Chapter 1: Globalization

What is Globalization?
 Globalization is the shift toward a more integrated and interdependent world economy.
 It involves closer connections among countries through trade, investment, and communication.
 Globalization has several parts:

1. Globalization of markets
2. Globalization of production
3. Globalization of consumers

The Globalization of Markets

 Refers to the merging of separate national markets into a single global marketplace.
 Caused by declining barriers to trade and advances in communication technology.
 Consumers’ tastes and preferences across countries are becoming more similar, leading to more
standardized products worldwide.
 Companies such as Citicorp, Coca-Cola, McDonald’s, and Apple are examples of firms that
both benefit from and promote this trend by selling standardized products globally.
 Example: Eventscape Inc., a Toronto-based design and fabrication company, expanded
internationally by completing large projects in places such as New York, Macau, and Abu Dhabi.

Limits of Market Globalization

 Despite these global similarities, national differences still matter:

o Consumer preferences
o Distribution systems
o Cultural values
o Legal regulations
o Economic conditions
 These differences mean firms still need to adapt products and marketing strategies to local
conditions.
 Example: Automobile companies adjust car models to reflect local fuel prices, laws, income
levels, traffic, and culture.
 Most global markets today are not consumer markets but industrial markets—for materials
and goods that meet universal needs.

Examples of Global Industrial Markets

 Commodities: aluminum, oil, wheat

 Industrial products: microprocessors, memory chips, jet aircraft
 Computer software and financial assets such as Treasury bills, eurobonds, and currency futures
Global Competition

 Many firms compete with the same rivals in multiple countries.

 Examples include:
o Coca-Cola vs. Pepsi
o General Motors vs. Toyota
o Airbus vs. Boeing
o Caterpillar vs. Komatsu
o Sony, Nintendo, and Microsoft in video games

 As firms follow each other into new markets, they bring similar products, brands, and
strategies, leading to greater uniformity among markets.
 In many industries, it is becoming less meaningful to speak of national markets like “the
Canadian market” or “the German market” — many firms now operate in a single global
market.

The Globalization of Production

 Refers to sourcing goods and services from around the world to benefit from differences in
cost and quality of production factors such as:
o Labor
o Energy
o Land
o Capital
 Goal: lower costs and/or improve quality and functionality to compete more effectively.

Examples

 Burger King expanded globally by acquiring Tim Hortons (Canada), Karali Group (UK),
and Popeyes (U.S. and other countries).
 Smaller companies also participate.
o Example: Tornado Spectral Systems, a Canadian firm that makes chemical analysis
instruments, expanded internationally with help from Export Development Canada
(EDC).
o EDC supports small and medium-sized enterprises (SMEs) with export strategies, loans,
data, and risk insurance.
o Tornado now operates in Europe, the Middle East, Asia-Pacific, and the U.S.

Implications

 Products are increasingly seen as global rather than national, since parts and production come
from multiple countries.
 However, barriers still limit full globalization of production:
o Trade restrictions
o Investment barriers
o Transportation costs
o Political and economic risks
Overall Trend

 Despite obstacles, production and markets are becoming more global.

 Firms are key players driving this trend, responding efficiently to global opportunities and
changes in their environment.

Drivers of Globalization
Globalization has two main underlying forces:

1. The decline in barriers to the free flow of goods, services, and capital since World War II
2. Technological change, especially in communication, information, and transportation

1. Declining Trade and Investment Barriers

 After World War II, many nations committed to reducing barriers to trade and investment.
 They aimed to avoid the economic problems that occurred in the 1930s when countries raised
barriers and caused a worldwide depression.
 The result was the creation of international institutions and agreements designed to promote
global trade and investment.

The General Agreement on Tariffs and Trade (GATT)

 A major international treaty that helped reduce tariffs and other trade restrictions.
 Encouraged countries to trade more freely with one another.
 Eventually replaced by the World Trade Organization (WTO), which continues to oversee
global trade rules and disputes.

Decline in Tariffs

 Tariffs (taxes on imported goods) have been gradually reduced for decades.
 Lower tariffs make it easier and cheaper for companies to sell goods in other countries.
 This has helped expand international trade and foreign direct investment (FDI).

Growth in Foreign Direct Investment

 FDI occurs when a company invests directly in facilities to produce or market goods in another
country.
 As restrictions decreased, firms began to build factories, offices, and branches abroad more
frequently.
 This strengthened economic links between nations.

Global Integration of Markets

 Reduced barriers led to a world where production, trade, and finance are more interconnected.
  Many companies now operate globally instead of focusing only on their home countries.
 This integration allows firms to access larger markets and more diverse resources.

2. Technological Change

 Advances in communication, information processing, and transportation have greatly

accelerated globalization.

Communication and Information Technology

 The development of the Internet, mobile communication, and digital networks allows businesses
and consumers to interact across borders instantly.
 Information about prices, products, and opportunities can spread worldwide within seconds.
 This has made it easier for even small firms to participate in global trade.

Transportation Improvements

 Modern jet aircraft, container shipping, and logistics systems have dramatically reduced the
cost and time needed to move goods and people across the world.
 These innovations allow companies to locate production where it is most efficient and serve
customers in distant markets quickly.

Impact on Global Business

 Technology enables the creation of global supply chains, where different parts of a product are
made in different countries.
 Companies can manage operations around the world more effectively.
 Consumers also benefit from faster communication and access to a wider variety of goods.

Overall Effect of These Drivers

 Together, declining barriers and technological progress have made the world’s economies more
interdependent.
 Firms can expand globally more easily and reach international customers.
 Countries are more connected through trade, investment, and information exchange.
 This has created both opportunities and challenges for businesses, governments, and individuals.

The Changing Demographics of the Global Economy

Globalization has changed who participates in the world economy and how economic power is
distributed among nations.

1. Change in World Output and World Trade

  In the 1960s, the United States and other advanced economies (Western Europe, Japan)
dominated global production and trade.
 Over time, the share of world output by these developed nations has declined.
 Emerging economies, such as China, India, Brazil, and others, have seen their share of global
output and exports rise sharply.
 This shift reflects the industrialization and economic growth of developing countries.
 Many developing countries have adopted market-oriented reforms, opening up to trade and
investment.
 As a result, they have become major players in manufacturing, services, and exports.

2. Change in Foreign Direct Investment (FDI)

 In the past, most FDI came from developed nations and went to other developed nations.
 Today, a large and growing portion of FDI flows to developing countries.
 Developing countries have become attractive destinations for global companies due to lower
labor costs and growing consumer markets.
 Some developing countries are now sources of FDI themselves — for example, Chinese, Indian,
and Brazilian firms investing abroad.
 This shows that economic activity and investment are becoming more geographically diverse.

3. Change in the Nature of Multinational Enterprises (MNEs)

 Originally, most MNEs were headquartered in the United States, Western Europe, or Japan.
 Today, many successful MNEs are emerging from developing nations.
 Examples include companies from China, India, South Korea, and Brazil that have become
global competitors.
 These new MNEs often start by producing for low-cost markets and then expand internationally.
 This trend reflects the global spread of business innovation and entrepreneurship.

4. Rise of Mini-Multinationals

 In the past, only large corporations operated internationally.

 Today, even small and medium-sized enterprises (SMEs) can become global through
technology and e-commerce.
 These are sometimes called “mini-multinationals.”
 Technology allows small firms to communicate, sell, and collaborate across borders at low cost.
 This means globalization is no longer limited to big corporations.

5. Change in the World Order

  The collapse of communism in Eastern Europe, the economic reforms in China, and
the opening of many developing countries have reshaped the global system.
 Many former communist nations transitioned to market-based economies and began integrating
into global trade.
 China’s rapid growth has been one of the most significant global economic changes.
 Latin American and African nations have also liberalized trade and sought more stable
governance.
 The result is a more interconnected and competitive global economy.

6. Implications of Changing Demographics

 The global economic landscape is no longer dominated by a small group of Western nations.
 Power and production are more evenly distributed among countries.
 Companies face more competition but also more opportunities in new markets.
 Businesses must adapt to new consumer bases, cultures, and regulations.
 Policymakers must also adjust to this shift in global influence toward developing economies.

The Globalization Debate

 Main question: Is globalization good or bad?
 Supporters see it as a driver of economic growth, lower prices, and job creation.
 Critics see it as causing job losses, inequality, and harm to the environment and culture.
 Debate is both economic and emotional — tied to people’s sense of security, culture, and
identity.

Supporters’ View

 Globalization = free flow of trade and investment, helping countries grow richer together.
 Encourages specialization → each country produces what it’s best at.
 Efficiency increases → cheaper goods, higher productivity, rising living standards.
 Long-term gains outweigh short-term job losses.
 Globalization can help developing countries grow by giving them access to markets and
technology.

Critics’ View

 Globalization benefits the rich more than the poor.

 Creates job insecurity in developed countries (outsourcing, factory closures).
 Encourages “race to the bottom” — companies move to places with weak labour or
environmental laws.
 Threatens national culture and sovereignty.
  Seen as giving too much power to big corporations and unelected global institutions (like the
WTO).

Antiglobalization Protests

 Began with 1999 Seattle WTO protests — 40,000 people.

 Protesters blamed globalization for:
o Job losses and low wages
o Poor working conditions
o Environmental harm
o Cultural domination by Western (especially U.S.) values
 These protests spread to G20, IMF, World Bank meetings worldwide.
 Movement shows widespread unease, not just among radicals.

Globalization, Jobs, and Income

 Outsourcing jobs to cheaper countries causes fear and anger (e.g. Gildan, Harwood Industries).
 Critics say this hurts workers in rich countries.
 Supporters argue:
o It’s better for efficiency — each country produces what it does best.
o Consumers benefit from lower prices.
o Developing countries gain jobs and wealth → can buy goods from richer nations.
 Wage inequality has increased:
o Skilled workers benefit most.
o Unskilled workers face stagnant wages.
 Supporters say technology, not globalization, is the main reason for this.
 Solution: Invest in education and skills, not restrict trade.

Globalization, Labour, and the Environment

 Critics:
o Companies move to countries with weak regulations → pollution, unsafe work,
exploitation.
o Example: worries about firms moving to Mexico after NAFTA.
o Indigenous communities often harmed by large projects on their land.
 Supporters:
o As countries get richer, they improve labour and environmental laws.
o Free trade encourages growth, which funds cleaner tech.
o Agreements like NAFTA/CUSMA include environmental protections.
o Many businesses aim to be ethical; productivity matters more than cheap labour.
Globalization and National Sovereignty

 Critics fear global institutions (WTO, UN, EU) weaken governments’ control.
 Concern: unelected bodies make decisions affecting citizens.
 Supporters:
o These organizations represent collective decisions of member states.
o Real power still lies with national governments.
o If these bodies stop serving members’ interests, countries can withdraw.

Globalization and the World’s Poor

 Critics say wealth gap between rich and poor nations has widened.
 Many poor countries remain trapped in poverty due to:
o Corrupt governments
o War and instability
o Lack of property rights and infrastructure
o Heavy debt burdens
 Supporters argue:
o The problem isn’t globalization itself but bad governance and debt.
o Free trade + debt relief = key to lifting countries out of poverty.
 Debt relief movement (1990s–2000s):
o Pushed by figures like Bono, the Pope, and economists.
o Led to partial cancellation of debt for poorest countries.
o Success depends on using debt relief wisely (education, healthcare, infrastructure).

Summary

 Supporters: Globalization = opportunity, progress, and interconnection.

 Critics: Globalization = inequality, exploitation, and loss of control.
 Reality is complex — benefits exist, but so do costs.
 Key idea: How globalization is managed matters more than whether it happen

Managing in the Global Marketplace

1. Key idea:
Managing an international business is not the same as managing a domestic one.

2. Why it’s different:

 Every country has its own culture, political system, economic system, and legal system.
 Countries are at different stages of development, which affects how business is done.
  Managers must adapt their strategies to fit each country’s unique environment.

3. Manager’s challenges in global business:

 Government differences: Policies, taxes, trade restrictions, and regulations vary by country.
 Cultural differences: Attitudes toward work, communication, leadership, and negotiation differ.
 Economic differences: Levels of income, inflation, and market stability influence business
success.
 Legal differences: Laws around contracts, property, and employment can change business
behavior.

4. Cross-border transactions:

 Businesses need to exchange currencies when buying, selling, or investing internationally.

 Exchange rates change over time — this can cause big gains or losses.
 Firms must have strategies to manage currency risks.

5. Importance of good strategy:

 A bad policy can lead to major financial losses.

 A smart strategy helps a company increase profits and remain competitive internationally.

6. What the rest of the book explores:

7. Goal for managers:

By understanding these differences and challenges, managers can:

 Make better international decisions.

 Develop fair and effective global strategies.
 Compete successfully in a fast-changing global economy.

Sustainability in Practice – Starbucks

Company Overview

 Starbucks began in Seattle in 1971.

 It is now the largest coffeehouse company in the world, with over 35,000 stores in 84 countries.
 The company recognizes that climate change threatens coffee supplies, farmers’ livelihoods, and
the health of local communities.
 These challenges are economic, civic, environmental, and global.

Sustainable Coffee Challenge

 Starbucks created the Sustainable Coffee Challenge to make coffee the world’s leading
sustainable agricultural product.
  The initiative brings together the coffee industry and conservation partners to collaborate and
share investments.
 Starbucks uses an open-source approach, sharing new coffee varieties and growing techniques
with researchers and farmers worldwide.
 The company’s main coffee plant, Arabica, defines its flavor but is highly vulnerable to drought,
flooding, and rising temperatures caused by climate change.
 Climate change also affects other products like cocoa and tea, which are important to Starbucks’
menu and brand.

Approach to Sustainability

 Starbucks invests in programs that support sustainable farming communities and address climate
change impacts on coffee supply and pricing.
 These investments include:
o Farmer loans to improve financial stability.
o Farmer support centers that provide training and technical help.
o Ethical sourcing through the C.A.F.E. Practices program.
 The goal is to maintain a long-term supply of high-quality coffee while building stronger, more
sustainable farming communities.

Key Achievements by 2020

 Invested more than $70 million in farmer-related programs.

 Distributed 10 million rust-resistant coffee trees to farmers in Mexico, Guatemala, and El
Salvador.
 Helped farmers improve harvest quality, yield, and income.
 Trained over 40,000 farmers in 2020, reaching a total of 200,000 trained farmers worldwide.
 Operates nine farmer support centers globally, staffed with agronomists and quality experts.
 Invested $42.9 million in a Global Farmer Fund, providing low-interest loans to farmers in areas
with weak banking systems.

Coffee-Specific Environmental Goals

 In 2020, Starbucks launched its Carbon Neutral Green Coffee Program.

 By 2030, the company aims to achieve carbon-neutral green coffee and reduce water usage in
coffee processing by 50 percent.
 Planned methods include:
o Investing in eco-mills.
o Providing precision agronomy tools.
o Distributing climate-resistant trees and plants.
o Protecting and restoring coffee landscapes and forests.
o Using efficient water technologies and machinery.
o Developing water restoration projects in coffee-growing regions.
 Chapter 2: Country Differences in Political
Economy

Political Systems
 A political system refers to the system of government in a nation.
 It influences and shapes a country’s economic and legal systems.
 Political systems are evaluated based on two main dimensions:
1. Collectivism vs. Individualism
2. Democracy vs. Totalitarianism
 These two dimensions are related — collectivism often aligns with totalitarianism, and
individualism with democracy.
 However, there is a gray area where systems mix elements of both.

1. Collectivism

 Definition: Political system that emphasizes the goals of society as a whole over individual goals.
 Individual freedom can be limited for the common good.
 Origin: Traced to Plato, who argued that property should be owned collectively and that society
should serve the majority’s interests.
 In modern times, collectivism is most associated with socialism.

Socialism

 Based on the ideas of Karl Marx (1818–1883).

 Marx believed that capitalism benefits a few at the expense of the many.
 Argued that the state should own the means of production, distribution, and exchange to ensure
fairness and benefit society as a whole.
 The goal is to prevent exploitation and provide equal benefits to workers.

Two Forms of Socialism:

1. Communism
o Achieved through violent revolution and totalitarian dictatorship.
 o Reached its peak in the 1970s, when many countries (e.g., USSR, China, Cuba, Vietnam,
Eastern Europe) were communist.
o Declined after the collapse of the Soviet Union and revolutions in Eastern Europe
(1989).
o Today, communism remains mainly in North Korea, Cuba, Laos, Vietnam, and a
modified form in China (state capitalism).
o The Communist Party of Canada (1921) exists but has limited influence.
2. Social Democracy
o Aims to achieve socialism through democratic means rather than revolution.
o Found in countries such as Sweden, Germany, France, Norway, the UK,
and Australia.
o Promoted state ownership of key industries for the public good.
o Over time, many state-owned enterprises became inefficient due to lack of competition.
o In the 1970s–1980s, many social democratic parties moved toward free-market policies.
o Today, they are often considered centre-left parties, blending social welfare with
capitalism.

2. Individualism

 Definition: Philosophy that individuals should have freedom in economic and political activities.
 Opposes collectivism — the individual’s interests come before the state’s.
 Origin: From Aristotle, who argued that private ownership encourages productivity and progress.
 Re-emerged during the 16th century in England and the Netherlands and influenced Western
political thought.

Key Thinkers:

 David Hume, Adam Smith, and John Stuart Mill.

 Their ideas shaped the U.S. Declaration of Independence and modern democracy.

Two Main Principles:

1. Freedom and self-expression — individuals should be free to act unless they harm others.
2. Economic self-interest benefits society — following Adam Smith’s “invisible hand” concept.

 Individualism supports economic and political freedom, forming the basis

for democracy and capitalism.
 Historically opposed to collectivism, especially during the Cold War (U.S. vs. USSR).
 Since the 1980s, individualism has been dominant, though there has been a recent resurgence of
socialist ideas in some countries (e.g., Venezuela, Bolivia, Russia).
 The COVID-19 pandemic has also strengthened nationalism and populism, reducing global
cooperation.

3. Democracy and Totalitarianism

  These represent two ends of another political spectrum.
 Democracy: Government by the people, directly or through elected representatives.
 Totalitarianism: One person or party controls all aspects of life and prohibits opposition.
 Democracy aligns with individualism, while totalitarianism aligns with collectivism (especially
communism).

Democracy

 Origin: Ancient Greek city-states (direct democracy).

 Modern form: Representative democracy — citizens elect officials to make decisions on their
behalf.
 Core idea: Elected leaders can be removed if they fail to serve the people.

Key Safeguards in a Representative Democracy:

1. Freedom of expression, opinion, and organization.

2. Free and independent media.
3. Regular, fair elections with genuine opposition.
4. Universal adult voting rights.
5. Limited terms for representatives.
6. Independent judicial system.
7. Nonpolitical state bureaucracy.
8. Nonpolitical police and military.
9. Public access to government information.

Totalitarianism

 Definition: System where the government controls all aspects of life and denies political
freedoms.
 Political opposition is banned; dissent is often punished.
 Lacks the safeguards found in democracies.

Four Major Types of Totalitarianism:

1. Communist Totalitarianism
o Advocates for socialism through totalitarian dictatorship.
o Declining globally since 1989 but remains in China, Cuba, Vietnam, Laos, and North
Korea.
2. Theocratic Totalitarianism
o Political power based on religious principles.
o Commonly linked to Islamic states such as Iran, Afghanistan, and Saudi Arabia.
o Religious law dictates state policies and limits freedoms.
3. Tribal Totalitarianism
o Occurs when a tribe or ethnic group monopolizes power.
o Found in parts of Africa (e.g., Zimbabwe, Uganda, Kenya).
 o Results from colonial borders that ignored tribal divisions.
4. Right-Wing Totalitarianism
o Allows some economic freedom but limits political freedom to prevent communism.
o Typically military-backed regimes hostile to socialist or communist ideas.
o Historical examples: Nazi Germany, Fascist Italy, and past dictatorships in Latin
America and Asia (e.g., South Korea, Taiwan, Indonesia).
o Connection Between Politics and Economics
 A country’s political ideology shapes its economic system.
 Individual goals → more likely to have a free market economy.
 Collective goals → more likely to have state control and restricted markets.
 There are three main types of economic systems:
1. Market economy
2. Command economy
3. Mixed economy

Market Economy

 All productive activities are privately owned, not controlled by the state.
 What and how much to produce is decided by supply and demand, not by planning.
 Prices act as signals:
o High demand → prices rise → producers make more.
o Low demand → prices fall → producers make less.
 Consumers have power; their choices decide what gets produced.

Monopoly Issue:

 When one firm controls the market, it can raise prices and reduce output.
 This hurts consumers and reduces efficiency because there’s no competition.

Government Role:

 Prevent monopolies and encourage competition (through antitrust laws, e.g.,

Canada’s Competition Act).
 Private ownership motivates entrepreneurs to innovate and improve efficiency.
 This continuous improvement supports economic growth and development.

Command Economy

 The government controls everything:

o What to produce, how much, and at what price.
 Based on collectivist ideology — production for “the good of society.”
 Businesses are state-owned, allowing the government to direct resources and investments.
 Historically common in communist countries.
  Some democratic countries (like France, Argentina, India) once had elements of this but later
reduced it.

Problems:

 No competition or profit motive → no incentive to control costs or innovate.

 Leads to inefficiency, low-quality goods, and economic stagnation instead of growth.

Mixed Economy

 A blend of market and command systems.

 Some industries are privately owned; others are government controlled.
 Used to be very common (e.g., UK, France, Sweden) but has declined with privatization.
 Even in market economies (like Canada, U.S., UK), the government still intervenes during
crises.

Example: COVID-19 Pandemic

 Governments stepped in heavily to prevent economic collapse.

 Canada provided grants, rent subsidies, employment benefits, tax rebates, and healthcare
access.
 Though it was high government involvement, it was necessary to protect people and the
economy.

Economic Development and Political-Economic Systems

 A country’s political, economic, and legal systems strongly influence its economic
development and attractiveness as a market/production location.

