Exam 1 Review

Causes of Globalization

 Strategic imperatives that motivate companies to go global Environmental changes that facilitate going gloabl

Strategic imperatives

 Companies want to
Leverage their core competencies
If a company is doing well domestically they usual will do well globally

find new markets

Primarily because of economies of scale mass production reduces costs To not solely depend on one countries market

Acquire scarce resources Better compete with their rivals

Especially with oligopoly industries

Environmental Changes

 Political Changes
GATT General Agreement on Tariffs and Trade
Smoot Hawley Act of 1930 stopped international trade between WWI and WWII After WWII world powers got together to make sure this will never happen again and came up with GATT
A multilateral agreement

Reverse restrictions on foreign investment and international trade bringing tariff rates down

WTO Replaced GATT in 1995

Also added dispute settlement mechanism to allow countries to present evidence about other countries involved in unfair trade practices Protections for intellectual property rights

Regional Trade blocs EU, NAFTA, MERCOSUR

Technological Changes
Improved communication tech, transportation methods, information processing

EU

28 countries
Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, UK

Eurozone

17 Countries
Use the euro Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain

NAFTA

 Canada, Mexico, US

MERCOSUR

 In Latin America Argentina, Brazil, Paraguay, Uruguay, and Venezuela Bolivia accessing member
Meaning its entrance is pending

Avg. International Bandwidth

 Worlds richest countries have either high globalization trade, high bandwidth or both The poorest countries had low bandwidth and international trade
Hungary, Mexico, Tanzania

Shows correlation not causation

KOF Index of Globalization

 By the Swiss Economic Institute Created an overall globalization index with three sub indices
Economic looks at trade flows, foreign investment, tariff rates, and other barriers to trade and investment Social amount of international phone and internet activity in a country and international tourism and immigration
Also the number of McDonalds and IKEAs in a country
Seen a signal that a country is open to foreign business

Political number of embassies in a country, number of treaties signed, number of international orgs it s a part of

Increase since 1980

KOF Index top 15 countries of 2012

1. Belgium 2. Ireland 3. Netherlands 4. Austria 5. Singapore 6. Sweden 7. Denmark 8. Hungary 9. Portugal 10. Switzerland 11. Cyprus 12. Luxembourg 13. Czech Republic 14. UK 15. Canada US did not make this list most of the top Global countries are European because they are typically small and close together

Global Cities Index

Created in 2012 by AT Kearney Management Consultants Gauge how global a city is by business activity, human capital, info exchange, cultural experience, and political engagement 1. New York 2. London 3. Paris 4. Tokyo 5. HK 6. LA 7. Chicago 8. Seoul 9. Brussels 10. DC due to high political engagement Also looks at strengths and vulnerabilities of emerging cities
Strengths GDP growth, growth of middle class, improving infrastructure, and ease of doing business Vulnerabilities pollution, insecurity, instability, and corruption High Strength and Low Vulnerability all cities were in Asia and Bogota, Colombia
Shanghai, Mumbai, Beijing, Taipei

Low Strength High Vulnerability cities in Sub Saharan Africa These Classifications are controversial

Cold War

 from WWII to mid 1990s ideological battle between US and Soviet Union
Countries on the US side created NATO (North Atlantic Treaty Org) Countries on SU side created Warsaw Pact

Countries Divided into 3 groups:

First World US, allies, and Japan Second World SU and allies Third World middle and low income countries
Latin America, Africa, most of Asia

Most international trade happened between first world countries Second world countries were politically powerful but avoided commerce with first world First world got raw materials from 3rd world

After fall of Berlin Wall

 Countries now divided into two groups

Developed countries Emerging markets
Experience rapid growth Potential for future growth exceeds traditional markets

Least developed countries (LDC) non high income countries

Concentrated in sub Saharan Africa, some of Asia and the pacific Haiti only LDC in western hemisphere

BRICS

 Brazil, Russia, India, China, South Africa Emerging markets

Big 10

 Emerging markets Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea, and Turkey

Video: New Global Challenges

 Convergence of consumer tastes and preferences People are developing common interests Easier for companies to see the global marketplace as a single unified marketplace More firms are using same marketing approaches worldwide

Benefits and Challenges of Globalization

 Harms companies that:

Domestically produce and find foreign companies come in and become competitors
Causes prices to fall

Benefits companies that:

Produce new extremely innovative products Start ups

Large older companies are not nimble enough to change and adapt and take advantage of globalization Start ups are nimble enough to take advantage of it

Characteristics of Emerging Markets

27 countries 43% of World GDP 33% of world exports 67% of worlds population Relatively young populations
Contrast of the US and Western Europe with aging populations

Moving towards free trade and open investment

Liberalizing lifting trade restrictions

Large supply of low cost high skilled workers

Excellent base for research and development MNCs have increased budget spent abroad for research and development from 15% in 1995 to 22% in 2001
Higher today

Rising living standards Growth of Middle Class Rapid economic growth

Challenges of Emerging Markets

 Inadequate commercial infrastructure Underdeveloped legal system

May not have rights for intellectual property promote foreign investment

High levels of risk

Corruption is higher in EM countries

New Global Challengers

 Companies in emerging markets that are quickly becoming important players in the world market Succeeding because:
Vast majority of natural resources Access to a large pool of low cost labor High amount of managerial and engineering talent in their home countries

Their countries GDP grows from 8% - 9%

US and Europe have averaged 1.5% to 2% GDP growth over the past decade

Their countries provide:

large increasingly affluent market low cost sources of manufacturing pools of high quality labor and knowledge workers

News Article Purchasing Power Parity

 Poorer economies as a whole have higher purchasing power parity adjusted GDP than the advanced economy
Because their economies are growing faster than advanced ones Massive population growth

EXCEPTION: Australia is still seeing high growth even though its an advanced country

Global Poverty Paradox

 Although poverty rates have gone done significantly since the 1980s people in reality are not that much better off now than they were before Rates look like they have decreased because of Chinas people emerging from poverty
Other countries, such as India, have significant economic growth but has only slightly outpaced population growth World economic process is slower than what we expect if we take China out of the question

Inflation adjusted per capita GDP is not that much higher today than a few decades ago Sub Saharan Africas poverty increased during the 80s and 90s More countries should adopt capitalist system

Overview of the Entire Global Economy

 1970 US had largest share of GDP

US GDP was 36% EU GDP was 26% Other countries (not including US, CA, J, and EU) GDP was 28%

2009 EU has largest share of GDP

US GDP decreased to 24% EU GDP increased to 28% Other countries GDP increased to 37%

Marketplace of North America

US Canada Mexico Caribbean Central America

US

 Has the worlds largest GDP 24% Has the worlds largest economy High amounts of foreign investment due to
High political stability Large middle class prime for an export market

Trade only accounts for 12.3% of the US GDP

Due to the fact that trade is difficult since its so large compared to other countries like France and Germany since they are small and close together

US dollar is very important

Worlds invoicing currency currency in which the sales of goods and services are denominated
Even if the US is not part of the transaction

Investors flee to safety by buying dollars

Individuals and firms facing political or economic instability turn to US dollars Invest their flight capital in the US to minimize risk

US is a huge recipient of FDI 27% of the worlds 500 largest MNCs headquartered in the US

Canada

1/10 of the population compared to the US Worlds Second largest country in terms of landmass Exports are 24% of its GDP Natural Resources: petroleum, timber, minerals, and grain Canada and the US have the largest bilateral trade relationship in the world Several Advantages for international investors and MNCs
Close to the US High political and legal stability Good education and infrastructure attractive to foreign firms and investors

Mexico

 Has a federal government

President serves for 6 years

Moving towards open trade in the past 2 decades

Signed NAFTA in 1994 Entered other bilateral and regional trade pacts with numerous other countries

Central America and the Carribean

 Collectively have twice the population size as CA but their GDP collectively is 1/3 of CA Face significant structural challenges
Political instability US military intervention
US doesn't t hesitate to get involved in political affairs

Poor infrastructure, education, and economic policies High poverty and weak middle class
Without a strong middle class domestic firms cannot sell their goods and services domestically hinders economic growth

EXCEPTION: Costa Rica

Has meaningful economic growth

Gross Domestic Product

 GDP Market value of all final goods and services produced within a country in a given year
Goods must be produced within the nation Cannot be used Does not include spending on parts to make a good just the final good itself

Gross National Income

 GNI GDP + net income received from other countries

Total dividends and interest

Per capita measure of income

 Shows how rich or poor and country is on a global scale Per capita GDP Per capita GNI

High Income Nations

 Per capita incomes of $12,196 or more Include:

Oil rich countries OECD countries Small but rich island countries (SMICS)
Small and industrialized island countries

Upper Middle Income Nations

 Per capita between $3,946 and $12,196 Mexico, former USSR, BRICS, Big 10, Costa Rica

Lower Middle Income Nations

 Per capita income of $996 to $3,945 Armenia, Iran, Nigeria, Pakistan, Thailand, West Bank/Gaza Strip

Low Income Nations

 Per capita income is $995 or less Afghanistan, Haiti, Somalia, Nepal, Zimbabwe

Western Europe Marketplace

 European Union
Includes former communist countries Croatia last country to enter

Also includes:
High income countries Iceland, Switzerland, Norway, Andorra, Monaco, and Liechtenstein Middle Income countries Albania, Bosnia, Kosovo, Montenegro, Serbia, Macedonia
Andorra, Monaco, and Liechtenstein postage stamp countries
Because they are so small

Development of middle income countries was hindered by a decade of warfare in Yugoslavia in the 90s

European Union

Established in 1993 28 Countries 17 of them use the euro introduced in 1999 Major influential players:
Germany fourth largest economy in the world
Huge impact on world and European history

France major role in European history

Pushed for European unification and common foreign and defense policies Huge advocates for human rights issues

UK does not use euro

London Worlds largest financial center
Largely because of tradition and its centrally placed on the globe

London and the UK major destinations for FDI

Only 3 of the former communist countries that entered the EU are high income nations
Estonia, Slovenia, Czech Republic

