BUS 305

1. Chapter 03
International Institutions
from an International
Business Perspective
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 3-2
Learning Objectives
• LO1: Explain the importance of international
business institutions to business decision makers and
their firms.
• LO2: Outline the United Nations as an institution
and its relevance to international business.
• LO3: Describe the purposes of the two global
monetary institutions, the IMF and the World Bank.
• LO4: Discuss the purposes of the World Trade
Organization and its impact international business.
• LO5: Identify the levels of economic integration.
• LO6: Discuss the EU and its impact.
• LO1: Explain the importance of international
business institutions to business decision makers and
their firms.
• LO2: Outline the United Nations as an institution
and its relevance to international business.
• LO3: Describe the purposes of the two global
monetary institutions, the IMF and the World Bank.
• LO4: Discuss the purposes of the World Trade
Organization and its impact international business.
• LO5: Identify the levels of economic integration.
• LO6: Discuss the EU and its impact.

3. 3-3
What Are Institutions and
Why Are They Useful?
• Organizations of
groups, societies, or
cultures to achieve a
common goal: “to
provide stability and
meaning to social
life”
• Organizations of
groups, societies, or
cultures to achieve a
common goal: “to
provide stability and
meaning to social
life”
• A collection of norms
that “regulate the
relations of
individuals to each
other”
• A collection of norms
that “regulate the
relations of
individuals to each
other”
Institutions are socially constructed, limit behavior,Institutions are socially constructed, limit behavior,
andand set the rules of the game!set the rules of the game!

4. 3-4
Institutions Influence Behavior
• New
Institutional
Theory
Social Constructs:
norms that
structure
relations
between people
• New
Institutional
Theory
Social Constructs:
norms that
structure
relations
between people
• Formal Institutions
– Influence behavior through
laws and regulations
• Formal Institutions
– Influence behavior through
laws and regulations
• Informal Institutions
– Influence behavior through
norms, values, customs,
ideologies
• Informal Institutions
– Influence behavior through
norms, values, customs,
ideologies

5. 3-5
Institutions Influence Behavior
• New
Institutional
Theory:
– Societal
Expectations:
basic rules &
social
expectations of
groups, written
and unwritten
• New
Institutional
Theory:
– Societal
Expectations:
basic rules &
social
expectations of
groups, written
and unwritten
• Formal Institutions:
– City, State, and National
Governments, EU
– Operate through Laws & Rules
• Formal Institutions:
– City, State, and National
Governments, EU
– Operate through Laws & Rules
• Informal Institutions:
– Normative – set Standards:
NGOs & Professional
Organizations
– Cognitive – shared conceptual
ideals
• Informal Institutions:
– Normative – set Standards:
NGOs & Professional
Organizations
– Cognitive – shared conceptual
ideals
Examples

6. 3-6
Institutions Influence Behavior
• Formal Institutions
– Tax Laws, Speed Limits
– Membership Rules
• Formal Institutions
– Tax Laws, Speed Limits
– Membership Rules
• Informal Institutions
– Normative
• Organizational standards & Principles
– Cognitive:
• Function as frameworks for behavior
 China – guanxi
 Japan – “supplier game”
• Informal Institutions
– Normative
• Organizational standards & Principles
– Cognitive:
• Function as frameworks for behavior
 China – guanxi
 Japan – “supplier game”
Examples

7. 3-7

8. 3-8
The United Nations (UN)
• 192 member countries
dedicated to world peace
and stability
• Fosters global business
relationships
• Helps write
international law
• Helps stabilize global
economy
• Headquartered in New
York City
• 192 member countries
dedicated to world peace
and stability
• Fosters global business
relationships
• Helps write
international law
• Helps stabilize global
economy
• Headquartered in New
York City

