Global Business Lecture Slides.pptx

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Global Business
Topic:
Political Economy and Globalisation
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Acknowledgement of Country
I would like to acknowledge the traditional owners and custodians
of this land, the Boonwarrung and Wurrundjeri peoples on whose
lands we are situated and whose land I was born, live and work.
I acknowledge all First Nation people on whose land I have roamed
and travelled. I pay my respect to their elders, past, present and
future , acknowledging their deep connection to and on-going
struggle in defending their rights on their lands.
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Learning Outcomes of the Unit
On successful completion of this unit, you should have:
• Gain a preliminary overview of the economic, legal, political and
social environment in which business operations are managed
• Illustrate the interaction that takes place among individuals,
organizations, and governments in determining business
outcomes
• Facilitate an understanding of the role of globalization in relation to
the growth and interdependency of economies
• Understand how technological disruption and innovation allow for
the development of capabilities that provide value for business
• Assess the need for business to be ethical and socially
responsible
• Apply critical thinking to case-based analysis.
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Unit Outline
Now …
Please open the Unit information book and the assessment
information book link on Moodle.
 In order to pass this unit, you must obtain at least 50% across
the combined score of all the assessments

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Take a Break

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Learning Objectives
At the end of this lecture students should have an understanding of the
following:
 What is political economy?
 Different political systems
 Different economic systems
 Features and criticisms of these economic systems
 Globalisation (advantages/disadvantages)
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What is Political Economy?
• Economics –
• Politics –
• Legal -
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Interdependence

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Political Systems
• Political systems can be assessed according to two dimensions
 Degree to which they are democratic or totalitarian
 Degree to which they emphasize collectivism as opposed to
individualism
• Collectivist
• Primacy of collective goals over individual goals.
• Rights of individuals suppressed for the collective
• Individualist
• rights of the individual, freedom, economic and political interests.
• pursuit of economic self-interest
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Political Systems
• Liberal democratic (Most Western Democracies)
• Authoritarian (Saudi Arabia; )
• Communist (China; Cuba; Vietnam; North Korea)
• Theocratic (Iran; Saudi Arabia)
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Economic System – Market Economy (Capitalism)
 Capitalism is an economic system underpinned by the private
ownership of the means of production and whose business and trade
rely upon a market system.
 The government has minimal control over the market.
Characteristics of Capitalism
– economic freedom,
– self-interest,
– voluntary (willing) exchange,
– private property rights,
– profit motive
– competition.
‘Father’ of Modern Capitalism – Adam Smith

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Features of a Market Capitalist Economy
• Labour is a key source of wealth
• Specialisation - division of labour
• Competition is fundamental - Law of supply and demand
• Entrepreneurship and risk-taking
• Productive activities privately owned
• Minimal government interference
• Underpinned by the concept of Free Trade
• Perfect information
• Rational decision making
• Entry and exit from the market are easy (low barriers to entry/exit)
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Criticisms of a Market Capitalist Economy
• Great in theory but a free market is virtually impossible to achieve in
practice. Why?
– Market distortions occur
– Danger of the rise of monopolies
– Public goods
– Regulation required for the market to function
• Leads to inequality in society
• Can lead to exploitation of labour and those less well off
• Promotes a consumption culture based on wants not needs
• Most state economies today are organized on a free-market capitalist
system.
https://www.youtube.com/watch?v=dIuaW9YWqEU
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Command Economy - Socialism
• “Capital is reckless of the health or
length of life of the labourer, unless
under compulsion from society”
• The will of the capitalist is certainly
to take as much as possible. What
we have to do is not to talk about
his will, but to enquire about his
power, the limits of that power, and
the character of those limits. Karl Marx (1818-1883)
“Das Kapital”, “The Communist
Manifesto” (with Friedrich Engels)
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Command Economy (Socialist)
• Workers produce surplus value which is owned by capitalists
• Power then rests in the ownership and control of capital and leads to the
exploitation of workers
• Division of society into classes based on their roles in the economy and the state
• Struggle between classes for power – for control of the economy and the state
• The State owns the means of production
– Goods & Services are produced for the welfare of society (collectivism)
– “Supply and demand” are determined by the government, not by
consumers and producers.
– Pre-determines levels of production according to government plans.
– Wage rates determined by the State - provide for greater equality.
 The State provides free services like education and health and subsidizes other
goods and services such as housing, transport and essential goods and services.
 The market and private property are a social construct not natural, and therefore
non-existent or very limited in a socialist state.
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Criticisms of Command Economies
 Tend to be inefficient in terms of production as there is no need to
provide a return
 Lacks the notion of incentive or competition.
 Command economies require complex bureaucracies to run the
economic system.
 The complexity often means command economies are not
competitive in the world.
 Can see rise in ‘black market’ for goods not officially produced.
 A command economic system is argued to be anathema to the
nature of human beings
 Where implemented have had mixed results, in terms of success?
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Mixed Economy
• “The political problem of mankind is to combine
three things: economic efficiency, social justice
and individual liberty.”
• “The businessman is only tolerable so long as his
gains can be held to bear some relation to what,
roughly and in some sense, his activities have
contributed to society.”
• “When the capital development of a country
becomes a by-product of the activities of a
casino, the job is likely to be ill-done”
(This statement highlights the dangers of
‘speculative’ finance - as a threat to the workings
of industrial enterprises, when ‘the capital
development of a country becomes the by-
product of the activities of a casino’
https://www.youtube.com/watch?v=qtAeINU3
FKM
John Maynard Keynes (1883-1946)
The General Theory of
Employment, Interest and
Money (1936)
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Mixed Economy
 Government is a significant provider of goods and services e.g. health,
education, transport
 Mix between public (State) and private ownership
 Government economic regulator of the economy
 Citizens are taxed for redistributive purposes in the economy.
 Market not adequate provider of ‘adjustment mechanism’; only
government has the capacity to stabilize the economy.
 How? – by controlling the budget in terms of spending; the responsibility
derives from the imperative of maintaining social order.
 Creation of the ‘welfare state’ – Pres. Roosevelt (USA) -expands the
government sector - provision of welfare and Social Security.
 Period of economic growth in the “golden era” of Keynesianism, rise in
the “welfare state” in post-industrial societies from 1950s to early 1970s.
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Criticisms of the Mixed Economy
 Workers are unproductive - little incentive to work hard
 High taxes are a disincentive to work and disincentive to invest
 The welfare model drains resources – too expensive results in
high taxes, large bureaucracies, too many rules and regulations -
not efficient or productive use of resources
 Encourages irresponsible behavior by some – “free riding”
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Spread of the Market Based System
 The Late 70s saw the move away from State regulation and
government sector towards deregulation of economy opening up the
business to global competition with commensurate reductions of
taxes on wealth
 Economic globalization has seen the spread of the market-based
system underpinned by economic rationalism, deregulation and
increased privatisation.
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Globalisation
“Globalisation is the “widening, deepening and speeding up of
worldwide interconnectedness in all aspects of contemporary social
life” (Held, McGrew, Goldblatt, & Perraton,1999)
• from the cultural to the criminal’
• ‘the financial to the spiritual’
• globalisation ‘encompasses everything from global markets to the
internet’
• the economic sphere is where it has had the greatest impact
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GLOBALISATION OF MARKETS – E.g., market for Apple
GLOBALISATION OF PRODUCTION – E.g., fashion Industry
DRIVERS OF GLOBALISATION – technology, economies of scale, capitalism
Globalisation

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Some advantages of Globalisation...
• Economic Growth and Prosperity - for populations in countries like India, China and
Brazil large numbers have moved out of poverty
• Deregulation of Markets - proliferation of MNEs - free trade & investment opportunities
• cheaper location to produce - global flexible production,
• larger markets to sell - one global market place (standardization of g & s),
• greater access to resources,
• lower capital controls more opportunities to buy strategic assets globally
(Dunning 1990)
• production and the commodification of consumption (Arjun Appadurai)
• Significant more power and influence for MNEs
• Global Institutions and Civil Society setting the agenda
• Global Environmental Issues - ecology, ozone depletion, rainforests, logging
• Growing psychological consciousness globally reinforced through music, diet , dress
etc.
• Belief in in the Free Market / Capitalism - no losers, everyone is a winner! Or are they?
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Some disadvantages of Globalisation...
 Global Financial Collapse, Bankrupt Economies.
 State Intervention, IMF Intervention
 Perceived loss of national sovereignty
 Increased uncertainty and unpredictability of economic relations
 Unemployment among workers in advanced economies
 Not everyone has equal access to it, not everyone is gaining as a
result of globalisation - for some it has resulted in greater
exploitation – very cheap labour
 Externalities - global environmental issues - global warming,
rainforests, logging – should not allow the market free reign
 Resulting in significant resistance, civil society fighting back -
political instability in some countries
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 What is political economy?
 Different political systems
 Different economic systems
 Features and criticisms of these economic systems
 Globalisation (advantages/disadvantages)
What did we learn…

