Regional IntegrationRegional trade agreements (RTAs).docx

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Regional Integration
Regional trade agreements (RTAs)
ReferencesHill, C W “International Business” (6th edit., 2007),
Chapter 9
Ball, D et al. “International Business” (11th edit.), Chapter 4
Sloman, John, “Economics” (8th edit) – chapter 24.3
www.europa.eu.int
*
THEORY OF REGIONAL INTEGRATIONAgreements between
countries in a region to reduce tariff and non-tariff barriers to
trade and allow the free flow of factors of production
There has been a large increase in the number of regional trade
agreements in the last 10 years
75% of operational agreements were signed between 1992 -
1999
*Driven by the potential gains to be made from the free flow of
trade and investment
The population of the EU is now 457 million and the total GDP
is around $11 trillion
With 149 (2006) members the WTO (World Trade Organisation)
has been criticised for being too slow in reducing barriers to
trade

It is easier to establish free trade and investment in countries
which are geographically close to one another than on a global
scale
*Regional trade agreements can help speed up the process
The EU is the most prominent regional trade bloc having 27
members already with Turkey waiting to join
Other trade blocs include : -
NAFTA (1994) – USA, Canada and Mexico
MERCOSUR (1990) – Paraguay, Argentina, Brazil, Uruguay
and Venezuela
*APEC (1989) – may create Asia-Pacific rim 21 nation free
trade area, including NAFTA, Japan and possibly China
ASEAN (1967) – covers around 500 million people
Initially to promote peace and industrial co-operation between
member states has had some successes Members include
Singapore, Myanmar, Thailand, the Philippines and Vietnam
Andean Community (1969) - Colombia, Peru, Ecuador, Bolivia
and until recently Venezuela
*
Advantages of Regional Integration
(a) Economic
Advantages based on competition and scale
Small countries often cannot achieve economies of scale fully
until they open up to free trade

More competition makes firms more efficient
e.g. by opening up domestic monopolies to competition or via
internal inefficiencies
Open access to larger markets
Lower prices for consumers
Consumers have access to more goods
Free trade increases economic growth
Inflows of investment (FDI) from rest of world enabling
transfers of technology and skills
Factor mobility (i.e. labour and capital)
Trade creation inside the bloc
Can gain new skills, technology and experience
*
(b) Political
Increasing dependency on regional trading partners tends to
promote cooperation
Less risk of war
Greater influence in world

This was instrumental in the formation of the EU after WWII
On the one hand global domination by the USA and on the other
the potential threat from the USSR
*
*
Disadvantages of Regional Integration
Economic
TRADE DIVERSION instead of TRADE CREATION
- i.e. there may be a cheaper source outside of the trade
bloc but now common external trade barriers increase the price
of such goods for domestic consumers
Resources flow from the less efficient members of the customs
union to the most efficient or to the geographical centre leaving
periphery to decline
Greater industrial concentration tends to lead to collusion i.e.
oligopoly
Competition may be reduced as mergers and hostile takeovers
occur once barriers have gone
Administrative costs
Diseconomies of scale
(b) Political
A loss of sovereignty for member states e.g. monetary and fiscal
policy from single currencySlower decision-making
*

*
Levels of Integration
(a) Free Trade Areas
Tariffs, quotas and subsidies are set at the same level for all
members – no DISCRIMINATION between member states
Restrictions on movements of goods from outside are
determined by each country
NAFTA and EFTA (set up in 1960) – includes Norway, Iceland
and Switzerland
*
(b) Customs Union
Trade barriers between member states are removedA common
external trade policy is adoptede.g. the Andean Pact in South
America – Bolivia, Colombia, Ecuador and Peru
(c) Common Market
Again no internal trade barriers and a common external trade
policy BUT a common market also allows free flow of labour
and capital within the trade bloc
*Only achieved by the EC prior to becoming the EU
Requires close coordination of economic policy between the
member states
(d) Economic Union
Requires even closer economic integration including a common
currency – e.g. the EURO
Significant cooperation on fiscal and monetary policy – i.e. tax
rates set at the same level
So far only the EU has achieved this close degree of
cooperation

*
(e) Political Union
Economic Union AND a single accountable bureaucracy elected
by the citizens of the member states
This would include a single foreign policy
A Central Bank with a common currency
European Parliament and Council of Ministers
*
Disadvantages to Economic RegionalismMain disadvantage -
trade blocs may become ‘economic fortresses’
RTAs may undermine multilateral trade agreements
Developing nations may be excluded fro markets
Economic and political conflict between regional trade blocs
would be damaging to free trade
*
Market Structure and Pricing
References
“Economics” Sloman, J – chapters 2, 6
“International Business” Hill, C W (6th edit., 2007), Chapter 17
“International Business”, Ball, D et. al. (11th edit.), Chapter 18
“International Business”, Morrison, J (2012), Chapter 8,
Palgrave McMillan

*
Market StructureAccording to Porter’s Five Forces model one of
the key elements in determining success in either domestic or
international markets is the extent of rivalry
The level of competition is influenced by the number of
substitutes a product has, the possibility of new firms entering
the market and the respective power and influence of buyers and
sellers
This is closely related to the market structure that the firm is
operating in – which in turn will differ from industry to
industry
There are 4 different market structures
Perfect Competition – there are many buyers and sellers in the
market, the firms make an identical product, they have perfect
knowledge about the market and set up costs are negligible
Monopolistic Competition – as in perfect competition there are
many buyers and sellers and set up costs are negligible meaning
new firms can easily enter or leave the market
BUT under monopolistic competition the firm sells a
differentiated product
*
Oligopoly – occurs where a few dominant firms have significant
power over pricing and output in the industry
The firms operate strategically and they are interdependent i.e.
the price or output chosen by one firm will affect the price or
output chosen by others
Set up costs tend to be relatively high and firms cannot
enter/leave the industry easily

Monopoly – where one firm produces all the output of an
industry and has significant power over pricing
*
The market structure of an industry affects pricing, output,
advertising, R&D and strategy
For example in small scale agriculture farmers tend to be
growing near identical crops, there are many small producers
and there may be many small buyers
Farmers have very little control over the price they can set as
this is dictated by the market price – they are said to be price
takers
This would suggest that they are operating under perfect
competition
*
How does this example compare to a situation where a few large
companies provide gas or electricity to customers?
The firms can cooperate or compete through advertising or
product differentiation
It is expensive to set up competition and the buyers of the
service are relatively small compared with the providers
This scenario suggests that the firms are operating under
oligopoly
*
Comparing Market StructureType of MarketNumber of
FirmsEntry BarriersProduct TypeExamplesDemand
CurvePerfect CompetitionManyNoneIdenticalAgricultural
ProductsHorizontal
Price TakerMonopolistic CompetitionMany to

SeveralNoneDifferentiatedRestaurants, Small Plumbing Firm
etc.Downward Sloping
Fairly Elastic OligopolyFew DominantRestrictedEitherBanking,
Supermarkets
CarsDownward Sloping
Fairly Inelastic
Pricing depends on rivalsMonopolyOneVery
RestrictedUniqueDrug Companies, Local UtilitiesDownward
Sloping
Very Inelastic
Price Setter
Price Elasticity of DemandNotice in the above table that the
demand curves in each case are different ranging from
completely elastic for perfect competition to very inelastic for
monopoly
Price Elasticity of Demand (PED) is the responsiveness of
quantity demanded to a change in price and is found from the
formula
PED = %ΔQd

%ΔP
*
Comparison of Elasticities
*
Inelastic Demand Elastic Demand
£100
£100
£80
£80
40 50
20 50
In both cases the price increases from £80 to £100
In the first example this results in a decrease in the quantity
demanded from 50 to 40
In the second case the quantity falls from 50 to 20
Applying the formula for PED = %ΔQd
%ΔP
For the first case the change in quantity is -10 and as a
percentage change %ΔQd = -10/50 x 100% = - 20%
*
In the second case the change in quantity is -30 and as a
percentage change this is -30/50 x 100% = - 60%
Divide through by the percentage change in price
%ΔP = 20/80 x 100% = 25%
The price elasticity of demand in the first example is -
20/25 = -0.8 which is relatively inelastic
In the second example it is -60/25 = -2.4 which is relatively
elastic over this price range
*

This is significant as it affects the price a firm can set for its
products
Under perfect competition the firm is at the mercy of the market
and is faced with fierce competitive pressures
Inefficient firms are driven out of the market and price is set at
the point where P = MC
MC is marginal cost i.e. the extra cost associated with
producing ONE more unit of output
At P = MC the firm is said to be earning ‘normal’ profits
*
The Firm and the Industry in the Long Run under Perfect
Competition
Industry
S
D
Firm
AC
P
Output
MC
P=MR
q
The price P charged by the firm is determined by the market in
the long run
Output
Q

P
*
See Section 9-3 in the main text.
In all other circumstances the individual firm has some
influence on the price it charges for its products
The only difference here is that the price elasticity of demand
will vary – i.e. under monopolistic competition the demand
curve is fairly elastic but under oligopoly or monopoly the
curve is steeper i.e. more inelastic
The firms now set their output where MR = MC or where the
extra revenue in producing and selling ONE more unit of the
product is the same as the extra cost
The following diagram shows how this operates
*
Profit Maximisation by a Monopolist
Profits are maximised
where MC = MR
P1 is greater than AC1
The firm makes supernormal profits
shown by the shaded area
Output
Price

P1
Q1
MC
AC
D = AR
MR
*
See Section 9-6 in the main text, and Figure 9-13.
Pricing StrategiesWhen firms do have some degree of control
over prices there are a number of pricing strategies available to
them
E.g. a monopoly may lower prices when it believes that there is
a risk of a new competitor emerging or it could use supernormal
profits on advertising
Oligopolies are characterised by periods of intense price
competition followed by tacit collusion i.e. competing on non-
price areas
*
Other pricing strategies include:-
Penetration pricing – for new products or in new markets where
the company sets a low price for a short time until the brand
name becomes familiar
Market skimming – charging a high price for a time to recoup
expenditure on product development
Predatory pricing – driving out weaker competitors by
undercutting on price until rivals leave the industry

Price discrimination – charging a different price in different
markets for the same product
*
Pricing Strategies in International MarketsMany of the same
considerations for price setting in domestic markets are also
true in international markets
There are however some additional issues to address
Trade barriers can prohibit or restrict access to certain markets
Lower input prices – e.g. labour or raw materials as well as
availability of cheap credit
*
Increased competition as businesses become multinational
corporations – economies of scale are greater at an international
level
In order to stay ahead firms will need to remain innovative and
be able to adapt quickly to changing technologies
Geographical isolation allows price discrimination to take place
more easily than in domestic markets – the price elasticities of
demand for a product are likely to vary from country to country
*