Differences in Economic Development

 GNI per capita (formerly GNP per capita) is a common measure of economic development.
o Measures total income per person, including income from abroad.
o World Bank Atlas method adjusts for exchange rate fluctuations using a 3-year average.
 Purchasing Power Parity (PPP) adjusts GNI for cost-of-living differences, allowing more
accurate comparisons.
o Example: Canada’s nominal GNI in 2021: $48,310 → PPP: $51,690
o China’s nominal GNI: $11,880 → PPP: $19,160
 Informal/shadow economy: unrecorded transactions can be large in some countries (e.g., 43% of
India’s GDP).
Broader Views on Development – Amartya Sen

 Development ≠ just material wealth; it’s about real freedoms and capabilities.
 Development requires removing barriers: poverty, tyranny, poor healthcare, limited education.
 Human Development Index (HDI) reflects Sen’s ideas:
1. Life expectancy at birth (health)
2. Education (literacy + enrollment)
3. Income (PPP-adjusted for basic needs)
 HDI scale:

o <0.5 → Low human development

o 0.5–0.8 → Medium human development
o 0.8 → High human development

Innovation & Entrepreneurship – Engines of Growth

 Innovation = new products, processes, organizations, management, strategies.

 Entrepreneurial activity drives commercialization of innovations.
 Examples: Alphabet, Meta, IBM, Dell, Microsoft, Oracle → created economic value through
innovation.

Requirements for Growth

1. Market Economy:
o Economic freedom → high incentives for innovation & entrepreneurship.
o Planned economies lack incentive → stagnation (e.g., former communist states).
2. Strong Property Rights:
o Protects profits from innovation; prevents expropriation or corruption.
o De Soto: Lack of legal property titles in developing countries prevents conversion of
assets into capital → hinders growth.

Political System

 Debate: democracy vs. totalitarianism for growth.

 Representative democracy generally supports property rights and long-term growth.
 Some authoritarian regimes (South Korea, Taiwan, Singapore, Hong Kong) initially fostered
growth → “developmental dictatorships.”
 Long-term: democracy usually better for sustained growth and human development.
 Economic progress can lead to democracy (e.g., South Korea, Taiwan).

Geography, Education, and Development

  Geography affects trade, institutions, and growth:
o Coastal states → better trade, market institutions → faster growth
o Landlocked → slower growth
o Tropical regions → slower growth due to disease, soil, climate challenges
 Education:
o More education → higher productivity → higher growth rates
o Example: 1960, Pakistan vs. South Korea → by 1980s, South Korea’s GNP/person 3x
Pakistan’s due to higher school enrollment
 Education can help overcome geographical disadvantages (e.g., Southeast Asia vs. Africa/Latin
America).

Political and Economic Transitions Since the 1980s

Two major global trends:

1. Spread of democracy – totalitarian regimes collapsed; democratic governments emerged, often

embracing free-market capitalism.
o Most dramatic in Eastern Europe (collapse of communism, end of Cold War, breakup of
the Soviet Union).
o Similar shifts in parts of Asia, Latin America, and Africa.
2. Shift to market economies – countries moved away from centrally planned or mixed economies
toward free-market models.

2. Spread of Democracy

 Freedom House classifications (2023):

o Free: 84/195 countries
o Partly free: 35–43 countries showing partial freedoms
o Not free: Russia, China, most of the Middle East, etc.
 Examples of new democracies:
o Mexico: first fully free presidential election in 2000
o Senegal: peaceful presidential transition
o Ukraine: democratic progress disrupted by Russian invasion
 Drivers of democratic spread:

1. Economic failure of totalitarian regimes → populations seek better growth models

(e.g., Eastern Europe vs. Western democracies).
2. Information & communication technology → Internet, social media, satellite TV
reduce state control of information; used in protests and democratization movements
(e.g., Egypt 2011, Chile 2019).
3. Rising middle & working classes → demand for accountable government, property
rights, and contract enforcement.

 Limits to democracy:
o Sub-Saharan Africa: 7% free, 43% partly free, 50% not free
o Eurasia: 33% partly free, 67% not free
 o Middle East: only 8% free
o Authoritarian backsliding in Russia, Venezuela, Egypt, Nicaragua, etc.

3. The New World Order Debate

 Fukuyama: “End of history” → liberal democracy and free markets as the final form of
government.
 Huntington: world divided into civilizations; modernization can trigger cultural/religious revival
(e.g., Islamic resurgence, Sinic, Russian, Hindu, Japanese civilizations).
o Conflict may arise along “civilizational fault lines” (e.g., Bosnia, Kashmir, Sudan).
 Implication for business: geopolitical forces and conflicts can limit international operations.

4. Spread of Market-Based Systems

 Many countries transitioned from command/mixed economies to market-based

economies since the 1980s:
o Former Soviet & Eastern European states
o Asian countries: China, Vietnam
o African countries: Angola, Ethiopia, Mozambique
 Privatization & deregulation: state-owned enterprises sold to private investors to promote
competition.
 Rationale: market economies deliver sustained growth better than command/mixed economies
(e.g., U.S., Hong Kong, Switzerland, Taiwan).
 Economic Freedom (Heritage Foundation Index 2023):
o Measures 10 indicators: government intervention, trade policy, property rights, foreign
investment, taxation, etc.
o Top countries: Singapore, Switzerland, Ireland, Taiwan
o Canada: #16; U.S.: #25; U.K.: #28
o Note: economic freedom ≠ political freedom (e.g., Singapore: economically free but
partly politically free due to press censorship)

Steps Toward a Market-Based Economy

Economic transformation from a command or mixed economy to a market-based system typically
involves three main steps:

1. Deregulation
2. Privatization
3. Establishment of a legal system to protect property rights

2. Deregulation
  Definition: Removing government restrictions on markets, private enterprise, foreign investment,
and international trade.
 In former command economies:
o Governments previously controlled prices, output, foreign investment, and private
enterprise.
o Deregulation involved eliminating price controls, relaxing restrictions on business
formation, and opening up to foreign trade and investment.
 In mixed economies:
o State intervention was less pervasive, but some industries were still restricted.
o Example: India – reformed industrial licensing, opened electricity, oil, steel, air
transport, and telecom to private investment, reduced barriers to foreign ownership and
trade.

3. Privatization

 Definition: Transferring ownership of state property to private individuals or firms, usually

through sales or auctions.
 Purpose: Increases economic efficiency by giving owners incentives (profit motive) to boost
productivity, enter new markets, and exit unprofitable ones.
 Global examples:
o UK: Thatcher sold British Telecom and deregulated telecom to avoid private monopolies.
o Africa: Ghana, Mozambique, Zambia – sold state-owned companies (e.g., tea
plantations, chocolate factories).
o Canada: 1980s–1990s – electric power, potash industry, Canadian National Railway,
provincial telephone systems.
o Former Soviet & Eastern Europe:
 Czechia: 75% of state-owned enterprises privatized (1989–1996)
 Russia: private sector rose to 50% of GDP by 1995
 Poland: private sector grew from 20% (1989) → 59% of GDP (1995)
 Ownership challenges:
o Weak corporate governance laws in some former communist states
o Managers may dominate firms for personal gain rather than efficiency
o Sometimes former communist bureaucrats continue inefficient practices

4. Legal Systems

 Importance: Protects property rights and enforces contracts; essential for market efficiency.
 Challenges in former communist states:
o Lack of legal frameworks after collapse; all property was state-owned
o Property titles may be uncertain due to poor records, multiple claims, or restitution
demands
o Weak commercial codes and inadequate court capacity hinder contract enforcement
o Progress has been made, but legal systems are not yet as smooth as in Western countries
Challenges in Economic Transformation

 Transitioning from command or mixed economies to market-based systems has often been
difficult, especially in post-communist Eastern Europe.
 Early 1990s reforms included:
o Removing price controls
o Allowing private ownership
o Increasing competition
o Selling state-owned enterprises (privatization)
 Problems encountered:
o Many state-owned enterprises were inefficient and unattractive to private investors →
slow privatization
o Governments subsidized failing enterprises to prevent unemployment → ballooning
budget deficits
o Printing money + removal of price controls → hyperinflation

2. Shock Therapy vs Gradual Reform

 Shock therapy: Rapid economic reforms that combine:

o Quick price and trade liberalization
o Tight monetary policy to control inflation
o Rapid privatization of state-owned industries
 Successful examples: Czechia, Slovakia, Hungary, Poland
o Result: Smaller output declines and faster return to economic growth
 Slower reformers: Russia, Bulgaria, Romania, Belarus, Ukraine faced longer economic pain,
though some (Bulgaria, Romania) eventually experienced strong growth

3. Implications for International Business

 Opportunities:
o Global shift toward democracy and free markets opens previously inaccessible markets
o Huge potential consumer markets:
 China: 1.42 billion people → larger than U.S., EU, Japan combined
 India: Population surpassing China in 2023
 Latin America: 670 million potential consumers
 Risks:
o Newly democratic states may experience economic setbacks → threat to democracy
o Return of totalitarian regimes possible (though likely not communist)
o Potential conflicts in a multipolar world (different civilizations may clash)
o Investments in new markets carry both high potential reward and high risk
Key Takeaways

1. Political and economic liberalization creates opportunities for international business but is not
without risk.
2. Rapid reforms (shock therapy) generally lead to quicker economic recovery than slow reforms.
3. Global markets are increasingly interconnected, but geopolitical and economic instability can
impact business outcomes.

Chapter 3: The Cultural Environment

What Is Culture?

 Culture is difficult to define precisely; it broadly refers to the shared values, norms, and
practices of a group of people.
 Definitions from scholars:
o Edward Tylor (1870s): Culture includes knowledge, beliefs, art, morals, law, customs,
and other capabilities acquired by humans as members of society.
o Geert Hofstede: Culture is the “collective programming of the mind” distinguishing one
human group from another; includes values.
o Zvi Namenwirth & Robert Weber: Culture is a system of ideas that creates a “design
for living.”
 For practical purposes, culture can be seen as a system of values and norms that guide behavior
within a society.

2. Values and Norms

 Values: Abstract ideas about what a group believes is good, right, and desirable.
o Examples: Individual freedom, justice, honesty, loyalty, social responsibility, gender
roles.
o Highly emotionally significant; reflected in political and economic systems (e.g.,
democracy and free markets reflect values of individual freedom).
 Norms: Social rules that govern behavior, derived from values. Two types:

1. Folkways: Routine conventions of everyday life (dress codes, manners, punctuality).

 Violation is minor (eccentric or impolite)
 Example: Arriving on time for appointments differs culturally—Canada
(early/precise), Mexico/Argentina (“mañana” or late is acceptable).
2. Mores: Norms central to society; violations are serious and may be punished by law.
 Examples: Theft, adultery, incest, cannibalism
  Example of cultural variation: Alcohol is socially acceptable in Canada but
forbidden in Saudi Arabia.

3. Culture, Society, and Nation-State

 Society: A group of people who share a set of values and norms (common culture).
 Nation-state: A political entity, which may contain:
o One culture (e.g., France)
o Multiple cultures (e.g., Canada: Anglo, Quebecois, Indigenous; India: multiple ethnic and
religious groups)
 Subcultures: Even within one nation, multiple distinct cultures exist.
o Canada examples: Afro-Canadian, Acadian, Asian-Canadian, Hispanic, Indigenous, Irish-
Canadian, Newfoundland, Western culture.
 Cross-national cultures: Some cultures span multiple countries.
o Example: Islamic culture spans Middle East, Asia, Europe, and Africa.
o Links to Huntington’s “civilizations” theory: Western, Islamic, Sinic (Chinese), Russian
(Eastern Orthodox), Indian (Hindu), Japanese, African, Latin American.

4. Key Points

1. Culture is not always synonymous with nationality; nations can contain multiple
societies/cultures.
2. Values form the foundation; norms regulate behavior.
3. Cultures can be nested and overlapping: national cultures, regional cultures, ethnic/subcultural
groups.
4. Understanding these distinctions is crucial for cross-cultural communication, international
business, and policy-making.

Determinants of Culture
 Definition: Social structure is a society's basic organization of people and groups.
 Key Dimensions:
1. Individual vs. Group Orientation:
 Western societies (e.g., Canada, U.S.): emphasize the individual; achievement
and performance define social standing.
 Eastern societies (e.g., Japan): emphasize the group; the group’s success reflects
the individual’s worth.
 Implications: Western individualism encourages entrepreneurship and mobility
but can reduce loyalty and cooperation. Group orientation fosters cooperation
and company loyalty but may reduce dynamism and innovation.
2. Social Stratification:
 Societies vary in the rigidity of social hierarchy and mobility between
classes/castes.
 Caste system: rigid, limited mobility (e.g., India historically).
  Class system: more flexible, mobility possible (e.g., Canada, U.S.).
 Business Implications: Strong stratification can hinder cooperation, limit access
to talent, and raise production costs (e.g., historical UK). High mobility and
individualism can foster innovation but may challenge managerial stability.

2. Religion and Ethical Systems

 Definition: Religion provides a system of shared beliefs and rituals; ethical systems guide moral
behavior, often rooted in religion.
 Major Religions & Implications for Business:
1. Christianity:
 Protestant ethic emphasizes hard work, frugality, and wealth creation → linked to
capitalism and individualism (Weber).
 Catholicism historically less focused on material accumulation; other forms show
economic success as well.
2. Islam:
 Monotheistic; integrates religion with law and social behavior.
 Emphasizes fairness, honesty, and charitable acts.
 Supports market-based systems, but interest/usury prohibited; business must
align with ethical principles.
 Fundamentalism sometimes reacts to modernization and Western influence,
affecting economic and political life.
3. Hinduism:
 Emphasizes dharma, karma, reincarnation; spiritual achievements valued over
material wealth.
 Traditional caste system historically limited social and economic mobility;
asceticism may reduce entrepreneurial activity (Weber).
4. Buddhism:
 Emphasizes ending suffering through the Noble Eightfold Path.
 Less focus on material wealth; no caste system, making entrepreneurship more
feasible than in Hinduism.
5. Confucianism:
 Ethical system emphasizing loyalty, honesty, and reciprocal obligations.
 Promotes cooperation, reduces business transaction costs, and supports long-term
relationships (e.g., guanxi in China, lifetime employment in Japan).

3. Language

 Role in Culture:
o Language structures perception and thought.
o Multilingual countries often have multiple coexisting cultures (e.g., Canada: English,
French, Indigenous languages).
o Can influence diplomacy, trade, and social cohesion; tensions may arise when linguistic
groups conflict (e.g., Belgium, Cyprus).
o English is increasingly the global language of business, even when local languages are
different.
4. Education

 Education transmits cultural values, social norms, and skills across generations.
 The level and type of education affect social mobility, economic opportunities, and societal
values.
 Education systems can reinforce individualism, group cohesion, or respect for hierarchy,
depending on cultural context.

5. Political and Economic Philosophy

 Political and economic systems shape societal values.

 Example: Former Soviet Union vs. Canada → different views on freedom, justice, and
achievement due to political/economic philosophy.
 These philosophies interact with other determinants like religion and social structure to form
cultural norms.

Key Takeaways:

 Culture evolves from multiple interrelated factors: social structure, religion/ethics, language,
education, political and economic philosophy.
 These determinants influence how societies perceive individuals vs. groups, approach work and
entrepreneurship, and organize social hierarchies.
 Understanding these determinants helps businesses navigate cross-cultural interactions, manage
international teams, and anticipate economic behavior in different societies.

Culture and the Workplace

A society’s culture strongly influences values in the workplace. For international businesses, this means
management practices may need to adapt depending on local cultural norms. For example, U.S. and
French work cultures differ, so a multinational operating in both countries would need different
approaches.

Hofstede’s Study

Geert Hofstede, a psychologist at IBM, conducted a landmark study from 1967–1973. He surveyed over
100,000 IBM employees in 40 countries to understand how cultural values shape work behavior. He
identified five key cultural dimensions:

1. Power Distance – How societies handle inequality:

o High power distance: inequalities are accepted and grow over time (e.g., many Latin
American and Asian countries).
 o Low power distance: societies strive to minimize inequalities (e.g., Canada, U.S., UK).
2. Individualism vs. Collectivism – Relationship between the individual and society:
o Individualistic cultures: loose ties, individual achievement valued (e.g., U.S., Canada).
o Collectivist cultures: strong ties, loyalty to the group prioritized (e.g., Mexico,
Indonesia).
3. Uncertainty Avoidance – Tolerance for ambiguity and risk:
o High: prefer rules, clear instructions, job security (e.g., Japan, France).
o Low: more flexible, willing to take risks (e.g., Denmark, Sweden).
4. Masculinity vs. Femininity – Gender roles and values:
o Masculine: distinct gender roles, achievement, power, success (e.g., Japan, Mexico).
o Feminine: gender roles less distinct, cooperation and quality of life emphasized (e.g.,
Denmark, Sweden).
5. Long-Term vs. Short-Term Orientation – Focus on future versus tradition:
o Long-term: thrift, perseverance (e.g., East Asian countries like Japan, Hong Kong).
o Short-term: respect tradition, social obligations, “protect face” (e.g., U.S., Canada).

Hofstede quantified these dimensions on a 0–100 scale, allowing comparisons between countries. For
example, Western nations typically score high on individualism and low on power distance, whereas
many Asian and Latin American countries emphasize collectivism and high power distance.

Limitations of Hofstede’s Research

While Hofstede’s work is influential, it has several limitations:

 Assumes one culture per nation, ignoring regional or subcultural differences.

 Data came from IBM employees, not representative of all social classes or industries.
 Researchers’ own cultural biases may have influenced results.
 The study is dated; cultures evolve over time.

Despite these critiques, Hofstede’s framework provides a starting point for understanding cultural
differences and how they impact workplace values and management practices.

Cultural Change
Culture is not static; it evolves over time, though change is often slow and sometimes difficult. Societal
values shift, which can create social turmoil as people adjust.

Examples of Cultural Change

1. Gender Roles in North America

o In the 1960s, women holding senior management positions was rare and widely
questioned.
o Today, women occupy top corporate roles (e.g., Mary Barra at General Motors, Corie
Barry at Best Buy).
o While progress has been made, gender disparities in leadership still exist.
2. Shift from Collectivism to Individualism
o Formerly communist countries like Russia and many Eastern European nations are
moving from collectivist values toward individualism, causing social adjustments.
 o Economic advancement and globalization contribute to this shift.
3. Cultural Adaptation Across Borders
o Individuals can navigate cultural barriers, such as Mark Rowswell (“Dashan”) from
Canada, who gained fame in China by understanding and performing Chinese cultural
nuances.
4. Changes in Japan
o Traditional Japanese office workers (“salarymen”) were loyal to their companies,
sacrificing personal time.
o New generations prioritize personal life and career mobility, reflecting a shift
toward individualism, influenced by Japan’s economic growth.
o Wealthier societies reduce reliance on collective support structures, enabling individuals
to express autonomy and pursue personal goals.

Drivers of Cultural Change

1. Economic Progress
o Leads to urbanization, improved education, and reduced emphasis on traditional, rural
values.
o Encourages individualism as people can better provide for themselves.
2. Globalization
o Advances in communication, transportation, trade, and global brands create exposure to
new cultural ideas.
o Examples: McDonald’s in China, Levi’s in India, Apple in South Africa, social media
platforms promoting global youth culture.
o Cultural exchange can be bidirectional, with smaller or local cultures influencing global
markets (e.g., Canadian brands like Tim Hortons and Lululemon expanding
internationally).

Key Takeaways:

 Culture evolves due to economic growth, globalization, education, and urbanization.

 Societies tend to shift from collectivism toward individualism as wealth increases.
 Cultural change can be gradual, uneven, and sometimes contested, but it is inevitable over time.
 Chapter 5: International Trade Theories

Overview of Trade Theory

1. Mercantilism

 Originated in the 16th–17th centuries.

 Advocates: encourage exports, discourage imports.
 Modern echoes: Some argue policies like the U.S. Build America, Buy America Act reflect
mercantilist ideas.
 Largely discredited by modern economists.

2. Adam Smith – Absolute Advantage

 Proposed in 1776.
 Key idea: Free trade benefits a country; governments should not interfere with imports or exports.
 The “invisible hand” determines trade naturally.
 Basis for laissez-faire trade policies.

3. David Ricardo – Comparative Advantage

 Builds on Smith’s work.

 Even if a country can produce everything efficiently, it benefits by specializing in goods it
produces most efficiently and importing others.
 Explains why global trade is valuable even for goods a country can produce itself.

4. Heckscher-Ohlin Theory

 Developed in the 20th century by Swedish economists Eli Heckscher and Bertil Ohlin.
 Explains trade patterns based on factor endowments (land, labor, capital).
 Countries export goods that use abundant factors efficiently and import goods that require scarce
factors.
 Real-world applicability is limited; doesn’t explain all observed trade patterns.
Benefits of Trade

 Allows countries to specialize and increase efficiency.

 Example: Canada specializes in mining equipment (export) and imports textiles (produced more
efficiently elsewhere).
 Restricting imports benefits a small group (producers) but harms consumers through higher
prices.

Patterns of International Trade

 Resource-based trade: Cocoa from Ghana, coffee from Brazil, oil from Saudi Arabia.
 Skill/technology-based trade: Japan exports electronics, Switzerland exports pharmaceuticals,
Bangladesh exports garments.
 Product life-cycle theory (Raymond Vernon): New products are exported from the country of
invention, then production spreads internationally.
 New Trade Theory (Paul Krugman): Early entrants in some industries (e.g., commercial
aircraft) gain lasting competitive advantages due to first-mover benefits.
 National Competitive Advantage (Michael Porter): Countries dominate industries due to
domestic factors like local demand, competition, and specialized capabilities.

Trade Theory and Government Policy

 Mercantilism: Supports active government promotion of exports and restrictions on imports.

 Smith, Ricardo, Heckscher-Ohlin: Advocate unrestricted free trade.
 New Trade Theory & Porter: Suggest limited government intervention may help develop
competitive export industries (strategic trade policy).

Key Takeaways:

1. Trade allows specialization, efficiency, and higher living standards.

2. Absolute and comparative advantage provide the theoretical foundation for free trade.
3. Factor endowments, product life cycles, and first-mover advantages explain real-world trade
patterns.
4. Governments may intervene strategically, but unrestricted trade is generally beneficial for the
overall economy.

Mercantilism

 Era: Mid-16th century England.