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Which view do
you subscribe to?
Let’s discuss this
during the
tutorial…
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BEX5800
Global Business
Topic:
Business Environment and its Analysis
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Learning Objectives
At the end of this workshop students should have an understanding of the
following:
 The Nature of the Environment
 Environmental Analysis
 Diagnostic Tools for Analysing the Environment
– PESTEL
– Porters Five Forces
– SWOT analysis
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The Nature of the Environment
 No organisation exists in isolation, every organisation exists in an
environment where it interacts with, and is influenced by other
organisations
 At the same time all organisations are influenced by forces from within
 Business environment is turbulent and complex and mangers face
environmental uncertainty
 In some environments organisations need more information than in
others.
 Organisations function as open system.
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Environmental Analysis
Three goals in analyzing the environment:
• Understanding of changes taking place in the environment
• A warning mechanism of potential threats to the firm/industry
• Facilitate strategy development and ultimately strategic
decisions within an organization.
Firms which systematically analyze and diagnose the
environment are more effective than those which do not.
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Process of Environmental Analysis
The analysis consists of four steps:
• Scanning : Looking for early signals of environmental change.
• Monitoring : Assembling data to discern trends that are
emerging and identification of areas for further scanning.
• Forecasting : Developing projections of the direction, scope
and intensity of environmental change.
• Assessment : Determine the implications for the
organization’s current strategy.
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Organizational environments
• General/Macro environment
External forces that have the potential to
affect an organisation’s performance, these
work indirectly, beyond its control
• Task/industry environment
External forces that may affect an
organisation’s performance, work directly,
in general beyond its control.
• Internal Environment
Factors internal to an organization and
impact upon its operations and activities
and can directly affect the organisation
Internal
Task
General/Macro
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Tools for Analysing the Environment
 PESTEL (macro environment)
 Porters Five Forces (task environment)
 SWOT Analysis

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Macro-environment – PESTEL
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Political/Legal Environment
• Political Environment refers to the political system in place in society.
• How democratic?
• Role of the Government in the Economy
• Political Organisations
• Political Stability/Instability
• Terrorism/Threats
• Image of the country and its leaders
• Laws governing business
• Flexibility and adaptability of laws
• Corruption
• The Judicial System
• E.g., Russia, Ukraine, Iran
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Economic Environment
All forces have an economic impact on Business.
The economic environment consists of the type of economic system,
demand and supply, pricing factors, degree of competitiveness, and
impact of profitability. The economic environment among other factors
includes:
 Taxation
 Broad Economics Trends
 GDP national and per capita – national importance
 Growth Rates
 Infrastructure Development
 Money and Capital Markets – Interest Rates
 Currency Valuation
 Monetary and Fiscal Policy
 E.g., current inflation
.
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Socio-Cultural
 Institutional Set-Up (“rules of the game”)(North 1990)
 Culture values and people’s attitude to business and work.
 Ethics in business
 Social responsibility/ Social audit
 Corporate governance
 Demographics
Environment (natural)
 Health Emergencies - sickness, disease – pandemics
 Government agenda, legislation, policies around environment issues
 Diminishing natural resources
 Pollution
 Oceans, Waterways, Soils
 Climate change and global warming
 Organizations needing to meet their environmental responsibilities.
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Technological Environment
• New technological innovations, new products and ideas, the utilization of
technology for maximum inputs and outputs,
• Green technology, obsolescence of technology and the dynamic changes
that frequently occur in technologies which enable firms to get a
competitive advantage
• Helps in the productive capacity of firms
• Firms need to invest in R & D and keep up with the technological
improvements that are occurring
• Technological advances leads to high expectations of consumers in terms
of quality
• Leads to complexity in the environment system – measure required to
handle this environment - quickly changing
• Demand for large amounts of capital to invest in technological systems
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Global Environment
Those factors which are relevant to business coming from the
international or global environment:
 Trade treaties, WTO principles and agreements
 import/export regulations,
 Problems in one country or economic zone can affect an impact
on business operations in another country
 World is moving towards greater standardisation –one market
 Global Finance –interlinked economies
 Competition from MNEs
 Challenges imposed by other governments
 Capital, technology and knowledge transfers
 Which markets to enter and what to produce?
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Key Aspects to a PESTEL Analysis
When analysing the General Environment
• Need to understand what are the key drivers of change in that environment at present –
relate back to industry in that location. For example;
– Automotive industry in Germany
– Fashion in Milan
– Wine in the Yarra Valley (Victoria)
The analysis needs to be related and relevant to the industry. Avoid generalist
information of no relevance to the industry.
E.g. analysis of the “Automotive industry in Germany” , the analysis would require the
data and information to have relevance to Germany and the Auto Industry, no point in
giving general information about Germany.
• Is there one key factor or many – is there likely to be a combined effect of some of
these factors . Or it may be that not all factors in the PESTEL may be relevant
•Predicting the future impact of these factors – need to ‘crystal ball’ gaze.
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The nature and intensity of competition
Porter’ Five Forces Model
• Michael Porter proposed that managers should view the organizational
environments in terms of five competitive forces
 Rivalry among existing competitors
 The threat of new entrants
 The bargaining power of buyers
 The bargaining power of suppliers
 The threat of substitute products
• Assess and explain how each force acts to create competitive pressure
• Determines whether overall competition is:
– fierce, strong, moderate, or weak
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Porter’s Five Forces Model
Rivalry among
Competitors
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Threat of
Potential
Entrants
Threat of
Substitutes
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1. Rivalry among existing competitors
• Existing firms in an industry are an organization's current & direct
competitors
• What causes strong rivalry?
– Lots of firms, more equal in size & capability
– Industry conditions tempt rivals to use price cuts and other
offensive weapons to boost volume & market shares
– Customers have low switching costs
– One or more firms initiate moves to bolster their position at the
expense of rivals
– High costs to exit business than to stay in
– Firms have diverse strategies, corporate priorities, resources
and countries of origin
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• Firms in same strategic group (i.e. set of firms competing within an
industry) have two or more competitive characteristics in common:
– Sell in same price/quality range
– Cover same geographic areas
– Be vertically integrated to the same degree
– Have comparable product line breath
– Emphasize same types of distribution channels
– Offer buyers similar services
– Use identical technological approaches
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1. Rivalry among existing competitors