Major Players in the EU

 UK Germany France

Former SU Nations in the EU with High Incomes

 Estonia Slovenia Czech Republic

Brief History of EU

 Started as the European Coal and Steel Community formed in 1951 by F, I, West G, Belgium, Netherlands, and Luxembourg
Wanted to make European countries more interdependent on one another so a war like WWII would not occur again Chose to unify on coal and steel integral part of production for weapons and other stuff for war

1957 it became the European Economic Community

UK, Iceland, and Denmark tried to enter but were denied until 1973

1979 first Europe wide elections to the European parliament took place Over the years European Economic Community added several other members 1993 Maastricht Treaty converted European Economic Community in to the EU 1999 several countries adopted the euro After adding the countries they did between 2004-2007 new entrants GDP increased by 1.75 percentage points and enlarged existing members export market Now 28 Members

European Coal and Steal Community

1951 France Italy West Germany Belgium Netherlands Luxembourg

European Economic Community

 1957
France Italy West Germany Belgium Netherlands Luxembourg

1973
UK, Iceland and Denmark were added

Maastricht Treaty

 Signed in 1993 Converted European Economic Community into the EU

Euro

 Created in 1999 Adopted by 17 countries of the EU

Controversies of Some Members of the EU

 Turkey many Europeans believe it should not be in the EU

Because its in the far east Has a largely Muslim population

Macedonia Greece doesnt want it in the EU because they believe they have first rights to the countrys name because they have a region named Greek Macedonia
Macedonia was willing to change its name to be allowed to join the UN

Eastern Europe and Central Asia

 Modern Russia Central Asian Republics the stans

Kazakhstan Uzbekistan Tajikistan Turkmenistan Kyrgyzstan

Historical Influence on Eastern Europe and Central Asia

Soviet Union controlled these regions for decades Bolshevik Revolution after WWI over threw the Russian tsar giving control to the communist party
Communist party implemented:
New economic policies Collectivizing farms Outlawing private property Outlawing market system

Issues: worked to reduce income inequality but avg. living standards fell

Berlin Wall fell in 1989 USSR collapsed in 1991

Caused 15 former SU republics to declare independence called the newly independent states

1992, 12 of the newly independent states formed the Commonwealth of Independent States Transition from communism to free market was difficult
Boris Yeltsin first president of Russia
Presided over the financial crisis and had to devalue the ruble
Suspended payments to foreign creditors for 90 days

Vladimir Putin 2nd president of Russia

In 2000 deregulated small and medium enterprises
Allowed people to own private farmland Reformed tax system

Had to halt these reforms in 2003 due to major economic pressures

Renationalized major companies Especially oil and gas

Since then Russian politics very corrupt

Bolshevik Revolution

 After WWI Over threw the Russian Tsar Gave control to the Communist Party

Berlin Wall

 Collapsed in 1989

USSR

 Collapsed in 1991 15 states declared independence

Common Wealth of the Independent States

 12 of the newly independent states formerly part of the USSR 1992

Boris Yeltsin

 Devalued ruble during Russia's financial crisis at the end of the 90s

Vladimir Putin: First Round of Policies

2000 tried to move to free market deregulate small and medium enterprises Tax system overhauls Legalization of privatized farmland 2003 had to halt and renationalize major companies

Modern Russia

 Worlds largest country in terms of land mass 9th largest population A lot of natural resources benefited from recent increases in oil and raw material prices
Minerals Diamonds Oil
2nd largest oil producer and exporter

Gas

Economy growing rapidly rate of 5.9% a year since 2000 Accumulating reserves currency reserves are more than any other country except for China and Japan

Russias Income Inequality

 Economic growth not shared equally among Russian people President Putin and his Cronies have gained the most from Russias economic growth Oligarchs

Current President Putin

 Former leader of the KGB Great control over media in Russia Putin changed Boris Yeltsins policies nationalizing mass media and reforming tax code Get along with him become more rich and successful Dont get along with him either flee Russia or invest money abroad where the Russian govt cannot touch it
Mikhail Khodorkovsky

Oligarchs

 Extremely wealthy individuals who run Russias largest companies Became rich in the 1990s Own Russias:
Oil fields Steel factories Engineering companies Mass media

Paid little taxes under Yeltsin but changed under Putin Collective wealth of them increased from $300 billion to $450 billion in 2007

Mikhail Khordorkovsky

Russian oil tycoon Company: Yukos Oil Once Russias Richest man Criticized Putin in public
Putin nationalized his company Threw him in jail for corruption
Facts were so unconvincing Amnesty International labeled Khodorkovsky as a prisoner of conscience

Message from the government keep your mouth shot or leave the country

Russias Legal System

 Different from US Defendants appear in court in small barred cells Prosecution has the right to appeal verdict

Central Asian Republics Characteristics

 All part of or heavily influenced by the SU during the cold war

Heavily influenced by Russians

Common languages and religions Islam Lack large amounts of arable land not good farmland Low per capita incomes Significant fossil fuel reserves

Currency Reserve

 Foreign currency held by central banks and major financial institutions

as a means to pay off international debt obligations

A large % of commodities are usually priced in the reserve currency

causing other countries to hold these currencies to pay for these goods

Holding currencies reserves minimizes exchange rate risks

b/c the purchasing nation will not have to exchange their currency for the current reserve currency used to price the good in order to purchase it

News Article: Unemployment Rate

 Unemployment rate is calculated by the Bureau of Labor Statistics

Call a sample of 60,000 households and ask:
Have you worked for pay in the past week?
Even if it s an hour

If no, have you looked for work within the past 4 weeks?

Employed he or she has worked at all in the past week Unemployed he or she has looked for work in the past four weeks but has not worked for pay in the past week Discouraged workers those who currently do not have a job and have not looked for one in the past 4 weeks
NOT COUNTED IN UNEMPLOYMENT RATE

Rate can decrease because:

More workers are getting jobs good Labor force is shrinking and people are giving up to look for a job bad
Becoming discouraged workers

Does not tell you anything about wages earned by the work force
Many people are taking jobs that pay less than what they had before the recession

Monthly avg. is the lowest its been since 2007, before the recession began
Good news for the economy

News Article: European Central Bank

 Headed by Italian Mario Draghi Responsible for setting monetary policies in Europe Decide to keep interest rates extremely low .5% Does not believe global economy is strong enough to raise interest rates

Interest Rates

 Cost of borrowing money Recent economic downturn

European central bank and the US federal reserve have been keep interest rates extremely low Goal: promote borrowing, and eventually spending
To stimulate the economy

Consumer spending is crucial part of the global economy

Accounts for 75% of the USs GDP
Fed Reserve huge impact on USs economy short term

Effects of changes to the interest rates may not be seen right away
Can take up to 4 -18 months

News Article: Microsoft purchases Nokias smartphone and cellular handset business

 Try to compete with the big players n the smart phone market Failed to anticipate impact of Apple and Google on this market
They offered software and hardware Microsoft only offers operating system

News Article: Verizon purchases Vodafone

 Huge acquisition will require Verizon to take billions of dollars of new debt
But okay because you need to spend money to make money

Bought them because Verizon believes mobile access to the internet will be very important in the future
And wants complete control over operations and revenues

Stock prices soared as well as futures soared Consumers will probably not be affected directly
Will still offer same services, at least in the short term

The Olympics

 Will announce the site of the next summer Olympics soon

Choosing between: Madrid, Tokyo, and Istanbul
Leaning more towards Madrid

Economists debate whether the tremendous costs of hosting the Olympics is justified
Over this past century only 2/3 of the host cities have earned profits Cities that do earn profits after Olympics are over is sometimes due to the post hoc fallacy

Olympics committee has to convince taxpayers to host the Olympics

Typically overstate the revenues it will generate and understate the costs Better when money spent on preparing for the Olympics is on infrastructure that the country can use after the games have ended

Post Hoc Fallacy

 The false assumption that A causes B simply because A precedes B Do not confuse correlation with causation Example: Roosters all around the world crow as the sun comes up
There is a correlation between roosters crowing and the sun rising Does not mean cause:
We cannot say that the sun rises because the rooster crows

Asias Marketplace

 Japan Australia and New Zealand Four Tigers

S. Korea Singapore Taiwan HK

China India

Economic Situation in Asias Marketplace

 Share of world output has fluctuated throughout human history

1000 C.E. 2/3 worlds output 1800s 1980 20% of worlds output 2009 33% of worlds output

Sever economic crisis hit Asia in the late 1990s

Widespread currency collapse Asias market share of GDP fell Purchasing Power Parity adjusted measure of GDP market share increased
Because of cost of living also fell more than GDP fell PPP calculates value of GDP based on the cost of living

Still accounts for only a small % of worlds financial assets 20% Becoming and increasingly important force in the global economy

Japan

 Worlds 3rd largest economy Island nation population 127 million

Aging population by 2025 30% of the pop. Will be 65 years or older
Even more than the US

Strong economic growth in the past due to strong partnership between Ministry of international trade (MITI) and highly concentrated industrial sector Firms are organized in large families of companies called keiretsu

Keiretsu

 Large families of companies These companies control Japanese industry

Act as suppliers and financers of each other Cross ownership is common as well
Gives company stake in anothers success

Japans Lost Decade

 Real estate bust at the end of the 80s led to low economic growth in the 90s
Growth did not pick up till the 2000s

Growth rate was only 1.1% during this decade

Worlds avg. 2.9%

Issue: slow to adjust to world economic changes

Rising importance of emerging markets Growth of e-commerce

Japans Trading Practices

 Notorious for unfair trading practices Dumping a country promotes its exports by selling them lower abroad then they would at home
Japanese firms do this to drive other firms out of the industry and gain a large share of the export market

Have nontariff barriers that block imports from the rest of the world

Japans New Paradigm for the Workforce

 Historically firms hired workers and promised lifelong jobs Now due to weak sales firms have moved from hiring full time workers to temp workers vs. permanent ones Has caused increase n unemployment and underemployment
This has caused the rise of the deflationary spiral

