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Chapter one : Globalization
1. Introduction
Over the last five decades, the world has undergone a fundamental shift from a collection of self-
contained national economies toward an interdependent, integrated global economic system.
While barriers to trade and investment have historically declined, recent political events like Brexit
and trade disputes between the United States and China have introduced uncertainty about the
future of this integration. Companies like Apple exemplify this shift by utilizing global supply
chains to manufacture complex products like the iPhone using components and labor from across
the globe. Proponents view this as an inevitable future, while critics emphasize national sovereignty
and self-sufficiency.
2. What Is Globalization?
Globalization refers to the shift toward a more integrated and interdependent world economy. This
process has two primary facets: the globalization of markets and the globalization of production.
The Globalization of Markets This involves the merging of historically distinct and separate
national markets into one huge global marketplace. While firms like Coca-Cola and Starbucks
facilitate this trend by offering standardized products, managers must still account for significant
remaining differences in consumer tastes and legal regulations.
The Globalization of Production This refers to sourcing goods and services from locations
worldwide to exploit national differences in the cost and quality of factors of production.
 Processes and Types of Globalization:
 Merging national markets to create a unified global marketplace.
 Standardizing consumer products to converge global tastes (e.g., McDonald’s,
IKEA).
 Sourcing factors of production (labor, energy, land, and capital) from optimal
global locations.
 Outsourcing service activities such as software debugging, radiology, and customer
support using the Internet.
 Developing "global products" where the country of origin is less relevant than the
brand itself.
3. The Emergence of Global Institutions
As business transcends national borders, global institutions are required to manage, regulate, and
police the marketplace.
 Processes and Types of Global Institutions:
 Policing the world trading system and ensuring nation-states adhere to treaties
(World Trade Organization - WTO).
 Maintaining order in the international monetary system and acting as a lender of
last resort (International Monetary Fund - IMF).
 Promoting economic development through low-interest infrastructure loans (World
Bank).
  Preserving peace through international cooperation and harmonizing the actions
of nations (United Nations - UN).
 Coordinating policy responses to financial crises among the 19 largest economies
(Group of Twenty - G20).
4. Drivers of Globalization
Two macro factors underlie the trend toward greater globalization: the decline in barriers to trade
and investment, and technological change.
Declining Trade and Investment Barriers After World War II, Western nations committed to
reducing tariffs and barriers to the free flow of goods, services, and capital under the GATT and
later the WTO.
Role of Technological Change Major advances in communication, information processing, and
transportation technology have made globalization a tangible reality.
 Processes and Types of Technological Drivers:
 Microprocessor development, which enabled high-power, low-cost computing.
 Internet growth, which serves as the "information backbone" of the global economy
and acts as an equalizer for firms of all sizes.
 Containerization, which revolutionized transportation by significantly lowering the
cost of shipping goods over long distances.
 Low-cost jet travel, which reduced the cultural distance between nations and
facilitated a convergence of consumer tastes.
5. The Changing Demographics of the Global Economy
The global economic landscape has shifted from a period of U.S. dominance to a more multipolar
environment.
Changing World Output, Trade, and FDI The relative share of world output accounted for by the
U.S. and other developed nations has declined, while the share of developing nations, particularly
the BRIC countries (Brazil, Russia, India, China), has risen.
Changing Nature of the Multinational Enterprise (MNE) There has been a rise in non-U.S.
multinationals and the emergence of mini-multinationals.
 Processes and Types of Demographic Shifts:
 Relative decline of U.S. economic dominance as other nations industrialize.
 Shift in economic geography toward developing nations, which may account for
60% of world activity by 2030.
 Increased outward stock of FDI as firms from many nations invest across borders.
 Growth of mini-multinationals as the Internet lowers barriers for small and
medium-sized firms to build international sales.
 Transition to market-based systems following the collapse of communism in
Eastern Europe and reforms in China.
6. The Globalization Debate
The impact of globalization is a subject of intense debate among economists, politicians, and
business leaders.
  Processes and Types of Globalization Issues:
 Antiglobalization protests targeting job losses, environmental degradation, and
"cultural imperialism".
 Exporting jobs to low-wage nations to reduce cost structures.
 Widening earnings gaps between skilled and unskilled workers in developed
nations.
 Race to the bottom where firms move production to countries with weak
environmental or labor regulations.
 Enacting tougher regulations as nations become wealthier through trade (the
counter-argument to environmental concerns).
 Usurping national sovereignty by allowing supranational organizations to dictate
policy to democratically elected governments.
 Widening the gap between rich and poor nations while simultaneously reducing
absolute poverty rates globally.