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2. Threat of Potential Entrants
Seriousness of threat depends on barriers to entry and reactions of existing firms
• Common Barriers to Entry
– Economies of scale
– Inability to gain access to specialized technology & know-how
– Existence of learning/experience curve effects
– Customer loyalty
– High capital and/or specialized resource requirements
– Access to distribution channels
– Regulatory policies, tariffs, trade restrictions
• Threat of potential entry is greater when:
– Entry barriers are low
– Sizeable pool of potential entrants exists
– Established firms unwilling or can’t contest a newcomer's entry efforts
– Newcomers can expect to earn attractive profits
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3. Bargaining Power of Buyers
• Buyers are a strong when:
– Large and purchase a large % of industry’s product
– They can integrate backwards
– Industry’s product is standardized
– Switching costs to substitutes or other brands are low
– They can purchase from several suppliers
– The product purchased does not save the buyer money
• Buyers are also strong when they have leverage to bargain over:
– Price
– Quality
– Service
– Other terms and conditions of sales (e.g., warranties/guarantees)
– E.g., electronics
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4. Bargaining Power of Suppliers
• Suppliers are a strong competitive force when:
– Items makes up large portion of product costs,
– Items crucial to production process, and/or significantly affects
product quality
– It is costly for buyers to switch suppliers
– They have good reputations & growing demand
– They can supply a component cheaper than industry
members can make it themselves
– They do not have to contend with substitutes
• Suppliers are also stronger when they can exercise power over:
– Prices charged
– Quality and/or performance of items supplied
– Amounts and delivery times
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5. Substitute Products
• Substitutes matter when rival firms are able to attract customers with
products from other industries that satisfy the same need
– Restrict the price able to be charged for those goods
• When are substitutes a stronger force?
– Sale of substitute are growing rapidly
– Producers of substitutes are planning to add new capacity
– Profits of substitute producers are increasing
• The competitive threat of substitutes is stronger when they are:
– Readily available
– Attractively priced
– Believed to have comparable or better performance features
– Customer switching costs are low
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Strategic Implications of Porter’s 5 Forces Model
• An Industry is attractive when:
• Rivalry is moderate or low
• Entry barriers are high
• Good substitutes do not exist
• Suppliers and buyers are in a weak bargaining position
• An Industry is unattractive when
• Rivalry is strong
• Entry barriers are low
• Competition from substitutes are strong
• Suppliers and buyers have considerable bargaining power
If industry is unattractive what competitive advantages do you have as a
company, to overcome the ‘negatives’ of the industry, if looking to enter this
market.
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SWOT Analysis
• SWOT stands for Strengths, Weaknesses, Opportunities and
Threats
• Please Note identification of the;
– Strengths and Weaknesses generally occur in the internal
environment and
– Opportunities and Threats generally occur in the external
environment of firms
• The SWOT analysis provides a course of action to be developed
in order to stimulate the growth a firm and helps with business
strategy and policy formulation.
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Strengths — internal to the firm.
• resources and capabilities used as a basis for developing a competitive advantage;
strength should be realistic and not modest.
Questions to address?
•What are the firm’s or unit’s advantages, what does it do well?
•What resources can you access?
•What are your strengths, as seen by others?
•What would be the positive ‘sell’ to an outsider about the unit?
•E.gs. positive reputation, resources, human capital, assets, experience, knowledge,
know-how, management systems
•Think in terms of: capabilities; competitive advantages; resources, assets, people
•(experience, knowledge); marketing; quality; location; accreditations
•qualifications, certifications; processes/systems
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Weaknesses —internal forces serving as a barrier to acquiring a competitive
advantage;
Is there a limitation, fault or defect that needs to be overcome? Introspection and
facing the truth required in order that it is overcome as soon as possible.
Need to address these questions:
•How can we improve?
•What is done poorly?
•What should be avoided?
•How can we be more effective and efficient in what we do?
•If change is possible, what is one thing that would aid this unit to function better,
what would you change?
Examples: gaps in capabilities, financial, morale/attitude, management, personnel,
technological etc.
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Opportunities – external to the firm.
 Favorable situations present now or in the future in the external
environment.
Examples: unfulfilled customer need, arrival of new technologies,
loosening of regulations, global influences, economic boom,
demographic shift, new markets
Questions to address:
What are the opportunities facing you?
What are positive trends and forecasts are you are aware of?
Think of: market developments; competitor; vulnerabilities; industry/
lifestyle trends; geographical; partnerships
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Threats - external forces that may prevent a unit from achieving a competitive
advantage. May be an negative situation at present or likely to arise in the future.
Examples: shifts in consumer tastes, new regulations, political or legislative effects,
environmental effects, new technology, loss of personnel, economic recession,
demographic changes, competitor intent; market demands, financial difficulties, unforeseen
global crises - pandemics
Questions to be addressed:
What challenges and obstacles do you face?
What are your competitors doing?
Is the regulatory environment changing?
Is changing technology threatening your position?
Do you have financial problems?
Could any of your weaknesses seriously threaten your unit or your existence?
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Let’s discuss more during the tutorial…
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BEX5800
Global Business
Lecture Topic:
Role of Government and its Relationship with
Business
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Learning outcomes for the seminar
following:
 Pluralist Theory of the State
 The Role of the State
 The Functions of government in an economy
 Why markets need the State and Government
 Institutions and their role in the State
 Governments’ influence on Business
 Business influence on the relationship with Government
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Pluralist Theory of the State
• Recall that a state is a political entity with sovereignty which it exercises
within given territorial borders.
• Pluralist theory of the state underpins the essence of Liberal Democracies.
This theory suggests that within those territorial borders, the state:
• is an independent umpire/referee that arbitrates between competing
interests in society.
• needs to protect citizens from each other. It should guarantee the
individual’s right to ‘life (personal safety), liberty (freedom of
expression and organization) and property (recognize titles)
• The state has the ultimate power to control and not allow society to
degenerate into anarchy.
• Pluralism assumes that power in society is held by many groups and these
groups have a chance at influencing the decisions made by the state. It is
assumed that all get to have a say and be heard.
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Pluralist Theory of the State (cont…)
• In liberal democracies it is assumed that:
– The state is subordinate to government: institutions such as the
public service, military, etc. serve the elected.
– The government after being elected remains responsive to public
opinion
Critics of Pluralist Theory
 Galbraith, amongst others, argues that the pluralist state is being
dominated by some interest more than others (e.g. big business) and
as a result we need to rethink our expectations from the pluralist state.
 In some states the servants of the State – e.g. public service have an
agenda of their own and do not necessarily serve the government of
the day.
 The state therefore needs more checks and balances on how it
functions and greater transparency.
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Types of States
• The Minimal State - provide the bare essentials, need for an orderly
existence - law and order to allow society to function interference.
Economics should be left to the individual and market system.
• The Collectivized State -– government controls most aspects economic life
through central planning. e.g. Cuba
• The Totalitarian State - controlled by one ruler – individual, party, king etc.
influence often across both economic and social e.g. North Korea
• The Social-Democratic State - corrects the imbalances and inequities of the
market system through economic and social intervention. e.g. booms and
busts, negative externalities (e.g. pollution, income inequality). Also known as
“Welfare States” provision of free healthcare, free education, excellent
pension systems e.g. Germany, France, Sweden
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Government Type and Power
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Why Markets need the State/Government
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• Markets are man made, they are not self-creating, self-regulating, self-
stabilizing, or self-legitimizing
• They need to be embedded in a wide range of institutions in order that
they can function
• Regulatory institutions, redistributive institutions, monetary and fiscal
institutions, institutions of conflict management,
• Many advanced and successful economies are those with an extensive
government apparatus that provide stability, sustainability consistency in
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Institutions - Definitions
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• The mechanisms (rules, norms, values) of social orders, which govern the
behavior of individuals within a given community and give meaning to life.
There is no single or universally agreed definition of an 'institution’.
 The “rules of the game in a society” (North 1990, p3.) by which we engage
in business
 "a set of humanly devised behavioral rules that govern and shape the
interactions of human beings, in part by helping them to form
expectations of what other people will do." (Lin and Nugent 1995: 2306-2307).
Each rule provides the arrangements that inform the actions of individual
actors (i.e., people) and organizations (companies and government agencies
which are run by people) in the society.

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Three Pillars of Institutions
Richard Scott (1995) talked about three board categories of social rules
that function as the three pillars of institutions.
1. Regulatory institutions - legally defined written rules (e.g. regulations,
laws, policies) that regulate, prescribe and constrain human actions.
In business related to regulative institutions: regulatory and policy framework in a
country (importance of country analysis).
2. Normative institutions - agreed unwritten rules such as work norms,
habits, obligations, ideologies that obligate human actions often through
honor or shame.
3. Cognitive institutions - culturally shared and supported based on
unwritten rules such as beliefs, values, and shared logics of actions. Inspire
human actions that are taken for granted through shared understanding.
In business related to informal (i.e., normative and cognitive) institutions include:
business ethics, CSR, firm aspirations, corporate values etc.

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Institutional prerequisites for markets
• Markets are about gainful exchange of goods and
services.
Scenario: Seller in Colombia is looking to sell coffee beans
(coffee grower) to a buyer (a coffee roaster) in Australia.
• What institutions are required for exchange to actually
take place?
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Institutional prerequisites for markets
What institutions are required for exchange to actually take place?
• The good is private and not public
• Ownership property rights are attached to the good or service
• Information (observability of all relevant attributes of the good/service)
• Trust
• Govt. rules and regulations - quality control, subsidies, taxes, tariffs
• Compliance (recognition and enforcement of the contract)
• A recognized and reliable medium of exchange (legal tender - unless exchange
can be accommodated through barter)
• A physical (or virtual) marketplace to bring parties together
(transport/communication)
• Security to allow the exchange to take place.
• Post the exchange- “fit for purpose”
• Dispute resolution process?
Without these institutions what happens to exchange?
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Transaction Costs
• When institutional conditions are not met, there are risks and “costs in doing business”.
Transaction costs are the total costs of making a transaction, including the cost of
planning, deciding, changing plans, resolving disputes, and after-sales (Williamson 1981).
• These are often hard to quantify but can be a deterrent in conducting exchange.
– Direct costs of exchange
– Costs of disruption of exchange
– Costs of opportunistic behavior (“cheating,” “free riding”)
• Some types of goods/services are more prone to such transaction costs:
e.g. market for ideas - music, “public goods”
• Therefore, good institutions (both economic and social) (formal – e.g. those established
through the State and informal ones) help minimize these “transaction costs” to allow
business exchange to take place.
• Dilemma - trade off - between less ‘red tape’ and less formal rules or likely increases in
transaction costs.
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Summary of the Functions of State/Government
1. Provision of institutional environment (rules of the game e.g.
regulations) and infrastructure for the market system to operate.
e.g. property rights, rules of exchange, contracts, company law,
societal rules etc.
2. Maintain competition – market failure (imperfect information) regulation
to prevent monopolies, impose conditions on natural monopolies,
cartels, anti-competitive behaviour
e.g. Australia – ACCC
EU –Director of Competition
USA – Federal Trust Commission – anti-trust legislation
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3. Provision of collective and public goods
• Collective/public goods produced by government e.g. lighthouses, street
lights, national defence, waterways, public parks, beaches, basic
research, specific projects e.g. NASA , for public benefit and consumption.
• However what about transport, health , education, roads, bridges, traffic
systems, these issues are more debatable?
Two Characteristics:
–Non-excludable
(once provided, you cant exclude others from using it – “free rider” issue)
–Non-rival consumption
(consumption by one, does not reduce the amount available for others)
Merit Goods – a good determined to meet some need rather than an ability to
pay.
Can collective/public goods return a profit? Should they?
6
9
Summary of the Functions of State/Government

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Public v. Private goods
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Source:Tutor2u

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4. Dealing with externalities created by market or other activity
- An externality is a cost or benefit which falls on third parties as a result
of a market transaction engaged by two other parties
Negative: - Cost imposed on others
E.g. Degradation of the environment with air pollution,
pollution of waterways
Positive: - Benefit gained by others
E.g. The establishment of a park, bike track, the aesthetic of
public art
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Source: Tutor2u