Deflationary Spiral

 People who dont have jobs dont spend money

Puts downward pressure on demand and prices

Businesses earn less profits thus hire less workers

Causing people to spend even less

Deflation

 Central banks usually focus on fighting inflation but consequences of deflation are much worse They have policies to control inflation
Have fewer policies to fiz deflation

Deflation was a major factor that caused the great depression to be as long and severe as it was

Japans Current Economic Situation

 Stimulus efforts have not worked well in Japan Growth has been stagnant for 2 decades
Risk of another lost decade

Economy has started to rebound slightly Two issues of concern whether Japan will recover:
Economic strength of the US and china
They are Japans major trading partners Economic slowdowns with them can contribute to Japan's continued stagnation

Strength of the Yen

Yen is another safe haven currency in times of uncertainty Has caused yen to appreciate
Increased the prices of Japanese exports to the rest of the world Cause exports to decrease for them and has hindered recovery

Australia and New Zealand

 Geographically near Asia More akin with the US, UK, and Western Europe in terms of politics, culture, and economy

Australia

 Pop. is 22 million
Concentrated in the huge costal cities Sydney and Melbourne

Merchandise exports 17% of GDP in 2009 Rich in several natural resources:

Gold Coal Iron ore Wheat Beef

New Zealand

 Made up of several islands

80% of pop. Live on the 2 major islands

Merchandise trade 20% of GDP in 2009 Major Exports:

Meat Wool Dairy products

Four Tigers

South Korea Singapore Taiwan Hong Kong Achieved remarkable growth over the past few decades
Largely driven by open trade policies

South Korea

 After WWII a civil war divided Korea into North and South
North communist
faces perpetual economic stagnation

South democratic
Vibrant export led economy Exports 44% of GDP

Followed Japans after WWII economic path to successful economy

Singapore

 Great Britain founded them as a colony in 1819 Received independence in 1963

Growing rapidly ever since

Regional technological hub

Rapidly growing communications and financial service sectors

Exports 148% of GDP

Excellent ports that engage in re-exporting

Re-exporting

 Receiving goods
repackaging them or modifying them slightly

Then sending them back out

Taiwan

 When Chinese communist party took over mainland china in 1949 2 million nationalists fled the country They established what they considered a new country Republic of China
What we call Taiwan

One of the fastest growing regions in the world over the past three decades
Growth driven by trade Exports 64% of GDP

Political battle over independent status of Taiwan between mainland china and Taiwan
But Taiwan still maintains its independence These tensions are important cultural and economic ties between China and Taiwan

Hong Kong

 British colony until 1997

Control was then given to China
Technically still part of china but operates fairly autonomously

Major port Engages in significant amount of re-exporting Exports 194% of GDP

Chinas History

Worlds oldest continuous civilization Republic of China established in 1912 Rise of the communist party caused a civil war Communist leader Mao Tse-tung took control in 1949 established Peoples Republic of China

China under Maos Rule

 Suffered economically under his rule Great Leap Forward 1950s and 1960s
Series of economic and social reforms focused on collectivism and central planning
Tremendous failure Resulted in millions of deaths

Cultural Revolution 1960s and 1970s

Sought to instill communist orthodoxy in the ocuntry Remove cultural remnants of capitalism and the former regime Wanted the the countrys communist ethos to reign supreme

Great Leap Forward

 Mao Tse-tung 1950s and 1960s Economic and social reforms

Focused on collectivism and central planning

Cultural Revolution

 Mao Tse-tung 1960s to 1970s Sought to instill communist orthodoxy in the country

China After the Death of Mao

 Chinas leaders implemented series of free market reforms

Legalized some small business and privatized agriculture Trade liberalization and free market policies led to several decades of outstanding economic growth

Still criticized for restricting political freedoms According to china economy grew at an avg. of 10.9% between 2000 2009
Has a reputation to fudge numbers so most analysts believe it s a few percentage points less Still this is amazing growth

Chinas Territorial Disputes

 China and Japan:

Dispute over Diaoyutai Islands (Japan calls it Senakaku Islands)
Currently under the control of japan but china feels it should have it

Disagree where to draw the line between their exclusive economic zones
2008 agreed to joint development in the disputed area of exclusive economic zones Japan is angry about the gas field, Chunxiao (J calls it Shirakaba), exploited by China
Because disadvantage to Japan

Chinas Claims to the South

Contention with: Vietnam, Philippines, Brunei, Malaysia, and Indonesia Tensions are growing in the area especially with Vietnam

China and India:

Border war in 1962 and still continue to disagree over the Himalayas

China and Taiwan:

Fear the Taiwan might officially demand independence

Chinas Economic Situation

 Worlds largest population Rapid economic growth in recent years increased FDI
Especially from 2000 -2008 Slight decrease due to global recession

Workforce has a reputation for hard working and low cost labor
Attractive to foreign firms looking to outsource

Chinese firms and individuals are becoming wealthier

Investing more in other parts of the world
Including: Taiwan, Singapore, HK

China: Rural vs. Urban Populations

 Economic disparity between rural and urban people

750 million people still have not benefitted from economic boom

Growth largely occurred in its large coastal cities Rural unrest has caused political issues Economic prosperity has driven 160 million to migrate from rural to urban areas
Migration accounts for 20% of economic growth since 2001

Some businesses have moved to poorer areas

Promoting growth there Trend may lessen disparity but not guaranteed

China and the Internet

 Has become important part of their economy

Shown that an authoritarian government can benefit economically from the internet
Maintain power through censorship More expensive and difficult than in countries relatively free of censorship

More than 40% of pop. are online

Has begun to spread to rural areas as well

E-commerce has grown rapidly May surpass the USs market Many sites are blocked by Chinas firewall
Incudes: YouTube, Facebook, and Twitter Have created their own alternatives
Grown to be very popular Still monitor for posts about sensitive issues

India

 Worlds second largest population Worlds largest democracy

Government structure still reflects a strong British influence

Gained independence in 1947 After WWII relied on govt ownership of businesses in key industries to increase economic growth
Mixed success

1991 implemented series of market reforms and privatization

Attracted inflows of FDI

Grown on Avg. 7.8% per year since 2000

Challenges India Faces

 Poised to continue to grow rapidly but faces many challenges

Corruption
Govt corruption is widespread in all levels Bribes are necessary to do business in many industries

Poor infrastructure
Last summer 700 million people lost power for hours

Government red tape

Jump through a lot of hoops to do business in India
Makes FDI less attractive

Population is mostly young and poor

Pop. density in the north is very high India remains mostly rural
Nearly 50% of the population relies on agriculture to make a living Cities are growing and education is improving Urbanization is increasing

Successful city in India Surat

May soon grow to be larger than London

Assigned Article: Indias Economic Trouble

Economy has been suffering in the recent years due to structural problems
prevented the country from achieving China-like levels of sustained growth Depreciation of the Rupee
Depreciated against the dollar by 20% since May This makes imports more expensive
Especially goods priced in dollars Very important to Indias economy

Short Term Problems:

The price of diesel has increased significantly

Falling Stock Market

Fallen by 8% Decreasing the wealth of many Indians Inflation rate is 10% per year Widening budget and trade deficits

Other poor economic indicators

Long Term Chronic Problems:

Poor infrastructure
Poor roads make it costly and time consuming to get goods to ports Energy distribution less efficient than China electricity costs are high Govt regulations make it difficult to replace old buildings Shortage of appropriate industrial real estates in highly populated areas
Driven prices up

High Real Estate Costs

Bloated State Run Enterprises

India has largely ignored manufacturing sector Govt has not developed a thriving export industry

Burdensome Regulation
Extensive labor regulation discourages firms from growing beyond a certain size Govt regulators ask for bribes cost of business increases

Difficult for manufacturing sector to thrive difficult for the poor to move to the middle class FDI are not reinvesting into India due to chronic problems

Southeast Asia

 Includes number of island nations

Indonesia, Malaysia, Thailand, Vietnam

Many US, J, and European firms use this area for production of goods
These goods require low skilled low cost labor EX: textiles

FDI generated exports have caused these economies to grow rapidly

These countries are now solid middle income nations

Known for their cheap labor Companies have begun building high tech operations here as well
EX: 2010 -- Intel opened a plant to test computer chips in Ho Chi Minh City, Vietnam

News Article: Employment Numbers

 Unemployment rate 7.3%

Lowest level in nearly 5 years

But this may not be a good thing Decrease in unemployment rate is due to decrease in size of labor force
Lowest its been since 1970

Reason may be:

Aggregate demand is still low Businesses do not want to invest money in hiring when there is still uncertainty in the economy

Obama Care will negatively impact the labor force as well

Companies will scale back on number of employees to avoid buying mandatory health insurance for them

News Article: Federal Reserve

 Have keep interst rates low Fed Chairman is about to retire Obama must choose between two people:
Lawrence Summers
Gradually increase interest rates

Janet Yellen
Likely to keep interest rates low

Probably will choose Yellen

Summers made inappropriate comments about women Yellens economic predictions have been more accurate

News Article: Sept.

th 11

 Had a huge economic impact Caused Fed to drop IR to 0% to stave off catastrophic economic collapse Required Fed Govt to spend more on national security increased deficit
Explicit costs

Wall Street spent a lot of money increasing security against a cyber threat safest its ever been Implicit costs opportunity costs such as waiting in line in the airport for security and lives lost in car accidents because of the fear of flying Deficit a flow variable measured on an annual basis Debt stock variable that amounts to the sum of all our deficits

Africa

 55 countries More than a billion people Rich in natural resources

Huge oil deposits
Algeria, Angola, Nigeria, and Libya

Major mineral deposits

Zambia, Botswana, and the Democratic Republic of Congo

Many Africans are very poor and are farmers

Have to work the fields so they can have enough food to survive Makes it difficult to achieve meaningful growth if a large portion of the pop. cant even feed themselves

Agriculture 40% of GDP of the poorest African countries

Africas History

 Largely been defined by European colonization

Occurred in the 1800s Lasted until the 1950s

Colonization caused ongoing political problems

Colonizers constructed artificial political borders that cut across ethnic and cultural lines Rwanda Genocide of 1994

