have significant state
totalitarian dictatorship . ownership and government planning
2. THEOCRACTIC
TOTALITARIANISM WHAT IS AN LEGAL SYSTEM?
▪ political power is monopolized by a party,
group, or individual that governs according LEGAL SYSTEM of a country – refers
to religious principles to the rules, or laws, that regulate behavior
3. TRIBAL TOTALITARIANISM along with the processes by which the laws
▪ a political party that represents the are enforced and through which redress for
interests of a particular tribe monopolizes grievances is obtained.
power. ➢ The legal system of a country is influence
4. RIGHT WING TOTALITARIANISM by the prevailing political system
▪ individual economic freedom is allowed
but individual political freedom is
WHAT ARE DIFFERENT LEGAL SYSTEM?
restricted in the belief that it could lead to
communism three types of legal systems: Common Law,
PSEUDO-DEMOCRACIES Civil Law, and Theocratic Law.
 1. COMMON LAW - – is based on requires all publicly traded companies to keep
tradition, precedent, and custom. detailed records that would reveal whether a
2. CIVIL LAW – is based on detailed set of violation of the act has occurred.
laws organized into codes.
3. THEOCRACTIC LAW – is based on HOW CAN INTELLECTUAL PROPERTY BE
religious teachings. PROTECTED?

DIFFERENCES IN CONTRACT INTELLECTUAL PROPERTY – refers to

property that is the product of intellectual activity.
➢ A contract is a document that specifies the
conditions under which an exchange is to Can me protected using:
occur and details the rights and obligations of PATENTS - an exclusive rights for a defined
the parties involved period to the manufacture, use, or sale of that
➢ Contract law is the body of law that governs invention
contract enforcement. The parties to an
agreement normally resort to contract law COPYRIGHTS - are the exclusive legal rights of
when one party feels the other has violated authors, composers, playwrights, artists, and
either the letter or the spirit of an agreement publishers to publish and disperse their work as
➢ United Nations Convention on Contracts they see fit
for the International Sale of Goods (CIGS).
o establishes a uniform set of rules TRADEMARKS are design and names by which
governing certain aspects of the merchants or manufacturers designate and
making and performance of everyday differentiate their products.
commercial contracts between sellers
➢ World Intellectual Property Organization,
and buyers who have their places of
all of which have signed international treaties
business in different nations.
designed to protect intellectual property,
➢ When firms do not wish to accept the CIGS,
including the oldest such treaty, the Paris
they often opt for arbitration
Convention for the Protection of Industrial
Property,
HOW PROPERTY RIGHTS AND ➢ Trade to cover intellectual property. Under the
CORRUPTION ARE RELATED? new agreement, known as the Trade-Related
Aspects of Intellectual Property Rights
PROPERTY RIGHTS - –refers to the legal (TRIPS), as of 1995 a council of the World
rights over the use to which a resource is put and Trade Organization is overseeing enforcement
over the use made of any income that may be of much stricter intellectual property
derived from that resource regulations
Property rights can be violated through WHAT IS PRODUCT SAFETY AND
LIABILITY?
PRIVATE ACTION - refers to theft, piracy, and
blackmail. PRODUCT SAFETY LAWS - set certain
standards to which a product must adhere.
PUBLIC ACTION - can be done through legal
mechanism. It can also be done through illegal ➢ Both civil and criminal product liability laws
means, or corruption, by demanding bribes from exist.
businesses. ➢ Civil laws call for payment and monetary
damages.
➢ NOTE: No society is immune to corruption ➢ Criminal liability laws result in fines or
➢ Transparency International, imprisonment.
an independent nonprofit organization ➢ PRODUCT LIABLITY - involves holding a
dedicated to exposing and fighting corruption, firm and its officers responsible when a
has also measured the level of corruption product causes injury, death, or damage.
among public officials in different countries.
➢ Foreign Corrupt Practices Act. This law
makes it illegal to bribe a foreign government
official to obtain or maintain business over CHAPTER 3
which that foreign official has authority, and it
• GNI (GROSS NATIONAL INCOME) is
regarded as a yardstick for the economic POLITICAL ECONOMY AND
ECONOMIC PROGRESS
activity of a country; it measures the total
country’s economic development is a
annual income received by residents of a
function of its economic and political
nation. systems
• common measure of economic INNOVANTION AND
development ENTREPRENEURSHIP ARE ENGINES OF