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5. Redistribute Income – alleviate poverty, provide assistance to those less well off
through social security measures
– Direct Measures – direct payments - pensions
– Indirect measures - subsidies pharmaceuticals (PBS)
6. Ameliorate conflict in society – justice, order and security.
Seek to redress exploitation- e.g. child labour laws
7. Stabilise the Economy - through using fiscal and monetary policy. Governments
should look to promote full employment, low inflation and economic growth
• By adjusting government expenditure to achieve a desirable level of aggregate
demand.
• When in economic downturn, this can be achieved either through lowering tax
rates or increasing government expenditures.
• Keynes: governments should incur deficits and borrow money in times of
downturn; these debts can be repaid through higher taxation in times of
economic growth.
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Instruments of Government Policy
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 Subsidies, assisting private industry to produce goods and services
Source:Tutor2u

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Instruments of Government Policy (cont…)
 Producer and provider of goods and services - normally
a public enterprise provides the good or service
functions on a market basis
 E.g. utilities – water, electricity, public broadcasting, transport
 Regulator – use of power to make, permit or disallow
certain activities.
 Economic – Competition, Price Control, Tariffs,
 Social – Health and Safety, Affirmative Action
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Government’s Role in Influencing Business
1. Prescribes the rules of the game for business.
2. Buyer of goods and services.
3. Uses its contracting power to get business to do things it wants.
4. Is a major promoter and subsidizer of business.
5. Is the owner of vast quantities of productive equipment and wealth.
6. Is an architect of economic growth.
7. Is a financier.
8. Is the protector of various interests in society against business
exploitation.
9. Redistributes resources most often through taxation to meet social
objectives
10. The State as entrepreneur
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Influencing the Relationship with Government
 Business leaders are looking to participate in the political process and
influence government
– Government acts on issues affecting business operations
– Stakes for some business too high not to be involved
 A lot of companies formulate a Corporate Political Strategy to acquire,
develop, and use power to leverage a benefit or advantage
– Information strategy seeking to provide policymakers with
information to influence their action
– Lobbying
– Direct Communication – Business
– Roundtable
– Legal Challenges
https://america.cgtn.com/2014/08/19/tobacco-giant-threatens-20bn-
lawsuit-over-plain-packaging
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Influencing the Relationship with Government…
• Financial-incentives strategy - incentives to influence government
policymakers to act in a certain way
• Political contributions –campaign funds
https://www.theguardian.com/global/video/2019/feb/08/alexandria-ocasio-cortezs-brutal-
take-down-of-us-political-finance-laws-video
• Economic Leveraging –MNE threatening divestment
• Constituency-building strategy – forming groups (other affected
firms) to influence government policymakers to act in their benefit way
that helps them
• Stakeholders coalitions
• Advocacy advertising
• Public Relations Campaigns – e.g. Trade Associations
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Levels of Political Participation by Business
• Level 1: Limited Involvement – indirect and impersonal
– Contribution of funds
– Support by a trade association or industry group
http://www.abc.net.au/news/2017-02-09/political-donations-industry-dataset/8229192
• Level 2: Moderate – indirect and personal
– Industry Lobbies
– Stakeholders encouraged to get involved
• Level 3: Aggressive - direct and personal
– Executive Participation
– Partaking in working groups or getting on task forces
– Public Policy Development
– Campaign to seek to influence policy –overt and covert
https://www.theguardian.com/australia-news/2019/mar/08/national-disgrace-
glencore-coal-campaign-revelations-prompt-calls-for-reform
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Conclusion
• Degree of government influence in an economy will vary depending
upon the type of government and the power it yields
• The government is a fundamental player in an economy as its
functions, mean that it simply cannot be ignored.
• A symbiotic relationship exists between business and government.
They are interdependent seeking to exert influence on each other.
• Whether that influence bears fruit may ultimately be a matter of what
is being sought by business and how happy the government of the
day is to accommodate what is sought.
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BEX5800
Global Business Environment
Lecture 4
International Trade and its Regulation
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Learning Objectives
83
Students by the end of this lecture should have a better understanding of the following:
 The importance of trade and free trade for an economy
 What is meant by Comparative Advantage?
 A Case Comparison: South Korean and Ghana
 What are the arguments supporting government intervention in an economy as they
apply to trade?
 Measures employed by governments to regulate international trade
 Understand the development of the World Trade System
 Understand the functions and workings of GATT and the World trade Organisation
(WTO).
 What are the controversies surrounding the WTO?
 Criticisms of the WTO?

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The Importance of Trade?
International trade allows a country to:
 acquire and sell resources
 specialize in manufacturing and exporting goods, it can produce efficiently
 import products that can be produced more efficiently in other countries
What is Free Trade?
 Where governments do not intervene on what its citizens can buy,
produce or sell internationally
 Theoretically, free trade highlights why it is better for a country to engage
in international trade, even for products it is able to produce for itself
 Patterns of free trade
– Some patterns of trade are fairly easy to explain
> Saudi Arabia exports oil, Ghana cocoa, and Australia iron ore

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Comparative Advantage
Patterns of free trade - why does
> Switzerland export chemicals, pharmaceuticals, watches, and jewelry?
> Japan export automobiles, consumer electronics, and machine tools?
• David Ricardo (1817) in The Principles of Political Economy and
Taxation argued that
– countries should specialise in the production of those goods they
produce most efficiently and buy goods that they produce less
efficiently from other countries,
– even if this means buying goods from other countries that they could
produce more efficiently at home
• Believed that efficiency of resource utilization leads to more productivity
• Trade is a positive-sum game
• Comparative advantage arises from differences in productivity – relies on
the availability of resources, division of labour and specialization
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Comparative Advantage (cont.)
• A country has a relative advantage in producing goods and services
through the exploitation of resources, (e.g. primary resources, know-
how, natural environment, labour etc.) that are plentiful within that
country relative to other countries.
• Put simply these countries/regions are argued to be more efficient
producers of these goods. For example;
– Australia - wool, wheat, minerals
– Japan - cars
– Spain and Greece – tourism
– United States – pharmaceuticals
– Bangladesh – rice, clothing apparel
– West African countries – cotton

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Case Comparison
South Korea
GNP/capita
 1970 - $US 260
 1992 - $US 6790
 2020 - $US 32,960
Population 51.8 mil (2020)
GDP: 1.63 trillion
Internet Penetration
 97% (2020)
Ghana
GNP/capita
 1970 - $US 250
 1992 - $US 450
 2020 - $US 2,340 World Bank
Population 31.7mil (2020)
GDP: 73.35 billion
Internet Penetration
 53% (2020)
Source: World Bank

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 How did South Korea get to this level?
 Is it an issue of comparative advantage?
 How did it get to achieve this level of comparative
advantage?

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Ghana South Korea
 Independence 1957
 Pres. Nkrumah pursues Pan
African Socialism
 High Tariffs
 Anti- exports
 Shift from productive uses
(cocoa) to unproductive uses
(subsistence farming)
 Import Substitution
 1950s agriculture based
economy -77% of employment
 Lowered tariffs, subsidies and
quotas on manufactured goods
 Export incentives
 Manuf. GNP from 10% to 30%.
 Shift from non-comparative
advantage agriculture to
productive uses (labour
intensive manufacturing)
 Export Promotion

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Advantages of Trade Disadvantages of Trade
 Exploit Comparative Advantage
– produce more efficiently
 Specialization – economies of
scale
 Increase in competition –lower
prices
 Helps break domestic
monopolies
 May help increase
employments in export related
industries – multiplier effect
 Over specialization – reliant on
few industries
 Can’t develop local industries
as they face competition from
established o/seas firms
 Local producers can’t compete
against cheaper imports
 Country becomes reliant on
imports, can leave industry or
eco. exposed due to change

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Why government intervention?
 Based on two views:
 Political Arguments
 Concerned with protecting the interests of one group (i.e.
producers) often at the expense of another (i.e. consumers)
within a nation
 While many nations are nominally committed to free trade, they
tend to intervene in international trade to protect the national
interest or politically important groups – managed trade
 Economic Arguments
 Concerned with boosting the overall wealth of a nation to benefit
all groups

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Government intervention (cont.)
 Political arguments:
– Protecting jobs and industries
 The most common political reason for trade restrictions
 Results from political pressures by unions or industries that are "threatened" by
more efficient foreign producers, and have more political clout than consumers (e.g.
Australian Automotive Sector)
– National security
 Industries deemed important for national security (e.g. aerospace, advanced
electronics, weapons) are often protected
– Furthering foreign policy objectives
 Preferential trade terms can be granted to countries with which
a government wants to build strong relations
 Trade policy can also be used to punish “rogue” states e.g. Venezuela, Iran
 Protecting Human Rights - Using trade policy to protect the human rights of
individuals in exporting countries e.g. restrictions being placed upon Hong Kong

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 Political arguments (cont.):
 Protecting consumers
 Protection from “dangerous/unsafe” products
(e.g. mad cow disease, bird flu, genetic re-engineering)
 Protecting the environment
 Reduction of carbon emissions and trade sanctions
 Governments Retaliating
 When governments take or threaten to take, specific actions in retaliation to
unfair foreign competition
 Threatened governments may remove trade barriers or not back down
 Tensions can escalate and new trade barriers may be enacted in the latter case
(e.g. US/China Trade War at present)

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Trade Wars
 A trade war occurs when a country retaliates against another by raising import tariffs or
imposing non-tariff barriers and other restrictions on the other country's imports.
Fundamentally they are protectionist in nature
 In-favour: help protect the national interest by supporting domestic industry,
 Against: hurt the local economy incl. local business, especially when specifically targeted.
Donald Trump argues, that China is engaging in a number of things:
– Stealing Intellectual Property
– Manipulating its currency
– Has high trade barriers on imports and/or restricts FDI.
This has resulted in a loss of US jobs and China has more to lose than the US in a trade war
– Chinese companies are a threat to national security and need to be restricted. –
Huawei, Chinese Telecom
Understanding Trade Wars
https://www.youtube.com/watch?v=P2OhfgeAWb4

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 Economic arguments:
 The infant industry argument
 An industry should be protected until it can develop and be
viable and competitive internationally
 Accepted as a justification for temporary trade restrictions under
the WTO, especially developing nations
 When is an industry “grown up” ?
 If a country has the potential to develop a viable competitive
position, shouldn’t its firms be capable of raising necessary
funds without additional support from the government? (e.g.
Brazil, Australia – auto industry)
 Non-viable industry – what are the consequences if there is no
longer government support?

