1

MNI3701 – Global Business Environment

1: Overview of global busn Globalisation of businesses

Prev, globalisation meant busn expanded from developed to emerging economies, today if flows in both directions, & from 1 developed economy to another

MNEs must create sustainable competitive advantage over period of time so must understand modern global busn env & forces impacting the env

By est sustainable comp adv, busn can be assured of LT profitability (achieve by venturing abroad)

Modern global busn env is chaotic & volatile, contributing factors are 1. BRICS emergence (Brazil, Russia, India, China, South Africa) (all developing/ newly industrialised

countries with fast growing economies) 2. Shifting political & economic power to Asia (South Korea & China) 3. Changing cons prefs & demographics 4. Incr global political & economic instability 5. Changing nature of competition 6. Incr global terrorism 7. Incr risks of doing international busn 8. New legal & trade frameworks 9. New & cheaper wireless tech

Global nature of competition forces busn to distr prods widely, adapt to env change, create global alliances, be env & socially resp & sensitive to cost reduction & local needs

Major motivation to expand abroad is to seek location-specific adv (enter new markets, relats with diverse partners)

Factors contr to rise of G 1. Liberalisation of national markets 2. Dev of new & cheaper comm & transport tech resulting in expansion of int trade & investment 3. Systems reengineering & renewal 4. Fall of communism & rise of capitalism

Globalisation denotes level of interdependence btwn ppl, countries & nation states

Defining globalisation

Sociological perspective

Incr importance of humanity as collective actor in metaphysical study of nature of existence signifies collective mode of life & converging world culture

Consensus about interdep of global culture but doubtful reality of a global culture

Encapsulates G as process that diminishes int borders so incr possibility of global cultural homogeneity

Economic perspective

IMF sees G in purely economic terms – a historical process as result of human innovation & tech process, leading to incr economic integration around world, esp through movement of goods, services, capital, ppl & knowledge across borders

Encapsulates G by IDing movement of goods & services (globalisation of market) & movement of capital & input materials (G of production)

G of markets – merging of historically separate national markets into 1 global marketplace

2

G of production – sourcing of goods & services from locations around globe to get location-specific adv in labour, res & capital

G has achieved 1. Improved std of living 2. Incr trade 3. Diffusion (distribution) of tech 4. Access to info 5. Integration of world markets 6. Resulted in lower prices for goods & services

Institutions of Washington are GATT (General Agreement on Tariffs & Trade), IMF (International Monetary Fund) & World Bank

Main shortcoming of G is job losses from competition of foreign firms & financial crisis from liberalisation of fin markets

Drivers of G

G is growing interdep of countries worldwide through incr volume & variety of cross border transactions in goods & services, & int capital flow

Developments notable for driving G are significant changes in 2 main areas:

1 Changes in political env

1. Creation of global economic/ trade regulatory bodies (GATT)

GATT served as conduit through which int trade negotiations & arrangements were conducted (only regarding goods)

Then disbanded & became WTO (World Trade Org) which now covers trade in services & intellectual property as well

2. Collapse of communism

State owns & controls all res & assets incl production & distr of goods (Marxism is political & economic ideology)

Main goal was to bridge gap btwn rich capitalists & poor working class

After collapse of Soviet Union, largest communist protagonist, acted as catalyst for spread of capitalism & realisation of trade liberalisation

Essential features of communism are in 10 ideological pillars 1. Abolition of private property & confiscation of privately owned property to become

public property 2. Heavy progressive/ graduated income tax 3. Abolition of all rights of inheritance 4. Confiscation of property of all emigrants & rebels 5. Centralisation of capital market under exclusive control of state 6. State ownership & control of communication & transport 7. State ownership of factories & agriculture, full use of state res 8. Absolute state control of labour, majority to agriculture 9. Economic integration of agriculture & manuf, equitable distr of social amenities &

eradication of rural areas 10. Free edu for all children in public schools & abolition of child labour

2 Changes in tech env

1. Email & video conferencing – email makes it easier to comm & share info, cost saving, quicker, saves time, vid con allows brainstorming in virtual env irrespective of geog, saves money & time

2. Internet & www – monitor & respond to competition, reduce prices, advertise easier, aid consumerism, improved health care coz of more access to info

3

3. Company intranets & extranets – intranet is internet network for org to share info & access data (less paperwork & admin), extranet lets suppl replenish inv when req which saves time, money & is more efficient

4. Changes in transportation tech - innovations facilitating long distance travel in short time period with comfort & safety eg air travel & speed rail (telephone tech has decr need to travel)

Evolution of MNEs

Entry modes to overseas adventure o Contractual modes – direct exports, licensing o Equity modes – strat alliances, joint ventures, wholly

owned foreign subsidiaries

Evolution of MNEs is characterised by 7 phases

1. International/ overseas enquiries o Busn rec enquiry about prod directly from foreign busn

person/ indep domestic importer/ exporter, decides to sell that prod at profit in foreign market

o Done through domestic export intermediary like export merchant, commission house, resident buyer, broker/ combination export M

2. Appoint export M o Take export M into own hands, take on proactive role & appoint export M with small staff

actively searching for foreign markets for prod 3. Est export dept & direct overseas sales

o Appoint full export dept at same level as domestic sales dept, drop domestic export intermediary & sell directly to importers in foreign markets

4. Est overseas branches & subsidiaries o Est sales branch to handle sales & promos, branch M is directly resp to home office & branch

sells directly to intermediaries in foreign markets o Branch evolves in sales subsidiary in foreign country enjoying greater autonomy

5. Overseas assembly o Assembly occurs abroad for 3 reasons – cheaper shipping costs for disassembled prods, lower

tariffs & cheaper labour o Becomes more profitable to export disassembled prods coz tariffs & transportation are lower

on disassembled parts 6. Overseas manuf

o Have a well dev export programme supported by market studies & research o Hard to incr total sales volume & profits/ enter new markets (often if gov impose tariffs/ ban

imports) o Decide to penetrate foreign market by producing prod in heart of foreign market itself o 3 methods to start foreign production

Contract manuf – under contractual agreement, foreign producer produces & sells prod in foreign market, company continues to promote & distr

Licensing – foreign company pays royalty to int company for its patents & trademarks, foreign licensee might not promote sales enough/ maintain prod quality which damages rep of int company (decide to est manuf facility via direct investment)

Investing in manuf – after est manuf facility, company has entire busn to M in foreign country, must perform busn transactions & make significant commitments of technical, M & fin res to new entity

7. Integration of overseas subsidiaries o Parent company decides to integrate foreign subsidiaries into 1 multinational enterprise, M

lose autonomy as top M make strat decisions after considering worldwide implications

4

Born global firms

Contrary to MNEs which have globalised as result of decision to do so

Firms that begin international activities from birth, enter distant markets right away

They enter multiple countries on commencement of operations & engage in operational activities across regions, transcending geog divides

Begin internationalisation process by exporting prods to culturally similar countries

Justified coz 1. Longer firm waits to implement international activities, more difficult it will be to grow (caused

by home market competitive challenges & reluctance to fight home competitors for market share)

2. Want to avoid tendency to procrastinate about int expansion 3. Self-defeating concept that cost of doing busn overseas outweighs benefits

Main factors in success of born global firms are same as those in internationalisation of contemporary busn ventures

1. Encouraging global market cond 2. New dev in transportation & comm 3. Rising num of ppl with int busn experience & skills

*Motivation for expanding abroad

1. Strat intent – achieve obj of incr sales vol by penetrating overseas markets (serve same cons needs across multiple countries so reduce marginal costs)

2. Location-specific adv – improve profits & corporate status by location-specific adv like relative cost structures & attractive demand levels

3. Theory of multipoint competition – competitors imitate e/o & try outmanoeuvre other firms 4. Theory of strat behav – firms follow their competitors abroad, major players in oligopolistic industry

are dep on strat actions of other competitors to formulate their response (way of maintaining competitive balance in industry)

5. Supplier company follows client – suppl will follow client if it expands abroad esp in service provision, suppl should be close to buyers to avoid being substituted

6. Stagnant national market – saturated national market/ attempt to reduce absolute dep on home market, & risk of national market motivate expanding abroad

*International trade theories

Explain why nations are prepared to open borders to MNEs & other orgs in interests of international trade

Mercantilism

Proposes benefits of export promotion at expense of importation

Use of states power & res to build up industry, incr surplus of exports over imports & to accumulate stocks of precious metals

Centred on nation state which was viewed as being in competitive struggle with other nations

Aim was ensuring states security & prosperity

Absolute advantage (Adam Smith)

Believed real wealth of nation lies in quality of life of its citizens

Contr to practical application of division of labour to explain absolute adv

Each country should specialise in 1 prod for which it is uniquely suited so can produce more prods in total & trade in goods that were cheaper than those produced locally

Comparative adv (Ricardo)

Country should specialise in production of goods it produces most efficiently & import those it produces less efficiently, even if could produce them more efficiently than another country

5

Potential world production is greater with unrestricted free trade

Cons in all nations can consume more if no trade restrictions

Heckscher-Ohlin factor proportions theory of comparative adv

Supports concept of factors of production & their availability in given country

Country exports prods that use its abundant factors, & imports prods that use its scarce factors

Assumes same tech/ production process is used for same goods in all countries, so it’s not diffs in efficiency of production that will det trade relations

Leontief paradox (contradiction)

Since USA was relatively abundant in capital compared to other countries, they should export capital intensive goods, but found that USA exports were less capital intensive than their imports

This result was at variance with predictions of theory, hence the paradox

Prod life cycle (Vernon)

Focuses on USAs contradictory trading patterns, based on size & wealth of US market

Demand for prods in USA leads to new prod dev, demand in other countries ltd to high income groups

As demand in other countries grows, USA sets up production facilities in these growing markets

Price becomes main competitor, foreign producers start exporting to USA

Developing countries become more cost competitive & start producing for other advanced countries & USA (USA provided the catalyst)

USA switches from being exporter of prod to being an importer

New trade theory

Economists question assumption of diminishing returns to specialisation

Argued that incr returns to specialisation may exist in certain industries & that economies of scale may not be attainable inside borders of country, but across national borders

Implies that specialisation in manuf of goods, for which economies of scale aren’t achievable in country, is generally reliant on gov subsidiaries eg manuf of aircrafts

National competitive adv (Porter)

Innovations are driving & sustaining forces of competitiveness

Success of nations is closely linked to success of their indiv busn orgs

National comp adv originates from internationally successful orgs that innovate & cont improve

National comp adv is det by 4 attributes shaping competitive env which either promote/ inhibit innovation & creation of comp adv

Porter’s diamond of national comp adv 1. Factor cond – nations position regarding production factors like skilled labour & dev

infrastructure enabling firms to compete in industry Basic factor cond – natural res, climate, basic skills Advanced factor cond – high-level skills, infrastructure, advanced tech

2. Demand cond – degree of healthy competition in local market, strengthened by strong & sophisticated local demand (primary drivers of innovation, quality improvement & competitiveness)

3. Related & supporting industries – presence/ absence of supplier & related industries that are locally & globally competitive, presence helps firms attain incr comp adv through innovation & quality improvement

4. Firm strat, structure & rivalry – cond in home industry that hinder/ aid firms ability to create, org & M domestic & int rivalry (likely to do well if strong rivalry, M strats are closely aligned to industry source of comp adv - strat M)

o Role of gov & chance events (newly added) – gov uses trade policy to enhance/ restrict trade, chance events eg tsunamis have disastrous effects

6

Original 4 attributes need to be positive & support e/o to create ideal busn climate for internationalisation

National prosperity is created through national values, culture, economic structures, inst & histories (diffs in these factors form basis of comp adv)

2: Global political, legal & tech env PESTEL model

Companies operating in global market must remain competitive, which req understanding of market demands & competitors, & necessitates response to fundamental changes in society & economy

Political – Companies operate in a broader economy which is influenced by politics & gov policy, degree gov intervenes & how it chooses to do so affects busn, incl tax policy, labour law, env legislation, trade restrictions, political stability

Economic – healthy, growing economy is NB for busn, incl economic growth, interest, inflation & exchange rate

Social – demand & tastes related to sociocultural characteristics of population, incl population growth, age distribution, attitudes towards work, religion & lang

Tech – can create/ destroy industries, raise/ lower cost of production & infl outsourcing decisions

Env – growing env consciousness impacts how firms do busn, concerns about climate change have led to new laws & incentives that change how busn operate

Legal – laws & regulations affect cost of doing busn, incl cons laws, antitrust laws (competition laws) & labour laws, they protect locals but imposes costs on busn & becomes complicated when doing busn in multiple countries all with diff laws

Political env

Political system is designed to integrate parts of society into viable, functioning unit

Greater involvement in foreign market means greater need to monitor political climate as changes in gov mean changes in policies & attitudes towards foreign busn

Gov can encourage foreign activity by offering attractive opp for investment & trade/ discourage it by imposing restrictions like import quotas

Implications of gov ownership - certain sectors are exclusive for gov, can be obliged to sell to state trading orgs, marketing is restricted (all limits firm’s infl on market)

NB to exporter/ foreign investor is stability of political env, frequent changes in regime indicate unstable economy

Reflected in govs policies & attitudes towards foreign busn are ideas about how to promote national interest, could be seen as vital to growth & dev (rec favourable treatment eg reduced taxes & exemption from quotas), / threat to local industry

Political risk

Undesirable impact of political change on orgs foreign operations & decision making process (det diff for diff companies)

Vulnerability stems from extent of capital invested in export market

Macro risk – politically inspired env changes affect all foreign investment

Micro risk – env changes intend to affect selected fields of busn activity

Risks in developing countries are civil disorder, war, expropriation (gov takes private property for purpose deemed to be public interest)

Risks in developed countries are labour disruptions, price control

Checklist for assessing political risk

1. Form of gov & length of L in power

7

2. Extent of L changes & history of gov stability 3. Volatility of electorate & popular support for L 4. Role of military in politics & religious splits 5. Amount of political participation allowed through demonstrations/ informal interest groups 6. Prospects for domestic political violence & internal security forces per 1000 ppl 7. History of coercion & regional political alliances 8. Trade/ labour disputes 9. External threats to suppl/ markets

