MGMT 4710INTERNATIONAL BUSINESSUNIT 2 DISCUSSIONS Since

MGMT 4710
INTERNATIONAL BUSINESS
UNIT 2 DISCUSSIONS
Since the end of World War II, globalization of world markets
has been increasing.
The main characteristics of globalization include free flow of
goods and services
(International trade), and capital (foreign direct investments),
less government intervention,
and regional and global integration. In addition, globalization is
strengthened by cross-
national cooperation and institutions such as the World Trade
Organization, the World
Bank and the International Monetary Fund. Globalization is
supported by the argument
that international trade and foreign direct investments result in
a better allocation of
resources.
In the last few years however, international trade and foreign
direct investments
have been challenged as a growing number of governments have
been questioning the

benefits of free flow of goods, services, and capital. In
particular, the United Kingdom has
left the European Union (Brexit), the North American Free
Trade Agreements (NAFTA)
has been revised, the United Stated is threatening to reduce or
even eliminate its
contributions to international institutions. As a result, tariffs
have started to rise, and
multinational enterprises are under increasing pressures to
reduce their operations in
foreign countries and invest more in their home countries.
Question: Do you favor globalization of world markets?
Instructions:
-Your answer should be one single-spaced page or less (but at
least 10 sentences). Also, cite inside your answer (e.g.:
MacMillan, 2020) two recent articles (no older than 2018) from
business periodicals such as Business Week, Forbes Magazine,
Fortune Magazine, Wall Street Journal, Financial Times, or any
other relevant popular press (no textbook, Wikipedia, or
academic journal). At the end of your answer, provide complete
references of both articles.
MGMK 4710
Chapter 9. GLOBAL FOREIGN EXCHANGE MARKETS

https://www.youtube.com/watch?v=jo4z26THnpo
I.
INTRODUCTION
Multinational enterprises (MNEs) do business in more than one
country. Because countries
have different currencies (e.g. US dollar, Japanese Yen), MNEs
will conduct transactions in
several currencies. This chapter (and the next chapter) will look
at how companies handle the
complexities of dealing with multiple currencies.
II.
KEY CONCEPTS
- A currency is an instrument of payment in a country (e.g. US
dollar) or grouping of countries
(e.g. Euro in most European Union countries).
- Foreign exchange is money denominated in the currency of
another country (e.g. China has
more than US$2 trillion in reserve).
- Foreign exchange market is the place where currencies are
traded. The foreign exchange
market is comprised of two segments:
+ The over-the-counter market (OTC) includes commercial
banks, investment banks, and other financial institutions. The
OTC is where most foreign exchange activity occurs
+ The exchange-traded market includes certain securities
exchanges (e.g., the Chicago Mercantile Exchange and
NASDAQ OMX) where particular types of foreign-exchange
instruments (such as futuresand options) are traded.
- Players on the foreign exchange market are institutions that
take part in foreign exchange

transactions. There are three major players on the foreign
exchange market:
+ Reporting dealers (or money centers) are large banks (e.g.
Deutsche Bank, HSBC)
+ Other financial institutions such as local and regional
commercial banks, hedge funds, pension funds, mutual funds,
etc.
+ Non-financial institutions such as governments and companies
- Exchange rate is the number of units of one currency needed
to buy a unit of another currency.
A direct quote is an exchange rate that gives the value in dollars
of a unit of foreign currency (it
is also referred to as an exchange rate quoted in American
terms). An example of a direct quote
is US$1.2 = Euro 1. An indirect quote is an exchange rate that
gives the value in foreign
currency of one US dollar (it is also referred to as an exchange
rate quoted in European terms).
An example of an indirect quote is US$1= Euro 0.94
- Spot transactions represent the exchange of currencies settled
within two business days after
the date of agreement. The spot rate is the exchange rate quoted
for spot transactions
- Forward transactions represent the exchange of currencies
beyond two business days. The
forward rate is the exchange rate used for forward transactions
- An option is a foreign-exchange instrument that guarantees the
purchaser the right (but does

not impose an obligation) to buy or sell a certain amount of
foreign currency at a set exchange
rate within a specified amount of time.
- A futures contract is a foreign-exchange instrument that
specifies an exchange rate, an
amount, and a maturity date in advance of the exchange of the
currencies, i.e., it is an agreement
to buy or sell a particular currency at a particular price on a
particular future date.
III. CHARACTERISTICS OF THE FOREIGN EXCHANGE
MARKET
1. Size of foreign exchange market: It is estimated in 2007 that
$4 trillion in foreign exchange
was traded each day. One reason for such a trading activity is
the growing importance of foreign
exchange as an alternative asset and the larger emphasis on
hedge funds (a fund, usually used by
wealthy individuals and institutions, which is allowed to use
aggressive trading strategies
unavailable to mutual funds).
2. Importance of the US dollar: The U.S. dollar remains the
most important currency in the foreign-exchange market, and
represented of 84.9 percent of all foreign currency transactions
worldwide in 2010. This is because the dollar is:
+ An investment currency in many capital markets
+ Held as a reserve currency by many central banks
+ The currency for many international transactions