Government policy on tax, tariffs, FDI, competition and many
other issues will have a major influence on pricing
This would include the extent to which the country enforces fair
competition through legislation
The imposition of anti-dumping measures such as tariffs or
quotas
The power of lobby groups – e.g. consumer groups, producers,
environmental organisations, trade unions, etc.
*
Transportation costs may be higher for more remote or
inaccessible locations even in more developed countries – this
would have an impact on competitive advantage
More extreme differences in tastes and preferences for certain
types of goods especially traditional foods or dress
The possibility of monopolising production via mergers and
acquisitions – a more concentrated industrial sector would lead
to lower output and higher prices
*
Price DiscriminationIn an international setting price
discrimination exists where different countries are charged
different prices for the same product
In a highly competitive market multinational companies will set
prices at a competitive level
In a country where the company faces little competition i.e.
where it has a monopoly the price will be set at a higher rate
*

In order for price discrimination to work three conditions must
be met
The firm must be a price setter – i.e. not perfect competition
The markets must be separable or isolated – i.e. geographically,
type of user or by time
The demand elasticity must differ between markets
When all 3 are present a firm can increase revenues by price
discrimination
*
Price Discrimination
Bangladesh
Output (m)
10 20
P
£5
D
Norway
£3
P
Output (m)
£8
8 10
Charging different prices in the two countries will increase the
total revenue earned by the firm
£5
*

See Section 9-3 in the main text.
Norway is relatively inelastic in terms of price elasticity of
demand compared to Bangladesh
If the firm charges £5 in both markets it will earn a total
revenue of £5 x 10 million = £50 million in Norway and £5 x 10
million = £50 million in Bangladesh or £100 million overall
If the firm price discriminates it could earn more by increasing
prices in Norway and lowering them in Bangladesh
In Norway the firm raises its price to £8 and earns £8 x 8
million = £64 million
*
In Bangladesh the firm now charges £3 per unit and sells 20
million to earn £3 x 20 million = £60
The firm has increased revenue from £100 million to £124
million
If the two markets were not separable then arbitrage would
occur and the system would break down
i.e. firms would buy the product in Bangladesh for £3 and sell it
in Norway for below £8 per unit thus reducing the supernormal
profits of the multinational
*
Multipoint PricingThis occurs where 2 international companies
are competing against each other in at least 2 foreign markets
The company’s marketing strategy in one market will have an
effect on the its rivals strategy in the other markets
i.e. if the company aggressively reduces the price of its product
in one market the other firm may do the same in another market

where the first firm makes good profits
*
*
Exchange Rates
References
“Economics” Sloman, J – chapters 14, 22
“International Business” Hill, C W (6th edit., 2007), Chapter 10
“International Business”, Ball, D et. al. (11th edit.), Chapter 11
*
Exchange RatesCan be thought of as the price of one currency
in terms of another i.e. $1.5/£1- from the UK perspective
In a free floating system it is determined by the demand and
supply of the currency on the Forex (foreign exchange market)
The market will correct for any surpluses or deficits in the
currency by either lowering the exchange rate or by increasing
it
The Demand and Supply of a CurrencyWhere does the demand
and supply for a currency originate?
As well as the obvious case of tourists travelling abroad,
consumers and businesses also need to exchange currency
E.g. when buying foreign goods or when investing in foreign
banks
*

Businesses will need to convert currency in a number of
circumstances
Receiving foreign currency in exchange for exports
Income from foreign investments
To pay for imports or raw materials from abroad
To invest in foreign banks
Currency speculation
*
*
$ price of £
S by UK
Q of £
D by USA
Q
Determination of the Exchange Rate
QS
QD
b
a

*
*In the example above (Sloman, J chapter 14) the exchange rate
of £1 for $1.80 means that there is excess supply of pounds a –
b
In order to achieve equilibrium (very quickly in exchange
markets) banks will be forced to lower the exchange rate
In the example below the exchange rate is too low and there is
excess demand c – d for the £
This time banks will raise the exchange rate in order to reduce
demand and again achieve equilibrium
*
QS
QD
$ price of £
S by UK
Q of £
D by USA
Q
Determination of the Exchange Rate
d
c

*
Shifts in the Demand and Supply for a CurrencyThe position of
the demand and supply curves for £s can be affected by a
number of factors
Under a free floating currency regime the exchange rate is
allowed to appreciate (rise) or depreciate (fall) depending on
changes in these factors
Interest Rates
When interest rates in the UK rise relative to other countries the
exchange rate will appreciate
*
The demand for the £ rises as investors now want to put more of
their money into UK banks – the demand curve shifts to the
RIGHT
At the same time the supply for the £ falls as UK investors are
less likely to want to deposit their money in foreign banks
The supply curve shifts to the LEFT
The new equilibrium is at a higher exchange rate than the old
*
*
O
Exchange rate

Quantity of £s
S2
D2
er2
er1
S1
Appreciation
D1
An Appreciation in the Exchange Rate
Inflation Rates
If inflation is rising faster in the UK than abroad UK goods are
becoming relatively expensive
Imports rise and exports fall (X – M)
The supply of £s increases and the demand for £s falls leading
to a depreciation in the exchange rate
Investment Opportunities
If these improve in the UK the £ will appreciate
*
Increasing AD (Aggregate Demand)
This increase may be caused by an increase in consumption,
investment or government spending
This causes an increase in imports which initially causes a fall
in the exchange rate
Speculation
Occurs where investors believe that the value of the currency is

either over priced or under priced – this can be in any direction
(bandwagon effect)
*
Exchange Rates and BusinessInternational businesses are
constantly exposed to fluctuations in exchange rates – this
represents a risk to profits
Transaction Exposure
Obligations on the purchase of goods in the future – exchange
rate fluctuations may raise or lower the cost
Loans made in foreign currencies i.e. from foreign banks
*
Translational Exposure
Affects the value ‘on paper’ – i.e. this would give a false
picture of the value of an asset such as a foreign subsidiary
This may impact on future borrowing
Economic Exposure
The effects on competitiveness, costs and profitsVolatility
creates uncertainty for investors
*
Reducing Risk to Exchange Rate FluctuationsWhen we are
talking about exchange rates this is generally referring to the
‘spot rate’ – i.e. on any one particular day
Since exchange rates change continually this poses a risk to a
firm’s profitability
One way of reducing this risk is to buy currency on a ‘forward

rate’ fixed for some point in the future e.g. 30 days, 90 days or
180 days
*
E.g. a US company imports computers from Japan for ¥80,000
each and then sells them on at a price of $800 each in the USA
The spot exchange rate is ¥120/$1 so each computer costs
$666.67 and the company should make a profit of $133.33 on
each
BUT there is a time delay in ordering the computers and paying
for them of 30 days – in this time the US dollar depreciates to
¥96/$1
Each computer now costs $833.33 and the firm loses money on
each sale i.e. $33.33
*
The US company could insure this risk by agreeing to use the
forward exchange rate of ¥108/$1 meaning that the cost of each
of the Japanese computers is approximately $740 each
The US firm should still make a profit of $60 on each computer
as long as home demand conditions remain the same
The forward exchange rate is usually different to the spot rate
as it will reflect market sentiment on future exchange rates
*
Another way of reducing risk is to establish production
facilities or retail outlets within another country
e.g. many Japanese firms set up factories in the US and Europe
to avoid tariffs AND to lessen exchange rate costs – at the time
the value of the Yen was rising against many other countries
making Japanese exports expensive
Other measures include holding currency reserves in foreign
subsidiaries – which would reduce transaction costs

*
Flexible sourcing – i.e. set up in a number of countries and keep
spare capacity so that production can be increased or reduced in
line with exchange rate variations
Use forecasting to predict movements in exchange rates – i.e.
by following movements in forward exchange rates or by setting
up a forecasting unit
Keep track of foreign currency exposure on paper – i.e. as part
of financial reporting so as to hedge against risk
*
Fixed Exchange RatesUnder a fixed exchange rate system the
government intervenes in the currency markets to maintain an
agreed rate between countries
E.g. in 1990 the UK fixed the £ against the German DM at DM
2.95/£1
The UK was forced to leave the ERM in 1992 after speculation
on a fall in the £ against the DM became to intense to maintain
*
UK Exchange Rate Systems1944-72: Fixed Exchange Rates
Occasional devaluations against dollar (1948 and 1967)
1972-87: Managed Floating
1987-88: Shadowing the DM
1988-90: Managed Floating (run up to ERM entry)
1990-92: Semi-Fixed Exchange Rates
1992-present : Floating Exchange Rate

*
*
Correction under a Fixed Rate RegimeUnder a fixed exchange
rate mechanism the government may be forced to intervene in
the currency markets
This occurs where then demand and supply for domestic
currency are not equal at the FIXED rate
For example – if there is a currency flow deficit the Bank of
England will be forced to buy pounds by drawing on its foreign
currency reserves
*E.g. if UK interests rates are relatively high compared to other
countries – money flows in from abroad to take advantage of the
higher interest rates – the demand for £’s increases and shifts to
the RIGHT
At the same time UK residents are less likely to part with their
£’s and supply shifts to the LEFT leading to a higher exchange
rate
In a floating regime this simply results in an appreciation of the
exchange rate BUT in a FIXED regime the Bank is forced to
intervene
*
Effects of a Correction under a Fixed Rate SystemOne
important effect in this case is on the money supply – if the
Bank of England is forced to buy back pounds then the money
supply will be affected
The money supply will fall reducing aggregate demand and

potentially leading to a lower level of national output
If the government does not want the money supply to be
affected in this way it must use open market operations or lower
the reserve ratio to prevent this
*
Alternative Exchange Rate RegimesIn practice most exchange
rate systems have elements of both fixed and floating regimes
Systems include : -
Adjustable peg
Dirty floating
Crawling peg
Joint float
Exchange rate band
*Adjustable peg – exchange rates are fixed for a period of time
(usually years) and central banks play the same role as they
would in a totally fixed rate system
E.g. if a current account deficit persists the central bank would
be forced to pursue deflationary policies to shift demand and
supply for the currency back towards the fixed rate
Long term deficits or surpluses may then require revaluation or
devaluation of the currency i.e. a change (or adjustment to the
‘peg’) in the fixed rate
*Dirty floating is closer to free floating but the central bank
may intervene in the currency market when required
The central point here is that the central bank will allow
adjustment but will try to avoid excessive volatility in the

exchange rate
This may include interest changes as well as buying/selling
foreign reserves
The crawling peg system operates in a similar manner but
smaller adjustments are made more frequently e.g. once a month
*A joint float occurs when a number of countries fix their
currencies amongst themselves but float against other currencies
E.g. the ERM (or Exchange Rate Mechanism) began in 1979 but
the UK only joined in 1990
Exchange rate band – the government must intervene only when
the currency fluctuates beyond the boundaries set
i.e. above the ‘ceiling’ or below the ‘floor’
*
Exchange Rate Band
Ceiling
Floor
parity
Price of £s
Time
If the exchange rate rises to the ‘ceiling’ the UK government
sells £s for $’s or may lowers interest rates and if the exchange
rate falls to the ‘floor’ the government buys £’s for $’s with
dollar reserves and gold reserves or may increase interest rates
$1.75
$2.00
$1.50
*