Political spectrum (2 extreme ideologies)

Democracy

Citizens should be directly involved in decision making

Impractical so modern democracies use representative democracy where citizens periodically elect indivs to repr them

Reps form gov who make decisions on behalf of electorate, if fail to perform they will be voted out next election, which guarantees accountability

Cond for democracy 1. Meaningful competition among indivs & groups for all effective positions of gov, at regular

intervals, excl use of force 2. Highly inclusive level of political participation in selection of L & policies, through regular & fair

elections so no major group is excl 3. Level of civil & political liberties (freedom of expression, press & to form/ join orgs) to ensure

integrity of political competition & participation

Totalitarianism

1. Communist totalitarianism – version of collectivism that advocates that socialism can be achieved only through totalitarian dictatorship (communism)

2. Theocratic totalitarianism – political power is monopolised by party that governs according to religious principles (based on Islam)

3. Tribal totalitarianism – political party that repr interests of particular tribe (not always majority tribe) monopolises power (big in Africa)

4. Right-wing totalitarianism – allows some indiv economic freedom but restricts political participation, justification is anti-communist philosophy/ idea that political freedom needs to be oppressed to greater economic good

Role of state

Gov is NB cons, vital investors in socioeconomic infrastructure, largest employers

State det nature of economic system, defines who produces what, when, how

State provides predictable, stable env in which markets can flourish, they are ultimate guarantor (backer) of property rights & must be consistent & not arbitrary

Country’s economic system is defined as structure & processes country uses to allocate its res & conduct economic activities

Legal env

MNEs need to consider 3 legal dimensions 1. Laws of their domestic country 2. Laws of the foreign country 3. International law

Domestic laws govern marketing within country eg physical attributes, packaging

Diff legal systems

Common law – based on precedents & past practices

8

Code law – comprehensive set of volumes having statutory force & covering entire spectrum of country’s law (est by arbitrary methods eg speed limit)

English law – infl SA law esp if no domestic decision exists

African legal systems – mixed & epitomise most cosmopolitan aspects of G, in absence of particular legislation, country’s residual legal system will apply (shaped by country’s history eg country of colonisation in Africa)

Indigenous legal systems – ruled directly by chiefs, African law regulated private relats, customary law also still used, regulates private sphere (fam & property rights) & operates among rural community

Islamic law – also called Shari’ah & has long African history, regulates matters of personal status & family law among Muslims

European law - African countries retain law that was adopted as result of colonisation (English law, French civil law, Portuguese law, Spanish civil law, Belgian law, German law, Italian law), diff btwn civil & common law systems is lack of emphasis that civil lawyers place on precedent/ case law

Legal contracts

Central to all commercial activities, purpose is to specify rights & obligations of parties to an agreement & outline specific actions that must take place

Principal legal arrangement to export transaction is export sales contract

In case of dispute, try settle in 1 of country’s involved, then arbitration (negotiations facilitated by indep 3rd party) & lastly litigation (court)

International law

Set of laws that govern relats btwn countries/ int legal persons

No parliament empowered to create int law/ police force to enforce it but there is International Court of Justice in Netherlands which can be approached voluntarily, but countries can't be brought to the court involuntarily

Principal sources of int law are treaties & conventions, which are created when countries reach agreements on certain matters & bind themselves to it by authorising repr to sign doc embodying the agreement (failure to comply is breach of contract)

Other sources of int law are custom (int practice accepted as law) & natural law (general principles recognised by civilised nations – basis of human coexistence)

Before country is liable to comply with provisions of treaty/ convention, must 1st sign original protocol, if country defaults, sanctions can be imposed

More countries there are in protocol, easier it is to enforce by weight of opinion

Incoterms define costs, risks & resp of buyer & seller under 13 specific trade terms

Int law helps control use of sea & env outside territorial waters of countries

Impact of legal env on investment strats

In difficult contracting env, countries where incentive probs are extreme & legal framework for protecting investors is weak, M can't credibly convince investors of positive ROI

Expectation of future conflicts of interest are reflected in low price for shares offered

This discourages firm from fully diversifying & perfect risk sharing becomes unfeasible, firm may choose not to go public

Strong positive relat btwn quality & efficiency of country’s legal system & its level of economic dev

Preconditions for effective legal system 1. System must rely on framework of laws instead of ad hoc 2. Laws must be published/ known so can be obeyed 3. Must be understandable, possible to obey & consistent enough for ppl to adapt their behav 4. Must be congruence btwn rules as announced & their actual admin

9

Tech env

Tech is a method for converting inputs into outputs in accomplishing specific task, it refers to knowledge, skills & means for accomplishing a task

Tech innovation refers to incr knowledge, improved skills & improved means to achieve given task

Types of tech 1. Hard tech – hardware eg blueprints, machinery, equip, capital goods 2. Soft tech – marketing, fin & admin techniques, M know-how 3. Labour intensive – primitive tech 4. Capital intensive – highly advanced tech 5. Computer tech – impacted edu, health care, medical tech

Negative side eg weapons that can destroy human race, air & water pollution, env & health probs

In global arena, tech is NB for 3 reasons 1. Tech has facilitated process of G & allowed firms to go int through both sales & production 2. Multinational firms facilitate intercountry & intercompany transfers of tech 3. Country’s lack of tech sophistication can hinder foreign investment by raising costs of doing

busn there

Transfer of tech

NB coz of advancements in international comm, incr economic interdep & scarcity of vital natural res

It is necessary to attain high level of industrial capability & competitiveness

MNEs play NB role in transferring tech to expand production, marketing & research & to create economic & social stability in developing countries

Transfer of tech is complex, costly & time consuming & demands cont comm btwn parties involved (can't conflict with economic/ social needs of recipient country)

Dependence on foreign tech can be threat to economic indep & for seller, can lead to unempl/ future loss of tech superiority

Env factors

Sustainable dev – progress that meets needs of present without compromising ability of future generations to meet their own needs

Need to consider economic prob not only for current gen, but future gen too

Kyoto Protocol – int & legally binding agreement to reduce greenhouse gas (GHG) emissions

3: Global economic env Economic integration (EI)

Grouping countries by agreement/ treaty, on regional basis to form a trade bloc that secures benefits for member states through meaningful reduction/ elimination of tariff/ non-tariff barriers in interest of conducting cross border transactions

Adv of EI is to promote interregional trade by removing trade barriers so easier to move tradable merchandise across borders

*Types/ levels of economic integration

1 Global EI

Facilitated by rules of global inst eg WTO, IMF & World Bank

They est rules & adjudicate trade-related dispute

Promote global trade & investment through treaties ratified by member nations which provides platform for int trade & investment

2 Regional EI

10

Among countries in same geographical region

Membership det by accession through ratification of enabling treaty

Benefits member nations by removal of trade barriers btwn member states, while indiv states can implement barriers to suit particular circumstance to 3rd parties

3 Bilateral trade relations

Trade agreement btwn 2 countries facilitating preferential treatment btwn them

4 stages of economic integration

1 Free trade areas (FTAs)

Regional economic grouping of countries where non/tariffs are abolished btwn member nations

No common trade policy towards non-members eg NAFTA, AFTA, EFTA

2 Customs union

Free trade area that eliminates tariffs btwn members, but also est common tariff & other trade policies towards non-members

They pool tariffs collected by member nations & share revenue according to est formula eg MERCOSUR, CACM, CARICOM, SACU (SA Customs Union)

3 Common market

Customs union est by member nations to liberalise movement of regional production factors eg ppl & capital

Facilitates movement of goods among member nations & assists production process to achieve better economic productivity

Customs union that promotes “factor mobility” eg MERCOSUR & EEC

4 Economic union

Common market with aim of harmonising fundamental economic policies among member nations, esp those affecting monetary & fiscal policy eg EU & SADC

Measuring economic integration

1 Effects of EI on trade

Smith’s absolute adv – country will benefit by manuf more output of prod than other countries if it has req materials for production

Ricardo’s comparative adv – benefits of specialisation & trade, country should specialise in production of goods for which their adv over others is the largest

Trade can enhance efficiency in production, incr consumption & incr welfare of cons

2 *Benefits of EI

FTA would incr bilateral trade flow but not necessarily that it would yield gain in economic efficiency, & that whether incr in trade was desirable/ not dep on source of increased trade

Short term/ static effects (shift of production) – 2 possibilities

TRADE CREATION TRADE DIVERSION

Production shifts to more efficient member country from inefficient domestic/ outside country /

Imports from lower cost producer in member country instead of domestic production/ imports from higher cost non-member country

Shift in domestic consumption from high cost domestic source to lower cost partner source as result of abolition of tariffs on intra-union trade

Production shifts to inefficient member country from more efficient outsiders

Result of protectionist effect of EI where tend to import from higher cost member country instead of lower cost producer in int market

Shift in domestic consumption from low cost world source to high cost partner source from elimination of tariffs on imports from partner country & erection of trade barriers against non-member countries

11

Long term/ dynamic effects

Result in cost reduction coz of economies of scale

Positive effects of learning curves & exp help reduce production costs through mastery of production process & incr competition

Member nations can achieve incr in efficiency & economic growth by 1. Incr competition among member nations producing similar goods 2. Exploitation of economies of scale 3. Improved market size as result of reduced cost of living 4. Possibly attracting FDI from outside member countries

Polarisation can occur from concentrating production facilities in certain regions, req policy intervention to redistribute the facilities equitably across member nations

Major trade blocs

Europe (2)

European Union (EU)

EU single market is result of decisions & actions of indep European gov, to eliminate all internal trade barriers & control measures among them (27 member countries)

European Central Bank is indep inst whose decisions can't be infl by govs, they frame & implement European monetary policy, conduct foreign exchange & ensure smooth operation of EU payment system

Euro plays same role as $ in US, imagine each country having its own currency! It helps streamline trade & is binding factor to creating greater EU economic & political integration

European Free Trade Association (EFTA)

Int trade group est to foster economic growth & dev through trade liberalisation among member nations

Activities of EFTA divided into 3 areas o Monitor & M relats btwn EFTA states o Resp for dev relations with non-EU countries (3rd country relations) o Member states structured their relations with EU in form of agreement on European Economic

Area (EEA) to participate in EU single market

America (6)

North American Free Trade Agreement (NAFTA)

US signed agreement with Canada & Mexico aimed at removing most barriers to trade & investment btwn member countries

Agreement is NB coz o There were considerable trade barriers o Economists predicted it would incr trade, encourage economic growth, create job opp, incr

personal income & eliminate agricultural trade barriers

Achievements of NAFTA 1. Incr investments & flow of trade btwn members 2. Incr integration of productive processes 3. Incr knowledge of national legislation regarding labour & env 4. Safe legal framework for resolution of trade & inv disputes 5. Healthy exchange of knowledge & exp

Southern Common Market (MERCOSUR)

Largest trade bloc in Latin America, created by pact btwn Brazil & Argentina aimed at modest reduction in tariffs & quotas btwn them

Aim of the common market is to incr regional economic cooperation

12

Treaty provided for elimination of customs duties & tariff barriers, & common external tariff against 3rd parties

Andean Common Market (ANCOM)

6 Latin American countries to foster EI

Grew from its predecessor, Latin American Free Trade Association (LAFTA)

Initiatives to rectify probs of LAFTA 1. Strong political & inst support by members 2. Catalysing industrialisation process of members 3. Automatic tariff reductions with few exceptions

Central American Common Market (CACM)

Made advances towards EI, trade btwn members had incr, imports doubled & common tariff was est for non-members

Latin American Integration Association (LAIA)

Took over duties of LAFTA which was created to est common market for members to eliminate tariff barriers by given deadline

LAIA had goal of encouraging free trade with no deadline for inst a common market

Caribbean Community Common Market (CARICOM)

Haven’t yet est common external tariff as step towards EI

Asia (6)

South Asia Association for Regional Cooperation (SAARC)

Goal is to accelerate economic & social dev in member states through joint action in greed areas of cooperation

Reasons for promoting regional cooperation 1. Reduce danger of external intervention 2. Reduce political, military & economic tensions 3. Expand trade in larger market formed by reduction of trade barriers 4. Coordinate measures for mutual benefit in diverse areas 5. Improve close cultural links

Association of South East Asian Nations (ASEAN)

Key obj is to incr competitive edge as production base geared for world market

Achieved through eliminating intraregional non/tariff barriers to make manuf sectors more efficient & competitive (economies of scale & FDI would also incr)

Asia Pacific Economic Cooperation (APEC)

Aim is to promote EI around Pacific Rim & sustain economic growth

Played NB role in promoting trade & liberalisation of investment

Cairns Group

Coalition of countries with a commitment to reforming agricultural trade

Main obj is global agricultural trade reforms that incl cuts to tariffs & removal of tariff escalation, elimination of trade-distorting domestic subsidies, elimination of export subsidies & rules to prevent export subsidy commitments

Uruguay Round of GATT – Cairns Group proposed worldwide liberalisation of trade in agricultural prods, requested rights for developing countries to protect farmers against foreign competition

WTO – reforms proposed by Cairns Group at Uruguay Round are set out in WTO Agreement on Agriculture

13

Cooperation Council for the Arab States of the Gulf (Gulf Cooperation Council - GCC)

Economic & political policy coordinating forum for its members

It can't impose trade policies on members but each can enforce its own trade laws

Indian Ocean RIM Association for Regional Cooperation (IOR-ARC)

Obj is to build & expand understanding & mutually beneficial cooperation through consensus-based evolutionary & non-intrusive approach

Key obj are to improve market access through trade liberalisation & enhance flows of goods, services & investment

Adv of the open regionalisation encouraged by WTO 1. Initiative for regional & global cooperation through free trade 2. Counters risk of marginalisation without substantial economic grouping 3. Means for closer relations & greater access to Indian market 4. Encompasses wider concerns beyond trade & investment

Africa (4)

African, Caribbean & Pacific Group (ACP)

Unified negotiating body consisting of all countries that have aid, trade & dev relations with EU

Triregional economic grouping formally linked to EU by convention with benefit of tariff-free access to EU markets for export prods

Lome convention – governed cooperation & relations btwn EU & ACP

Cotonou agreement – replaced Lome convention, partnership agreement to enable relations btwn EU & ACP (rights, obligations & fin support), said to be key component of EUs development cooperation & external policy, has 3 interactive pillars (political dimension, development strats, economic & trade cooperation)