+ The invoice currency in many contracts
+ Often used as an intervention currency when foreign monetary
authorities wish to influence their own exchange rates.
Dollarization: It is the use of the US dollar in some nations in
addition to their domestic
currencies. For example, in Congo several stores and other
merchants accept the US$ alongside
the Congolese Frank. Nations whose economies are dollarized
tend to have unstable currencies.
3. Locations of foreign exchange market: The largest foreign
exchange market is in the United
Kingdom (London), which is strategically situated between Asia
and the Americas, followed by
the United States, Japan, and Singapore. Four of the most
commonly traded currency pairs
involve the U.S. dollar, with the top two pairs being euro/dollar
(EUR/USD) and the dollar/yen
(USD/JPY).IV.
HOW COMPANIES USE FOREIGN EXCHANGE
Companies enter the foreign-exchange market to facilitate their
regular business transactions, and/or to speculate:
1. Imports and exports: When a company must pay for
purchases (imports) or receive payment for sales (exports), it
has an option on the documents to use, including a draft and a
letter of credit:
- Draft: A draft (or commercial bill of exchange) is an
instrument in which one party directs another to make a
payment. If the exporter demands payment to be made

immediately, the draft is called a sight draft. If the payment is
to be made later, it is called a time draft. With a draft however,
it is always possible the importer will not be able to make the
payment to the exporter. The letter of credit minimizes this
possibility
- Letter of credit: A letter of credit (L/C) is an instrument of
payment that obligates the buyer’s bank to honor the draft.
There are still risks with an L/C. It must adhere to al l the
conditions in the document to be valid. A letter of credit may
also be confirmed by another bank and is called a confirmed
letter of credit.
2. Other financial flows: MNEs also deal in foreign exchange
for other transactions, such as the receipt or payment of
dividends or the receipt or payment of loans and interests.
3. Speculation: Sometimes companies deal in foreign exchange
for profit (i.e. for speculation). Speculation involves buying (or
selling) a currency based on the expectation it will gai n (or
lose) value against other currencies. Although speculation
offers the chance to profit, it also contains an element of risk.
Profit-seekers may engage in arbitrage, i.e., they may purchase
foreign currency on one market for immediate resale on another
market (in a different country) in order to profit from a price
discrepancy. Interest arbitrage involves investing in debt
instruments (such as bonds) in different countries in order to
maximize profits by capturing interest-rate and exchange-rate
differentials.
PAGE
1
MGMK 4710
Chapter 8. CROSS-NATIONAL COOPERATION
https://www.youtube.com/watch?v=oF5mLNA7C2Q Regional
economic integration

I.
INTRODUCTION
Cross-national cooperation (agreements among countries)
results in greater integration of economies. Economic
integration is the political and economic agreements among
countries that give preference to member countries in the
agreement. Economic integration has a significant influence on
MNEs because it defines the size of markets and the rules by
which companies need to operate. There are several types of
cross-nation cooperation: bilateral agreements, regional
integration, and global integration.
II. BILATERAL AGREEMENTS
Bilateral agreementsinvolve negotiation by two partner nations
to meet mutual trading objectives. Often, two countries
cooperate to circumvent (go around) the multilateral trading
system that they see as “unfair” to them. This chapter will
however focus on cooperation that involves several countries.
III. GLOBAL INTEGRATION
Global integration is worldwide economic efforts to reduce
tariff and nontariff barriers to the free flow of goods, services,
and other factors of production (e.g. labor, capital). There are a
number of global integration efforts:
A. The World Trade Organization (WTO):
The World Trade Organization is the primary multilateral forum
through which governments conclude trade agreements and
settle associated disputes. WTO replaced the General
Agreement on Tariffs and Trade (GATT). Established in 1947,
GATT was a multilateral agreement that governed the
international trade of goods. Its main objective was to abolish
quotas and reduce tariffs. Several rounds of negotiations took