South Africa

 Most economically successful African country

Africas powerhouse

Has grown rapidly after the end of the apartheid and the election of Nelson Mandela in 1994 Growth has been at an avg. of 3.3% but this number is growing Has joined the BRIC countries and has changed that name to BRICS Exports 22% of GDP
Mostly minerals

Africas Prospect of Growth

Two differing viewpoints Negative and Positive Negative: continent is rich in natural resources but the people remain poor
Africa has had a difficult time turning its natural resources into actual wealth in terms of dollars and cents Has gotten caught up in debt/capital flight revolving door Africa should renegotiate contracts with MNCs
So they can be better compensated for their resources

Corruption main cause of poverty

Positive: majority of institutional investors see Africa as the greatest opportunity for growth in the next decade
33% of them have shifted at least %% of their funds to Africa by 2016 Large emerging middle class
Sign that the country will be able to buy firms products Largest trading partner of Africas
Overtook US

China has invested heavily in Africa

Businesses are looking to gain a first mover advantage

Debt/Capital Flight Revolving Door

 For Africa:
$900 billion in wealth has left the continent
Mostly by small number of wealthy Africans

This has happened b/c government officials and powerful leaders take the money they borrow and move out out of Africa for their own personal wealth Capital flight gives rise to borrow more money
Then that money borrowed is moved out of the country again Causing the country to borrow even more to meet its obligations

Africa has $200 billion in debt

Middle East

 Centrally located on the globe History of conflict and political unrest

Impacted business environment Increases risk

Economies are dominated by oil exports Saudi Arabia has the largest economy
Oil 45% of GDP Exports 90% of GDP

Israel has the highest per capita income

Arab Spring

 Series of uprisings that occurred in 2011

Tunisia Egypt still see unrest Libya Syria still see unrest

Has increased the risk of doing business in some countries, but has opened some new business opportunity

Middle East and Oil

 Oil rich countries are realizing the finite resource that oil is
There will be life after oil

Countries are taking steps to diversify their economies

Dubai established a free trade zone and an export entry point
Encourages international ships to pass through there

Countries have been investing their oil revenues for the future
By expanding their foreign investments with sovereign wealth funds

Sovereign Wealth Funds

 Govt run investment funds Invest in real and financial assets or alternative investments Invest globally Funded by revenues from commodity exports or foreign exchange reserves
Middle East: funded by oil revenues

South America

 13 countries Have common social, economic, and political history Colonized by the Spanish and Portuguese
They subjugated native populations Exploited natural resources

Achieved independence in the 1800s

Began to struggle with
Income inequality Poverty Political instability

Some still continue to struggle today

South America: Import Substitution

 Policy where govt restricts imports with tariffs and non tariff barriers to develop domestic industries
Policy makes sense in theory but failed in practice Issue: small domestic markets were not large enough to allow domestic firms to take advantage of economies of scale
Result: had to charge very high prices for goods produced

After WWII used this policy to grow

South America: Export Promotion

 South America used this after WWII to increase growth Policy where the govt subsidizes domestic export industries to boost exports Issue: the cost of subsidies and nationalization was passed to the tax payers

South America and Economic Problems after WWII

 High taxes due to:

Nationalization Large govt subsidies

High Budget Deficit resulted in:

Inflation Instability

South America Today

 In the 1980s started to liberalize their market

Reduced trade barriers Privatized industries Promoted trade with free trade agreements

Economy began to grow rapidly

New policies began to pay of in late 80s and 90s Increase in demand for raw material and foodstuffs

Gini Coefficient

 Measures income inequality Ranges from 0 to 1

0 income perfectly distributed 1 income concentrated in one person

South Americas Income Inequality

 Major lingering problem and results in political instability Many countries have a high gini coefficient
Income distributed very unequally Brazil 0.65

Reasons for Inequality:

Education unequal education access
Receive an education become rich Do not receive education remain poor

Birth Rates higher in poor people

Children born into poor families have few financial resources to work with

Ineffective Public Spending govt that cannot effectively redistribute income cannot address income inequality
One Exception in textbook

Current Situation in Venezuela

 Death of Hugo Chavez and the Election of Nicola Maduro

Believe the election was rigged in favor of Maduro

Chavismo severely debilitated without Chavez

Positive for Venezuela in the middle term to long term

Oil production is declining

Lack of infrastructure Lack of human capital Maduro will have to invest in this industry in order to help the countrys economy to stay afloat and grow

Chavismo

 Progressive policies the nationalized major industries

Spread money and resources to the poor

If Maduro sticks to the policies he may be voted out mid term

Believe he lacks the personality and political understanding that Chavez had

Artic Region

 Important emerging market Important source of natural resources and fish Global warming is opening up several trade routes that pass through here Region is becoming more valuable tensions are rising to claim it

Artic Five

 US, Russia, Canada, Norway Denmark The five countries that play the most direct and active role determining this areas political fate Middle Powers Denmark and Norway
Important roles in negotiating deals and maintaining peace among nations with opposing claims

Tensions in the Artic Region

 Non artic nations want access to resources and trade routes

China and India

Discovery of new reserves of oil outside of the areas currently controlled by sovereign powers will present conflict
Cause competing claims over the reserves

If resolution of these disputes are peaceful may become a model for other geopolitical issues

Leverage

 The use of borrowed funds to make and investment Can dramatically increase and investors return on investment (ROI)
Amplifies profits

Issue: amplifies losses as well

Leveraged investors are more likely to lose all or his or her portion of an investment if things go south

Collateralized Debt Obligations

 COD Investment firms bought mortgages from lenders and packaged hundreds or even thousands of them in to this new kind of security
Then sold slices of these securities to other investors

CDOs were sliced into 3 different tranches (level of risk) and sold to investors
safe investors who wanted extremely safe investments okay investors who were okay with riskier investments risky investors willing to accept an extreme risk for a big payoff
Also for investors to hedge their funds

Credit Default Swap

 Special type of insurance for Investment bankers For mortgages in the safe tranche Allowed them to get AAA rating on these slices of the CDO

Subprime Mortgages

 Mortgages offered by lenders to riskier borrowers Changed their lending practices

Not requiring down payment Not verifying the borrowers income

Repo 105 Transaction

 Temporarily sell off risky assets that they did not want on its balance sheet After the financial statement was made
Would buy those assets back at a slight premium

US Financial System Now vs. Pre- Recession

 Safer today than before the collapse US banking regulations have increased capital requirements on banks
Used to be 2% could leverage 50:1 Now 10% leverage 10:1

Increase in liquidity
Banks are better able to weather a downturn if it occurs

Fed regulation have made improvements

Dodd Frank Act

FDIC working on plan to eliminate argument that big banks are too big to fail
FDIC Federal Deposit Insurance Corporation Create a process to allow big banks to fail without tax payer bailout Reduce moral hazard problems

Dodd Frank Act

 Addresses number of problems with the market Made the trading of derivatives more transparent Improved procedures of securitization Increased govt regulatory powers

Glass Steagall Act

 Required investment banking and commercial banking to be separate Law was repealed in 1995
Many analysts believe that this contributed to the financial crisis

Moral Hazard

 Business takes excessive risks because it is protected against negative consequences EX: big banks to big too fail
Took huge risky investments

Legal Environment in Global Business

 Global businesses must follow home and host countries laws Differences in law country to country can have a dramatic impact on a firms profitability and success
Impacts markets it can enter Cost of inputs Prices it charges Where it is located

Classification of Law

4 types Common Law Civil Law Religious Law Bureaucratic Law

Common Law

 Based on precedents set by prior judicial decisions

Relies on collective wisdom of judges who have heard cases throughout history

Derived from law that prevailed in the UK Often supplemented with statutory laws enacted by the legislature Common Law judges act more like referees

Civil Law

 Based on Roman and French Napoleonic law Based on extensive codes that details what is and is not permissible behavior Civil law judges take a more active role as a fact finder or advocate

Religious Law

 Based on one particular faith or religion Theocratic nations Can impose significant restrictions on business

Theocracy

 Countries that base its civil and criminal law on religion

Islamic Law

 Example of religious law Prevents the payment of interest Requires every transaction to be based on tangible assets Islamic banking has been around since the 600s
Differs from traditional western banking in two ways:
Banks cannot charge interest and profits must be earned on tangible assets
West: earn profits on intangible assets such as mortgage backed securities

Profits and losses are shared by the business and lender

West: banks expect borrowers to repay their loan whether or not the investment worked out

Bureaucratic Law

 Law is simply whatever the bureaucratic says it is regardless of the official law of the country Dictators commonly ignore the law and do whatever they want to do
Managers doing business in countries with dictators often deal with arbitrary and unpredictable decisions of these dictators
Doing business is quite risky in these nations

World Justice Project

 Org funded by the Bill and Melinda Gates Foundation Developed Rule of Law index Also ranks govts in terms of openness in terms of making laws public and widely available
Measures the comprehensibility of the law to the public Measures stability of the law

Open Legal System

 Most open legal system nations are in:

Western Europe North America

Least open legal system nations are in:

Sub Saharan Africa

Rule of Law Index

 Ranks countries from 0 10

Measures the extent to which they enforce regulations

Rough measure of the rule of law in a country

Simply refers to whether a country enforces laws

Strong Regulatory Enforcement:

US Canada Western Europe Chile Australia Japan

Weak Regulatory enforcement:

Russia India Pakistan

Corruption

 Dishonest or fraudulent conduct

Bribery Kickbacks Embezzlement

Lowest in EU and Western Europe Highest in Eastern Europe, Central Asia, Sub Saharan Africa More countries are perceived to be corrupt than clean
Influential to international business

Transparency International

 Non profit organization Ranks countries based on their perceived level of corruption from 0 to 10
0 most corrupt 10 least corrupt most clean

Most of the worlds countries rank below 5 Most Corrupt countries: Afghanistan, Burma, N. Korea, Somalia
Majority of Africa