• purchasing power parity (PPP) An adjustment GROWTH
in gross domestic product per capita to reflect Innovation - development of new products,
differences in the cost of living processes, organizations, management practices,
BROADER CONCEPTIONS OF and strategies and seen as the product of
DEVELOPMENT: AMARTYA SEN entrepreneurial activity
Amartya Sen – argued that development should be Entrepreneurs - Those who first
assessed less by material output measures such as commercialize innovations
GNI per capita and more by the capabilities and
opportunities that people enjoy INNOVATION AND
ENTREPRENEURSHIP REQUIRE A
▪ development should be seen as a process
MARKET ECONOMY
of expanding the real freedoms thatpeople argued that the economic freedom associated with
experience
a market economy creates greater incentives for
▪ development is not just an economic
innovation and entrepreneurship than either a
process, but is a political one too, and to
planned or a mixed economy
succeed requires the “democratization” of
In a planned economy, the state owns all means of
political communities
production
Human Development Index (HDI) - an
Main Factors in the economic stagnation:
attempt by the UN to assess the impact of a
❖ Lack of economic freedom
number of factors on the quality of human life in
❖ Incentives for innovation
a country. ❖ Monopoly
o HDI is scaled from 0 to 1. Privatization refers to the process of selling state-
▪ Countries scoring less than 0 -low owned enterprises to private investors.
human development
▪ Scoring from 0.5 to 0.8 - medium INNOVATION AND
human development ENTREPRENEURSHIP REQUIRE
▪ score above 0.8 - high human STRONG PROPERTY RIGHTS
State can expropriate the profits from innovation
development
through legal means or through illegal means.
▪ HDI is based on three measures Hernando de Soto - argued that much of the
o life expectancy at birth developing world will fail to reap the benefits of
o educational attainment capitalism until property rights are better defined
o whether average incomes, based on PPP and protected
estimates, are sufficient to meet thebasic • he says the key problem is not the risk of
needs of life in a country expropriation, but the chronic inability of
property owners to establish legal title to
Innovation - development of new products,
the property they own
processes, organizations, management practices,
and strategies and seen as the product of THE REQUIRED POLITICAL SYSTEM
entrepreneurial activity
Five of the fastest growing economies of the
Entrepreneurs - Those who first commercialize past 30 years—China, South Korea,
innovations Taiwan, Singapore, and Hong Kong
 common at the start of their economic “Free” countries - citizens enjoy a high degree
growth: undemocratic governments. of political and civil freedoms.
Lee Kuan Yew - believe that a country “Partly free”-countries - are characterized by
needs to develop discipline more than some restrictions on political rights and civil
democracy. liberties, often in the context of corruption, weak
totalitarian regime that is committed to a rule of law,ethnic strife, or civil war.
market system and strong protection of Not free” countries - the political process is
property rights is capable of promoting tightly controlled and basic freedoms are denied.
economic growth. Three main reasons account for the spread of
democracy:
ECONOMIC PROGRESS BEGETS
DEMOCRACY many totalitarian regimes s failed to
deliver economic progress to the vast
subsequent economic growth often leads to bulk of their populations.
establishment of a democratic regime.
new information and communication
GEOGRAPHY, EDUCATION, technologies
AND ECONOMIC DEVELOPMENT economic advances have led to the
emergence of increasingly prosperous
Jeffrey Sachs- argues throughout history, coastal
states, with their long engagements in middle and working classes that have
international trade, have been more supportive of pushed for democratic reforms.
market institutions than landlocked states,
He also argues that, irrespective of the THE NEW WORLD ORDER AND GLOBAL
TERRORISM
economic and political institutions a
country adopts, adverse geographic ❖ Francis Fukuyama- goes on to say
conditions— that the war of ideas may be at an end
Education emerges as another important and that liberal democracy has
determinant of economic development
triumphed
The general assertion is that nations that invest Samuel Huntington - the late influential political
more in education will have higher growth rates scientist n argued there is no “universal”
because an educated population is a more civilization based on widespread acceptance of
productivepopulation. Western liberal democratic

