Final Nota Lama

Chapter 1
International Business &

Globalization
1 1
International Business & Globalization
• Basic Concepts and Definition

• The differences between international business and
domestic business
• Risks in International Business
• Globalization & the effects in international business
What is International Business?
 International Business
 International business (IB) refers to business activities that involve the transfer of resources, goods,
services, knowledge, skills, or information across national boundaries
 Commercial transactions that take place between two or more nations or cross border
 Economic system of exchanging good and services, conducted between individuals and businesses
in multiple countries
 Nature of International Business
 All value-adding activities can be performed in international locations

 The subject of cross-border trade can be products, services, capital, technology know how, and
labor
 Firms internationalize through exporting, foreign direct investment, licensing, franchising, and
collaborative ventures
WHAT IS GLOBALIZATION?
Globalization refers to the shift towards a more integrated

and interdependent world economy.
The Globalization of Markets
Globalization of markets: the fact that in many industries historically distinct and separate
national markets are merging into one huge global marketplace in which the tastes and
preferences of consumers in different nations are beginning to converge upon some global
norm.
Examples:
Sony Playstation Citicorp credit cards
Coca-Cola McDonald's hamburgers
Effects of globalization can be seen everywhere:
• the cars people drive

• the food people eat
• the jobs where people work
• the clothes people wear
For consumers, it means more choice, lower prices
For business, it means lower costs, better supply, and more markets.
The Globalization of Production
Globalization of production: the tendency among many firms to source goods and services
from different locations around the globe in an attempt to take advantage of national differences
in the cost and quality of factors of production (such as land, labor, capital, and energy),
thereby allowing them to compete more effectively against their rivals.
Examples:
Boeing Lenovo
Why do firm internationalize??
Access to larger market, gain market power, & maximize production possibilities
Growth & expansion
Optimization of resources
Global competition
Profit maximization
Invest in profitable venture with a foreign partner
The differences between international business and
domestic business
1. The main difference between international business and domestic business is mainly due to prohibitive
costs involved in international business.
• tariffs,
• time costs due to border delays
• costs associated with country differences such as language, the legal system or a different culture.
2. International business uses a variety of currencies.
3. International Business may yield superior performance through:
• Maximizing returns and market share
• Attaining global scale economies
• The ease to acquire resources and cost
• Enhanced competitiveness
• Superior knowledge transfer
4. In IB, threats are also more pronounced
• Level of complexity and risk of the business nature
• Complexity in political, social and economic systems.
Risks in international business
Business risk
Economic risk
Political and legal risks
Culture risk
Risks in international business (cont.)
1. Business risk is a firm’s potential loss or failure from poorly developed or executed business strategies,
tactics, or procedures.
• Less than optimal formulation and/or implementation of strategies, tactics or procedures, e.g.
partnering
• Selections, market entry timing, pricing, product features, and promotional themes poor
• Execution of strategy and competitive intensity.
2. Economic risk is the risk of adverse unexpected fluctuations in exchange rates, inflation and other
harmful economic conditions create uncertainty of returns.
• For example, if money must be converted into a different currency to make a certain investment,
changes in the value of the currency relative to the U.S. dollar will affect the total loss or gain on the
investment when the money is converted back.
• This risk usually affects businesses, but it can also affect individual investors who make international
investments.
• Sometimes, this term is also called exchange rate risk.
3. Political and legal risks is the potentially adverse effects on company

operations and profitability holes by developments in the political, legal, and
economic environment in a foreign country.
• Differences in host country political, legal and economic regimes may
adversely impact firm profitability.
• Changes in the laws, regulations and indigenous factors such as property
rights, intellectual-property protection, product liability, taxation policies,
inflation, national debt, and unbalanced international trade.
• The level of government intervention.
4. Culture risk involves a situation or event whereby a cultural

miscommunication can put a damper on business dealings and at the same
time place human value at risk.
• Foreign customers’ attitude and behaviour differ significantly from those
buyers at home.
The Effect of Globalization in International Business
 Industrial
 Globalization has resulted in the emergence of global production markets and broader access to a range of
foreign products for consumers and industries. It also increases the movement of materials and goods inside and
outside the national boundaries.
 Financial
 Globalization has resulted in the emergence of worldwide financial markets and better access to external
financing for borrowers.
 Economic
 Globalization has resulted in the increasing in the realization of a global common market, based on the freedom
of exchange of goods and capital.
 Political
 Globalization may affect the way the term "globalization" is used. It could mean the creation of a world
government which regulates the relationships among governments and guarantees the rights arising from social
and economic globalization e.g. the United States has enjoyed a position of power among other world
powerhouse (i.e. U.K., France, Japan, China, Germany, Russia).
The Effect of Globalization in International Business
(cont.)
 Informational
 Globalization may augment information flows between geographically remote locations because of the
improvement in communication tools such as satellites and the availability of telephone and Internet.
 Language
 Globalization has increased the usage of various languages in the world. For example, the most popular
business language in the world is English. About 50% of all Internet traffic uses English. In addition, Mandarin is
the most widely spoken language in the world.
 Competition
 Since the world market has becoming more integrated and creates a level of playing field, companies in various industries have
to keep up the intense competition by continuously upgrading their technology.
 Environment
 Many factories are built in developing countries with less or non existence environmental regulations that have resulted in the
raise of pollution level.
The Effect of Globalization in
International Business (cont.)
 Social
 Globalization has resulted in the catapult of a system of nongovernmental organization that becomes the main
agents of global public policy, including humanitarian aid and developmental efforts.
 Technical
 The Internet is associated with the process of cultural globalization because it allows interaction and
communication between people with very different lifestyles and from very different cultures. Social networking
websites such as facebook.com and twitter.com allow interaction even when language would otherwise become
a barrier.
 Globalization has contribute to the development of a global telecommunication infrastructure and greater trans-
border data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable,
and wireless telephones, and boost in the number of standards applied globally e.g. copyright, patents and world
trade agreements.
 Cultural
 Globalization has contributed to the growth of cross-cultural contacts through cultural diffusion. Some of the
examples can be seen in the food-Now Malaysian people can easily enjoy French food anytime.
The Effect of Globalization in
International Business (cont.).
 Legal and Ethical issues
 Globalizations has resulted in the creation of the international criminal court and
international justice movements, and raising awareness on global crime-fighting
efforts and cooperation. It also contributes to the emergence of global
administrative law.
 Effect to poor countries
 It can be said that globalization is the gateway that opens up a resource poor
country to the international market. Where the majority of the earliest occurrences
of economic globalization are recorded as being the expansion of businesses and
corporate growth, to many poorer nations, globalization is actually perceived as
the outcome of the foreign businesses investing in a country by taking advantage
of the lower wage rate e.g. Nike setup factories in Vietnam, Indonesia etc. This
eventually will lead to raise their standard of living.
 Negative effects
 Globalization has also garnered significant international opposition over concerns
that it may have increased inequality and environmental degradation.
 In Midwest of United States, globalization has taken away its competitive edge in
once prolific industry and agriculture area, and at the same time lowering the
quality of life in locations that have not been able to adapt to the changes.
Chapter 2
International Trade Theory
& Trade Barriers
Reference;
Saihani et al. (2011), International Business: An Introduction,
McGraw-Hill, Ch. 6.
18
18
International Trade Theory & Trade Barriers
 Basic Concepts and Definition

 Traditional trade theories
 Contemporary theories
 Government intervention and protectionism
 Trade barriers
Overview of International trade theory
Free trade refers to a situation where a government does not attempt

to influence through quotas or duties what its citizens can buy from
another country or what they can produce and sell to another country.
The Benefits of Trade
 The theories of Smith, Ricardo and Heckscher-Ohlin show why it is

beneficial for a country to engage in international trade even for
products it is able to produce for itself
 International trade allows a country to specialize in the manufacture
and export of products that can be produced most efficiently in that
country, and import products that can be produced more efficiently in
other countries
The Pattern of International Trade
 Some patterns of trade are fairly easy to explain - it is

obvious why Saudi Arabia exports oil, Ghana exports
cocoa, and Brazil exports coffee
 But, why does Switzerland export chemicals,

pharmaceuticals, watches, and jewelry? Why does Japan
export automobiles, consumer electronics, and machine
tools?
Trade Theory and Government Policy
Trade theories lack agreement in their recommendations for

government policy.
 Mercantilism makes a crude case for government involvement in

promoting exports and limiting imports
 The theories of Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
 New trade theory and Porter’s theory of national competitive
advantage justify limited and selective government intervention to
support the development of certain export-oriented industries
Traditional Trade Theory
 Mercantilism
 Absolute Advantage
 Comparative Advantage
 Factor proportions theory
 Product life cycle
MERCANTILISM
Mercantilism, which emerged in England in the mid-16th century,

asserted that it is in a country’s best interest to maintain a trade
surplus, to export more than it imports.
 Mercantilism advocated government intervention to achieve a surplus
in the balance of trade
 Main Tenet:
Export > Import (i.e. Trade Surplus)
 Wealth of nations is based on accumulation Gold/Silver (i.e.
currency used to facilitate the exchange of goods)
 It viewed trade as a zero-sum game, one in which a gain by one
country results in a loss by another
 As an economic philosophy, mercantilism is problematic and not
valid, yet many political views today have the goal of boosting exports
while limiting imports by seeking only selective liberalization of trade
Absolute Advantage Theory
 Based on Adam Smith’s “Wealth of Nations” (1776)
 Invent the concept of Invisible Hand (i.e. capitalism, free
market)
 Laissez-Faire – government has no power
 Specialization – has absolute advantage to produce goods
(i.e. efficient to produce product)
 Suggestion By Smith; that England should specialize to
produce textiles while France should specialize to produce
wine. Thus, England should buy wine from France and France
should buy textile from England
Hence, they benefit by engaging in TRADE
 Basic argument that country should not produce product at
home, where it can buy it from other country at cheaper
price
Comparative Advantage
 David Ricardo most famous work “Principles of Political Economy
and Taxation” (1817)
 According to Ricardo’s theory of comparative advantage, it
makes sense for a country to specialize in the production of those
goods that it produces most efficiently and to buy the goods that it
produces less efficiently from other countries, even if this means
buying goods from other countries that it could produce more
efficiently itself
 Based on opportunity cost (i.e. relative difference in cost) &
labor productivity
 Two nations can do trade
 Create “Win – Win Situation” between nations
 Country that is less efficient to produce a product could still
produce the product (i.e. create more supply) and exchanging it
with other countries
Comparative Advantage (cont..)
Example:
Wine (1 gallon) Cloth (1 yard)
England 120 100