Most Clean Countries: New Zealand, Denmark, and Finland

US ranks 19th in terms of cleanliness
Higher than Russia Lower than Canada and Australia

Most Corrupt Countries

Afghanistan Burma N.Korea Somalia

Most Clean Countries

 New zealand Denmark Finland

Bribery

 % of countrys pop. that has had to pay a bribe

Canada 3% US 7% Kazakhstan 34% India 54%

Corruption in Sectors

 Sectors seen as most corrupt in US, Canada, and W. Europe:

Political Parties

Sectors seen as most corrupt in Colombia:

Legal System

Sectors seen as most corrupt in UK and Egypt:

Media

No countries perceived their military, educational system, or NGOs to be most corrupt This info is important for firms considering to expand overseas
Firms want to avoid corruption whenever possible

Domestically Oriented Laws

 A company operating in a foreign country has to abide by its laws

Including laws to regulate domestic economic environment
Work force management
EX: wages and benefits

Finances
EX: required govt filings and disclosures & tax rates

Marketing
EX: regulations on advertising & nutrition labeling rules

Developing and using technology

EX: safety standards

Laws can impose constraints on a foreign firm

Complying with them can increase costs and decrease a firms competitiveness

Some regulations are essential Nations must find a balance between protecting the public and unduly constraining business

Laws Directly Affecting International Business

 A company operating in a foreign country have to deal with national laws that are intended to regulate international business Laws may be put in place for many reasons
Political considerations To achieve certain military or diplomatic objectives

Sanction

 A limit on commerce with a country United States Office of Financial Assets Control (OFAC)
Administers sanctions with countries around the world

Embargo

 Specific kind of sanction Comprehensive prohibition against all commerce with a country US has had an embargo with Cuba since 1961
Longest running economic embargo in the world

Extraterritoriality

 When a country tries to regulate business activities outside of its borders

EX: anti-boycott provisions of US law
prohibit a US company from complying with a foreign countrys boycott on products of a country friendly with the US Enacted in the 1950s when the League of Arab States called for a worldwide boycott of firms that do business with Israel
Israel is a strong ally of the US

Helms Burton Act

 Most controversial extraterritoriality US law Intended to punish foreign companies in Cuba that use of US property confiscated by the Castro Regime in the late 1950s Allows lawsuits in American Courts against foreigners who use this property Allows US to prevent executives of these companies from entering the US

Laws Directed Against Foreign Firms

 A company operating in a foreign country must deal with laws and actions specifically aimed at foreign owned firms
They have no other options but to deal with these laws because they want to exploit an immobile resource

Examples:
Nationalization Privatization Constraints on foreign ownership

Nationalization

 Government seizes ownership of a private firm Most commonly carried out in leftist govt
Interested in seizing control of strategic private sector firms
Especially those that are not mobile
Natural resource industries Capital intensive industries

EX: Venezuelas aggressive confiscation of foreign assets has caused net FDI to fall

Expropriation

 Govt offers compensation to the private owners for seizing ownership of their firm

Confiscation

 Govt offers no compensation to the private owners for seizing ownership of their firm

Privatization

 When govt owned property is converted to private property State-owned businesses are usually inefficient and unprofitable
Privatizing them increases economic efficiency
Opening up new opportunities for international businesses to get involved

Wave of privatization during 80s and 90s

Led by the UK

Constraints on Foreign Ownership

 Many countries prohibit foreign firms form owning a large stake in key industries Another form: ability to repatriate

Repatriate

 Inhibiting MNCs from bringing profits earned abroad back home

Impacts of MNCs on Host Countries

 Have negative and positive impacts on host countries Important impacts

Economic Political Cultural

Economic Impact of MNCs

 Positive impact
Create local jobs Contribute money to the local economy
Supports education and infrastructure

Transfer technology and knowledge of it to their domestic partners and workers

Negative impact
Highly powerful MNCs might drive domestic firms out of business Local economy can become dependent on the MNCs
If they leave the country or impose layoffs or cutbacks local economy will suffer

Political Impact of MNCs

 Large MNCs have significant political influence in the countries they operate in
Can use influence negatively or positively

Cultural Impact of MNCs

 They can sometimes change the norms, standards, and behaviors of the countries they operate in
For better or worse
Introduction of new or better products and services may improve living standards Worse: EX Nestl's baby formula in developing countries

Dispute Resolution in International Business

 When a dispute arises the parties must decide:

Which law applies Where conflict will be resolved Technique used to resolve How decision will be enforces

Contracts specify which law applies and where disputes must be brought
Most countries honor such contractual provisions

Forum Shopping

 When a party to a lawsuit attempts to have the case heard in a country where the laws are most favorable
Likelihood of one partys success may be better in one country compared to another

EX: tort of defamation

Easier for plaintiff to win case in the UK than the US

Comity

 A country will usually honor the decisions of foreign courts as long as

The two countries extend reciprocity between one another Defendant has proper notice Foreign judgment does not violate any statutes and treaties

Arbitration

 A process in which the parties agree to abide by the decision of a private non judicial body Faster, cheaper, more private, and more informal than litigation
Litigation is costly, expensive, and time consuming

Sovereign Immunity

 Businesses have limited resource to challenge the actions of a foreign govt in the US courts Foreign Sovereign Immunities Act (1976)

Foreign Sovereign Immunities Act (1976)

 Provides that actions of foreign govts against US firms are generally beyond the jurisdiction of US courts
EXCEPTION: commercial transactions

EX: US firm and Venezuela

Firm could not go to court to challenge Venezuelas govt decision to nationalize its Venezuelan operations Could challenge Venezuela if the country did not pay for 1000 printers that it had ordered

World Economic Forum

 Holds the World Economic Conference Gives country groupings different names for their economic status
Factor drive economies low income countries
They rely on factors of production
Particularly on low skilled labor and natural resources

Efficiency driven economies middle income countries (emerging)

They focus on increasing output by improving production efficiency

Innovation driven economies high income countries (developed)

They rely on innovation and product development to fuel economic growth

Also determined most competitive nations have:

high per capita GDP
Strong correlation no causal link

High levels of debt

Debt can be a good thing
Allows a country to have more money to invest which increases competitiveness Can lead to long run growth

Countries with low levels of debt usually is because they do not have access to capital markets
Due to low creditworthiness

World Economic Forum: Worlds Best Economies

1. Switzerland 2. Singapore 3. Finland 4. Germany 5. US 6. Sweden 7. HK 8. Netherlands 9. Japan 10. UK

World Economic Forum: Worlds Worst Economies

1. Chand 2. Guinea 3. Burundi 4. Yemen 5. Sierra Leone 6. Haiti 7. Angola 8. Mauritania 9. Burkina Faso 10. Myanmar Many are located in Sub - Saharan Africa
Africa has a lot of problems Also presets a lot of opportunities for growth

The Technological Environment

 Foundation for a country's economy Countrys resources determine what kind of tech environment will prevail and the kind of products and services it will produce and export Country will fertile land export agricultural goods Country with less skilled labor export labor intensive goods Country with abundant natural resources export those commodities and their derivatives

Changing and Shaping the Technological Environment

 Two Ways:
Strategic investments:
Investments in infrastructure facilitate the production and distribution of goods Investments in human capital improve efficiency, productivity, and competitiveness

Technology Transfer:
Occurs when a foreign firms know-how is passed on to home-country firms or individuals
Can occur naturally with FDI Some countries require it to do business there

Intellectual Property Law in Technological Environment

 Important role
Firms core competencies and competitive advantage are often based on intellectual property rights (IPR)
Want to protect their valuable assets

Countries with greater protection are more likely to attract high tech foreign investments Weak IPR
Reduces FDI in middle income and rich nations Reduce likelihood domestic firms will invest in R&D necessary to create new products and technologies

Accounting Environment

 Face challenges from international differences in accounting systems Many rely on accounting data:
Managers to effectively run their companies Useful to outsiders
Lenders Investors Shareholders Govt officials

Accounting Standards in Common Law Countries

 Informally established by professional accounting groups

The US Financial Accounting Standard Board

Most of the countries follow Generally Accepted Accounting Principles (GAPP) More flexible than civil law countries Enforcement is usually by private litigation

Accounting Standards in Civil Law Countries

 Civil law = code law Accounting practices are determined by specific laws More strict than common law countries The govt plays a more active role in monitoring and enforcing the rules than in common law countries

Notable Differences in Accounting Practices Across Countries

Valuation and revaluation of assets Valuation of inventories Dealing with tax authorities Use of Accounting Reserves Capitalization Requirements Goodwill

Valuation and Revaluation of Assets

 In most countries companies are required to report the value of assets at historical costs
Without taking replacement cost or inflation adjusted values into account EX: US and Japan
It is illegal to increase the market value of an asset to reflect the impact of inflation

Netherlands requires companies to report market value as the true replacement value Britain and Australia allow accountants to use historical cost, current cost, or a mix of two Which method a company uses can dramatically effect the meaning of these statements

Valuation of Inventories

 Two major methods: LIFO and FIFO LIFO Last in first out
During inflationary periods increases the cost of goods sold and reduces profits
Therefore reduces taxes

FIFO First in first out

Provides a better estimate of the true value of the firms inventory Predominant in the UK and Brazil

US and Canada firms can choose either one

Dealing with Tax Authorities

 US:
Firms can have separate financial statements for financial reporting and tax purposes
Not uncommon for firms to use accelerated depreciation to reduce their taxable income on official govt filings
Reduces their tax burden

Do not use accelerated depreciation on statements provided to shareholders

To increase apparent profitability

Germany and France:

Only one set of financial statements is used Bias is towards reporting earnings downwards to reduce tax burdens

Use of Accounting Reserves

 Accounting reserves accounts created in a firms financial reports to record foreseeable future expenses that might affect operations
rainy day account

In the US IRS and SEC limit these

Can reduce firms taxable income Can falsely portray a firms financial health

In Germany may use reserves more aggressively

Can keep outside investors from clearly assessing how much a firm is worth

Capitalization Requirements

 Capitalization accounting method that firms use to delay the recognition of expenses
By recording a fixed asset and depreciating it over several periods