9. 3-9
The UN Impacts IB
• UN Center for Trade
Facilitation and
Electronic Business
(UN/CEFACT)
– Technical standards
and norms
– Standardized trade
documents
– Standards for E-data
exchange
• UN Center for Trade
Facilitation and
Electronic Business
(UN/CEFACT)
– Technical standards
and norms
– Standardized trade
documents
– Standards for E-data
exchange
• UN Educational,
Scientific and
Cultural
Organization
(UNESCO)
– Investment in
emerging economies
– Development in
health, education,
governance &
political stability
• UN Educational,
Scientific and
Cultural
Organization
(UNESCO)
– Investment in
emerging economies
– Development in
health, education,
governance &
political stability

10. 3-10
The UN Impacts IB
• UN Agencies deal
with downsides to
globalization:
– Terrorism
– Crime
– Drugs
– Arms Traffic
• UN Agencies deal
with downsides to
globalization:
– Terrorism
– Crime
– Drugs
– Arms Traffic
• UN Environmental
Programme (UNEP)
– Climate control
Convention
– Kyoto Protocol
– Sustainable Business
Practices
• UN Environmental
Programme (UNEP)
– Climate control
Convention
– Kyoto Protocol
– Sustainable Business
Practices

11. 3-11
The UN Impacts IB
• UN Addresses
Global Education &
Health
– The Global Compact
• Education and health
issues needing private
industry/developing
nation partnerships
• UN Addresses
Global Education &
Health
– The Global Compact
• Education and health
issues needing private
industry/developing
nation partnerships
• UN Economic and
Social Council
promotes:
– Social Justice
– Human Rights
– Labor Rights
• UN Economic and
Social Council
promotes:
– Social Justice
– Human Rights
– Labor Rights

12. 3-12
The UN Global Compact
• Framework for businesses committed to
aligning operations and strategies
• 10 universally accepted principles for:
– Human rights
– Labor
– The Environment
– Anticorruption
• Framework for businesses committed to
aligning operations and strategies
• 10 universally accepted principles for:
– Human rights
– Labor
– The Environment
– Anticorruption

13. 3-13
The UN and the
Conduct of Global Business
• Ships sail protected across international waters.
• Commercial airlines fly across borders and land in emergencies –
International Civil Aviation Organization.
• WHO sets quality standards for drug names and quality.
• Universal Postal Union protects mail and allows cross-border
mailing.
• International Telecommunications Union keeps airwaves
unclogged and avoids radio interference.
• World Meteorological Organization shares global weather data.
• UN Sales Convention and UN Convention on Carriage of Goods
by Sea set rights and obligations of international buyers/sellers.
• Ships sail protected across international waters.
• Commercial airlines fly across borders and land in emergencies –
International Civil Aviation Organization.
• WHO sets quality standards for drug names and quality.
• Universal Postal Union protects mail and allows cross-border
mailing.
• International Telecommunications Union keeps airwaves
unclogged and avoids radio interference.
• World Meteorological Organization shares global weather data.
• UN Sales Convention and UN Convention on Carriage of Goods
by Sea set rights and obligations of international buyers/sellers.

14. 3-14
UN Organization
• 5 working bodies/organs:
1. The General Assembly
2. The UN Security Council
3. Economic and Social Council
(ECOSOC)
4. International Court of Justice (ICJ)
5. The Secretariat
• 5 working bodies/organs:
1. The General Assembly
2. The UN Security Council
3. Economic and Social Council
(ECOSOC)
4. International Court of Justice (ICJ)
5. The Secretariat

15. 3-15
UN Organs
• General Assembly
(1 vote/member)
– Adopts resolutions
– Decisions reflect world
opinion
– Decisions NOT legally
binding
• General Assembly
(1 vote/member)
– Adopts resolutions
– Decisions reflect world
opinion
– Decisions NOT legally
binding
• The UN Security
Council
– Maintains international
peace & security
• 15 members including 5
permanent members
• The UN Security
Council
– Maintains international
peace & security
• 15 members including 5
permanent members