Portugal 80 90
Absolute Advantage:
Portugal produce both Wine & Cloth
Comparative Advantage (cont..)
Opportunity Cost:
Wine (1 gallon) Cloth (1 yard)
England 120/100=1.2 100/120=0.83

Portugal 80/90=0.89 90/80=1.12
Comparative Advantage:
Portugal produce Wine while
England produce Cloth
Heckscher – Ohlin Theory (1930s)
 builds on David Ricardo's theory of comparative advantage
 Link between National Factor Endowment and Comparative
Advantage
 based on the abundance of Factor of Production (i.e. land, labor,
capital)
 The more abundant the factor, the lower the cost it would be
 Export goods - abundant factor
Import goods - scarce factor
 Example; China has abundant of labor-supply, hence it produce
labor-intensive products such as textiles and footwear.
U.S. has much capital, thus it produce capital-intensive products
such as weapons and aircrafts.
The Leontief Paradox
 An Economists- Input Output Theory
 1953 – test H-O theorem for US.
 The Proposition:
US will Export Capital Intensive
& Import Labor Intensive
 The Findings
US Export Labor Intensive Goods & Import Capital Intensive
Goods
 Why?
US goods need Skilled Labor &
Need Capital Goods as resources
The Product Life Cycle Model
•Proposed by Raymond Vernon (1960s)- Product goes through its
life cycle by analyzing product from US
•during 1960s, US was the leader in producing new product (i.e. TV, Radio,
automobiles) due to its wealth and size of market but, higher cost of production
give incentive for them to produce the product overseas.
International Product Cycle Theory
 Introduced by Raymond Vernon (Prof in Harvard)

 International product cycle theory: each product and
its associated manufacturing technologies go through
three stages of evolution: introduction, growth, and
maturity
 In the introduction stage, the inventor country enjoys a
monopoly both in manufacturing and exports
 As the product’s manufacturing becomes more standard,
other countries will enter the global marketplace
 When the product reaches maturity, the original
innovator country will become a net importer of the
product
 Applicability to the contemporary global economy:
Today, the cycle from innovation to maturity is much
shorter making it harder for the innovator country to
sustain its lead in a particular product 32
Example: FujiXerox
Xerox – Photocopy Maker
 First developed in US -
Exporters
 Sell to other developed nations
 As Demand Grows – build JV The Life-Cycle has 4 stages

with Japan’s Fuji become •US has Monopoly in new product
FujiXerox •Foreign Production begins
 Competitors start to enter (e.g. •Export market become Competitive
•US becomes Importer
Canon, Olivetti)
 People start buying cheaper
brands – Stiff Competition
 Shift the production to
developing countries (e.g.
S,pore, Thai)
 US become Importer
Contemporary Theory
 New trade theory
 National Competitive Advantage: Porter’s Diamond
Model
 National Industrial Policy
 Dunning’s Eclectic Paradigm
New Trade Theory
 International Trade - Increasing Returns
 Economies of scale – reduction in cost associated by large scale of output (i.e. mass production). The
impact;
 Can increase the variety of goods
 Few companies dominate the market (i.e. first mover advantage)
 Individual markets can combine becoming larger world market and thus, Economies of scale can be
realized
 Each nation has its own specialize goods, by combining market it will result to variety of goods,
hence lower the cost.
 Eg: Toyota, Coca-cola, Nike,
 Firms with first mover advantages (the economic and strategic advantages that accrue to many
entrants into an industry) will develop economies of scale and create barriers to entry for other
firms
 Aerospace industry dominates by Airbus and Boeing
 Generates govt intervention and strategic trade policy (ie trade barriers)
Variables that Explain Trade
 National differences
 Factor endowment, Skill & Technology
 Income Preference
 Return on Investment
NATIONAL COMPETITIVE ADVANTAGE:
PORTER’S DIAMOND
PORTER’S DIAMOND
Porter’s 1990 study tried to explain why a nation achieves international

success in a particular industry and identified four attributes that
promote or impede the creation of competitive advantage:
Factor Endowments
 A nation's position in factors of production can lead to competitive
advantage
 These factors can be either basic (natural resources, climate,
location) or advanced (skilled labor, infrastructure, technological know-
how)
Demand Conditions
 The nature of home demand for the industry’s product or service
influences the development of capabilities
 Sophisticated and demanding customers pressure firms to be
competitive
PORTER’S DIAMOND
Relating and Supporting Industries

The presence supplier industries and related industries that are
internationally competitive can spill over and contribute to other
industries
 Successful industries tend to be grouped in clusters in countries -
having world class manufacturers of semi-conductor processing
equipment can lead to (and be a result of having) a competitive semi-
conductor industry
Firm Strategy, Structure, and Rivalry

 The conditions in the nation governing how companies are created,
organized, and managed, and the nature of domestic rivalry impacts
firm competitiveness
National Industrial Policy
Proactive economic development plan implemented by the public
sector to nurture or support promising industry sectors with
potential for regional or global dominance. Public sector initiatives
can include:
 Tax incentives
 Monetary and fiscal policies
 Rigorous educational systems
 Investment in national infrastructure
 Strong legal and regulatory systems
International Business: Strategy, Management, and the New 40

Realities
Internalization Theory
 Explains the process by which firms acquire and retain one or

more value-chain activities inside the firm – retaining control over
foreign operations and avoiding the disadvantages of dealing with
external partners
 In contrast to arm’s-length foreign market entry strategies (such
as exporting and licensing) which imply developing contractual
relationships with external business partners, FDI implies control
and ownership of resources

Realities
Dunning’s Eclectic Paradigm
Three conditions determine whether or not a company will internalize via FDI:
1. Ownership-specific advantages – knowledge, skills, capabilities,
relationships, or physical assets that form the basis for the firm’s competitive
advantage
2. Location-specific advantages – advantages associated with the country in
which the MNE is invested, including natural resources, skilled or low cost labor, and
inexpensive capital
3. Internalization advantages – control derived from internalizing foreign-based
manufacturing, distribution, or other value chain activities

Realities
Value – Chain of a Firm
Government Intervention
Reasons:
Political – Protect interest of certain Group (i.e. producers)
Economic – Boost wealth of nations (i.e. benefit producers and
consumers)
National Security – protect nation’s strategic industries (e.g. defense,

telecommunication, semiconductor, banking etc), important to national
security
Infant Industries – protect new domestic industry from competition,

insufficient capital and capabilities to compete (e.g. Proton)
Government Intervention (cont..)
Protecting Domestic Job
 protect jobs and industries from competition
(e.g. the use of Voluntary Export Restraint (VER) to protect US

automobile industry)
Protecting Consumers and Environment
 Protect consumers from product liability (i.e. unsafe, defect, etc)
and respond to local differences
Preventing Dumping
 Selling goods in foreign market below cost of production
(e.g.Canadian wheat dump in US)

Trade Barrier
Non-Tariff
Tariff Barrier
Barrier
Tariff Barrier
Tariff
Tax levied by govt on imports and exports. Types:
Specific Tariff- fixed charge for each unit of good imported
 E.g.: M’sian imposed 300% tax on import cars
Ad-Valorem – tax levied as the proportion of the imported goods
 E.g: US imposed tariff between 8-30% on import steel, to protect its local producer (i.e.
import steel become expensive)
 Tariff increase the price of the imported goods (i.e. lose to consumers), but Increase
the Government Revenues (i.e. source of income)
 Tariff boost the domestic business (i.e. citizens will buy more local product)
Non-Tariff Barrier (cont…)
Subsidies
 Govt payment to domestic producer (i.e. cash grants, tax-break, low-
interest loan)
 Gain to domestic producer by lower the production cost, improve the
production, to compete against foreign competitors, and help to improve
exports.
 Eg:
 EU paid $43bill to farmers annually, US govt gives $180bill agriculture subsidies for 10
years
 Airbus received subsidies amounted $15bill from UK, German, Spain and France in
1970s to compete with Boeing
Import Quota and VER
 Quota – direct restriction on the quantity of good that can be imported
e.g. US imposed import quota on cheese (i.e. US is the largest producer of cheese), M’sia
allows approximately 10% foreign car to enter M’sia car market
 Voluntary Export Restraint – quota agreed by both export and import nations
e.g.: limitations on Japanese car into US in 1981 (only 1.68mill car from Japan can enter US
market, and increase to 1.85mill in 1984).
 Quota and VER gives benefits to local producer by limiting import competitions,
increase the price of foreign products (i.e. low supply)
Local content requirements
 specific fraction of goods produced domestically
(e.g. Kia in Malaysia, where 75% components are made by local producer)
 Widely used by developing countries (i.e. to develop and improve the respective industry)
 Provide protection for domestic producer by limiting competition, improve consumer
choices and cheaper product price.
Administrative Policy
 bureaucratic rule to make import difficult to enter a country
 e.g. Japan imposed inspection on Dutch Tulip Bulb, and parcels handles by
Federal Express
France inspects the VCR player from Japan
 Benefits local producer but hurts consumers
Anti-dumping policies
 Dumping- selling goods in a foreign market for less than the products
production cost or below than the fair market value
 Firms unload excess production in foreign markets
 May result of predatory behavior (i.e. hurt local producer)
 Anti-dumping policies; designed to punish foreign firms that engaged in
dumping (i.e. to protect local producer from unfair competition)
Chapter 4
The Culture Environment
Reference:
McGraw-Hill, Ch. 4.
53 53

• Elements of Culture
• Overcoming Cultural Challenges
• Cultural affects International Business
Basic Concepts and Definition
Is the system of values and norms that are shared among

a group of people and that when taken together constitute
a design for living
The term society refers to a group of people who share a

common set of values and norms.
Basic Concepts and Definition-cont
Values
Abstract ideas about what a group believes to be good,
right and desirable
E.g.: honesty, loyalty, attitude towards works
Norms
Social rules and guidelines that prescribe appropriate
behavior in particular situations
E.g.: Alcohol is prohibited in Saudi Arabia but it is common
in the U.S.
Cultural Values
International Business: Strategy, Management, and the New Realities 57

• Some of the definitions of culture can best be described below:
Some of the definitions of culture can best be described below:
 Culture refers to the collective deposit of knowledge, experience, beliefs, values, attitudes,
meanings, hierarchies, religion, notions of time, roles, spatial relations, concepts of the
universe, and material objects and possessions acquired by a group of people in the course
of generations
 Culture is communication, communication is culture.
 Culture is the sum of total of the learned behavior of a group of people that are generally
considered to be the tradition of that people and are transmitted from generation to
generation.
Basic Concepts and Definition-cont.
Ethnocentrisms and Cultural Stereotypes
 Ethnocentrism is the tendency to believe that one's ethnic or cultural group is centrally
important, and that all other groups are measured in relation to one's own.
 Stereotypes are generalizations or assumptions that people or a person make about the
characteristics of another individual or all members of a group, based on an image about
what people or individual in that group are like.
Stereotyping.