Standards differ on whether cost of leases and R&D can be spread of several periods
US, UK, and Canada require it for financial leases
US does not allow it for R&D

Switzerland allows it but does not require it

Goodwill

 Amount that the acquiring firm paid in excess of the acquired firms book value Differences occur in how a firm should treat goodwill
Can amortize it or immediately write it off

Sarbanes Oxley Act

 Enacted in 2002 Due to Enron scandal Increased and strengthened accounting regulations and requirements

US and Accounting Regulation Impacts

 Many regulations Foreign firms are opting to list on foreign exchanges rather than US exchanges US accounting statements more trust worthy than other countries International Accounting Standards Board currently negotiating with the US to effectively merge accounting standards so that they are more similar around the world
Progress is very slow

Political Risks

 Any adverse challenges in the political environment that hurt the value of the firms business activities Three categories:
Ownership risk Operating risk Transfer risk

High political risk with countries that have economically depressed areas

Political Risk Assessment

 Systematic analysis of political risks

Ownership Risk

 Threat of confiscation or expropriation of company property

Operating Risk

 Threat that a change in the laws, tax codes, environmental standards, insurrections, or terrorism will impact the firms operation or its workers safety

Transfer Risk

 Risk that a govt will prevent a firm from bringing money in and out of the country Govt often freeze funds in times of crisis
More likely to do this if the have a high % of short term debt as a share of their international reserves

High in European and Central Asian Countries

Macro political Risk

 Political risk affects every firm in the country

Micro political Risk

 Political risk that affects a single firm or a group of firms in an industry

Minimizing Political Risk Exposure

Monitor
Larger the companys proposed investment in a new market the more resources it should devote to assessing risk

Balance
Firm must make sure rate of return offsets the risk operating there

Minimizing the net investment

Firm can reduce by leasing capital equipment and continuously repatriating profits back home Firms will lose less if the govt confiscates its property

Popularizing Firm Abroad

Should build support of the foreign govt and its citizens Support local projects and charities Purchasing local raw material Hiring local labor

Getting Insurance
can take out insurance against political risk Offered by OPIC, MIGA, and many private insurance firms

Overseas Private Investment Corporation (OPIC)

 In the US Provides insurance against:

foreign exchange inconvertibility Insurrections Revolutions Nationalization

Only available to companies doing business in countries that have bilateral treaties with the US Primarily supports projects of small businesses

Multilateral Investment Guarantee Agency (MIGA)

 World bank subsidiary Provides similar insurance like OPIC for major projects mostly in the areas of:
Infrastructure Finance Agribusiness Manufacturing Services

Majority of projects are in Europe and Central Asia

Constraint on FDI in Developing Countries

 Most important reasons to not do FDI over the next three years are:
Political risks Weak govt institutions Macroeconomic instability weak economy

Most Important Political Risks in Developing Countries

 Regulatory changes Civil disturbance War was not an important reason

Most Important Political Risks in CAF Countries

CAF conflict afflicted and fragile countries Breach of contract Regulatory changes Civil disturbance was relatively high on the list War was not an important political risk

Doing Business Report

 Doing business has become easier over time in most of the world
Most difficult to do business in areas of low income and high political risk

Easiest in Singapore Hardest in Central African Republic Eastern Europe and Central Asia had the largest share of economies that enacted reforms making it easier to do business Gap between high income nations and the rest of the world is shrinking

Samuel Slater

 Learned how to run the mill and brought that knowledge to the US in 1789
Violation of British law

Implemented those systems in the US

Became a major contributor to the American Industrial Revolution He achieved success in the US

His wife developed a revolutionary new kind of thread

He encouraged his wife to apply for US patent protection

Hannah Slater became the first American woman to successfully apply for a US patent

Samuel Slater Method

 Based on slater stealing technology Summarized as flout then follow Ignore patent laws to gain tech know how and then fight for enforcement once a critical mass of knowledge has been gathered Common development path for developing countries Is a current issue of debate in the world of IPR

World Intellectual Property Organization

 According to them there are 2 groups of IPR Industrial property:

Patents, trademarks, industrial design, and geographic indication of source

Copyright:
Literary and artistic works

Global Harmonization

 Current trend of IPR Push towards establishing minimum standards of IPR worldwide

Trade Related Aspects of Intellectual Property Rights

 TRIPS WTO made members sign this agreement Agreed to eventually adopt certain minimum standards for IPR protection
Middle income countries had until 2006 LDC had until 2013

Developing Countrys Viewpoint on IPR

 Dont want to implement minimum standards

Believe it will hinder growth

Able to steal tech from the developed world by:

Imitating Reverse engineering already developed products and processes

Without this ability they fear they will not be bale to catch up to developed nations Fear firms will force them to pay royalties to use tech
Would amount to transfer of wealth from poor to rich

Developed Countrys Viewpoint on IPR

 Think developing countries argument is misleading

They would see a net benefit from strong IPR protection

Strong protection encourages investment by foreign firms

Less fear of leakage of their tech

Patent

 An exclusive right for an invention which is a product or process that either:

provides a new way of doing something offers a new technical solution to a problem

Owner can either prevent others from using it or license it to another for a certain period
Licenses are accompanied by agreements to provide technical assistance to teach the licensee how to use the invention

R&D

 Firms are increasing outsourcing their R&D functions overseas corps Number of the worlds developing nations are top R&D destinations IPR protection important in countries where outsourced R&D is taking place

Relationship Between IPR Protection and Licensing

 Increasing IPR protection

increases licensing activity only in countries that already had some minimum standards
Strengthening IPR protection reduces imitation risks in these countries makes it more attractive to licensing

Does not increase licensing in countries without standards

Because imitation risks are low in these countries due to low levels of human capital Increases profitability for licensors Will not increase the flow of tech into the country

Countries tend to lower IPR protections until they reach a per capita GDP of $1,000
Pattern exhibits flout and follow

Relationship Between IPR Protection and FDI

 Similar link between IPR and FDI

Stronger IPR higher FDI
Especially in certain high tech sectors Can impact modes of investment in all sectors

Strong IPR protection shows foreign company that the investment climate in the country is positive

China and IPR

 The probability the IPR law will be enforced is less than 30% Companies take proactive steps to prevent their Chinese partners from stealing from them
Produce the less sensitive components in china and put them together somewhere else

Shows that mere existence of IPR laws does not guarantee their effectiveness

Transperfect

 A language services company that was founded by a UF grad Business is project based or transactional
85% of its business is repeat business

Challenges doing business internationally:

Language barriers Cultural challenges Human resources Understanding the marketplace

Ethnocentric

 Believe that our way is the best way Very popular with Americans
Do not make an effort to adapt to cultural differences

News Article: Terrorist Attacks in Nairobi

 The terrorist attacks are considered to be macro political operating risk

Macro political attacks target the entire country not just just specific sectors or people Operating attacks could harm a companys employees or damage physical assets
Impacts the firms willingness to do business in a country

News Article: Grand Theft Auto V

 Could have a measurable effect on our GDP Need to figure out if consumers are still spending the same amount on entertainment and then buying the game Or using the game as a substitute for buying other forms of entertainment

Culture

 The collective beliefs, behaviors, customs, attitudes, and values that make societies distinguishable The prevailing one in a society establishes the rules of how individuals and firms operate
Determine what's acceptable and not acceptable

Primary Characteristics of Culture

 Culture is learned
Passed from generation to generation From members of society to others

Culture is adaptive
External forces can change it

Culture is shared
Every society has at least one culture

Culture is interrelated with many aspects of society

Affects how we interact with other people and societal level

Elements of Culture

Social structure Language Communication Religion Values and Attitudes

Social Structure

 Encompasses:
individual roles in society Social stratification Social mobility

Individual Roles in Society

 Types of Families define how important individuals are

Nuclear Family father, mother, offspring
US

Extended Family other related individuals and nuclear family Some believe family extends out to members of a clan or people who share a common ancestor
Somalia Middle Eastern countries

Individual is important nuclear family Groups are important extended and clan families
Japan

Social Stratification

 Grouping people based on socio-economic status

Birth Occupation Education

Managers hiring workers in high stratified cultures must base it on socio economic variables High in the UK and India

Social Mobility

 Individuals ability to move from one social stratum to another Low in highly stratified cultures
UK and India

High in less stratified cultures

US, Singapore, Canada

Can affect how people approach:

risk taking Entrepreneurship Education human capital formation labor relations

Economic Mobility

 Related to social mobility Ones ability to move up or down the economic ladder during ones lifetime and across generations Two measures:
Absolute mobility Relative mobility

Can experience absolute without relative mobility Three Factors Affect it:
Education Savings Neighborhood poverty

Absolute Mobility

 Whether you are better off than you were before of whether you are better off than your parents were

Relative Mobility

 Whether you are better off compared to everyone around you

Economic Mobility: Education

 People who are more educated tend to earn more

Economic Mobility: Savings

 Important they allow people to make investments Survive emergencies without taking out more debt

Economic Mobility: Neighborhood Poverty

 People who come from low income neighborhoods tend to have poor educational opportunities
Therefore earn less

Explanation for this phenomenon:

Household demographics:
Households in poor neighborhoods have a high % of low income families with single parents
Single parents have to work a lot so they cannot focus on their children

Property taxes:
Local schools are funded by property taxes House values are lower in low income neighborhoods less money to spend on the education system

Social Stratification and Skin Color

 Controversial attitude to social stratification and skin color Many firms produce products that change skin colors due to societies that place and emphasis on the importance of skin color Many Asian countries believe having lighter skin is better
Johnson & Johnson and Unilever have made products to supply this need

Language

Major functions:
Convey formality and informality of a culture Primary delineator of cultural groups Offers clues about cultural values
Many languages have an informal and formal way of saying you the US does not shows US has a lower level of formality

Shapes how you see the world Aids in acculturation process through which people learn the behaviors acceptable in a culture Differences in language are in indicator of diversity
Country has more languages spoken there more culturally diverse it is EX: India