  Key Idea: National wealth comes from accumulating gold and silver; trade is a zero-sum game.
 Goal: Maintain a trade surplus (exports > imports).
 Policy Tools: Tariffs and quotas to limit imports; subsidies to encourage exports.
 Critique (David Hume, 1752):
o Trade surpluses cannot persist due to price changes from gold inflows/outflows.
o Inflation in the exporting country and deflation in the importing country naturally balance
trade over time.
 Neo-mercantilism: Modern governments sometimes pursue similar strategies, linking economic
power to military/political power, e.g., China’s past currency policy or some U.S. policies.

2. Absolute Advantage (Adam Smith, 1776)

 Key Idea: Trade is positive-sum; countries benefit by specializing in goods they produce most
efficiently.
 Definition: A country has an absolute advantage if it can produce a good more efficiently (using
fewer resources) than another country.
 Example (England & France):
o England: efficient in textiles → specialize in textiles.
o France: efficient in wine → specialize in wine.
o Both trade to consume more than if they produced everything themselves.
 Illustration with Ghana and South Korea:
o Ghana: absolute advantage in cocoa.
o South Korea: absolute advantage in rice.
o Specialization + trade increases total production and allows each country to consume
more.

3. Comparative Advantage (David Ricardo, 1817)

 Key Idea: Even if a country has an absolute advantage in all goods, trade can still benefit both
countries.
 Definition: A country should specialize in goods for which it is relatively more efficient (lower
opportunity cost) and trade for others.
 Example (Ghana & South Korea):
o Ghana: absolute advantage in cocoa and rice.
o Comparative advantage: cocoa (produces cocoa much more efficiently than rice
compared to South Korea).
o South Korea specializes in rice.
o Trade allows both countries to consume more than without trade.
 Gains from Trade:
o Increases total world production.
o Consumers in all trading countries can consume more goods.
o Trade is a positive-sum game

Key Takeaways
 1. Mercantilism: Trade viewed as zero-sum; emphasis on trade surpluses.
2. Absolute Advantage: Trade is positive-sum; specialize in most efficient goods.
3. Comparative Advantage: Even without absolute advantages, countries benefit from specializing
based on relative efficiency.
4. Overall: Trade increases production, efficiency, and consumption, forming a strong economic
argument for free trade.

Free Trade and the Ricardian Model

 The simple Ricardian model assumes:
1. Only two countries and two goods exist.
2. No transportation costs.
3. No differences in resource prices.
4. Resources move freely between sectors.
5. Constant returns to scale.
6. Fixed resources; trade does not improve efficiency.
7. No effects on income distribution.
 Key point: While the model predicts mutual gains from trade, real-world complexities (many
countries, transportation costs, immobile resources, dynamic efficiency gains) limit this
simplicity.
 Samuelson critique: Under some circumstances, a rich country can be worse off trading with a
rapidly improving poor country due to lowered wages from offshore labor competition.

2. Extensions to the Ricardian Model

A. Immobile Resources

 Resources like labor and land cannot always shift easily between industries.
 Example: Canadian textile workers may lose jobs when Canada moves toward high-tech exports;
retraining may be necessary.

B. Diminishing Returns

 More resources may be needed for each additional unit of output (convex PPF).
 Specialization is beneficial only until the point where diminishing returns outweigh gains from
trade.

C. Dynamic Effects

 Trade can increase resource stock (foreign investment) and efficiency (technology transfer,
economies of scale).
 These gains can lead to long-term growth, as seen in Eastern Europe and developing countries
during the Green Revolution.
3. Empirical Evidence

 Open economies grow faster than closed ones:

o Developing countries: 4.49% vs. 0.69% (1970–1990)
o Developed countries: 2.29% vs. 0.74%
 Trade increases per capita income: a 10% increase in trade intensity raises average income by at
least 5%.

4. Heckscher-Ohlin Theory

 Comparative advantage arises from factor endowments (land, labor, capital).

 Countries export goods that intensively use locally abundant factors.
 Leontief paradox: U.S. exports were less capital-intensive than imports, possibly due to
innovation and technology differences.
 Adjusting for technology differences, Heckscher-Ohlin predictions align better with real trade
patterns.

5. Product Life-Cycle Theory (Vernon)

 New products are first developed and sold in the innovating country (historically the U.S.).
 Over time, production moves to other advanced countries and then to developing countries as the
product matures.
 Modern globalization reduces the theory’s relevance; new products can be introduced in multiple
countries simultaneously.

6. New Trade Theory

Key concepts:

 Economies of scale: Lower unit costs from large production volumes.

 First-mover advantages: Early entrants capture cost and market advantages that deter later
competitors.
 Trade benefits even without resource or technology differences: Specialization + economies
of scale → more variety + lower costs.

Examples:

 Airbus A380 failed due to insufficient scale but A320 succeeded with nearly 2,000 orders.
 Boeing’s first-mover advantage helped the U.S. dominate commercial jet exports.

Policy implications:
  Government subsidies and strategic trade policies can help domestic firms become first movers in
emerging industries.
 Contrasts with classical free trade theory, which assumes minimal government intervention.

7. Takeaways

1. Free trade generally increases economic growth and living standards.

2. Short-term costs exist (job displacement, adjustment costs).
3. Gains from trade depend on dynamic factors: technology, economies of scale, and first-mover
advantages.
4. Classical theories (Ricardo, Heckscher-Ohlin) explain much, but modern trade patterns also
require new trade theory and product life-cycle perspectives.

Chapter 6: Government Policy and International Trade

Instruments of Trade Policy

Trade policy uses seven main tools to influence international trade:

1. Tariffs
2. Subsidies
3. Import quotas
4. Voluntary export restraints (VERs)
5. Local content requirements (LCRs)
6. Administrative policies
7. Anti-dumping duties

1. Tariffs

 A tariff is a tax on imports (or exports).

 Types:
o Specific tariffs: fixed charge per unit (e.g., $3 per barrel of oil).
o Ad valorem tariffs: percentage of the import’s value.
 Purpose: Protect domestic producers and generate government revenue.
 Effects:
o Benefits domestic producers and government.
o Hurts consumers (higher prices).
o Can reduce global economic efficiency.
 Example: U.S. steel tariffs (2002, 2018) raised domestic steel prices.
 Export tariffs: rare, usually to ensure domestic supply (e.g., China on steel/textiles).
2. Subsidies

 Definition: Government payment to domestic producers to lower production costs.

 Forms: cash grants, loans, tax breaks, or equity participation.
 Purpose:
o Compete against foreign imports.
o Gain export markets.
 Agriculture often receives the most subsidies (EU, U.S., Japan).
 Effects:
o Benefits producers by boosting competitiveness.
o Can protect inefficient producers and lead to excess production.
o Costly for taxpayers.

3. Import Quotas & Voluntary Export Restraints (VERs)

 Import quota: limit on the quantity of a good that can be imported.

 Tariff rate quota: lower tariff within quota, higher tariff beyond quota.
 VERs: quota agreed upon by exporting country to avoid stricter trade barriers.
 Effects:
o Protect domestic producers.
o Raise prices for consumers.
o Create “quota rents” for foreign producers.

4. Export Tariffs & Bans

 Export tariff: tax on exports to ensure domestic supply.

 Export ban: partial or full restriction on exports (e.g., U.S. crude oil ban, 1975–2015).
 Purpose: Protect domestic supply, control prices, national security.

5. Local Content Requirements (LCRs)

 Definition: Require a certain percentage of a product to be produced domestically (by value or

components).
 Purpose:
o Promote domestic manufacturing.
o Protect local jobs.
 Example: Buy America Act – 51% domestic content required for government contracts.
 Effect: Protects domestic producers but increases consumer costs.
6. Administrative Policies

 Informal or bureaucratic rules to restrict imports or boost exports.

 Example: Japan’s complex vehicle import standards make foreign competition difficult.
 Purpose: Protect domestic industries without formal tariffs or quotas.

7. Anti-dumping Policies

 Dumping: Selling goods abroad below production cost or fair market value.
 Purpose: Protect domestic producers from unfair foreign competition.
 Implementation:
o Domestic producer files complaint.
o Government may impose anti-dumping duties (special tariffs up to 5 years).
 Example: U.S. Commerce Department handles dumping complaints; Canada uses Canada Border
Services Agency.

Key Takeaways:

 Trade policies usually benefit domestic producers but harm consumers.

 They can distort markets, reduce efficiency, and create trade disputes.
 Tools include tariffs, subsidies, quotas, LCRs, administrative barriers, and anti-dumping
measures.

The Case for Government Intervention

Governments intervene in international trade for two main reasons: political and economic.

1. Political Arguments for Intervention

Political interventions usually aim to protect specific groups (often producers) or achieve non-economic
objectives like national security, human rights, or foreign policy goals.

Key political reasons:

a) Protecting Jobs and Industries

 Governments protect jobs and industries from unfair foreign competition, often caused by
subsidies in exporting countries.
 Example:
o U.S. filed WTO complaints against Chinese auto parts subsidies (2012).
o U.S. steel tariffs (2002) protected domestic steel producers but raised costs for steel
consumers (like auto companies).
o EU’s Common Agricultural Policy protected farmers but increased consumer prices.
 o Canada protects cultural industries to preserve Canadian content from U.S. media
dominance.

b) Protecting National Security

 Certain industries (defense, aerospace, advanced electronics) are protected for strategic reasons.
 Examples:
o U.S. steel and aluminum tariffs (2018) cited national security.
o Canada blocked the sale of MTS Allstream to foreign buyers in 2013 due to critical
telecommunications infrastructure.

c) Retaliating / Bargaining

 Governments can use trade interventions to pressure other countries to change policies.
 Example:
o U.S. threatened tariffs on China to enforce intellectual property rights.
o Risk: retaliatory trade barriers can escalate, harming all parties.

d) Protecting Consumers

 Trade policies sometimes limit imports to protect consumers from unsafe products.
 Example:
o Japan and South Korea banned U.S. beef after mad cow disease detection (2003).

e) Furthering Foreign Policy Objectives

 Trade can be used as a tool to reward allies or punish rogue states.

 Examples:
o Sanctions on Iraq (1991–2003), Cuba, Libya, and Iran to achieve political goals.

f) Protecting Human Rights

 Governments use trade restrictions to influence human rights policies abroad.

 Examples:
o Sanctions on Myanmar eased after democratic reforms.
o Sanctions against South Africa during apartheid pressured policy changes.

2. Economic Arguments for Intervention

Economic arguments focus on increasing national wealth and long-term competitiveness.

a) Infant Industry Argument

 Idea: New industries in developing countries may have potential comparative advantage but
cannot compete initially with established industries abroad.
 Governments may protect these industries temporarily with tariffs, quotas, or subsidies.
 Criticisms:
 o Protection may foster inefficiency rather than competitiveness.
o Example: Brazil’s auto industry grew under protection but struggled when barriers were
removed.
o Modern global capital markets reduce the need for government support; firms can borrow
for investment.

b) Strategic Trade Policy

 Focuses on industries with substantial economies of scale where first-mover advantage is

critical.
 Governments can intervene to help domestic firms gain a global advantage.
 Examples:
o U.S. subsidies helped Boeing dominate the commercial aircraft market.
o Japanese government supported LCD production, giving Japanese firms first-mover
advantages.
o Airbus received $18B in European government subsidies to compete with Boeing.
o Bombardier in Canada benefited from Quebec government support to establish
international presence.
 Key idea: Government intervention can help domestic firms:

1. Establish first-mover advantages in new industries.

2. Overcome foreign firms’ first-mover advantages.
3. Use a combination of domestic protection and export subsidies to secure global
competitiveness.

The Revised Case for Free Trade

The revised case for free trade responds to the strategic trade policy arguments of new trade theorists,
which suggest a justification for government intervention in international trade. While strategic trade
policy may look appealing theoretically, it has practical challenges.

1. Critique of Strategic Trade Policy

 Paul Krugman’s view:

o Strategic trade policy (aimed at giving domestic firms a global advantage) is essentially
a beggar-thy-neighbour policy, boosting national income at the expense of other
countries.
o Retaliation is likely, potentially leading to a trade war, which harms all countries
involved.
 Example:
o If the U.S. subsidized Boeing in response to Airbus subsidies, the subsidies could cancel
each other out.
o Result: Both taxpayers (Europe and U.S.) pay more, but no real competitive advantage is
gained.
 Implication: Strategic trade policy can be costly, inefficient, and counterproductive.
2. Practical Alternative

 Instead of retaliatory subsidies, governments should focus on:

o Establishing rules of the game to minimize trade-distorting subsidies.
o Using WTO mechanisms to enforce fair competition.
o Anti-dumping policies to address unfair pricing by subsidized competitors.

3. Domestic Political Considerations

 Governments do not always act in the national interest due to political influence from interest
groups.
 Example:
o EU’s Common Agricultural Policy (CAP) benefits politically powerful farmers, not EU
consumers, who face higher prices.
 Strategic trade policy is likely to be captured by special interests, distorting its intended
economic benefits.
 Krugman’s conclusion:
o In reality, governments cannot ignore domestic politics when crafting industry-specific
policies.
o A blanket policy of free trade, with very limited exceptions, may be the most realistic
and effective approach

Key Takeaways

1. Strategic trade policies risk trade wars and inefficiency.

2. Free trade rules, enforced by institutions like the WTO, provide a safer, fairer framework.
3. Domestic political pressures often distort targeted interventions, reducing their effectiveness.

Development of the World Trading System

The development of the world trading system reflects the long-term effort to promote free trade while
addressing the challenges of trust, protectionism, and international cooperation.

1. The Trust Problem in Trade

 Governments may recognize the benefits of free trade but are often reluctant to unilaterally
lower trade barriers.
 Example: Brazil and Argentina may each fear that the other will take advantage of lower barriers
while keeping their own high, leading to mutual distrust.
 Solution: Countries negotiate rules for trade and create independent bodies (like the WTO) to
monitor compliance and impose sanctions if rules are broken.
2. Early History of Free Trade

 Adam Smith and David Ricardo: Provided the theoretical foundation for free trade.
 Britain (1846): Repealed the Corn Laws to reduce tariffs on imported corn, responding to famine
threats.
 Britain promoted free trade unilaterally for 80 years, but other nations did not reciprocate.
 Great Depression: Protectionist policies like the U.S. Smoot-Hawley tariff triggered trade wars
and worsened global economic conditions.

3. GATT and Post-WWII Trade Liberalization (1947–1979)

 GATT (General Agreement on Tariffs and Trade, 1947): Multilateral agreement to reduce
tariffs, quotas, and subsidies gradually.
 Impact:
o Membership grew from 19 to over 120 nations.
o Average U.S. tariffs declined nearly 92% between 1947 and 1979.
o Trade liberalization under GATT stimulated economic growth worldwide.

4. Protectionist Trends (1980–1993)

 Pressures for protectionism rose due to:

1. Japan’s rapid economic success and perceived market barriers.
2. Persistent U.S. trade deficits leading to domestic job losses.
3. Use of bilateral voluntary export restraints (VERs) to circumvent GATT rules.
 Example: Japan-U.S. automobile VER.

5. Uruguay Round and Formation of the WTO (1995)

 Uruguay Round (1986–1993): Expanded trade rules to services, intellectual property, and
agriculture.
 Key Outcomes:
1. Tariffs on industrial goods reduced significantly.
2. Agricultural subsidies reduced.
3. GATT rules extended to services and intellectual property.
4. WTO established to enforce trade rules.
 WTO Powers:

o Arbitration of trade disputes.

o Binding decisions with enforcement mechanisms (“teeth”).
o Expanded oversight for services and intellectual property (GATS and TRIPS).
6. WTO Experience

 164 members (2023), representing 98% of world trade.

 Over 600 trade disputes resolved since 1995, showing confidence in WTO dispute mechanisms.
 Key sectors for reform: telecommunications and financial services.

7. Ongoing Issues in Global Trade

1. Anti-dumping policies:
o Countries impose duties on goods sold below cost.
o Exploited for protectionism; concentrated in metals, chemicals, machinery, electrical
equipment.
2. Agricultural protectionism:
o High tariffs and subsidies distort trade, raise prices, and reduce global welfare.
o Developed nations defend subsidies; developing nations push for reform.
3. Intellectual property:
o TRIPS agreement protects patents, copyrights, and trademarks to incentivize innovation.
4. Market access for nonagricultural goods and services:
o Tariffs remain high in certain sectors, especially in developing countries.
o Reducing tariffs can significantly increase global income.

8. Doha Round and Trade Negotiations

 Launched in 2001 to further liberalize trade.

 Agenda: cut tariffs, reduce agricultural subsidies, liberalize investment, limit anti-dumping.
 Progress stalled due to disagreements, particularly over agricultural subsidies.

9. Multilateral and Bilateral Agreements

 Countries increasingly pursue regional or bilateral free trade agreements to bypass stalled
WTO talks.
 Example:
o U.S.–South Korea FTA (2012)
o Australia–China FTA (2014)
o Trans-Pacific Partnership (TPP) partially implemented after U.S. withdrawal.
 Over 360 such agreements exist as of 2023.

10. Threats to the World Trading System

 Recent events challenging global trade:

 1. Brexit (2016): U.K. exits one of the most successful free trade zones.
2. Trump presidency (2016): U.S. pulls out of TPP, adopts mercantilist stance.
3. COVID-19 pandemic (2020): Global supply chains disrupted.
4. Russia–Ukraine conflict (2022): Disrupted exports, caused global food shortages.

Key Takeaways

 Free trade requires trust, rules, and enforcement.

 WTO plays a critical role in monitoring, dispute resolution, and expanding trade coverage.
 Challenges include protectionism, anti-dumping abuse, agricultural subsidies, IP enforcement,
and political/economic shocks.
 Multilateral and bilateral agreements supplement WTO efforts in liberalizing trade.

Chapter 7 : Foreign Direct Investment

Foreign Direct Investment (FDI) in the World Economy

1. FDI Concepts

 Flow of FDI: Amount of investment made over a specific period (usually a year).
 Stock of FDI: Total accumulated value of foreign-owned assets at a given time.
 Inflow vs Outflow:
o Inflows: FDI coming into a country.
o Outflows: FDI leaving a country for investments abroad.

2. Trends in FDI

 FDI has increased significantly over the past three decades:

o Outflows rose from $244 billion in 1990 to $1.71 trillion in 2021.
 o Dropped to $1.3 trillion in 2022 due to the Ukraine war, grain shortages, inflation,
and public debt.
 FDI growth has outpaced world trade and output:
o 1990–2021: FDI flows increased ~7×, world trade ~4×, world output ~60%.
 Drivers of FDI growth:

1. Protectionist pressures: Firms use FDI to circumvent potential trade barriers.

2. Political/economic changes in developing nations: Democratization, market
liberalization, privatization, and deregulation attract FDI.
3. Globalization: Firms want production closer to major markets; international revenue and
profits are increasingly foreign-based (e.g., S&P 500 firms generate ~1/3 of revenue
abroad).

3. Direction of FDI

 Historically developed nations received most FDI.

 United States has been the top target due to: large, wealthy markets, stable economy, openness to
foreign investment.
 Europe also attracts substantial inflows.
 Developing nations have seen rapid growth in FDI:
o Southeast Asia and China are major recipients (China: $181B in 2021).
o Latin America: $134B in 2021 (Brazil and Mexico top recipients).
o Africa: Lowest FDI, but Chinese investment is rising, mainly in extraction industries.

4. Source Countries for FDI

 Largest sources: United States, UK, France, Germany, Netherlands, Japan (accounted for ~60%
of outflows 1998–2019).
 China: Emerged as a major investor; outward FDI reached $196B in 2016, mainly in extractive
industries and recently slowed due to trade conflicts with the U.S.

5. Forms of FDI

 Greenfield Investment: Establishing a new operation abroad.

 Mergers & Acquisitions (M&A): Buying or merging with an existing foreign firm.
o M&A dominates in developed nations (40–80% of FDI inflows 1998–2019).
o Developing nations: Only ~1/3 of FDI is M&A due to fewer acquisition targets.
 Reasons firms prefer acquisitions:

1. Faster execution than greenfield investments.

2. Access to strategic assets (brands, patents, customer base, distribution networks).
3. Efficiency gains through transfer of capital, technology, or management expertise.
 o However, many acquisitions fail to achieve expected benefits.

6. FDI in Canada

 Canada’s outflows historically exceed inflows.

 2022: FDI inflow = $53B, outflow = $79.2B → Canada is a net creditor.
 Outflows are mostly to the U.S., but investments in other countries are growing.
 Canadian FDI often targets:
o Existing affiliates/subsidiaries for working capital.
o New markets to diversify beyond U.S. dependence.
 Canada’s diverse population supports global business expansion.

7. Key Takeaways

 FDI is critical for global economic integration, often outpacing trade and output growth.
 Both developed and developing nations benefit, but motivations and forms of FDI differ.
 Political stability, market size, and openness strongly influence FDI direction.
 M&A and greenfield investments serve different strategic purposes.
 Canada is a significant player in FDI, increasingly investing beyond its traditional U.S. focus.

Benefits and Costs of FDI

Many governments act as pragmatic nationalists, weighing the costs and benefits of FDI before forming
policies. The impacts differ for the host country (receiving FDI) and the home country (origin of FDI).

1. Host Country (Receiving FDI)

Benefits

1. Resource-Transfer Effects
o Capital: MNEs provide financial resources often unavailable to domestic firms, through
internal funds or easier access to loans.
o Technology: FDI transfers technology for products (e.g., computers) and processes (e.g.,
oil refining), stimulating industrialization and productivity.
 Example: Swedish firms acquired by foreign companies showed increased labor
and total factor productivity.
o Management skills: Foreign managers introduce advanced techniques, improving
efficiency; local personnel gain skills that may spread to domestic firms.
2. Employment Effects
o Direct: Jobs created in the foreign MNE subsidiary.
o Indirect: Jobs created in local suppliers or due to increased spending by employees.
  Example: Toyota’s plant in France created 2,000 direct jobs and 2,000 indirect
jobs.
o Caveat: Sometimes net employment gain is less if domestic firms lose market share
(substitution effect).
o Acquisitions vs Greenfield: Acquisitions may reduce jobs initially during restructuring,
but foreign-owned firms often expand employment faster than domestic rivals over time.
3. Balance-of-Payments Effects
o FDI can improve the host country’s current account if it substitutes for imports.
 Example: Japanese auto companies producing in the U.S. supply the U.S. market
locally, reducing imports from Japan.
o Reduces the need to finance deficits by selling domestic assets to foreigners.
4. Competition and Economic Growth
o Greenfield FDI introduces new firms → increases competition → drives down prices and
increases consumer welfare.
o Stimulates domestic firms to invest in R&D, plant, and equipment.
o Example: South Korea’s retail sector saw improved efficiency and lower prices after
Walmart, Costco, and Carrefour invested.
o FDI in services (telecom, retail, finance) can be especially beneficial because these
sectors must be produced locally.