Countries and Culture
Canada; French-speaking culture, and Native American
culture
African Nations; culture difference according to Tribes
India; Caste, Religion
Iraq; Shiites and Sunnis
Malaysia; Races, Religions, Languages
Every countries are distinct according to

Their culture
Basic Concepts and Definition-cont.
Dimensions of Culture
Hofstede’s model contains five dimensions of culture:

 Individualism versus collectivism. This dimension looks at the
relationship between individuals and others in their society.
 Power distance. This dimension quantifies how well individuals
accept the different levels of power that may be evident among
them.
 Uncertainty avoidance looks at how well individuals accept
ambiguous situations and risk.
 Masculinity versus femininity ranks the extent to which a society
embraces masculine values (assertiveness, status, financial
rewards) versus feminine values (quality of life).
 Long-term versus short-term orientation basically helps to
distinguish the difference in thinking between the East and the West
societies.
Culture and the Workplace
Dimensions Used in Hofstede’s Study
• Power distance (PD)
ranking in the society (or in the org), people are unequal in physical and intellectual
capabilities, can cause corruption
High PD – inequalities of power and wealth
Countries – Panama, Mexico, Indonesia, Japan
Low PD – equal treatment, less control
Countries – Denmark, Canada, UK, US, Australia
• Individualism vs Collectivism (IC)
r’ship between individual and his/her fellows
High I/C – ties between individuals were loose, value individual achievement and freedom
(self interest)
Countries – US, UK, Canada, Australia
Low I/C – ties between individuals were tight, group decision
Countries – Japan, Panama, Indonesia, Mexico
Dimensions Used in Hofstede Study
• Uncertainty Avoidance (UA)
accept ambiguous situation & tolerating uncertainty, perception
toward RISK,
High UA – need job security, career patterns, retirement benefits,
resistance to change, rules and regulation, RIGID org structure
Countries – Japan, Argentina, Mexico
Low UA – flexible to changes, RISK taker, pro-active
Countries – Denmark, Sweden, UK, US
• Masculinity vs Feminity (MF)
r’ship between gender and work roles
High M/F – masculine value , male is dominant than female
Countries – Japan, Mexico,
Low M/F – fair treatment, base on performance
Countries – Denmark, Netherlands, Sweden

The results of Hofstede’s study are shown in

Table 3.1.
Elements of Culture
1. Social Structure:
 All societies are stratified on a hierarchical basis into social categories, or
social strata (usually defined by characteristics such as family
background, occupation, and income).
 Why social stratification is significant in international business?
1. class consciousness
2. the way individuals from different classes work
together
Elements of Culture-cont.
• There are two dimensions to consider in social structure:

- the degree to which the basic unit of social organization is the
individual, as opposed to the group
- the degree to which a society is stratified into classes or castes
• The most rigid system is the caste system. A caste system is a closed system of
stratification in which social position is determined by the family into which a person
is born, and change in that position is very unlikely e.g. India-untouchables
•the degree to which a society is stratified into classes or castes

 Stratified (i.e. social strata); hierarchical categories within
society
 caste system is a closed system of stratification in which social
position is determined by the family into which a person is born,
and change in that position is usually not possible during an
individual's lifetime (e.g. Indian society)
 A class system is a form of open social stratification in which
the position a person has by birth can be changed through his or
her achievement or luck (e.g. British society)
2. Language:
• Language plays a lot of role in business and can affect the outcome of the deals.
• Negotiations between a buyer and seller typically will include price, delivery dates,
shipping methods, and methods of payment. If either party is not completely fluent in
the other party’s language, confusion may arise which could lead to late payment or
losses.
• Another language issue that may affect payment, as Hofstede indicates, is the
meaning of words. Think about the classic example of the Spanish word “mañana.”
• Another common issue is the Asian concept of saving face.
Language, both spoken and unspoken, is one of the defining

characteristics of culture.
Spoken Language
• While English is the language of international business, knowledge of
the local language is beneficial, and in some cases, critical for business
success
Unspoken Language
• Unspoken language such as facial expressions and hand gestures
can be important for communication. However, because these can
have different interpretations in different cultures, misunderstandings ;
are common. Eg: gestrure, body language, physical space
3. Religion:
• Religion is a system of shared beliefs and rituals that are concerned
with the realm of the sacred.
• Ethical systems are a set of moral principles, or values, that are
used to guide and shape behavior. The ethical practices of
individuals within a culture are often closely intertwined with their
religion.
• Religions with the greatest following in the world are:
· Christianity (1.7 billion adherents)
· Islam (1 billion adherents)
· Hinduism (750 million adherents)
· Buddhism (350 million adherents)
• German Sociologist, Max Weber, says that there is a relationship
between Protestantism in Christianity and the emergence of modern
capitalism.
• In countries where Islam is the predominant religion, Sharia law is
the body of Islamic law which regulates the public and some private
aspects of life.
• Judaism is an Abrahamic religion. The people of this faith recognize Abraham as a Patriarch.
During the Passover season businesses are not allowed to come in contact with or inventory
any products that contain yeast, which means destroying the product or selling it prior to
Passover.
• The impact of Hinduism on economy vis-à-vis other religions is incredible. The caste system,
despite its social fallbacks, functioned much like medieval European Guilds, ensuring the
management principles of division of labour on work and apprentice training.
• The two obvious economic behavioral implications of the Buddhist philosophy include the
frugality and moderation of material consumption.
• The Confucian ethics emphasize the concept of guanxi, which is about building good
network connections. In today’s world, the Chinese will often cultivate guanxiwang or
“relationship network” for help.
Christianity Islam
• Christianity is the largest religion and Economic Implications of Islam

is common throughout Europe, the • In Islam, people do not own
Americas, and other countries settled property, but only act as stewards
by Europeans for God and thus must take care of
that which they have been
Economic Implications of Christianity: entrusted with. While Islam is
Focus on hard work, wealth creation, supportive of business, the way
and frugality that was the driving force business is practiced is prescribed.
of capitalism
Hinduism Buddhism
• focuses on the importance of achieving spiritual • Buddhists stress spiritual growth and the
growth and development (i.e. Nirvana)
afterlife, rather than achievement while in
this world
Economic Implications of Hinduism
• Since Hindus are valued by their spiritual rather
than material achievements, there is not the same • Buddhism, practiced mainly in South East
work ethic or focus on entrepreneurship found in Asia, does not support the caste system,
some other religions however, so individuals do have some
• Promotion and adding new responsibilities may mobility and can work with individuals from
not be the goal of an employee, or may be different classes
infeasible due to the employee's caste
4. Government Involvement
• Laws of a country built on a society and its religion will ultimately impact the business law
structure of the country as well.
• The following are matters that international managers should take into consideration:
1. code law (written law) versus common law (application of precedent) systems;
2. level of development of the business law system;
3. cultures that prefer to litigate over a dispute versus those that prefer to arbitrate or
mediate;
4. systems that require that laws be written before business is conducted (Europe) versus
those that wait until issues arise to legislate (US); and
5. inclusive versus exclusive statements.

Overcoming Cultural Challenges
Cultural Risk
 While doing business, cultural risks presents itself due to the
emergence of different expectations, misunderstandings and
miscommunication between a buyer and the seller.
 Cultural Miscommunication can occur in four settings:
1. Different Values
2. Different Types of Communication Styles
3. Different Concepts Of Time (i.e. chroneics)
4. Different Use of Physical Space (i.e. proxemics)
Culture Affects International Business
Cultural Etiquettes in Selected Countries
China
When conducting a business in China, it can take a number of extremely lengthy
meetings before any substantial progress is made.
Place values and principles above money and expediency.
In negotiations, reciprocity is important. If the Chinese give concessions, they expect
some in return.
USA
The US has adopted a 'scientific' approach to business compared to other
industrialized countries.
Japan
Invest maximum amount of time and resources into the early stages of relationship
building even though eventual results may seem a long way off.
United Arab Emirates (UAE)

In UAE, there is little separation between religions, life in general and business and
they are all interlinked in a way that is alien to most western business people.
Connections are extremely important in conducting business.
Patience is critical to the success of business transactions. This time consideration
should be built into all negotiations.
Chapter 5
The Political & Legal
Environment
Reference:
McGraw-Hill, Ch. 5.
78 78

• Political systems
• Legal systems
• Country risks
• Managing country risks
Basic Concepts and Definition
Political risk
 A type of risk faced by investors, corporations, and
governments.
 Political risk refers to the complications businesses
and governments may face as a result of what are
commonly referred to as political decisions or “any
political change that alters the expected outcome and
value of a given economic action by changing the
probability of achieving business objectives.”
 In short, political risk is an exposure to potential loss or
adverse effects on company operations and
profitability caused by a country’s political and legal
environments
What are Political and Legal Systems?
• Political system - a set of formal institutions that constitute a

government. It includes legislative bodies, political parties,
lobbying groups, and trade unions. A political system also defines
how these groups interact with each other.
• Legal system - a system for interpreting and enforcing laws. The
laws, regulations, and rules establish norms for conduct. A legal
system incorporates institutions and procedures for ensuring
order and resolving disputes in commercial activities, as well as
protecting intellectual property and taxing economic output.