Indicator of differences in income, education, and cultural values Can be a competitive weapon
Two countries are more likely to trade with each other if they have the same language

Language differences offer companies the opportunity to target market segments People dont always mean what they say the same word in different cultures holds different meanings

Lingua Franca

 Means predominant language English language of international business

Translation

 Can help eliminate some linguistic barrier Must focus on ideas rather than word for word

Back Translation

 Process used to avoid translation issues One person translates the document into another language Second person translates it back to see if it matches Make sure to use common words and phrases to avoid mistranslation or misunderstanding

Communication

 Process:
Sender encodes message and sent to receiver Receiver decodes that message
People use their own cultural filters to decode messages and can cause misunderstandings

Two Types:
Verbal Nonverbal

Nonverbal Communication

 80 to 90%of information is transferred this way Transmitted through:

hand gestures Eye contact Body posture and position Intonation Facial expressions

Customs and conventions of nonverbal comm. differ by culture

Using the wrong one could cause offense in foreign counter parts

United States Hand Signals

Come Here

 Latin America is a suggestive come on

Okay Symbol

 Brazil asshole Turkey asshole Japan Money

thumbs up

 Middle East shove it up your ass

White Flowers

 Asian cultures only sent to funerals

Giving gifts with left hand

 Unclean to give it with left hand because it used to be used to clean yourself before toilet paper
India Africa Middle East

talk to the hand

 Greek rubbing poop on ones face

Placing your finger on your nose

 Japan indicating Me

Place your hand on your chest

 Arab countries praise be to God

Reaching around your head to touch the opposite ear

 Russia Why so complicated

Gift Giving and Hospitality in Countries

 Japan if given a gift must open it in private Arab countries open the gift in public China typical to woo clients with lavish banquets in private US woo clients in public
Especially in expensive restaurants Called see and be seen

Religion

 Shapes social attitudes

About planning, work, consumption, and individual responsibility

Constrains business Affects advertising campaigns

How will firms ads resonate with the local population
USs ads are in the middle when it comes to how risqu they are

Shapes consumer behavior Must be sensitive to religious traditions

Major Religions

 Four of them
Christianity Islam Buddhism Hinduism

Christianity

 Protestant work ethic emphasizes achievement, hard work, frugality, and the glorification of god Spend a lot more during Christmas season compared to other seasons South America Roman Catholic
Tolerant of other religions Religion only affects holidays and work schedules

Hinduism

 Emphasizes spirituality over material possessions and success Caste system affects social mobility

Islam

 Emphasis on ones obligation to society Countries that follow Islamic law

Restrictions on women causes countries to be poor because they disqualify half the work force

Consumer spending falls during Ramadan Major role in Saudi Arabia 99% are Muslim
Restrictions during Ramadan
Must pray five times a day

Different rules apply to finance and banking Role of women different Sensitive to the name and image of Allah or Prophet Mohammed
Any depiction of Allah could be offensive

News Article: Revised GDP Numbers

 2nd Q GDP growth went from 1.7% to 2.5%

Largely due to export increase Still sluggish though

Fed Chairman Ben Bernanke

Held off on scaling back the Feds bond purchases

Values and Attitudes

 Culture shapes ones values and attitudes towards:

Time Age Education Status

Time

 US and UK time is money Latin America, Middle East, and Africa punctuality not as important

Age

 US youthfulness is an asset Asia and the Middle East youthfulness is a liability Japan rank usually depends on age

Education

 US everyone should get a higher education UK elite higher education is for only a small number of students Germany relies on apprenticeship programs Japan and France prepare students for an college entrance exam
Only highest percentile attend the top universities

Status

 US achieved through personal achievement Europe social status is inherited Japan social status determined by corporate affiliation India affected by caste system

Halls Cultural Context Approach

 Low context cultures very literal

Speakers words explicitly covey the intended message US, Canada, Switzerland, Germany Contracts and facts more important

High Context cultures context of conversation is important

Focus not only on words but cultural cues such as non verbal comm. Japan and the Arab nations Relationships and emotions more important

Cultural Cluster Approach

 Classifying cultures by grouping them together that share cultural dimensions and common business practices
Based primarily on geography and language

Include:
Anglo Latin America Germanic Nordic Latin European Arab Near Eastern Far Eastern

Issue: rarely universal agreement to which countries belong in which clusters and some countries dont fit into any clusters Managers that use this approach expand to one cluster of countries

Hofstedes Five Dimensions

Social Orientation Power Orientation Uncertainty orientation Goal orientation Time Orientation

Social Orientation

 Individualism or collectivism Individualism interests of the individual takes precedence

US, UK, Canada, New Zealand, Australia

Collectivism interests of the group takes precedence

Mexico, Greece, HK, Singapore, Colombia, and Pakistan Tend to be organized in well defined social networks
Such as tribes and extended families

Power Orientation

 Extent to which people accept hierarchies Power Respect accept it

Accept authority based on someones position Tend to be more collectivistic cultures France, Mexico, Japan, Spain, Brazil, Singapore

Power tolerance place less importance on hierarchies

More likely to bypass authority and question a superior Better equipped to handle the needs of a start up Tend to be more individualistic US, Israel, Ireland, Denmark, Germany

Uncertainty Avoidance

 How people respond to ambiguous or uncertain situations Uncertainty acceptance positive response to change and new opportunities
Firms here actively seek out change Belief that rules are meant to be broken Employees are free to seek out other opportunities that will maximize their income US, Canada, Denmark, HK, Sweden

Uncertainty Avoidance prefer consistency and structure

Rely on rigid hierarchies and rules to get work done Lifetime commitment to their job Rules are there to be obeyed Israel, Italy, Japan, Colombia, Austria, France, Germany, Peru

Goal Orientation

 They way people are motivated to achieve goals Aggressive goal behavior value money assertiveness, and material possessions
Rigid gender roles Japan Lesser extent in Mexico, US, Italy and Germany

Passive Goal Behavior value quality of life, social relevance, and the welfare of others
Societal concerns placed over profits Woman play a more important role in business Norway, Finland, Sweden, Denmark, and the Netherland

Time Orientation

 Take a long term or short term outlook Long term outlook value hard work, dedication, perseverance, and thriftiness
Japan, S. Korea, Taiwan, HK

Short Term outlook value traditions and social obligations

Guided by past norms and traditions regardless of their affect on the future Pakistan, West Africa Lesser extent US and Germany

Cultural Convergence

 Cultures are becoming more similar over time Involves an exchange of ideas, lifestyles, attitudes, and goals MNCs contribute to this through advertising
Helps define appropriate lifestyles, goals, and attitudes by bringing new techniques, technologies, and values to the global marketplace

Self Reference Criterion

 Unconsciously using ones own culture as a reference point to understand the rest of the world

Cross Cultural Literacy

 Understanding other cultures through research, experience and training

News Article: Govt Shutdown

 Shutdown because of political disagreement between republicans and Democrats over Obama care Most direct impact: 8000 govt employees will not receive pay checks Not good for economic growth
GDP growth will decrease by .15% for every week the shut down continues

Ethics

 And individuals beliefs about what is right and what is wrong

Social Responsibility

 Also known as corp social responsibility (CSR) An orgs obligation to protect and enhance society
Behave well in its interactions with the natural, social, and political environment

Ethical Behavior

 Behavior that conforms with the generally accepted social norms Societies generally adopt laws based on the ethical standards Social expectations, personal values, and religious beliefs must supplement the law determining and individual's personal ethical behavior

Unethical behavior

 Behavior that does not conform with social norms Not all unethical behaviors are illegal

Generalizations about Ethics and ethical behaviors

 People have their own individual beliefs of what's ethical and unethical People form the same culture are more likely to have the same ethical beliefs What is ethical depends on circumstances People may deviate from beliefs about ethical behavior depending on the situation Ethical values are impacted by national customs and cultures
Nepotism more acceptable in china

Ethical Variation in How an Org. treats its employees

 Hiring, firing, and career development Wages and working conditions Workers rights and dignity

Ethical Variation in How Employees Treat Orgs

 Conflicts of interest
US does not allow employees to take gifts Japan and china this is common

Secrecy and Confidentiality

IPR more important in the US than china

Honesty

Guanxi

 Chinas concept of mutual back scratching Extend favors to one another in the interest of good business both benefit

Ethical Variation in How Employees and Orgs treat other economic agents

 Customer:
Advertising truthful? Products safe?
China has had a huge issue with this

Competitors:
Does the company bribe vendors? Does the company steal ideas?

Stockholders:
Financial disclosures honest and complete?
Sarbanes Oxley Act

Suppliers:
Companys suppliers ethical? Are they held to an ethical standard?

Labor unions:
Working conditions good? Can they negotiate for wages?