16. 3-16
UN Organs
• Economic and Social
Council (EOCSOC)
Economic & social issues
• Trade & Transport
• Industrialization
• Economic development
• Population growth
• Children
• Housing
• Women’s rights
• Racial discrimination
• Illegal drugs & crime
• Social welfare & youth
• The human environment
• Economic and Social
Council (EOCSOC)
Economic & social issues
• Trade & Transport
• Industrialization
• Economic development
• Population growth
• Children
• Housing
• Women’s rights
• Racial discrimination
• Illegal drugs & crime
• Social welfare & youth
• The human environment
• International Court
of Justice (ICJ) or
World Court
– 15 judges
– Worldwide
jurisdiction
– Legal decisions
between national
governments
• International Court
of Justice (ICJ) or
World Court
– 15 judges
– Worldwide
jurisdiction
– Legal decisions
between national
governments

17. 3-17
UN Organs
• The Secretariat
– UN staff – 40,000 people worldwide
– Headed by the Secretary General
• The Secretariat
– UN staff – 40,000 people worldwide
– Headed by the Secretary General
The Secretary General is recommended byThe Secretary General is recommended by
the Security Council and appointedthe Security Council and appointed
by the General Assembly forby the General Assembly for
5 year renewable terms.5 year renewable terms.

18. 3-18
International Monetary
Institutions
• IMF – coordinates and enforces
international monetary rules
• IMF – coordinates and enforces
international monetary rules
• World Bank – lends money for
development projects
• World Bank – lends money for
development projects
Established in 1944 at Bretton Woods byEstablished in 1944 at Bretton Woods by
treasury and central bank representativestreasury and central bank representatives
from the Allied Nations of WWIIfrom the Allied Nations of WWII
Established in 1944 at Bretton Woods byEstablished in 1944 at Bretton Woods by
treasury and central bank representativestreasury and central bank representatives
from the Allied Nations of WWIIfrom the Allied Nations of WWII

19. 3-19
IMF
• Basic Premise:
– all nations seek a
workable
international
monetary system
which transcends
their conflicting
national interests
• Basic Premise:
– all nations seek a
workable
international
monetary system
which transcends
their conflicting
national interests
• IMF Promotes
– International
monetary cooperation
– Orderly exchange and
payment systems
– Available funds for
BOP corrections
• IMF Promotes
– International
monetary cooperation
– Orderly exchange and
payment systems
– Available funds for
BOP corrections
Each of the 186 members contribute fundsEach of the 186 members contribute funds
based on the country’s relative sizebased on the country’s relative size
in the world economy.in the world economy.
These funds are called “quotas.”These funds are called “quotas.”
Each of the 186 members contribute fundsEach of the 186 members contribute funds
based on the country’s relative sizebased on the country’s relative size
in the world economy.in the world economy.
These funds are called “quotas.”These funds are called “quotas.”

20. 3-20
IMF and Exchange Rates
• Articles of Agreement (1945)
– Set fixed exchange rates between member nations
– Par value – based on U.S.$ and gold @ $35/oz
– U.S. would redeem U.S.$ for gold
– U.S.$ was only currency redeemable for gold
– U.S.$ was method of international payment and
reserve currency
• Articles of Agreement (1945)
– Set fixed exchange rates between member nations
– Par value – based on U.S.$ and gold @ $35/oz
– U.S. would redeem U.S.$ for gold
– U.S.$ was only currency redeemable for gold
– U.S.$ was method of international payment and
reserve currency
In 1971 President Richard NixonIn 1971 President Richard Nixon
took the U.S. off the gold standardtook the U.S. off the gold standard

21. 3-21
The World Bank
• 2 Major Institutions:
– International Bank for
Reconstruction and
Development (IBRD)
– International
Development Association
(IDA)
• 2 Major Institutions:
– International Bank for
Reconstruction and
Development (IBRD)
– International
Development Association
(IDA)
• 3 Minor Institutions:
– International Finance
Corporation (IFC)
– Multilateral Investment
Guarantee Agency
(MIGA)
– International Center for
the Settlement of
Investment Disputes
(ICSID)
• 3 Minor Institutions:
– International Finance
Corporation (IFC)
– Multilateral Investment
Guarantee Agency
(MIGA)
– International Center for
the Settlement of
Investment Disputes
(ICSID)
A World Education Bank to set up primaryA World Education Bank to set up primary
schools and train teachersschools and train teachers
was called for in 2008was called for in 2008