Political and Legal Systems are Dynamic
• Political and legal systems are dynamic, constantly changing and

interdependent.
• Examples- new government, shifting values or priorities in political
parties, new directions from special interest groups, and new laws or
regulations
• Change may be gradual or sudden.
• Country risk is always present, but its nature and intensity vary over time
and from country to country.
• Example- China is in the process of overhauling the national legal
system, making it increasingly consistent with Western systems.
Piecemeal regulations have been poorly formulated, are confusing, and/or
contradictory.

Political Systems
•A political system is the system of government of a nation
• The principal functions of a political system are to establish stability
based on laws, provide protection from external threats, and govern
the allocation of valued resources.
• Emerging from a specific historical, economic, and cultural context,
amidst constituent demands, and the evolution of the national and
international environments, country political systems are relatively
unique.
• The continuum runs from state ownership and control of economic
enterprises to minimal government intervention in business
activities.
Political Systems (cont..)
Governments
• affect the economic and legal environment.
• They set monetary and tax policies, price controls, and intellectual
property regulations.
• influence labor relations, trade policies, capital and exchange controls,
and transfer pricing policies.
• Government can be a regulator, a legislator, a competitor, a customer, a
distributor, and a potential partner
1. TOTALITARIANISM
• Government controls all economic and political matters.
• Totalitarian states are generally either theocratic (religion-based) or secular (non-religion-
based).
• A state party is led by a dictator, such as Kim Jong-il in North Korea. Party membership is
mandatory for those who wish to advance.
• Power is sustained via secret police, propaganda disseminated through state-controlled
mass media, regulation of free discussion and criticism.
• Totalitarian states do not tolerate criticism by individuals or groups such as churches, labor
unions, or political parties.
• Transition- most of the world’s totalitarian states have either disappeared or shifted their
political and economic systems toward democracy and capitalism. China initiated major
reforms in the 1980s, and the Soviet Union collapsed in 1991.
• Transition- not easy- former Soviet states and China are still characterized by government
intervention, red tape, bureaucratic accounting and tax regulations, inadequate legal systems
to protect business interests.
2. SOCIALISM (i.e. Manifestation of Collectivism)
• Capital and wealth should be vested in the state and used primarily
as a means of production for use rather than for profit.
• Based on a collectivist ideology where group welfare outweighs
individual welfare.
• Socialists argue that capitalists receive a disproportionate amount of
society's wealth relative to workers. Government should control the
basic means of production, distribution, and commercial activity.
• Socialism has manifested itself in much of the world as social
democracy, and has been most successful in Western Europe, and
playing a role in Brazil and India.
• In social democratic regimes, such as France and Norway,
government does intervene in the private sector and in business
activities. Corporate income tax rates are higher.
3. DEMOCRACY (i.e. Manifestation of Individualism)
• Democracy is a political system in which government is by the people, exercised either
directly or through elected representatives
Key features:
• Private property rights: The ability to own property and assets and to increase one’s asset
base by accumulating private wealth.
• Property includes tangibles: land and buildings, and intangibles: stocks, contracts, and
patent rights.
• Democratic governments devise laws that protect property rights. People and firms can
acquire property, use it, buy or sell it, and bequeath it to whomever they want. These rights
are important because they encourage individual initiative, ambition, and innovation, as well
as thrift.
• Limited government: The government performs only essential functions that serve all
citizens, such as national defense, maintaining law and order, diplomatic relations, and the
construction and maintenance of infrastructure such as roads, schools, and public works.
4. Social Democracy
• Exemplified by Japan, Germany, and Sweden, where the individual rights and freedoms
are balanced with broader social goals.
• Social democracy- virtually all democracies include elements of socialism, such as
government intervention in the affairs of individuals and firms. Socialistic tendencies
emerge because of abuses or negative externalities that occur in purely democratic
systems.
• Example- Japan has been striving to achieve the right balance between democracy and
socialism. In the 1990s, poor management practices and an economic recession led to
the bankruptcy of thousands of Japanese firms. To maintain jobs and economic stability,
the Japanese government intervened to support numerous large firms and banks that, in
a pure democracy, would have failed. Nevertheless, such policies have also led to
inflexibility in the Japanese economy and a delay of needed structural improvements.

Source:
Cavusgil et al. (2014), International Business: The New Realities.
Pearson. Exhibit 7.4, p. 203.
The Relationship between Political Systems &
Economic Systems
1. COMMAND ECONOMY
• The state is responsible for making all decisions:
• What goods and services the country produces; Quantity of production; Prices at which they
are sold; and Distribution
• The state owns all wealth, land, and capital, and allocates resources based on which
industries they want to develop.
• Command economies were common in the 20th century; they proved so inefficient that most
have gradually died out.
• Central planning is less efficient than market forces in synchronizing supply and demand.
• Today many countries exhibit some characteristics of command economies- examples-
China, India, Russia, and certain countries in Central Asia, Eastern Europe, and the Middle
East.
The Relationship between Political Systems &
Economic Systems
2. MARKET ECONOMY
• Decisions regarding production levels, consumption,
investment, and savings resulting from the interaction of
supply and demand (market forces).
• Economic decisions are left to individuals and firms.
• Government intervention in the marketplace is limited.
• Capitalism (private ownership of production) is closely
aligned with market economies.
• State should establish a legal system that protects
private property and contractual agreements.
• Government may also intervene to address the
inequalities that market economies sometimes produce.
•Can be found in Democratic countries (i.e. with high
level of individualism). E.g.: US, Canada, UK
The Relationship between Political
Systems & Economic Systems
3. MIXED ECONOMY
• Exhibits market and command economy features, thus combining state
intervention and market mechanisms.
• Most industries are under private ownership, and entrepreneurs freely
establish, own, and operate corporations- but the government also controls
certain functions, such as pension programs, labor regulation, minimum
wage levels, and environmental regulation.
• The state usually funds public education, health care, and other vital services
and owns enterprises in transportation, telecommunications, and energy.
• Examples- France, Germany, Japan, Norway, Singapore, and Sweden,
government often works closely with business and labor interests to
determine industrial policy, regulate wage rates, and/or provide subsidies to
support specific industries.
How Political Systems Influence Economic Systems
In general:
• Totalitarianism is associated with command economies
• Democracy with market economies
• Socialism with mixed economies

LEGAL SYSTEMS
• Legal system is a system for interpreting and

enforcing laws.
• Legal systems provide a framework of rules and norms
of conduct that mandate, limit, or permit specified
relationships among people and organizations, and
provide punishments for those who violate these rules
and norms.
• Laws empower citizens to enter into contracts and seek
remedies for contract violations.
• Legal systems are dynamic- they evolve over time to
represent each nation’s changing social values and the
evolution of their social, political, economic, and
technological environments.
Rule of Law Signals Existence of a Legal System
• Political systems— totalitarianism, socialism, and democracy—influence their

respective legal systems.
• In Australia, Canada, Japan, the United States, and most European countries, laws
are widely known and understood. Such well-developed legal systems are effective
and legitimate because they are applied to all citizens equally, issued by means of
formal procedures applied by recognized government authorities, and enforced
systematically and fairly by police forces and formally organized judicial bodies.
• Rule of law (businesses flourish) the existence of a legal system where rules are
clear, publicly disclosed, fairly enforced, and widely respected by individuals,
organizations, and the government.
• Legal systems can be eroded by declining respect for the law- in the absence of the
rule of law, economic activity can be impeded and firms have to contend with great
uncertainty.

Source:
Cavusgil et al. (2014), International Business: The New Realities.
Pearson. Exhibit 7.6, p. 207.
LEGAL SYSTEMS (cont..)
1. COMMON LAW
• Common law (also known as case law) is a legal system that originated in England and
spread to Australia, Canada, the United States, and former members of the British
Commonwealth.
• The basis of common law is tradition, past practices, and legal precedents set by the nation’s
courts through interpretation of statutes, legislation, and past rulings.
• Common law is open to interpretation by courts- it is more flexible than other legal systems.
• Judges have substantial power to interpret laws based on the unique circumstances of
individual cases.
2. CIVIL LAW
• Civil law is found in France, Germany, Italy, Japan, Turkey, Mexico, and in Latin
America.
• Its origins go back to Roman law and the Napoleonic Code- based on an all-inclusive
system of laws that have been “codified”—clearly written and accessible.
• Civil law divides the legal system into three separate codes: commercial, civil, and criminal.
• Rules and principles form the starting point- the codified rules emerge as specific laws and
codes of conduct produced by a legislative body or some other supreme authority.
• Both common law and civil law systems originated in western Europe and both represent the
common values of western Europeans.
• A key difference is that common law is primarily judicial in origin and based on court
decisions, whereas civil law is primarily legislative in origin and is based on laws passed by
legislatures.
3. RELIGIOUS LAW
• Religious law is strongly influenced by religious beliefs, ethical
codes, and moral values, viewed as mandated by a supreme being.
• Most important religious legal systems are based on Hindu, Jewish,
and Islamic law- the most widespread is Islamic law, found mainly
in the Middle East, North Africa, and Indonesia.
• Islamic law (also known as shariah law) is derived from
interpretations of the Qur’an, and the teachings of the Prophet
Mohammed.
• Islamic law is nonsecular and spells out norms of behavior regarding
politics, economics, banking, contracts, marriage, and many other
social issues.
• Most Muslim countries maintain both religious and secular courts.
• Indonesia, Bangladesh, Turkey and Pakistan have secular
constitutions and laws. Saudi Arabia and Iran use religious courts as
authority over all aspects of jurisprudence.
• Strict interpretation of Islamic law prohibits the giving and receiving
of interest on loans or investments.
4. Socialist Law
• Socialist law is a legal system found mainly in the independent
states of the former Soviet Union, China, and a few states in Africa.
• It is based on civil law, with elements of socialist principles that

emphasize state ownership of property- state rights take precedence
over individuals’.
• Socialist law countries tend to view property and intellectual property

rights more loosely.
• As China and Russia adopt free-market principles, their legal

systems increasingly incorporate additional elements of civil law.
5. Mixed Systems
• Mixed systems- variation of two or more legal systems operating
together.
• The contrast between civil law and common law has become particularly
blurred as many countries combine both systems. Legal systems in Eastern
Europe mix elements of civil law and socialist law. Legal systems in
Lebanon, Morocco, and Tunisia share. elements of civil law and Islamic
law
• Socialism is most associated with socialist law, but may include elements of
common law and civil law.
• Totalitarianism is most associated with religious law and socialist law.
• Democracy is associated with common law, civil law, mixed systems, and,
occasionally, socialist law.