Costs

1. Adverse Effects on Competition

o Foreign MNEs may dominate markets using global funds, potentially pushing domestic
firms out and raising prices.
o Acquisitions may reduce competition, unlike greenfield investments, which add new
competitors.
o Example: Hindustan Lever (Unilever) in India acquired rivals to dominate soap,
detergent, and ice cream markets.
o Domestic competition authorities can mitigate these risks.
2. Adverse Effects on Balance-of-Payments
o FDI may require importing inputs from the home country → reduces positive effect on
current account.
o Example: Japanese auto companies in the U.S. initially imported many parts; later
increased local sourcing.
3. Effects on National Sovereignty
o Concerns that foreign parents control key economic decisions.
o Most economists argue this concern is outdated: global interdependence prevents any
country from holding another “ransom” economically.

2. Home Country (Source of FDI)

Benefits

1. Employment Effects
 oForeign subsidiaries may create demand for exports from the home country → supports
jobs.
o Example: Toyota’s European operations import parts from Japan, boosting Japanese
employment.
2. Reverse Resource-Transfer
o MNEs learn skills abroad (management, product, process technology) → transfer
knowledge back home → contributes to home country growth.

Costs

1. Balance-of-Payments
o Initial capital outflow to finance FDI.
o Outward FDI may substitute for home-country exports, hurting the current account.
 Example: Toyota’s U.S. and European operations may reduce Japanese export
revenue.
2. Employment Effects
o Offshoring production may reduce domestic jobs if FDI replaces home-country
production.
o Concerns grow if home country has high unemployment.
o Example: U.S. concerns over NAFTA/CUSMA: investment in Mexico could reduce U.S.
jobs.

International Trade Theory Perspective

 Offshore production can stimulate home-country growth by allowing domestic resources to

focus on areas of comparative advantage.
 Consumers benefit from lower prices.
 Restricting FDI to protect domestic jobs can backfire if international competitors exploit low-cost
locations.

Key Takeaways

 Host countries gain capital, technology, management skills, jobs, competition, and economic
growth—but face potential market dominance, import dependencies, and sovereignty concerns.
 Home countries gain export demand, knowledge transfer, and competitive advantages—but risk
balance-of-payments pressures and job losses.
 Overall, careful policy design is needed to maximize benefits while minimizing risks.

Government Policy Instruments and FDI

Countries regulate FDI using different policies, which can either encourage or restrict investment. The
policies differ depending on whether the country is the home (source) country or the host (receiving)
country.

1. Home Country Policies (Outward FDI)

Encouraging Outward FDI

1. Foreign Risk Insurance

o Covers risks like expropriation, war, or inability to repatriate profits.
o Encourages firms to invest in politically unstable countries.
2. Capital Assistance
o Government loans or special funds for firms investing in developing countries.
3. Tax Incentives
o Elimination of double taxation (income taxed in both home and host country).
4. Political Influence
o Governments can pressure host countries to relax restrictions on inbound FDI.
o Example: U.S. pressure on Japan allowed Toys “R” Us to enter the Japanese market.

Restricting Outward FDI

1. Capital Outflow Controls

o Limit investments abroad to protect the balance of payments.
o Example: U.K. exchange controls from 1960s–1979.
2. Tax Rules
o Discourage foreign investment by taxing foreign earnings higher than domestic earnings.
3. Political Restrictions
o Prohibit investment in certain countries for ideological or diplomatic reasons.
o Examples: U.S. restrictions on Cuba, Iran; informal pressure on South Africa (1980s);
restrictions on Russia (2022).

2. Host Country Policies (Inward FDI)

Encouraging Inward FDI

1. Incentives
o Tax concessions, low-interest loans, grants, or subsidies.
o Motivated by resource transfer, employment benefits, and competition to attract FDI
from other countries.
o Example: U.S. state governments competing for Toyota plants; Kentucky offered $147
million incentive.

Restricting Inward FDI

1. Ownership Restraints
 o Limits foreign ownership in certain sectors for national security or competition.
o Examples:
 Tobacco and mining in Sweden.
 Natural resources in Brazil, Finland, Morocco.
 Airlines in Canada capped at 25% (can go up to 49% via Governor in Council).
o Purpose:
 Protect infant industries.
 Maximize local benefits from technology transfer and employment.
 Example: Japan allowed joint ventures only if foreign MNEs brought valuable
technology.
2. Performance Requirements
o Controls on local subsidiaries to ensure benefits for the host country.
o Common requirements:
 Local content in production.
 Export quotas.
 Technology transfer.
 Local participation in management.
o More common in less developed countries than in advanced economies.

3. Role of International Institutions (WTO and FDI Liberalization)

1. WTO Involvement
o Promotes international trade in services, which must be produced locally (cannot be
exported easily).
o Encourages liberalization of FDI regulations, especially in services.
2. Major Agreements
o 1997 agreements liberalized trade in telecommunications and financial services,
requiring signatories to allow inward FDI.
3. Limitations
o WTO efforts to create universal FDI rules have been resisted by developing countries
(led by Malaysia and India).

Key Takeaways

 Home countries use incentives (insurance, capital, taxes, political influence) to encourage
outward FDI but can restrict it for balance-of-payments, taxation, or political reasons.
 Host countries use incentives (tax breaks, loans, grants) to attract FDI and controls (ownership
and performance requirements) to maximize benefits.
 International institutions like the WTO push for FDI liberalization, especially in services, but
universal rules face resistance from developing nations.

Implications for Business

Businesses need to consider both theories of FDI and government policies when making decisions about
foreign investments.

1. Implications of FDI Theories

A. Internalization Theories (Most Useful for Business)

 Focus on the limitations of exporting and licensing.

 Provide guidance on when FDI is more profitable than licensing or exporting.

Decision Framework:

1. Transportation Costs & Trade Barriers

o Low: Exporting is preferable.
o High: Choice between FDI and licensing.
2. Control & Know-How
o Firm has valuable know-how not easily protected → FDI.
o Firm requires tight control over foreign operations → FDI.
o Skills not amenable to licensing → FDI.

Industries where FDI is preferable:

1. High-tech industries – protecting proprietary knowledge.

2. Global oligopolies – need tight control for competitive coordination.
3. Cost-sensitive industries – need control to disperse production efficiently.

Industries where Licensing/Franchising is preferable:

 Fragmented, low-technology industries where:

o Tight control is unnecessary.
o Knowledge can be protected via contracts.
o Example: McDonald’s uses franchising, which allows brand and operational consistency
without full ownership.

B. Less Useful Theories

 Product Life-Cycle Theory and Knickerbocker’s Theory:

o Descriptive, not analytical.
o Explain historical patterns but not profitability comparisons.
o Do not address licensing as an alternative to FDI.

2. Implications of Government Policy

A. Host Country Policies

  Government attitude toward FDI affects location decisions.
 Investment in countries with permissive policies is preferable.

Negotiation Considerations:

 If FDI is encouraged: focus on incentives offered and commitments required.

 If FDI is restricted: focus on concessions required to proceed.

Bargaining Power Factors:

1. Value of each party’s offerings – high value increases bargaining power.

2. Number of alternatives – more options increase a firm’s bargaining power.
3. Time horizon – longer time to negotiate improves bargaining position.

Implication: Firms must assess host government policies, incentives, and negotiation power to make
informed FDI decisions.

Key Takeaways

 Internalization theory helps firms decide between exporting, licensing, and FDI.
 FDI is often necessary for high-tech, globally competitive, or cost-sensitive industries.
 Licensing and franchising work well in low-tech, fragmented industries.
 Host government policies and negotiation leverage significantly influence FDI decisions.

Chapter 8: Regional Economic Integration

Levels of Economic Integration

Levels (from least to most integrated):

1. Free Trade Area (FTA)

o Removes all barriers to trade among member countries.
o Each country sets its own trade policies for nonmembers.
o Examples:
 EFTA (Norway, Iceland, Liechtenstein, Switzerland) – mainly industrial
goods.
 NAFTA/CUSMA/USMCA – North American free trade agreement.
o Key feature: No discriminatory tariffs, quotas, subsidies among members.
2. Customs Union
o Removes internal trade barriers and adopts a common external trade policy.
o Requires administrative mechanisms for trade with nonmembers.
o Examples:
 EU (initial stage)
 Andean Community (Bolivia, Colombia, Ecuador, Peru – common
external tariff 5–20%).
3. Common Market
o All features of customs union plus free movement of labor and capital.
o Requires cooperation on fiscal, monetary, and employment policies.
o Examples:
 EU (previously)
 MERCOSUR (Argentina, Brazil, Paraguay, Uruguay, Venezuela –
Venezuela suspended).
4. Economic Union
o Features of common market plus:
 Common currency
 Harmonized tax rates
 Common monetary and fiscal policy
o Requires significant loss of national sovereignty.
o Example: EU (imperfect; not all members use euro, tax differences remain).
5. Political Union
o Central political body coordinates economic, social, and foreign policies.
o Examples:
 EU (partial political union, European Parliament, Council of Ministers)
 USA (fully integrated political union of states).

The Case for Regional Integration

Economic Case:

 Based on gains from trade and FDI:

o Specialization increases efficiency and world production.
o Free trade encourages economic growth (dynamic gains).
 o FDI transfers knowledge, technology, and management skills.
 Regional integration easier than global integration:
o Fewer countries = easier coordination and policy harmonization.

Political Case:

 Encourages cooperation, reduces conflict.

 Increases global political influence.
 Examples:
o EU: post-WWII unity to prevent future wars, compete globally.
o NAFTA/USMCA/CUSMA: promote democracy and economic stability in
Mexico, reduce illegal immigration.

Impediments to Integration:

1. Economic Costs:
o Certain groups lose (e.g., job losses in vulnerable industries under NAFTA).
o Short-term pain despite long-term national benefits.
2. Sovereignty Concerns:
o Nations must relinquish control over trade, fiscal, monetary policies.
o Examples:
 Mexico’s oil exempted under CUSMA
 UK opted out of euro; Brexit referendum driven by sovereignty concerns.

The Case Against Regional Integration

Key Concerns:

 Trade Creation vs. Trade Diversion:

o Trade creation: shifts production to lower-cost producers within the FTA →
positive effect.
o Trade diversion: shifts from lower-cost external producers to higher-cost
members → negative effect.
 Free trade agreements benefit world only if trade creation > trade diversion.
 WTO rules aim to prevent trade diversion, but nontariff barriers can bypass rules → risk
of protected regional markets.

Quick Comparison Table: Levels of Integration

 Internal External Factor Monetary/Fiscal
Level Example
Barriers Policy Mobility Policy
Each country
FTA No No No EFTA, NAFTA
sets
Customs Andean
No Common No No
Union Community
Common MERCOSUR,
No Common Yes No
Market EU
Economic
No Common Yes Common EU (imperfect)
Union
Political USA, EU
No Common Yes Common
Union (partial)

Regional Economic Integration in Europe and the Americas

1. Trade Blocs in Europe

 EU: 27 members (post-Brexit), major economic and political influence.

 EFTA: 4 members, less significant globally.
 EU often seen as an emerging superpower comparable to the U.S.

2. Evolution of the EU

Origins:

 Post-WWII desire for peace and global economic/political influence.

 Economic benefits of integration recognized.

Key Milestones:

 1951: European Coal and Steel Community – Belgium, France, West Germany, Italy,
Luxembourg, Netherlands.
 1957: Treaty of Rome → European Community (EC) → common market.
 1993: Maastricht Treaty → European Union (EU).

Treaty of Rome Objectives:

 Remove internal trade barriers.

 Common external tariff.
 Free movement of production factors.
  Harmonize member laws; common agricultural & transport policies.

EU Expansion Timeline:

 1973: UK, Ireland, Denmark

 1981: Greece
 1986: Spain, Portugal
 1995: Austria, Finland, Sweden
 2004: 10 countries (mostly Eastern Europe + Malta & Cyprus)
 2007: Bulgaria, Romania
 2013: Croatia
 2020: UK exits → 27 members

3. Political Structure of the EU

Main Institutions:

1. European Commission
o Proposes legislation, implements laws, monitors compliance.
o 27 commissioners (1 per member), headed by a president.
o Monopoly on proposing legislation; implements and enforces EU law.
o Competition policy: regulates market dominance, antitrust fines (e.g., Intel,
Google, Microsoft).
2. Council of the European Union
o Represents member states’ governments.
o Approves legislation from the Commission.
o Voting: depends on country size (e.g., Germany 29 votes, Denmark 7 votes).
o Some decisions require unanimity (tax, immigration); others use majority voting.
3. European Parliament
o 705 members, directly elected.
o Primarily consultative; can amend legislation.
o Right to approve commissioner appointments and veto certain laws.
o Co-equal legislator since Treaty of Lisbon (2009).
4. Court of Justice
o Supreme EU law appeals court, 1 judge per member state.
o Ensures treaties are followed; independent from national interests.

4. Single European Act (1987)

 Objective: One single market by 1992.

 Key reforms:
o Remove internal border controls.
 o Mutual recognition of product standards.
o Open public procurement.
o Liberalize banking and insurance.
o Remove foreign exchange restrictions.
o Lift cabotage restrictions.
 Impact:
o Reduced costs, improved efficiency, increased competition.
o Raised EU GDP by 2–5% over 15 years.

5. Establishment of the Euro

Maastricht Treaty (1992):

 Common currency adopted 1999 (notes/coins 2002).

 Eurozone: 19 of 27 members.
 Criteria: price stability, fiscal health, stable exchange rates, converged interest rates.

Benefits of the Euro:

1. Reduced currency conversion costs (~0.5% of EU GDP).

2. Easier price comparison → increased competition.
3. Encouraged efficiency among producers.
4. Pan-European capital market → lower cost of capital, more investment.
5. Diversified investment opportunities.

Costs / Challenges:

 Loss of national monetary control → ECB centralizes policy.

 Not an optimal currency area → economic divergence among members (e.g., Finland vs.
Portugal).
 Fiscal transfers politically contentious (e.g., Germany vs. Greece).

Euro Experience:

 1999: €1 = $1.17 → 2008: €1 = $1.54 → post-2008: decline due to sovereign debt crisis.
 Bailouts: Greece (€110B), Ireland (€85B), Portugal (€78B).
 European Stability Mechanism: €500B permanent bailout fund.
 Fiscal pact (2012) enforced stricter budget rules.

6. Enlargement of the EU

 Eastern European countries applied post-1989.

  Requirements: privatization, deregulation, democratic stability, human rights, adoption of
EU laws.
 Key enlargements:
o 2004: 10 countries (Baltic + Poland, Hungary, Malta, Cyprus)
o 2007: Bulgaria, Romania
o 2013: Croatia
 Türkiye: candidate status hindered by human rights concerns and political issues.
 Canada: CETA agreement (2017 provisional application) → trade +7% in first year.

7. Regional Economic Integration in the Americas

 EU remains the most ambitious integration globally.

 Significant Americas efforts:
o Andean Community
o MERCOSUR
 Integration in Americas less deep than EU.

NAFTA / CUSMA

 NAFTA Timeline
o 1988: U.S. and Canada agree on free trade (effective 1989)
o 1991–1993: Talks with Mexico → ratified Jan 1, 1994
 Key Provisions
o Abolish tariffs on 99% of goods by 2004
o Remove most service barriers; protect intellectual property
o Limit restrictions on FDI; special treatment for certain sectors
o Maintain national environmental standards
o Commissions enforce standards for health, safety, wages, child labor
 Arguments For
o Boost efficiency, productivity, and competitiveness
o Lower costs for consumers
o Job creation in Mexico; dynamic gains for U.S. & Canada
 Arguments Against
o Job losses in U.S./Canada (alarmist claims up to 5.9M)
o Environmental concerns (e.g., Rio Grande, Mexico City)
o Loss of Mexican sovereignty to U.S. firms
 Results
o Trade between U.S., Canada, Mexico increased (1990: 30% → 2017: 46%)
o Modest employment effects; overall small but positive impact
o CUSMA updates:
 Auto content rules: 75% North American parts
 40% high-wage labor content requirement
  Dairy market access for U.S.
 Extended intellectual property terms & digital economy provisions
 16-year sunset clause with six-year reviews

Other Regional Trade Blocs

 Andean Community
o Members: Bolivia, Chile, Ecuador, Colombia, Peru
o Evolution: 1969 Andean Pact → 1997 Andean Community
o Achievements: Customs union implemented (Peru opted out)
 MERCOSUR
o Members: Brazil, Argentina, Paraguay, Uruguay (Venezuela joined 2012,
suspended 2016)
o Goals: Free trade area (1994), common market (pending)
o Early growth: Trade quadrupled 1990–1998; GDP growth 3.5%
o Criticism: Trade diversion; inefficiencies due to tariffs
 BRICS
o Members: Brazil, Russia, India, China, South Africa
o Significance: Largest emerging economies, large domestic markets
o Limitations: Political differences, no common currency, not a formal bloc
 Central America (CAFTA), CARICOM
o CAFTA: Free trade with U.S.; lower barriers for goods/services
o CARICOM: Caribbean integration attempts; CSME aims for single market
 ASEAN
o Members: 10 SE Asian nations
o Progress: ASEAN Free Trade Area (AFTA), ATIGA reduces tariffs to 98.6%
o Trade agreement with China: 90% tariff removal
 Africa
o Many overlapping trade blocs; slow integration
o EAC (Kenya, Uganda, Tanzania, etc.): Customs union & common market
o AfCFTA: Potential largest free trade area (55 countries, $3.4T GDP)

Implications for Business

Opportunities

 Larger markets → higher sales potential

 Lower factor costs → centralize production strategically
 Harmonized standards → simplified operations
 Cross-border supply chains → tighter regional integration
 Example: Atag Holdings NV struggled to standardize products across EU due to cultural
differences
Threats

 Increased competition within single markets → price pressure

 Non-member firms face stronger, more efficient competitors
 Risk of “trade fortresses” (EU may protect politically sensitive sectors)
 Regulatory challenges (e.g., EU merger and acquisition oversight)
 Political opposition to free trade (e.g., U.S. NAFTA renegotiation, Brexit)

Chapter 11: The Strategy of International

Business
Strategy and the Firm
1. What is a Firm?

A firm is an organization that coordinates activities to create and deliver goods or services.
It can be called a multinational enterprise (MNE), multinational corporation (MNC), global
company, or international business.

A unique type of firm is an SME (small or medium-sized enterprise):

 Fewer than 500 employees in North America.

 Fewer than 250 employees in Europe, Asia, or Africa.

This textbook focuses on both large MNEs and SMEs, recognizing that smaller firms often
use different global strategies.

2. What is Strategy?

A strategy is the actions managers take to achieve the firm’s goals.

The main goal of most firms is to maximize value for owners and shareholders — but ethically, legally,
and responsibly.

Firms increase value by:

1. Raising profitability – earning more profit per dollar of capital invested.

2. Increasing profit growth – growing profits faster over time.

3. How to Increase Profitability and Profit Growth

Managers can:

 Reduce costs (e.g., cheaper production, logistics, or labor).

 Add value and raise prices (e.g., through better quality, design, or brand image).
 Sell more in existing markets (market penetration).
 Enter new markets (market expansion).

International expansion can help do all four — lower costs, add value, sell more, and grow faster.

4. Value Creation
Value creation is the difference between what consumers value (V) and the cost of production (C).

 Value created = V – C
 Profit per unit = P – C (where P is price)
 Consumer surplus = V – P (the extra satisfaction customers get for what they pay)

A firm is more profitable when:

 It creates more value (V – C is larger).

 It charges a higher price (P) or lowers its costs (C).

Two main strategies for creating value:

1. Low-Cost Strategy: Focus on minimizing production costs.

2. Differentiation Strategy: Focus on making products more valuable or unique so customers pay
more.

5. Michael Porter’s Framework

Porter identified two basic ways to achieve competitive advantage:

 Low Cost: Be more efficient than rivals.

 Differentiation: Offer products customers value more.

Superior profitability happens when a firm’s gap between V and C is larger than its competitors’.

6. Strategic Positioning and the Efficiency Frontier

A firm must choose a position between value (V) and cost (C) that fits the market.

 The efficiency frontier shows the best combinations of cost and value a firm can achieve if it
operates efficiently.
 A firm on the frontier is efficient (like Four Seasons or Marriott).
 A firm inside the frontier (like Starwood, in the example) operates less efficiently.

To maximize profitability, a firm must:

1. Pick a viable position on the efficiency frontier (enough demand to support it).
2. Configure operations to support that position (e.g., marketing, production, HR).
3. Have the right organization structure to execute it effectively.

7. The Firm as a Value Chain

The value chain shows how a firm’s activities add value at each stage.
It has primary and support activities:

Primary Activities

1. R&D – Designs new products or processes (raises V or lowers C).

2. Production – Creates the product/service efficiently (lowers C or raises V).
3. Marketing and Sales – Builds brand and finds customer needs (raises V, allows higher P).
4. Customer Service – After-sale support (raises V and customer loyalty).

Support Activities

1. Information Systems – Improve coordination and efficiency (e.g., Dell’s real-time ordering
system).
2. Logistics – Efficient flow of materials (lowers C).
3. Human Resources – Hiring, training, motivating employees (raises V, lowers C).
4. Company Infrastructure – Leadership, structure, and culture that support strategy.

8. Organization Architecture

A firm’s organization must support its strategy and operations.