STATES IN TRANSITION theorized that modernization in non-

TWO TRENDS that made the political Western societies can result in a retreat
economy of many of the world’s nation-states toward the traditional
changed radically since the late 1980’s: Global terrorism - is a product of the tension
o wave of democratic between civilizations and the clash of value
revolutions systems and ideology
o a strong move away from
centrally planned and mixed
economies and toward a THE SPREAD OF MARKET-
more free market economic BASED SYSTEMS
model HERITAGE FOUNDATION - a
THE SPREAD OF DEMOCRACY politically conservative U.S. research
foundation, gives some idea of the
❖ One notable development of the past degree to which the world has shifted
30 years
toward market-based economic systems
❖ Political freedom into three broad
groupings:
THE NATURE OF ECONOMIC ❖ By identifying and investing early in a
TRANSFORMATION potential future economic star,
The shift toward a market-based economic international firms may build brand loyalty
system often entails a number of steps: and gain experience in that country’s
deregulation, privatization, and creation of a business practices. Early entrants into
legal system to safeguard property rights. potential future economic stars may be able
to reap substantial first- mover advantages.
A. DEREGULATION - Removal of ▪ First-mover advantages -
government restrictions concerning the Advantages accruing to the first to
conduct of a business. enter a market.
❖ command economies - ❖ Late entrants may find that they lack the
exercised tight control over brand loyalty and experience necessary to
prices and output, setting both achieve a significant presence in the
through detailed state planning market. Late entrants may fall victim to
❖ mixed economies - the role of the late-moverdisadvantages.
state was more limited ▪ Late-Mover Disadvantages -
B. PRIVATIZATION - transfers the Handicaps experienced by being a
ownership of state property into the late entrant in a market.
hands of private individuals, frequently
COSTS. A number of political, economic, and
by the sale of state assets through an
legal factors determine the costs of doing
auction.
business in a country.
❖ a way to stimulate gains in
economic efficiency by giving ▪ political factors - a company may have to
new private owners a powerful pay off politically powerful entities in a
incentive—the reward of greater country before the government allows it
profits to do business there.
C. LEGAL SYSTEMS - Without a legal ▪ economic factors - one of the most
system that protects property rights, and important variables is the sophistication
without the machinery to enforce that of a country’s economy. It may be more
system, the incentive to engage in costly to do business in relatively
economic activity can be reduced primitive or undeveloped economies
substantially by private and public because of the lack of infrastructure and
entities, including organized crime, that supporting businesses.
expropriate the profits generated by the ▪ legal factors
efforts of private-sector entrepreneurs. o costly to do business in a
country where local laws and
BENEFITS, COSTS, RISKS, AND OVERALL regulations set strict standards
ATTRACTIVENESS OF DOING BUSINESS with regard to product safety,
INTERNATIONALLY
safety in the workplace,
BENEFITS. the long-run monetary benefits of
environmental pollution, and the
doing business in a country are a:
like.
1. Function of the size of the market o costly to do business in a country
2. the present wealth (purchasing power) of that lacks well-established laws
consumers for regulating business practice.
3. future wealth of consumers.
RISKS. As with costs, the risks of doing
business in a country are determined by a Ethics serves as the foundation for
number ofpolitical, economic, and legal factors. what people do or not, and ultimately
whatcompanies engage in globally.
▪ Political Risk - The likelihood that
▪ refers to accepted principles
political forces will cause drastic
of right or wrong that govern
changes in a country’s business
the conduct of aperson, the
environment that will adversely affect
members of a profession, or
the profit and other goals of a particular
the actions of an organization.
business enterprise.
Business Ethics - Accepted principles
▪ Economic Risk -The likelihood that
of right or wrong governing the
events, including economic
conduct ofbusiness people
mismanagement, will cause drastic
Ethical Strategy- A course of action that
changes in a country’s business does not violate a company’s business
environment that adversely affect the ethics.
profit and other goals of a particular
business enterprise. ETHICAL ISSUES IN INTERNATIONAL
BUSINESS
o indicator of economic A. EMPLOYMENT PRACTICES
mismanagement: country’s B. HUMAN RIGHTS
inflation rate, the level of
▪ One of the most obvious historic
business and government debt in
the country. examples was South Africa
▪ Legal Risk - The likelihood that a during the days ofwhite rule and
trading partner will opportunistically apartheid, which did not end
break a contractor expropriate until 1994.
intellectual property rights. ▪ General Motors, which had
significant activities in South
OVERALL ATTRACTIVENESS Africa adopted theSullivan
❖ The overall attractiveness of a country as a principles.
potential market or investment site for an ▪ SULLIVAN PRINCIPLES –
named after Leon Sullivan
international business depends on balancing
o Two principles must be
the benefits, costs, and risks associated with
followed:
▪ the company should not obey the
apartheid laws in its own South
African operations
▪ the company should do
everything within its power to
promotethe abolition of
apartheid laws.
C. ENVIRONMENTAL POLLUTION
▪ The atmosphere and oceans can be
viewed as a global commons.
▪ tragedy of the commons
occurs when a resource held in
doing business in that country
common by all, butowned by no
CHAPTER 5 one, is overused by individuals,
 resulting in its degradation business ethics
▪ Corporations can contribute to B. DECISION-MAKING PROCESSES
the global tragedy of the C. ORGANIZATION CULTURE - The
commons. values and norms shared among an
D. CORRUPTION organization’s employees. It
▪ The Lockheed case was the
deemphasizes business ethics, reducing
impetus for the 1977 passage of
all decisions to the purely economic.
the Foreign Corrupt Practices
▪ Values are abstract ideas about
Act