Advantages/Disadvantages of Fixed/Floating Exchange
RatesAdvantages of fixed exchange ratesCertainty (for exports
and imports)less speculation (but devaluations?)prevents
'irresponsible' government policies
Disadvantages of fixed exchange ratesconflicts with other
macro objectivesmonetary policy is less effectivedanger of
competitive deflationsproblems of international
liquiditydifficulties in adjusting to shocksspeculation on how
‘fixed’ a rate actually is e.g. UK in the ERM 1992
*Advantages of free-floating ratesautomatic correctionno
problem of international liquidityinsulation from external
eventsless constraint on domestic macro policy
Disadvantages of free-floating ratespossibly unstable exchange
ratesspeculationuncertainty for business offset by use of
forward marketslack of discipline on economy may lead to
inflation
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0

1
Trade Restrictions
References
Hill, C W “International Business” (6th edit., 2007), Chapter 6
Ball, D et al. “International Business” (11th edit., 2008),
Chapter 3
www.europa.eu.int
Trade Restrictions
Having looked at the advantages for trade why is it that so many
countries use trade barriers to restrict imports from other
countries?
The answer may be found in the actions of lobby groups who
represent the interests of domestic producers
There are a number of arguments given for trade restrictions but
it may be useful to consider how countries do this first
Trade Barriers
Tariffs – a tax on imports
This works by raising the price of imports relative to
domestically produced goods. The government gets the tax
revenue from this
Quotas – a restriction on the number or quantity of goods

imported
This will raise the price for consumers and benefits domestic
producers
The Effects of a Tariff (or a Quota)
Quantity
Q1 Q2 Q3 Q4
Pw + Tax (P2)
Pw (P1)
Price
s
d
Q4 – Q1 are imports before the tariff
Q3 – Q2 are imports after the tariff
R
When a country is open to trade domestic consumers are able to
buy the product at the world price Pw
At this price the domestic producers are only willing to produce
Q1 but consumers want Q4
The difference Q4 – Q1 is made up from imports
After the tariff raises the world price domestic suppliers will
increase production to Q2
Imports fall to Q3 – Q2 as consumers now only want to buy
only Q3

The government gains from this the area represented by revenue
R
A quota operates in a similar way
The government now only allows Q3 – Q2 imports into the
country which creates a shortage
This increases the price from P1 up to P2
In this case the foreign companies lucky enough to have a
contract will gain instead of the government
Subsidies
A subsidy is a payment made by the government to a domestic
producer
The subsidy can take many forms such as a direct cash grant,
low interest loans, tax breaks, location inducements etc.
The subsidy shifts the firm’s supply curve to the right as it
lowers production costs for the firm – this causes the price of
products to fall making the firm more competitive
As well as helping domestic firms compete against imports the
subsidy helps domestic producers compete in foreign markets
This is especially important where a firm is able to secure a
‘first mover’ advantage – once established the firm will be able
to take advantage of economies of scale
In doing so the firm may form a natural monopoly
BUT the government may end up footing the bill in the long

term especially where domestic producers fail to improve their
efficiency
Other Forms of Trade Restriction
Voluntary Export Restraint
The EXPORTING country restricts the level of exports after
making an agreement with the IMPORTING country
E.g. a limitation on car exports to the United States enforced
by Japanese automobile producers in 1981
Caused by pressure from the US government that limited
Japanese imports to no more than 1.68 million vehicles per year
(revised upward in 1984 to 1.85 million)
Import quotas and VERs always raise the domestic price of an
imported good
It is estimated that the imposition of the voluntary export
restraint on cars cost US consumers $1 billion per year between
1981- 85 as the price of imports increased
Local Content Requirement
Requires some proportion of a good to be produced
domestically or that local labour be employed

e.g. 75% of engine parts have to be made locally
The effects are similar to an import quota – reduces competition
from abroad
Also allows domestic firms to move out of manufacturing
components into assembly etc.
Administration Policies
Bureaucratic regulations designed to slow down imports at
customs
Such checks can either physically damage the imports or delay
their entry so that they would be less demand for the product
The number of staff employed in checking may be made
deliberately small or performed in remote locations
Countervailing Duties
Tariffs used to punish foreign firms when they sell excess stock
at very low prices
Dumping is defined as selling goods in a foreign market at a
price below their costs of production or below their "fair"
market value
Producers may use profits from home markets to subsidise
prices in a foreign market driving local competitors out

Arguments for Restrictions
There are a number of arguments put forward by countries to
justify their restrictions on trade
(1) The Infant Industry Argument – where an industry has the
potential to become competitive but has not grown enough to
enjoy economies of scale
Protection here may give the industry time to grow and gain
experience before being exposed to foreign competition
(2) To prevent dumping – this allows a country to protect itself
from unfair competition from very low prices
This may be caused by foreign governments subsidising certain
industries to encourage exports from those countries
(3) Retaliation – in response to another country protecting its
own domestic industries
(4) To prevent foreign monopolies taking over an industry and
then raising prices
(5) To reduce reliance on specialist industries – where a country
is over reliant on a few key industries
Fluctuations in price have a dramatic affect on their economies
e.g. Cuban sugar, Zambian copper
(6) To protect consumers – health and safety or from genetically
engineered crops

(7) Foreign Policy Objectives - preferential trade agreements or
to punish ‘rogue’ states e.g. Cuba, North Korea and Iran
(8) Defence or strategic resources – this may involve weapons
technology or vital resources such as food, oil or energy
(9) To protect the environment – to force countries to adopt
more environmentally friendly ways of producing goods
(10) Workers rights and conditions – to influence countries to
adopt more rights for workers e.g. for children or those working
very long hours under poor conditions
(11) Strategic Trade Policy
Linked with the New Trade Theory where first mover advantage
and economies of scale are important considerations
The government may subsidise newly emerging firms in key
areas to give them a head start - this can be in the form of R&D
as well as cash subsidies
Also used to catch up with a foreign firm who has a first mover
advantage e.g. European governments subsidised the
development of Airbus to rival Boeing
Problems with Trade Restrictions
Higher prices for consumers and less choice of goods and
services
Tariffs may protect inefficient industries

Retaliation – may provoke trade wars and further increase world
prices
Extra bureaucracy – large administration costs
Corruption in the form of bribes by importers or domestic firms
*
International Trade (2)
Alternative Trade Theories
References
Chapter 3
*
Assumptions of Comparative Advantage
The theory of comparative advantage provides a strong
argument in favour of free trade but it is however based on a
number of simplifying assumptions which are sometimes
unrealistic
In the real world there are many countries and many goods – not

just two
Transportation costs between countries have to be taken into
account
*
There are differences in the prices of resources in different
countries. We ignored exchange rates and assumed that cocoa
and rice swapped on a one-to-one basis
We have assumed resources can move freely from the
production of one good to another within a country – this is not
necessarily the case
We have assumed constant returns to scale. In reality, both
diminishing and increasing returns to specialisation exist
*
We have assumed that each country has a fixed stock of
resources and that free trade does not change the efficiency with
which a country uses its resources
We have ignored the effects of trade on income distribution
within a country – can we therefore say that free trade has
unequivocally benefitted a country
*
Free Trade and Economic GrowthIf these assumptions are
dropped the theory of comparative advantage is less robust
Free trade can change a country's stock of resources – i.e.

labour and capital from abroad
It might also increase the efficiency with which a country uses
those resources
*Economies of scale in production are likely to become
available as the size of the total market increases
Trade might make better technology from abroad available to
domestic firms
Opening an economy to foreign competition is likely to
stimulate domestic producers to look for ways to increase their
efficiency
*
Free Trade and the Production Possibility FrontierFree trade
increases the quantity of goods which can be produced by
pushing out the boundaries of the PPF
Higher levels of productivity and/or greater quantities of land,
labour and capital increase production
This means consumers can enjoy the benefits of these higher
levels of production and prices fall
Global competition also forces down prices
*When we accept the assumption of diminishing returns to
specialisation then the PPF is CONVEX to the origin instead of
being straight - what are the implications of this?
Cocoa
Rice
After growth - 2015
Before growth - 2005

*
The Heckscher-Ohlin ModelDavid Ricardo suggested that
comparative advantage was caused by differences in labour
productivity – e.g. skilled labour
Two Swedish economists - Heckscher (1919) and Ohlin (1933)
developed an alternative explanation for comparative advantage
They argued that it arises from differences in national FACTOR
ENDOWMENTS - e.g. land, labour and capital
*The extent to which a country has more of a particular
resource – e.g. land
In this case the cost of the abundant factor will be lower
Countries will export goods that make intensive use of factors
that are locally abundant
E.g. The United States exports agricultural goods because it has
large areas of arable land – this means that land is relatively
cheap
*
The Leontief ParadoxStudies to test the HO theory on US
imports and exports were conducted by W Leontief (1953)
Since the US has a relative abundance in capital compared to
many other countries it should be an exporter of capital
intensive goods and an importer of labour intensive goods
The study however showed this was not the case
*In fact US exports were less capital intensive than imports
One explanation put forward to explain this is that : -

The US may be exporting new goods which use highly skilled
labour e.g. computer software and at the same time importing
simple mass produced machinery which is capital intensive
*The problem for economists is that the labour productivity
theory of trade put forward by Ricardo is better than the
Heckscher-Ohlin theory at explaining trade patterns
However if the role of technology is also considered then the
HO theory becomes stronger
Technology will improve productivity
*
The Product Life CycleRaymond Vernon - a US economist
(1960’s)
Found that a large proportion of new products were developed
in the USA
e.g. TV’s, cars, computers
He argued that this was due to the fact that the USA was a large
and wealthy market
*Companies had an incentive to produce goods for this market
using skilled labour and capital in the most efficient way
The production and marketing of a new product occurs in a
number of stages
First of all firms sell the new product in the US market
They start to export the product to other industrialised countries
for sale to a few high income earners