Organization architecture includes:

 Structure – how the firm is divided and where decisions are made.
 Controls – how performance is measured.
 Incentives – how employees are rewarded.
 Processes – how work and decisions happen.
 Culture – shared values and norms.
 People – who is hired and how they fit the culture.

All of these must work together consistently.

9. Strategic Fit

For a firm to succeed, four things must fit together:

1. Market conditions
2. Strategy
3. Operations
4. Organization

If market conditions change (e.g., new technology or competition), the firm must adjust its strategy,
operations, and organization to maintain this fit.
International expansion adds another layer of complexity — it must still align with the firm’s overall
strategy and structure.
Global Expansion, Profitability, and Profit Growth
Expanding internationally allows firms to increase both profitability and profit growth in ways that are
not possible for companies operating only in their home country.
Firms that go global can:

1. Expand markets for their domestic products.

2. Realize location economies by locating activities where they are most efficient.
3. Benefit from experience effects by producing for a global market.
4. Leverage skills developed in one part of the global network across others.

However, global success is limited by the need to adapt to local conditions — companies must balance
global efficiency with local responsiveness.

1. Expanding the Market: Leveraging Products and Competencies

Firms can increase growth by selling at home-developed products abroad.

Examples:

 Procter & Gamble (P&G) sold products like Pampers and Ivory Soap internationally.
 Microsoft, Toyota, and Volkswagen developed at home and expanded globally.

This works especially well if foreign competitors lack similar products or skills. For example, Toyota
succeeded in North America and Europe because its cars were more reliable than local brands.

The foundation of this strategy lies in a firm’s core competencies — skills that competitors cannot easily
copy.
Examples:

 Toyota: world-class production and logistics efficiency.

 IKEA: affordable, flat-pack furniture design.
 McDonald’s: efficient fast-food management.
 P&G: marketing and branding expertise.

Core competencies are the source of competitive advantage, helping firms either reduce costs or offer
higher value. Successful global firms often transfer these core competencies to new markets to
outperform local competitors.

2. Location Economies

Definition: Cost advantages gained by performing value-creating activities in the optimal location
worldwide.
Because countries differ in factor costs, resources, and capabilities, companies locate activities where
they are most efficient.
Examples:

 Design in France
 Assembly in Mexico
 Marketing in the U.S.
 Animation in Canada

Benefits of location economies:

 Lower costs of value creation.

 Product differentiation through access to specialized skills or resources.

Examples:

 Canarm: Moved manufacturing to China and Taiwan to cut labor costs and lower production
expenses.
 Lululemon: Manufactures in Vietnam, China, and Sri Lanka for low-cost production but
maintains premium quality and brand image.

The result is often a global web — a network where different stages of the value chain are spread across
the world to maximize efficiency and value.

However:

 High transportation costs, trade barriers, and political risks (like unstable governments or
currency fluctuations) can limit these advantages.

3. Experience Effects

Definition: Systematic reductions in unit cost over time as a firm gains production experience.

Each time cumulative output doubles, unit costs typically fall (often to about 80% of their previous
level).
This happens because of:

a) Learning Effects

 Workers and managers get more efficient with repetition.

 Productivity rises, and mistakes decrease.
 Effects are strongest early in a process and fade over time.

b) Economies of Scale

 Cost savings from producing in large volumes.

 Firms can spread fixed costs (like R&D or factory setup) over more units.
  Large-scale production also improves bargaining power with suppliers.
Examples:
 Intel: Produces globally to justify $20 billion factory costs.
 Automakers: Need global sales to reach efficient production volume.
 Walmart: Uses buying power to negotiate lower supplier prices.

Strategic Importance:
Firms that move down the experience curve faster gain a cost advantage.
For example, Intel keeps global production limited to a few plants to maximize experience-based
efficiency. Once established, this low-cost position can discourage new competitors.

4. Leveraging Subsidiary Skills

Although core skills often start at headquarters, subsidiaries can also develop new valuable
capabilities.
Example:

 McDonald’s France redesigned restaurants and menus to fit local tastes (hardwood floors,
premium sandwiches). The concept succeeded and was later used in other countries, including the
U.S.

To take advantage of subsidiary innovation, multinational managers must:

1. Recognize that new skills can develop anywhere.

2. Encourage experimentation and risk-taking.
3. Reward employees who develop useful innovations.
4. Facilitate knowledge transfer across the global network.

5. Summary: Profitability and Profit Growth

Global expansion increases profitability and growth by:

 Entering new markets with unique competencies.

 Reducing costs through location and experience economies.
 Sharing innovations and skills across subsidiaries.

A successful global strategy can both lower costs (C) and increase perceived value (V) — leading to
higher profitability.
Firms can also choose whether to:

 Raise prices to capture higher margins, or

 Keep prices lower to grow market share and further exploit economies of scale

Pressures for Cost Reductions and Local Responsiveness

International firms face two main types of pressures that strongly influence their global strategies:

1. Pressures for cost reductions

2. Pressures for local responsiveness

These pressures often conflict—cutting costs usually requires global standardization, while responding to
local needs requires differentiation, which raises costs. Firms must balance these opposing demands
depending on their industry, product type, and market conditions.

1. Pressures for Cost Reductions

Goal: Lower the cost of value creation to remain competitive.

Typical responses:

 Mass production of standardized products to gain economies of scale.

 Outsourcing to low-cost countries (e.g., customer service to India).
 Centralizing production in the most efficient global locations.
 Forcing suppliers to reduce prices (e.g., Walmart’s pressure on manufacturers).
 Shifting manufacturing to low-cost regions such as China.

Industries with strong cost pressures:

 Commodity or standardized goods (e.g., steel, petroleum, sugar, bulk chemicals).

 High-tech products with little differentiation (e.g., smartphones, chips, PCs).
 Markets with intense competition, low switching costs, and excess capacity.
 Sectors open to global trade, where foreign competitors can easily enter.

Example:
Computer companies and banks move service operations (like call centers or back-office work) to
countries such as India or the Philippines to reduce labor costs.

2. Pressures for Local Responsiveness

Goal: Adapt products and strategies to fit local markets, regulations, and consumer preferences.

Main sources of local responsiveness pressures:

a) Differences in Consumer Tastes and Preferences

 Preferences differ due to culture and history.

 Example: Pickup trucks are popular personal vehicles in North America but considered work
vehicles in Europe.
 Firms must customize products and marketing for each market.
  However, some argue globalization is reducing these differences (e.g., Apple iPhones,
McDonald’s, Coca-Cola show global standardization trends).

b) Differences in Infrastructure and Traditional Practices

 Countries differ in technical systems and cultural habits.

 Example:
o North America uses 110 volts, Europe uses 240 volts — appliances must be adapted.
o Driving sides differ (left-hand vs. right-hand) — cars must be customized.
o Different mobile network standards (GSM in Europe vs. CDMA in the U.S.) force phone
makers to modify devices.

c) Differences in Distribution Channels

 Marketing and distribution vary widely.

 Example: Pharmaceutical sales methods differ between the U.S. (direct, aggressive sales) and
Japan or the U.K. (soft-sell approach).
 Companies must adapt their sales and promotion strategies accordingly.

d) Host Government Demands

 Governments may require local production, testing, or content rules.

 Example: Drug approval processes differ by country.
 During COVID-19, governments accelerated approval and required fair access to vaccines.
 Example: Bombardier manufactures in several European countries because local rules favor firms
that produce domestically.

3. The Rise of Regionalism

 Increasingly, regional markets (rather than national ones) are emerging.

 Countries within a region often share common infrastructure, regulations, and culture.
 This creates opportunities for regional standardization, which reduces costs while maintaining
some responsiveness.

Examples:

 European Union (EU): A single market with shared currency and regulations.
 North America (CUSMA): U.S., Canada, and Mexico form a relatively unified region for
certain industries (like automobiles).
 Latin America, Greater China, and the Middle East also show regional convergence in some
sectors.

Implication:
Firms may find it more efficient to customize at the regional rather than national level—for example,
designing one car model for all of Europe instead of different ones for each country.
However, deep national and cultural differences still exist, so managers must judge how much local or
regional adaptation makes sense for each product.
4. Overall Challenge for Firms

 Firms like A, B, and C in Figure 11.8 face different combinations of pressures:

o Firm A: High cost pressures, low local responsiveness.
o Firm B: Low cost pressures, high local responsiveness.
o Firm C: High in both (the most complex challenge).
o Rolex-type firms: Low in both (standardized luxury products).
 Managing these conflicting pressures requires strategic balance.
o Being too standardized may ignore customer needs.
o Being too localized may raise costs excessively.

Choosing a Strategy
Main Idea

When competing internationally, firms face two main pressures:

1. Pressure for cost reduction – the need to lower costs and improve efficiency.
2. Pressure for local responsiveness – the need to adapt products and operations to local markets.

These two pressures determine which of the four main strategies a firm should pursue.

1. Global Standardization Strategy

Goal: Achieve low costs by producing a standardized product for the global market.

Characteristics:

 Concentrates production, marketing, and R&D in a few efficient locations.

 Produces one global product with little or no customization.
 Relies on economies of scale, learning effects, and location advantages.

Appropriate when:

 Pressures for cost reduction are high.

 Pressures for local responsiveness are low.

Examples: Intel, Texas Instruments, Motorola, Gildan Activewear, Bombardier.

Advantages:

 Significant cost savings.

 Global brand consistency.
Disadvantages:

 May not meet local preferences.

 Limited flexibility in diverse markets.

2. Localization Strategy

Goal: Increase profitability by customizing goods or services to match local tastes and preferences.

Characteristics:

 Products and marketing are adapted for each country or region.

 Focuses on increasing value in each local market rather than cutting costs.

Appropriate when:

 Pressures for local responsiveness are high.

 Pressures for cost reduction are low.

Examples: Toyota, Honda, Ford, McDonald’s.

Advantages:

 Strong local customer satisfaction.

 Ability to charge premium prices.

Disadvantages:

 Higher costs due to duplication and smaller production runs.

 Less opportunity for global economies of scale.

3. Transnational Strategy

Goal: Combine global efficiency with local responsiveness.

Characteristics:

 Seeks both cost reduction and product differentiation across markets.

 Shares knowledge and innovation between home and foreign subsidiaries.
 Mixes centralized production of key components with local assembly or customization.

Appropriate when:

 Both cost pressures and local responsiveness pressures are high.

Examples: Caterpillar, 3M, ABB.

Advantages:

 Achieves cost efficiency while meeting local needs.

 Promotes learning and innovation across the organization.

Disadvantages:

 Very complex to manage.

 Difficult to balance conflicting goals of cost reduction and customization.

4. International Strategy

Goal: Sell products first developed for the home market in international markets with minimal
customization.

Characteristics:

 Product development (such as R&D) is centralized in the home country.

 Some manufacturing and marketing functions are established abroad.
 Products are exported or slightly modified for foreign markets.

Appropriate when:

 Pressures for cost reduction are low.

 Pressures for local responsiveness are low.

Examples: Microsoft, early Xerox, early Procter & Gamble.

Advantages:

 Easy to implement and control.

 Suitable when competition is limited.

Disadvantages:

 Not sustainable in the long term as competitors emerge.

 Inefficient if the firm does not eventually reduce costs or adapt.

5. Evolution of Strategy

 Over time, competition forces firms to change strategies.

 As competitors emerge, international and localization strategies often become less viable.
 Firms typically shift toward global standardization or transnational strategies to remain
competitive.

Chapter 12: Entering Developed and Emerging Markets

Basic Entry Decisions
A firm considering foreign expansion must make three basic decisions:

1. Which markets to enter

2. When to enter those markets
3. On what scale to enter

1. Which Foreign Markets?

a. Factors determining attractiveness

 Profit potential varies among countries; it depends on long-term revenue potential.

 The benefit-cost-risk trade-off determines a country’s attractiveness:
o Benefits: Market size, consumer wealth, and growth potential.
o Costs: Cost of doing business, cultural differences, infrastructure, and legal
systems.
o Risks: Political instability, economic volatility, corruption, and currency
fluctuations.

b. Economic and political considerations

 Economic factors:
o Market size: Measured by population and purchasing power.
o Economic growth rate: Indicates future consumer wealth.
o Examples:
 China and India are attractive due to rapid growth despite lower income
levels.
 Pakistan is less attractive due to weak growth.
 Political factors:
o Politically stable democratic nations with free markets offer low risk and higher
potential.
o Unstable or command economies pose higher risks and uncertainty.

c. Benefit–cost–risk trade-off

 Most favorable in politically stable, developed or developing nations with free

markets and stable inflation and debt.
 Least favorable in unstable, developing nations with mixed or command economies or
speculative financial environments.

d. Value creation and competition

 A firm’s success depends on how much value it can create in the foreign market.
  Value is higher when:
o The product meets an unmet need.
o Domestic competition is weak or nonexistent.
 Higher perceived value allows higher prices or faster sales growth.
 Firms can rank countries based on long-run profit potential and focus on the top
markets.
o Example: Tesco expands into emerging markets with few strong local
competitors.

2. Timing of Entry

a. Early vs. Late Entry

 Early entry: Entering before other foreign firms.

 Late entry: Entering after other international businesses are established.

b. Advantages of early entry (First-Mover Advantages)

1. Preempt rivals and capture demand

o Build brand recognition and customer loyalty early.
2. Experience curve and economies of scale
o Build sales volume early and lower costs over time.
3. Switching costs
o Establish customer habits and loyalty, making it hard for later entrants to attract
them.
4. Supplier and distributor relationships
o Gain priority access to local networks and resources.
5. Learning benefits
o Understand local regulations, culture, and consumer preferences early.

c. Disadvantages of early entry (First-Mover Disadvantages)

1. Pioneering costs
o High initial costs of learning, training, and adapting to the new environment.
o Risk of business failure due to lack of local knowledge.
2. Customer education costs
o Costs of teaching customers about a new or unfamiliar product.
3. Political risk exposure
o Early entrants are more vulnerable to policy or regulation changes.
4. Technological change
o New technologies may render early products obsolete.
o Example: Retailers who didn’t adapt to e-commerce lost out to Amazon.

d. Late entry advantages

  Learn from the mistakes of early entrants.
 Avoid pioneering and education costs.
 Enter after market conditions and regulations stabilize.
 Example: McDonald’s learned from KFC’s mistakes in China and succeeded later.

3. Scale of Entry and Strategic Commitments

a. Large-scale entry

 Involves significant resource commitment and rapid entry.

 Example: ING entering the U.S. insurance market with a multibillion-dollar investment.

Advantages

1. Strong market presence

o Signals commitment to customers and distributors.
o Attracts partnerships and consumer trust.
2. Discourages competitors
o Competitors hesitate to enter due to strong established presence.
3. Potential for first-mover advantages
o Demand preemption, economies of scale, and customer loyalty.

Disadvantages

1. High risk and low flexibility

o Difficult and costly to reverse strategic decisions.
2. Opportunity cost
o Limits ability to invest in other markets.
o Example: ING’s focus on the U.S. limited its expansion in Japan.

b. Small-scale entry

 Involves limited investment and gradual market learning.

Advantages

1. Lower risk exposure

o Minimizes financial loss if entry fails.
2. Learning opportunity
o Helps gather information before larger investment.
3. Flexibility
o Easier to adjust or withdraw if needed.

Disadvantages
 1. Limited market share growth
o Harder to compete with larger, committed entrants.
2. Loss of first-mover advantages
o Missed opportunity for early brand recognition and scale economies.
3. Perception of low commitment
o Customers and distributors may doubt long-term presence.

4. Balancing Risk and Reward

 High risk, high reward:

o Early, large-scale entry into large developing nations (e.g., China, India).
 Low risk, low reward:
o Late, small-scale entry into developed nations (e.g., Canada, Australia).

There is no single “right” decision — firms must balance:

 Market potential
 Competitive landscape
 Risk tolerance
 Resource availability

5. Late Movers from Developing Nations

 According to Bartlett and Ghoshal, firms from developing countries can still compete
globally despite being late entrants.
 Strategies for success:
1. Benchmarking:
 Learn from global competitors’ operations and performance.
2. Differentiation:
 Target niches ignored by large multinationals or adapt products to local
needs.
3. Learning and improvement:
 Use domestic experience to enhance competitiveness abroad.
 These firms can later expand globally using their unique market insights and adaptability.

6. Key Takeaways
 Decision
High Risk–High Reward Low Risk–Low Reward
Area
Timing Early entry Late entry
Scale Large-scale investment Small-scale investment
Market Type Developing/emerging markets Developed/stable markets
Tesco expanding early in emerging Small firms testing developed markets
Example
markets first

Entry Modes
After deciding where, when, and on what scale to enter a foreign market (LO1), a firm must
decide how — that is, the mode of entry.
There are six main entry modes:

1. Exporting
2. Turnkey Projects (covered later)
3. Licensing
4. Franchising
5. Joint Ventures
6. Wholly Owned Subsidiaries

Each has its own advantages, disadvantages, and risk/reward balance.

1. Exporting

Definition:
Selling products produced in one country to residents of another.

Advantages

 ✅ Avoids costs of establishing production in the host country.

 ✅ Economies of scale: Manufacture centrally and export globally.
 ✅ Experience curve effects: Increased efficiency and lower unit cost.
 Example: Japanese automakers (Toyota, Honda) exported from Japan to the U.S. before
building plants there.

Disadvantages

 ❌ High transportation costs, especially for bulky or heavy goods.

 ❌ Tariff barriers can make exporting uneconomical or risky.
 ❌ Not ideal if cheaper production sites exist abroad (e.g., U.S. firms shifting
production to Asia).
  ❌ Dependence on local agents or distributors — divided loyalties and poor marketing
control.
 Solution: Set up wholly owned subsidiaries for marketing/sales control.

2. Licensing

Definition:
An arrangement where a licensor grants rights to intangible property (patents, designs,
trademarks, technology, etc.) to a licensee in exchange for royalty payments.

Example:

 Xerox and Fuji Photo → Fuji Xerox (now Fujifilm Business Innovation)
Xerox licensed its photocopier technology to Fuji in return for royalties.

Advantages

 ✅ Low development cost and risk: Licensee provides capital and handles operations.
 ✅ Useful when investment barriers exist (e.g., restrictions on foreign ownership).
 ✅ Attractive for firms lacking capital or facing political uncertainty.
 ✅ Allows monetizing unused intellectual property (e.g., Bell Labs licensing the
transistor).

Disadvantages

 ❌ Lack of control over manufacturing, marketing, and strategy.

 ❌ No coordination of global strategy (profits can’t be shifted across countries).
 ❌ Risk of losing proprietary technology or know-how.
o Example: RCA licensed TV tech to Sony and Matsushita, who then outcompeted
RCA.

Ways to Reduce Risk

 🔒 Cross-licensing agreements: Both firms license technology to each other — mutual

dependence discourages cheating.
 🤝 Link licensing with a joint venture: Aligns incentives and control, as in the Fuji
Xerox model.

3. Franchising

Definition:
A specialized form of licensing used mainly by service firms, where the franchiser sells
intangible property (brand, business model) and requires the franchisee to follow strict operating
rules.

Examples:

McDonald’s, Subway, 7-Eleven, Pizza Hut, Boston Pizza.

Advantages

 ✅ Low cost and risk of international expansion.

 ✅ Franchisee provides capital and takes on operational risks.
 ✅ Rapid global growth possible at minimal investment.
o Example: McDonald’s, Boston Pizza, and Two Men and a Truck expanded
globally using this model.
 ✅ Franchiser provides support, training, supply chain management, and brand
reputation.

Disadvantages

 ❌ Quality control issues: Distant franchisees may damage brand reputation.

o Example: Poor service at a Four Seasons abroad can hurt global brand image.
 ❌ Limited profit repatriation: Hard to move profits across borders to support other
markets.
 ❌ Loss of independence for franchisees.
 Solution: Use master franchisee or subsidiary to oversee quality and training locally (as
McDonald’s and KFC do).

4. Joint Ventures

Definition:
A separate firm jointly owned by two or more independent companies — often a 50–50 split,
but sometimes one partner holds a majority stake.

Example:

 Fuji Xerox (Xerox + Fuji Photo)

 Boeing–Mitsubishi proposed partnership (illustrates tech-sharing concerns).

Advantages

 ✅ Local partner’s knowledge: Culture, regulations, language, market conditions.

 ✅ Shared costs and risks of entry (useful in expensive or risky markets).
 ✅ Government acceptance: Some countries only allow foreign entry via joint ventures.
  ✅ Lower risk of nationalization or expropriation: Local partners protect shared
interests.

Disadvantages

 ❌ Risk of losing control over technology (as with Boeing–Mitsubishi concerns).

 ❌ Limited control: Harder to achieve global coordination or experience curve
economies.
 ❌ Potential for conflict: Differing goals, strategies, or power shifts over time.
o Example: Conflicts arise when one partner’s market knowledge grows, altering
power dynamics.
 ❌ Autonomy issues: Each partner may resist central strategic control.

Ways to Reduce Problems

 ⚖️Hold majority ownership for more control.

 🔒 “Wall off” key technologies to prevent imitation.
 🤝 Maintain clear governance and shared objectives.

5. Wholly Owned Subsidiaries

Definition:
The firm owns 100% of the foreign entity’s stock.
Two forms:

1. Greenfield venture: Build new operations from scratch.

2. Acquisition: Buy an existing firm in the host country.

Examples:

 ING entered the U.S. by acquiring existing insurance firms.

 IKEA typically uses greenfield ventures to maintain full control and brand consistency.

Advantages

 ✅ Full control over technology — protects proprietary know-how.

 ✅ Tight operational control — enables global strategic coordination.
 ✅ Easier to realize location and experience-curve economies.
 ✅ All profits retained by the parent company.

Disadvantages

 ❌ Most expensive and risky entry mode (requires large capital investment).
 ❌ Cultural and operational learning curve in a new country.
  ❌ Integration problems if entering via acquisition (culture clash, redundancies).
 ❌ High exposure to political and economic risks.