Common Market of East & Southern Africa (COMESA)

21 countries & occurred from 3 major developments o Collapse of federations that reduced political cooperation o Destabilisation of economies by apartheid (needed economic counterweight) o No alt to reducing traditional economic dependence on industrialised countries, could only be

done through self-sustaining dev

Characteristics – largest regional economic community in Africa, target is to remove all internal trade barriers & probs tend to be civil war & political instability

Southern African Development Community (SADC)

Created to foster closer cooperation among govs & ppl in southern Africa

Policies aimed at economic liberalisation & integrated dev of national economies

Obj is to create southern African common market dedicated to idea of free trade, free movement of ppl, single currency, democracy & respect for human rights

SADC treaty is legally binding doc enabling countries to coordinate, harmonise & rationalise policies for sustainable dev

*Obj of SADC 1. Promote sustainable & equitable economic growth & socioeconomic dev to ensure poverty

alleviation & eradication, enhance std & quality of life of ppl in southern Africa & support socially disadv through regional integration

2. Promote common political values & systems which are transmitted through inst that are democratic, legitimate & effective

3. Consolidate, defend & maintain democracy, peace, security & stability 4. Promote self-sustaining dev on basis of collective self-reliance & interdep of member states 5. Achieve complementarity btwn national & regional strats 6. Promote & maximise productive employment & use of res

14

7. Achieve sustainable use of natural res & protection of env 8. Strengthen & consolidate long-standing historical, social & cultural links 9. Combat HIV/AIDS & other deadly diseases 10. Ensure poverty eradication is addressed in all SADC activities 11. Mainstream gender in process of community building

Southern African Customs Union (SACU)

Oldest customs union in the world

Aim is to maintain free interchange of goods btwn member countries

Provides common external tariff & common excise tariff for common customs area

All customs & excise duties collected are paid into SAs national revenue fund & shared among members according to revenue-sharing formula

Trade characteristics

EU NAFTA ASEAN Cairns Group ACP

Geog area Central Central Widespread Widespread Widespread

Proximity to e/o Close & direct access

Close & direct access

Direct access Far Far

Geog mobility (transport network)

Excellent (road, air & sea)

Excellent (road, air & sea)

Reasonable (air & sea)

Restricted (poor links)

Restricted (poor links)

Natural res Yes Yes Yes Considerable but

ltd to agricultural res

Considerable but not adequately exploited

Labour capacity & manuf skills Yes Yes Diverse, being

developed Differ, viewed from agricultural POV

Differ, some very undeveloped

Entrepreneurial culture Yes Yes Yes Limited Limited

Governing of trading relations Formal treaty Formal treaty Formal

agreement Agreement btwn

ACP & EU instead of btwn ACP members

FTA

Yes, common currency of euro (17 of the 27 states use Euro)

No FTA, joint efforts to reduce non/ tariff barriers

Accepted but with difficulties

Free trade not enforced

Benefits from EU but ltd among ACP members

Free trade agreements (FTAs)

Advocates & facilitates removal of protectionist measures (tariffs & quotas) that are designed to insulate domestic producers from int competition, premised on theory of int competitive adv (EU-Egypt, EU-Mexico, EU-SA are egs of FTAs)

EU & SA

EU-SA trade relat

SA is EUs largest trading partner in Africa & EU is SAs most NB trading partner

*Implications of euro for SA market

1. Gold & European Central Bank – SA companies must understand consequences of euro on marketplace & be able to foresee areas of possible change

2. Trade balance – NB change when moving out of recession is acceleration in European economic growth which will lead to incr in their demand cycle & incr imports from SA, other change will be incr internal flow of trade in EU single market which will be to detriment of foreign importers, but not SA as we export non-substitutable goods eg gold, diamonds, coal & iron

15

3. Stock market – consolidation of European fin market & incr fin regulations, expected to lead to incr European investment in emerging markets so if Sa can keep stable, incr FDI esp through JSE is anticipated

4. Currency impact - incr exports to Eurozone & incr FDI in JSE will have positive impact on SAs balance of payments & stability of Rand

5. SA pricing policies – exporting to Eurozone means simplified pricing strats as only deal with 1 exchange rate calc, capital flows will therefore also move easier

Detail & implications of TDCA

Main link btwn EU & SA is the Trade Development & Cooperation Agreement (TDCA)

Encompasses new areas of political dialogue on issues like migration, health, space, energy, ICT, maritime transport, science & tech, trade & dev, env & sustainable dev, political, security, interparliamentary meetings

Agreement is asymmetrical & encompassed gradual relaxation of tariffs on imports & exports from member states (bilateral agreement)

TDCA implications for southern Africa, SACU & SADC o Political & economic implications for southern African countries through the SACU (they will

get drawn into it via SACU) o SA is also member of SADC so will affect them as well

EU adopted TDCA to achieve 1. Bilateral negotiations 2. Reciprocal lowering of trade barriers 3. Continued protection of vulnerable European markets, esp agriculture 4. Respect for democracy, good governance & human rights

Impact of regional trade blocs & trade agreements for SA busn

Criteria for successful regional trade blocs & trade agreements

1. Members should be geographically close & have easy access to e/o 2. Geographic mobility – good transport network (road, air & sea links) 3. Available natural res 4. Diverse labour capabilities & manuf skills 5. Entrepreneurial culture 6. Trading relations within regional trade bloc & with 3rd parties must be governed by formal

agreement/ series of informal 1s 7. Should be internal free trade within regional trade bloc & non/tariff barriers against 3rd party

countries to protect internal commercial activities

Role of WTO

Continued conflict btwn world trade system that seeks global trade liberalisation & dev of regional trade blocs like EU & NAFTA that advocate protectionist measures against 3rd parties

WTO plays proactive role to stimulate & dev int trade by creating level playing field for developing countries

Implications of regional trade blocs for SA

Focus on how less developed countries are affected by G

Adv of FTAs

Improved income & working cond o Competition accompanying G provides incentive for local empl in developing countries to

improve busn practices (foreign companies pay more & have better working cond so local firms forced to improve to survive)

16

o Western busn know that treating workers poorly is bad for busn & US cons demand that firms respect their worker’s rights, so US firms producing abroad pressure local suppl to do the same

FTAs are engines of growth & progress, they exploit country’s comparative adv, accommodate specialisation & division of labour, expand size of export market & promote efficiency & competition within FTA

Disadv of FTAs

Job lost in home country coz of more efficient producers in member countries eg tension btwn US & Mexico when Mexico joined NAFTA (Mexicans worked for lower wages & had less strict env stds so had unfair comparative adv)

When FTA 1st launched, there is shifts in res use & trade patterns, each firm specialises in its comparative cost adv

Cons are biggest beneficiaries coz get better prods at lower prices

4: Economic & investment env Importance of economic env

Economic env – totality of economic factors such as empl, income, inflation, int rates, productivity & wealth that infl buying behav of cons & firms in country

Eco env is NB & various factors must be considered – level of eco dev, extent of eco freedom, current wealth of population, eco policies, future eco prospects

Main reason to analyse eco env is to assess opp for marketing prods abroad, evaluate potential benefits, costs & risks of locating MNE abroad

Benefits of doing busn abroad is det by - market size, current wealth (purch power), future eco prospects

Risks of doing busn abroad – political instability, gov attitudes towards nationalisation, expropriation of assets, social unrest, absence of rule of law, inefficiency of law enforcement

Holistic approach to country analysis req detailed understanding of level of eco dev & perf, & extent country upholds economic freedom

o Need to understand nature, level & direction of eco dev coz production & consumption patterns are det by wealth of market sectors

o Evaluate extent & infl of gov policies & intervention in shaping eco landscape o Int busn must ID & evaluate policy issues, eco trends, industry trends & trends in market

segment of each country they are involved in

Purpose of economic analysis is to evaluate overall outlook of country in ST & LT & to assess how eco changes will affect firm, M must therefore consider

o Extent & direction of eco growth in GNP

o Availability of credit o Size & efficiency of capital market o Purch power & level of disposable

income o Propensity of ppl to save o Exchange rates

o Interest rate o Inflation o Foreign debt levels o Budget & trade deficits o Employment levels o Socioeconomic & demographic

trends

Economic systems

Structure & processes country uses to allocate its res & conduct its commercial activities

Incl all mechanisms est to facilitate making & implementation of decisions within economic framework relating to production, consumption, expenditure & income

Set of eco principles, processes & techniques by which country decides & organises ownership & allocation of eco res in way that fosters eco philosophy of country

17

1 Market economy (capitalism)

Economic decisions & pricing of goods are guided by combined interactions of citizens & busn with little gov intervention

Assume that market forces (supply & demand) best det quantity & pricing of goods

Practical application req cust sovereignty, entrep spirit & competitiveness

Major portion of nations land, productive facilities & eco res are privately owned

Eco decisions like who produces what, quantity & cost, is det by interaction of supply & demand

Believe indiv interests supersede group interests coz groups will benefit when indivs are rewarded

Cultural values of individualism & political ideology of democracy (USA, Canada)

Cond req for smooth functioning of market economy 1. Freedom of choice (cons sovereignty) – few restrictions on decision making ability of cons

regarding purch options 2. Free enterprise – freedom of enterprise to operate in market & freedom to decide what to

produce 3. Price flexibility – allows prices to rise & fall to reflect supply & demand (means no monopoly/

manipulation of supply/ prices)

Large degree of eco freedom where citizens have right to own property, invest, trade internationally & participate equally in economy

Gov have marginal direct restrictive involvement in busn activities but do play enabling role in: 1. Enforcing antitrust laws & competition policy 2. Preserving property rights 3. Providing stable fiscal & monetary env 4. Preserving political stability

Countries that had property rights esp intellectual property rights perf better

Economic freedom – absence of gov coercion/ constraint on production, distr, consumption of goods beyond extent necessary to protect & maintain liberty

Index of economic freedom – measures countries eco freedom based on 10 measures of eco openness, regulatory efficiency, rule of law & competitiveness

Basic principles emphasised in index are indiv empowerment, equitable treatment & promotion of competition

10 categories regarded as Economic Freedom Component Score o Busn freedom o Trade freedom o Fiscal freedom o Monetary freedom o Investment freedom

o Financial freedom o Labour freedom o Gov spending o Property rights o Freedom from corruption

Determinants of economic freedom

1. Corruption of judiciary, customs service & gov bureaucracy 2. Non-tariff barrier to trade (import bans, quotas, strict labelling & licensing) 3. Fiscal burden of gov (income tax, corporate tax, gov spending) 4. Rule of law, efficiency in judiciary & ability to enforce contracts 5. Regulatory burdens on busn (health, safety & env) 6. Restrictions on banks & fin services (selling securities & insurance) 7. Labour market regulations (work weeks, separation pay) 8. Informal market activities (corruption, smuggling, piracy)

2 Command economy (communism)

Centrally planned economic system where gov owns nations land, productive facilities & economic res, gov plans country’s economic activity, allocation & pricing is det by gov so no incentive to work hard

Cultural values of collectivism & political ideology of totalitarianism (gov allocates for “good of society”)

18

Communism facilitates process where gov is assumed to be better judge of how res should be allocated

Aim is to achieve wide range of political, economic & social obj by controlling allocation, production & distr of res (Russia, Bulgaria)

Believe that group welfare is more NB than indiv well-being

Command economies stagnated coz of failure to 1. Create economic value 2. Provide incentives for innovation & entrep behav 3. Measure up to achievements of other economic systems 4. Satisfy cons needs & improve quality of life

They collapsed mainly coz of poor economic perf, intrinsic inefficiency & disillusionment of ppl from unrealised expectations

3 Mixed economy (socialism)

Compromise where land, facilities & economic res are distributed in equitable manner btwn private & gov ownership (most common eg Germany, France, SA)

Gov controls certain sectors that are NB to national interest eg energy, security, health care, transport, & other sectors are left for private sector

As result of deregulation & privatisation, classification of eco systems has shifted from mixed economy to free economy

Not inclined to use central planning in strict sense, but govs do infl eco activity by incentives & special concessions to certain industries

Mixed economies are slowly transforming into market economies to remain competitive in global marketplace

Country classification in terms of economic development

Country’s economic dev is NB if MNE wants to expand abroad

MNEs profitability & growth are main determinants of competitiveness, esp international competiveness so must expand into int markets

Evaluate country’s attractiveness in terms of level of economic dev, economic growth, population size, extent country appreciates & adopts monetary & fiscal policies that facilitate economic freedom

Measures of economic activity

Broad-based measures of country’s economic output & activity during given period

1 GNI (gross national income)

Measures total annual income rec by residents of nation

Sum of value added by all resident producers + prod taxes (– subsidies), not incl in valuation of output + net receipts of primary income (compensation of empl & property income) from abroad

GNI = W + R + I + P + D + IT o W – wages & salaries (all income earned in country) o R – rent (income earned through renting) o I – interest (earned in country) o P – profit (realised at all stages of production) o D – depreciation (decr of old inventory of busn & gov) o IT – indirect tax (hidden taxes eg in cigs, alch, petrol & clothing)

2 GDP (gross domestic product)

At purchaser prices, is sum of gross value added by all resident producers in economy + prod taxes (- subsidies) not incl in valuation of output

Value added is net output of industry after adding up all outputs – intermediate inputs

Market value of production within nation’s borders without regard to whether factors of production are domestic/ foreign

19

GDP = C + I + G + (EX – IM) o C – cons spending (households) o I – investments (private inv spending) o G – gov spending o (EX – IM) – exports – imports

3 GNP (gross national product)

Market value of all goods produced in economy, incl value of goods imported – goods exported

Market value of final goods produced by domestic factors of production in accounting yr

Production by domestic factors can take place at home/ abroad & incl income residents rec from abroad – similar payments to non-residents who contr to domestic economy

GNP is same as GNI (World Bank use GNI per capita for calcs)

GNP = GDP – factor payments from abroad

Using measures of country’s output

GDP reflects activity within country’s borders more accurately than GNP o GDP is value of goods & services produced in country o GNP is value of goods & services produced by citizens of country