what a group believes to be
▪ Foreign Corrupt Practices Act
good, right, and desirable
U.S. - law regulating behavior
▪ Norms are the social rules and
regarding the conduct of
guidelines that prescribe
international business in the
appropriate behavior in
taking of bribes and other
particular situations
unethical actions.
D. UNREALISTIC PERFORMANCE
o act was subsequently GOALS
amended to allow for
▪ pressure from the parent
“facilitating payments.”
company to meet unrealistic
Sometimes known as
speed money or grease performance goals that can be
payments attained only by cutting corners
▪ Convention on Combating or acting in an unethical manner.
Bribery of Foreign Public E. LEADERSHIP
Officials in International ▪ Other employees in a business
Business Transactions - An often take their cue from
OECD convention that business leaders, and if those
establishes legally binding leaders do not behave in an
standards to criminalize bribery ethical manner, they might not
of foreign public officials in either
international business F. SOCIETAL CULTURE
transactions and provides for a ▪ the study found that enterprises
host of related measures that headquartered in cultures where
makethis effective. individualism and uncertainty
E. MORAL OBLIGATIONS OF avoidance are strong were more
MULTINATIONAL CORPORATIONS. likely to emphasize the
importance of behaving ethically
ETHICAL DILEMMAS
than firms headquartered in
Ethical Dilemma - A situation in which
there is no ethically acceptable solution. cultures where masculinity and
power distance are important
THE ROOTS OF UNETHICAL cultural attributes
BEHAVIOR
A. PERSONAL ETHICS - are the
generally accepted principles PHILOSOPHICAL APPROACHES
of right and wrong governing TO ETHICS
the conduct of individuals. STRAW MEN. raised by business ethics scholars
first step to establishing a strong sense of primarily to demonstrate that they offer
 inappropriate guidelines for ethical decision 2. Kantian Ethics - The belief that people
making in a multinational enterprise should be treated as ends and never as means
to the ends of others.
FOUR APPROACHES OF STRAW MEN.
Kantian ethics is based on the philosophy of
A. The Friedman Doctrine Immanuel Kant (1724– 1804)
▪ Milton Friedman – his basic position is the “
the social responsibility of business is to RIGHTS THEORIES
increase profits,” so long as the company
A twentieth-century theory that
stays within the rules of law
recognizes that human beings have
▪ He explicitly rejects the idea that businesses
fundamental rightsand privileges that
should undertake social expenditures beyond
transcend national boundaries and
those mandated by the law and required for
cultures.
the efficient running of a business
Moral theorists argue that fundamental
B. Cultural Relativism - The belief that human rights form the basis for the
ethics are culturally determined and that
moralcompass
firms should adopt the ethics of the
Universal Declaration of Human
cultures in which they operate.
Rights - A United Nations document that
▪ implicitly rejects the idea that lays down thebasic principles of human
universal notions of morality
rights that should be adhered to.
transcend differentcultures
Moral agent is any person or
C. The Righteous Moralist - One who
institution that is capable of moral
claims that a multinational’s home- action such as agovernment or
country standards of ethics are the
corporation)
appropriate ones for companies to
follow in foreign countries. This JUSTICE THEORIES
approach typically associated with ❖ focus on the attainment of a just
managers from developed nations. distribution of economic goods and
D. The Naive Immoralist - One who asserts services.
that if a manager of a multinational sees ❖ JUST DISTRIBUTION- A
that firms from other nations are not distribution of goods and services
following ethical norms in a host nation, that is considered fair andequitable.
that manager should not either. ❖ JOHN RAWLS - argues that all economic
goods and services should
UTILITARIAN AND KANTIAN ETHICS bedistributed equally except when
an unequal distribution would work
1. Utilitarian Approaches to Ethics - These hold
to everyone’s advantage
that the moral worth of actions or practices is
❖ VEIL OF IGNORANCE - everyone
determined by their consequences.
is imagined to be ignorant of all of his
▪ The utilitarian approach to business
or her particular characteristics.
ethics dates to philosophers such as
❖ DIFFERENCE PRINCIPLE -
David Hume (1711–1776), Jeremy
formulated by Jon Rawls, which is
Bentham (1748–1832), and John Stuart
that inequalities are justified if they
Mill (1806–1873).
benefit the position of the least-
▪ Utilitarianism is committed to the advantagedperson.
maximization of good and the
minimization of harm MAKING ETHICAL DECISIONS
 INTERNATIONALLY Refers to the idea that businesspeople should
7 actions that an international business and its consider the social consequences of economic
managers can take to make sure ethicalissues actions when making business decisions and that
are considered in business decisions: there should be a presumption in favor of decisions
that have both good economic and social
1. HIRING AND PROMOTION -
consequences.
businesses should strive to hire and
noblesse oblige (is a French term that refers to
promote people whohave a strong
honorable and benevolent behavior considered
sense of personal ethics and would not
the responsibility of people of high (noble) birth)
engage in unethical or illegal behavior.
6 SUSTAINABILITY
2. ORGANIZATION CULTURE
The core idea of sustainability is that the
AND LEADERSHIP - build an
organization—through its actions— does not
organizational culture and
exert a negative impact upon the ability of future
exemplify leadership behaviors
generations to meet their own economic needs
that place a high value on ethical
and that its actions impart long-runeconomic and
behavior.
social benefits on stakeholders.
▪ CODE OF ETHICS -
SUSTAINABLE STRATEGIES- Strategies
which is a formal
that not only help the multinational firm make
statement of the ethical
good profits, but that do so without harming the
prioritiesa business
environment, while simultaneously ensuring that
adheres to.
the corporation acts in a socially responsible
3. DECISION-MAKING
manner with regard to its multiple stakeholders
PROCESS -business people must
be able to think through theethical
implications of decisions in a
systematic way.