6. Comparing Entry Modes

Ownership / Example
Mode Risk Cost Speed Best When…
Control Firms
Cost advantages
Low–
Exporting Low Low Fast Toyota, Sony from centralized
Medium
production
Coca-Cola,
Limited capital or
Licensing Low Low Low Fast Harley-
political barriers
Davidson
Service firms
Low– McDonald’s,
Franchising Medium Medium Fast wanting global
Medium Boston Pizza
reach
Need local
Medium–
Joint Venture Shared Medium Moderate Fuji Xerox partner or shared
High
risk
Wholly Technology
IKEA,
Owned Full High High Slow control and
Samsung
Subsidiary global integration

Selecting an Entry Mode

Once a company decides to enter a foreign market, it must choose how — that is, which entry
mode to use.
Each option (exporting, turnkey, licensing, franchising, joint venture, or wholly owned
subsidiary) has advantages and disadvantages, so managers must balance trade-offs depending
on the firm’s goals, resources, and risks.

Table Summary: Entry Mode Pros & Cons

Entry Mode Advantages Disadvantages

• High transport costs
• Avoids cost of local production
Exporting • Trade barriers
• Realizes economies of scale
• Dependence on local agents
• Earn returns from technology in • Creates competitors
Turnkey Projects
restricted FDI markets • No long-term presence
 Entry Mode Advantages Disadvantages
• Lose control over technology
• Low cost and risk • Can’t coordinate globally
Licensing
• Good for politically unstable markets • Can’t gain location/experience
economies
• Low cost and risk • Quality control issues
Franchising
• Quick global expansion • Hard to coordinate globally
• Local partner knowledge • Lose control over tech/quality
Joint Venture • Shares risk/cost • Conflicts between partners
• Politically acceptable • Can’t gain full economies
• Protects technology
Wholly Owned • Full control • High cost
Subsidiary • Gains location & experience • High risk
economies

How to Choose the Right Entry Mode

1. Core Competencies (What the firm is best at):

a. Technological Know-How

 If the company’s strength is technology (e.g., semiconductors, electronics,

pharmaceuticals),
➜ Avoid licensing and joint ventures → risk of tech theft.
➜ Prefer wholly owned subsidiaries for full control.
 Exception: If the tech will soon be outdated (short-term advantage), licensing quickly can
help the firm spread its technology worldwide before competitors catch up.

Example:
RCA lost control when it licensed TV technology to Japanese firms like Sony and Matsushita.
Xerox, on the other hand, protected itself by forming a joint venture (Fuji Xerox) that aligned
both parties’ interests.

b. Management Know-How

 Common in service industries (e.g., McDonald’s, Starbucks, Hilton).

 Risk of losing management skills is low because brand names are legally protected.
 These firms often use franchising combined with master subsidiaries:
o The master subsidiary oversees all franchises in a region.
o Can be wholly owned or a joint venture (for local knowledge & political
acceptance).
Example:
McDonald’s and Boston Pizza use this model — they franchise globally but maintain control and
consistency through regional subsidiaries.

2. Pressures for Cost Reduction

 If minimizing cost is critical, firms prefer:

o Exporting (centralized production, global economies of scale)
o Wholly owned subsidiaries (tight control and coordination across markets)

This allows the company to:

 Produce in low-cost locations,

 Export to multiple markets,
 Use profits from one region to support competition elsewhere.

Example:
Brookfield Renewable Partners uses wholly owned subsidiaries to coordinate its global energy
operations efficiently.

In Short — Decision Summary

If the firm’s main strength

Best Entry Mode Why
is…
Technology / R&D Wholly owned subsidiary Protect tech, maintain control
Brand / Management Leverage brand, lower risk, use
Franchising or joint venture
expertise local expertise
Exporting + wholly owned Achieve economies of scale,
High cost pressure
subsidiaries coordinate globally
Political barriers / high risk Reduce investment risk, gain local
Joint venture or licensing
markets support

Greenfield Venture or Acquisition

When a firm chooses to enter a foreign market through a wholly owned subsidiary, it has two
main options:

1. Acquisition – purchasing an existing company in the host country.

2. Greenfield venture – building a new operation from the ground up.
Acquisitions

Advantages

1. Speed of entry – An acquisition allows a firm to quickly establish a presence in the

market.
Example: Daimler’s acquisition of Chrysler to gain a U.S. presence.
2. Preemption of competitors – Acquisitions can block rivals from gaining a foothold in
attractive markets.
3. Reduced uncertainty – The acquiring firm obtains existing assets, customers, brand
recognition, and local knowledge.

Disadvantages

1. Overpayment – Competition for the same target can inflate prices; managers may
overestimate potential synergies (the “hubris hypothesis”).
2. Cultural clashes – Differences in management style, pay systems, or national culture can
create conflict and turnover.
3. Integration difficulties – Merging operations, systems, and management often takes
longer and is more complex than planned.
4. Inadequate screening – Rushed or shallow due diligence can result in acquiring troubled
or incompatible firms.

Reducing the Risks

 Conduct thorough financial and cultural due diligence.

 Avoid bidding wars and unrealistic synergy assumptions.
 Retain key managers from the acquired firm to preserve local expertise.
 Plan integration early and execute it quickly to prevent resistance.

Greenfield Ventures

Advantages

1. Full control – The firm can design the subsidiary exactly as it wants.
2. Easier to transfer culture and systems – Building from scratch allows management to
instill the parent company’s values and routines.
3. Better alignment with existing practices – Facilitates the transfer of products, skills,
and processes.

Example: Lincoln Electric shifted from acquisitions to greenfield ventures because it found it too
difficult to impose its strong culture on acquired firms.

Disadvantages
 1. Slower entry – Building new operations takes significant time.
2. Uncertain profitability – Future demand and revenues are less predictable.
3. Risk of being preempted – Competitors may acquire existing firms and establish market
dominance before the greenfield operation is ready.

Example: McCain Foods’ greenfield investment in China required years of preparation but
ultimately paid off due to long-term control and consistent quality.

Which to Choose

Preferred Entry
Situation Reason
Mode
Fast entry and instant market
Market has strong established firms Acquisition
presence
Market is new or undeveloped Greenfield venture No existing firms to buy
Competitive advantage relies on Easier to replicate and control
Greenfield venture
organizational culture or skills culture
Prevents competitors from gaining
Industry is rapidly globalizing Acquisition
market share quickly
Firm prioritizes long-term control and Allows full design of operations
Greenfield venture
consistency and culture

Chapter 13: Exporting, Importing and Counterblade

The Promise and Pitfalls of Exporting

1. The Promise of Exporting

 Exporting allows firms to expand sales beyond their domestic market.

 The international market is usually much larger than the domestic market — offering
major opportunities for growth, revenue, and profit.
  By selling to more customers, firms can achieve economies of scale, which reduces unit
costs.
 Companies that avoid exporting miss significant opportunities for both expansion and
cost reduction.

2. Exporting as the Main Entry Mode

 Exporting is the most common form of international business, especially for small and
medium-sized enterprises (SMEs).
 It’s often the first step into international markets before investing in other entry modes
(like joint ventures or subsidiaries).
 However, success depends on whether the company and its products are export-ready.
 Tools like globalEDGE’s CORE (Company Readiness to Export) help firms evaluate
readiness and answer common export questions (e.g., government regulations, financing,
logistics).

3. Real-World Example: Product Naming Mistakes

 Example: Boggs Cranberry Liqueur worked in the U.S., but failed in the U.K.
o In British slang, “bog” means toilet, so the brand name hurt sales.
 Lesson: Cultural differences matter — firms must research local language, culture, and
consumer perception before entering new markets.

4. Example: Marlin Steel Wire Products

 U.S. manufacturer of custom wire baskets.

 Initially exported only 5% of its orders.
 During the 2008 financial crisis, when U.S. demand fell, Marlin expanded into 37
countries, using exports to survive and grow.
 Lesson: Exporting can protect firms from domestic downturns and open new revenue
streams.

5. Why Many Firms Don’t Export

 Proactive exporters (mostly large firms) actively seek global opportunities and plan for
them.
 Reactive firms (mainly small and medium ones) wait until the domestic market is
saturated.
  Barriers include:
o Lack of knowledge about foreign markets.
o Fear of cultural, legal, and language differences.
o Perceived complexity and risk.
o Intimidation by foreign business practices.

6. Example: MMO Music Group

 Produced karaoke tapes and had 15% foreign sales.

 Ignored inquiries from Asia and Europe due to focus on domestic business.
 When it finally tried to expand, competitors had already taken the opportunity.
 Eventually acquired by another company.
 Lesson: Ignoring export opportunities can lead to lost market share and stagnation.

7. Canadian Export Context

 Small firms (<50 employees):

o Make up 81% of exporting firms but only 14.9% of export value.
 Large firms (500+ employees):
o Only 2.7% of exporters, but account for ~59% of total exports.
 Between 2000 and 2022, the number of Canadian exporters stayed roughly flat
(~48,000).
 Conclusion: While many small firms export, their total contribution in dollar value
remains small.

8. Common Pitfalls of New Exporters

New exporters often fail because of poor planning and lack of experience.
Typical problems:

1. Poor market research and analysis.

2. Lack of understanding of foreign competition.
3. Failure to adapt products to local needs.
4. Weak or ineffective distribution strategy.
5. Poor promotional campaigns.
6. Inadequate financing or cash flow planning.
7. Underestimating time, cost, and effort needed.
8. Ignoring cultural and communication differences.

 Exporting requires long-term commitment and dedicated management attention.

  Building trust may require travel and face-to-face negotiations.
 Paperwork and compliance are complex and time-consuming.
 Example: A UN report found that a typical export transaction may involve:
o 30 parties
o 60 original documents
o 360 copies
o Documentation and error costs can equal 10% of the value of goods.

9. Key Takeaways

 Exporting offers huge opportunities but also significant challenges.

 Success depends on:
o Being proactive rather than reactive.
o Having the knowledge, resources, and commitment to manage exports properly.
o Understanding cultural and market differences.
o Preparing for the bureaucratic and financial demands of international trade.

Improving Export Performance

Overview

Many new exporters fail because they lack knowledge, resources, or a clear strategy. Improving
export performance requires access to information, use of export service providers, and careful
planning.

1. International Comparisons

Problem:
Many firms hesitate to export because they don’t know where opportunities exist — due to
differences in culture, language, distance, and legal systems.

Successful Models:

 Germany: Trade associations, government agencies, and banks actively collect and share
export information.
 Japan: MITI and sogo shosha (large trading houses) help firms identify and exploit
export opportunities.
 United States: Historically self-contained, but now expanding export support structures.
  Canada: Still dependent on U.S. trade but improving through government agencies like
Export Development Canada (EDC) and trade missions.

Key Point:
Countries that provide institutional support — information, financing, and promotion — enable
their firms to export more successfully.

2. Information Sources for Canadian Exporters

Federal Level:

 Global Affairs Canada: Supports exporters through trade promotion and international
connections.
 Innovation, Science and Economic Development Canada (ISED): Provides trade data,
market reports, and cultural information.
 Statistics Canada: Offers trade statistics and industry reports.
 Export Development Canada (EDC): Provides financing, insurance, and risk
management for exporters.

Training and Support:

 FITT (Forum for International Trade Training): Provides training, certification, and
competency standards for international trade professionals.

Provincial & Municipal Levels:

 Provincial governments have trade offices abroad.

 Local chambers of commerce connect businesses to global networks through the
Canadian Chamber of Commerce and the International Chamber of Commerce
(ICC).

Incoterms:
International trade rules (developed by the ICC) that define responsibilities of buyers and sellers
— essential for clear global transactions.

3. Service Providers

Service Provider Main Function

Arrange international transport, consolidate shipments, handle
Freight Forwarders
logistics and paperwork.
Export Management Act as an outsourced export department; handle sales,
Companies (EMCs) documentation, and distribution.
 Service Provider Main Function
Identify foreign buyers and manage the entire export process for a
Export Trading Companies
fee or commission.
Export Packaging
Ensure goods meet packaging requirements of destination
Companies (Export
countries.
Packers)
Manage customs documentation and ensure compliance with
Customs Brokers
import/export laws.
Confirming Houses (Buying Represent foreign buyers, purchase goods on their behalf, and
Agents) earn commissions.
Export Agents, Merchants, Buy products, rebrand or relabel them, and resell under their own
Remarketers name.
Designated areas (also known as FTZs or free ports) where goods
Export Processing Zones
can be imported, processed, and re-exported without customs
(EPZs)
duties.

4. Export Strategy – How to Improve Success

Firms can reduce export risks and improve success by following these guidelines:

1. Use Experts: Hire an EMC or export consultant to navigate foreign regulations and find
opportunities.
2. Focus Narrowly at First: Start with one or a few markets to avoid overextension.
3. Start Small: Enter on a small scale to reduce risk and learn about the market before
investing heavily.
4. Commit Resources: Allocate time, management attention, and staff to manage export
growth.
5. Build Relationships: Develop long-term partnerships with local distributors and
customers.
6. Hire Locals: Employ local staff who understand the market and culture.
7. Be Proactive: Actively seek export opportunities; don’t wait for buyers to come to you.
8. Consider Local Production: Once volume grows, establish local facilities for cost
efficiency and market acceptance.

Example – 3M:
Built export success by starting small, adding product lines over time, and hiring local staff.

Example – Two Men and a Truck:

Expanded internationally using franchising and gradual market entry.

5. GlobalEDGE™ CORE Tool (Company Readiness to Export)

Purpose:
Helps firms assess how ready they are to export — both in terms of company capabilities and
product potential.

Two Dimensions:

 Product Readiness – Is the product suitable and competitive internationally?

 Company Readiness – Does the firm have the motivation, management commitment,
experience, and resources?

Results:
The tool gives a report that identifies strengths, weaknesses, and overall export readiness.

Key Takeaways

 Lack of information is the biggest barrier for new exporters.

 Use government programs, training, and export service providers to overcome this.
 Begin small, focus your efforts, and learn before expanding.
 Build local relationships and hire local talent.
 Use diagnostic tools like CORE to evaluate readiness and plan strategically.

Export and Import Financing

Purpose

Export and import financing exists to solve the problem of trust in international trade.
Buyers and sellers in different countries may not trust each other due to distance, different legal
systems, and the difficulty of enforcing contracts.

To address this, banks act as trusted intermediaries, using three key financial instruments:

 Letter of Credit (L/C)

 Draft (Bill of Exchange)
 Bill of Lading

The Trust Problem

 Exporter’s concern: Wants payment before shipping goods (to avoid not being paid).
 Importer’s concern: Wants goods before paying (to avoid being scammed or receiving
defective products).
  Solution: Use a reputable bank as a trusted third party to guarantee payment and
delivery.

Main Financial Instruments

1. Letter of Credit (L/C)

 A written promise by a bank, issued at the request of the importer, guaranteeing

payment to the exporter once specific documents are presented.
 It shifts the risk from the trading partners to their banks.

Process:

1. Importer requests its bank (e.g., BNP Paribas) to issue a letter of credit.
2. The bank checks the importer’s creditworthiness and issues the L/C to the exporter’s
bank (e.g., BMO).
3. Once the exporter’s bank receives it, the exporter ships the goods.
4. The exporter presents the required documents (e.g., bill of lading, draft) to its bank for
payment.
5. If all terms are met, the importer’s bank pays the exporter’s bank, and the importer later
reimburses the bank.

Advantages

 Exporter is guaranteed payment if terms are met.

 Importer only pays once goods are shipped and documentation is verified.
 Banks facilitate trust and financing.

Disadvantages

 The importer must pay fees (usually 0.5%–2% of the L/C value).
 The letter of credit counts as a financial liability, reducing borrowing capacity.

2. Draft (Bill of Exchange)

 A written order by the exporter instructing the importer (or their bank) to pay a certain
amount at a certain time.

Types of Drafts:

 Sight Draft: Payable immediately upon presentation.

 Time Draft: Payable after a specified period (e.g., 30, 60, 90, or 120 days).
Once accepted (stamped by the bank), a time draft becomes:

 Banker’s Acceptance if accepted by a bank.

 Trade Acceptance if accepted by a business.

Example:
If a 120-day time draft for $100,000 is discounted at 7%, the exporter receives $97,700
immediately. The bank collects the full amount ($100,000) after 120 days.

Purpose:
Allows exporters to receive funds earlier and helps manage cash flow.

3. Bill of Lading

A document issued by the carrier (e.g., a shipping company) to the exporter. It serves three
functions:

1. Receipt – Confirms the carrier has received the goods.

2. Contract – Outlines the carrier’s obligation to transport the goods.
3. Document of title – Proves ownership and allows control over the goods.

The exporter can use the bill of lading as collateral to secure financing before payment.

A Typical International Trade Transaction (14 Steps)

Example: Canadian exporter and French importer

1. Importer orders goods from exporter and requests shipment under a letter of credit.
2. Exporter agrees and specifies prices, terms, and shipping details.
3. Importer applies to its bank (BNP Paribas) for a letter of credit in favour of the exporter.
4. BNP Paribas issues the letter of credit and sends it to the exporter’s bank (BMO).
5. BMO informs the exporter that the L/C has been opened.
6. Exporter ships the goods via a carrier and receives a bill of lading.
7. Exporter presents the bill of lading and a 90-day draft (drawn on BNP Paribas) to BMO.
8. BMO sends these documents to BNP Paribas.
9. BNP Paribas accepts the draft, promising to pay in 90 days, and sends the accepted draft
back to BMO.
10. BMO notifies the exporter that the accepted draft has been received.
11. The exporter can sell the draft to BMO at a discount to receive immediate cash.
12. BNP Paribas notifies the importer that documents have arrived and releases them once
payment is arranged.
13. After 90 days, the importer pays BNP Paribas.
 14. BNP Paribas pays BMO, which in turn pays the holder of the draft.

Chapter 14: Competing in a Global Marketplace

The Globalization of Markets and Brands

1. Globalization of Markets (Theodore Levitt)

 Levitt argued that technology is driving markets toward global standardization.

 Key idea: global corporations sell standardized products worldwide at low relative cost.
 Examples: McDonald’s, Coca-Cola, Pepsi, Levi’s, Sony.
  Reality check:
o Full standardization is rare; local preferences persist.
o McDonald’s adapts menus (e.g., McArabia in Arab countries, Croque McDo in
France).
o Younger consumers (≤40) show more homogenization; older consumers retain
local preferences.
 Global culture vs. globalization:
o Global culture exists as shared symbols, not identical tastes.
o Trade barriers, standards, and local competition constrain full global
standardization.

2. Market Segmentation

 Definition: Identifying distinct consumer groups with differing needs, wants, and
purchasing behavior.
 Segmentation bases:
o Geography
o Demographics (age, income, gender, education)
o Sociocultural (values, religion, lifestyle)
o Psychological (personality, attitudes)
 International segmentation challenges:

1. Market structure differences across countries.

2. Existence of intermarket segments (similar across countries).

 Example: Millennials are similar globally in digital usage, values, and preferences.

3. Business Analytics

 Purpose: Explore data to gain insights into international markets and drive strategy.
 Applications:
1. Descriptive: Summarize current data (e.g., age distribution of Starbucks
customers).
2. Predictive: Identify trends and cause-effect relationships.
3. Prescriptive: Optimize resource allocation using quantitative models (e.g.,
advertising budgets).

4. International Market Research

  Definition: Systematic collection and analysis of data to support global business
decisions.
 Additional challenges vs. domestic research:
o Language translation.
o Cultural and environmental differences.
 Prominent firms: Nielsen, Kantar, Ipsos, NPD Group.
 Process:

1. Define research objectives.

2. Determine data sources (primary vs. secondary).
3. Assess costs vs. benefits.
4. Collect data (quantitative & qualitative).
5. Analyze & interpret data (cultural awareness important).
6. Report findings to guide decisions.

 Example: Toyota accelerator issue – misunderstanding local problems delayed solutions.

Product Attributes
1. Products as Bundles of Attributes

 Products = combination of attributes that satisfy consumer needs.

 Examples:
o Car → power, design, comfort, fuel efficiency.
o Hamburger → taste, size, texture.
o Hotel → service, comfort, atmosphere.
 Products succeed when attributes match needs and price is appropriate.

2. Cultural Differences

 Countries differ in social structure, language, religion, education, and tradition.

 Examples:
o Islamic countries → no ham in burgers.
o Japan → lemon-scented Pledge initially failed due to negative cultural
associations.
 Some convergence exists (coffee in Japan/UK, frozen meals in Europe), but full
standardization remains distant.

3. Economic Development
  High-income countries demand products with advanced features (e.g., AC, Bluetooth,
luxury cars).
 Less developed countries prioritize reliability and basic features.
 Consumers in developed nations often pay more for products tailored to local
preferences.

4. Product and Technical Standards

 National standards limit fully standardized global products.

 Technical differences (e.g., DVD formats) affect global product compatibility.
 Regional trade agreements can facilitate partial standardization.

Distribution Strategy
Definition:
Distribution strategy is how a firm delivers its products to consumers and is a key part of the
marketing mix.

Distribution Options:

 Direct to consumer
 Through retailer
 Through wholesaler
 Through import agent (for foreign manufacturing)

Key Differences Between Countries

1. Retail Concentration
o Concentrated: Few retailers dominate → easier distribution, e.g., USA.
o Fragmented: Many small retailers → harder distribution, e.g., Japan, rural India.
2. Channel Length
o Short: Producer → Consumer (few intermediaries).
o Long: Producer → Import Agent → Wholesaler → Retailer → Consumer.
o Fragmented markets usually have long channels.
o Concentrated markets often have short channels.
3. Channel Exclusivity
o Exclusive channels are hard to access (e.g., Japan).
o Firms can overcome exclusivity via: partnerships, strong local reputation, or
direct sales.
4. Channel Quality
o Refers to retailers’ ability to sell and support products.
o Low-quality channels may require training, support, or company-owned stores
(e.g., Apple).
Choosing a Distribution Strategy

 Short channels → maintain price and profit margins.

 Long channels → lower selling costs in fragmented markets, better market access.
 Strategy depends on: retail concentration, channel length, exclusivity, and quality.

Communication Strategy
Definition:
Communication strategy defines how a firm promotes its product using various channels like
social media, advertising, direct selling, and sales promotions.