Coz countries differ in size of economy & population, GDP & GNP data can't be used for direct comparison of economic dev btwn countries

Need to divide GDP & GNP by population to obtain GDP & GNP per capita which allows results to be comparable for all countries irrespective of population size

GDP & GNP per capita have 2 shortcomings 1. Don’t consider diffs in cost of living btwn countries, fix by adjusting data for diffs in purch

power to reflect diff costs of living 2. Provide static pic of eco dev at specific point in time (don’t reflect LT trends which would be

more valuable to int busn M), fix by considering eco trends using forecasting, time-series analysis & scenarios

Purchasing power parity (PPP)

Since GDP & GNP don’t consider cost of living, data can be misleading

To accommodate diffs in cost of living, GDP & GNP per capita are adjusted using PPP

Rationale for using PPP is to ID relative ability of 2 countries’ currency to buy same amount of goods & services in counties under consideration

Purchasing power - value of goods & services that can be purch with 1 unit of country’s currency

PPP – relative ability of 2 countries’ currencies to buy same basket of goods in those 2 countries (ordinary goods consumed daily)

PPP adjusted data provides info on reliable income, consumption & buying patterns

Avoid unjust concl from per capita data even when adjusted for PPP 1. Statistical systems in developing nations are deficient so unreliable 2. To adjust using PPP, World Bank must convert local currency to US $ using avg exchange rate,

after adjusting for inflation btwn country & US 3. Adjusted data presents static pic at given point, no info on if economic gaps are widening/

narrowing

Economic classification of countries

Classification according to phases of economic dev

Analyse for purpose of evaluating socioeconomic dev & as framework for foreign aid programmes 1. Developed (industrialised) - high income & upper-middle income countries according to World Bank

classification eg USA, Germany, Japan

20

2. Developing (newly industrialised countries – NICs / emerging economies) – btwn developed & less developed, in process of evolving to developed, dynamic but vulnerable to economic & socio-political occurrences in other emerging economies eg Brazil, China, SA

3. Less developed – low income category

DEVELOPED DEVELOPING LESS DEVELOPED

Political stability Relative political stability, tending towards market economy

Political instability, anarchy, gov instability

Highly educated & literate population Improving edu system, literacy rates & work skills

High illiteracy, low employment skills

High levels of innovation & entrep Abundance of natural res but lack further processing & beneficiation

High levels of industrial & info tech Relatively efficient tech systems Low levels of industrial & info tech

High levels of industrialisation Poor health cond, food shortages, high infant mortality rates, low life expectancy

High std of living Improved social cond & higher std of living

Low std of living & economic wealth (disposable income, savings), shortage of investment capital

Well-developed infrastructure, transport, comm & utilities

Less dependence on agriculture & mining, expanding industrial sector

Strong emphasis on agriculture & mining, poor infrastructure

Active involvement in int busn & foreign trade

Incr involvement in int busn Low involvement in int busn, foreign trade involves exports of agricultural prods, raw materials & basic manuf prods

Well-dev fin inst & monetary networks Rapidly dev fin sector Underdeveloped fin sector

Sophisticated social systems (edu, health care)

Int trade is less dep on agriculture & res-related exports

Inadequate edu, health care & housing, high dep on foreign fin & social aid

Macroeconomic issues in international busn

Economic growth

Incr in economy’s capacity to produce goods & services over long period of time

Implies rising levels of output over time, produced by economy’s available res, which incr quantity & quality of production factors over time, improves production techniques & achieves greater output, provide there is demand for more output in market

Capital investment & tech innovation are NB factors in economic growth

If GDP incr from 1 yr to next, but quantity of output remains same, then higher GDP is attributed to general price incr as no incr in quantity of goods produced so no economic growth in real terms

To measure change in total production (economic growth), need to eliminate effects of price changes from GDP, holding prices constant based on prices in base yr, then measure of total production for given yr is real GDP/ GDP at constant prices

If measured at prices prevailing that yr, then monetary GDP/ GDP at current prices

Annual measure of economic growth is % change in real GDP of country from 1 yr to next, derived by 1. Calc nominal GDP 2. Det real GDP by adjusting for inflation 3. Calc % change in real GDP from prev yr

GDP at constant prices measures how much economy really produces & grows

GDP should incr over time as stock of production factors & productivity of labour & capital improve as result of learning/ exp curve, improved tech & better operations processes

Positive real eco growth doesn’t necessarily mean welfare of every citizen will incr, if pop grows faster than economy, citizens won't benefit

Economic growth – international busn perspective

Main reasons for internationalisation were to expand markets & incr profitability

Since high eco growth rates & levels of activity reflect high income levels & potential demand for prods, firms want to expand to those countries

21

ID countries with high rates of sustainable eco growth by analysing historical data, time-series analysis, form scenarios based on assumptions

For int busn, trends in eco growth at global level are NB broad indicators of eco dev worldwide

Evaluate potential countries based on political, eco, legal & social trends, as well as industry & market potential

Inflation

Continuing general incr in price of goods & services over time

Affect int rates, exchange rates, cost of living & political & eco confidence in country

Deflation – opposite of inflation, prices fall over time (less common)

Inflation occurs when aggregate demand incr faster than aggregate supply, / gov spending rises faster than tax revenues, / changes in monetary & fiscal policy

2 causes of inflation 1. Demand-pull – excess demand as result of inexpensive borrowing, tax cuts, which encourages

producers to incr prices & leads to demands for higher wages to maintain std of living 2. Cost-push – excessive production costs drive up prices, since wages constitute significant cost

element so rising labour costs passed onto cons in higher prices, creating wage-price inflationary spiral

Inflation is measured by inflation rate which is % incr in change in prices from 1 period to next & measured by CPI & PPI

CPI (consumer price index)

Yardstick used to measure general level of price incr in economy

Indicates how avg price level of goods bought by typical cons has changed over time

Change is expressed as % & comparisons of inflation rate are done using rate of specific yr (base yr)

SA CPI basket contains 403 prods & services

Process to calc CPI 1. Select goods & services in basket 2. Assign weights to each to indicate its relative importance in basket 3. Choose base yr 4. Choose formulate 5. Collection of prices to calc value of CPI

Consumer-related price indices in SA for measuring components of inflation 1. CPI headline inflation rate – price changes of all goods & services that typical cons buys 2. Core inflation rate – same price changes as headline inflation but excl price changes in fresh

meat, fruit & veg, interest on bank overdrafts & VAT (excl coz volatile & subject to temp infl of market forces & gov intervention)

3. CPIX (cons price index excl int rates on mortgage bonds) – same price changes as headline inflation but excl int rates on mortgage bonds in urban areas

4. CPI food – price changes in selected food items that typical cons buys, forms part of CPI headline & CPIX

PPI (production price index)

Indicates % change over time in avg level of prices of all goods produced, but excl services eg in agriculture, mining

Calculated at price of goods when they leave factory

PPI incl price of imported goods calc at point-of-entry prices (price at which prod is sold for 1st time), prices of goods sold by 1 producer to another for further processing & incl price of capital goods used in production process

Implications of inflation for int busn M

With high inflation, domestic exporters goods will be less competitive in global markets coz of high prices, foreign investors will turn to other countries with lower inflation for following reasons

22

1. High inflation forces int rates higher to enable investors to achieve real ROI 2. High int rates reduce domestic demand & adversely affect economic growth

To try curb inflation, gov implements wage & price controls which actually end up in unempl

Firm interested in investing abroad should know how inflation is measured in host country, what is incl & excl, nominal GDP, real GDP to measure production output, GDP adjusted for PPP for country comparisons, inflation values, economic trends

High inflation causes int rates to rise for 2 reasons 1. Banks need to offer higher int rates to attract money 2. Gov raises int rates to slow down economic growth & dampen demand

Interest rates used to counteract, inflation means prices are high coz too many ppl buying, so use int rates to make credit more expensive so ppl will buy less, reducing inflation but also hindering growth

When int rates incr coz of inflation, borrowing money becomes more expensive & firm are reluctant to incur debt for expansion, cons spending decr, incr cost of living, all results in slowing down of cons spending & economic growth

Exchange rate also affected coz higher inflation rate is relative to other countries, more currency will depreciate relative to that of other currencies eg Zimbabwe

For int firm importing, high inflation & depr of currency will have adverse effect if import more than export, opposite is true if exports exceed imports

Balance of payments (BOP)

NB component of country’s national accounts, reflecting value of country’s economic relations with outside world (gold & foreign reserves are balancing item)

National accounting system that records all payments to firms in other countries, & all receipts coming into nation (comparable to income & expense account)

Depicts total transactions carried out btwn residents of country & rest of world during given period

Characteristics of BOP

Reflects demand at home & abroad, helps policy makers & int busn M understand perf of economies of indiv countries

Int busn M must pay attention to BOP stats for following reasons 1. Stats ID attractive markets for prods & services 2. Warn int companies of policies changes that could impact busn climate & their profitability in

country 3. Signal incr risk of lending in countries 4. Indicate reductions in foreign exchange reserves (signal currency will depreciate in future) 5. BOP reflects relative costs of domestic production & global competitiveness of manuf sector

as whole

Keep in mind regarding BOP 1. BOP accounting system refers to specific time period 2. It records transactions btwn residents of country & all other countries (incl indivs, busn & gov) 3. It is double entry system where every transaction has debit & credit entry of equal value

Composition of BOP

1. Current acc o Trade in goods & services & income from assets abroad (imports & exports) o 3 parts to current acc

Merchandise trade balance which measures country’s trade deficit (imports exceed exports) / trade surplus (exports exceed imports)

2nd part measures transactions in services 3rd part measures income, both receipts & payments on assets

2. Financial acc o All transactions in real assets/ fin assets eg investment in shares, btwn countries in specific

period

23

External debt

Country’s external debt is amount of money obtained from foreign/ private sector banks & is measured by

1. Total monetary amount of debt 2. Debt as % of GDP

Larger these 2 measures become, more unstable the country’s economy eg Greece in Eurozone crisis

African countries fare well on list of indebted countries, but historical factors tend to discourage investors eg unstable market cond, political instability

Int busn M should monitor extent of external debt as part of assessing potential benefits, costs & risks

Privatisation

Selling of gov-owned res to private operators

Privatisation of state-owned enterprises (SOEs) has been NB in transition from command economy to market economy

Also adopted to reduce internal debt levels in country, achieved as gov removes subsidies used to featherbed uncompetitive SOEs & labour, help gov reduce deficits from funds generated by sale of state assets

Pressure leading to momentum gained by privatisation 1. Political ideology – eg in Britain when gov divested its interest in British Airways, but economic

crisis of 2008 resulted in series of protectionist measured where gov nationalised many privately owned firms as bailouts

2. Economic pressure – pressure for local responsiveness & cost reduction from G makes it hard for govs to keep funding less competitive SOEs esp with budgetary constraints (incr competition req regular funding for upgrades, expansion & reengineering which isn’t affordable by gov)

Broad adv 1. Attract foreign direct investment 2. Provide foreign entrep & their skills access to local markets 3. Acquire managerial expertise & tech from abroad

Specific benefits 1. Improved enterprise efficiency & perf 2. Dev competitive industry 3. Access capital, know-how & markets that permit growth 4. Achieve effective corporate governance 5. Broadening & deepening capital markets 6. Securing best price possible for sale

Process of privatisation has economic & political elements, obj of the 2 areas are often in conflict (which SOE should be sold, should it use foreign/ local investors)

Key to successful privatisation is availability of capital

Innovation & entrepreneurship

Innovation & growth are drivers of economic growth

Innovation concerns new dev in products, services, processes, orgs, busn systems, practices & strats

Political economy & economic system det extent of entrep orientation

Elements of culture like social structure & religion, either encourage/ discourage entrep orientation eg individualistic countries like USA are more entrepreneurial

Economic freedom of market economy enhances innovation & entrep activity

Innovation & entrep associated with small busn activity req strong property rights & protection of ownership (otherwise risk that intellectual property could be expropriated/ jeopardised)

5: International cultural env

24

Int busn involves ppl from diff cultures, every busn function is subject to potential cultural diffs

Implicit in concept of “nation” is the definition of culture coz culture delineates borders & groups within which nations’ ppl share values, lang, race & religion

Groups are based on nationality, ethnicity, religion, gender, work org, profession, age, political affiliation & these national identities expressed through rites, symbols, flags, parades, preservation of historical sites & museums

Diff cultures respond diff in given situations so what works in 1 culture may not work in another

All indivs are to some extent home-country oriented (ethnocentric)

Challenge for int M is to broaden their perspectives & avoid making mistakes caused by lack of knowledge of cultural diffs

Int M therefore need to recognise, learn about, understand & adjust to unique cultures of country they are doing busn in

Int firms need for cultural knowledge incr as 1. Num of int functions & operations incr 2. Num of countries they are involved in incr 3. Incr handles int operations internally

Role of culture in international busn

Together with country’s politics, legal, economic & tech systems, culture creates & infl env of int busn

Cultural awareness enables int M to get better grasp of indiv & group behav

Pivotal to ` is need for cross-cultural literacy enabling M to understand how cultural diffs affect indiv & group behav

M of MNEs in foreign countries must understand cultural values, norms, beliefs, traditions & habits of their empl

Understanding these diffs & their potential infl on leadership, int negotiations, comm & cons behav, design of incentive pay, org structure, relats btwn M & labour, how trade unions operate presupposes sensitivity to cultural diffs

Host countries have been known to accommodate unacceptable behav as trade-off for other adv (tolerate behav from foreigners that they wouldn’t of own ppl)

NB that int M 1. Understand & able to work effectively with members of other cultures 2. Recognise importance of culture & its infl on behav in pursuit of org goals, which will take

place in foreign setting, so must be able to M ppl from various cultural backgrounds

Meaning of culture

Broadest sense – culture is result of human interaction

Defining culture

Anthropology perspective – complex whole which incl knowledge, belief, art, law, morals, customs, religion & any capabilities & habits acquired by members of society

Comprehensive def – collective programming of mind, which distinguishes members of 1 human group from another, it incl system of values, & values are building blocks of culture (allied to view of culture as system of ideas that constitute a design for living)

Adapted def for us – integrated system of values & norms that are shared among group of ppl & when taken together constitute a design for living