STAKEHOLDERS - The individuals or groups

that have an interest, stake, or claim in the actions
and overall performance of a company.
INTERNAL STAKEHOLDERS - People who
work for or own the business such as employees,
directors, and stockholders.
EXTERNAL STAKEHOLDERS- Individuals
or groups that havesome claim on a firm such as
customers, suppliers, and unions.
4. ETHICS OFFICERS - To make
sure that a business behaves in an
ethical manner, firms now must have
oversight by a high-ranking person or
people known to respect legal and
ethical standards.
4.DEVELOP MORAL COURAGE

5 CORPORATE SOCIAL
RESPONSIBILITY
CHAPTER 8 2. Second, foreign firms are acquired
because those firms have valuable
FOREIGN DIRECT INVESTEMNT (FDI) strategic assets, such as brand loyalty,
customer relationships, trademarks
• occurs when a firm invests directly in
3. Third, firms make acquisitions because
facilities to produce or market a product in
they believe they can increase the
a foreign country.
efficiency of the acquired unit by
• is a category of cross-border investment in transferring capital, technology, or
which an investor resident in one economy
management skills.
establishes a lasting interest in and a
significant degree of influence over an 3 Theories of FDI
enterprise resident in another economy.
1. seeks to explain why a firm will favor
FDI TAKES 2 FORMS direct investment as a means of entering a
foreign market when two other
1. GREENFIELD INVESTMENT - which alternatives, exporting and licensing, are
involves the establishment of a new open to
operation in a foreign country. 2. seeks to explain why firms in the same
2. ACQURING OR MERGING – existing industry often undertake foreign direct
firm in the foreign country investment at the same time and why they
favor certain locations over others as
FLOW OF FDI – amount of FDI undertaken targets for foreign direct investment
over a given time period (normally a year) 3. known as the eclectic paradigm, attempts
to combine the two other perspectives into
STOCK OF FDI – total accumulated value of a single holistic explanation of foreign
foreign-owned assets at a given time direct investment
Exporting – sale of products produced in one
TRENDS IN FDI country to residents
Licensing – occurs when a firm (the licensor)
1.firms still fear protectionist pressures licenses the right to produce its product, use its
production processes, or use its brand name or
2. increase in FDI has been driven by the political trademark to another firm (the licensee
and economic changes
NOTE: FDI is expensive because a firm must
US- largest source country of FDI bear the costs of establishing production facilities
in a foreign country or of acquiring a foreign
DIFFICULTIES TO DO BUSINESS IN
enterprise.
CHINA FDI is risky because of the problems associated
with doing business in a different culture where
1. Lack of purchasing power
the rules of the game may be very different
2. Highly regulated environment
3. Problems with local joint LIMITATION OF EXPORTING
Merger and Acquisitions – are typically quicker • Exporting strategy is often constrained by
to execute than building something from literally o Transportation costs
o Trade barriers
ground up
LIMITATION OF LICENSING
When contemplating FDI, when do firms Internationalization - refer to a company that
takes steps to increase its footprint or capture
prefer to acquire existing assets rather than greater market share outside of its country of
undertake greenfield investments? domicile by branching out into international
markets
1. Many firms apparently believe that if According to internalization theory, licensing
they do not acquire a desirable target has three major drawbacks as a strategy for
firm, then their global rivals will. exploiting foreign market opportunities
1. Licensing may result in a firm giving away • arises from a network of informal contacts
valuable technological know-how to a potential that allows firms to benefit from each
foreign competitor. other’s knowledge generation.
2. Licensing does not give a firm the tight control • Economists refer to such knowledge
over manufacturing, marketing, and strategy in a “spillovers” as externalities.
foreign country that may be required to maximize POLITICAL IDEOLOGY AND FDI
its profitability. • Between these two extremes is an
3. the firm’s competitive advantage is based not as approach that might be called pragmatic
much on its products as on the management, nationalism.
marketing, and manufacturing capabilities that RADICAL VIEW
produce those products. • traces its roots to Marxist political and
economic theory.
FDI IS MORE PROFITABLE THAN • FDI by the MNEs of advanced capitalist
LICENSING WHEN nations keeps the less developed countries
1. Firm has valuable know-how that cannot of the world relatively backward and
be adequately protected by licensing dependent on advance capitalist nations for
contract investment, jobs, and technology.
2. when the firm needs tight control over a • no country should ever permit foreign
foreign entity to maximize its market share corporations to undertake FDI,
and earnings in that country • multinational enterprise (MNE) is an
3. when a firm’s skills and know-how are not
instrument of imperialist domination.
amenable to licensing FREE MARKET VIEW
• traces its roots to classical economics and
the international trade theories of Adam
Smith and David Ricardo.
Strategic Behavior
• this view has been strengthened by the
One theory is based on the idea that FDI flows are
internalization explanation of FDI.
a reflection of strategic rivalry between firms in
the global marketplace. • argues that international production should
oligopoly is an industry composed of a limited be distributed among countries according
number of large firms. to the theory of comparative advantage.
Multipoint competition arises when two or more • MNE is an instrument for dispersing the
enterprises encounter each other in different production of goods and services to the
regional markets, national markets, or industries. most efficient locations

John Dunning PRAGMATIC NATIONALISM

• Argues that location-specific advantages • The pragmatic nationalist view is that
are also of considerable importance in FDI has both benefits and costs.
explaining both the rationale for and the • FDI can benefit a host country by
direction of foreign direct investment. bringing capital, skills, technology, and
Eclectic Paradigm – jobs, but those benefits come at a cost.
• argument that combining location specific
assets or resource endowments and the BENEFITS AND COST OF FDI
firm’s own unique assets often requires The main benefits of FDI for a host country arise
FDI; it requires the firm to establish from:
production facilities where those foreign (1) Resource transfer effect
assets or resource endowments are located. (2) Employment effects
Location-Specific Advantages (3) Balance-of-payments effects
• Advantages that arise from using resource (4) Effects on competition and economic
endowments or assets that are tied to a growth.
particular foreign location
Resource Transfer Effect
• comes from the sheer concentration of
Resource-transfer effects can be categorized
intellectual talent in this area
based on their effects on capital, technology
and management resources. Such resource
transfer can stimulate the economic growth of
the host country Some key consideration regarding the home
A. Availability of Capital: country cost of FDI includes:
B. Availability of modern technology:
C. Exploitation of natural resources: Capital Outflows: initial capital outflow from
home nation to host nation adversely affects the
EMPLOYMENT EFFECT BPO position of Home Nation.
• Increase in Employment
• Cynics argue that not all the “new jobs” Job Displacement: if FDI by Home nation has
created by FDI represent net additions in replaced the export mode, it adversely effects the
employment. exports of home nation.
Economic theory- tells us that the efficient Trade Imbalances: if FDI replaced the trade, then
functioning of markets depends on an adequate the goods which were earlier manufactured in
level of competition between producers. home nation are now manufactured in host

HOST COUNTRY COST GOVERNMENT POLICY INSTRUMENTS

Three cost of FDI concerned in host country, is AND FDI
that they arise the following: HOME-COUNTRY POLICIES
(1) Possible adverse effects on competition Is where the FDI comes from albeit Domestic
(2) Adverse effects on balance of payment Corporations of said country or Government
• the set is against the initial capital inflow funds.
that comes with FDI must be subsequent
outflow earnings from the subsidiaries to Encouraging Outward FDI
its parent company. Many investor nations now have government-
• Secondly, the concern arises when a backed insurance programs to cover major types
foreign subsidiary imports a substantial of foreign investment risk. The types of risks
number of inputs from abroad which insurable through these programs include the risks
results in a debit in a current amount of of expropriation (nationalization), war losses, and
host country balance of payment. the inability to transfer profits back home
(3) The perceived loss of national sovereignty and
autonomy Restricting outward FDI
Virtually all investor countries, including the
NATIONAL SOVEREIGNTY AND United States, have exercised some control over
AUTONOMY outward FDI from time to time. One policy has
Political scientist Robert Reich has noted that been to limit capital outflows out of concern for
such concerns are the product of outmoded the country’s balance of payments. nation. So
thinking because they fail to account for the investment mode promotes unemployment in
growing interdependence of the world economy. home nation.