*
Demand grows in these countries and domestic producers start
to make similar products
This creates competition for US producers who cut back
production
The market becomes mature and US consumers begin to
purchase foreign goods – especially where local labour or
capital is cheaper
The process then continues on to less developed countries who
in turn begin production at more competitive prices
*Is the theory valid?
From 1945 to 1975 most new products were introduced in US
BUT today many products are introduced simultaneously in US,
Japan and the advanced European nations
e.g. laptop computers, compact disks, and electronic cameras
The theory may have been valid in the post war period but
comparative advantage provides a better explanation for
differences in production and efficiency
*
The New Trade TheoryThis theory emerged during the 1970s
based on scale economies and intra-industry trade
Economists (Paul Samuelson) questioned the assumption of
diminishing returns to specialisation in international trade
In many industries economies of scale give increasing returns –
average fixed costs fall as output rises

*In some industries world demand is limited and supports only a
few firms
Therefore countries export certain products because they have a
firm that was an EARLY ENTRANT into that industry known as
‘FIRST-MOVER ADVANTAGE’
E.g. commercial aircraft industry – Boeing and Airbus
discourage new entrants
Economies of scale increase productivity - an important source
of comparative advantage
*How useful is this theory in explaining trade patterns?
It stresses the role of luck, entrepreneurship and innovation in
giving a firm first-mover advantages.
It also provides an excuse for government intervention - e.g.
Boeing's R&D was largely paid for by the US government as a
spin-off from its military programs
Using subsidies governments can help domestic firms become
‘first movers’
*
National Competitive Advantage
Porter’s DiamondPorter (1990) examined the success of certain
industries in certain countries
He argued that success relied on 4 main elements :-
Factor Endowments
Demand Conditions
Relating or Supporting Industries

Firm Strategy, Structure and Competition
*Success depended upon how the 4 elements of the ‘Diamond’
interact with each other : -
(a) Factor endowments
Not just basic factors such as land, climate and natural
resources but also includes man made endowments
e.g. Government investment in education, communications
infrastructure and research facilities
*
(b) Demand conditions
home demand for the industry's product or service - a nation's
firms gain competitive advantage if their domestic consumers
are sophisticated and demanding
(c) Relating and supporting industries
the presence or absence of suppliers’ industries and related
industries that are internationally competitive
successful industries tend to be in clusters of related industries
*(d) Firm strategy, structure and competition
how companies are organised and managed and how they
compete
E.g. predominance of engineers in the German and Japanese
firms - emphasis on improving manufacturing processes and
product design

*
International Trade (1)
Absolute and Comparative Advantage
References
Chapter 3
The Development of Trade TheoryTrade theory has a long and
distinguished history in the UK dating back as far as the 16th
Century
The earliest policy which can be identified as a true government
initiative is known as mercantilism
Under mercantilism a country should always try to ensure that it
has a trade surplus
This meant that money would be flowing into a country as more
goods were exported than imported
*
In order to achieve this aim governments would intervene in
international markets to make sure that this was the case
Imports were heavily taxed and quotas imposed so that the value
of exports was always more than the value of goods imported
At the time governments saw no benefit in increasing the
volume of trade with other countries only that there should be a

trade surplus
*
By the mid 18th century economists such as David Hume (1752)
were questioning this belief
A constant inflow of capital into a country increases the money
supply and leads to inflation making British goods relatively
expensive compared to foreign goods
In this way exports would fall and imports increase
Hume argued that trade was not a zero-sum game but a positive-
sum game where all participants gained
*
*
Absolute AdvantageAdam Smith in his book the Wealth of
Nations (1776) suggested that countries would be better off if
they specialised in producing those goods in which they had an
ABSOLUTE ADVANTAGE
E.g. at the time England was the most efficient producer of
textiles in the world and France was the most efficient at
producing wine
Therefore England had an absolute advantage in textiles and
France in wine
By specialisation and trade it was possible to increase the total
amount of both goods produced and consumed
Smith’s arguments revolve around the idea that a country should
never devote its resources to producing goods domestically if it
is able to buy those goods more cheaply from abroad
Since production involves using inputs such as labour, land and
capital these resources can be transferred from less efficient
areas to more productive ones

*
*As an example of this take the case of Ghana and South Korea
In this simple example Ghana and South Korea both have 200
resource units (here labour) available for production
Labour can be used to either grow rice or cocoa or some
combination of each
BUT there are differences in the relative efficiencies in each
country due to climate or the quality of the land
The following tables summarise the position
Resources needed to produce 1 ton of cocoa or 1 ton of rice
Since each country has 200 labour units at its disposal Ghana
can produce 20 tons of cocoa or 10 tons of riceSouth Korea can
produce 5 tons of cocoa or 20 tons of rice
*CocoaRiceGhana1020South Korea4010
The production possibility frontier for each country
*
Rice

Cocoa
20
5
20
10
Assume each country devotes exactly half its resources to each
good pre-trade
10
2.5
5
Ghana
S. Korea
This means that the combined total in terms of production (and
presumably of consumption) will be as shown in the table below
If each country specialised
*CocoaRiceGhana105South
Korea2.510Total12.515CocoaRiceGhana200South
Korea020Total2020

*It is clear that if each country specialises and then trades the
combined total is higher than if each country tried to produce
its own goods
i.e. 5 extra tons of cocoa and 7.5 tons of rice
Therefore trade allows countries to increase their production
AND consumption of goods
This idea gives a powerful argument for specialisation and trade
without restrictions i.e. that trade is a positive sum game
*
Comparative Advantage What if one country is more efficient in
producing BOTH goods? Is there still a basis for trade?
David Ricardo (1772 – 1823) took this analysis further
He suggested that countries would benefit from trade even if
one country was more efficient in producing both goods – i.e. it
had an absolute advantage in both goods
*In the theory of COMPARATIVE ADVANTAGE each country
should specialise in the production of those goods that it
produces RELATIVELY MORE efficiently
Again the idea is based on the most efficient use of resources
Let’s go back to look at the example used earlier but change the
production efficiency of Ghana in terms of how many resources

it needs to produce 1 ton of rice
Resources needed to produce 1 ton of cocoa or 1 ton of rice
Since each country again has 200 labour units at its disposal
Ghana can produce 20 tons of cocoa or 15 tons of rice
South Korea can produce 5 tons of cocoa or 10 tons of rice
*CocoaRiceGhana1013.33South Korea4020
The new production possibility frontiers
*
Rice
Cocoa
20
5
15
10
Assume each country devotes exactly half its resources to each
good pre-trade
10
2.5
5

7.5
Ghana
S. Korea
*Ghana could produce either 20 tons of cocoa or 15 tons of rice
or any combination in-between
South Korea can only produce either 5 tons of cocoa or 10 tons
of rice or any combination in-between
Comparative advantage tells us that Ghana is x4 more efficient
at producing cocoa and x1.5 more efficient at producing rice
than South Korea
What should the two countries do in this case?
*If each country is self sufficient and uses half of its resources
to produce both goods they would produce as follows
Ghana = 10 tons of cocoa and 7.5 tons of rice
South Korea = 2.5 tons of cocoa and 5 tons of rice
A combined total of 12.5 tons of cocoa and 12.5 tons of rice
*According to the theory of comparative advantage Ghana
should produce more cocoa and less rice leaving South Korea to
do the opposite
E.g. if Ghana decides to switch SOME production to making
more cocoa it could produce 15 tons of cocoa and 3.75 tons of
rice (this would take 200 resource units)
South Korea could produce 10 tons of rice and no cocoa
Note that it wouldn’t work if Ghana produced ONLY cocoa and
no rice in this example

The new production possibility frontiers
*
Rice
Cocoa
20
5
15
10
Ghana increases its production of cocoa and lowers production
of rice
South Korea does the opposite and only produces rice
10
2.5
5
7.5
Ghana
S. Korea
3.75
15
Comparing production BEFORE trade
AFTER specialisation and trade
*CocoaRiceGhana107.5South
Korea2.55Total12.512.5CocoaRiceGhana153.75South
Korea010Total1513.75

*The combined total of cocoa has increased from 12.5 tons to
15 tons and for rice from 12.5 tons to 13.75
Again specialisation and trade allows a greater combined total
than if each country tried to produce and consume its own goods
The main point of the argument here is that potential world
trade is greater where it is free and unrestricted
Ricardo’s analysis is still relevant today and is used to argue
the case for free trade
Business Ethics Today
Dr Bhabani Shankar Nayak
Senior Lecturer in International Business
Salford Business School
University of Salford, UK
[email protected]

Expected and Actual Levels
of Business Ethics
Ethical Problem
Ethical Problem
Society’s Expectations of Business Ethics
Actual Business Ethics
1950s
Early 2000s
Time
Business Ethics: Today vs. Earlier Period
Questions on Business Ethics
To understand public sentiment towards business ethics, ask
three questions
Has business ethics really deteriorated?
Are the media reporting ethical problems more frequently and
vigorously?
Are practices that once were socially acceptable no longer
socially acceptable?
Business Ethics: What does it really mean?
Definitions
Ethics involves a discipline that examines good or bad practices
within the context of a moral duty.
Moral conduct is behavior that is right or wrong.
Business ethics include practices and behaviors that are good or

bad.
Two Key Branches of Ethics
Descriptive ethics involves describing, characterizing and
studying morality
“What is”
Normative ethics involves supplying and justifying moral
systems
“What should be”
Conventional Approach to Business Ethics
Conventional approach to business ethics involves a comparison
of a decision or practice to prevailing societal norms
Pitfall: ethical relativism
Decision or Practice Prevailing Norms
Sources of Ethical Norms
Fellow Workers
Family
Friends
The Law
Regions of Country
Profession
Employer
Society at Large
Fellow Workers
Religious Beliefs
Individual/Social
Conscience

Making Ethical Judgments
Behavior or act that has been committed
Prevailing norms of acceptability
Value judgments and perceptions of the observer
compared with
Ethics, Economics, and Law
9
3 Models of Management Ethics
Immoral Management—A style devoid of ethical principles and
active opposition to what is ethical.
Moral Management—Conforms to high standards of ethical
behavior.
Amoral Management
Intentional - does not consider ethical factors
Unintentional - casual or careless about ethical considerations
in business