7. Managing in the Global Marketplace
Managing an international business is more complex than managing a domestic one because
countries are different in their cultures, political, and economic systems.
 Processes and Types of Global Management:
 Varying business practices country-by-country in areas like marketing, human
resources, and strategy.
 Selecting optimal locations for production activities to minimize costs.
 Choosing entry modes for foreign markets (e.g., exporting, licensing, joint ventures,
or wholly owned subsidiaries).
 Navigating government intervention in the international trade and investment
system.
 Developing policies for currency conversion and managing exchange rate risks.
Chapter two : National Differences in Political Economy
L01: Understand how the political systems of countries differ
A political system is defined as the system of government in a nation. These systems shape the
economic and legal frameworks of a country and can be assessed along two primary dimensions:
the degree of emphasis on collectivism versus individualism, and the degree to which they are
democratic or totalitarian.
Main Points:
 Political systems that prioritize collective goals often lead to state intervention in economic
activity.
 Systems emphasizing individual freedoms typically advocate for democratic ideals and free-
market economics.
 While these dimensions are interrelated, "gray areas" exist where societies may mix
elements of different systems, such as democratic states with high collective values.
Types and Processes of Political Systems:
 Collectivism: A system that stresses the primacy of collective goals over individual goals,
viewing the needs of society as a whole as more important than individual freedoms.
  Socialism: Modern expression of collectivism where the state owns basic means of
production, distribution, and exchange to ensure workers are fully compensated.
 Communism: A type of socialism that believes these goals can only be achieved
through violent revolution and totalitarian dictatorship.
 Social Democracy: A type of socialism where the state works to achieve socialist
goals through democratic means rather than revolution.
 Individualism: A philosophy stressing that an individual should have freedom in their
economic and political pursuits and that their interests should take precedence over the
interests of the state.
 Democracy: A system in which government is by the people, exercised either directly or
through elected representatives.
 Representative Democracy: The most common modern form where citizens
periodically elect individuals to represent them and form a government.
 Totalitarianism: A form of government in which one person or political party exercises
absolute control over all spheres of human life and prohibits opposing political parties.
 Communist Totalitarianism: A system where the Communist party monopolizes
power.
 Theocratic Totalitarianism: A system where political power is monopolized by a
party or group that governs according to religious principles.
 Tribal Totalitarianism: Occurs when a political party representing the interests of a
particular tribe monopolizes power.
 Right-Wing Totalitarianism: A system that generally permits some individual
economic freedom but restricts individual political freedom to prevent the rise of
communism.
 Pseudo-Democracies: Imperfect systems that lie between pure democracy and
totalitarianism, where authoritarian elements capture much of the machinery of the state
while maintaining the appearance of democratic processes.
L02: Understand how the economic systems of countries differ
Political ideology and economic systems are closely connected; societies emphasizing
individualism often have market-based systems, while those emphasizing collectivism often feature
state control.
Main Points:
 In a market economy, consumers are "sovereign," determined by their purchasing patterns.
 Command economies often stagnate because state-owned enterprises have little incentive to
control costs or innovate.
 The government's role in a market economy is to encourage free and fair competition by
banning restrictive monopoly practices.
Types and Processes of Economic Systems:
 Market Economy: An economic system in which all productive activities are privately
owned and production is determined by the interaction of supply and demand through the
price system.
 Command Economy: An economic system where the government plans the goods and
services produced, the quantity, and the price at which they are sold.
  State Ownership: The process where all businesses are owned by the state so the
government can direct investments for the nation's interest.
 Mixed Economy: A system found between market and command economies where certain
sectors are left to private ownership while others have significant state ownership and
government planning.
 Privatization: The process of selling state-owned enterprises to private investors to
stimulate gains in economic efficiency.
L03: Understand how the legal systems of countries differ
The legal system refers to the rules, or laws, that regulate behavior along with the processes for
enforcement and redress. These systems are immense to international business because they define
how business transactions are executed and set the rights and obligations of parties.
Main Points:
 Legal systems are strongly influenced by the prevailing political system and historical
tradition.
 Common law systems are considered more flexible because judges have the power to
interpret the law based on specific circumstances.
 Civil law systems are generally less adversarial because judges only have the power to apply
detailed legal codes.
Types and Processes of Legal Systems:
 Common Law: A system based on tradition, precedent, and custom, where law courts
have the power to interpret the law to unique circumstances.
 Civil Law System: A system based on a detailed set of laws organized into codes, where
judges apply rather than interpret the law.
