International Business Environment

International Market Entry

• Need for diplomatic channels

• Exports, Imports, FDI
• Example of Diplomatic intervention
• China and Pyramid Scheme
– Amway, Avon, Tupperware successful but banned due
to some other firm cheating
– Intervention of US restored the business
– Microsoft
• Home and host political (decision making, affinity or animosity)
and economic interests vary
 What is Economic Integration?

• Unification of economic policies between different states

– partial or full abolition of tariff and non-tariff restrictions
on trade taking place among them prior to their integration.
• Trade agreement
– Bilateral or multi lateral
– How countries will work together
– Mutual benefit
 Trade Barrier -Tariffs
A tariff is a tax on imported products or services. In the
case of tariffs imposed by the United States, the business that
imports or produces the foreign product must pay the tax to
the government. The tariff revenue goes directly to the
governmental Treasury.

Tariff = taxes =
money
 Example of a Tariff
Two companies sell athletic shoes to India . Company 1
is located in Brazil
Company 2 is in Chennai, India
A tariff must be paid on all shoes made outside India and sold in
India
The tariff is 10% of all sales. Both companies sell shoes at a
price of Rs 1000 per pair
1. Which company must pay the tariff? Which company
benefits from the tariff?
2. How much will the tariff cost the company?
3. Who receives the revenues generated by the tariffs?
 Trade Barrier 2 - Quota

• A quota is a limit on the amount of goods that can be

imported. Putting a quota on a good creates a shortage (or a
scarcity), which causes the price of the good to rise and allows
domestic (inside the country) producers to raise their prices and
to expand their production.
 Example of Quota
Germany has imported 2 million tons of steel from France
every year for the past decade.
Germany then started an import quota on steel.
Germany now only imports around 1 million tons of steel from
France, but the country of Germany still uses around 3 tons of
steel a year.
1. How will this impact German steel companies?
2. How will this impact French steel companies?
3. Why would a country do this?
 Embargo
An embargo stops exports or imports (sending goods to
another country and getting goods from another country) of
a product or group of products. Sometimes all trade with a
country is stopped, usually for political reasons.

Draw a stop sign

so you remember
that an embargo
means countries
stop trading with
others
 Example of Embargo

Last year Spain had some political disagreements with Greece,

so they enacted an embargo against Greece. With the
embargo, no Greek ships are allowed in Spanish ports.
1. How will this impact Greece?
2. Why would Spain want to do this?
3. Will Spain benefit from this decision?
 Decide what kind of barrier is being imposed in the
following examples…

1. A tax of 15% makes jewelry from Mexico more

expensive than jewelry make in the United States.

2. The European Union prohibits the importing of meat

products from animals treated with growth-promoting
hormones.

3. Korea may export only 15,000 automobiles a year to the United

States.
 Barriers

Tariff Non Tariff

• Import tariff/duty • Government regulations and policies
• Export tariff • Government procedures which affect
• Transit duties the overseas trade
• Specific duty • Quotas – numerical limits – import and
• Ad valorem export
• Compound duty • VER- Voluntary Export Restriction
Fixes a quota on what will be exported
to a country
• Subsidies
• Embargo
 Economic Integration

Why Why Not?

• Trade creation • Increase trade barriers
– Wider selection of goods and
services • Trade diversion
– Lower cost due to lowered tariff – trade with non-member
or removal of tariff
countries in favor of trade
– More trade – more benefit –
more money available with each other
• Greater consensus • National sovereignty
– Lesser number of countries
– Give up control
• Political cooperation
– Ability to handle social and
economic challenges
• Employment opportunities
– Shifting of units to cheaper
areas
 How ??