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 Economic arguments (cont.):
 Strategic trade policy - governments identify key industries and use
subsidies to protect promising firms in newly emerging industries with
substantial scale economies
 In cases where there may be important
first mover advantages, governments can
help firms from their countries attain these advantages
 U.S. government and Boeing in the 1950s and 1960s
 Japan and S. Korea – cars, electronics 1960s and 70s.
 Governments can help firms overcome barriers to entry into
industries where foreign firms have an initial advantage
 Governments of GB, France, Germany, and Spain and the
Airbus consortium

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Instruments of Trade Policy
 Tariffs
– Tax or duty to be paid on imported goods
– Increase government revenues
– Consumers pay more for certain imports
– Are pro-producer and anti-consumer
– Carbon tariffs https://www.abc.net.au/news/2021-03-11/australia-to-face-huge-tariffs-
in-europe-over-climate-emissions/13233360
 Import quotas
– Restriction on the quantity of some good imported into a country
• Benefit domestic producers
• Raise the prices of imported goods

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Instruments of Trade Policy (cont.)
 Subsidies
– Government payment to a domestic producer to encourage the
production of g & s (e.g. cash grants, low-interest loans, tax breaks)
– Help domestic producers:
• Compete against low-cost foreign imports (e.g. Holden Australia)
• Gain export markets
– Can lead to over-production and inefficiencies in production
– Consumers typically absorb the costs of subsidies
 Local Content
– Requires some specific fraction of a good to be produced
domestically
– Initially used by developing countries to help shift from assembly to
production of goods
– Benefits producers, not consumers

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Instruments of Trade Policy (cont.)
• Administrative Policies
– Bureaucratic rules designed to make it difficult for imports to enter a
country
– Japan: Restricting the importation of foreign rice citing inferior health
properties compared to Japanese rice
– Australia: Attempting to prevent the importation of New Zealand apples to
prevent their diseases from spreading to Australian production
 Antidumping Policies
– Dumping
> Selling goods in a foreign market below their costs of production, or selling
goods in a foreign market below their “fair” market value
> Enables firms to unload excess production in foreign markets
– Governments use countervailing duties to punish foreign firms that
engage in dumping and protect domestic producers from “unfair”
foreign competition

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Development of the World Trading System
 Who should govern/police international trade?
 National governments?
 Regional bodies (i.e. The EU)?
 An international institution? - GATT/WTO?

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Development of the World Trading System (cont.)
 GATT (General Agreement on Tariffs and Trade)
– Multilateral agreement established in 1947 under U.S. leadership
– Membership grew from 23 founding members to 128 until it was
superseded by the World Trade Organisation (WTO)
– Objective was to liberalise trade by eliminating trade barriers
– Promoted free competitive trade
– Most favoured nation:
> Any preferential treatment granted to one country must be
extended to all countries
> Exceptions:
– Lower tariffs for poorer nations
– Regional agreements (EU, NAFTA)
• GATT rules, primarily focused on reducing tariffs and quotas

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• The Uruguay Round
– Commenced in 1986, ratified in 1994, took effect 1995
– Tariff barriers reduced
– Agricultural subsidies reduced
– Fair trade and market access to cover a range of services
– Barriers to trade in textiles reduced
– Intellectual property rights
– Formation of the World Trade Organisation (WTO)

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The World Trade Organisation
• WTO
– Created in January 1995;
HQ Geneva, Switzerland
– Implements Uruguay Round
agreements
– The WTO encompassed GATT along with two sister organisations
> The General Agreement on Trade in Services (GATS)
> The Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS)
– Acts as the world trade advocate, encourages nations to adopt non-
discriminatory predictable trade policies
– Enforce trade rules, expanded GATT to cover non-tariff barriers
– Reduced existing tariff barriers (40% to 5% in manufactured goods)
– International trade police: responsible for trade arbitration

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• Differences between the WTO and GATT
– Organisation compared to Agreement
– Expanded role to consider non-tariff barriers thus considering more
than trade issues
– Has the ability to influence domestic policy:
• Can limit what non-tariff policies countries can implement
• Affects environment, health and safety, culture, workers rights
etc.
– A lot tougher in enforcement

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 WTO Dispute Settlement Process
– Countries can challenge each others laws - violations of WTO rules
– Cases decided by a panel of 3 (or 5) local/domestic issues not considered
– Provision for appeal
– Panel passes report to the Dispute Settlement Body (consisting of all WTO
members)
– Decisions made from a strictly free trade rationalist perspective
– WTO hearings are in private, only national governments can be represented
 Once a ruling is made:
– Ruling adopted unless specifically rejected
– After appeal, failure to comply can result in compensation to injured country or
trade sanctions
– Countries can:
• Change law to conform
• Pay compensation to the winning country
• Face non-negotiated trade sanctions

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 Benefits of the WTO
–System helps promote peace
–Rules make life easier for all
–Free trade cuts the cost of living for all
–Greater choice in products
–Trade stimulates economic growth
–System encourages good government

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Controversy Surrounding the WTO
• WTO in Seattle 1999
–Millennium round was aimed at further reduction of trade
barriers in agriculture and services
–WTO meeting disrupted by
• Human rights groups
• Trade unions
• Environmentalists
• Anti-globalization groups
–No agreement was reached

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WTO – Doha Agenda (2001)
• Cutting tariffs on industrial goods and services
• Phasing out of agricultural subsidies
• Reducing anti-dumping laws
• WTO regulation on intellectual property should not prevent members
from protecting public health
• New Issues: genetically modified food
– A legitimate concern or new excuse for protectionism?
No agreement has been reached.

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Criticisms the WTO
Critics argue the WTO is a global system of enforceable rules, where MNEs have all the
rights, governments have all the obligations, and democracy is left behind
 Enforcing global free trade common rules, has advantaged MNEs in the developed
world.
 MNE’s from the developed world have more wealth and influence on their government.
Power allows them to push and lobby for their own interests (Khor M, 2000).
 Stiglitz (2006) argues, that their lobbying ability has seen the WTO do little to stop
developed country subsidies to western farmers.
 WTO free trade rules ‘trap’ developing countries into a debt trap forcing them to open
their economies lowering their trade barriers down, thus consolidating the MNEs’
dominance (Stiglitz, 2006).
 Rodrik (2018) argues that economists have failed to appreciate the downsides of free
trade and “hyper-globalization.”

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Conclusion
• Comparative advantage, countries benefit by specializing in the production and trade
of goods and services in which they are most efficient. Trade is a positive-sum game
• Governments use both tariff and non-tariff barriers to regulate international trade
• Such barriers can be applied quite readily between countries resulting in trade
disputes that can escalate into trade wars.
• The WTO was set up to regulate free trade around the world by acting as the global
watchdog of international trade
• Controversies surrounding the WTO, critics argue:
– through its enforcement of global free trade rules, the WTO has advantaged MNEs from the
developed world to the detriment of people from developing countries
– free trade rules ‘trap’ developing countries into a debt trap forcing them to open their
economies lowering their trade barriers down, thus consolidating the MNEs’ dominance
(Stiglitz, 2006).