place to address multiple violations of GATT agreements. The
outcome of those negotiations was the replacement of GATT by
the WTO in 1995.
The World Trade Organization is a permanent world trade body
created for the purposes of (i) facilitating reciprocal trade
negotiations and (ii) enforcing trade agreements between or
among member nations. The WTO improved GATT by covering
trade in services, intellectual property protection, trade dispute
settlement (e.g. dispute over subsidies and tariffs), and reviews
of trade policies. Currently the 153-member countries of the
WTO collectively account for more than 97 percent of the value
of world trade.
B. Commodity agreements:
A commodity agreement is designed to stabilize the price and
supply of a primary commodity such as petroleum (oil), natural
gas, copper, etc. If effective, commodity agreements can
alleviate adverse consequences of both long-term trends and
short-term fluctuations in commodity prices for the world
economy. The most important commodity agreement is the
Organization of Petroleum Exporting Countries (OPEC). OPEC
represents several oil producing countries and its purpose is to
control the quantity produced in order to minimize fluctuations
in oil prices.
C. Other global integration efforts:
The United Nations (UN): The UN was established in 1945 to
promote international peace and security and to help with global
issues such as economic development, antiterrorism, and
humanitarian relief. The UN has several specialized entities,
including UNICEF and UNCTAD.
The United Nations International Children’s Emergency Fund
(UNICEF) was created to address the needs of children, first in

war-torn Europe, and later, in less developed countries. The UN
Conference on Trade and Development (UNCTAD) was
established to tackle problems of the developing world
concerning trade issues.
Non-Government Organizations (NGOs): NGOs are private and
non-profit volunteer institutions such as the Red Cross, Doctors
Without Borders, that are undertaking transnational activities
whose main focus is human rights, humanitarian assistance to
displaced people in war zones, etc. Today, NGOs are highly
active in less developed countries.
Global integration efforts also include institutions such as the
World Bank and the International Monetary Fund. These two
institutions are discussed in later chapters.
IV.
REGIONAL INTEGRATION
Regional integration is the economic cooperation of countries in
the same geographic proximity. Integration efforts are taking
place in every continent.
A. Levels of regional integration:
Basic levels of regional integration are:
- Free Trade Agreements (FTA): these are integration efforts
whereby all trade barriers are abolished among member nations,
but each member nation has its own trade policies (i.e. barriers)
with non-member countries.
- Customs Unions: integration efforts that abolish all trade
barriers among member nations, plus common trade policies
with non-member countries.
- Common Market: all of the above, plus free movement of
goods, people and capital.
- Economic Union: all of the above, plus coordination and
harmonization of monetary and fiscal policies in a single

economic entity.
- Monetary Union: all of the above, plus adoption of a common
currency.
- Political Union: all of the above, plus establishment of a
supranational political structure dedicated to dealing with
common political and economic affairs.
B. Effects of regional integration:
Regional economic integration can affect member countries in
social, cultural, economic, and/or political ways. Regional
integration has static as well as dynamic effects:
- Static effects: they represent the shifting of resources from
inefficient to efficient firms as trade barriers fall. Static effects
may occur when either of two conditions occurs:
Trade creation: occurs when production shifts from less
efficient domestic producers to more efficient regional
producers for reasons of absolute or comparative advantage.
Trade diversion: occurs when, as a result of the imposition of
common external barriers, trade shifts from more efficient
external sources to less efficient suppliers within the group.
- Dynamic effects: they represent the gains from overall market
growth, the expansion of production, the realization of greater
economies of scale and scope, and the increasingly competitive
nature of the regional market.
C. Major regional integration groups:1. The European Union
(EU):
The European Union represents the most integrated region in
the world. Integration efforts in Europe started shortly after the
end of World War II.
Organizational Structure:
+ The European Commission: it provides the EU’s political
leadership, i.e., it proposes and implements EU legislation, and
it monitor compliance with EU laws by member nations.

+ The European Council: it passes laws, and makes and enacts
major policies.
+ The European Parliament: it has three major responsibilities:
legislative power, control over the budget, and supervision of
executive decisions.
+ The European Court of Justice: it ensures consistent
interpretation and application of EU treaties. It also serves as
an appeals court for individuals, firms, and organizations fined
by the commission for infringing upon the laws.
The Single European Act: it is designed to eliminate all trade
barriers in Europe.
Monetary Union: Signed in 1992, the Treaty of Maastricht led
to the creation of a single currency, the Euro, to be launched in
1999. However, not all members have adopted the euro.
Expansion: The EU has been expanding and has 28 members
(Brexit, or exit of the United Kingdom, may bring the number
of members down to 27).
Challenges facing the EU: One challenge is the economic
disparity among members. Compared to traditional members
(e.g. Germany, France, Netherlands), several new members are
poor, newly democratized economies. This can seriously strain
EU financial resources. Another challenge is the issue of
governance, because economically large members of the EU fear
that the addition of so many new countries will weaken their
control and influence.
Implications of the unification of Europe for MNEs:
+ Site location: As EU is a single market, the location of MNEs’
facilities should take into account the total production costs
(i.e. labor, transportation).
+ Entry strategy: MNEs need to decide whether to enter the EU
market through new investments, expanding existing