 Theocratic Law System: A system where the law is based on religious teachings, such as
Islamic law which governs both moral and commercial activities.
 Contract Law: The body of law that governs contract enforcement.
 Coping with Differences: The process where international businesses must adjust to
common law's detailed contracts versus civil law's shorter, code-based contracts.
 United Nations Convention on Contracts for the International Sale of Goods
(CISG): A uniform set of rules governing commercial contracts between buyers and
sellers in different nations.
 Property Rights Protection: The legal rights over the use of a resource and any income
derived from it.
 Private Action: Violation of property rights through theft, piracy, or blackmail by
private individuals or groups.
 Public Action: Occurs when public officials extort income or property from holders
through legal mechanisms (e.g., excessive taxation) or illegal means (corruption).
 Intellectual Property (IP) Protection: Legal rights over the product of intellectual activity,
established through specific legal instruments.
 Patents: Grants an inventor exclusive rights for a defined period to the manufacture
or sale of an invention.
 Copyrights: Exclusive legal rights of authors and artists to publish and disperse their
work.
  Trademarks: Officially registered designs and names used to differentiate products.
 Regulation of Product Standards:
 Product Safety Laws: Laws setting safety standards to which a product must
adhere.
 Product Liability: Holding a firm and its officers responsible when a product causes
injury, death, or damage.
L04: Explain the implications for management practice of national differences in political economy
The macro environment of a country profoundly impacts the benefits, costs, and risks associated
with doing business there.
Main Points:
 Management must weigh ethical considerations, such as whether to operate in totalitarian
countries that deny human rights.
 The overall attractiveness of a country depends on balancing long-term benefits against the
potential costs and risks.
 Democratic nations with market-based economies and strong property rights protections are
generally more attractive for investment.
Types and Processes of Managerial Implications:
 Assessing Market Attractiveness: The process of evaluating a country's potential as a
market or investment site.
 Evaluating Benefits: Based on the size of the market, current purchasing power, and
future wealth prospects of consumers.
 Calculating Costs: These include the costs of corruption (political payoffs), the cost of
providing one's own infrastructure, and legal costs for compliance.
 Risk Assessment:
 Political Risk: The likelihood that political forces will cause drastic changes in a
country's business environment that adversely affect profit goals.
 Economic Risk: The likelihood that economic mismanagement (e.g., high inflation)
will cause drastic changes that hurt profits.
 Legal Risk: The likelihood that a trading partner will opportunistically break a
contract or expropriate property rights due to weak safeguards.
Chapter 4 : Differences in Culture
L01: Explain what is meant by the culture of a society
Culture is defined as a complex system of values and norms shared among a group of people that,
when taken together, constitute a "design for living". Values serve as the bedrock of a culture,
representing abstract ideas about what a group believes to be good, right, and desirable. These
shared assumptions define how things "ought to be" and are often invested with significant
emotional importance. Norms are the social rules and guidelines that prescribe appropriate behavior
in specific situations. A society is a group of people sharing a common set of these values and
norms. While a society often corresponds with a nation-state, the relationship is frequently
ambiguous because a single country may contain multiple subcultures or a single culture may span
several nations.
 Types and Processes of Cultural Components:
  Folkways: Routine conventions of everyday life that deal with social manners, dress
codes, and business etiquette.
 Mores: Norms that are more widely observed, have greater moral significance, and
are often enacted into law (e.g., prohibitions against theft or incest).
 Rituals and Symbols: The visible manifestations of a culture that constitute the
outward expression of deeper underlying values.
 Socialisation: The process by which individuals are taught the "hidden curriculum"
of a society, such as respect for authority and personal achievement, through formal
and informal education.
L02: Identify the forces that lead to differences in social culture
Differences in social culture do not emerge fully formed but evolve over time in response to several
macro factors. These determinants include the prevailing political and economic philosophies, the
social structure of a society, and dominant factors such as religion, language, and education. For
instance, a society’s social structure refers to its basic organization and is shaped by how people
and groups treat each other. This includes whether the society emphasizes the individual as the basic
unit or views the group as the primary means of social organization. Furthermore, social
stratification—the hierarchical division of society into categories—profoundly influences life
chances and mobility.
 Types and Processes of Cultural Determinants:
 Individual-Group Dimension: The degree to which a society emphasizes individual
performance and achievement (common in Western cultures) versus group
membership and collective action (common in non-Western cultures).
 Social Stratification Systems: Methods of organizing people into social categories
based on socioeconomic characteristics like family background and income.
 Caste System: A closed process of stratification where social position is determined
by birth and remains fixed for a lifetime.