HOME COUNTRY BENEFITS Host countries adopt policies designed both to

restrict and to encourage inward FDI.
There are three(3) ways a home country would
benefit from FDI: Encouraging Inward FDI
(1) The home country's balance of payments • It is common for governments to offer
benefits from inward flow from foreign earnings incentives to foreign firms to invest in
(2) Benefits from outward flow of FDI their countries. Such incentives take many
employment effects forms, but the most common are tax
(3) Learning of valuable skills needed for greater concessions, low-interest loans, and grants
production or subsidies.
HOME COUNTRY COST
The most important concern in FDI within the Restricting Inward FDI
home country comes in two • Host governments use a wide range of
ways. controls to restrict FDI in one way or
(1) Center of balance of payments another. The two most common are
(2) Employment effects of outward FDI
 ownership restraints and performance  eliminates all barriers to the trade of goods
requirements. and services among member
• Ownership restraints can take several countries, but members determine
forms. In some countries, foreign their own trade policies for nonmembers.
companies are excluded from specific
European Free Trade Association
fields.
(EFTA)- (between Iceland,
THREE TYPES OF INDUSTRIES Liechtenstein, and Switzerland)
and
1. High-technology industries in which North American Free Trade
protecting firm-specific expertise is Agreement (NAFTA)- (between the
of paramount importance and licensing is U.S, Canada and Mexico) are both free
hazardous. trade areas.
2. Global oligopolies, in which competitive 2. Customs Union
interdependence requires that
multinational firms maintain tight control over  eliminates trade barriers between member
foreign operations so that countries and adopts a common external
they have the ability to launch coordinated attacks trade policy.
against their global  most countries that enter a customer union
competitors.
desire further integration in the future
3. Industries in which intense cost pressures Ex. The Andean Community
require that multinational firms maintain tight (formerly known as Andean Pact) -
control over foreign operations (so that they can between Bolivia, Columbia, Ecuador
disperse manufacturing to locations around the and Peru.
globe where factor costs are most favourable in
order to minimize costs). 3. Common market

 has no barriers to trade between member

CHAPTER 9: countries, a common external trade policy,
and the free movement of the factors of
Regional Economic Integration production.
INTRODUCTION MERCOSUR (between Brazil,
 Regional Economic Integration→ means Argentina, Paraguay, and Uruguay) is
the agreement among countries in a aiming for common market status.
geographic region to reduce, and
ultimately remove, tariff and nontariff 4. Economic Union
barriers to the free flow of goods, services,  involves the free flow of products and
and factors of production between each factors of production among member
other. countries and the adoption of a common
• In this future scenario, free trade will external trade policy, but it also requires a
exist within each bloc, but each bloc common currency, harmonization of
will protect its market from outside m
competition with high tariffs e
m
b
LEVELS OF ECONOMIC INTEGRATION- e
r
There are 5 levels of economic integration: s
1. Free Trade Area ’

t
 ax rates, and a common monetary and been easy to achieve or sustain for two main
fiscal policy. reasons:
The European Union (EU) is an
(1) although economic integration
economic union, although an imperfect
aids the majority, it has its costs.
one since not all members of the EU
While a nation as a whole may
have adopted the euro, and differences
benefit significantly from a regional
in tax rates across countries still
free trade agreement, certain groups
remain Economic Union.
may lose.
5. Political Union • people in some industries will
 involves a central political apparatus that
(2) arises from concerns over
coordinates the economic, social, and
foreign policy of member states. national sovereignty
the EU is headed toward at least partial • it can result in a loss of
political union national sovereignty
the United States is an example of even • countries still want to protect
closer political union certain goods
❖ ex) Mexico and its
THE CASE FOR REGIONAL INTEGRATION- oil
NATHALIE
• integration of monetary policies
 THE ECONOMIC CASE FOR can be complex
INTEGRATION ❖ ex) UK and the
 regional economic integration is an attempt pound/euro
to achieve additional gains from the free
flow of trade and investment between THE CASE AGAINST REGIONAL
countries beyond those attainable under INTEGRATION-SHEILA
international agreements such as the WTO.
 since it is easier to form an agreement with Regional Economic Integration is only beneficial
a few countries than across all nations, if the amount of trade it creates exceeds the
there has been a push toward regional amount it diverts
economic integration.
 Trade creation→ occurs when high-
 THE POLITICAL CASE FOR cost domestic producers are replaced by
INTEGRATION low-cost producers within the free trade
area. It may also occur when highercost
→ Linking countries together, making
external producers are replaced by
them increasingly dependent on each
lower-cost external producers within the
other:
free trade area.
•
creates incentives for political  Trade diversion→ occurs when lower-
cooperation and reduces the cost external suppliers are replaced by
likelihood of violent conflict higher-cost suppliers within the free
• gives countries greater political trade area.
clout when dealing with other
nations. REGIONAL ECONOMIC INTEGRATION IN
 IMPEDIMENTS TO INTEGRATION EUROPE
Despite the strong economic and political  Europe has two trade blocs
arguments in support, integration has never
 1. The European Union (EU) with 28 proposed by the commission and
members forwarded to it by the council.
2. The European Free Trade Association • Treaty of Lisbon- A European
(EFTA) with 4 members Union–sanctioned treaty that will
 The EU is seen to become as the world’s allow the European Parliament to
economic and political superpower as become the co-equal legislator for
the United States. almost all European laws.
• The Treaty of Lisbon also created a
 EVOLUTION OF THE EUROPEAN new position, a president of the
UNION European Council, who serves a 30-
 The European Union (EU) is the product month term and represents the
of two political factors: nation-states that make up the EU.
(1) the devastation of western 4. The Court of Justice: comprised of one
Europe during two world wars, and judge from each country, is the supreme
the desire for a lasting peace, and appeals court for EU law.
(2) the European nations’
desire to hold their own on the  THE SINGLE EUROPEAN ACT
world’s political and economic
 was born out of frustration among EC
stage.
members that the community was not
 The forerunner of the EU, the European living up to its promise
Coal and Steel Community, was formed in
 was adopted by the EU in 1987
1951 by Belgium, France, West Germany,
 committed EC countries to work toward
Italy, Luxembourg, and the Netherlands.
establishment of a single market by
• Its objective was to remove barriers to
December 31, 1992.
intragroup shipments of coal, iron,
steel, and scrap metal. The Objectives of the Act