investments, joint ventures, or mergers and acquisitions.
+ National differences: MNEs should determine if
standardization is better, given persistent national differences
(economic growth rates, cultural traditions).
2. North American Free Trade Agreement (NAFTA):
Effective January 1, 1994, the North American Free Trade
Agreement (NAFTA) incorporates Canada, Mexico, and the
United States into a regional trade bloc of countries with
somewhat different cultures, populations, and income levels.
Purpose of NAFTA: NAFTA calls for the elimination of tariff
and nontariff barriers, the harmonization of trade rules, the
liberalization of restrictions on services and foreign investment,
the enforcement of intellectual property rights, and a dispute
settlement process. NAFTA makes logical sense in terms of
geographical location and trading importance.
Benefits of NAFTA: Canada and the U.S. benefit from low -cost
agricultural products from Mexico. Also, U.S. producers benefit
from a growing Mexican market (Mexican incomes are steadily
rising because of substantial inflows of FDIs from US MNEs).
Trade diversion: NAFTA is a good example of trade diversion
because Canadian and U.S. companies have shifted some
production facilities to Mexico from Asia due to the benefits of
the trade agreement and NAFTA privileges.
NAFTA privileges: MNEs are granted tariff privileges if they
are located in a NAFTA country. For example, the rule of origin
states that to qualify for more liberal tariff conditions, at least
50% of the cost of the content (e.g. components) need to
originate within the region.
Challenges posed by NAFTA: First, due to low wages in
Mexico, U.S. companies invested significantly in the country
(instead of staying in the US). As a result, Wal-Mart is now the
largest employer in Mexico. Second, according to some
estimates, 1.3 million farm jobs were eliminated in Mexico due
to competition from American farmers. In turn, some of the

Mexican workers who had lost their job illegally cross the
border in their search for work in the United States (this
argument is increasingly being disputed, because Mexicans are
now finding work at home, as more US MNEs are investing in
Mexico, therefore creating jobs there).
Implications of NAFTA for MNEs: Because NAFTA countries
are seen as one large market, MNEs are re-examining their trade
and investment strategies. For example, automotive and
electronics firms are rationalizing their production (by
concentrating their activities in one location), and standardizing
their products. Although much low-end manufacturing has
moved south to Mexico, more sophisticated manufacturing and
services operations are increasing in the United States.
3.
Regional Economic Integration in the Americas:
Although there are several regional economic groups in the
Americas, regional integration in Latin America has not been
particularly successful. The reason is that many countries rely
more on the United States for trade than on members of their
own groups.
The largest regional trade group in South America is
MERCUSOR. It is comprised of Brazil (the most populous
country and the largest economy in Latin America), Argentina,
Paraguay, Uruguay, Chile, Bolivia, Colombia, Ecuador, and
Peru.
4. Regional Economic Integration in Asia:
Regional economic integration has not been as successful in
Asia as it was in Europe or North America, in part because most
Asian countries have relied on U.S. and European markets for
their exports. Also, for a variety of reasons, several Asian
nations do not get along well.

Asia’s most important trading groups include ASEAN AND
APEC. ASEAN (Association of Southeast Asian Nations) was
formed in 1967 for the purpose of cutting tariffs on interzonal
trade to a maximum of 5%. It is comprised of Brunei,
Cambodia, China, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam. ASEAN holds
great promise for market and investment opportunities because
of its large market size.
APEC (Asia Pacific Economic Cooperation) was founded in
1989 to promote multilateral economic cooperation in trade and
investment in the Pacific Rim (countries that border both sides
of the Pacific Ocean). It is comprised of 21 nations, including
the United States. Progress toward free trade is hampered by the
number of members, the geographic distances between nations,
and the lack of a binding treaty.
5. Regional economic integration in Africa:
There is one continent-wide grouping called the African Union,
and several regional trade groups. These include the Southern
Africa Development Community (SADC), the Common Market
for Eastern and Southern Africa (COMESA), the Economic and
Monetary Community of Central Africa, and the West African
Economic and Monetary Union (WAEMU).
Integration efforts in Africa are the least effective. One major
problem with African countries is that they rely more on their
former colonial powers and other developed markets for trade
than they do on each other. In addition, the leaders of African
nations are more preoccupied in supporting each other to stay in
power than in developing their economies.
V. IMPLICATIONS OF ECONOMIC INTEGRATION FOR
MNEs

Economic integration is reinforcing the trend toward
globalization of markets. As economies integrate and become
increasingly interdependent, MNEs need to address two
strategic issues:
1. Rationalization:
With the harmonization of trade and investment policies and of
product standards, MNEs have an opportunity to realize cost
economies by centralizing production in few optimal locations.
Rationalization may however be constrained by persistent
country differences (e.g. is European Union a one unified
market or several national markets that are simply integrated?).
2. Regional versus global focus:
While the trend toward globalization is increasing, there may be
situations where MNEs should “regionalize” their activities.
This is particularly the case when an integrated region provides
preferential treatment for members, and discriminate against
mon-members (e.g. certain products are granted the NAFTA
status based on the “rule of origin”).
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1

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