Country Risks Produced by Political Systems
SANCTIONs
GOVERNMENT
AND
TAKEOVER
EMBARGOES
BOYCOTTS TERRORISM
Country Risks Produced by Political
Systems (cont.)
 1. Government takeover
• Confiscation refers to the seizure of foreign assets
without compensation. For example, in Venezuela,
President Hugo Chavez confiscated a major oil field
owned by the French petroleum firm Total.
• Expropriation refers to the seizure of corporate
assets with compensation.
• Nationalization refers to government takeover of an
entire industry, with or without compensation. In
2006, the government of Bolivia nationalized much
of the oil and gas industry in that country.
• Privatization - selling of state-owned enterprises to
private interests. The trend has been especially
notable in China and Eastern Europe.
Country Risks Produced by Political
Systems (cont.)
 2. Sanctions and embargoes
Governments may resort to sanctions and embargoes to
respond to offensive activities of foreign countries.
• Sanctions are a type of ban on international trade,
usually undertaken by a country, or a group of countries,
against another judged to have jeopardized peace and
security.
• Embargoes are official bans on exports or imports that
forbid trade in specific goods with specific countries. For
example, the U.S. has enforced embargoes against
Cuba, Iran, and North Korea, all at times labeled as state
sponsors of terrorism.
Country Risks Produced by Political Systems (cont.)
3. Boycotts
• Boycott- voluntary refusal to engage in commercial dealings
with a nation or a company
• Examples- Disneyland Paris and McDonald’s- targets of
boycotts by French farmers, who view these firms as symbols
for venting their anger against U.S. agricultural policies and
globalization.
• War, insurrection, and revolution- indirect effects- can be
disastrous.
105
Country Risks Produced by Political Systems (cont.)
4. Terrorism
• Terrorism is the threat or actual use of force or violence to attain a political
goal through fear, coercion, or intimidation.
• Much terrorism is sponsored by national governments, making it a
particularly hazardous form of country risk.
• Terrorism has escalated in much of the world, as exemplified by the 9/11
attacks on the United States.
• In addition to causing tremendous loss of life, the financial markets were
severely damaged following the 9/11 attacks, the value of the U.S. stock
market dropped some 14 percent.
• Hospitality, aviation, entertainment, and retailing industries may be
particularly affected by terrorism.
106
Managing Country Risk
1. Allying with Qualified Local Partners

• A practical approach to reducing country risk is to enter target
markets in collaboration with a knowledgeable and reliable local
partner.
• Examples –due to various challenges in China and Russia,
Western firms often enter these countries by partnering with local
firms who assist in navigating the complex legal and political
landscape.
107
Managing Country Risk (cont.)
2. Environmental Scanning
• Develop a comprehensive understanding of the political and legal
environment in target countries.
• Scanning- assess potential risks/threats to the firm- good sources
of intelligence:
 Employees working in the host country
 Embassy and trade association officials
 Consulting firms, such as PRS Group (www.prsgroup.com/) and Business
Entrepreneurial Risk Intelligence (www.beri.com/)
• Firm then takes steps to minimize its exposure to country risks
that threaten its performance.
108
3. Protection through Legal Contracts

• A legal contract spells out the rights and obligations of each party and is especially important
when relationships go awry.
• Contract law varies widely from country to country, and firms must adhere to local standards.
• Three approaches for resolving contractual disputes:
1. Conciliation is the least adversarial method. It is a formal process of negotiation whose
objective is to resolve differences in a friendly manner.
2. Arbitration is a process in which a neutral third party hears both sides of a case and
decides in favor of one party or the other, based on an objective assessment of the facts.
Compared to litigation, arbitration saves time and expense.
3. Litigation is the most adversarial approach, and occurs when one party files a lawsuit
against another- it is most common in the U.S.
109
4. Safeguarding Intellectual Property Rights (IPRs)

• Intellectual property (often the basis for competitive advantage) consists of industrial
property—patents, inventions, trademarks, industrial designs, and copyrights for works of
literature, music, art, books, films, and TV shows.
• Despite protections by the WTO, the World Intellectual Property Organization (WIPO) and
various international treaties, the protection of intellectual property rights—the legal claim
that firms and individuals hold on their proprietary assets and are protected from
unauthorized use by other parties—is not guaranteed in much of the world.
• Laws enacted in one country are enforceable only within that country.
• Enforcement is a challenge.
• Individual country laws and practices differ widely.

5. Adherence to Ethical Standards

• Ethical behavior is essential not only for its own sake, but also because it helps
insulate the firm from country risks.
• Corporate social responsibility (CSR) -- operating a business in a manner that
meets or exceeds the ethical, legal, commercial, and public expectations of
stakeholders (customers, shareholders, employees, and communities).
• Trend- good corporate citizenship implies that firms should behave not just to
maximize their profits but in ways that benefit society.
• Examples of such behavior include: complying with local and international laws;
not discriminating in hiring or promoting; providing fair and adequate wages;
ensuring health and safety in the workplace; instituting a fair system of regular
and overtime work hours; avoiding the use of child labor; providing adequate
protection of the environment.
111
Chapter 8
International Entry
Strategies
Reference;
McGraw-Hill, Ch. 7.
112 112
Chapter Outline
1. Introduction
2. Where to enter
3. When to enter
4. How to enter
113
Basic entry decisions
• Decisions of Which foreign market (i.e. Where) to Enter

and When to enter…
• Decision on How to enter the Foreign Market
Where to Enter?
Porter’s Diamond of competitive advantage

Which Foreign Market? (cont..)
Based on an assessment of the long run profit potential.
• Political Condition (i.e. openness, local practices, government efficiency and corruption,
attitudes toward foreign business, Industrial policies, foreign direct investment policies,
availability of economic zones)
• Economic Condition (i.e. no dramatic upsurge in either inflation rates, or private sector
debt)
• Demand Factors (i.e. market size and growth, customer presence, local competition)
• Related and Supporting Industries (i.e. Investment infrastructure, industrial concentration,
supply/distribution linkages, workforce productivity, complementary industries)
• Factor Conditions (i.e. transportation, wage, availability of land and its costs, construction
cost, materials cost)
When (i.e. Timing of Entry)
• This relates to timing of market entry in comparison to other

enterprises.
 Entry is early (i.e. First Mover) when a Firms enters a foreign market before
other foreign firms, and
 Late (i.e. Late Mover) when it enters after Firms have already established
themselves in the market
• Timing is important because it determines the risks and potential
returns from the investment.
When (i.e. Timing of Entry)
First-Mover Advantage First-Mover Disadvantage

• the ability to preempt rivals and capture • Pioneering costs; business failure, to
demand by establishing a strong brand develop the industry
name • Educate customer; promotions,
• the ability to build up sales volume in advertising
that country and gain a cost advantage • Poor infrastructure
over later entrants • Unstable market structure
• the ability to create switching costs that
tie customers into their products or
services
How – Entry Mode Selection
1. Exporting
2. Licensing
3. Franchising
4. Joint Ventures
5. Wholly owned subsidiaries
Refer Figure 7.1, p.85.

International Entry Mode
Wholly-Owned Subsidiary
Risk &
Return
Franchising
Export
Commitment &
Control
Exporting
• Firms begin its global expansion as exporters (i.e. least level

of expansion)
• The use of export intermediaries (i.e. trading companies or
third parties) to get the product to the foreign market (i.e.
distribution)
• e.g. 1980’s -Toyota & Honda started its presence in US by
exporting their cars.
Exporting
Advantages:
• low cost and low commitment,
• firm can achieve experience curve (i.e. learning effect &
economies of scale), improve sales volume
Disadvantages:
• There may be lower-cost locations for manufacturing abroad,
• high transportation costs,
• tariff barriers,
• agents may not act in exporter’s best interest
Licensing
• Agreement whereby firms (i.e. licensor) grants the

intangible property rights (i.e. brand name) to another
parties (i.e. licensee), and in returns licensor will earn
royalty.
• Intangible property includes patents, inventions, formulas,
processes, designs, copyrights, and trademarks
• Upon signing a licensing contract, the licensee pays the
licensor a fixed amount upfront and an ongoing royalty
(typically 2-5 %) on gross sales generated from using the
licensed asset
• E.g. Disney licenses its trademark names and logos to
manufacturers of apparel, toys, and watches for sale
worldwide.
• Most of major brandy includes Nike and Levis give license to
local company to produce their product
Licensing
Advantages;
• Minimize the cost and risk associated with foreign market,
• Suitable for firms that do not want to commit substantial financial resources
Disadvantages:
• The firm doesn’t have the tight control over the licensee,
• Licensing limits a firm’s ability to coordinate strategic moves
• Potential loss of proprietary (or intangible) technology or property
Franchising
• The extension of Licensing, where franchisor (i.e. Firm)
grants intangible property rights (i.e. brand name &
trademark) to franchisee (i.e. local firm), which agree to
abide strict rules to operate business.
• In return, the franchisee compensates the franchisor, usually
via a royalty representing a percentage of the franchisee's
revenues.
• The franchisor tightly controls the business system to
ensure consistent standards. Franchisors employ globally
recognized trademarks and attempt to guarantee the
customer a uniform and consistent retail experience and
product quality.
• Franchisor provide technical expertise and other assistance
to run business on continuous basis.
• E.g. McDonalds, strict rules (i.e. quality, menu, staffing
policies, training, design of restaurant etc)
Franchising
Franchising
Joint Ventures (i.e. Strategic Alliances)
• JVs are the collaborative venture between firms, or sometimes competitors across
borders
• Could be divided into two forms; Equity Based JVs and Non-equity based JVs
1. Equity Based Joint Ventures