Three Approaches to Management Ethics
Developing Moral Judgment
External Sources of a Manager’s Values
Religious values
Philosophical values
Cultural values
Legal values
Professional values
Internal Sources of a Manager’s Values
Respect for the authority structure
Loyalty
Conformity
Performance
Results
Common Causes of Unethical Practices in Business: Pressure,
Fear, Greed ,Convenience

Why ethics matters in business?
Employee-Employer Relations
Employer-Employee Relations
Company-Customer Relations
Company-Shareholder Relations
Company-Community/Public Interest
Environmental and sustainable business
Corporate Social Responsibilities
Marketing Entry Strategies
and
Internationalisation
[email protected]
Market
Market as a process brings producers and consumers together.
Market as an institution separates consumers from producers.
Market as an Institution and as a Process
What goods and services should be produced?
How should the goods and services be produced?
Who should get the goods and services?
---------------------------------------

Traditional
Command System
Market System
2 Key Components:
Private property
Voluntary exchange
Market Structures
Factors influence market structure
Pricing
Supply
Barriers to Entry
Efficiency
Competition
Imperfect or Monopolistic Competition
Many buyers and sellers
Products differentiated
Relatively free entry and exit
Each firm may have a tiny ‘monopoly’ because of the
differentiation of their product
Firm has some control over price
Lacks market information
Examples – restaurants, professions – solicitors, etc., building
firms – plasterers, plumbers, etc.
Advantages and disadvantages of monopoly:
Advantages:
May be appropriate if natural monopoly
Encourages R&D
Encourages innovation

Development of some products not likely without some
guarantee of monopoly in production
Economies of scale can be gained – consumer may benefit
Disadvantages:
Exploitation of consumer – higher prices
Potential for supply to be limited - less choice
Potential for inefficiency –
What is a Pure Monopoly?
A pure monopoly exists when a single firm is the sole producer
of a product for which there are no close substitutes.
Examples: local telephone company, local gas and electric
company, small town gas station
7
Characteristics of
Pure Monopoly
Single supplier – the firm and the industry are synonymous.
No close substitutes – the product is unique and unlike any
others.
Price maker – the firm has considerable control over price since
it controls the total quantity supplied.
Blocked entry – barriers to entry exist because there is no
immediate competition.
8

Barriers to Entry
Barriers to entry are factors that prohibit firms from entering an
industry. They include:
Economies of scale
Legal and economic barriers to entry
Ownership or control of essential resources
Pricing and other strategic barriers to entry
9
Oligopoly – Competition amongst the few
Industry dominated by small number of large firms
Many firms may make up the industry
High barriers to entry
Products could be highly differentiated – branding or
homogenous
Non–price competition
Price stability within the market - kinked demand curve?
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
Examples of oligopolistic structures:
Supermarkets
Banking industry
Chemicals
Oil
Medicinal drugs
Broadcasting
Duopoly:

Industry dominated by two large firms
Possibility of price leader emerging – rival will follow price
leaders pricing decisions
High barriers to entry
Abnormal profits likely
Fig. 1.Reasons firms/market internationalise
Slides adapted from Wall, Minocha and Ress (2010)
International Business , 3rd ed. Pearson Education Limited.;and
Daniels(2013) International Business, 14th ed. Pearson
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Fig 2.Internationalisation methods
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Fig.3 Types of Collaborative Arrangements
Collaborative Strategy and Complexity of Control
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14
This Figure shows that as a company increases the number of
partners and decreases the amount of equity it owns in a foreign
operation, its ability to control that operation decreases.
Export-based internationalisation (1)
Indirect exporting: firm operates through intermediaries
Export house
Confirming house
Buying house
‘piggybacking’; benefits to ‘rider’ and ‘carrier’
Advantages: less costly, quicker
Disadvantages: information/experience is ‘second hand’.
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Export Processing Zones (EPZs)
Provide incentives for direct exporting activities: e.g. Lower or
zero taxes on profits and/or imported components, government
subsidies, better infrastructures, less restrictive regulations, etc.
Widely used by countries to encourage inward fdi specifically
targeted towards increasing direct exports.
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Non-equity based internationalisation
Licensing
Patents
Franchising
Management contracting, etc.

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Common Market Entry Modes
Joint Venture Company
Licensing
Acquisition
Joint Venturing
Local Firm
New Subsidiary Company
“Green Field” Entry
HOME COUNTRY
HOST COUNTRY
Export
MNE
Int’l Sourcing

HOME COUNTRY
HOST COUNTRY
MNE
Local Firm
Design, spec and/or technology
OEM goods
Payment
Applicable to manufacturing of mature products (e.g., shoes)
Access to location economies
Competition among OEM producers lowers costs.
Compensation Trade
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm
Equipment and technology

Output
Common reason: Local firm’s lack money to buy equipment
Economic benefits
Enhanced incentives for MNE to make sure that equipment
works
MNE’s skills in marketing the products in its home country
Management Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY
HOST COUNTRY
Profit
MNE
Wholly-Owned Subsidiary
Managerial Service
Management Contract
Advantages
Access to local management skills
Avoids buying unwanted assets
Retains strategic control

Disadvantages
Potential incentive problem
Potential adverse selection problem
How do you know the competencies of the manager?
Joint Venture
Joint Venture Company
Inputs
MNE
Local Firm
HOME COUNTRY
HOST COUNTRY
Inputs
Share of Profit
Share of Profit
Joint Venture
Advantages
Access to partner’s local knowledge
Reduction of concern about overpayment
Both parties have some performance incentives
Significant control over operation
Disadvantages
Potential loss of proprietary knowledge
Potential conflicts between partners

Neither partner has full performance incentive
Neither partner has full control
Licensing
Permission granted by the proprietary owner to a foreign
concern (the licensee) in the form of a contract that would
otherwise be legally forbidden (e.g. Under patent protection).
Licensors benefit by access to overseas markets (via licensees)
with little or no investment or ‘local knowledge’.
Licensees benefit by access to technologies or products (brands)
otherwise unavailable.
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Franchising
Franchisee purchases the right to undertake business activity
using the franchiser’s name or trademark rather than any
patented technology.
First-generation franchising: franchiser grants considerable
autonomy to franchisee.
Second-generation franchising: franchiser grants little or no
autonomy to franchisee.
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Franchiser: advantages/disadvantages
Advantages for the franchiser: overseas expansion can be much
less expensive and any local adaptations can (with agreement)
be made by those well acquainted with cultural issues in that

country.
Disadvantages for the franchiser : possible conflict with the
franchisee for not following regulations and agreements as well
as a threat that the franchisee may opt to ‘go it alone’ in the
future and thus become a direct competitor.
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Franchisee: advantages/disadvantages
Advantages for the franchisee
Buy into an existing brand and receive support from the
franchiser in terms of marketing, training and starting up.
When customers walk into a McDonald’s restaurant, they know
exactly what to expect.
Disadvantages for the franchisee
Restrictions on what they can and can’t do. E.g. McDonald’s
have very strict regulations concerning marketing, pricing,
training etc.
A franchisee cannot simply change the staff uniform, alter
prices or vary opening hours as the company operates a
standardised approach to doing business.
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Alliances
Collaborative relationship which is much less structured than a
joint venture or acquisition.
Four ‘I’s’ determine whether to have an alliance rather than a
joint venture or acquisition
Infeasibility

Information asymmetry
Investment in options
Indigestibility.
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Fig. 4 Alliances - The four ‘Is’ of collaboration
Source: Based on Reuer (1999)
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Consortia
These involve the bringing together of different companies to
pool resources into an integrative organisational design.
Some overlap with ‘alliances’ but consortia usually occur across
many firms and sectors.
Keiretsu: Japanese consortia where 20/25 different companies
integrate through interlocking directorates, common bank
holdings, close personal ties, etc.
Chaebols: South Korean consortia and have similarities with
Japanese keiretsu.
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Foreign direct investment (fdi)
International investment in ‘real’ items, e.g. land, buildings,
equipment, organisation
Can take various forms:
‘Greenfield investment’, whereby an entirely new foreign
operation is established
Merger with, or acquisition of an existing organisation
Advantages/disadvantages of mergers acquisitions – explored
further in Ch. 7.
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Why invest abroad?
Supply factors
Production costs
Distribution costs
Availability of natural resources
Access to key technology
Incentive schemes to reduce costs.
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Barriers to internationalisationRankClassification of
barrierDescription of barrier1CapabilitiesInadequate quantity of
and/or untrained personnel for internationalisation
2FinanceShortage of working capital to finance
exports3AccessLimited information to locate/analyse
markets4AccessIdentifying foreign business
opportunities5CapabilitiesLack of managerial time to deal with
internationalisation6Capabilities Inability to contact potential

overseas customers7Capabilities Developing new products for
foreign markets8Business environment Unfamiliar foreign
business practices9CapabilitiesMeeting export product
quality/standards/specification 10AccessUnfamiliar exporting
procedures/paperwork
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Eclectic theory
John Dunning (1993) concluded that companies will only
become involved in overseas investment and production (fdi)
when the following conditions are all satisfied:
Companies possess an ‘ownership-specific’ advantage over
firms in the host country
It must be more profitable for the multinational to exploit its
ownership-specific advantages in an overseas market than in its
domestic market. In other words, there must additionally exist
‘location-specific’ factors which favour overseas production
These advantages are best exploited by the firm itself, rather
than by selling them to foreign firms.
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Sequential theory (1)
Sometimes called the ‘Uppsala model’ as Johanson and
Widersheim-Paul examined the internationalisation of Swedish
firms.
They found a regular process of gradual change involving the
firm moving sequentially through four discrete stages:
Intermittent exports