 The Treaty of Rome established the  Remove all frontier controls among
European Economic Community in 1957 EC countries
with the goal of becoming a common  Apply the principle of “mutual
market. recognition” to product standards
• the name changed to the EU in 1993  Institute open public procurement to
nonnational suppliers
 POLITICAL STRUCTURE OF THE  Lift barriers to competition in the
EUROPEAN UNION retail banking and insurance
businesses
The four main institutions of the EU:
 Remove all restrictions on foreign
1. The European Commission→ exchange transactions between
responsible for proposing EU legislation, member countries by the end of 1992.
implementing it, and monitoring  Abolish restrictions on cabotage o
compliance with EU laws by member- Cabotage- the right of foreign
states. truckers to pick up and deliver goods
2. The European Council→ the heads of within another member-state’s
state of EU members and the president of borders—by the end of 1992
the European Commission.
Impact of the Single European Act
3. The European Parliament→ is directly
elected by the populations of the  THE ESTABLISHMENT OF THE
memberstates. It debates legislation EURO
 EC members signed the Maastricht use a single exchange rate as an
Treaty instrument of macro-economic policy.
• Treaty agreed to in 1992, but not • Countries may react differently
ratified until January 1, 1994, that to changes in the euro
committed the 12 member-states of
the European Community to a
closer economic and political union
The Euro Experience: 1999 to the
 The euro is used by 18 of the 28 member- Sovereign Debt Crisis
states of the European Union; these 17
states are members of what is often  Since its establishment January 1,
referred to as the euro zone. 1999, the euro has had a volatile
trading history against the world’s
 By adopting the euro, the EU has created
major currency, the U.S. dollar.
the second largest currency zone in the
world after that of the U.S dollar.  Initially, the euro was valued at $1.17,
then fell in value relative to the dollar,
 Three long-term EU members—Great
but strengthened to an all-time high of
Britain, Denmark, and Sweden—are still
$1.54 in March ,2008
sitting on the sidelines.
 Reflecting persistent concerns over
Benefits of the Euro slow economic growth and large
budget deficits among several EU
 There are savings from having to
member-states, particularly Greece,
handle one currency, rather than
Portugal, Ireland, Italy, and Spain.
many.
 The adoption of a common currency
 ENLARGEMENT OF THE
makes it easier to compare prices
EUROPEAN UNION
across Europe.
 many countries, particularly from Eastern
 Faced with lower prices, European
Europe, have applied for membership
producers have been forced to look for
ways to reduce their production costs  To qualify for EU membership, the
to maintain their profit margins. applicants had to privatize state assets,
deregulate markets, restructure industries,
 A common currency has given a boost
and tame inflation. They also had to
to the development of a highly liquid
enshrine complex EU laws into their own
panEuropean capital market.
systems, establish stable democratic
 The development of a pan-European, governments, and respect human rights
euro denominated capital market will
 10 countries joined in 2004, expanding the
increase the range of investment
EU to 25 states, with population of 450
options open to both individuals and
million people, and a single continental
institutions.
economy with a GDP of 11 trillion
Costs of the Euro euros450 million people, and a single
continental economy with a GDP of 11
 The drawback, for some, of a single trillion
currency is that national authorities
 In 2007, Bulgaria and Romania joined, and
have lost control over monetary
in 2013 Croatia joined, bringing total
policy.
membership to 28 nations.
 Another drawback of the euro is that
 The new members were not able to adopt
the EU is not optimal currency area,
the euro for several years, and free
where similarities in the underlying
movement of labor among the new and
structure of economic activity make it
existing members was prohibited until then
feasible to adopt a single currency and
 → Turkey has been denied full member • access to a large and increasingly
because of concerns over human rights prosperous market and lower prices
for consumers from goods
REGIONAL ECONOMIC INTEGRATION IN produced in Mexico
THE AMERICAS- NATH & SHEILA
 U.S. and Canadian firms with production
 There is a move toward greater regional sites in Mexico are more competitive in
economic integration in the Americas. world markets
 The biggest effort is the North American The Case against NAFTA
Free Trade Agreement (NAFTA).
 Other efforts include the Andean  jobs could be lost, and wage levels could
Community and Mercosur. decline in the U.S. and Canada
 Mexican workers could emigrate north
THE NORTH AMERICAN FREE  Mexico would lose its sovereignty
TRADE AGREEMENT
NAFTA: The Results
 NAFTA became law January 1, 1994
 Canada, Mexico, and the United States are  Initial effects muted → overall impact has
the NAFTA’s participants. been small but positive - Increased trade
partnership.
NAFTA’S CONTENTS:  Employment
effects of
 Abolished tariffs on 99% of the goods NAFTA have
traded between members been moderate
 Removed barriers on the cross-border flow to small.
of services  Overall impact
 Protects intellectual property rights of NAFTA →
 Removes most restrictions on FDI between Small
members
 Allows each country to apply  THE ANDEAN COMMUNITY
environmental standards  A 1969 agreement among Bolivia, Chile,
 Established two commissions to impose Ecuador, Colombia, and Peru to establish a
fines and remove trade privileges when customs union.
environmental standards or legislation  Based on the EU model, but was far less