 Establishes new entity that jointly owned by two or more firms
 Popular mode to enter new market
 Most typical form, 50/50 basis e.g. FujiXerox, Sony Ericcson, SonyBMG
2. Non- Equity Based JVs (i.e. Cooperative JVs)
Type of Cooperative JV
a. Distribution alliances; shared distribution network
 e.g. Nissan market VW cars in Japan, Chrysler distribute
Mitsubishi car in US, Naza and Kia in Malaysia
b. Manufacturing Alliances; shared manufacturing
 E.g. Matsushita manufacture IBM PCs in Japan
Advantages;
• ease to entry,
• share costs and risks,
• to develop complementary skills,
• Increased brand awareness through partner's channels,
reduced R&D costs,
• access to partner’s resources (i.e. tech, product, capital),
achieve economies of scale
Disadvantage;
• risks giving control of technology to its partner,
• may not have the tight control over subsidiaries,
• Shared ownership can lead to conflicts
Wholly-owned Subsidiary
• A traditional FDI, whereby firm commits investment capital in plant

and related facilities in foreign market.
1. Greenfield operation;
 to invest directly in plant and other facilities, e.g. Toyota in US,
Advantage;
• to acquire raw material,
• reduce cost of production (i.e. economies of scale)
• protection of know-how
• adapt to local taste and preference
Disadvantage:
• Greenfield ventures are slower to establish,
• Greenfield ventures are also risky (i.e. first mover)
Wholly-owned Subsidiary
2. Acquisition
 Firm acquire existing or local firms
 E.g., Sony acquire Columbia Picture , Daimler acquire
Chrysler,
Advantages;
• speed market penetration,
• less risky than Greenfield,
Disadvantages:
• subject to fail due to overpay by the acquiring firm,
• clash of cultures between the acquiring and acquired firm,
• inadequate pre-acquisition screening
Chapter 3
Foreign Direct Investment
(FDI)
Reference;
McGraw-Hill, Ch. 10.
133 133
Foreign Direct Investment

• FDI vs Foreign Portfolio Investment
• Important Terms in FDI
• Global Trends in FDI
• Characteristics of FDI
• Factors to consider in selecting FDI location
• Forms of FDI
• Advantages and Disadvantages of FDI
• Theories of FDI
Concept of FDI
• Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to
produce and/or market in a foreign country.
 E.g.: Toyota in US, Motorola in Malaysia, Nestle in Malaysia, Honda in US, BMW in
Malaysia
• Once a firm undertakes FDI it becomes a multinational enterprise (i.e. a firm with FDI
that owns or controls value adding activities in more than one country)
• FDI is not the same as foreign portfolio investment (FPI).
 FDI is the investment in real or physical assets such as factories or facilities,
 FPI is investment by individuals, firms, or public bodies in foreign financial
instruments (i.e. stocks bonds other assets in financial asset).
Terms of FDI
• The flow of FDI refers to the amount of FDI undertaken over a given time
period
• The stock of FDI refers to the total accumulated value of foreign-owned
assets at a given time
• Outflows of FDI are the flows of FDI out of a country
• Inflows of FDI are the flows of FDI into a country
Global Trends in FDI
FDI Trends
• Over the past 20 years there has been a marked increase in both the flow
and stock of FDI in the world economy.
• FDI has grown more rapidly than world trade and world output because:
• firms still fear the threat of protectionism (i.e. trade barriers)
• the globalization of the world economy (i.e. nations need to participate
so that it can generate more inflow of FDI)
Global Trends in FDI (cont…)
FDI Outflows from 1982 to 2005
The Directions of FDI (i.e. the recipient)
• Historically, most FDI has been directed at the developed nations of the world, with the
United States being a favorite target
• FDI inflows have remained high during the early 2000s for the United States, and also for
the European Union
• South, East, and Southeast Asia, and particularly China, are now seeing an increase of
FDI inflows
• Latin America is also emerging as an important region for FDI
FDI Inflows by Region

Regional Distribution of Inward and Outward FDI
Stock, 1985 and 1999 (percentage)
Inward FDI Stock Outward FDI Stock

Region/Country 1985 1999 1985 1999
Developed 72.3 67.7 95.7 89.9
Countries
Developing 27.7 30.1 4.3 9.8
Countries
Africa 3.1 1.9 0.9 0.4
Latin America and 10.1 10.2 1.1 2.2
the Caribbean
Developing Europe 0.1 0.2 - -
Asia 14.3 17.7 2.3 7.3
The Pacific 0.2 0.1 - -
Central and - 2.2 - 0.3
Eastern Europe
Source: World Investment Report 2000, Tables B.3 and B.4.

The Sources of FDI (i.e. the Contributors)

• For most of the period after World War II, the U.S. was by far the
largest source country for FDI
• WHY?
Most of the MNEs are from the U.S. and other developed nations
• Other important source countries were the United Kingdom, the
Netherlands, France, Germany, and Japan
The five major Recipients and Contributors,
2000 and 2001 (Millions of dollars)
Inflows (i.e. recipients)

2000 2001
United States 300 912 United States 124 435
Belgium and Luxembourg 245 561 United Kingdom 53 799
Germany 195 122 France 52 623
United Kingdom 116 552 Belgium and Luxembourg 50 996
Netherlands 52 453 Netherlands 50 471
Outflows (i.e. contributors)

2000 2001
United Kingdom 253 929 United States 113 977
Belgium and Luxembourg 241 997 France 82 814
France 175 504 Belgium and Luxembourg 67 307
United States 164 969 Netherlands 44 020
Netherlands 71 346 Germany 43 257
Source: UNCTAD, World Investment Report 2002.

Characteristics of FDI
• FDI requires greater resource commitment by the firm.

• FDI means the company must have local presence and
operations.
• FDI assumes the firm wants to achieve global scale
efficiency.
• FDI entails great risk and uncertainty. The firm sets up a
permanent, physical presence in a foreign country, and
exposes the firm to new risks.
• FDI means the firm must have greater contact with the
social and cultural factors of the host market.
• MNEs need to behave in socially responsible ways in
host countries.
145
Experience Curve
Reduction of Production Cost
B • Learning effects
• Economies of scale
Unit Cost
Accumulated Output
Factors to Consider in Selecting FDI Locations
• Market attractiveness
• Human resource factors
• Infrastructure
• Profit retention factors (e.g.,taxes)
• Economic environment
• Legal and regulatory environment
• Political and governmental structure

Forms of FDI
FDI can be in the form of

• Greenfield investment occurs when a firm invests to build a new manufacturing, marketing
or administrative facility, as opposed to acquiring existing facilities. (e.g., Toyota in the U.S.)
• An acquisition refers to a direct investment or purchase of an existing company or a facility.

(e.g., Lenovo acquires IBM)
• The majority of FDI is in the form of acquisition rather than Greenfield investment.
• Reasons:
– speed market penetration
– less risky
– can increase the efficiency by transferring capital, technology, or management skills

Structures of Foreign Direct Investment
• Horizontal FDI- is where a MNE enters a foreign country

to produce the same products.
• Vertical FDI- investment to produce intermediate goods

either forward or backward in the supply stream.
 In forward vertical integration, the firm develops the
capacity to sell its outputs by investing in downstream value-
chain facilities, that is, marketing and selling operations.
 backward vertical integration, in which the firm acquires
the capacity abroad to provide inputs for its foreign or
domestic production processes by investing in upstream
facilities, typically factories, assembly plants or refining
operations
150
Advantages and Disadvantages of FDI
Firms
Advantages:
• Can get location advantages; benefits arising from
the host country (e.g.. China & Mexico- lower cost of
production, Silicon Valley in US- IT industry
• Can get improved performance; different in market
structure, less competition, unsaturated market (e.g..
Levis in Latin America, Asian region)
• Can get very good ROI;
• Can grow by learning culture; process and product
innovation (and improvement), cost saving (e.g. Toyota
in US, Nissan in UK)
Experience Curve
Reduction of Production Cost
B • Learning effects
• Economies of scale
Unit Cost
Accumulated Output
Firms
Disadvantages:
• Risky, complicated & expensive; requires large pool
of resources, bureaucracy, high commitment.
• Different business environment; culture, political,
economic etc.
Host Countries
Advantages:
• Resource-Transfer Effects, capital, technology, and
management resources (i.e. improve the industry and boost the
economy)
• Employment Effects, FDI can bring jobs to a host country that
would otherwise not be created there
• Balance-of-Payments Effects, surplus in current account (i.e.
Export > Import)
• Tax revenue
• Effect on Competition and Economic Growth
• competition will result to low price and more choices
• increased productivity growth, product and process
innovation,
Host Countries
Disadvantages:
• Adverse Effects on Competition, negative effect to the local
business
• Adverse Effects on the Balance of Payments
 Money outflow from foreign subsidiary to its parent country (i.e.
transfers of profit)
 foreign subsidiary imports capital goods from abroad (i.e.
increase the host country’s imports)
• National Sovereignty and Autonomy; can affect the host
country’s economy when the firms pull out the investment from the
host country
• Social impact like drug use, alcohol, family, spending issues.
Home Countries
Advantages:
The benefits of FDI to the home country include:
• the effect on the capital account of the home
country’s balance of payments from the inward flow
of foreign earnings (i.e. profit repatriation)
• the employment effects that arise from outward FDI
(i.e. supply components to foreign subsidiaries)
 Toyota in US & Europe; some components come from Japan
• the gains from learning valuable skills from foreign
markets (i.e. via joint ventures and mergers)
 e.g.: Fuji Xerox, GM and Isuzu, Ford & Mazda, Sony Ericcson
Home Countries
Disadvantages:
The benefits of FDI to the home country include:
• the effect on the balance of payments via capital
outflow from HOME to HOST to finance foreign
investment
• the employment effects that arise from outward FDI
(i.e. reduced home-country employment)
 e.g.; US firms move to Mexico (i.e. low-cost production), Toyota
in US & Europe, Volvo in Korea
Theories of FDI
1. Market Imperfections (Internalization Theory)
Why Firms choose FDI
• firms prefer FDI to either exporting (producing
goods at home and then shipping them to the
receiving country for sale) or
• licensing (granting a foreign entity the right to
produce and sell the firm’s product in return for a
royalty fee on every unit that the foreign entity
sells)
 Eg: Disneyland in Japan, Naza using Kia models, Levis
• Both Mode of Entries create Limitations on Firms
Theories of FDI
Limitations of Exporting Limitations of Licensing