From above, culture in its broadest sense – outcome of human behav based on shared norms, values, attitudes & beliefs that ppl use to interpret exp & to generate social behav that guides everyday life

1. Values Foundation of culture, context within which norms, beliefs, attitudes, traditions &

symbols are est Basic convictions regarding right & wrong, good & bad Legitimate goals of life & how things should be

25

Learned from culture indiv grows up in & guides behav Det society’s attitude towards trust, honesty, justice, loyalty, freedom, democracy, role

of women, sex & marriage 2. Attitudes

Persistent tendency to feel & behav in certain way towards object/ event eg believe Mc Ds is superior (value judgement) so willing to stand in long queues (attitude)

If emanates from values, have direct infl on int busn Values infl attitude which infl culture, so relat btwn culture, values & attitudes is

complex 3. Beliefs

Repr implicit understanding of basic assumptions about what is true eg science vs religion

Diff beliefs affect how busn is conducted, esp how operations are M, prods marketed & empl appointed & promoted

4. Norms Social rules & guidelines that prescribe appropriate behav & actions In contrast to values, norms prescribe behav by telling ppl what they can/ can't do eg

who to marry, what to wear, time orientation 5. Cultural symbols, traditions, rituals & stories

Comm the norms, values & beliefs of society to its members, passed on from generations

Symbols can be physical like flags, traditions & rituals may be ceremonies/ folk festivals

Society

In country characterised by homogeneous culture, society may be equivalent to the country, but many countries have several societies, each with own culture

Societies can cross national boundaries & embrace more than 1 country, these societies form subcultures that can have things in common with subcultures in other countries, therefore NB for int M to ID societies & subcultures with same behav

Culture, society & nation state

Concept of nation provides workable def for following reasons 1. Within bounds of nation, ppl share essential attributes spread through tradition, rituals &

symbols 2. Laws governing busn operations apply within national boundaries

Nation states are political creations & can contain single/ multiple cultures, subcultures, ethnic groups, classes & races

Physical & demographic characteristics as well as cultural values, norms & beliefs, preserve country’s national identity (affects int busn)

Caution when using nation as pint of reference coz many nations have internal disparities in terms of ethnicity, religion, lang & eco well-being (heterogeneous)

Characteristics of culture

Culture is rooted in history & passed on through generations, as context & env change, culture is bound to evolve & change over time

Culture is… 1. Learned – acquired through learning & exp, not inherited/ biological

o Trans-generational – transmitted form 1 generation to another o Inter-generational – transmitted from 1 member of society to another

2. Shared – ppl share culture, it’s not specific to single indivs, every1 in group understands values, attitudes, beliefs, norms & behav pattern

3. Relative – no std culture, all cultures are diff, without any 1 being inferior/ wrong

26

4. Interrelated – various cultural components are interrelated, change in 1 element causes change in another

5. Adaptive – learned behav so is adaptive coz based on human capacity to change 6. Symbolic – based on human capacity to symbolise/ use 1 thing to repr another in behav patterns

understood by the group 7. Pervasive – affects everything ppl do, see, feel & achieve

Elements of culture

6 elements – political & economic philosophy, social structure, religion, lang & edu

Elements infl value system, 2 way chain of causation btwn cultural values, beliefs & norms, & elements of culture (esp infl social structure, religion & edu)

Understanding elements & their infl on culture is NB for int M to respond proactively & M cultural diffs effectively to get sustainable competitive adv

1 Political philosophy

Political system is the system of gov in nation that shapes economic & legal systems (interrelated)

Political philosophy infl values, norms & beliefs in society

Political systems are evaluated according to 2 interrelated dimensions from which political ideology & philosophy emerge

1. Degree they emphasise collectivism/ individualism 2. Degree they are democratic/ totalitarian

Individualism thrives in democratic political system & free market economy

Collectivism is ripe in totalitarian states where citizens are denied constitutional guarantees & benefits that democracies provide (widespread political repression)

Implications for int M are that they must deal with varying degrees of gov involvement, intervention & political risk

These factors infl decisions like 1. Deciding to invest in country based on benefits, risks & costs 2. Deciding to do busn with country eg exporting, importing/ collaborations 3. Deciding if gov is participator, regulator/ enhancer of foreign busn 4. Deciding if ideological attitude of gov is inclined to nationalisation, expropriation/ free market

economy

2 Economic philosophy

Political ideology infl type of economic type, but economic & legal system will det potential benefits, costs & risks of doing busn in a country

Potential benefits – det by country’s market size (population), wealth (purch power) & future economic growth prospects

Potential costs – incr if infrastructure is inadequate, corruption & bribery are rife, compliance with legislation becomes expensive (socioeconomic factors)

Potential risks – higher if political instability, economic misM, deficient legal protection of contracts, physical property & intellectual property

Economic systems – market (free market, private ownership), command (state-owned, central planning) & mixed (part private, part state ownership)

Knowledge of economic systems, incl kind of political, economic, cons, investor & ethical behav to expect is NB for int M

Implications for int M are that countries with free market economies & where property rights are protected, perform better economically

3 Social structure

Overall framework that det roles of indivs & groups in society, stratification of society, class systems & mobility of indivs

27

Indivs, families & groups

Individualism – indiv behav & achievements are more NB than group behav

Collectivism – social standing of indiv is det by their standing in the group

Societies differ worldwide – western families are traditional family units, others recognise extended fam too, in Africa, clans are a unit who share common ancestor

Family-based groups – fam are most NB group, in some societies it leads to working closely with fam which implies strong distrust for non-fam outsiders, in those countries, fam run busn are more successful than large diverse firms

Gender-based groups – country-specific diffs btwn M & F often based on religion, some countries have strong preference for men, whereas in others women are just as successful

Age-based groups – some country view age as wisdom, so advancement in workplace is seniority based, some place age limitations stating mandatory retirement ages

Understanding diff attitudes about importance of fam regarding busn involvement is NB for int M 1. Regarding HR, nepotism (hiring fam) is normally discouraged, but in Arab firms fam ties are NB

so hiring relatives is accepted, they occupy NB positions, int M need to accommodate host-country social behav

2. Understanding extended fam relations, obligations to fam, tribal politics & social behav is NB to avoid conflict

3. In market research, realise basic consumption patterns characterised by extended fams will differ from others

4. Regarding work teams, social orientation can affect mobility, loyalty & dynamics

Social stratification

Ppl are categorised (stratified) in classes on basis of birth, fam background, occupation, edu, income

NB is way indivs relate to e/o within & btwn hierarchical stratified classes

British class system & Indian caste system

Assume ppl in high social strat have better edu & career opp

All societies are stratified somehow, but differ in ways NB to infl of culture on busn 1. Degree of mobility btwn social strata 2. Significance attached to social strata in busn context

Social mobility refers to ease with which indivs can move upward out of strat they were born into 1. Caste systems - rigid social systems with low mobility, occupation handed down through generations

eg in India 2. Class system – open stratification that is less rigid, indivs can move up through strat through

achievements/ luck

British class system has 3 classes (upper, middle, working class)

USA has more flexible system with social mobility, due to importance of individualism & indiv achievements, irrespective of background/ social standing

Implications of social mobility for int M 1. In open class systems, impact & disadv of background are ltd so improved working & personal

relats, disadv are empl turnover & lack of loyalty 2. In strict class systems, diffs btwn M & workforce can cause hostility, conflict, disrupted

workflow & strikes which incr cost & risk of doing busn

4 Religious & ethical systems (5)

Religion – system of shared beliefs & rituals concerned with the realm of the sacred

Ethical system – set of moral principles that guide & shape behav

Religion infl lifestyle, values, beliefs, attitudes, ethics & behav

Most ethical systems are based on religion, except Confucianism

Religion infl social & busn env in following ways 1. Places constraints on roles of indivs, groups & busn 2. Places constraints on gender issues eg limiting job & career opp for women

28

3. Infl attitude towards initiative & work 4. Infl dietary habits & consumption patterns 5. Can form basis for political & economic decisions 6. Major hols are linked to religion

Impact of religion on busn will vary dep on 1. Country’s legal system 2. Extent of homogeneity of religious beliefs 3. Tolerance of other religious views

Christianity

World’s major religion, originates from Judaism & formed Roman Catholic Church & Orthodox Church

Reformation lead to non-conformist Protestant movement that formed Congregationalists, Methodists & Baptists

Economic & busn implications of Protestantism 1. They were economically better developed, attributed to work ethic of hard work, productivity,

saving, reinvestment of capital & wealth creation 2. Provided political & eco freedom req for individualism which lead to entrepreneurial free

market capitalism

Islam

2nd largest religion, Muhammad the Prophet of Allah (Muslims)

Monotheistic faith req uncond adherence to all religious as per Qur’an

Worldly gain & temporal power are regarded as illusions

Expected to act charitably, respectfully & humbly in dealings with others

Must be pure of heart & mind, respect rights of others, not commit adultery & safeguard possessions of orphans

Muslims are surrogates to Allah so not totally free in this world, religious principles define their actions

No distinction btwn religion & the state so Islam is also source of law, guide to statecraft, statesmanship & arbitrator for social behav

Supports capitalism but places more emphasis on indivs obligations to society

Muslim countries are pro free market & receptive to int busn provided they are consistent with Islam ethics, banking laws, religious practices & dietary habits

Economic & busn implications of Islam 1. Profits earned in fair busn are justified but can't result from deceit 2. Expected to act justly, charitably & humbly in busn dealings 3. Total prohibition on payment & receipt of interest 4. Stresses importance of honouring contractual agreements 5. Qur’an is basis of theocratic legal system in Muslim countries 6. Strong political pressure to preserve religious traditions 7. Worship in prayer 5x daily, can be disruptive to outsiders 8. Wealthy & successful has obligation to help disadv 9. Female execs face obstacles in advancement due to attitude of role of women in society 10. Women have to dress in certain way & are subord to men 11. Consumption of pork & alcohol is forbidden

Hinduism

Founding is not related to particular person & doesn’t have rigid texts equivalent to Bible/ Qur’an

Emphasises spiritual accomplishment rather than economic success

Believe in moral force in society that req acceptance of certain resp (dharma)

Believe in reincarnation & rebirth so also believe in karma – spiritual progression of person’s soul in successive cycles of life, death & rebirth

Karma is affected by how u live so by perpetuating soul in each new life, can eventually achieve nirvana – state of complete spiritual perfection

29

Economic & busn implications of Hinduism 1. Ascetic (extreme) lifestyle of material & physical self-denial discourages entrep, productivity,

efficiency & wealth creation 2. Rigid caste system restricts upward mobility btwn diff castes (classes) so limits career opp &

advancement leading to inflexible labour, friction in workplace & suboptimal use of res

Hindu values emphasise that 1. Indivs should be judged by their spiritual rather than material achievements 2. Mobility btwn castes be can be achieved through spiritual dev, progression & reincarnation

rather than material achievement

These values are NB for int M coz 1. Restrictive nature of caste system affects roles & advancement opp, as well as productivity,

efficiency, & org culture (HR policies would need adapting) 2. Religious values & beliefs relating to work ethic, religious hols & dietary habits can affect

effective operation of firm

Buddhism

Siddhartha Gantama founded Buddhism when he relinquished his wealth & pursued an ascetic lifestyle in pursuit of spiritual perfection (through his teachings, he became known as Buddha, the awakened 1)

Believe life comprises suffering & can be alleviated by following the Noble Eightfold Path, emphasises right seeing, thinking, speech, action, living, mindfulness & meditation

Doesn’t support caste system/ extremely ascetic lifestyle but does emphasise afterlife & spiritual achievement rather than material well-being

Economic & busn implications of Buddhism 1. Doesn’t emphasise material well-being, wealth creation & entrep 2. Absence of caste system & less ascetic lifestyle means more mobility, flexible labour market,

encouraging attitude towards entrep

Confucianism

Ethical system founded by Confucius

Attaining personal salvation through correct actions is NB

Based on comprehensive ethical code providing guidelines for relats, std of moral & ethical conduct, loyalty to others

Not concerned with supernatural, scared supreme being/ afterlife therefore not considered a religion

Work ethic is similar to Protestantism in emphasis on hard work

Economic & busn implications of Confucianism (3 central values NB to busn) 1. Loyalty – infl relat btwn M & labour, lowers the costs & risks 2. Reciprocal obligations – loyalty must be rewarded (reciprocated) through bestowing blessings

on loyal workers (guanxi – lifetime empl) 3. Honesty in dealing with others – honesty pays off in LT, implications

Companies trust e/o not to break contractual obligations so costs & risks are lower, good relats are subst for formal legal systems

Honesty & trust result in companies readily committing res for collaborative arrangement

Trust & close cooperation btwn manuf & suppl leads to lower costs & risks, better efficiency & productivity & therefore sustainable competitive adv

5 Lang

Most NB way to comm is through spoken word

Comm is key element of culture coz cross-cultural contact is est through comm & lang (spoken & unspoken word)

Understanding lang diffs btwn cultures is NB for int M esp regarding negotiations, marketing & advertising

30

Role of lang in int busn

Beyond just method of comm, lang organises way members in society think about the world & filter their observations & perceptions

Provides NB info on cultural values eg in/formal ways of addressing some1

If more than 1 lang, alerts M to other areas of diversity like income levels, work ethic & demographic variables that can serve as sources of strat & marketing intelligence

Can also be source of competitive adv

Locate foreign subsidiaries in countries with lang similar to parent company to serve other regions effectively & avoid probs of foreign lang

Inability to understand can be huge barrier to comm

Sometimes even in same lang, diff accents, semantics & dialect can lead to misinterpretation eg diff phrases have diff meanings in UK & USA

Lack of foreign lang skills can put int M at disadv, even if know the lang, probs in dialect & diff meanings can still occur coz of expressions/ words, not always solved by using translator

Lang, culture & int busn

Verbal & written comm o Eg saying no outright (rude to some, appreciated by others) o Problems can be overcome using translators but not infallible as subtleties are often lost in

translations o Easy to make marketing & advertising errors by translating wrongly/ too directly