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BEX5800
Global Business
Topic:
Technology and Disruption
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Learning outcomes for the lecture
At the end of this lecture students should have an understanding of the following:
• The different stages of industrial development
• What is Creative Destruction? - Schumpeter
• As examination of automation and what is means for work in the future
• What are innovation and innovative technologies?
• What are disruptive technologies?
• What is digital disruption?
• Understanding the Innovator’s Dilemma and what it means for business.
• What are the implications and the consequences for business,
government and society of digital disruption?
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Stages of Industrial Development
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Creative Destruction
• “Capitalism […] is by nature a form or method of economic
change…but never can be stationary. […] The fundamental impulse
that sets and keeps the capitalist engine in motion comes from the
new consumers’ goods, the new methods of production or
transportation, the new markets, the new forms of industrial
organization that capitalist enterprise creates.” – Joseph Schumpeter,
‘Capitalism, Socialism and Democracy‘ (1942)
• Creative destruction (CD) means that old industries and firms,
which are no longer profitable, close down enabling the resources
(capital and labour) to move into more productive processes.
• Process by which capitalism leads to a constantly changing
structure of the economy.
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Creative Destruction and the free-market
• Destruction necessary and inevitable process of economic
development
• Free market system - oppose government attempts to hold it back this
process of decline and renewal.
• Company is unprofitable, closure means resources need to be
allocated into more productive areas
• Change helps increase our living standards.
• Going out of business is an incentive for firms to adopt to changes in
the market to keep costs low and keep costs low.
– E.g. Newspapers and an online presence
• Yes, short-term job losses but also there is creation of other jobs.
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Steam-powered loom reduced the cost of making clothes. It put
the traditional cottage industries out of business, but led to an
industry of manufactured cotton and clothes which created new
kinds of jobs. (This particular invention led to the Luddites, who
saw the new power looms as destroying their livelihoods)

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• Music industry has seen numerous technological changes which
have led to the rise and fall of several companies.
• From the 1920s to the 1980s vinyl records
• 1980s cassette starts to overtake vinyl,
• Early 1990s, the compact disc had started to replace the cassette. –
great for Phillips and Sony.
• Early 2000s, electronic downloads create a very different music
industry, dominated by digital downloads
• 2008 to today – music streaming via subscription
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Automation
Automation: a process of automatically producing goods through the use of robots,
control systems and other appliances with minimal direct human operation.
Benefits
• Within manufacturing industries led to increased labour productivity through
lower costs – less workers and transaction costs
• Greater economies of scale and scope.
• Shorter lead times, more efficient delivery, use of stock and cash flow.
• Creation of new jobs, that are more creative, flexible and less repetitive.
• More profits- firms should pay more tax - revenue for government
• Countries need to automate (become competitive), production will relocate to
them, develop comparative advantage.
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Costs of automation
• Significant capital investment required and the benefits may take
several years to exceed current production methods.
• Firms with short-term pressures unlikely to make investment, will lag
behind – has been argued to cause poor growth in labour productivity
• Needs specialised labour to develop software and maintain machinery
• Creates winners and losers.
• Winners- owners of profitable factories, software developers, highly skilled
• Losers – unemployed, unskilled may struggle to gain equivalent employment
• High structural rates of unemployment – especially amongst unskilled.
• Work in the gig economy – not equivalent, zero contact hours, low pay
and uncertainty – less employment conditions.
• Creates ill-feeling towards the direction of the economy
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What is Innovation?
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Innovation
• Innovation “is the commercial exploitation of new knowledge”
(Hamilton & Webster, 2015, p. 201)
• “Innovation is relevant only if it creates value for customers — and
therefore for the firm. Thus creating “new things” is neither necessary
nor sufficient for business innovation. Customers are the ones who
decide the worth of innovation by voting with their wallets. It makes
no difference how innovative a company thinks it is. What matters is
whether customers will pay.” (Sawhney et al., 2006, pp. 76-77)
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Innovation Adoption Lifecycle Curve
• Diffusion of innovation – each
group of consumers adopts the
new technology (shown in blue),
its market share (yellow) will
eventually reach the saturation
level.
• The more mature the technology,
the higher the user expectations.
• The laggards are the most
difficult customers often requiring
the most resources.
Source: Everett Rogers (1962)
Diffusion of Innovations

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The curve is loosely divided into 5 segments:
 Innovators – interest in new products from the start. May even accept
incomplete products, need to be an early user.
 Early adopters, also visionaries or enthusiasts, have an interest, see the
risks but see the potential in the new product. Can influence their
organizations and communities to help promote the new product.
 Early majority, pragmatists, buy the new products only after it has been
referred to them, and seek verification as to their efficacy.
 Late majority, conservatives, buy the product after it has become
‘mainstream’ and the price has dropped significantly.
 Laggards, only buy the product if it is the only option available.
Source: Everett Rogers (1962) Diffusion of Innovations

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• “In the future, the innovation performance of a country is
likely to be even more crucial to its economic and social
progress... Assessment of innovation performance must
therefore cover a country’s ability not only to develop new
products, processes, services and systems, but also to
diffuse such innovations throughout the economy – both
those originating in the country concerned and those
developed abroad” (OECD, 2005 ).
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Disruptive Technology : Predictions
• But what ... is it good for? --Engineer at the Advanced Computing Systems Division of
IBM, 1968, commenting on the microchip.
• Computers in the future may weigh no more than 1.5 tons. -Popular Mechanics,
forecasting the relentless march of science, 1949
• “There is no reason anyone would want a computer in their home” Ken Olsen,
President and Founder of Digital Equipment Corp. 1977
• “640k ought to be enough for anybody” - attributed to Bill Gates in 1981
• “The horse is here to stay, but the automobile is only a novelty – a fad” Advice to
Henry Ford’s Lawyer, 1922
• “This telephone has too many shortcomings to be seriously considered as a means
of communication. The device is inherently of no value to us.” Western Union Memo,
1876
• “The wireless music box has no imaginable commercial value. Who would pay for a
message sent to nobody in particular?” Response of Associates of David Sarnoff, when
invited to invest in radio

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The Innovator’s Dilemma
“The best of conventional good business practices can
ultimately weaken a great firm”
from “The Innovator’s Dilemma”, by Clayton M. Christensen (1995)

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• The personal computer is a very good example of a "disruptive
technology“. Initially dismissed by the IT establishment at the time,
when first produced. When it took off, it was too late for some of the
large companies that did not get on board initially.
• Disruptive technologies are hard to predict initially - may offer little in
terms the way of performance, but plenty in terms of cheapness,
convenience and ease of use.
– As such, they appeal to a different class of customers, carving out
new markets for themselves before going on to subsume the
business of industrial Goliaths.

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Digital Equipment Corporation
• One of the best companies in the 1970s and 1980s, the PC disrupted
DEC - dealing in minicomputers
• 1980s meeting customer demands for more computing power. With time
continued to lower prices.
• Introduced by a few start-ups, the PC appealed to individuals, not
enterprises, who wanted to use them mainly to play games.
• In 1977, Ken Olsen, the founder and CEO of DEC said, "There is no
reason for any individual to have a computer in his home."
• DEC decided not to invest time, or money, in a product its customer
companies didn't want. DEC invested in high-end products.
• The rest is history. Digital's customers decided they didn't want to pay
high prices for its products when the PC was cheaper and performed
adequately. DEC was brought out in the 1990s by Compaq – the PC
was disruptive technology it failed to recognize.

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The Innovators Dilemma
• “The reason [for why great companies failed] is that … Managers
played the game the way it’s supposed to be played. The very
decision-making and resource allocation processes that are key to
the success of established companies are the very processes that
reject disruptive technologies: listening to customers; tracking
competitors actions carefully; and investing resources to design and
build higher-performance, higher-quality products that will yield
greater profit. These are the reasons why great firms stumbled or
failed when confronted with disruptive technology change”.
Source: X. Thrasyvoulou from PeoplePerHour.com and SuperTasker.com.
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• The Innovator's Dilemma: A company listens to existing customers to keep
customers happy and steadily grow the business.
• How to use company resources to satisfy present customer base
– improve existing products that improve the company’s profit margins or
– invest its money to create products or an idea that its customers have no need
for at present and likely to affect its profit margins
• ROI is deemed to be too low. Company rejects investment in new
technologies and acts in the company’s best interests. New products have
small markets, investment is not worth it, costs high, low ROI
– Sustaining technologies – meet the needs of customers today and the ones
who are paying
– Disruptive technologies – come from innovators who keep improving the
product performance, till it comes "from below“ (R& D in S curve) and starts
hurting the entrenched incumbents.