 Class System: An open process of social stratification where individuals can move
between strata through achievement or luck.
 Spoken Language: The primary process for communication that also structures how
members of a society perceive and categorize the world.
 Unspoken Language: Non-verbal communication cues, such as hand gestures and
personal space, that are culturally bound.
L03: Identify the business and economic implications of differences in culture
Culture has a direct relationship with the cost of doing business in a country and influences its
national competitive advantage. For example, a society’s religious and ethical systems—shared
beliefs concernced with the sacred and moral principles—shape attitudes toward work and
entrepreneurship. Protestant ethics have been linked to the "spirit of capitalism" due to their
emphasis on hard work and wealth creation. Conversely, Confucian ethics may lower the costs of
doing business by emphasizing loyalty, honesty, and reciprocal obligations. In contrast, class-
conscious societies with significant management-labor friction often face higher production costs
due to industrial disputes.
 Types and Processes of Economic and Business Implications:
  Resource-Transfer Effects: The process of transferring managerial and technical
skills through expatriate postings to enhance local operations.
 Guanxi: The Chinese process of building relationship networks based on reciprocal
obligations to facilitate business in a society lacking a strong rule-based legal
tradition.
 Pro-Business Religious Doctrines: The modern process where most major religions
have evolved to support free enterprise and entrepreneurial activity.
 Islamic Banking Methods: Processes such as mudarabah (profit sharing) and
murabaha (markup) used to conduct financial transactions without violating
prohibitions against interest.
 Class Consciousness: The condition where people perceive themselves in terms of
their class background, potentially leading to antagonistic management-labor
relations.
L04: Recognize how differences in social culture influence values in the workplace
National culture profoundly impacts work-related values, requiring multinational firms to vary their
management practices accordingly. Geert Hofstede’s research identified several dimensions that
summarize how culture relates to the workplace. Power distance measures how a society deals
with physical and intellectual inequalities. Uncertainty avoidance captures the extent to which
cultures accept ambiguous situations. Individualism versus collectivism focuses on the
relationship between individuals and their fellows. Newer frameworks, like the GLOBE instrument
and the World Values Survey, have since expanded on these concepts to include dimensions like
humane orientation and performance orientation.
 Types and Processes of Workplace Value Dimensions:
 Power Distance: The process of managing inequalities in power and wealth within
an organization.
 Individualism vs. Collectivism: The degree to which workplace ties are loose
(valuing personal freedom) or tight (valuing the interests of the collective).
 Uncertainty Avoidance: The process of creating rules, regulations, and job security
to manage ambiguous situations.
 Masculinity vs. Femininity: The differentiation of gender roles and the emphasis on
"masculine" values like achievement versus "feminine" values like cooperation.
 Long-Term vs. Short-Term Orientation: The degree to which citizens are
programmed to accept delayed gratification for material and social needs.
 Indulgence vs. Restraint: The process by which a society allows or suppresses the
gratification of basic human drives related to enjoying life.
L05: Demonstrate an appreciation for the economic and business implications of cultural change
Culture is dynamic and evolves over time, though change is often slow and painful. Economic
advancement and globalisation are primary engines of cultural change. As societies become
wealthier, there is a documented shift from collective values toward individualism because people
have less need for material support from extended families or companies. This has led to the
convergence hypothesis, which suggests that modern communications and transportation are
creating a more homogeneous global consumer culture, particularly among younger populations.
However, deep-seated social values and norms often change much more slowly than visible
material symbols.
  Types and Processes of Cultural Change:
 The Convergence Hypothesis: The process where diverse cultures move toward a
form of homogeneity due to international trade and global media.
 Urbanisation: A process driven by economic progress that leads to a declining
emphasis on traditional values found in rural societies.
 Secular-Rational Shift: The process where countries moving up the economic
ladder transition away from traditional religious and family-linked values.
 Cross-Cultural Literacy Development: The management process of building an
appreciation for cultural differences to avoid costly business blunders abroad.
 Pioneer Risk: The process where early entrants into a market must educate
customers about new products, potentially bearing higher costs than later followers.
Chapter 6: International Trade Theory
L01: Understand why nations trade with each other
Nations trade because it allows them to consume more than they could in isolation by exploiting the
benefits of specialization. Common sense indicates that a nation shouldn't produce everything it
needs if it can buy those goods more cheaply from others; for instance, Iceland trading its abundant
fish for oranges it cannot grow. However, formal trade theory goes deeper, showing that trade is
beneficial even for products a country is capable of producing for itself.
 Main Points:
 Trade allows countries to specialize in producing goods they make most efficiently.