Nonverbal comm o 80-90% of info transmitted is by means other than lang o Coz of cultural diffs, non-verbal comm can lead to serious misunderstandings o Eg hand gestures, facial expression, posture, interpersonal distance, touching, eye contact,

speed & volume of talking, silence

Int M should familiarise themselves with customs, traditions & non-verbal means of comm in foreign countries

Lang capability serves 4 distinct roles in int busn 1. NB in info gathering & evaluation 2. Provides invaluable access to local society 3. Becoming increasingly NB in busn communications 4. Provides more than just ability to comm, extends beyond mechanics to interpretation of

contexts

6 Education

In/formal edu play NB role in sharing & passing on culture through generations

Edu levels & extent of edu at each level of culture can be measured using enrolment & output data

Formal edu is where indivs learn lang, conceptual, mathematical & technical skills

For int M, knowledge about extent of edu is NB for 2 reasons 1. General edu level will reflect knowledge, intellectual capacity & sophistication of society, which

could infl type of prods they use 2. Reflects availability, skills & capabilities of human res (affects staffing)

NB aspect of edu is as determinant of national comp adv in providing a pool of skilled & educated human res

Edu is det by % of GDP allocated to it & effective use of those funds as level of spending reflects country’s commitment to edu

Relat btwn edu, culture & busn are reflected by values & norms taught about economic, political & social nature of society in process of edu

Levels of culture

1 National culture

31

Dominant culture within borders of country, repr by majority of population/ group with most political power

Political boundaries don’t reflect cultural boundaries, even homogenous cultures have various subcultures within them

Implications of national culture for int busn 1. Dominant culture has greatest infl on int busn as result of political & economic ideologies &

legal system 2. Edu system transmits values, norms, attitudes & beliefs that manifest in how busn ethics are

perceived & practiced in country 3. Religious beliefs infl work ethic, way of life, moral stds & cons behav

2 Busn culture

Involves values, norms, attitudes, beliefs & etiquette that manifest in all areas when doing busn in specific country

Can't be separated from national culture on issues like 1. Importance of age/ seniority 2. Role of women 3. Supervisor/subord relats

Infl all facets of work & org involvement incl 1. Cross-cultural L & M 2. Empl selection & promotion 3. Leading & motivating empl 4. Structuring org 5. Structuring remuneration & reward systems 6. Conducting busn negotiations 7. Formulating, deciding on & implementing strats 8. Deciding on strat alliances

Knowing & understanding acceptable busn etiquette is minimum req for int busn M, eg know expected degree of punctuality, how to greet/ exchange busn cards, personal distance, all det success/ failure of meeting

3 Organisational culture/ occupational culture

National & busn culture provide context for understanding org & occupational culture

Org culture – dev around org o Norms, values & beliefs concerning org & shared by members of the org o Emerge when members learn to cope with in/ external probs

Occupational/ professional culture – dev around work roles o Distinct cultures of occupational/ professional groups eg lawyers, accountants (same level as

org culture) o Values, norms, beliefs & expected behav of ppl in same occupational group, irrespective of org

they work for o NB for int M to know these exist & note that members of occupational groups often behav

more similar to e/o than to others in national culture

Culture in workplace

MNEs need to understand how culture of country affects values in workplace, will det extent M processes & practices must be adapted to accommodate diff work-related values resulting from cultural diffs

Hall’s low-context, high-context approach

1. Low context culture – speaker’s words explicitly convey msg to listener 2. High context culture – context in which convo takes place is as NB as words spoken, nonverbal behav is

NB

32

Implications for int busn 1. High context cultures value LT relats, trust is sufficient grounds for contractual negotiations 2. Advertising in high context cultures is more emotion oriented, low context cultures prefer

factual 3. Low context cultures place importance on specific terms of agreements, high context cultures

use trust as basis 4. High context cultures prefer good emotional social setting for decision making, low context

cultures decision making is impersonal & conflicts of interest are avoided at all costs

Ronen & Shenkar’s cultural cluster approach

Grouped 50 countries on basis of how empl responded to 4 sets of qu concerning 1. Importance of work goals 2. Extent which needs at work were satisfied 3. Autocratic vs democratic M styles 4. Work roles & interpersonal relations

Countries were found to be similar coz they share attributes like lang, religion, geog location, ethnicity & economic dev

M can expect fewer diffs when moving within cluster, & more variety when moving btwn clusters

Hofstede’s cultural dimensions

NB study on national culture & how it relates to values in workplace 1. Power distance

o Extent to which less powerful members of org accept that power is distr unevenly o High power distance – ppl blindly obey orders of superiors, inequalities in societies are

accepted o Low power distance – fear concentration of power, society believes inequality should be

minimised 2. Individualism vs collectivism

o Relat btwn indiv & their fellow beings o Individualistic – ties among indivs are loose, indivs take care of themselves, indiv freedom &

achievement is highly valued o Collectivist – ties btwn indiv are tight, born into collective & every1 expected to look after

interests of collective 3. Uncertainty avoidance

o Extent which society accepts & prepares itself for ambiguous situations & uncertainty o High uncertainty avoidance – ppl are uncomfortable in unstructured situations, prefer to be

regulated by laws & rules on safety eg job security o Low uncertainty avoidance – likely to take risks, likely to change, comfy with fewer regulations

4. Masculinity vs femininity o Masculinity – men are assertive, gender roles are clearly defined, wealth & material

possessions are NB o Femininity – gender roles less strictly defined, equality btwn genders, little diff in men &

women in same job 5. Time orientation

o Extent which members adopt LT/ ST outlook on work, life & societal aspects o LT orientation – value dedication, hard work & perseverance o ST orientation - casual about time, focus on present

Implications for int M - Hofstede dev index score for each dimension from 1-100, high scores tended towards high individualism, power distance, uncertainty avoidance & masculinity

Guidelines on what to expect

High individualism - performance appraisal system works best if High collectivism – group oriented reward system is best

33

directed to indiv instead of group

High uncertainty avoidance – LT planning, contingency plans & ensuring security is NB

Low uncertainty avoidance – ST planning & flexibility is motivational, job security isn’t really NB

High power distance – centralised decisions, low org mobility, tall org structures, prefer direction from supervisors

Low power distance – flat org structures, participative decision making, mobility within org

High masculinity – org goals focus on incr market share, profitability & wealth, men dominate upper levels of M, focus on task accomplishment

High femininity – quality of work life, env protection, equity, fairness, social resp are NB, less overt diffs on gender roles

Trompenaar’s cultural parameters

Guidelines for int M in respect of understanding cultural diffs in org context & how to motivate ppl with diff cultural values

1. Universalism vs particularism – social vs personal obligations 2. Collectivism vs individualism – group vs personal goals 3. Neutral vs emotional relats – showing emotion in busn relats 4. Specific vs diffuse relats – degree of involvement in personal relats btwn subords & superiors 5. Achievement vs ascription – basis for det status 6. Sequential vs synchronic – attitude towards time 7. Inner-directed vs outer-directed – control over destiny

Implications of these parameters

Universalism - focus on rules & procedures Particularism - focus on relats

Collectivism - emphasise “we” Individualism - emphasise “I”

Neutral relates - suppress delight, anger/ intense emotion in workplace (deemed unprofessional)

Emotional relats (affective) - express emotion openly

Specific relats - separate work life & private life Diffuse relats - work life & private life are closely related

Achievement oriented - M evaluated on their perf Ascription oriented – power & status given to those who are admired, loyal, senior & experienced

Sequential – specific plans of action & chronological execution

Synchronic – several things can be done at once

Implications of culture for int busn

1 Culture & competitive adv

Connection btwn culture & comp adv

Cultural values, norms & beliefs of country infl cost & risk of doing busn there

MNEs must M costs & risks related to cultural diffs better than competitors to gain comp adv (presupposes M is aware of & can ID potential costs & risks)

Req intimate knowledge of the culture (having cross-cultural literacy)

Attitudes towards classes & castes, work, cooperation btwn M & labour, interest, reward systems, consumption patterns & religious beliefs differ btwn cultures

Most issues tend to raise costs & incr risk of doing busn there

Other factors incl Protestantism work ethic, orientation towards capitalism, free trade & entrep, most of which is negated by caste & collectivist societies

Edu is NB in indicating skills level, high skills level is NB consideration to attain competitive adv

Sound edu systems, adequate workforce, absence of disruptive labour practices, ethic of hard work & free market orientation is ideal destination for MNE

2 Culture & busn ethics

Have to ask whose ethical system do u use in int busn

Coz customs vary, firms should adopt customs of host country (not always sound)

Guidelines in Declaration of Human Rights should be followed

34

1. Every1 has right to work, free choice of employment, just & favourable cond & protection against unempl

2. Every1, without discrim, has right to equal pay for equal work 3. Every1 who works has right to just & favourable remuneration 4. Every1 has right to form/ join trade union for protection of own interest

Firms facing ethical probs should be guided by 3 principles 1. Respect for core human values that det absolute moral threshold for busn activities 2. Respect for local tradition 3. Belief that context matters when deciding what is right/ wrong

3 Cross-cultural literacy

Doing busn in diff cultures req intimate knowledge of cultures involved & ability to adapt & conform to value system of culture concerned

Busn that are ignorant are likely to fail, so cultural awareness is NB

Adaption to conform to other value systems may incl considering 1. L, M & decision making styles 2. Structuring of org 3. Use of teams 4. Reward systems

5. Negotiation strats 6. Labour relations 7. HR practices (staffing & promotion) 8. Marketing, prod dev, promo strats

Method of categorising org culture & values & how it affects int M o Ethnocentric (home-country oriented) / polycentric (host-country oriented)

Ways of enhancing cross-cultural literacy (geocentric approach) 1. Guard against ethnocentric behav, employ host country nationals in key areas (polycentric

approach) 2. Dev set of multicultural execs, appoint foreigners on BOD 3. Use multicultural task teams 4. Selectively transfer home-country execs to foreign locations regularly

4 Culture & entrep orientation

Some societies are more inclined to entrep behav due to cultural factors so strong link btwn culture & entrep

Low power distance, low uncertainty avoidance, masculine, individualistic & achievement oriented would most encourage strong entrep orientation

Gain benefits of enhanced economic growth, incr empl opp & incr global competitiveness

6: Global monetary systems & foreign exchange markets

International monetary system (IMS)

Repr set of rules aimed at facilitating int trade without jeopardising indiv economies/ global economy

Provides framework within which foreign exchange market functions & rationale for gov intervention when necessary

Gold std (1st)

Gold was used as medium of exchange 1st formal int monetary system

Countries det rates at which their currency could be converted to specific weight of gold (usually ounce)

Confidence in system was undermined by distortions in int fin market from inadequate monetary policies, protectionist currency devaluations & trade wars

Needed more stability so phased out

35

Bretton Woods Agreement of fixed exchange rate paradigm (2nd)

Agreement provided US dollar based int monetary system where dollar became int money to which other currencies could be converted, & dollar converted to gold

2 NB inst were est – Int Monetary Fund (IMF) & World Bank (WB)

New fixed rate system meant all currencies were pegged to dollar

Countries had to obtain approval from IMF before any currency revaluations

IMF maintained monetary discipline & stability in int fin markets

Came under pressure as world trade expanded & collapsed coz of divergent monetary policies, diff inflation rates & BOP deficit which meant oversupply of dollar

Floating/ flexible exchange rate system (current)

Made exchange rate fluctuations more unpredictable & gave rise to greater uncertainty in foreign exchange market

Contend with rapidly changing int monetary scene & volatile exchange market

While overcoming shortcomings of fixed rate system, just led to incr complexity

Also known as managed float system/ dirty float system

Other contemporary currency arrangements

IMF classifies currency arrangements in 7 categories 1. Pegged to another currency 2. Begged to basket 3. Flexible against single currency 4. Joint float 5. Adjusted according to indicators 6. Managed float 7. Independently floating

SA has full flexibility of indep float where central banks allow exchange rates to be det by market forces alone

Dev of European Monetary System & Economic & Monetary Union

European Monetary System (EMS)

3 obj 1. Creation of zone of monetary stability in Europe by reducing exchange rate volatility through

convergence of member states interest rates 2. Control of member states inflation through imposition of monetary policy discipline 3. Coordination of member states exchange rate policies regarding non-European currencies

Added 4th obj - introduction of common currency (led to euro)

EMS based on fixed exchange rate that encompassed strong & weak currencies so exposure to dangers of speculative pressures

Country that seeks to maintain value of its currency must have enough foreign exchange reserves to buy/ sell as situation req to keep its value fixed

This triggered 2 changes in EMS – exchange rate fluctuation band widened & countries with strong currencies were no longer compelled to intervene in market

Economic & Monetary Union (EMU)

Monetary union, economic union but not political union

Monetary union coz national monetary competencies are pooled within European Central Bank (ECB) that defines & implements single monetary policy in single currency (euro) for entire EMU region

Impact of euro

Benefits of single currency o More transparent prices o Lower transaction costs

36

o Certainty for investors o Enhanced competition

Uncertainty regarding effects of issues like o Free flow & mobility of labour o Flexibility of wages & prices o Appropriate mechanisms for transferring fiscal res to affected countries

Volatility in int rates of EMU dep on monetary policy instruments in ECB & frequency of market inventions

Regarding exchange rates, elimination of forex risk btwn Eurozone states as result of single currency has reduced costs, enhanced competition & stimulated cross border trade btwn member states

Intro of euro gave rise to accounting & taxation issues, esp accounting of foreign subsidiaries, translation of fin statement data & translation of historical fin data

Euro has created opp but demands greater efficiency for global competitiveness

From SA perspective, Europe is NB trading partner so fin M that are internationally involved must be aware of challenges & opp of Eurozone

Evolving int fin inst

Bank for International Settlements (BIS) est for netting of payments among European Payment Union members, which reduced vol of gross int payment transactions

BIS acted as club for central bankers & regulators that gather data on exchange markets, euro markets & new fin instruments

They are filling niche of int fin agency that serves as 1. Bank for central banks, coordinating best practices across countries 2. Provider of rules & guidelines that foster cross border prudential banking 3. Thought leader in global fin matters that offers mechanisms for M future consequences of

prod innovation

Global fin crisis of 2008 highlighted importance of BIS, prior to this, BIS started calling attention to need to understand complexity & contagion effects of rapidly proliferating fin derivatives (new fin prods designed to channel risks to those most capable of handling of them)