22. 3-22
WTO
Deals with rules of trade between nations
• Goal: Reduce or eliminate trade barriers
and restrictions
• Established in 1995
• 153 members set and implement trade rules between
nations
• Minimize government action against trade
Deals with rules of trade between nations
• Goal: Reduce or eliminate trade barriers
and restrictions
• Established in 1995
• 153 members set and implement trade rules between
nations
• Minimize government action against trade

23. 3-23
WTO
WTO Principles:
1. Trade without discrimination (MFN
Principle)
2. Freer trade through negotiation
3. Predictability through binding and
transparency
4. Promoting fair competition
5. Encouraging development and economic
reform
WTO Principles:
1. Trade without discrimination (MFN
Principle)
2. Freer trade through negotiation
3. Predictability through binding and
transparency
4. Promoting fair competition
5. Encouraging development and economic
reform

24. 3-24
WTO
• Doha Development
Agenda
– provides market access to
least developed nations
– Duty and quota-free
imports on manufactured
goods
– Agriculture hard to agree
on
• Doha Development
Agenda
– provides market access to
least developed nations
– Duty and quota-free
imports on manufactured
goods
– Agriculture hard to agree
on
• Trade-related
Intellectual Property
Rights (TRIPS)
– Copyright, trade mark,
trade secrets and
intellectual property
protection
• Trade-related
Intellectual Property
Rights (TRIPS)
– Copyright, trade mark,
trade secrets and
intellectual property
protection
Over 400 Regional Trade AgreementsOver 400 Regional Trade Agreements
(EU, NAFTA, etc.) may weaken the WTO(EU, NAFTA, etc.) may weaken the WTO
Over 400 Regional Trade AgreementsOver 400 Regional Trade Agreements
(EU, NAFTA, etc.) may weaken the WTO(EU, NAFTA, etc.) may weaken the WTO

25. 3-25
Economics Integration
Agreements
• Free Trade Area (FTA) – tariffs
among members eliminated but external
tariffs remain
• Free Trade Area (FTA) – tariffs
among members eliminated but external
tariffs remain
• Customs Union – collaboration that
adds common external tariffs to an FTA
• Customs Union – collaboration that
adds common external tariffs to an FTA

26. 3-26
Economics Integration
Agreements
• Common Market – customs union that
includes mobility of services, people, and
capital within a union
• Common Market – customs union that
includes mobility of services, people, and
capital within a union
• Complete Economic Integration –
integration on economic and political
levels
• Complete Economic Integration –
integration on economic and political
levels

27. 3-27

28. 3-28
Examples of
Economic Integration Agreements
• North America:
– North American Free Trade
Agreement (NAFTA)
• Central & South America:
– Mercosur
– Central American Free Trade
Union (DR-CAFTA)
– Andean Community (CAN)
• Europe:
– European Union (EU)
• North America:
– North American Free Trade
Agreement (NAFTA)
• Central & South America:
– Mercosur
– Central American Free Trade
Union (DR-CAFTA)
– Andean Community (CAN)
• Europe:
– European Union (EU)
• Africa:
– Economic Community of West
African States (ECOWAS)
– Common Market for Eastern
and Southern Africa (COMESA)
– Southern African Development
Community (SADC)
– African Free Trade Zone (AFTZ)
– African Union (AU)
• Asia:
– Association of Southeast Asian
Nations (ASEAN & ASEAN+3)
• Africa:
– Economic Community of West
African States (ECOWAS)
– Common Market for Eastern
and Southern Africa (COMESA)
– Southern African Development
Community (SADC)
– African Free Trade Zone (AFTZ)
– African Union (AU)
• Asia:
– Association of Southeast Asian
Nations (ASEAN & ASEAN+3)