 Importing goods produced more efficiently elsewhere allows domestic resources
(land, labor, capital) to be shifted to more productive uses.
 Limits on imports often serve the interests of domestic producers but hurt domestic
consumers by raising prices and reducing variety.
 Types and Processes of Why Nations Trade:
 Resource Endowment Trading: Trading based on natural gifts like climate,
minerals, or land (e.g., Saudi Arabia exporting oil).
 Labor Productivity Processes: Trading based on differences in how efficiently
labor is used to produce specific goods.
 Factor Proportion Processes: Trading based on the relative abundance and cost of
land, labor, and capital factors.
 Consumer Preference Convergence: A process where global material culture starts
to look similar, creating unified demand for global products like smartphones.
L02: Summarize the different theories explaining trade flows between nations
The history of trade theory shows an evolution from government-controlled "mercantilism" to
modern models emphasizing competitive advantage and economies of scale.
Definitions and Theories:
 Mercantilism: A 16th-century doctrine advocating that countries should encourage exports
and discourage imports to maintain a trade surplus and accumulate gold and silver.
 Absolute Advantage: Proposed by Adam Smith (1776), it argues a country should produce
only what it makes more efficiently than any other country.
  Comparative Advantage: David Ricardo (1817) argued that a country should specialize in
what it produces most efficiently and buy what it produces less efficiently, even if it could
produce those goods more efficiently than the seller.
 Heckscher–Ohlin Theory: Attributes trade patterns to differences in national factor
endowments (land, labor, capital) rather than just productivity.
 Product Life-Cycle Theory: Raymond Vernon suggested that new products are initially
produced in the country of innovation and then move to lower-cost foreign locations as the
product matures.
 New Trade Theory: Stresses that economies of scale and first-mover advantages allow
certain countries to dominate exports in specific industries where the world market can only
support a few firms.
 National Competitive Advantage (Porter's Diamond): Michael Porter explains
international success through four attributes: factor endowments, demand conditions,
related/supporting industries, and firm strategy/structure/rivalry.
 Types and Processes of Trade Theories:
 Zero-sum Game: The mercantilist process where one country's economic gain
results in a loss for another.
 Positive-sum Game: The process in free trade where all participating countries
realize economic gains.
 Production Possibility Frontier (PPF): A mapping process used to show the
various combinations of goods a country can produce given its resources.
 Standardization Process: A stage in the product life cycle where price becomes the
main competitive weapon and production moves to low-cost locations.
 Experience Curve Process: Systematic reductions in production costs that occur
over the life of a product due to learning and scale.
L03: Recognize why many economists believe that unrestricted free trade between nations will raise
the economic welfare of countries that participate in a free trade system
Economists advocate for free trade—where governments do not attempt to influence through
quotas or duties what its citizens can buy or sell—because it maximizes global production and
efficiency.
 Main Points:
 Static Gains: Trade supports higher levels of domestic consumption and more
efficient utilization of resources.
 Dynamic Gains: Free trade stimulates growth by increasing a country's stock of
resources (via foreign investment) and improving the efficiency of resource use.
 Samuelson Critique: A caution that if a rich country trades with a poor country that
rapidly improves productivity, the rich country's real wage rates might fall,
potentially negating the gains from cheaper imports.
 Types and Processes of Economic Welfare:
 Specialization Process: Replacing high-cost domestic production with low-cost
imports to free up capital.
  Efficiency Gains: The process where opening an economy to competition forces
domestic producers to find more efficient methods to survive.
 Economic Growth Cycle: A process where trade leads to higher income, which
increases demand for more goods, further fueling growth.
 Resource Transfer: The process of capital, labor, and technology flowing from
abroad into an open economy.
L04: Explain the arguments of those who maintain that government can play a proactive role in
promoting national competitive advantage in certain industries
While free trade is generally preferred, New Trade Theory and Porter’s Diamond suggest a role
for strategic trade policy.
 Main Points:
 Governments can use subsidies to help domestic firms become first movers in newly
emerging industries (e.g., U.S. support for Boeing or EU support for Airbus).
 Government policy can influence the "National Diamond" through investments in
education (advanced factors), local product standards (demand), and antitrust laws
(rivalry).
 Drawbacks: Such policies often invite retaliation (trade wars) or are captured by
special-interest groups that protect inefficient industries.
 Types and Processes of Government Intervention:
 Subsidization Process: Providing R&D grants, low-interest loans, or tax breaks to
domestic producers.
 Factor Upgrading: The process of government investing in higher education and
research to create advanced factors of production like skilled labor.