• The viability of an exporting strategy can • giving away valuable technological know-
be constrained by transportation costs how (i.e. expertise) to a potential foreign
and trade barriers
competitor
• Foreign direct investment may be
undertaken as a response to actual or • Less control over manufacturing,
threatened trade barriers such as import marketing, and etc
tariffs or quotas • Foreign firms may not have capabilities
• Foreign product become expensive as and competitive edge to come out with
the result of trade barrier (i.e. Tariff) quality output
Theories of FDI
Advantages of FDI
• A firm will favor FDI over exporting as an entry strategy
when transportation costs or trade barriers make
exporting unattractive
• A firm will favor FDI over licensing when it wishes

 To maintain control over its technological know-how (i.e.
expertise), or
 To control over its operations and business strategy, or
when the firm’s capabilities are simply not amenable to
licensing
Theories of FDI
2. Strategic Behavior (by F.T. Knickerbocker)
 relates FDI with rivalry in oligopolistic industries
(industries composed of a limited number of large
firms).e.g. oil industry
 FDI flows are a reflection of strategic rivalry between
firms in the global marketplace (i.e. action from one firm
will give impact on the competitors). E.g. Coca Cola and
Pepsi, Toyota and Honda
 The theory can be extended to embrace the concept of
multipoint competition (when two or more enterprises
encounter each other in different regional markets,
national markets, or industries). E.g.: Kodak and Fuji
Photo
Theories of FDI
3. Product Life Cycle (by Vernon)
 firms undertake FDI at particular stages in
the life cycle of a product they have
pioneered
 Firms invest in other advanced countries
when foreign demand grow and then shift
production to low-cost developing
countries due to stiff competition and cost
pressures
 Finally, the pioneer of the product become the
Importer
• E.g.; Fuji Xerox
Example: FujiXerox
Xerox – Photocopy Maker

 First developed in US -
Exporters
 Sell to other developed nations
 As Demand Grows – build JV The Life-Cycle has 4 stages
with Japan’s Fuji become •US has Monopoly in new product
FujiXerox •Foreign Production begins
 Competitors start to enter (e.g. •Export market become Competitive
•US becomes Importer
Canon, Olivetti)
 People start buying cheaper
brands – Stiff Competition
 Shift the production to
developing countries (e.g.
S,pore, Thai)
 US become Importer
Theories of FDI
4. Electic Paradigm (by John Dunning)
 also known as the OLI theory.
 When firms lever
• Ownership specific advantages (O),
• Location specific advantages (L),
• Internalization advantages (I),
 They can gain advantage from FDI.
 Eg: Toyota in US,
• O – lean production, technology know-how, quality after
sales service, reputation
• L – leverage on huge consumer base, high productivity
• I - create its own supply, production, or distribution
streams.
Value – Chain of a Firm
Firm’s Resources
Tangible Resources Intangible Resources

Financial: Resources for Innovation:
sufficient fund & capital Skill labor, R&D
Physical: Reputation:
Plant & equipment Brand name, customer perception on
Technology: product (ie Quality)
Knowledge, know-how
CHAPTER 8
COUNTRY
COMPETITIVENESS
COUNTRY
COMPETITIVENESS
Definition :
Public Sector : “ the ability of a country to realize

central economic policy goals, especially growth in
income and employment without running into
balance of payments difficulties “ - Fagerberg, 1998
Private Sector : “ the ability to persuade customers

to choose their offerings over alternatives while
others view competitiveness as the ability to
improve continuously process and capabilities; in
other words , core competences as well as
capabilities tat drive such competences are
considered to form the essence of competitiveness”
– Feurer & Chaharbaghi,1994
COUNTRY
COMPETITIVENESS
Method to measure country competitiveness :
i) WORLD ECONOMIC FORUM (WEF)
II) INTERNATIONAL INSTITUTE FOR MANAGEMENT

DEVELOPMENT (IMD)
III) MEXICAN INSTITUTE FOR COMPETITIVENESS

(IMCO)
** These organizations may have their own

standard in measuring country competitiveness
of a country
COUNTRY
COMPETITIVENESS
 WEF defines competitiveness as set of
institutions, policies and factors that
determine the level of productivity of a
country.
 The level of productivity achieved may in turn

contribute to :
i) Level of prosperity can be earned and

maintained by a country
ii) Rate of return obtained by investments in a
country.
COUNTRY
COMPETITIVENESS
 IMCO defines competitiveness as “ the ability
of a country to attract and retain foreign and
national investment”
 10 competitiveness factor set by IMCO :-
i) Reliable and objective legal system

ii) sustainable environment management
iii) inclusive, prepared and healthy society
iv) macroeconomic stability
v) stable and functional political system
vi) efficient market factors
vii) world class precursor sectors
viii) efficient and effective government
ix) benign international relations
x) Economic sectors with potential
COUNTRY
COMPETITIVENESS
GOLDEN RULES OF COMPETITIVENESS :-
 Garelli,2002 stated that a country must follow the 10
golden rules in order to stay competitive :
i) Stable and predictable legislative environment
ii) Flexible and resilient economic structure
iii) Invest in traditional and technological infrastructure
iv) Promote private savings and technological infrastructure
v) Develop aggressiveness on the international markets
(exports) as well as FDI
vi) Focus on quality, speed and transparency in government
and administration/
vii) Maintain a relationship between wage levels, productivity
and taxation
viii) Preserve the social fabric by reducing wage disparity and
strengthening the middle class
ix) Invest heavily in education especially at the secondary
level and in the lifelong learning of the labor force
x) Balance the economies of proximity and globalism to
ensure substantial wealth creation, while preserving the
value systems that citizens desire
COUNTRY
COMPETITIVENESS
WHY DO COUNTRIES COMPETE WITH

EACH OTHER ?????
COUNTRY
COMPETITIVENESS
Different stages of competitiveness development
A) FACTOR DRIVEN ECONOMIES STAGE

- The country is driven to produce natural
resources or rely on heavily labor intensive
production.
B) EFFICIENCY DRIVEN STAGE

- This is the next stage of the development
C) INNOVATION DRIVEN STAGE

COUNTRY
COMPETITIVENESS
THEORIES OF COMPETITIVENESS
A) PORTER’S DIAMOND MODEL
Michael Porter identify four (4) determinants in

his model :
i) Factor conditions
ii) Firm structure, strategy and rivalry
iii) Demand conditions
iv) Related and supporting industries

COUNTRY
COMPETITIVENESS
THEORIES OF COMPETITIVENESS
B) COMPETITIVENESS “ CUBE” THEORY
 Theory modeled by Professor Stephane Garelli

has outlined four (4) dimensions in achieving
country competitiveness :
i) Attractiveness vs. Aggressiveness

ii) Assets vs. Processes
iii) Globality vs. Proximity
iv) Social responsibility vs. Risk taking
COUNTRY
COMPETITIVENESS
THE 12 PILLARS OF COMPETITIVENESS :
I) Institutions
II) Infrastructure
III) Macroeconomic Stability
IV) Health and primary education
V) Higher education and training
VI) Goods market efficiency
VII) Labor market efficiency
VIII)Financial market sophistication
IX) Technological readiness
X) Market size
XI) Business sophistication
XII) Innovation
Source :World Economic Forum,2009
CHAPTER 9
REGIONAL ECONOMIC
INTEGRATION
REGIONAL ECONOMIC INTEGRATION
BASIC CONCEPTS AND DEFINITION
REGIONAL ECONOMIC INTEGRATION : arrangement made by countries of a

certain geographic region to reduce and remove tariff and non tariff barriers to the
free flow of goods and services as well as factors of production among each other.
• Regional Economic Integration should fulfill at least eight important functions (Van Langenhove) :
a) The strengthening of trade integration in the region.
b) The creation of an appropriate enabling environment for private sector development
c) The development of infrastructure programmes in support of economic growth and regional
integration.
d) The development of strong public sector institutions and good governance
e) The reduction of social exclusion and development of an inclusive civil society
f) Contribution to peace and security in the region
g) The building of environment programmes at the regional level
h) Strengthening of the region’s interaction with other regions of the world.
• Regional Economic Integration can be defined along three dimensions :
i) Geographic scope illustrating the number of countries involved in an arrangement

ii) The substantive coverage of sector or activity e.g : trade, labor, mobility, macro
policies, sector policies
iii) The depth of the integration to measure the degree of sovereignty a country is
ready to surrender.
LEVELS OF ECONOMIC INTEGRATION :
a) Free trade
b) Customs Union
c) Common Market
d) Economic Union
e) Political Union
ECONOMIC IMPLICATIONS OF REGIONAL INTEGRATION :
A) TRADE CREATION EFFECT AND TRADE DIVERSION EFFECT

• “trade creation effect” may happen as it expands markets and promotes
competition by eradicating barriers to trade and investment among member
countries.
• “trade creation effect” allows for efficient allocation of resources and
higher productivity
• “trade diversion effect” may happen when elimination of barriers to trade
between member countries causes trade that had been conducted with
efficient non regional countries to be diverted to less efficient countries in
the same region.
ECONOMIC IMPLICATIONS OF REGIONAL INTEGRATION :
B) INVESTMENT CREATION EFFECT AND INVESTMENT DIVERSION

EFFECT
• “Investment creation effect”
C) ECONOMIC EVALUATION OF REGIONAL INTEGRATION