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Established firm and tech leaders are in a dilemma:
• Evaluating whether to invest in new and immature
technologies
• Managers need to ‘crystal ball gaze’ – will these
technologies find new customers, new markets which may
mature enough to make inroads into our domain?
• Does investing in these new technologies mean we might
cannibalize ourselves, does this make sense for us in the
long term? Thus, the innovator’s dilemma.
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What happens next?
• New entrants (often former employees) set up small start-ups with new
technologies - no real threat to large MNE
• Looks for new markets, a lot of trial and error - low margins (may fail)
• However, their small size, low cost structure enable survival and adaption –
more difficult for established companies
• They combine the right application and market – start-ups move fast and hit
the steep part of the S curve - can enter mature markets of the incumbents
and disrupt them.
• Move into higher margin upmarket territory disrupting due to their better
performance.
• They overtake the sustaining technologies meet market demand with lower
costs.
• Large companies that did not invest in the disruptive technology sooner, are
quickly left behind.
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Digital Disruption
• Change that occurs when new digital technologies and business models
affect the value proposition of existing goods and services. (source:
searchcio.techtarget.com)
• Mobile devices, have increased the potential for digital disruption across
many industries.
• Entrepreneurs using disruptive technologies to overcome traditional
industries with high barriers.
• E.g. Facebook, Netflix have disrupted the media and entertainment
industries. Traditional media losing money, face competition, where once
they were the sole provider.
• AirBnB, Uber and Spotify, all employ platform technologies to disrupt the
existing incumbent models to unlock previously underutilised potential of
existing property, transport and music streaming services.
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Consequences of Disruption
• Technology threatens jobs, however can’t stop technological progress,
• Creation of new jobs, areas such as robots, research, software development etc.
• Technological change in general leads to higher economic welfare,
• Problem - mismatch of skills between unemployed and jobs available
– occupational immobility (lack of flexibility in labour market, skills not there)
– geographical immobility (difficulty in moving to areas where jobs are created)
– drop in living standards for those in traditional, ’blue collar’ manufacturing jobs
• Concerns about the social and economic impact of the rapid job displacement
associated with automation, disruption and globalisation.
• Concern automation is costing jobs (esp. unskilled), not enough new jobs being created.
• Government intervention needed
– education and retraining to help the unemployed find new jobs.
– providing unemployment insurance
• Will it be enough? - Income Support?
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Conclusion
• Technology and connectivity have “changed the game” in terms of how business is
being conducted.
• Innovation, new technologies and connectivity afford business the opportunity to
start new ventures, increase profits but also disrupt existing businesses.
• Innovation is relevant only if it creates value for customers — and therefore for the
firm. Solely creating “new things” is not enough for business innovation.
• Companies cannot rest on their laurels and rely on past glories and are often in a
dilemma as to whether or not to adopt new innovations
• Technology and connectivity through digital disruption is very much part of the
competitive landscape that firms and industries will need to confront.
• Disruption will also prove a challenge for governments - not everyone is likely to win
and there will be many losers, especially among the semi-skilled and unskilled.
• Which raises the question, where does their future lie?
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BEX5800
Topic:
Global Financial Issues
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Learning outcomes
following:
• What are exchange rates and explore the functions of the foreign
exchange market
• Explore methods to insure against foreign exchange risk
• Why countries adopt different exchange rate regimes
• Central bank issued digital currencies: e-CNY
• Currency Fluctuations: Influential Factors
• The historical development of the modern global monetary system
• The roles of the IMF and World Bank in governing the international
monetary system
• The implications of exchange rates and the international monetary
system for international business
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What is a Foreign Exchange Rate?
• The rate at which one currency is converted into
another or the price of a unit of foreign currency
– AUS XXX = US XXX
– That is, one Australian dollar buys approximately
seventy-one U.S. cents
• Currencies appreciate and depreciate, not exchange
rates

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What is a Foreign Exchange Rate? (cont.)
• The foreign exchange rate is determined by the demand for and supply
of a given currency in the foreign exchange market
– Demand for foreign exchange increases if:
• There is an increase in demand for imported goods
• Domestic income rises, thus, greater disposable income to spend on imports
• Net income payable overseas rises
– Supply of foreign exchange increases if:
• Demand for Australian exports increases
• Net capital inflow rises (e.g. FDI into Australia)
• Domestic interest rates rises or overseas interest rate falls (i.e. interest rate
differential)
• Expected appreciation of AUD

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Functions of the Foreign Exchange Market
• Two main functions:
– The foreign exchange market:
• is used to convert the currency of one country
into the currency of another
• provides some insurance against foreign
exchange risk, the adverse consequences of
unpredictable changes in exchange rates

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Functions of the Foreign Exchange Market (cont.)
 Currency conversion
– Consumers can compare the relative prices of goods and services in
different countries using exchange rates
– International business has four main uses of foreign exchange
markets
 To exchange currency received in the course of doing business
abroad back into the currency of its home country
 To pay a foreign company for its products or services in the
currency used in its country
 To invest excess cash for short terms in foreign markets
 To profit from the short-term movement of funds from one currency
to another in the hope of profiting from shifts in exchange rates,
also called ‘currency speculation’

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 Insuring against foreign exchange risk:
–The possibility that unpredicted changes in future
exchange rates will have adverse consequences for the
firm
–A firm that insures itself against foreign exchange risk is
hedging
–The foreign exchange market facilitates insuring against
foreign exchange risk through:
• Spot exchange rates
• Forward exchange rates
• Currency swaps

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• Insuring against foreign exchange risk (cont.):
–A spot exchange occurs when two parties agree to
exchange currency and execute the deal immediately
–The spot exchange rate is the rate at which a foreign
exchange dealer converts one currency into another
currency on a particular day
• Spot exchange rates change continually depending on the supply
and demand for that currency and other currencies

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– Forward exchanges occur when two parties agree to exchange
currency and execute the deal at some specific date in the future
• Exchange rates governing such future transactions are referred
to as forward exchange rates
• For most major currencies, forward exchange rates are quoted
for 30 days, 90 days, and 180 days into the future
– When a firm enters into a forward exchange contract, it is taking out
insurance against the possibility that future exchange rate
movements will make a transaction unprofitable by the time that
transaction has been executed
– https://www.youtube.com/watch?v=x0KiPLMi0Z0

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– A currency swap involves the exchange of interest and maybe the
principal – in one currency for the same in another currency. Interest
payments are exchanged at fixed dates through the life of the contract.
– Swaps are generally transacted between:
• International businesses and their banks
• Banks
• Governments when it is desirable to move out of one currency
into another for a limited period without incurring foreign
exchange rate risk
https://www.youtube.com/watch?v=QURHOrbs6dY

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Types of Foreign Exchange Rate Systems
• A floating exchange rate exists when a country allows the foreign
exchange market to determine the relative value of a currency
– The U.S. dollar, the Euro, the Japanese yen, British pound and the AUD among
others all float freely against each other
– Their values are determined by market forces and fluctuate daily
• A dirty float is when a country tries to hold the value of its currency (not
through market forces) by intervention requiring the currency to trade
within a range of a reference currency such as the USD.
China pegs the Yuan to a basket of other currencies
• A dual exchange rate system is when a country has two or more
different currencies for different transaction. One exchange rate for the
purchase of local goods and another for the purchase of foreign goods.
– Cuba has the Cuban Peso and the Convertible Cuban Peso

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• A pegged (fixed) exchange rate system exists when a country
fixes the value of its currency relative to a reference currency
– Many Gulf and African states peg their currencies to the U.S. dollar
• Monetary or Currency Union exists when more than one country
share the same currency through an inter-governmental
agreement.
– Ecuador uses the USD
– The Euro is shared by 19 countries in Europe.
– Why the Euro is problematic for poorer countries in the EU?
https://www.youtube.com/watch?v=ULQiCN0YNmw
Types of Foreign Exchange Rate Systems (cont.)

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Fixed vs. Floating Exchange Rate Systems
Fixed exchange rate systems:
• Certainty of rate in future
• Provides monetary discipline, and price
stability
• May help facilitate business planning
• Reduces uncertainty over future value
• However can create pressures on the
exchange rate and creates need for
devaluations
• Revaluations fails to adjust to economic
shocks results in lags occurring. Difficult
to identify problem and implement
remedial policy
• May encourage development of “black”
market for currency exchange
Floating exchange rate systems:
• Currency floats freely, rate determined by
pure market forces
• In practice, ‘managed float’ common
• Some intervention to regulate
volatility/fluctuations
• Floating rate avoids problem of fixed rates
when expectations of impending
revaluation build-up
• responsive to changing market forces
• difficult to predict future exchange rate
level
• As a general rule larger more developed
economies prefer a more flexible
exchange rate system

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Digital Currency: e-CNY
 A digital version of the China’s currency the renminbi (RMB).
 Issued by the People’s Bank of China (PBOC). e-CNY part of the money supply
 At present, used mainly for small scale retail purchases and transactions.
 It is not a cryptocurrency - it is a Central Bank Digital Currency (CBDC)
 The e-CNY has the same valuation as the RMB.
How does it work practically?
 People issued with a digital wallet, accessed online through a digital app which
allows you to keep track of and store your e-CNY.
 Users can have multiple digital wallets, set daily spend limits and what services you
want to pay with the wallet and link it to different bank cards in order to replenish
your digital wallet.
 The e-CNY is presently operated by seven commercial banks that have been
approved to provide digital wallet and e-CNY exchange services to the public.
 Source: https://www.china-briefing.com/news/china-launches-digital-yuan-app-what-you-need-to-know/

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Currency Fluctuations
• Influential factors
–Interest rates
–Inflation rates
–Market expectations

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Currency Fluctuations (cont.)
• Interest rates
– Governments use interest rates within the monetary policy to
increase or contract money supply
– Higher the interest rate greater the demand for currency
– Interest rate differential between countries would influence the
• Flow of capital between the countries
• Demand for each country’s currency
• Appreciation/depreciation in value of each currency against each
other

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• Inflation rates
– Accelerating inflation
• Diminishes the value of funds
• Increases incentive to withdraw capital, possibly resulting in capital flight
• Reduces the real value of money as general level of price rises
• Governments keen to bring inflation under control by raising interests
rates: increases the cost of borrowing – less spending – intention to slow
economy
• In extreme circumstances can lead to hyperinflation rendering a currency
practically worthless e.g. Zimbabwe 2008-9
What Caused Hyperinflation in Zimbabwe ?
• https://www.youtube.com/watch?v=78-BlZXm7wA

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• Market expectations
–Expected appreciation
• Results in inflow of capital, increases demand for currency
–Expected Devaluation
• Results in capital outflows or conversion of currency into
“safe” hard currency (e.g. Zim $ into US $)
• Lesson - act swiftly, avoid expectations

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Who Manages Exchange Rates?
• Governments through
– Fiscal and monetary policy
• Central Banks
– Reserve Bank of Australia in Australia
• Why do they intervene in the foreign exchange market?
– To protect local assets and attract FDI
– Manage inflation, political instability
– Avoid capital flight
• Avoid erosion of net worth, exit affected economy – seeking safe ‘haven’
• Rise in Demand For FX
• Fall in Demand For Domestic Currency
• Signal encourage further fall in value of domestic currency

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Who Manages Exchange Rates? (cont.)
• Does intervention work?
– Not always, however, maybe necessary as
• Currency markets may overshoot and push currency values too
high/too low
• May require drastic readjustment - devaluation
– Consider what is happening now to the Australian dollar? What
impact does it have on different groups?
– Exporters, importers, government, business, travelers,
international students etc.