 Antidumping Actions: A process designed to punish foreign firms that sell goods
below cost to drive out domestic competitors.
 Local Content Requirements: A process requiring that a specific fraction of a good
be produced domestically to protect local jobs.
L05: Understand the important implications that international trade theory holds for business
practice
International trade theory offers essential insights for corporate strategy, particularly regarding
where to produce and how to compete.
 Main Points:
 Location Implications: Firms should disperse productive activities to countries
where they can be performed most efficiently based on comparative advantage.
 First-Mover Implications: Investing heavily to capture a market early can establish
a long-term sustainable advantage.
 Policy Implications: Businesses are major players who can lobby the government to
either promote free trade or seek protectionist barriers.
 Types and Processes of Business Practice:
 Global Web Configuration: The process of siting design in one country, component
manufacturing in another, and final assembly in a third to maximize value.
  Preemption Process: Investing to build a brand and scale ahead of competitors to
discourage their entry into an industry.
 Lobbying Process: Firms influencing trade policy, such as Apple and IBM lobbying
against tariffs on Japanese components that they needed for their own products.
 Flexible Sourcing Process: Moving production between global locations to counter
foreign exchange movements or new trade barriers.
Chapter 7 : The Political Economy of International Trade
L01: Identify the policy instruments used by governments to influence international trade flows
Governments use seven main instruments to intervene in international trade: tariffs, subsidies,
import quotas, voluntary export restraints, local content requirements, administrative
policies, and antidumping duties. While tariffs are the oldest and simplest tool, the decline in tariff
barriers in recent decades has been accompanied by a rise in nontariff barriers.
Main Points:
 Tariffs are generally pro-producer and anticonsumer; they protect domestic firms but
raise prices for the public.
 Nontariff barriers like subsidies and quotas have become more prevalent as the WTO has
successfully limited traditional tariffs.
 Trade instruments often lead to an inefficient utilization of resources because they
encourage domestic production of goods that could be made more efficiently abroad.
Types and Processes of Trade Policy:
 Specific Tariffs: The process of levying a fixed charge for each unit of a good imported
(e.g., $3 per barrel of oil).
 Ad Valorem Tariffs: A process where taxes are levied as a proportion of the value of the
imported good (e.g., a 25 percent tax on steel).
 Subsidies: Government payments to domestic producers in forms such as cash grants, low-
interest loans, tax breaks, and equity participation.
 Import Quotas: Direct restrictions on the quantity of a good that may be imported, often
enforced through import licenses.
 Tariff Rate Quotas: A hybrid process where a lower tariff rate is applied to imports within a
quota and a higher rate is applied to those exceeding it.
 Voluntary Export Restraints (VER): A quota on trade imposed by the exporting country,
typically at the request of the importing country’s government.
 Local Content Requirements (LCR): A requirement that some specific fraction of a good
be produced domestically, expressed in physical or value terms.
 Administrative Trade Policies: Bureaucratic rules designed to make it difficult for imports
to enter a country (e.g., unusual product standards).
 Antidumping Duties: Special tariffs (often called countervailing duties) designed to
punish foreign firms that sell goods below their cost of production or "fair" market value.
L02: Understand why governments sometimes intervene in international trade
The case for government intervention is generally divided into two categories: political arguments
and economic arguments. Political arguments focus on protecting specific interest groups (usually
producers), while economic arguments aim to boost the nation’s overall wealth.
Main Points:
 Political intervention is often a response to unfair foreign competition, such as when
foreign producers are heavily subsidized by their governments.
 Economic arguments have seen a renaissance with the development of new trade theory
and the concept of strategic trade policy.
Types and Processes of Government Intervention:
 Protecting Jobs and Industries: The most common political process used to shield
domestic workers from low-wage foreign competition or subsidized imports.
 National Security: Protecting industries like aerospace, electronics, and semiconductors
that are deemed vital for a country's defense.
 Retaliation: Using the threat of trade barriers as a bargaining tool to force partners to open
their markets or follow international rules.
 Protecting Consumers: Implementing regulations to ban or limit products deemed unsafe
(e.g., the ban on American beef during mad cow disease scares).
 Furthering Foreign Policy: Using trade terms to build strong relations with allies or trade
sanctions to punish "rogue states".
 Protecting Human Rights: Linking trade status to a country’s treatment of its citizens to
pressure for democratic reform.
 Infant Industry Argument: A process of temporarily supporting new manufacturing
industries in developing nations until they are strong enough to meet international
competition.