Barriers to International Communication

1. Cultural Barriers: Messages may be misinterpreted due to cultural differences.

o Solution: Use local advertising agencies and develop cross-cultural literacy.
2. Source & Country of Origin Effects:
o Consumers evaluate products based on the reputation of the sender or country.
o Negative effects can be countered by emphasizing performance attributes or local
contributions.
3. Noise Levels:
o Refers to competition for consumer attention.
o High in developed countries; low in developing markets.

Push vs. Pull Strategies

Strategy Method Best for Notes

Direct selling, trade Industrial or complex products, Educates consumers and
Push
promotions short channels, limited media intermediaries
Consumer goods, long Creates consumer demand to
Pull Mass advertising
channels, sufficient media “pull” product through channel

Factors Affecting Choice:

 Product type & consumer sophistication

 Channel length
 Media availability

Push-Pull Mix Example:

 Industrial products with short channels → Push

  Consumer goods in developed countries → Pull

Global Advertising

Standardized Advertising:

 Pros: Lower cost, better use of creative talent, consistent global brand.
 Cons: Cultural differences, local laws may block ads.

Localized Advertising:

 Adjusts visuals, actors, or settings for local culture while keeping some global elements.
 Example: Nokia’s “1001 reasons to have a Nokia imaging phone” campaign.

Optimal Approach:

 Hybrid: Standardize brand image, customize for local culture.

International Pricing Strategy

Definition:
International pricing strategy determines how a firm sets prices for its products in different
countries and is a key part of the marketing mix.

1. Price Discrimination

 Definition: Charging different prices for the same or slightly different products in
different countries.
 Purpose: Maximize profits by charging what each market will bear.
 Conditions for success:
1. Markets must be separate – to prevent arbitrage (reselling from low-price
countries to high-price countries).
 Example: Ford Escort priced differently in Germany vs. Belgium;
arbitrage forced price alignment.
2. Different price elasticities of demand – higher prices where demand is inelastic.
 Elasticity influenced by: income levels and competition.
 Example: PCs in India (luxury → high elasticity) vs. USA (necessity →
low elasticity).
2. Strategic Pricing

Three main types:

1. Predatory Pricing:
o Price below competitors to drive them out of a market, then raise prices.
o Often subsidized by profits in another market.
o Example: Matsushita (Panasonic) in the US TV market.
2. Multipoint Pricing:
o Pricing in one market affects competitor reactions in other markets.
o Example: Kodak vs. Fuji in the US and Japan; price wars across markets.
o Requires central monitoring to avoid unintended competitive responses.
3. Experience Curve Pricing:
o Aggressively price low worldwide to build global volume → reduce unit costs
over time.
o Goal: Move down the experience curve to gain cost advantage.

3. Regulatory Influences

 Anti-dumping regulations: Prevent selling products below cost or “fair value” abroad.
 Competition policy: Limits monopolistic or unfair pricing.
o Example: Hoffmann-La Roche ordered to reduce tranquilizer prices in the UK.

Configuring the Marketing Mix

Definition:
Adjusting the 4Ps/4Es to fit international markets while balancing standardization and
customization.

4 Es (Customer-Centric)

1. Experience: Create positive, memorable customer experiences.

2. Everywhere: Be present across all channels and touchpoints.
3. Exchange: Deliver value to customers.
4. Evangelism: Build loyal, brand-advocating customers.

Standardization vs. Customization

 Standardization: Same core product, advertising, or fees worldwide.

 o Example: American Express, Nike “Just Do It”.
 Customization: Adjust aspects for local culture, economy, regulations, or distribution.
o Example: McDonald’s menu variations, location strategies (US vs. Japan).

Key Insight:

 Some elements can be standardized (core product, brand message) while others should be
customized (distribution, pricing, menu).

Questions to Guide Marketing Mix Configuration

Mix Element Key Questions

Product Customer needs across markets? Product adoption & branding?
Distribution Where and how are products bought? Role of wholesalers/retailers?
How is awareness created? Role of mass media, social media, sales
Communication
promotions?
Pricing Price perception/value? Demand differences? Costs & regulations?

Chapter 15: Competing in a Global Marketplace

Strategy, Production, and Supply Chain Management
Key Concepts
  Production/Operations: Creation of goods or services. Can refer to manufacturing
physical products or services (e.g., outsourcing customer support to India for lower labor
costs).
 Supply Chain Management (SCM): Integration and coordination of purchasing,
logistics, operations, and market channels from raw materials → production → end
customer.
o Purchasing: Buying raw materials and components globally.
o Logistics: Planning and controlling inventory flow and transportation.

Strategic Objectives

1. Lower Costs:
o Firms can lower costs by locating production where activities can be performed
most efficiently.
o Efficient supply chain management (coordinating purchasing, logistics, and
production) reduces total costs.
o Example: Efficient logistics reduces inventory levels, increases inventory
turnover, and ensures optimal transportation modes.
2. Increase Quality:
o Quality means reliability: products must perform consistently without defects.
o Upstream supply chain (suppliers → factory) and downstream supply chain
(factory → customers) must both maintain high quality.
o Improving quality also lowers costs because fewer defects → less rework, less
scrap, and lower warranty costs.

Quality Improvement Tools:

 Six Sigma: A statistical approach to reduce defects, boost productivity, and cut costs.
Named after the Greek letter “sigma,” representing standard deviation; six sigma =
99.99966% accuracy (~3.4 defects per million units).
 Total Quality Management (TQM): Management philosophy focused on eliminating
defects, continuous improvement, and employee involvement. Example: W. Edwards
Deming emphasized training, supervision, and creating an environment where employees
can report issues without fear.

Other Objectives

 Local Responsiveness: Products/processes must adapt to local tastes, infrastructure, or

regulations.
 Time-Based Competition: Quickly respond to unpredictable shifts in customer demand.

Where to Produce?
Factors Affecting Production Location

1. Country Factors

 Political, economic, and cultural differences influence costs, benefits, and risks.
 Factor Costs: Differences in wages, materials, and utilities create comparative
advantage.
 Trade Barriers: Tariffs, import/export rules, or FDI restrictions can make a country
more or less attractive.
 Location Externalities: Benefits of clusters where skilled labor and supporting
industries are concentrated (e.g., semiconductor hub in Taiwan; “Cyberabad” in
Hyderabad for IT).
 Exchange Rates: Currency appreciation increases costs, potentially making a low-cost
location expensive (e.g., Japanese firms moved offshore due to yen appreciation).

2. Technological Factors

 Fixed Costs: High fixed costs of production (e.g., $10–20 billion for semiconductor
plant) → centralized production. Low fixed costs → multiple locations.
 Minimum Efficient Scale: The output level at which major scale economies are realized;
beyond this, further production adds little cost advantage.
o High scale → centralize; low scale → decentralize.
 Flexible Manufacturing / Lean Production: Technologies that reduce setup time,
increase machine utilization, and reduce waste.
o Enables mass customization: producing customized products at low cost (once
only achievable via standardized mass production).
o Example: Toyota Production System reduced inventory, waste, and enabled
diverse models efficiently.
o Flexible Machine Cells: Grouping multiple machines with a centralized
computer controller allows quick switching between products, better utilization,
and lower waste.

3. Production Factors

 Value-to-Weight Ratio: High ratio (electronics, pharmaceuticals) → central production

is cost-efficient. Low ratio (bulk chemicals, sugar) → produce near markets.
 Universal vs. Local Needs: Universal products → centralized production. Products with
varying national tastes → decentralized production.

Location Strategies

Example
Strategy Favoured When
Considerations
Concentrated Large differences in factor costs, stable exchange Serve global market from
 Example
Strategy Favoured When
Considerations
rates, high fixed costs, high value-to-weight ratio,
Production flexible manufacturing available, universal a single/optimal location
products
Low differences in factor costs, high trade barriers,
Decentralized Produce near major
volatile exchange rates, low fixed costs, low
Production markets
minimum efficient scale, non-universal products

Strategic Roles of Production Facilities

1. Offshore Factory: Low-cost production; minimal strategic involvement.

2. Source Factory: Cost-focused but with strategic input on suppliers, processes, and
production.
3. Server Factory: Supplies specific markets; minor customization allowed.
4. Contributor Factory: Handles product/process development; can compete with home
factories.
5. Outpost Factory: Gathers intelligence near competitors, key suppliers, or important
customers.
6. Lead Factory: Develops new products/processes/technologies for global deployment;
requires highly skilled workforce.

Hidden Costs of Foreign Locations

 High employee turnover → reduced productivity.

 Poor workmanship or quality issues → increased defects, delays.
 Example: Microsoft in India faced high turnover despite lower wages and skilled
workforce.

Lesson: Lower labor costs must be balanced against productivity, quality, and operational risks.

The Strategic Role of a Foreign Production Site

Global production is a major part of operations management in supply chains. Decisions such
as where to produce, the strategic role of a foreign production site, and make-or-buy
decisions are central to global production. Production alone is not enough—logistics,
purchasing (sourcing), and distribution strategy also need to be coordinated with production.

 Logistics ensures raw materials, components, and products are delivered in the right
quantity, quality, and time to the right location.
 Purchasing ensures the sourcing of raw materials, components, and products aligns with
production needs.
  Distribution strategy deals with marketing channels and getting finished products to
customers.

Global Logistics

Logistics manages the flow and storage of raw materials, components, and finished products
throughout the global supply chain. Core activities:

1. Global Distribution Centre (DC) Management

o A DC stores, customizes, and distributes products globally to wholesalers,
retailers, or consumers.
o Modern DCs add value (e.g., kitting, packaging, assembly) rather than just storing
goods.
o Strategic location considers labor and transportation costs to optimize delivery
efficiency.
2. Inventory Management
o Decisions include: how much inventory to hold, what form to hold it in (raw,
WIP, finished), and where to locate it.
o Example: Toyota holds 8.71% of assets in inventory (26% raw, 14% WIP, 60%
finished). Sinopec holds 21% in inventory (37% raw, 43% WIP, 20% finished) –
shows that petroleum firms need flexibility in producing finished products.
o Trade-off: Holding inventory near customers improves service but increases risk
of excess/obsolete stock.
3. Packaging & Materials Handling
o Three types of packaging:
 Primary: Holds the product itself (what customers take home).
 Secondary: Holds multiple primary packages (case packs, used for
stocking shelves).
 Transit (unit-load): Outer packaging for palletizing/shipping; aids
handling and protection.
o Functions:
 Perform: Ease of transport, storage, and convenience.
 Protect: Preserve freshness, prevent damage, ensure safety.
 Inform: Instructions, guarantees, and regulatory compliance.
4. Transportation
o Moves raw materials, components, and finished goods globally.
o Costs influenced by distance, mode (ocean < land < air), load size, product
density, value, perishability, and fuel prices.
o Economies of scale: Larger shipments cost less per unit.
5. Reverse Logistics
o Flow of products from consumer back to origin for returns, recycling, or
disposal.
o Example: In 2022, product returns cost $817B (16% of total retail sales).
o Optimizes after-market activity and reduces environmental waste.
Global Purchasing

Purchasing is buying raw materials, components, or products worldwide. Strategic levels:

1. Level I: Domestic purchasing only.

2. Level II: International purchasing as needed (reactive, uncoordinated).
3. Level III: International purchasing integrated with supply chain strategy.
4. Level IV: Global purchasing integrated across worldwide locations.
5. Level V: Global purchasing integrated across worldwide locations and functional
groups, coordinating supplier selection and processes.

Basic decisions in purchasing:

 Internal vs. external: Make within the firm or buy from supplier (internal ≈ 35%,
external ≈ 65%).
 Domestic vs. global: Where to source materials.
 Purchasing strategy options: Domestic internal, global internal, domestic external,
global external.

Outsourcing-Related Terms:

 Outsourcing: Buying externally instead of producing in-house.

 Insourcing: Producing in-house instead of outsourcing.
 Offshoring: Buying from a supplier in another country.
 Offshore outsourcing: Outsourcing to a supplier in a different country than your
production location.
 Nearshoring: Outsourcing to a nearby country.
 Co-sourcing: Combination of internal and external resources to perform a task
strategically.

Make-or-Buy Decisions
The make-or-buy decision determines whether a firm should produce in-house
("make") or purchase from an external supplier ("buy").

Strategic vs. Operational levels:

 Strategic: Long-term, focuses on core competencies, proprietary technology, and

continuous supply.
 Operational: Short-term, focuses on costs, production capacity, and immediate resource
allocation.
Factors influencing the decision:

For Make (produce in-house):

 Lower or comparable cost.

 Excess production capacity.
 Quality control critical to success.
 Proprietary technology that should not be shared.
 Limited supplier options.
 Assurance of continuous supply.
 Strategic alignment with industry globalization drivers.

For Buy (outsourcing):

 Supplier expertise unavailable in-house.

 Small volumes (economies of scale not achieved in-house).
 Easier inventory management or cost reduction.
 Brand preference (e.g., buying Intel chips instead of producing in-house).
 Non-essential items that do not affect core competencies.

Key point: Cost and production capacity are primary drivers, but strategic fit, quality, and risk
management are equally important.

Managing a Global Supply Chain

Global supply chains can reduce costs dramatically since material costs are 50–70% of
revenue. Even small efficiency improvements significantly boost profits.

Just-in-Time (JIT) Inventory

 Philosophy: Materials arrive just in time for production, reducing inventory holding
costs.
 Benefits: Faster inventory turnover, lower working capital, better quality (defects caught
immediately).
 Risks: No buffer stock → vulnerable to supply disruptions (e.g., 9/11, SARS, COVID-
19).
 Mitigation: Multiple suppliers in different countries to manage country-specific risks.

Role of Information Technology

  Web/cloud systems track materials globally, optimize scheduling, and accelerate
production.
 Key systems:
o EDI: Electronic data interchange between companies.
o ERP: Enterprise resource planning, includes supply chain modules like MRP.
o CPFR: Collaborative planning, forecasting, and replenishment.
o VMI: Vendor-managed inventory.
o WMS: Warehouse management system, works with ERP.
 Benefits: Reduces inventory, balances supply/demand, improves efficiency, even small
firms can compete globally.

Coordination in Global Supply Chains

 Analogous to turning an aircraft: small, coordinated adjustments create powerful results.

 Shared decision-making: Joint consideration of replenishment, inventory, orders, batch
size, product development.
 Operational objectives:
o Responsiveness: Meet customer needs quickly.
o Variance reduction: Minimize disruptions.
o Inventory reduction: Optimize asset commitment.
o Shipment consolidation: Combine shipments efficiently.
o Quality: Zero defects across supply chain.
o Life-cycle support: Integrate reverse logistics, recycling, after-market service,
recalls, disposal.

Interorganizational Relationships

 Trust and commitment are key for efficient global supply chains.
 Not all relationships are equally valuable—prioritize critical upstream (suppliers) and
downstream (distributors/retailers) partners.
 Strong relationships improve coordination, reduce conflicts, and increase responsiveness
across the supply chain.

Chapter 9:
LO1 — The Functions of the Foreign Exchange Market
The foreign exchange (FX) market has two major functions:

1. Currency Conversion
2. Insuring Against Foreign Exchange Risk (Hedging)

1. Currency Conversion

Why currency conversion is needed

 Every country uses its own legal tender (e.g., US$, €, ¥, C$, £).
 When individuals or firms buy/sell goods across borders, they must convert funds.
 Example: A U.S. tourist in Scotland must convert U.S. dollars into British pounds to buy
goods.

Exchange Rates

 The exchange rate tells you how much one currency is worth in another.
 Example: €1 = US$1.07 → 1 euro buys 1.07 U.S. dollars.

Using exchange rates to compare prices

Example:

 Whisky costs £30 in Scotland.

 Exchange rate: £1 = US$1.25 → £30 = US$37.50.
 If the same whisky in the U.S. costs US$35, then it is cheaper in the U.S. despite shipping
costs.

Who uses the FX market?

 Tourists → small participants

 International businesses → major users

Four main uses of FX markets by businesses

1. Convert foreign earnings

 Exporters paid in foreign currency must convert to home currency to use funds.
 Example:
o Toyota earns U.S. dollars from selling cars in the U.S. but must convert US$ to
yen.
2. Paying foreign suppliers

 Importers convert home currency to supplier’s currency.

 Example:
o Dell pays Malaysian suppliers in ringgit → must convert U.S. dollars to ringgit.

3. Short-term money market investments

 Firms invest surplus cash in foreign money markets if interest rates are higher elsewhere.
 Risk: Return depends on foreign interest rate + exchange rate movement.

4. Currency Speculation

 Short-term movement of funds to profit from exchange rate changes.

 Example:
o Company converts US$10M to yen at 120 ¥/$ → gets 1.2B yen.
o Yen strengthens to 100 ¥/$ → converting back yields US$12M → profit US$2M.
 High risk — losses occur if exchange rate moves the opposite way.

Carry Trade

 Borrow in low-interest-rate currency → invest in high-interest-rate currency.

 Example:
o Borrow in yen at 1% → invest in U.S. dollars at 6% → profit from 5% interest
gap.
 Risk: If the borrowed currency (e.g., yen) appreciates, repayment becomes more
expensive.

The Canadian Dollar in the World

Secondary global currency

 The Canadian dollar (CAD) is less used internationally.

 Often behaves as a "petrocurrency" (linked to commodity prices), though this effect is
weakening.

How Canadian businesses operate internationally

 Large firms use U.S. dollar or major currency accounts → less concerned about CAD
fluctuations.
 Small firms exporting to the U.S. may be heavily affected.

Example: Exchange rate risk for Canadian exporters

  If C$100 product = US$74.39 (when 1 CAD = US$0.7439)
 If CAD rises to US$0.80 → product costs US$80 → U.S. buyers may buy less → hurts
exports.

Why strong currency does NOT always hurt exports

 Example: Germany (high-value Deutsche mark) still dominated exports.

 Why? Superior quality, efficient manufacturing, strong marketing.

LO2 — The Nature of the Foreign Exchange Market

1. Structure of the FX Market

 Not a physical place — a global network of:

o Banks
o Brokers
o Dealers
 Connected electronically → enables fast global trading.

Rapid growth

 1986: $200 billion/day

 2019: $6.6 trillion/day
 2022: $7.5 trillion/day

Major FX trading centres (2022)

1. London (38%) — largest and historically dominant

2. United States
3. Singapore
4. Hong Kong
5. Japan
→ These five account for 78% of global FX activity.

Why London dominates

 Historical financial hub

 Time zone advantage (overlaps with Asia and North America)

2. Features of the FX Market

A. The Market Never Sleeps

  Open 24 hours because of time zone rotation:
o Tokyo → London → New York
 Only closed for about 3 hours/day globally.

B. Integrated Market

 Computer systems link global financial centres.

 Prices between centres cannot differ significantly.

Arbitrage

 Buying low in one market and selling high in another → risk-free profit.
 Example:
o London: ¥120 = $1
o New York: ¥125 = $1
o Trader buys yen in New York, sells in London, earns profit.
 Such differences vanish quickly as traders exploit them.

C. Dominance of the U.S. Dollar (Vehicle Currency)

Most FX transactions involve the USD on one side:

 88% of all trades involve USD (2022).

 Other major vehicle currencies:
o Euro (31%)
o Yen (17%)
o Pound sterling (13%)
o Chinese renminbi (7%)

Why USD is used even in non-U.S. trades

 High liquidity
 Easier to find buyers/sellers
 More efficient than trying to match two non-major currencies

Example:
Selling Korean won to buy Canadian dollars → dealers typically convert won → USD → CAD.

Insuring Against Foreign Exchange Risk (Hedging)

Three tools:

1. Spot Exchange Rates

 Immediate currency conversion.

 Spot rate changes constantly based on supply and demand.
 Example:
o Start of day: £1 = $1.25
o End of day: £1 = $1.23
o → Pound depreciates, dollar appreciates.

2. Forward Exchange Rates

 Agreement to exchange currencies at a future date at a set rate.

 Protects against unexpected exchange rate changes.

Example: U.S. importer buying Japanese cameras

 Must pay ¥200,000 per camera in 30 days.

 Spot: $1 = ¥120 → cost = $1,667
 If in 30 days: $1 = ¥95 → cost rises to $2,105 → loses money

Hedging solution: Use 30-day forward rate

 Forward rate = $1 = ¥110 → cost = $1,818

 Guarantees profit regardless of future movements.

Forward Premium or Discount

 If $1 buys less yen in forward market → dollar sells at discount.

 If $1 buys more yen in forward market → dollar sells at premium.

3. Currency Swaps

 Simultaneous purchase and sale of currency for two different dates.

 Most common type of forward transaction.

Example: Apple

 Needs yen today to pay supplier.

 Will receive yen in 90 days from Japanese customers.
 Solution: Spot + Forward swap
 o Converts $1M at spot ($1 = ¥120) → gets ¥120M today
o Enters forward deal ($1 = ¥110) to convert ¥120M back in 90 days → receives
$1.09M
 Purpose: eliminate exchange rate risk.
CHAPTER 16 — INTERNATIONAL HRM

LO1 — The Strategic Role of International HRM

1. Why IHRM Matters Strategically

 Research shows that HRM practices must match the firm’s strategy to achieve high
profitability.
 Strategy alone is not enough — it must be supported by the right organizational
architecture (structure, culture, people, incentives, and control systems).
 People are the central element of organizational architecture. Without the right people,
strategy cannot be executed.

2. HRM as the “Linchpin” of Global Strategy Execution

HRM directly influences:

 People → hiring, placement, development

 Culture → shaping shared values and norms through staffing & training
 Incentives → compensation policies
 Control systems → performance appraisal systems

Together, these determine whether a strategy will succeed or fail in an international setting.

3. How HRM Supports Global Performance

HRM must ensure:

1. Right people in the right roles globally

2. Training to build required skills and embed corporate culture
3. Compensation aligned with strategy (incentives drive desired behavior)
4. Performance appraisal that measures & rewards strategic goals

In short: HRM → People → Culture → Incentives → Control → Strategy execution.

LO2 — Staffing Policy

1. What Staffing Policy Is

Staffing policy = deciding which people should be selected for which jobs globally.
Two major purposes:

1. Filling roles with capable people

2. Building/maintaining the desired corporate culture
o Corporate culture = the firm’s shared values, norms, and beliefs.
o Hiring people aligned with this culture supports effective strategy execution.