29. 3-29
The European Union
• EU Development
– Countries committed to
economic and political
integration
– Established in 1993 by
the EC in the Maastricht
Treaty
• 3 Areas of
Integration:
1. Economic Community
2. Foreign Policy
3. Domestic Affairs
• EU Development
– Countries committed to
economic and political
integration
– Established in 1993 by
the EC in the Maastricht
Treaty
• 3 Areas of
Integration:
1. Economic Community
2. Foreign Policy
3. Domestic Affairs
• EU Profile Today
– 27 member countries
– 500+ million people
– 7.3%+ of world
population
– 20% of global imports
& exports
– Supranational body
with regional
government
• EU Profile Today
– 27 member countries
– 500+ million people
– 7.3%+ of world
population
– 20% of global imports
& exports
– Supranational body
with regional
government

30. 3-30
• European Monetary Union (EMU) or
Economic and Monetary Union
EU group using € in 16-country euro zone
• European Monetary Union (EMU) or
Economic and Monetary Union
EU group using € in 16-country euro zone
• European Parliament – legislative body;
members popularly elected from member
nations
• European Parliament – legislative body;
members popularly elected from member
nations
• Council of the European Union – the EU’s
primary policy setting institution
• Council of the European Union – the EU’s
primary policy setting institution
EU InstitutionsEU Institutions

31. 3-31
• European Commission
– 27 commissioners responsible for EU’s daily operations
• European Commission
– 27 commissioners responsible for EU’s daily operations
• Court of Auditors
• Reviews spending of EU funds
• European Economic and Social
Commission (EESC)
• Focuses on occupational & social interests
• Committee of Regions (CoR)
• Local views on transportation, education & health
• European Investment Bank
• Finances projects of EU objectives
• Court of Auditors
• Reviews spending of EU funds
• European Economic and Social
Commission (EESC)
• Focuses on occupational & social interests
• Committee of Regions (CoR)
• Local views on transportation, education & health
• European Investment Bank
• Finances projects of EU objectives

32. 3-32
• European Central Bank (ECB)
• sets and implements EU monetary policy
• European Central Bank (ECB)
• sets and implements EU monetary policy
• European Court of Justice
• rules on issues related to EU policies under the
Treaty of Rome
• European Court of Justice
• rules on issues related to EU policies under the
Treaty of Rome

33. 3-33
EU Impact on IB
•The Changes:
– Harmonized national
standards, labeling laws,
testing procedures &
consumer protection
issues
– Eliminated shared border
taxes and customs laws of
member nations
– Common currency – the €
•The Changes:
– Harmonized national
standards, labeling laws,
testing procedures &
consumer protection
issues
– Eliminated shared border
taxes and customs laws of
member nations
– Common currency – the €
• The Results:
– The World’s largest
trading economy
– FDI outflow = 26% of
World output
– Cost of Doing Business in
EU is reduced
– EU regulations set new
global standards
• The Results:
– The World’s largest
trading economy
– FDI outflow = 26% of
World output
– Cost of Doing Business in
EU is reduced
– EU regulations set new
global standards
EU market access means firms play by EREU market access means firms play by ER
rules globally AND within the EU!rules globally AND within the EU!
EU market access means firms play by EREU market access means firms play by ER
rules globally AND within the EU!rules globally AND within the EU!

34. 3-34
GLOBAL gauntlet
• Do International
Institutions Weaken
the Nation State?
• Do International
Institutions Weaken
the Nation State?
• Issues:
– National
Sovereignty?
– Member Alliances?
– Member Relations?
– Common Cross-
Border or Regional
Issues?
– Global Issues?
• Issues:
– National
Sovereignty?
– Member Alliances?
– Member Relations?
– Common Cross-
Border or Regional
Issues?
– Global Issues?