 Strategic Trade Policy: The process of using subsidies to help domestic firms achieve
first-mover advantages in global industries where economies of scale are significant.
L03: Summarize and explain the arguments against strategic trade policy
While strategic trade policy sounds appealing, many economists, including Paul Krugman, argue
that it is often unworkable and counterproductive in the real world.
Main Points:
 Strategic trade policies are often "beggar-thy-neighbor" actions that provoke retaliation.
 Government intervention is frequently captured by special-interest groups that distort
policy for their own benefit rather than the national interest.
Types and Processes of Policy Drawbacks:
 Retaliation and Trade War: The process where one country’s subsidies lead to counter-
subsidies from another, resulting in a pointless trade war that leaves both nations worse off.
 Domestic Politics Capture: A process where powerful groups (like the EU's farm lobby)
influence the government to protect inefficient sectors, raising costs for consumers.
 Perversion of Democracy: The risk that trade policy becomes a tool for lobbyists rather
than a mechanism for optimal economic growth.
L04: Describe the development of the world trading system and the current trade issue
The world trading system has evolved from 19th-century unilateral free trade to a structured
multilateral framework managed by the World Trade Organization (WTO).
Main Points:
  The GATT (General Agreement on Tariffs and Trade) was established in 1947 to
liberalize trade following the damaging protectionism of the Great Depression.
 The WTO (established in 1995) has more "teeth" than the GATT because its dispute
settlement rulings are binding.
 The system is currently under threat from rising nationalism and the failure of the Doha
Round of talks.
Types and Processes in the Global Trading System:
 GATT Liberalization Rounds: A series of eight negotiations (e.g., Geneva, Tokyo,
Uruguay) used to progressively lower tariffs.
 The Uruguay Round: The most ambitious process, which extended trade rules to services
(GATS) and intellectual property (TRIPS) and created the WTO.
 WTO Dispute Settlement: A formal process where an arbitration panel rules on trade
disputes, with an appellate body to handle appeals.
 The Doha Round: A stalled round of talks focused on cutting tariffs on industrial goods,
phasing out agricultural subsidies, and limiting antidumping laws.
 Bilateral and Multilateral Agreements: A modern process where nations bypass the stalled
WTO to form smaller trade deals (e.g., the CPTPP or revised USMCA).
LQ5: Explain the implications for managers of developments in the world trading system
Managerial strategy is profoundly affected by the macro environment of trade barriers and
international regulations.
Main Points:
 Trade barriers constrain a firm's ability to disperse production activities to the most
efficient global locations.
 Managers must decide whether to lobby for free trade or seek protection—though
protection often leads to long-term inefficiency.
Types and Processes of Managerial Strategy:
 Rationalizing Production: The process of locating facilities within a protected market (e.g.,
Japanese car plants in the U.S.) to circumvent quotas or high tariffs.
 Strategic Use of Antidumping: Firms using legal mechanisms to limit aggressive
competition from low-cost foreign producers.
 Lobbying Process: Businesses acting as major players to influence government trade
policy, either to promote open markets or to request import restrictions.
 Global Web Adjustments: The process of reconfiguring globally dispersed production
systems to counter the threat of retaliatory trade actions.
Chapter 8: Foreign Direct Investment
LO 1: Recognize current trends regarding foreign direct investment (FDI) in the world economy
Foreign Direct Investment (FDI) occurs when a firm invests resources in business activities
outside its home country. It is important to distinguish between the flow of FDI (the amount
undertaken over a specific time period, usually a year) and the stock of FDI (the total accumulated
value of foreign-owned assets at a given time). Over the past 25 years, FDI has accelerated faster
than world trade and world output. While historically directed at developed nations, FDI inflows
into developing nations and transition economies have surged, with China becoming a record
recipient.
 Processes and Types of FDI Trends:
 Inflows and Outflows: The process of capital flowing into or out of a country.
 Greenfield Investment: A type of FDI involving the establishment of a new
operation in a foreign country from the ground up.
 Acquisitions and Mergers: The process of buying or merging with an existing firm
in a foreign country, which accounts for the majority of FDI into developed nations
because it is quicker to execute and provides access to strategic assets.
 Circumventing Protectionism: The process where firms use FDI as a real hedge
against potential trade barriers or unfavorable currency movements.
 Rise of Non-U.S. MNEs: The shift from U.S. dominance to a multipolar
environment where Chinese, Japanese, and European firms are major source
countries for FDI.
L02: Explain the different theories of FDI
Theories of FDI explain why firms choose this method over exporting or licensing and why certain
patterns exist in the global marketplace. Internalization theory (or the market imperfections
approach) suggests that FDI is preferred when the costs or risks of exporting and licensing are too
high.