BIS lent its voice for fin services to mark-to-market (report current market values of) derivative instruments on their books, by doing so, relative risk level of prods would be more apparent

During fin crisis, BIS was proactive in offering solutions to resolve crisis & coordinating effective policies for major central banks of the world

Foreign exchange market

Key characteristic that distinguishes int finance from purely domestic finance is concept of foreign exchange

Fin flows from int trade & investment are subject to conversion of currencies/ foreign exchange rate mechanism facilitated by foreign exchange market

Functioning of forex market

Forex market is worldwide fin market that provides physical & inst structure for foreign exchange transactions

Made up of network of banks across globe that facilitate conversion of domestic currency to currencies of nations with whom domestic country seeks to have economic exchange (transactions)

Forex market has no fixed location, main players are in major commercial banks of many open countries around world

Trading is conducted by open bidding on official floors of stock exchanges, but currency transactions are mainly conducted electronically by authorised forex traders & dealers/ currency brokers (open 24 hrs day coz of time diffs)

Key functions of foreign exchange market 1. Transfer of purchasing power of 1 currency to another 2. Provision of credit to indivs & MNEs distr across globe 3. Minimisation of forex risk related to cross border trade & investment

37

Foreign exchange market – structure & participants

Forex market comprises 1. Wholesale/ interbank market - constitutes informal network of hundreds of banks &

brokerages dealing with e/o & MNEs 2. Retail/ client market - caters for forex needs of indivs

Market can be further subdivided into 1. Spot exchange market – transactions executed immediately at prevailing market rate with

settlement (payment & delivery of currency) within 2 busn days 2. Forward exchange market – exchange rate & delivery date are agreed today, with settlement &

delivery of currency taking place at specified future date

5 broad categories of participants involved 1. Bank & non-bank foreign exchange dealers 2. Indivs & firms conducting cross border trade & investment 3. Speculators & arbitrageurs 4. Central banks & treasury dept 5. Forex brokers

Foreign exchange rates

Importance of forex market lies in facilitation of cross border production in most efficient way possible

Foreign exchange, exchange rate & foreign exchange transaction

Foreign exchange – money of foreign in form of bank deposits, drafts/ fin claims on economic agent

Exchange rate – value of 1 currency in terms of another

Foreign exchange transaction – agreement btwn buyer & seller that fixed amount of 1 currency be delivered for some other currency at specified rate & time (1 currency can be converted to another by spot/ forward exchange)

Banks, most NB forex dealers form NB link btwn forex demand & supply

Forex banking activities involving advanced comm tech ensure info on forex transactions is readily available, which results in relatively uniform price ranges

Direct & indirect quotas

Direct quote – gives home currency price of 1 unit of the foreign currency eg home currency is R, foreign currency is $, exchange rate in direct quote is R7/ $ ($1 = Rx) (referred to as American terms)

Indirect quote – num of units of foreign currency needed to buy 1 unit of home currency eg $0.14/ R (R1 = $x) (referred to as European terms)

Bid, ask & spread

Bid – price bank will buy foreign currency from another bank

Ask – price bank will sell foreign currency

Banks normally buy at lower rates & sell at higher rates

Spread – diff btwn selling & buying rate, repr dealer’s profit margin (likely to incr in thinly traded currency/ risks of trading are incr)

Spot & forward transactions

Spot transaction – purchase of forex with settlement (delivery & payment) completed within 2 busn days following transaction

Spot rate (bilateral spot forex rate) - price at which 1 currency trades for another in immediate execution of transaction

Forward rate – price agreed on today for purch/ sale of forex at future date

Forward transaction – uses forward rate & req delivery of forex on designated future date, normally quoted for maturities/ future value dates of 1, 3, 6/ 12 months, & should be settled by 2nd busn day

38

after expiry of contractual period (eg 3m contract entered into on 2 June will be for value date of 4 Sept/ next busn day if its falls on weekend/ public hol)

Forward quotations are either at premium/ discount eg if $ is more expensive in forward market compared to spot rate, $ is selling at premium & R is selling at discount meaning more R are req to buy given quantity of $

Adv of forward market is it allows economic agents to contractually agree today on future exchange rate that is fixed to eliminate any risk from unfavourable exchange rate movements

For fin decision making, note o If future spot rate (unknown at present) should be higher than forward rate, importing country

would exp loss in absence of forward contract o If future spot rate is lower than forward rate, importer would save in absence of forward

contract

Currency swaps

Trade involving exchange of 2 currencies by means of simultaneous purch & sale of given amount of forex for 2 diff value dates (sophisticated forex contract)

Useful for hedging forex risks by swapping notional value of currency which party has exposure & counter party has need for its currency

Currency swaps allow for o Moving out of 1 currency into another for specified time period without incurring forex risk o Companies to obtain LT foreign currency financing at lower cost than with direct borrowing

Swap deal is like conventional deal in that it enables manuf to insure itself against forex risk & by engaging in swap, firm knows today that the payment it will receive will yield Rx

Cross rates

Exchange rate btwn 2 currencies, calc on basis of common relat with 3rd currency

Exchange rate btwn 2 currencies, usually non-US & infrequently traded currencies, both are quoted in a 3rd currency, usually $

Where exchange rate btwn 2 currencies isn’t available, rely on cross rate

If cross rate is diff to quoted bilateral exchange rate, trader can earn arbitrage profit by buying undervalued currency & simultaneously selling overvalued 1

Arbitrage

Exchange rates tend to converge to same value since info is readily available, where this isn’t the case, there will be arbitrage profit opp from simultaneously buying a currency in 1 market & selling it in another

By buying currency where it is too low, it raises exchange rate of the currency in that market, selling it where it is too high would lower exchange rate in that market

Arbitrage would cont until diff in these exchange rates becomes so small that no longer justifies cost of buying & selling so eliminates arbitrage profit opp

Eg if using 3 currencies, calc cross rate & if any of 3 exchange rates is out of line with remaining 2, arbitrage opp exists

Exchange rate determination

Exchange rate determinants

Price of forex is det by interaction of supply & demand for each currency

Doesn’t tell us what factors inherently affect demand & supply, when 1 will exceed the other/ under what cond currency will be in relatively higher demand

Main motivators for demand of foreign currency are desire for foreign goods, investments, int financial instruments & to capitalise on speculative opp

Ppls desire to sell prods creates supply of foreign currency

3 factors have significant infl on future exchange rate movements of currency

39

o Country’s relative inflation rate o Relative interest rate o Market psychology

Exchange rates & price levels

Law of 1 price

Relat btwn price levels & exchange rate movements is explained by theory of PPP, based on law of 1 price

According to law of 1 price, identical prods sold in diff countries must sell at same price when items are expressed in same currency, assuming competitive markets free from non/tariff barriers to trade & transportation costs

Purchasing power parity (PPP)

Exchange rate btwn any 2 currencies adjusts to reflect diffs in price levels in the 2 countries

Price of a basket of goods should be same in each country & predicts exchange rate will change if relative prices change

Diffs in national inflation rates are main cause of changes in relative prices of goods, which are cause of changes in exchange rates where country’s inflation rate is believed to be function of growth in its money supply

Exchange rate adjusts to keep purch power constant btwn currencies

Absolute PPP – commodity costs same, regardless of where it’s sold/ what currency is used

Relative PPP – doesn’t serve as indicator of absolute level of exchange rates, but rather of change in exchange rates over time

Change in bilateral exchange rate is det by diff in inflation rates btwn the 2 countries

Currency either depreciates/ appreciates in value & therefore strengthens/ weakens relative to foreign currency so it takes more/ less of 1 currency to buy a unit of the foreign currency

PPP explains LT trends in exchange rate movements but not suitable for predicting ST changes

Relat btwn exchange rates, interest rates & inflation

Fisher effect

Parity relat that nominal interest rates (i) are equal to real interest rate (r) plus expected rate of inflation (h) i = r + h

Supports economic theory that int rates reflect expectations about likely future inflation rates (investors req positive real ROI)

When inflation is expected to be high, nominal int rates will be high to compensate investors for drop in purch power of their money

Link btwn inflation rates & exchange rates & since int rates reflect expectations about future inflation, logically link btwn int rates &exchange rates

International Fisher effect (IFE)

Relat btwn exchange rates, int rates & inflation is embodied in IFE

For any 2 countries, bilateral spot exchange rate should change in equal amount, but in opposite direction to diff in nominal int rate btwn the 2 countries

Diff in returns (nominal int rate) is equal to diff in inflation, confirming theory that real int rates are equal across countries

Int rate differentials have value in predicting future currency movements & exchange rates in LT

Both PPP & IFE are poor predictors of ST changes in spot exchange rates

Forex market & behavioural infl

Behav finance deals with explaining rational investors conduct that don’t fit the efficient market hypothesis where fin assets fully reflect all available relevant info about asset

Psych factors become NB in assessing expectations of traders in forex markets

40

Bandwagon effect – herd instincts lead to certain types of mass trading behav (infl ST exchange rate movements but occurrence, frequency & effects are hard to predict)

Exchange rate forecasting

Market efficiency

In env characterised by floating exchange rates, difficult to forecast future spot rates due to exchange rate volatility & infl of fundamental, technical & behavioural nature

Greater the relative accuracy which spot rates can be forecast, less the effect on forex risk

Regarding formality & desirability of forecasting exchange rates, led to 2 schools of thought 1. Efficient market school

o Forward exchange rates are best predictors of future spot rates o Quoted future exchange rates repr combined views of market participants concerning possible

future spot exchange rate o Belief is based on assumption that exchange market is efficient & prices reflect all available info

so any further analysis will be waste of time & money o Forward exchange rates should be regarded as unbiased predictors of future spot rates & any

inaccuracies will be random 2. Inefficient market school

o Believes forex markets are inefficient to varying degrees & market imperfections exist so analysts can improve predictions

o Forward exchange rates aren’t best predictors of future spot rates & investing in professional/ forecasting services would be worthwhile

Approaches to exchange rate forecasting

Supporters of inefficient market school follow 2 approaches 1. Fundamental analysis – based on economic theory & incl variables like fundamentally det forward

exchange rates, recognised lead indicators, relative money supply data, growth rates, int rates, inflation, BOP info

2. Technical analysis – use relevant vol & price data to ID historical trends & repetitive cycles which are projected into future, no economic basis/ theoretical rationale but become popular method for ST focusing horizons, psych infl as exchange rate determinants are closely linked to technical analysis

International capital markets

Money markets & capital markets

Fin markets are categorised into 2 types 1. Money markets – cater for ST fin assets (1day – 1yr) eg currency forward, repurchase agreement

treasury bill markets, foreign exchange activity via cross border banking transactions 2. Capital markets – cater to trading of LT fin assets (>1yr) eg equity & bond markets, roll over exchange

rate activity, cross border multiple yr borrowing, portfolio capital investment & FDI

Scope, structure & functions of int capital markets

1st phase of internationalisation where involved in import & export, int capital markets facilitate import & export finance (complex transactions carrying risk)

Therefore apart from political & other non-fin risks, intimate knowledge of int monetary system, forex market & int capital markets is NB

Scope of int capital markets as frame of ref for int fin M is reflected by demands on int fin M

Adv for investors – wider range of investment opp, able to diversify investment portfolios internationally, reducing portfolio risk

Adv for borrowers (MNEs) – access to int capital markets, greater scope, better financing opp, greater liquidity, potential of lowering cost of capital

Eurocurrency market

41

Eurocurrency – any domestic currency banked/ on deposit in another country, eg Eurodollar is US$ denominated interest bearing deposit in bank outside US

Value of Eurocurrency is same as that currency at home

Can be created anywhere in world, “euro” prefix indicated European origin of this market

Eurocurrency market serves 2 purposes o Eurocurrency deposits are efficient & convenient money market device for holding excess

corporate liquidity o Eurocurrency market is major source of ST bank loans to finance corporate working capital

needs, incl import & export fin req, other offshore ventures

Adv is its free from gov regulation & interference so beneficial for investors & borrowers

Reasons for this is spread btwn Eurocurrency deposit & lending rates is less than spread btwn domestic deposit & lending rates

2 limitations o Unregulated system so probability of bank causing depositors to lose money o Int loans don’t offer complete assurance against risk so still exposed

Int bond market

Bonds are NB means of corporate finance where fixed rate bonds are found

2 types of int bonds 1. Foreign bonds – sold outside country of borrower but denominated in currency of issue 2. Eurobonds – underwritten by int banking syndicated, placement of bonds is in country other than

country in whose currency bond is denominated (most popular in int capital market), main adv is no forex risk if Eurobond is raised by MNE subsidiary domiciled in country of bond currency documentation

Rapid growth of Eurobond market is attributed to o Absence of regulatory interference o Less stringent disclosure req compared to domestic bond markets o Favourable tax status, majority of industrialised countries have abolished withholding tax on

interest payments to foreigners

Int equity market

No real int equity market, reflects trend where investors are taking ownership in companies in foreign countries where regulatory systems allow such practice

Companies list shares on stock exchanges in foreign countries, preliminary step to actual issuing of company’s shares on foreign stock market, which incr its access to other fin sources & can lower cost of capital

7: Political economy of global trade Home gov normally negotiates better deals for MNE with host gov if MNE is of strat national interest to

home gov

Possible to curtail activities by discouraging, banning/ restricting activities dep on national interest that dominates gov agenda

Qu why some countries produce goods that could be purch cheaper from other countries, reason is trade barriers

Evolution of global trade

Idea of exchange is inevitable, no nation can satisfy its incr needs & desires satisfactorily & economically only by means of it local production & res

Int trade in early periods wasn’t free of charge, so duties, royalties & tariffs evolved as integral part of historical trade phenomena

42

Today, busn practices & int busn are infl by macroeconomic policies & political agendas of gov, fiscal & monetary policy

Political reality of int busn practices prevent realisation of free trade regime

Global trade regulatory organs like WTO & WB make efforts to encourage free trade, nations still use policies to restrict trade like tariffs, subsidies, import quotas, local content req, admin policies, voluntary export restraints & antidumping duties

Regulating trade

Political economy means gov can employ protectionist measures to regulate quantity & quality of goods traded