Ethisphere

 Organization that scores international companies based on:

Compliance programs Reputation Corp governance Corp citizenship Culture of ethics

Gap, H&M, Ford, Accenture, Adobe, Microsoft

Social Media

 Has caused more companies to be transparent Or receive bad backlash from people using these sites that could damage their brands and reputations Called the age of damage

UN Global Impact

Strategic policy to help companies that want to increase their CSR with ten principles
Human Rights
Should support and respect the protection of the internationally proclaimed human rights Not complicit in human rights abuse Uphold freedom of association and the effective recognition of the right to collective bargaining Elimination of all forms of forced or compulsory labor Effective abolition of child labor Elimination of discrimination in respect of employment and occupation Precautionary approach to environmental challenges Undertake initiatives to promote greater environmental responsibility Encourage the development and diffusion of environmentally friendly technology Should work against all forms of corruption including extortion and corruption

Labor

Environment

Anti Corruption

Majority of signatories are from Europe and Latin America Mostly small privately owned companies Often spread commitment to subsidiaries and suppliers

Organizational Stakeholders

 Any people or org that has a stake in the orgs performance and are impacted by their practices Customers Employees Investors

CSR and the Natural environment

 Minimize negative impacts Increase beneficial initiatives Customer pressure and social media forcing companies to become more green

CSR and General Social Welfare

 Rebound in profits as we see increases in charitable giving

Four basic Approaches to adopting CSR

 Obstructionist take little action as possible

Actions run afoul of the law try to deny responsibility

Defensive meet all legal requirements but does nothing more

Generally focus on just creating value fore share holders

Accommodative meet all legal and ethical requirements

In some case go beyond this

Proactive seek opportunities to contribute to society

Managing CSR Formally

 Legal Compliance conformity to regional, national, and international laws Ethical compliance orgs members adherence to basic ethical and legal standards
Ethics committees, ethical training, guidelines and codes

Philanthropic giving donating money and gifts to charities and social programs

Managing CSR Informally

 Orgs leadership and culture top leaders must promote social responsibility and ethical behavior Whistle blowing some corps promote this some do not
US passed a law to protect whistle blowers Japan shuns whistle blowers an act of betrayal
Not integrity

Corporate Social Audit

 Higher managers formally analyze the firms CSR efforts and effectiveness Steps:
Define specific social goals Analyze resources that the firm can devote to those goals Asses whether the firm successfully achieved those goals Recommend courses of action

CSR Policy formation: State

 Passes and enforces laws the org must abide by

CSR Policy formation: Market

 Organizes inputs Manages production Allocates outputs to the people of society

CSR Policy formation: civil society

 Includes labor unions, churches, charitable groups, and non govt orgs Contribute to pubic opinion and public policy

Anglo Saxon Approach

 The state, the market, and the civil society are all separate entities
Operate antagonistically and compete with one another

Corruption occurs when there is not separation between business and the govt Inappropriate for business and civil society to have too much influence on the govt Competition among groups achieves social goals

Asian Approach

 Close relationship between market and govt Civil society plays a minor role highly organized business networks with strong ties to the govt
Japans keiretsu chaebol in S. Korea

Continental European Approach

 Cooperative relationship between govt market and civil society

Economic and political actors in these countries attempt to reach consensus between the three

Foreign Corrupt Practice Act

 FCPA Us firms, their employees, and agents cannot bribe foreign officials to influence actions or policies to gain business

UK Anti Bribery Act (2010)

 Prevent corruption by any company that has a business footprint in the UK Punishes companies that fail to prevent bribery that know its happening More comprehensive and extensive than FCPA Applies internationally

Alien Torts Claim Act (1789)

 To impose liability on US corps that benefit from human rights abuse of foreign govts

Anti Bribery convention of the Org. for Economic Cooperation and Development (OECD)

 Developed in 2000 International attempt to eliminate bribery by mandating jail time for those convicted of bribery

International Labor Organization

 ILO Watchdog that monitors working conditions in developing countries ILO inspections help a company gain favor with consumer activists

Extra Info From Textbook

JIT

 Just in time Inventory management system Originated in japan

Worlds Largest Corporation

 In 2010 Walmart

The Lexus and the Olive Tree

 By Tom Friedman Lexus represents homogeneity of aspirations and points of view resulting from globalization Olive tree is the nation state There will continue to be sometimes an antagonistic relationship between the global economy and the nation state
Some People will continue to criticize globalization

Old Age Dependency Ratio

 Measures the ratio of the number of people 65 and older to the number of people between the ages of 20 to 64 Countries with growing old age dependency ratio firms will face:
Higher taxes Smaller workforce Large portions of money and labor go into caring for retirees

Flower Industry

 One of the fastest growing inudstries in the world Dutch are the largest exporter 65%

Global Trade

 63% conducted in:

North America Europe Japan

USs marketplace

 Is a major exporter an importer Trade accounts for a small share of the US economy

OECD

 Organization for Economic Cooperation and Development 34 market oriented democracies

Prominent European Countries

 UK and Switzerland
Have not adopted the Euro Switzerland is not in the EU

Spain and Italy

Have adopted the Euro and are in the EU

Russias Economy over the past 15 years

 Economy has rebounded Vladimir Putin 2nd President

Successfully implemented 13% flat tax rate
Has worked

Russias GDP has picked up and is poised to grow rapidly in the future

Asias GDP

 Less than 25% of the worlds GDP

Sogo Shosha

 Members of keiretsu rely on this export trading company to help them export goods

Chaebol

 South Korean conglomerates similar to the Japanese keiretsu

Chinas Communist Party in 1989

 Massacred pro-democracy supporters in Beijings Tiananmen Square Icing the relationship between China and the developed countries

Cradle of Civilization

 Another name for the Middle East Earliest components of human societies evolved here Including:
Agriculture Govt Legal codes Alphabets

Important Sovereign Wealth Funds

 The Abu Dhabi Investment Authority

Largest sovereign wealth fund

China Investment Corporation

Bolsa Familia

 Program by former Brazilian President Luiz Inacio Lula da Silva Aimed to reduce poverty through conditional cash transactions Under the program:
Cash subsidies are only provided to families if children attend school at least 85% of the time and if they participate in health programs

Targeted:
Short term problems health and nutrition Long term problems education for economic success

Evolving Areas of Law Due to the Internet

IPR Consumer privacy Cyber Squatters Country specific Restrictions

Cyber Squatters

 people who buy domain names solely for the purpose of preventing legitimate companies from acquiring it
In hopes of selling them in the future

World Intellectual Property Organization (WIPO)

Has arbitration procedures to resolve such cases

Dual Use Products

 Products that can be used for both civilian and military use Tight Export Controls on high tech products

Patent Systems

 First to invent
Used by the US
Required invention to be novel, useful, and nonobvious to acquire and patent

First to File
Used by the rest of the world

Patent Flooding

 Company files for a patent on small modifications to existing inventions

Prohibiting the company that originally made the invention from making improvements

Happening in Japan
Gives patent protection for even small improvements to existing inventions

Germanys Accounting standards

 Standards have a strong anti inflation bias

Reflects the country's aversion after the hyperinflation of the 1920s

Businesses rely on big banks for capital

Standards are geared mostly to the needs of lenders

More conservative approach for standards:

Tends to overvalue liabilities and undervalue assets

Social Balance Sheet

 Required by french firms Shows how they treat their employees

US and Sources of Capital

 Businesses rely on public investors for capital US accouting standards emphasize transparency and accurate info to the public

Japans Accounting Standards

 Tailored to the needs of lenders and keirtsu partners because:

Businesses are often parts of kiertsus Debt to equity ratios are higher than in most western countries

International Financial Reporting Standards

 IFRS Set of standards that encourages transparent financial reporting Many Foreign companies are starting to adopt this

Nepotism

 Not acceptable in the US

They emphasize the importance of the individual and personal success

Acceptable in China and Arab countries

Extended families Collectivist cultures

Frowned upon in individualistic societies

Key Cultural Elements of the Japanese Culture

Hierarchal Structure Groupism Wa social harmony Obligation

Hierarchal Structure

 Social hierarchy defines how people should interact Businessmen exchange business cards upon meeting so they know how they should interact

Groupism

 Japanese children are taught to develop a strong identity as a member of a cohesive group
Opposite of the US: trained to develop a sense of self worth as individuals

Wa

 social harmony
Group members make decisions by consensus Japanese firms base pay on seniority rather than performance

Obligation

 Firm takes on duty to respect the employee Employee takes on duty to respect the firm Lifetime employment is common in Japan

British Class Structure

 Based on Medieval Europes feudal system Strong social stratification regimes

Greeting Business People

 US handshake Brazil kisses and hugs are more common

Business People in Conversation

 Stand closer when they talk in Saudi Arabia than the US

okay symbol

 US means okay Eastern Europe considered vulgar

Silence During Meetings

 US Rude and uncomfortable Japan perfectly acceptable

Max Weber

 Attributed rise of capitalism to the protestant work ethic

Achievement Hard work Frugality Glorification of god

Time in the US

 Time is very valuable Influenced by protestant work ethic Business meeting start right away
Immediately discuss business at hand
Opposite in Saudi Arabia and Japan
Must begin with pleasant conversation to develop trust

Sharia

 Islamic Law

Cultural Influence on Form of Entry

 Firms entering a coutnry with similar cultures do so through joint ventures Firms entering a country with dissimilar cultures do so through greenfield investment

Greenfield investment

 Starting a business from scratch

Major Areas Most Susceptible to Ethical Variation

Advertising and Promotion Fianncial disclosures Ordering and purchasing Shipping and solicitations Bargaining and negotiating

Diamonds

 Have a high value to weight ratio Offten smuggled

Conflict Diamonds

 Smuggled diamonds Responsible for the start of many civil wars in Africa Diamond industry faces pressure from consumers and has refused to trade conflict diamonds Growing concern about them has provided and opportunity for Canadas gem industry

Smokin Notes Exam Questions Review

Glasnost

 Soviet policy of openness to the West Adopted by former communist leader Mikhail Gobachev (1985 1991)

IPR Protections Relationship with Licensing and FDI

 Unequivocally positive NOT MOSTLY POSITIVE

Cocaine Use

 US is the highest user of cocaine

Levels of use have remained stable

Europe is the second highest user of cocaine

Levels have doubled

Rise Of Capitalism

 May be attributed to the Protestant work ethic

Preconditions of the Principle of Comity

 Reciprocity is extended between countries Defendant receives proper notice Judgment does not violate any domestic statutes and treaties Foreign court has less stringent puntive damages for corporations

Russia

 Has more currency reserves than any other country except for China and Japan Inequality is getting better Benefited in recent years from rise in oil and natural resource prices Russias economy has grown relatively rapidly since 2000 5.9% per year

Draghi Doctrine

 Do anything possible to save the Euro

Great Trade Collapse

 Refers to the decrease in trade during the recent financial crisis

Sectors that improved after Sept. 11th

 Energy and defense Sectors that suffered telecommunication and the financial sectors

Ethical Violation of Siemens

 Was fined Fired top executives in response

When did trade begin

 Historians believe as far back as 2000 BC

Ethics Concerns of BP

 Worker safety Environmental safety BP oil spill killed workers and led to a huge environmental disaster

Indonesia

 Worlds 4th largest country Largest Muslim country