Exports via agents
Overseas sales via knowledge agreements with local firms, for
example by licensing or franchising
Foreign direct investment in the overseas market.
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Sequential theory (2)
This particular sequence is sometimes called the establishment
chain, the argument being that each of these stages marks a
progressive increase in the resource commitment by the firm to
the overseas markets involved.
There is also a suggestion that as firms move through these
sequential stages, the knowledge and information base expands
and the ‘psychic distance’ between themselves and the overseas
markets involved contracts, making progression to the next
stage that much easier.
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Simultaneous theory
Suggests that customers’ tastes around the world are becoming
progressively homogeneous, e.g. the success of such global
products as Coca-Cola or Sony Walkman.
The economies of scale and scope available for standardised
products in such global markets are so substantial that a
gradual, sequential approach to internationalisation is no longer
practicable.
Proponents point to studies which suggest that the global
awareness of brands has fallen dramatically over time, with less

than two years now needed for making consumers worldwide
aware of high profile brand images.
Critics, however, suggest that sophisticated customers demand
greater customisation.
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Network theory (1)
Internationalisation builds on existing relationships or creates
new relationships, with the focus shifting from the
organisational or economic to the social.
It is people who make the decisions and take the actions.
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Network theory (2)
Networks can be considered at three levels.
Macro – external environment is seen as a set of diverse
interests, powers and characteristics. To enter new markets a
firm may have to break old relationships or add new ones.
Inter-organisational – firms may well be competitors in one
market, collaborators in another.
Intra-organisational – relationships within the organisation may
well influence the decision-making process; e.g. decisions may
be taken in overseas subsidiaries that influence the international
involvement of the parent MNE.
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The Market
Free Market and Marxian Theory of Alienation
Result is that workers became alienated:
From their products: workers lost control of the products of
their labor
From their own work: workers lost control of how they did their
jobs
From themselves: workers were taught false views of their
needs and desires
From each other: workers were kept fighting amongst
themselves (divide and conquer)
Market and Economic Crisis
43
Contrary to neoclassical economics & Marxist economic
determinism, Karl Polanyi (1944) proposed that economies are
embedded within and influenced by macro-level social,
political, cultural, institutional contexts.
“Our thesis is that the idea of a self-adjusting market implies a
stark utopia. Such an institution could not exist for any length
of time without annihilating the human and natural substance of
society; it would have physically destroyed man and

transformed his surroundings into a wilderness.”
Mark Granovetter (1985) revived Polanyi’s thesis, launching a
“new economic sociology” emphasizing social construction of
markets & embeddedness of economic actors in social networks
and institutions.
Though sharing NET ideas, social embeddedness lacks formal
rigor in application to large-scale socioeconomic systems,
whose analysts must identify specific historical and spatial
mechanisms of structural relations.
Social Embeddedness of Economic Institutions
Role of Political, Legal and Technological Environment in
International Business
University of Salford, Manchester
[email protected]
Global Business Environment Today
Global competition is characterized by networks that bind
countries to one another
Globalism trends
A borderless world
Increase in exports
Increase in direct foreign investment
Dominance of trading blocs

International Business Environment
3
Regional Trading Blocs
“The dominance of the United States is already over. What is
emerging is a world economy of blocs represented by NAFTA,
The European Union, and ASEAN. There’s no one center in this
world economy.”
- Peter Drucker
Fortune, January 12, 2004
Regional Trading Blocs
TRIAD Market
EU-European Union, EEA-European Economic Area
Asian Market- BRICS
NAFTA-North American Free Trade Agreement
CAFTA-Central America Free Trade Agreement
ASEAN-Association of Southeast Asian Nations (ASEAN)
The TRIAD
Three regional free-trade blocs
Western Europe, Asia, and North America
Grouped around three dominant currencies
Euro, Yen, and Dollar
In 2004, these trade blocs were expanding their boarders to
include neighboring countries

Gerber, J.(2007), International Economics, Addison Wesley.
Role of IMF and World Bank in International Business
The IMF
The World Bank
Promote global financial stability among its 182 members.
Exchange Rate Stability (balanced growth of trade)
Forum for international monetary cooperation
Temporary financial assistance to members experiencing
balance of payments difficulties
Reconstruction and economic development after WWII
Long-term economic development
Project financing, including infrastructure, energy, education,
health

8
Both IMF and WB share the common objective of raising living
standards of their member countries (membership is the same)
with distinct mandates: WB promotes long-term economic
development while IMF promotes international financial
stability (stable exchange rates) and facilitates the growth of
trade.
Anecdote Bretton Woods Conference 1944: Keynes drew an
analogy with the christening-party in The Sleeping Beauty,
which, as Chairman of Covent Garden, he had seen danced at
the reopening of the Garden only two weeks earlier. He hoped
that the Bretton Woods twins, Master Fund and Miss Bank,
would receive three gifts from their fairy-godmothers: first, a
many-colored coat “as a perpetual reminder that they belong to
the whole world”; second, a box of vitamins to encourage
“energy and a fearless spirit, which does not shelve and avoid
difficult issues, but welcomes them and is determined to solve
them”; third, “a spirit of wisdom … so that their approach to
every problem is absolutely objective”.
Voting Structure of the IMF
General Agreement on Tariffs
and Trade (GATT)
GATT created as an agency to serve as watchdog over world

trade and provide a process to reduce tariffs
GATT also provided a mechanism to resolve trade disputes
bilaterally
GATT covers three basic areas:
trade shall be conducted on a nondiscriminatory basis;
protection shall be afforded domestic industries through
customs tariffs, not through such commercial measures as
import quotas; and
consultation shall be the primary method used to solve global
trade problems.
3. GATT now replaced by the World Trade Organization
World Trade Organization (WTO)
It sets many rules governing trade between its members.
WTO provides a panel of experts to hear and rule on trade
disputes between members, and, unlike GATT, issues binding
decisions.
Unlike GATT, is an institution, not an agreement
Three Types of Political Risk to International Business
Ownership Risk
Exposes property and life
Operating Risk
Interference with the ongoing operations of a firm
Transfer Risk
Limitations on the outflow of funds
-------------------------------------------------------------------------
Confiscation
The government takeover of a firm without compensation to the

owners.
Expropriation
A form of government takeover in which the firm’s owners are
compensated.
Domestication/Nationalisation
The government demands transfer of ownership and
management responsibility.
Legal Concerns in International Business
Major areas of governmental activity that are of concern to the
international business :
Embargoes and Sanctions
Export Controls
Regulation of International
Business Behavior
Role of IT on International Business
Growth of virtual market.
Borderless business.
Growth of ebusiness and e-commerce.
Information is no longer centrally or secretly controlled by
governments.
Information technology is boosting productivity and electronic
commerce around the world.
Growth of Value Chain and Commodity Chain based on
information about production, price, consumer and market.
The Way Forward for International Business
Adaptation
Dependency

Hedging
Adaptation
Equity sharing includes the initiation of joint ventures with
nationals (individuals or those in firms, labor unions, or
government) to reduce political risks.
Participative management requires that the firm actively involve
nationals, including those in labor organizations or government,
in the management of the subsidiary.
Localization of the operation includes the modification of the
subsidiary’s name, management style, and so forth, to suit local
tastes. Localization seeks to transform the subsidiary from a
foreign firm to a national firm.
Development assistance includes the firm’s active involvement
in infrastructure development (foreign-exchange generation,
local sourcing of materials or parts, management training,
technology transfer, securing external debt, and so forth)
Dependency
Input control means that the firm maintains control over key
inputs, such as raw materials, components, technology, and
know-how.
Market control requires that the firm keep control of the means
of distribution
Position control involves keeping certain key subsidiary
management positions in the hands of expatriate or home-office
managers.
Staged contribution strategies mean that the firm plans to
increase, in each successive year, the subsidiary’s contributions
to the host nation

Hedging
Political risk insurance is offered by most industrialized
countries. Insurance minimizes losses arising from specific
risks—such as the inability to repatriate profits, expropriation,
nationalization, or confiscation— and from damage as a result
of war, terrorism, and so forth.
The Foreign Credit Insurance Association (FCIA) also covers
political risks caused by war, revolution, currency
inconvertibility, and the cancellation of import or export
licenses.
Local debt financing (money borrowed in the host country),
where available, helps a firm hedge against being forced out of
operation without adequate compensation. In such instances, the
firm withholds debt repayment in lieu of sufficient
compensation for its business losses.
References
See, Chapter-5, International Business by K. Aswathappa, Tata
McGraw Hill Education Pvt Ltd, New Delhi.
http://www.fao.org/docrep/w5973e/w5973e08.htm
http://www.witiger.com/internationalbusiness/6environments.ht
m
Current IMF Voting Rights
All Others
37.7%
Japan
5.9%
Germany
5.8%
France

4.8%
United Kingdom
4.8%
High-Income Oil
Producers*
4.3%
China
3.6%
Italy
3.1%
Canada
2.8%
Russia
2.6%
India
1.9%
Korea & Singapore
1.7%
Mexico
1.4%
Australia & New
Zealand
1.8%
Brazil
1.4%
United States
16.5%
* High-income oil producing countries include: Saudia Arabia,
Kuwait, the United Arab Emirates, Qatar, Brunei, and Bahrain
Source: IMF, 2008. "IMF Members' Quotas and Voting Power,
and IMF Board of Governors."
http://www.imf.org/external/np/sec/memdir/members.htm
Chart1All OthersUnited StatesJapanGermanyFranceUnited
KingdomHigh-Income Oil
Producers*ChinaItalyCanadaRussiaIndiaAustralia & New
ZealandKorea & SingaporeMexicoBrazil

now
38.39
16.77
6.02
5.88
4.86
4.86
4.39
3.66
3.19
2.89
2.69
1.89
1.88
1.73
1.43
1.38
Sheet1MemberPercent United States316.77United
States16.77United States16.77All Others (<1%
each)28.7Austria30.86Other Europe6.15Other
Europe6.15United
States16.77Japan36.02Japan6.02Japan6.02Japan6.02Germany35.
88Germany5.88Germany5.88Germany5.88Algeria30.58Other
MENA5.73Other
MENA5.73France4.86France34.86France4.86France4.86United
Kingdom4.86United Kingdom34.86United Kingdom4.86United
Kingdom4.86China3.66Angola0.14Other Africa4.63Other
Africa4.63Italy3.19Brunei Darussalam30.11Other
Pacific4.11Other Pacific4.11Saudia Arabia3.16Antigua and
Barbuda30.02Other LAC3.8Other