 Processes and Types of FDI Theories:
 Limitations of Exporting Process: FDI is favored when high transportation costs or
trade barriers (like tariffs and quotas) make shipping goods unprofitable.
 Limitations of Licensing Process: Firms avoid licensing to protect valuable
technological know-how, maintain tight control over operations, or when their
competitive advantage is embedded in management skills that cannot be easily
codified.
 Strategic Behavior (Knickerbocker): A type of theory explaining FDI in
oligopolistic industries where rivals imitate each other's investments to prevent a
competitor from gaining a first-mover advantage.
 Multipoint Competition: The process where firms match each other’s moves in
different national markets to maintain a global balance of power.
 Eclectic Paradigm: A holistic type of theory that combines internalization
advantages with location-specific advantages (like natural resources or specialized
labor) and externalities (knowledge spillovers in areas like Silicon Valley).
L03: Understand how political ideology shapes a government's attitudes toward FDI
Government attitudes toward FDI vary based on their underlying political and economic
philosophy, ranging from total hostility to complete openness.
 Processes and Types of Political Ideologies:
 The Radical View: A type of ideology, rooted in Marxist theory, that views the
multinational enterprise (MNE) as an instrument of imperialist domination and
exploitation of host countries.
  The Free Market View: A type of ideology, based on classical economics, arguing
that FDI increases global efficiency by distributing production according to
comparative advantage.
 Pragmatic Nationalism: The most common process where governments allow FDI
only if the national benefits (jobs, tech) outweigh the costs (repatriation of profits).
 Shifting Ideology Process: The global trend of nations moving away from radical
views toward free-market policies, though some nations (like Venezuela and Bolivia)
have recently shifted back toward hostility.
L04: Describe the benefits and costs of FDI to home and host countries
Governments evaluate FDI based on its impact on the economy, competition, and national
sovereignty.
 Processes and Types of Benefits and Costs:
 Host-Country Resource-Transfer Effects: The process of supplying capital,
technology, and management skills that would otherwise be unavailable to the host
nation.
 Host-Country Employment Effects: A type of benefit involving direct jobs (MNE
employees) and indirect jobs (suppliers and increased local spending).
 Host-Country Balance-of-Payments Effects: The process where FDI can improve
a country's current account by substituting for imports or creating export-led growth.
 Host-Country Adverse Effects: The type of costs including potential loss of
national sovereignty and the risk that powerful MNEs could drive local firms out of
business.
 Home-Country Benefits: The process of receiving an inward flow of foreign
earnings and the "reverse resource-transfer effect" where the MNE learns new skills
abroad to bring back home.
 Home-Country Costs: The type of costs associated with initial capital outflows and
the potential loss of jobs to offshore production.
L05: Explain the range of policy instruments that governments use to influence FDI
Both home and host countries use a variety of tools to either encourage or restrict the flow of
foreign investment.
 Processes and Types of Policy Instruments:
 Home-Country Encouragement: The process of providing foreign risk insurance,
capital assistance, tax incentives (eliminating double taxation), and political pressure
on other nations to open their markets.
 Home-Country Restriction: A type of policy involving capital-flow limits (to
protect the balance of payments), domestic tax incentives for home investment, or
political bans on investing in certain "rogue" nations.
 Host-Country Encouragement: The process of offering tax concessions, low-
interest loans, and grants to attract MNEs.
 Host-Country Ownership Restraints: A type of restriction where foreign firms are
excluded from certain sensitive sectors (e.g., national security) or must enter via joint
ventures with local partners.
  Host-Country Performance Requirements: The process of imposing controls over
a subsidiary's behavior, such as local content rules, export targets, or technology
transfer requirements.
L06: Identify the implications for managers of the theory and government policies associated with
FDI
Managers must use a systematic framework to decide whether to pursue FDI and how to negotiate
with host governments.
 Processes and Types of Managerial Implications:
 Entry Mode Decision Process: Using a decision tree to weigh transportation costs
and trade barriers (favoring FDI over exports) and the need for tight control over
know-how (favoring FDI over licensing).
 Strategic Sourcing Process: Distributing productive assets globally to minimize
costs and maximize value added, particularly in high-tech or intense cost-pressure
industries.
 Government Negotiation Process: The process where a firm's bargaining power
depends on the value of what it offers, the number of alternative locations available,
and its time horizon for completing the deal.
 Hedging against Risk: A type of strategy where firms use FDI to reduce exposure to
volatile exchange rates and the threat of future trade barriers.