involving health and safety, minimum successful at achieving its stated goals.
wages, or child labor are ignored.  By the mid-1980s, the Andean Pact had all
but collapsed and had failed to achieve any
The Case for NAFTA
of its stated objectives
Proponents of NAFTA have argued that the free • No tariff-free trade among
trade area should be viewed as an opportunity to member countries, no
create an enlarged and more efficient productive common external tariff, and
base for the entire region. no harmonization of
economic policies.
 Mexico would benefit from
• Political and economic
• increased jobs as low-cost production problems seem to have
moves south and will see more hindered cooperation among
rapid economic growth as a result member countries.
 U.S. and Canada would benefit from  Countries of the Andean Pact have had to
deal with low economic growth,
 hyperinflation, high unemployment,
political unrest, and crushing debt burdens  FREE TRADE AREA OF THE
 Additionally, countries during this period AMERICAS (FTAA)
tended toward the radical-socialist end of  was proposed on December 1994 at the
the political spectrum and so ideology hemispherewide Summit of the Americans.
towards free market economic principles → talks begin in April 1998 to establish an
were hostile. FTAA by January 1, 2005
 In 1990, the pact was relaunched and  The FTAA was not established and now
renamed the Andean Community support from the U.S. and Brazil is mixed
• the U.S. wants stricter enforcement
 MERCOSUR if intellectual property rights
 originated in 1988 as a free trade pact • Brazil and Argentina want the U.S.
between Brazil and Argentina. to eliminate agricultural subsidies
 Helped bring about 80% increase in trade and tariffs
between Brazil and Argentina in the late  If the FTAA is established, it will have
1980s major implications for cross-border trade
 Expanded to include Paraguay and and investment flows within the
Uruguay in 1990 hemisphere
 Critics → Mercosur countries might not be • would create a free trade
able to compete globally once the group’s area of 850 million people
external trade barriers come down. who accounted for nearly
 Later on due to recession, progress slowed $18 trillion in GDP in 2008
down
REGIONAL ECONOMIC INTEGRATION
 CENTRAL AMERICAN COMMON ELSEWHERE
MARKET, CAFTA, AND CARICOM
 Central American Common Market: a  Numerous attempts at regional economic
trade pact among Costa Rica, El Salvador, integration have been tried throughout
Guatemala, Honduras, and Nicaragua, Asia and Africa.
which began in the early 1960s but  The most significant is the Association of
collapsed in 1969 due to war. Southeast Asian Nations (ASEAN).
 Central America Free Trade Agreement  In addition, the Asia-Pacific Economic
(CAFTA): the agreement of the Cooperation (APEC) forum has recently
memberstates of the Central American emerged as the seed of a potential free
Common Market joined by the Dominican trade region.
Republic to trade freely with the United
States.  ASSOCIATION OF SOUTHEAST
 CARICOM (establish in 1973): an ASIAN NATIONS
association of English-speaking Caribbean  Formed in 1967, an attempt to establish a
states that are attempting to establish a free trade area among Brunei, Cambodia,
customs union. Indonesia, Laos, Malaysia, Myanmar, the
• Experienced repeated failure but Philippines, Singapore, Vietnam, and
has seen growth in membership → Thailand.
eventually led to CSME  Objective: To foster freer trade among
 Caribbean Single Market and Economy member countries and to achieve
(CSME): The six CARICOM members cooperation in their industrial policies.
that agreed to lower trade barriers and  In 2003, an ASEAN free trade area
harmonize macroeconomic and monetary (AFTA) between the six original members
policies.
 of ASEAN came into full effect to reduce Regional economic integration threats
import tariffs among members.
 The lowering of barriers to trade and
 ASEAN signed a free trade agreement with
investment among countries has led to
China in 2010 that removes tariffs on 90
increased price competition throughout the
percent of traded goods between China and
EU and NAFTA.
ASEAN members more than tripled during
the first decade of the twenty-first century, • Increased competition within the
and this agreement should spur further EU is forcing EU firms to become
growth. more efficient, and stronger global
competitors
 ASIA-PACIFIC ECONOMIC  Firms outside of trading areas is the threat
COOPERATION (APEC) of being shut out of the single market by
the creation of a “trade fortress.”
 was founded in 1990 at the suggestion of
Australia.  The EU is increasingly willing and able to
intervene and impose conditions on
 currently has 21 member-states, including
companies proposing mergers and
as the United States, Japan, and China.
acquisitions. This is a threat insofar as it
 The stated aim of APEC is to increase
limits the ability of firms to pursue the
multilateral cooperation in view of the
corporate strategy of their choice.
economic rise of the Pacific nations and
the growing interdependence within the
region.

 REGIONAL TRADE BLOCS IN

AFRICA
 There are now nine trade blocs on the
African continent.
 Although the number of trade groups is
impressive, progress toward the
establishment of meaningful trade blocs
has been slow.
 Kenya, Uganda, and Tanzania committed
to re-launching the East African
Community (EAC) in 2001, however so
far, the effort appears futile.
 FOCUS ON MANAGERIAL
IMPLICATIONS
Regional economic integration opportunities

 formerly protected markets are now open

to exports and direct investment
 the free movement of goods across
borders, the harmonization of product
 standards, and the simplification of tax
regimes means that firms can realize
potentially enormous cost economies by
centralizing production in those locations
where the mix of factors costs, and skills is
optimal