TYPES OF STAFFING POLICIES

1. Ethnocentric Staffing Policy

Definition

 Key management positions in foreign subsidiaries are filled by parent-country nationals

(PCNs).

Why Firms Use It

1. Lack of qualified local managers (common in developing countries).

2. Helps maintain a unified corporate culture (PCNs already “socialized” in HQ culture).
3. Supports transfer of core competencies
o Tacit knowledge (e.g., marketing expertise) cannot be learned from manuals.
o Must be transferred through experienced home-country managers.

Advantages

 Ensures consistent culture and management style

 Effective transfer of knowledge & core competencies
 Solves skill shortages in host countries

Disadvantages

 Resentment among host-country nationals (HCNs)

 Cultural myopia → failure to understand host-country differences
 High cost of expatriates

When Ethnocentric Fits

 Best with an international strategy (firm tries to replicate home-country competencies

abroad).
2. Polycentric Staffing Policy

Definition

 Subsidiaries are managed by host-country nationals; HQ is staffed by parent-country

nationals.

Advantages

1. Reduces cultural myopia

2. Less expensive (avoids expatriate costs)
3. Better local responsiveness

Disadvantages

1. HCNs have limited career mobility; cannot move to HQ roles

2. Creates a loose federation of national units
3. Weak integration between subsidiary & HQ
o Hard to transfer competencies or coordinate global operations

Best Strategic Fit

 Localization strategy — when subsidiaries must respond to local markets.

3. Geocentric Staffing Policy

Definition

 Firm seeks the best people worldwide, regardless of nationality.

Advantages

 Most effective use of global HR talent

 Builds:
o Global mindsets
o Multinational leadership teams
o Unified corporate culture
o Informal networks across countries
 Supports:
o Experience curve benefits
o Location economies
o Cross-border knowledge flow (multidirectional)

Disadvantages
  Immigration restrictions limit hiring flexibility
 Very expensive (training, relocation, standardized compensation)
 Possible resentment due to pay differences

Best Strategic Fit

 Global standardization and transnational strategies

4. Summary Table (Simplified for Exam)

Staffing
Best Strategy Key Advantages Main Problems
Policy
Culture unity; transfers
Ethnocentric International Resentment; cultural myopia
competencies
Avoids cultural myopia; Limited mobility; HQ–
Polycentric Localization
cheap subsidiary isolation
Best talent; strong culture;
Geocentric Global/Transnational Expensive; immigration limits
networks

LO3 — Expatriate Managers

1. Definition

Expatriate = person working in a country other than their own.

“Inpatriate” = foreign citizen working in company’s home country.

Ethnocentric & geocentric strategies rely heavily on expatriates.

2. Expatriate Failure

Premature return from assignment or inability to perform.

Costs of Failure

 Up to 3x annual salary + relocation

 Estimates: $250,000–$1,000,000 per failure
 High turnover — expatriates resign at double the domestic rate
3. Failure Rates (from Tung’s classic study)

 U.S. firms had the highest failure rates historically

 Common reasons (ranked):

U.S. Companies

1. Spouse inability to adjust

2. Manager inability to adjust
3. Family problems
4. Lack of emotional maturity
5. Inability to handle larger responsibilities

Japanese Companies

1. Inability to handle increased responsibilities

2. Difficulties with new environment
3. Personal/emotional problems
4. Lack of technical competence
5. Spouse inability to adjust (lowest concern)

4. Why Expatriates Fail

Primary reasons:

 Spousal adjustment problems

 Manager’s lack of cultural skills
 Family strain
 Poor selection methods (chosen for technical skills only)

5. Expatriate Selection: Four Predictors of Success

(Mendenhall & Oddou)

1. Self-Orientation

 Self-confidence, self-esteem, ability to handle stress

 Ability to maintain interests & hobbies abroad

2. Others-Orientation

 Ability to interact with host-country nationals

  Relationship-building
 Willingness to communicate (use local language)

3. Perceptual Ability

 Ability to empathize with host-country culture

 Ability to understand why locals behave differently
 Flexibility in management style

4. Cultural Toughness

 Some countries are harder postings

 Non-Western cultures often require higher adjustment effort

6. Global Mindset

A global mindset =

 Cognitive complexity
 Openness to different cultures
 Comfort with ambiguity
Developed through:
 Bicultural upbringing
 International experiences
 Language skills

LO4 — Training & Management Development

1. Training vs. Management Development

 Training = preparing for a specific job/assignment (short-term).

 Management development = building long-term managerial capabilities and global
leadership.

Training for Expatriates

Three Types of Training

1. Cultural Training

 Provides knowledge of host-country:

o History, politics, economy
o Social & business norms
o Cultural values
 Goal: develop empathy & reduce culture shock
 Should include spouse & family

2. Language Training

 Even limited proficiency improves:

o Rapport with host employees
o Cultural understanding
o Effectiveness
 Shows willingness to integrate

3. Practical Training

 Helps with everyday life:

o Housing, schools, transportation
o Shopping, banking
o Support networks
 Faster adjustment → lower failure rates

Repatriation (Return Home)

A major but often neglected issue.

Problems Returning Expatriates Face

 Loss of autonomy
 No role that uses their new skills
 Organization ignores their international experience
 Many returnees quit within 1–2 years

Why it Happens

 Poor HR planning
 No reintegration program
  Lack of career path after return

Solutions

 Plan repatriation BEFORE departure

 Assign meaningful roles after return
 Use their global experience strategically
 Provide psychological & career support

Management Development & Strategy

Why It Matters

Firms (especially transnationals) need:

 A strong corporate culture

 Informal networks across borders
 Managers who understand local differences and global integration

How Firms Develop Global Managers

 Job rotations across countries

 Corporate universities/training centers
 Cross-cultural leadership programs
 Socialization through shared experiences

Benefits

 Knowledge-sharing
 Transfer of competencies
 Stronger global coordination

Workforce Diversity

Why Diversity Improves Performance

1. Better insight into diverse customers

2. Broader perspectives → creativity & problem-solving
3. Stronger talent pool
4. Improved brand image
5. Higher employee satisfaction & productivity
Challenges in Global Diversity Efforts

 Cultural differences across countries

 Varying acceptance of women/minorities
 Legal and societal norms differ

How Firms Promote Diversity

 Leadership commitment
 Clear goals & metrics
 Training to reduce unconscious bias
 Diverse hiring & promotion practices
 Employee resource groups
 Flexible work policies (e.g., childcare)
Chapter 4
LO1 — Ethical Issues in International Business
(Why ethical issues arise & how changing environments create dilemmas)

Ethical issues in international business arise because political, legal, economic, and cultural
systems differ widely across nations. What is normal or legal in one country may be unethical
or illegal in another. International managers work in intertwined environments, where
decisions in one area affect others.

1. Ethics in the Changing Political Environment

Politics influences ethics—and vice versa.

Political changes anywhere in the world now affect:

 Local regulations
 International law
 Social expectations
 Corporate conduct

Example: Canadian anti-vaccination protests (Ottawa Convoy)

 COVID-19 caused 4.6M Canadian cases and 50,000+ deaths.

 Protests blocked downtown Ottawa and border crossings.
 Government used the Emergencies Act to clear the areas.
 Ethical debate:
o Supporters: legal process followed; necessary to protect citizens.
o Critics: Act was meant for war/disasters; police could have acted without
extraordinary powers.

Political cooperation example:

 PM Justin Trudeau (left-leaning) and Premier Doug Ford (right-leaning) cooperated

during the pandemic → ethics of putting the public good above politics.

Insider trading during crises

 U.S. senators allegedly sold stocks after a classified COVID-19 briefing.

 Possibly legal, but widely viewed as unethical abuse of privileged information.
 Shows how ethics are tested in crises.
2. Corruption

Definition & Impact

 Corruption is widespread historically and globally.

 Firms may gain advantage by bribing officials, especially in weak institutional
environments.
 Economists argue corruption:
o Reduces returns on investment
o Slows economic growth
o Discourages foreign investors

OECD Anti-Bribery Convention (1997 → in force 1999)

 Requires member states to criminalize bribing foreign public officials.

 Excludes “facilitating payments” for routine actions (still controversial).
 Countries must adopt domestic laws to enforce it.

OECD tools

 Website tracking each country’s enforcement progress.

 2009 report: Tax Deductibility of Bribes
o Prevents companies from hiding bribes in fake accounts or expense categories.

3. Corruption in Canada

 Canada fell from 8th (2017) to 14th (2022) on Transparency International’s Corruption
Perceptions Index.
 Issues include:
o Quebec political/business scandals
o SNC-Lavalin case
o B.C. casino & real estate money-laundering
o WE Charity controversy
o Delayed investigations into foreign election interference

Corruption is not limited to developing countries; high-income democracies face it too.

4. Human Rights Issues

Human rights abuses remain common globally.

Rights often violated:

 Freedom of speech, movement, assembly

 Freedom from political repression
 Safe working conditions
 Freedom from forced labour

Canadian companies linked to alleged abuses

Reports accuse companies (e.g., Barrick Gold, Torex Gold, Nygard International) of involvement
in:

 Killings
 Torture
 Forced labour
 Environmental destruction

Important: These are allegations, not proven facts.

Companies operating internationally must adapt when:

 Local political conditions shift

 Human rights concerns arise
 Canada’s own laws (CISG, Bill S-21, etc.) restrict sourcing from abusive regions

5. Ethics in the Changing Sociocultural Environment

Different cultures view ethics differently. Examples:

 Gift giving: hospitality in one culture; bribery in another

 Treatment of women or children
 Approach to law enforcement
 Minimum standards vs. moral responsibilities

Common ethical issues for multinationals:

 Employment practices
 Human rights
 Environmental standards
 Corruption
 Use of corporate power

Technology increases the speed at which ethical issues spread and are judged.
6. Ethics in the Changing Technological Environment

Technology can create new ethical problems.

Fake news (2016 onward)

 Social media amplified misinformation during the U.S. election.

 Overwhelming volume diluted real journalism → ethical challenge for society and firms.

Social media in corporations

 Employees share working conditions publicly → increases transparency.

 Can reduce ignorance about global labour conditions.

But technology also exposes companies to:

 Privacy concerns
 Monitoring dilemmas
 Reputational risks

7. Ethics in the Changing Economic Environment

Offshore tax havens — The Panama Papers (2016)

 Canadians held at least $199B in offshore accounts (declared), possibly far more
undeclared.
 Raised ethical questions about:
o Tax avoidance
o Fairness
o Corporate responsibility

Corporate tax avoidance

 Legally minimizing taxes may be unethical if it deprives governments of revenue used

for public services.

8. Ethics in the Changing Competitive Environment

Employee data usage

Companies now analyze:

 Messaging patterns
 Emails
 Social media
 Sentiment data
Using AI tools.

Benefits: productivity insights, early detection of HR issues

Ethical issues: privacy invasion, employee consent, potential misuse

Whistle-blower ethics (Amazon example)

 Amazon VP Tim Bray resigned in protest after warehouse workers alleging unsafe
COVID conditions were fired.
 Raised ethical concerns about:
o Whistle-blower protection
o Worker safety
o Corporate retaliation

9. Outsourcing & Offshoring — Ethical Questions

Companies outsource to reduce costs. Ethical questions include:

 Are cheaper materials safe?

 Are workers paid fairly?
 Are safety standards followed?
 Is environmental protection ignored?
 Are suppliers exploiting weak regulations?

Example: Freshii (2022)

 Outsourced cashier jobs to Nicaragua via video link; workers earned $3.75/hr.
 Legal? Possibly.
 Ethical? Highly debated:
o Canadians saw it as exploitation & job loss
o Company argued wages were 250% of Nicaragua’s minimum wage

10. Environmental Pollution

Multinationals sometimes pollute more in weaker regulatory environments.

Examples

 Sri Lankan glove manufacturer polluted drinking water; protests ended with deadly
clashes.
 U.S. Inflation Reduction Act’s unintended consequence: increased agricultural pollutants.

Should firms lower environmental standards abroad?

 Legally allowed in some places

 Ethically questionable
 Risk contributing to long-term harm

Tragedy of the Commons

 Some resources (air, oceans) belong to everyone → easily overused

 Firms may exploit weak rules in one country but harm the global commons

Asarco Case

 Claimed a "right to pollute" under old agreements

 Lost over $1B in lawsuits → bankruptcy

11. Power of Multinationals

Multinationals can pressure governments

Example: Ending apartheid in South Africa — firms exited → economic pressure → reforms.

But some regimes are too repressive

Ethically questionable to invest in:

 Myanmar
 Russia after Ukraine invasion

Many companies withdrew from Russia in protest.

Power is morally neutral

It can be used:

 Unethically (e.g., media manipulation in China by News Corp.)

 Ethically (e.g., BP’s water projects in Algeria)
But even “ethical” firms make mistakes (e.g., BP Deepwater Horizon spill).

LO2 — Ethical Dilemmas

Ethical dilemmas = situations where no alternative is fully acceptable.

Multinationals face dilemmas involving:

 Employment conditions
 Human rights
 Corruption
 Environment
 Use of power
 Conflicting cultural norms

There is often:

 No universal agreement on ethical principles

 No completely “right” choice
 Serious consequences to all options

Example: Child labour ethical dilemma

A Canadian manager finds a 12-year-old orphan working in a subsidiary.

 Company policy forbids child labour → he orders her replaced

 She loses income
 Turns to prostitution → contracts AIDS → dies
 Younger brother becomes a beggar → later dies too

What should the manager have done?

 Hiring a child: unethical

 Firing her: leads to worse consequences
 Possible solution (like Levi Strauss):
o Keep paying her wage
o Send her to school
o Help support her family
o Replace her with an adult worker

There is no perfect solution, only better or worse outcomes.

Why dilemmas are hard:

 Consequences affect multiple people

 Long-term effects unknown
 Cultural expectations differ
 Company policy may conflict with local reality

Managers need a “moral compass”

The chapter later offers tools for ethical decision-making.

LO3 — Roots of Unethical Behaviour

Managers, executives, and politicians frequently behave unethically in international business
because of complex, interacting causes. Ethical problems intensify in global settings due to
multiple cultures, legal systems, and pressures.

1. Personal Ethics

Personal ethics = foundation of business ethics.

 Business ethics cannot be separated from personal ethics.

 Individuals with strong moral principles are less likely to behave unethically at work.
 Societies with stronger emphasis on personal ethics → companies with stronger ethical
cultures.

2. Expatriate Pressures

Expatriate managers are at high risk of unethical behaviour because:

 Absence of familiar social norms and support systems

 Distance from HQ oversight
 Host country may have different ethical norms
 Surrounded by local employees with different standards
 Pressure to “fit in” or “get things done” despite questionable practices

Result: more vulnerability to unethical decisions.

3. Failure to Ask Ethical Questions

Many managers behave unethically simply because:

 They don’t realize they’re facing an ethical issue

 They frame a choice as a pure business decision (cost, delivery, quality)
 They never ask: “Is this ethical?”

Examples:

 COVID-related false product claims (“kills 99% of germs”—not verified)

 French doctors suggesting testing vaccines on Africans first
 Trump using the Defense Production Act to block 3M from selling N95 masks to
Canada

Managers often apply economic logic and ignore moral consequences.

4. Intense Competitive Pressures

Competitive global markets push firms to:

 Cut costs aggressively

 Deliver products cheaper and faster
 Meet shareholder expectations
 Protect margins or face stock sell-offs

This pressure:

 Encourages shortcuts
 Discourages ethical reflection
 Creates “ends justify the means” thinking

Particularly true for publicly traded firms with volatile stock prices.

5. Flawed Decision-Making Processes

Unethical choices often stem from:

 Systems that do not incorporate ethics

 Narrow focus on:
o Cost
o Delivery time
 o Efficiency
o Supplier price
 Ignoring questions like:
o "Are working conditions safe?"
o "Is this supplier exploiting workers?"

Example:
Pfizer testing an experimental drug on Nigerian children;
INSERM/Cochin Hospital suggesting African vaccine tests first.

Competitiveness → managers avoid deep moral reflection.

6. Organizational Culture

Organizational culture = shared values + norms → determines behaviour.

If culture focuses only on economics, ethics are sidelined.

Research by Filabi & Bulgarella (OECD):

 Regulators (post–Financial Crisis) increasingly view culture as key to preventing

corruption.
 UK and US regulators demand firms monitor and report on their internal culture.

If the culture tolerates unethical behaviour, employees will follow suit.

7. Unrealistic Performance Expectations (HQ Pressure)

Parent-company demands for extraordinary performance can push managers to:

 Pay bribes
 Lower safety standards
 Ignore environmental rules
 Exploit workers
 Manipulate customers

Distance allows HQ to:

 Not notice (or choose not to notice) how goals are met

Example: TD Bank (2017)

Employees alleged they:
  Increased customers’ credit limits
 Boosted overdraft protections
 Raised borrowing limits
Without authorization
→ to meet sales targets

Culture + pressure = unethical actions.

8. Leadership Failures

Leadership is a major root cause:

 Employees follow leaders’ actions, not their words

 If leaders behave unethically, others will too
 Leaders set the tone for the entire culture

Example:
Kellyanne Conway (White House advisor) endorsing Ivanka Trump’s products on TV, despite
rules forbidding endorsements by government officials.
OGE recommended discipline; none was taken → signals unethical behaviour is tolerated.

LO5 — Ethical Decision Making & Corporate Social Responsibility

(CSR)
Managers in international business need structured tools to ensure ethics are incorporated into
decisions, especially when facing dilemmas with no perfect answer.

Before the five tools, the chapter emphasizes:

Why Managers Should Care About Ethics: Morale

 Ethical behaviour directly affects employee morale, which affects productivity.

 If a company mistreats employees, customers, or suppliers → morale drops →
competitiveness falls.

Five Tools for Ethical Decision Making

1. Hire and Promote People with Strong Personal Ethics

Companies should:
  Avoid hiring unethical individuals (but difficult because people hide it)
 Use:
o Psychological testing
o Reference checks
o Reputation checks

Promotions should reward ethical behaviour and deny advancement to unethical employees.

Job seekers should evaluate an organization’s ethical climate (Table 4.1 questions).

2. Build an Ethical Organizational Culture

Key steps:

1. Explicit values (codes of ethics, mission statements)

2. Codes often draw from universal principles (e.g., UN Universal Declaration of Human
Rights)
3. Communicate and reinforce values regularly
4. Leaders must model ethical behaviour—actions > words
5. Use external audits to verify compliance
o Example: HBC uses independent auditors to check supplier compliance.

3. Leadership That Acts Ethically

Leaders must:

 “Walk the talk”

 Demonstrate ethical behaviour in their decisions
 Shape culture through consistent action

Leadership behaviour → strongest influencer of employee ethics.

4. Ethical Decision-Making Processes ("Ethical Algorithms")

Three-question test

A decision is ethical if you answer YES to all:

1. Is it consistent with company values/code of ethics?

2. Would I be okay seeing it reported publicly?
 3. Would people close to me (family, respected peers) approve?

Five-step approach to analyzing ethical problems

Step 1 — Identify stakeholders

 Internal: employees, board, shareholders

 External: customers, suppliers, governments, lenders, communities
 Use moral imagination: imagine being each stakeholder

Step 2 — Judge the ethics of the decision

 Does it violate stakeholder rights?

 Is it acceptable under Rawls’s veil of ignorance?
 Does it violate core moral principles?
 Profit maximization is allowed only if no moral principles are violated.

Step 3 — Establish moral intent

 Decide that ethical principles override short-term gains

 Top management involvement is crucial

Step 4 — Act ethically

Follow through based on prior steps.

Step 5 — Audit and review decisions

 Evaluate whether actions met ethical expectations

 Adjust processes if needed
 Often ignored but essential

5. Develop Moral Courage

Moral courage enables employees to:

 Reject profitable but unethical decisions

 Say no to unethical orders
 Blow the whistle if necessary

Employees need protection from retaliation.

Example:
Unilever’s Code of Business Principles promises:
  No punishment for reporting issues
 Board will not criticize managers for losing business due to ethical behaviour

Hotlines can support anonymous reporting.

Ethics Officers

Many firms appoint ethics officers to:

 Train employees
 Ensure ethics enter decision-making
 Investigate complaints
 Audit actions
 Serve as confidential ombudspersons

Beware “fake” ethics officers (only a title).

Example: NovaGold publicly posts its Code and appoints a corporate controller to handle ethics
issues.

Corporate Social Responsibility (CSR)

CSR = businesses should consider social consequences of economic actions and choose actions
with both good economic and social outcomes.

Also known as:

 Corporate citizenship
 Corporate conscience
 Sustainable business
 Social performance

CSR ensures behaviour aligns with:

 Social-cultural expectations
 Political-legal regulations in each country

CSR Moral Obligations

 Multinationals possess significant power

  With power comes noblesse oblige → responsibility to give back
 Includes:
o Philanthropy
o Local community support
o Environmentally responsible practices

CSR Response Types (4 Stances)

1. Obstructionist

 Hide information
 Delay responses (paperwork, “privacy rules,” tech issues)
 Avoid accountability
Example: Toyota initially withholding event recorder data during crash investigations.

2. Defensive

 Follow the law strictly, but do nothing more

 No compassion or fairness
Example: Companies stranding customers after bankruptcy because not legally required
to help.

3. Accommodative

 Meet legal requirements and go further

 Exceed expectations
 Good for CRM + CLV
Examples:
 Flexible returns
 Accepting warranty claims without receipts

4. Proactive

 Anticipate problems and communicate early

 Provide information before customers ask
Example: TELUS notifying customers of data usage to prevent overcharges.

Implications, Benefits, Costs, and Risks

Implications

 Global media exposes ethical lapses instantly

  Intense competition pressures unethical behaviour
 Political fragmentation complicates expectations
 Firms must act ethical and appear ethical

Benefits

 Strong brand reputation

 Consumer trust
 Positive social media narratives
 Protection when competitors face scandals

Costs

 Ethical behaviour can be more expensive upfront (e.g., pollution controls, worker
protections)
But long term → saves money when scandals hit competitors.

Risks

Ethics vary by culture.

 Practices normal in one country (e.g., facilitation payments) may be seen as bribery
elsewhere.
 Media may judge actions without understanding context.

No universal manual—context matters.