ADVANTAGES AND DISADVANTAGES :
Advantages :
a) Market access
b) Trade gains
c) Increased returns and increased competition
d) Investment
e) Coordination and bargaining power
f) Increased security
Disadvantages :
a) Lock in to domestic reforms
b) Negotiation requires high resources
Ch 9
Ethics and Corruption in
the Global Marketplace
Reference;
Saihani et al. (2011), International Business : An Introduction.
McGraw-Hill. Ch 11.
186 186
Ethics and Corruption in the Global Marketplace
• Concepts and definitions

• Origin of Corruption
• Drawbacks of corruptions
• Types of Corrupt Practices
Definition
• Corruption is an exchange between two partners that has an influence on

the allocation of resources and involved the use or abuse of public or
collective responsibility for private ends.
• Corruption could also be defined as the use of public office for private gain,
or in other words, use of official position, rank or status by an office bearer for
his own personal benefit (i.e. bribery)
• Corruption is an unethical behavior (i.e. use illegal or unethical practices to
achieve business objectives).
• Corruption is difficult to measure, but The Economist projects that corruption
may be measured at approximately $9 trillion per year.
What are the causes of corruption?
1. Low Salary Level among Government Officials

When government officials are unable to meet their minimal living costs
from their salaries, corruption tend to prevail. Low salaries can provide a
powerful incentive for officials to become corrupt but they only form part of
the environment in which corruption flourishes. For example, in Thailand
and Indonesia, government officials are underpaid and that is one of the
reason why the corrupt culture in these two countries are so prevalence.
2. Nations with Weak Economic Development and Weak infrastructure

• weak or low economic development has been found encouraged corruption.
• corruption exists in all countries it is more widespread in low income
countries. For example, in developing nations, it is necessary to pay a small
bribe to secure services that ought to be provided free of charge.
• Countries with high level of poverty are more conducive for the growth of
corruption.
3. Nations with Weak Legal Systems and Weak Enforcement

Corruption is an illegal activity in all nations. However, in reality, the
probability of detection and punishment of corrupt offences is low in certain
countries including in Indonesia, the Philippines and Thailand as the public
in these countries perceive corruption to be a low risk, high reward activity.
For example, former Indonesia’s President Suharto was charged for
corruption in 2000, but the case was dropped on medical grounds and his
youngest son, Tommy, was also convicted for corruption, but he freed from
the charges.
The drawbacks of corruption
• Firstly, corruption undermines economic development by creating a
distortion and inefficiency. Corruption is believed to have a significant impact
on lowering investment. Corruption mostly occurs in large procurement
projects, construction projects, in roads, dams, hospitals, airports and military.
• Corruption reduces the return on investment and leads to slower economic

growth. Corruption undermines trade and foreign direct investment (FDI).
Corruption therefore increases the uncertainty and risk attached to investment
as well as reducing the incentive for new businesses to enter into a country.
The Corruption Perception Index conducted by Transparency International,
determines the level of corruption of a nation. The Corruption Perception
Index (CPI) is a league table of international corruption with the least corrupt
countries at the top and the most corrupt at the bottom.
Corruption Perception Index By Country Ranks, 2007
country country 2007 CPI country country 2007 CPI
rank score rank score
1 Denmark 9.40 79 Saudi Arabia 3.40
1 Finland 9.40 84 Thailand 3.30
4 Singapore 9.30 94 Sri Lanka 3.20
9 Canada 8.70 105 Argentina 2.90
9 Norway 8.70 105 Egypt 2.90
11 Australia 8.60 111 Guatemala 2.80
12 United Kingdom 8.40 123 Zambia 2.60
14 Hong Kong 8.30 131 Iran 2.50
16 Germany 7.80 131 Philippines 2.50
17 Japan 7.50 138 Pakistan 2.40
19 France 7.30 138 Paraguay 2.40
20 USA 7.20 138 Syria 2.40
43 Malaysia 5.10 138 Syria 2.40
43 South Africa 5.10 143 Indonesia 2.30
43 South Korea 5.10 143 Russia 2.30
46 Bahrain 5.00 150 Kenya 2.10
60 Kuweit 4.30 162 Bangladesh 2.00
61 Cuba 4.20 162 Cambodia 2.00
72 Brazil 3.50 162 Venezuela 2.00
72 China 3.50 168 Laos 1.90
72 India 3.50 172 Afghanistan 1.80
72 Mexico 3.50 179 Myanmar 1.40
72 Morocco 3.50 179 Somalia 1.40
• In the private sector, corruption increases the cost of business through the
extra payments or the management cost of negotiating with officials in getting
the contract.
• Corruption destroys the structure and pattern of economic development
and reduces the efficiency of economic activity. When corruption exists
extremely in the business environment, it will distort the playing field among
the business players, shielding firms with connections from competition and
thereby sustaining inefficient firms.
• Corruption helps accelerate the exploitation of resources without regard to

environmental impact. For example, oil exploration, mining concessions and
harnessing water power are activities characterized by corruption and
environmental damage.
• Finally, corruption reduces government’s income (tax revenue). Tax
policies in corrupt countries often favor the rich, well-connected and powerful
to begin with. Paying bribes to reduce taxes, fees, dues, custom duties and
public utility charges such as for water and electricity, are common in many
countries.
Types of Corrupt Practices
1. Smuggling
• illegal trade and transportation of goods devised to avoid custom duties, quotas, safety
transportation requirements, etc.
• damages legitimate importers that find themselves in competition with similar products sold
at lower cost
• likely to occur in nations sharing a contiguous border with substantial differences in the
availability and cost of goods.
• example: smuggling of diesel from Malaysia to Thailand,
2. Money Laundering (i.e. cleaning money)

• involves concealing the source of ill-gotten funds (i.e. funds form illegal activities) by
channeling them into legitimate business activities and bank deposits in other countries.
• Practiced by individuals, businesses, corrupt officials, and organize crime (i.e. Mafia in US)
Types of Corrupt Practices (cont..)
3. Piracy and Counterfeiting
• Piracy: using illegal and unauthorized means to obtain goods (i.e. govern under
intellectual property act) such as copying software, movies, music etc.
• Counterfeiting: attempting to pass the copied product as an original such as producing
and selling fake Gucci bag or Rolex watch
4. Bribe Paying
• Sums or gift, given to alter the behavior of the person in ways not consistent with the duties
of that person
• Is meant to expedite process (e.g.. custom clearance)
• In forms of money, goods, rights, property, privilege etc.
• For example; motorists bribe policeman, firms bribe official to get contract
Bribe Payers Index of Leading Exporting Countries,
2006
Rank Country Average score Rank Country Average score

(0 - 10) (0 - 10)
1 Switzerland 7.8 16 Portugal 6.5
2 Sweden 7.8 17 Mexico 6.5
3 Australia 7.6 18 Hong Kong 6.0
4 Austria 7.5 19 Israel 6.0
5 Canada 7.5 20 Italy 5.9
6 United Kingdom 7.4 21 South Korea 5.8
7 Germany 7.3 22 Saudi Arabia 5.8
8 Netherlands 7.3 23 Brazil 5.7
10 Belgium 7.2 24 South Africa 5.6
10 United States 7.2 25 Malaysia 5.6
11 Japan 7.1 26 Taiwan 5.4
12 Singapore 6.8 27 Turkey 5.2
13 Spain 6.6 28 Russia 5.2
14 United Arab 6.6 29 China 4.9
15 France 6.5 30 India 4.6

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Chapter 1

International Business &

• Basic Concepts and Definition

 Nature of International Business

 All value-adding activities can be performed in international locations

Globalization refers to the shift towards a more integrated

The Globalization of Markets

Effects of globalization can be seen everywhere:

• the cars people drive

For consumers, it means more choice, lower prices

The Globalization of Production

Growth & expansion

Political and legal risks

3. Political and legal risks is the potentially adverse effects on company

4. Culture risk involves a situation or event whereby a cultural

 Basic Concepts and Definition

Free trade refers to a situation where a government does not attempt

The Benefits of Trade

 The theories of Smith, Ricardo and Heckscher-Ohlin show why it is

The Pattern of International Trade

 Some patterns of trade are fairly easy to explain - it is

 But, why does Switzerland export chemicals,

Trade Theory and Government Policy

Trade theories lack agreement in their recommendations for

 Mercantilism makes a crude case for government involvement in

Mercantilism, which emerged in England in the mid-16th century,

Wine (1 gallon) Cloth (1 yard)

England 120 100

England 120/100=1.2 100/120=0.83

 Introduced by Raymond Vernon (Prof in Harvard)

 As Demand Grows – build JV The Life-Cycle has 4 stages

Porter’s 1990 study tried to explain why a nation achieves international

Relating and Supporting Industries

Firm Strategy, Structure, and Rivalry

International Business: Strategy, Management, and the New 40

 Explains the process by which firms acquire and retain one or

International Business: Strategy, Management, and the New 41

International Business: Strategy, Management, and the New 42

National Security – protect nation’s strategic industries (e.g. defense,

Infant Industries – protect new domestic industry from competition,

(e.g. the use of Voluntary Export Restraint (VER) to protect US

(e.g.Canadian wheat dump in US)

• Basic Concepts and Definition

Is the system of values and norms that are shared among

The term society refers to a group of people who share a

International Business: Strategy, Management, and the New Realities 57

Ethnocentrisms and Cultural Stereotypes

International Business: Strategy, Management, and the New Realities 60

Every countries are distinct according to

Hofstede’s model contains five dimensions of culture:

Countries – Denmark, Netherlands, Sweden

The results of Hofstede’s study are shown in

• There are two dimensions to consider in social structure:

•the degree to which a society is stratified into classes or castes

Language, both spoken and unspoken, is one of the defining

• Christianity is the largest religion and Economic Implications of Islam

5. inclusive versus exclusive statements.

United Arab Emirates (UAE)

• Basic Concepts and Definition

• Political system - a set of formal institutions that constitute a

International Business: Strategy, Management, and the New Realities 81

• Political and legal systems are dynamic, constantly changing and

International Business: Strategy, Management, and the New Realities 82

International Business: Strategy, Management, and the New Realities 88