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The International Monetary System
• Refers to the institutional arrangements that countries adopt to govern
exchange rates
• Historical evolution
– The Gold Standard
– Post WWII
– Bretton Woods System
• International monetary system
• Birth of the International Monetary Fund (IMF)
• Birth of the International Bank for Reconstruction and
Development (later to become The World Bank)
• Plans for a World Trade Organisation

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The International Monetary System (cont.)
• Bretton Woods System (cont.)
– A fixed exchange rate system was established
– All currencies were fixed to gold, but only the U.S. dollar
was directly convertible to gold
– Devaluations could not to be used for competitive
purposes
– A country could not devalue its currency by more than 10%
without IMF approval

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Collapse of the Fixed Exchange Rate System
• Bretton Woods worked well until the late 1960s
• It collapsed when huge increases in welfare programs and the Vietnam War
were financed by the U.S. government by increasing the money supply and
causing significant inflation
– Other countries increased the value of their currencies relative to the
U.S. dollar in response to speculation the dollar would be devalued
• System relied on an economically well managed U.S., when the U.S. began
to print money, run high trade deficits, and experience high inflation, the
system was strained to the breaking point
– The U.S. dollar came under speculative attack

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The Role of the IMF
The IMF Articles of Agreement were set up to help combat
– The worldwide financial collapse
– Competitive devaluations
– Trade wars
– Hyperinflation
– General economic disintegration that occurred between the two world
wars
The aim of the IMF was to try to avoid a repetition of that chaos
through a combination of discipline and flexibility

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The Role of the IMF (cont.)
• Discipline
– Coordination mechanism
– A fixed exchange rate imposes monetary discipline, curtails inflation
– Brake on competitive devaluations and stability for world trade
• Flexibility
– Lending facility:
• Lend foreign currencies to countries having balance-of-payments
problems – lender of last resort
• Borrowings based on IMF conditionality (e.g. cut budget deficits,
eliminate export subsidies, decrease domestic money supply etc.)
– Adjustable parities:
• Allow countries to devalue currencies more than 10% if balance of
payments was in “fundamental disequilibrium”

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Role of the IMF Today
• Focuses on lending money to countries in
financial crisis
• There are three main types of financial
crises:
–Currency crisis
–Foreign debt crisis
–Banking crisis

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Role of the IMF Today (cont.)
• A currency crisis
–Occurs when a speculative attack on the exchange value of
a currency or
–Rampant inflation is causing a deterioration in the economy
and a depreciation in the value of the currency, or
–Authorities expend large volumes of foreign currency
reserves and sharply increase interest rates in order to
defend prevailing exchange rates.
https://www.youtube.com/watch?v=eT2DRFmeqIM

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Role of the IMF Today (cont.)
• A foreign debt crisis
–A situation in which a country cannot service its foreign
debt obligations, whether private sector or government
debt
– https://www.youtube.com/watch?v=eKG5lW5XdS0
• A banking crisis
–Refers to a situation in which a loss of confidence in the
banking system leads to a run on the banks, as individuals
and companies withdraw their deposits
– https://www.youtube.com/watch?v=sKjdT8I6TnE

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The Role of the IMF (cont.)
• Has the IMF been successful in achieving stated objectives?
–Inappropriate policies
• The IMF’s ‘one-size-fits-all’ approach to macroeconomic policy is
inappropriate for many countries
• Economic rationalist agenda
–Moral hazard
• People behave recklessly when they know they will be saved if
things go wrong
–Lack of accountability
• The IMF has become too powerful for an institution that lacks any
real mechanism for accountability

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The Role of the World Bank
• Purpose was to initially fund Europe’s reconstruction and help
developing countries
• Overshadowed by Marshall Plan, it turned towards development
– Lending money raised through WB bond sales
• Agriculture, education, population control, urban
development
• Loans for ‘productive’ purposes
• Hard loans to national governments
• Soft loans to least developed countries
• Promotion of private sector initiatives in developing countries
• Provision of debt and equity capital

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Implications for Managers
• Currency management
–The current system is Australia is a free floating
currency, Reserve Bank can intervene through interest
rates to influence exchange rates
–Speculation can also create volatile movements in
exchange rates
• Business strategy
–Exchange rate movements can have a major impact on
the competitive position of businesses when they trade
–Need to be aware of the different options available not
to lose on a trade deal from currency movements.

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Conclusion
• Exchange rate systems and the foreign exchange market are critical for
international business
• Firms use a variety of methods to insure against foreign exchange risk
• Number of factors influence the demand and supply of foreign exchange
• The IMF and World Bank were established as part of the Bretton Woods
System to govern the international monetary system
• Countries adopt different exchange rate regimes for a number of
reasons
• Exchange rate movements have implications for managers of
international business especially when it comes to currency
management.

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BEX5800
Topic:
Global Supply Chain, Global Production,
Sourcing and Logistics
170

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Learning Objectives
171
Students by the end of this seminar should have a better understanding
of the following:
 What is Global Supply Chain and why is it an important consideration
for most firms?
 When do firms look to outsource or in-source production?
 How do firms determine as to where is the best location to produce
their goods and services?
 What is offshoring and what are some of the location factors that
encourage it to occur?
 What is reshoring and nearshoring and what are the motivating factors
that make it happen?

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Introduction
• Global competition is transforming the way products are produced
and moved around the world.
• Global supply chain (GSC) has evolved which enables firms to take
advantage of the unique competitive advantages of different
locations.
• This GSC entwines the procurement, processing, and distribution
activities of an MNE.
• As a result of more free trade MNEs can garner the competitive
advantage that differing locations have to offer.
• The various value adding activities of the supply chain can be
strategically dispersed among various locations globally and be
coordinated to produce competitive advantage.
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Firms must decide…
• how to manage a globally dispersed supply chain
• where to locate productive activities
• what is the long-term strategic role of foreign production
• whether to own foreign production activities or outsource
those activities
• whether to manage global logistics or outsource

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Global Supply Chain
• The supply chain incorporates all aspects of moving material from
the vendor through the manufacturing process to the final customer.
• The supply chain focuses on vendors, manufacturers, intermediaries,
logistical services and the customer.
• The supply chain is no longer a domestic matter, but encompasses
all nations, whether they are vendors, manufacturers or customers.
• Global supply chain is becoming more complex companies must
adapt to incorporate them into their strategies.
Goal
• Prompt and reliable delivery of high-quality products and services at
the least cost.
• To effectively meet rising customer expectations
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Supply Chain - Definition
• The interconnected set of business procedures and business partners that
manage the flow of goods and information from the point of design to the
delivery of the product or service to the end customer (City University, London)
• In the instance of global supply, the chain is extended to many different
countries around the world.
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Supply Chain Components
SUPPLIERS
Source of raw materials, component parts, semi-manufactured products and
unfinished or non-consumable products that occurs early in the supply chain.
MANUFACTURERS
Makers of final products. Manufacturers perform the task of final assembly or
product integration.
DISTRIBUTORS
Responsible for managing, storing and handling of products for organizations that
don’t want to carry entire variety of products in their own facilities.
LOGISTICS SERVICE PROVIDERS
Commercial provider of individual or multiple integrated service for other entities in
the supply chain e.g. transportation management, value-added warehousing and
distribution and information technology based services
RETAILERS
The entity that buys from the manufacturer and sell to the final customer.
CONSUMERS
People who go into the stores and buy and consume the product
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Why is supply chain management so important?
– Efficiencies from procurement, distribution and logistics
– Reduce inventories and transportation costs – JIT –delivery
improvement
– Meet competitive pressures from shorter development times,
more new products, and demand for more customization
– Manage the complexities of supply chains
– Manage the inventories needed across the supply chain –
enhance speed and efficiency
– Improve capacity
– Diversify Business Trading
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BUSINESS
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Why is supply chain management difficult?
– Different organizations in the supply chain may have different,
conflicting objectives
• Manufacturers: long run production, high quality, high
productivity, low production cost
• Distributors: low inventory, reduced transportation costs,
quick replenishment capability
• Customers: shorter order lead time, high in-stock inventory,
large variety of products, low prices
– Supply chains are dynamic - they evolve and change over time
– Differences in cultures and environments
– Market instability
– Unexpected/Unforeseen disruptions to supply chain
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Zara – Global Supply Chain
179

Global Business Lecture Slides.pptx

Global Business Lecture Slides.pptx

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