• Formation of trade bloc

– A trade bloc is a type of intergovernmental agreement,
– Where regional barriers to trade,
– Are reduced or eliminated among the participating states
Types of Economic Integration
S
A Hierarchy of
Regional Economic Integration Initiatives
Free Trade Elimination of
Area Trade Barriers

Customs + Common External

Union Trade Positions

Common + Labor/Capital
Market Mobility

Economic + Coordinated Monetary

Union and Fiscal Policy
Complete
Economic + Coordinated Political
Integration
and Social Policy
 Preferential Trading Area

• Gives the participating country a preferential access for

specific products.
– Reducing the tariffs but not completely removing them.
• Not allowed among WTO members who are obligated to grant
most-favoured nation status to all other WTO members
– Thus, if a country's low tariff on bicycle imports, for
example, is 5%, then it must charge 5% on imports from all
other WTO members
• 'India, Chile expand preferential trade agreement'
 Trade Blocs- Free Trade Areas
NAFTA, ASEAN, SAARC

• Group of countries without any

trade restrictions within the area,
• Each member country retains its
own tariff and quota system on trade
with third countries
• Problem
– Non members take advantage of
different trade policies among
members.
– Member countries with lower
tariffs get more trade.
 Trade Blocs-Customs Union
Mercosur
• CU = FTA + common tariffs and
quotas (CET)
• Removes all restrictions on
mutual trade
• Adopt a common system of tariffs
and quotas with third countries
• Problem
– Member countries with low
wages or taxes attract more
foreign direct investment
(FDI).
– Southern Common Market
– Mercosur (Argentina;
Bolivia; Brazil; Paraguay;
Uruguay;
SACU
 Trade Blocs-Common Market
• A CU becomes a common market with
East African Community , EU the removal of all restrictions on the
movement of factors.
• CM = CU + free factor mobility.
• Prevent non member countries from
taking advantage of different wages
and taxes.
• Common languages, culture and
business practices facilitate the
formation of a common market.
• Problem
– Income Tax Rates still differ.
Countries with lower income tax
rate get more FDI.
Trade Blocs-Economic Union (Monetary Policy)
• Adopts a single currency together with
a single central bank.
• Economic Union = CM + a single
currency, a central bank, Monetary
Policy (Interest and discounts)
• European Monetary Union
• Problem
• When several countries fail to pay back
their debts in full (e.g.,Portugal, Italy,
Ireland Greece, and Spain), this
situation jeopardizes the regional
currency (i.e., euro in the EU).
Trade Blocs-Political Union – Full Economic
Integration
• An agreement between two or
more countries to coordinate
their economic, monetary,
fiscal and political systems.
• Required to accept a common
stance on economic and
political policies against non-
members.
• No control over economic,
full monetary union and
complete harmonization of
fiscal affairs
 Economic integration: an overall perspective

• Can join at any level – based on political and economic level

• Second, each member can specialize in those goods and services it
makes most efficiently and rely on others in the group to provide the
remainder
• Internal economies of scale - Efficiencies brought about by lower
production costs and other savings within a firm
• External economies of scale - Efficiencies brought about by access to
cheaper capital, highly skilled labor, and superior technology
• Finally, in the short run, some bloc countries may suffer because other
member countries are able to achieve greater efficiency and thus
dominate certain industries and markets in the bloc. In the long run,
however, economic integration results in all bloc
countries becoming much more efficient and competitive
 Types of Trade Blocs
2-30 Level of No Tariffs Common No Harmoniz Unified
Integration and Quotas Tariffs and Restrictions ed/unified Eco. &
Quotas on Factor Eco. Political
Movements Policies & Policies &
Institution Institutions
s
Free Trade Yes No No No No
Area
Customs Yes Yes No No No
Union
Common Yes Yes Yes No No
Market
Economic Yes Yes Yes Yes No
Union
Political Yes Yes Yes Yes Yes
Union
 Why Economic Integration?

• Increased productivity
• Specialize in the product they have comparative advantage
• Provides the countries with the economies of scale
• Political reasons for creating integrating economies
 Evaluation of Economic integration

• Greater size of the market

• Potential for exports
• Greater efficiency
• More choice
• Lower prices for consumers
• Increased foreign investment
• Greater political stability
• Free trade among members but discriminatory policies against
non-members which might not lead to global economic
integration.
 Ethics, environment,
MNEs and the civil society
• The civil society is a group of individuals, organizations and
institutions that act outside the government and the market to
advance a diverse set of interests, including opposition to
global business.
• Non-governmental organizations (NGOs) are private-sector
groups that act to advance diverse social interests.