LAC3.8Canada2.89China33.66China3.66China3.66Russia2.69It
aly33.19Italy3.19Italy3.19Netherlands2.34Saudi
Arabia33.16Saudia Arabia3.16Saudia
Arabia3.16Belgium2.09Canada32.89Canada2.89Canada2.89Indi
a1.89Russian
Federation32.69Russia2.69Russia2.69Switzerland1.57Belarus30
.19Other Eastern Europe2.53Other Eastern
Europe2.53Australia1.47Netherlands32.34Netherlands2.34Nethe
rlands2.34Mexico1.43Belgium32.09Belgium2.09Belgium2.09Sp
ain1.39India31.89India1.89India1.89Brazil1.38Switzerland31.5
7Switzerland1.57Switzerland1.57Korea1.33Australia31.47Austr
alia1.47Australia1.47Venezuela1.21Mexico31.43Mexico1.43Me
xico1.43Sweden1.09Spain31.39Spain1.39Spain1.39Brazil31.38
Brazil1.38Brazil1.38Korea31.33Korea1.33Korea1.33Venezuela,
República Bolivariana
de31.21Venezuela1.21Venezuela1.21Afghanistan, Islamic
Republic of0.08Other Central & South Asia1.75Other Central &
South
Asia1.75Sweden31.09Sweden1.09Sweden1.09Albania0.03Other
Central & South Asiaother28.7Benin30.04Other
AfricaBotswana30.04Other AfricaBurkina Faso30.04Other
AfricaBurundi0.05Other AfricaCameroon30.1Other AfricaCape
Verde30.02Other AfricaCentral African Republic30.04Other
AfricaChad30.04Other AfricaComoros30.02Other AfricaCongo,
Democratic Republic of the30.25Other AfricaCongo, Republic
of 30.05Other AfricaCôte d'Ivoire30.16Other
AfricaDjibouti30.02Other AfricaEquatorial Guinea30.03Other
AfricaEritrea0.02Other AfricaEthiopia0.07Other
AfricaGabon30.08Other AfricaGambia, The30.03Other
AfricaGhana30.18Other AfricaGuinea30.06Other AfricaGuinea-
Bissau30.02Other AfricaKenya30.13Other AfricaLesotho
30.03Other AfricaLiberia0.07Other
AfricaMadagascar30.07Other AfricaMalawi30.04Other
AfricaMali30.05Other AfricaMauritania30.04Other
AfricaMauritius30.06Other AfricaMorocco30.28Other
AfricaMozambique, Republic of0.06Other

AfricaNamibia30.07Other AfricaNiger30.04Other
AfricaNigeria0.8Other AfricaRwanda30.05Other AfricaSão
Tomé and Príncipe0.01Other AfricaSenegal30.08Other
AfricaSierra Leone30.06Other AfricaSomalia0.03Other
AfricaSouth Africa30.85Other AfricaSwaziland30.03Other
AfricaTanzania30.1Other AfricaUganda30.09Other
AfricaZambia30.23Other Africa0Other
AfricaArmenia30.05Other Central & South AsiaAzerbaijan,
Republic of0.08Other Central & South
AsiaKazakhstan30.18Other Central & South AsiaKyrgyz
Republic30.05Other Central & South AsiaMongolia30.03Other
Central & South AsiaTajikistan30.05Other Central & South
AsiaTurkmenistan0.05Other Central & South
AsiaUzbekistan30.14Other Central & South AsiaBosnia and
Herzegovina0.09Other Eastern EuropeBulgaria30.3Other
Eastern EuropeCroatia30.18Other Eastern EuropeCzech
Republic30.38Other Eastern EuropeEstonia30.04Other Eastern
EuropeGeorgia30.08Other Eastern EuropeLatvia30.07Other
Eastern EuropeLithuania30.08Other Eastern EuropeMacedonia,
former Yugoslav Republic of30.04Other Eastern
EuropeMoldova30.07Other Eastern EuropeMontenegro,
Republic of30.02Other Eastern EuropeRepublic of
Serbia30.22Other Eastern EuropeRomania30.48Other Eastern
EuropeSlovak Republic30.17Other Eastern
EuropeSlovenia30.12Other Eastern EuropeDenmark30.75Other
EuropeFinland30.58Other EuropeGreece30.38Other
EuropeHungary30.48Other EuropeIceland30.06Other
EuropeIreland30.39Other EuropeLuxembourg30.14Other
EuropeMalta30.06Other EuropeNorway30.77Other
EuropePoland30.63Other EuropePortugal30.4Other EuropeSan
Marino30.02Other EuropeUkraine30.63Other
EuropeArgentina30.97Other LACBahamas, The30.07Other
LACBarbados30.04Other LACBelize30.02Other
LACBolivia30.09Other LACChile30.4Other
LACColombia30.36Other LACCosta Rica30.09Other
LACDominica30.01Other LACDominican Republic30.11Other

LACEcuador30.15Other LACEl Salvador30.09Other
LACGrenada30.02Other LACGuatemala30.11Other
LACGuyana30.05Other LACHaiti30.05Other
LACHonduras30.07Other LACJamaica30.13Other
LACNicaragua30.07Other LACPanama30.1Other
LACParaguay30.06Other LACPeru30.3Other LACSt. Kitts and
Nevis30.02Other LACSt. Lucia30.02Other LACSt. Vincent and
the Grenadines30.02Other LACSuriname30.05Other
LACTrinidad and Tobago30.16Other LACUruguay30.15Other
LACEgypt30.44Other MENALibyan Arab Jamahiriya30.52Other
MENASudan30.09Other MENATunisia30.14Other
MENABahrain 30.07Other MENACyprus30.07Other MENAIran,
Islamic Republic of30.69Other MENAIraq0.55Other
MENAIsrael30.43Other MENAJordan30.09Other
MENAKuwait30.63Other MENALebanon30.1Other
MENAOman30.1Other MENAQatar30.13Other MENASyrian
Arab Republic0.14Other MENATurkey30.55Other MENAUnited
Arab Emirates30.29Other MENAYemen, Republic of
30.12Other MENACambodia30.05Other PacificFiji30.04Other
PacificIndonesia30.95Other PacificKiribati30.01Other
PacificLao People's Democratic Republic0.04Other
PacificMalaysia30.68Other PacificMarshall Islands30.01Other
PacificMicronesia, Federated States of30.01Other
PacificMyanmar0.13Other PacificNew Zealand30.41Other
PacificPalau30.01Other PacificPapua New Guinea30.07Other
PacificPhilippines30.41Other PacificSamoa30.02Other
PacificSingapore30.4Other PacificSolomon Islands30.02Other
PacificThailand30.5Other PacificTimor-Leste30.01Other
PacificTogo30.04Other PacificTonga30.01Other
PacificVanuatu30.02Other PacificVietnam30.16Other
PacificBangladesh30.25Other Central & South
AsiaBhutan0.01Other Central & South AsiaMaldives0.01Other
Central & South AsiaNepal30.04Other Central & South
AsiaPakistan30.48Other Central & South
AsiaSeychelles30.02Other Central & South AsiaSri
Lanka30.2Other Central & South Asia

Algeria3
Antigua and Barbuda3
Argentina3
Armenia3
Australia3
Austria3
Bahamas, The3
Bahrain 3
Bangladesh3
Barbados3
Belarus3
Belgium3
Belize3
Benin3
Bolivia3
Botswana3
Brazil3
Brunei Darussalam3
Bulgaria3
Burkina Faso3
Cambodia3
Cameroon3
Canada3
Cape Verde3
Central African Republic3
Chad3
Chile3
China3
Colombia3
Comoros3
Congo, Democratic Republic of the3
Congo, Republic of 3
Costa Rica3
Côte d'Ivoire3
Croatia3
Cyprus3

Czech Republic3
Denmark3
Djibouti3
Dominica3
Dominican Republic3
Ecuador3
Egypt3
El Salvador3
Equatorial Guinea3
Estonia3
Fiji3
Finland3
France3
Gabon3
Gambia, The3
Georgia3
Germany3
Ghana3
Greece3
Grenada3
Guatemala3
Guinea3
Guinea-Bissau3
Guyana3
Haiti3
Honduras3
Hungary3
Iceland3
India3
Indonesia3
Iran, Islamic Republic of3
Ireland3
Israel3
Italy3
Jamaica3
Japan3

Jordan3
Kazakhstan3
Kenya3
Kiribati3
Korea3
Kuwait3
Kyrgyz Republic3
Latvia3
Lebanon3
Lesotho 3
Libyan Arab Jamahiriya3
Lithuania3
Luxembourg3
Macedonia, former Yugoslav Republic of3
Madagascar3
Malawi3
Malaysia3
Mali3
Malta3
Marshall Islands3
Mauritania3
Mauritius3
Mexico3
Micronesia, Federated States of3
Moldova3
Mongolia3
Montenegro, Republic of3
Morocco3
Namibia3
Nepal3
Netherlands3
New Zealand3
Nicaragua3
Niger3
Norway3
Oman3

Pakistan3
Palau3
Panama3
Papua New Guinea3
Paraguay3
Peru3
Philippines3
Poland3
Portugal3
Qatar3
Romania3
Russian Federation3
Rwanda3
St. Kitts and Nevis3
St. Lucia3
St. Vincent and the Grenadines3
Samoa3
San Marino3
Saudi Arabia3
Senegal3
Republic of Serbia3
Seychelles3
Sierra Leone3
Singapore3
Slovak Republic3
Slovenia3
Solomon Islands3
South Africa3
Spain3
Sri Lanka3
Sudan3
Suriname3
Swaziland3
Sweden3
Switzerland3
Tajikistan3

Tanzania3
Thailand3
Timor-Leste3
Togo3
Tonga3
Trinidad and Tobago3
Tunisia3
Turkey3
Uganda3
Ukraine3
United Arab Emirates3
United Kingdom3
United States3
Uruguay3
Uzbekistan3
Vanuatu3
Venezuela, República Bolivariana de3
Vietnam3
Yemen, Republic of 3
Zambia3
Sheet2nowbeforeAll Others (<1% each)28.7United
States17.02316.77United StatesUnited
States16.77Japan6.1086.02JapanJapan6.02Canada2.9282.89Can
adaGermany5.88Germany5.9685.88GermanyFrance4.86France4.
9294.86FranceUnited
Kingdom4.86Italy3.2423.19ItalyChina3.66United
Kingdom4.9294.86United KingdomItaly3.19Other
Europe8.944Other EuropeSaudia Arabia3.16Australia & New
Zealand1.9151.88Australia & New ZealandCanada2.89Other
High Income4.765Other High IncomeRussia2.69Korea &
Singapore1.1661.73Korea & SingaporeNetherlands2.34SA,
Kuw, UAE, Qat, Brun, Bahr4.4614.39SA, Kuw, UAE, Qat,
Brun,
BahrBelgium2.09China2.9283.66ChinaIndia1.89India1.9161.89I
ndiaSwitzerland1.57Brazil1.4021.38BrazilAustralia1.47Mexico
1.1961.43MexicoMexico1.43Russia2.7342.69RussiaSpain1.39Ot

her Developing23.45Other DevelopingBrazil1.38All
Others37.15938.39All OthersKorea1.33All
OthersVenezuela1.21Sweden1.09others now not
before9.69SaudiArabia,Kuwait,UnitedArabEmirates,Qatar,Brun
ei,andBahrain),0.41SA3.16Kuw0.63UAE0.29Qat0.13Brun0.11B
ah0.07Egypt30.44Other MENA4.39Libyan Arab
Jamahiriya30.52Other MENASudan30.09Other
MENATunisia30.14Other MENABahrain 30.07Other
MENACyprus30.07Other MENAbeforenowIran, Islamic
Republic of30.69Other MENAAll Others37.159All
Others38.39Iraq0.55Other MENAUnited States17.023United
States16.77Israel30.43Other
MENAJapan6.108Japan6.02Jordan30.09Other
MENAGermany5.968Germany5.88Kuwait30.63Other
MENAFrance4.929France4.86Lebanon30.1Other MENAUnited
Kingdom4.929United Kingdom4.86Oman30.1Other MENAHigh-
Income Oil Producers*4.461High-Income Oil
Producers*4.39Qatar30.13Other
MENAItaly3.242China3.66Syrian Arab Republic0.14Other
MENACanada2.928Italy3.19Turkey30.55Other
MENAChina2.928Canada2.89United Arab Emirates30.29Other
MENARussia2.734Russia2.69Yemen, Republic of 30.12Other
MENAIndia1.916India1.89Australia & New
Zealand1.915Australia & New Zealand1.88Brazil1.402Korea &
Singapore1.73Mexico1.196Mexico1.43Korea &
Singapore1.166Brazil1.38
Sheet2
Source: Bryant, Ralph C. (2008). "Reform of IMF Quota Shares
and Voting Shares: A Missed Opportunity." Washington, DC:
Brookings Institution (April 8).
http://www.brookings.edu/~/media/Files/rc/papers/2008/0409_i
mf_bryant/0409_imf_bryant.pdf
before
Pre-Singapore IMF Voting Rights

Sheet3
now
Role of Cultures, Languages and Religions in International
Business
[email protected]
Religion and Culture
Historically transmitted system of beliefs with meanings
embedded in symbols through which knowledge about power,
order, and truth that guide life are communicated, developed,
perpetuated, and transformed.
Shared beliefs and rituals concerned with the realm of the
sacred.
Ethical Systems:
Moral principles or values used to guide and shape behavior.
Shapes attitudes toward work and economy.

Language
Language is critical to culture because it is the primary means
used to transmit information and ideas.
Knowledge of local language can:
permit a clearer understanding of a situation;
provide access to local people;
allows the person to pick up nuances, implied meanings, and
other information that is not stated outright.
Language and Culture
Language, spoken
“private” does not exist as a word in many languages
Eskimos: 24 words for snow
Words which describe moral concepts unique to countries or
areas: “face” in Asian cultures, “filotimo” in Greece
Spoken language precision important in low-context cultures
Language, unspoken
Context... more important than spoken word in low context
cultures
Different determinants
Cross-cultural business contexts

Economic Features of Religious Philosophies
Christianity: Work ethic, wealth creation, individual freedom
Islam: Pro free enterprise, right to private property, keep
contractual obligations, avoid deception, sin to collect interest
Hinduism: Spiritual progression (reincarnation), aesthetic (non-
material) lifestyle, self-reliance, caste system.
Buddhism: Spiritual achievement but lack of support for
extreme aesthetic behavior or caste system.
Confucianism: High moral/ethical conduct, loyalty, reciprocal
obligations, honesty
7
7
Role of Religion in Economy
Religion rationalises work by morality. Economic success and
failure was decided by God and a marker of divine favor.
NOT the goal of the religion, but rather a byproduct, giving rise
to capitalism, allowing for the basic amount of accumulated
wealth for capitalism to evolve (Weberian logic).
Systematic and rational pursuit of profit combined with
frugality, punctuality, fairness, and the earning of money itself
as a legitimate goal.
Religious Modes of Capitalist Accumulation
Religions in general serve as an instrument of mass
domestication through regulatory mechanisms to control
individual as well as community lives and labour. The
regulatory mechanism imposed by religion helps in disciplining
the labour which is a requirement for the sustenance of
capitalism and its system (Grossman, 2006).

The construction of norms for the regulation of social life and
individual behaviour is a compelling need of capitalism, so long
as it wishes to proclaim itself as a universal form of social life
(Borkenau, 1971: 96 as cited in Grossman, 2006:201).
Individual vs Group Cultures and its implications for
International Business
Individual
Managerial mobility between companies
Economic dynamism, innovation
Good general skills
Team work difficult,
non-collaborative
Exposure to different ways of doing business
e.g., U.S. companies
Group
Loyalty and commitment to company
In-depth knowledge of company
Specialist skills
Easy to build teams, collaboration
Emotional identification with group or company
e.g., Japanese companies
Figure 5.2 Hofstede’s power distance against individualism for
20 countries
Source: Hofstede, G. (1983). The cultural relativity of
organizational practices and theories, Journal of International
Business Studies, Fall, p. 92. Copyright © Geert Hofstede

Impacts of different cultural dimensions at the workplace
(1)Cultural dimensionImpacts at the
workplaceIndividualistSame value standards apply to all:
universalism
Other people seen as potential resources
Task prevails over relationship
Calculative model of employer–employee
relationshipCollectivistValue standards differ for in-group and
out-groups: particularism
Other people seen as members of their group
Relationship prevails over task
Moral model of employer–employee relationship
(2)Cultural dimensionImpacts at the workplaceLarge power
distance (power respect)Hierarchy reflects on existential
inequality of roles
Subordinates expect to be told what to do
Ideal boss is a benevolent autocrat (good father)Small power
distance (power tolerance)Hierarchy means an inequality of
roles, established for convenience
Subordinates expect to be consulted
Ideal boss is a resourceful democrat
(3)Cultural dimensionImpacts at the workplaceWeak uncertainty
avoidance (uncertainty acceptance)Dislike of rules, written or
unwritten
Less formalisation and standardisation
Readiness to accept changeStrong uncertainty
avoidanceEmotional need for rules, written or unwritten
More formalisation and standardisation
Reluctance to accept change

(4)Cultural dimensionImpacts at the workplaceMasculinity
(aggressive goal behaviour)Assertiveness appreciated
Oversell yourself
Stress on careers
DecisivenessFemininity (passive goal behaviour)Assertiveness
ridiculed
Undersell yourself
Stress on life quality
Intuition
Four key strategies for multicultural teams in International
Business
Brett et al. (2006) reduce the 8 stages into 4 key strategies.
Adaptation: team members adapt practices or attitudes
themselves, without changing the team membership or the tasks
allocated.
Structural intervention: removing sources of conflict or inter-
personal frictions by formally re-organising the team or
redistributing tasks.
Managerial intervention: leader(s) intervene to establish norms
of behaviour and decision making which take account of the
multicultural characteristics of the team.
Exit: removing one or more members from the team.
Theoretical Outlook
Abraham Maslow (1954) – Hierarchy of needs
Physiological, safety, social, esteem and self-actualization
needs
David McClelland (1961) – Achievement Theory
Achievement, power and affiliation

Victor Vroom (1964) – Expectancy Theory
People estimate their ability to perform a task and the probable
type of reward
William Ouchi (1982)-Leadership
The impact of culture 11/20/01
18
Literature
Hofstede, Geert (1997), Cultures and Organizations, New York
et al.: McGraw-Hill
Knapp, Karlfried et al. (eds.)(1999), Meeting the Intercultural
Challenge, Sternenfels: Verlag Wissenschaft und Praxis
Role of Social and Cultural Environment in International
Business
University of Salford
Time, Place, People & their Ideologies.
Age and generational influences (Children, elders,
adolescents).
Ethnicity, Race, Religion, culture and language (minority).
Regional (rural/urban, developed, developing and
underdeveloped).
Socio-economic status (class, caste, tribe, education,
occupation, income).
Sexual orientation (gay, lesbian, bisexual, heterosexual).
Indigenous heritage(natives, indigenous, foreign).
National origin (refugees, immigrants, international, students).

Gender (women and transgender people).
Developmental and acquired disabilities (differently able).
Diversity created by economic development and market.
Multiple forms of diversity (identities)
Economic Features of Our Society Today
Individual actions are around the idea of ‘utility, pleasure and
satisfaction’.
Societies are organised as nation-states concerned with
‘production, distribution, exchange, and consumption’ of goods
and services to achieve our growing needs/desires and security.
The economic systems are based on;
Private ownership of the means of production &distribution
Labour is a commodity—bought and sold on labour markets
General commodity production—production for sale not use
Thus, commodity production is essential for profit based on
exchange.
Inequalities
20% of the world’s population was controlling 85% of the
available capital in 1995.
This share was 70% in the 1960s.
1% of the population controls 40% of the capital.
50% of the global population live with less than $2 a day.
The richest 200 people in 2010.
Combined income of 41% of the global population (2.46
billions).
Net worth of $1,042 billion.
Make $500 per second.

Richest 1% humanity as much income as poorest 57% .
10% of the world’s people claim 1/2 of its income; the top 5%,
more than 1/3 in 2014.
Diverse but Divided World
Culture and Religion
Historically transmitted system of beliefs with meanings
embedded in symbols through which knowledge about power,
order, and truth that guide life are communicated, developed,
perpetuated, and transformed.
Shared beliefs and rituals concerned with the realm of the
sacred.
Ethical Systems:
Moral principles or values used to guide and shape behavior.
Shapes attitudes toward work and economy.
RELIGION, ECONOMY AND CULTURE
POLITICS: Social relations involving power and authority
where as POLITICAL ECONOMY is about Social relations
involving power and authority always also involve the access to
and control of resources.
Religion is cultural and political.
Culture is political
Politics involves economics.
Politics, economics, religion, and culture are interrelated and
ever interactive.
We are all agents, subjects, performers, etc., constantly
interacting in a variety of ways with these structural processes.

6
Social Structures of Accumulation
The processes of capital accumulation occurs within a social
regime of accumulation (Michel Aglietta, Robert S. Boyer,
Samuel Bowles and David Gordon).
The social structure of accumulation divides the capital
accumulation process (the profit-making activities of individual
capitalists) from the institutional (social, political, legal,
cultural and market) context within which it occurs (Gordon,
Edwards and Reich,1982: 25).
The social institutions are essential to stabilise class conflicts
and competition, and to assure long-term markets is the core of
SSA (Kotz,1994).
Mode of Production =
The way a society’s technology,
economic organization
and statification systems are organized
Social Relations
of Production =
Who controls the
means of production
Forces of
Production =
What gets produced and
with what Configuration of
means of production
*Land (Including
natural resources)

Regional IntegrationRegional trade agreements (RTAs).docx

Regional IntegrationRegional trade agreements (RTAs).docx

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