Main reason for applying trade barriers is to encourage local production, making it hard for foreign competitors to enter local market

Means local producers can incr production & gain enough exp earn competitive adv that can lead to int competitiveness

Reasons for trade barriers

4 major reasons – political, economic, retaliation & trade wars, domestic policies

1. Protection of local jobs Domestic markets shielded from foreign competition to bolster empl opp

Discourage importation of goods produced domestically

Discourage mergers & acquisitions & even FDI coz of possible job shedding

2. Import substitution

Based on assumption that greater industrialisation creates greater wealth

More manuf activities that take place in country, more efficiently wealth is distr among economic agents (esp labour & investors)

Domestic prods are considered cheaper than imports

Incr in market size affects output indirectly as other sectors demand more input materials to feed production demand

3. Protection of infant industries

Protection of young industries/ economic sectors that are just starting out & too immature to compete against est rivals

Level of protection is informed by strat importance to nations building

4. Reduction of reliance on foreign suppliers

More economy relies on foreign suppl, more vulnerable they are to be infl

High suppl power could have devastating effect on economy in case of economic dispute

5. Attraction of local production & foreign investment

Subsidies used to attract investment in areas strat important to economy

Gov willing to give concession to investors to facilitate local production of goods that are strat NB to economy

Same tools used to attract FDI into industries where country lacks production capability & competence

6. Reduction in balance of trade payments/ deficits

Use trade policies to achieve trade equilibrium

If trade balance is in deficit, tariffs used to discourage imports & promote exports

7. Promotion of exports Economic advancement best achieved through export promotion

Countries can only lose less developed status through improved industrialisation which culminates in export promotion (use subsidies)

8. Antidumping remedies Tariffs erected against foreign firms that export & sells its prods in overseas market at

price lower than production cost in home market

Intended to raise importation costs & selling price of goods

9. Political obj/ retaliation Use instruments to advance political agenda

Used as sanctions against countries with poor human rights, child labour, sweatshops, tyranny & totalitarianism/ retaliation

10. Protection of national sovereignty

From int law POV, country is regarded as sovereign state if it is indep, free from external control, full legal status, formulates own policies, est inst & adjudicates matters

Legal status enables country to select its own political, social & economic systems & enter into contractual agreements with other nations

Gov protect their territory by carefully choosing trade partners & limiting kind of prods left in hands of foreign investors

43

Implications of trade barriers

1. Trade barriers are arbitrary & discriminatory in nature & are applied subjectively o Application stems from political motives rather than economic rationale o Applied discriminatorily to discourage trade with specific countries o Can breed counter tariffs which incr tariff list & polarisation of economies o Tariffs undermine int standing of countries as trigger reprisals & trade wars

2. Application of trade barriers req special training, supervision & admin o Personnel that administer tariffs are given customised training, need regular supervision & up

to date knowledge on existing & new trade relations o Constant updating of admin systems & procedures, systems reengineering to enhance tech

capability 3. Admin of trade barriers adds to microeconomic probs of country

o Eg country faced with inflation needs to push up demand & supply bands to equilibrium which req improved supplies, if local manuf is at its max, need to import & if tariffs in place, prices of imports will be too expensive for cons & inflationary pressures will incr

o Featherbedding of local manuf causes inefficiency, lack of competitiveness & lower national economic productivity

4. Application of trade barriers encourages special-interest privileges o Trade barriers breed special concessions to allies while rest of world is treated like outcasts

(major drawback coz can lead to trade diversion) o Preclude cons from accessing prods from various markets at competitive prices o Weaken market equilibrium coz distort supply & demand

5. Application of tariffs incr gov intervention in trade & economic matters o From dev economic POV, role of gov in economic matters should be ltd to creating enabling

env where busn can thrive o With tariffs, gov regulate busn env & household consumption patterns

Instruments of trade policy

Trade barriers adopted to discourage free flow of goods, input materials & services across int borders

2 main categories of barriers o Tariffs – price based barriers o Non-tariff barriers – administrative in nature

Tariffs

Tax levied on goods, input materials & services imported into country

Levy is attached to total quantity of items imported at specific rate per unit in consignment (specific tariff eg R20 on every fridge imported)

1. Ad valorem tariffs o Based on % of value of imported item in destination country o Calc amount payable by multiplying % by quantity of item imported

2. Export tariffs o Payable on good & services leaving borders of country for another country o Meant to incr cost of exports to discourage them o Used to incr govs revenue in areas where country has absolute/ very high comparative adv o Seldom applied in modern trading since hardly any country enjoys absolute adv in provision of

service/ manuf of prod 3. Transit tariffs

o Special duty paid on goods that pass through country to final destination o Levied on diff basis like specific tariff, ad valorem duty/ compound tariff that consists of both

specific & ad valorem duties

Subsidies

44

Fin payment made by gov to domestic manuf/ service providers to reduce burden of manuf/ operating costs with aim of reducing of reducing cons price

Common forms are cash grants, low interest loans, tax breaks & gov equity participation in ownership & capital structure of firm

Aimed at achieving 2 obj 1. Discouraging foreign imports

o Subsidies lower production costs of domestic manuf to discourage imports o Makes local selling price cheaper than that of imports so discourages rational cons from purch

more expensive imported goods o Applied to prods strategically critical to gov/ of special national interest

2. Gaining export markets o Govs encourage exports coz boosts trade balance with outside world o Subsidies also aided dumping & other unfair trade systems o Main argument against subsidies is they help featherbed inefficient domestic producers at

expense of efficient foreign producers as goods produced below normal market costs are exported & sold in foreign markets at low prices

o This kills global competition & encourages countries to produce in excess what could be more competitively produced elsewhere

Quotas

Most prominent non-tariff barriers (NTB), it restricts amount of goods/ service that can be imported into a country over accounting period

Application suggests domestic production of that will incr to cater for shortfall in imports, gov loses money on tariffs but gains revenue on excise duties

1. Import quotas o Direct restriction on quantity of goods/ service that can be imported o Applied by prescribing import license as prereq for importing specific items o Each licensee is awarded right to import specific quantity of item over acc period & special

tariff is payable on every item imported within limits of approved quantity 2. Voluntary export restraint (VER)

o Quota imposed on quantity of goods exported from country o Self-inflicting restriction used by exporting country at request of importing country to avoid

trade dispute 3. Local content req

o Req that certain quantity/ % of input materials should be sourced domestically & are formulated in express terms

o Failure to comply can lead to heavy fines/ boycott of prod o Adopted to incr local manuf capacity of component parts at expense of mere assembling

4. ‘Buy national’ restrictions o Applied to limit consumption of imported goods to promote local manuf o Improves local brand loyalty & promotes industrial capacity dev

5. Technical barriers o Used to discourage imports where using non/tariffs are unpopular & could trigger retaliation

so use technical barriers to frustrate importation o Countries are statutorily empowered to protect citizens from hazardous & substd prods, also

used to impede imports eg high prod stds o Process is subjective & frustrating eg if country has small entry point, prods can go off/ become

obsolete before obtaining clearance

Dumping

Goods are exported at price less than their normal value/ if goods are sold at less than production cost in exporting market

45

Process where exporting country offloads its excess domestic prod to foreign markets (importing countries)

Employed by exporting country to unleash competitive pressures that may drive out domestic competitors in importing country

Measures to address dumping are

Antidumping policies

Designed to redress unfair trade practice of dumping, so protecting domestic producers against unfair competition

Dumping benefits cons coz have access to bargains but unfair to local produces & can hurt cons if exporting company succeeds in killing competition in importing country

Countervailing duties

Special duty levied against foreign firm found guilty of dumping (guilt req proof that local firms in industry have suffered material injury)

Tariff will be very high & applied to guilty firm for protracted period

Evolution of global trading arrangements

When nations concentrate production on commodities they have comparative adv in, cons benefit from lower range & greater variety & coz each prod is produced by country best at producing it, scarce world res are allocated efficiently

Measures to allow free movement of factor inputs & distr of finished prods

Challenge facing world leaders is to ensure reasonably open economy & trade liberalisation to enhance location of production facilities at most favourable location for investors

Resulted in est global structure with resp of est new economic world order aimed at fostering greater trade integration & liberalisation

GATT was est as framework for conducting & practicing free trade, they created system for distr of value added activities & acted as conduit for realisation of free trade

Resulted in furthering of foreign investments & improvement in global trade relations which helped achieve economic prosperity

Needed to rectify inherent deficiencies in GATTs statutory capability to decisions so led to Uruguay Round where WTO was announced

WTO helped lower trade barriers & non-tariff barriers in restricted trade sectors

Member nations aren’t allowed to block adoption of arbitration reports on trade disputes but allows them autonomy to choose & respond to FDI based on indiv state’s circumstance

WTO are strong regulatory body with power & authority to formulate, implement, enforce & mediate all forms of trade-related matters

They pay crucial role in facilitating global free trade & liberalisation of economies

FDI in manuf has incr, but investment in services is becoming focus of FDI

What the future holds

WTO has facilitated better global economic enabling efficient use of relatively scarce global res which resulted in many countries achieving unprecedented levels of wealth & prosperity

Challenge to start restructuring existing agreements on agriculture, service & intellectual property, Doha Dev Agenda was launched to provide mandate for negotiations on range of subj concerning implementation of present agreements

Main obj of agenda was to achieve o Market access – substantial reductions o Export subsidies – reductions & phasing out all export subsidies o Domestic support – substantial reductions for support that distorts trade

Difficulty in Doha Round based on alleged skewness of earlier trade agreements that provide developed economies with more of a comp adv than developing

46

Developed countries were reluctant to accept any reform that would jeopardise trade benefits

Developing countries intent on rectifying inherent errors so WTO has task ahead

WTO – only int org dealing with global rules of trade btwn nations, main function is to ensure trade flows as smoothly, predictably & freely as possible

8: Foreign direct investment & capital markets Defining FDI

FDI is located in capital market (where LT fin contracts are traded) & enable holders a stake in the contract-writing firm

Often in form of organised exchanges eg JSE & typical contracts are o Ordinary shares - ownership in issuing firm (expected indefinite life) o Bonds - IOUs issued by firms/ gov to creditors (terms of 15 yrs on avg)

FDI – capital market transaction that permits foreign economic agent to acquire significant interest/ controlling stake in ownership of domestic firm

Significant/ controlling interest is economic agent’s equity ownership of firm worth at least 10% of firm’s total value

International portfolio investment – foreign investor’s equity ownership stake in firm is less than 10% of its total value/ investor holds any amount of debt securities eg corporate bonds issued by firm (termed ‘hot money’)

Key distinguishing features btwn FDI & int port inv 1. Foreign investor’s stake must be in form of equity/ ownership to be FDI 2. Equity stake must be at least 10% to be FDI, otherwise its int port inv

Definitions confirm o Both FDI & int port inv take place in capital market (offshore/ local) o Both are international transactions associated with int production o FDI is LT interest in recipient firm, int port inv is temporary

Use int port inv for ST inv return opp where enter & exit domestic fin markets esp in developing capital markets, characterised by high risks & returns

This kind of ebb & flow of foreigner’s funds in capital market tends to destabilise recipient capital market & doesn’t foster sustainable real economic activity

FDI - reflects obj of obtaining lasting interest by resident entity in 1 economy (direct investor) in an entity resident of another economy (direct inv firm), lasting interest implies existence of LT relat btwn direct investor & firm & significant degree of infl on M of the firm

Adv of FDI relative to int portfolio investment

1. FDI uses capital markets in a way that doesn’t destabilise domestic capital markets 2. Int port inv is arm’s length relat, FDI sensitises foreign investors to needs of domestic community so are

more socially resp 3. FDI provides foreign firm seeking to internationalise its operations with additional mechanism –

controlling ownership stake in domestic firm means investing foreign firm becomes MNE with all adv that entails

4. Given high ownership stake of FDI, MNEs are NB conduits for transferring new production tech not yet available in domestic markets, which enhances productivity of local firms (termed ‘spillover effects of FDI’)

5. Local firms & gov keen to take adv of spillover effects, would incr training & edu of human capital & improve infrastructure (domestic preparation for rec FDI is termed ‘building of absorptive capacity’)

6. FDI is viable economic growth mechanism for govs constrained by lack of domestic res capacity given LT relat of FDI

47

Diff forms of FDI

1. Acquisition o Investor buys shares in domestic firm that entitles investor to controlling ownership stake in

local firm 2. Joint venture (JV)/ merger

o Foreign firm teams up with another firm (local/ foreign) to create new enterprise that produces & sells prods from domestic base

3. Greenfield o Firm, gov/ indiv investors raising funds to start new production & distr activity (busn) in foreign

location o More challenging coz starting venture in unfamiliar env but higher risks mean higher returns o Affords investors autonomy in conducting busn & full appropriation of ownership factor/

competitive adv in foreign location

Non-equity strat alliances like licensing, trademarks/ serving as distr conduit for foreign firms prods don’t constitute FDI

Theories of FDI

Theories of FDI-embodied MNEs

Int trade & finance theories

1. Trade in goods & services o Absolute adv (Smith)

Free trade is NB to incr wealth of country, country should export what it can produce at lower cost & import what it produces at higher cost

Absolute adv gained by diffs in climate, fertility & location factors o Comparative adv (Ricardo)

Emphasises efficiency, country should consider opp cost involved in its trade decisions Labour is only relevant factor of production, no possibility for FDI Drawback is fails to explain spillovers from tech through FDI

o Diffs in factor endowments (Hecksher & Ohlin) Countries specialise in & export goods that intensively use the most abundant factors

of production & import those that intensively use its scarce factors Introduce capital as 2nd factor of production but still immobile internationally Failure due to unrealistic assumption of perfect competition, 2 inputs that are

immobile int & idea of no barriers to trade/ transaction costs o Paradox (Leontief)

USA which is capital abundant, exported labour-intensive commodities & imported capital-intensive commodities

Assuming immobility of factors of production, theory doesn’t explain MNEs & FDI Suggests there are no int diffs in tech so no room for tech transfer & spillovers

2. Int capital movements o Neoclassical arbitrage theory of portfolio investment (after WW2) & culminates in

macroeconomic theory of FDI o Mundell’s work explains foreign inv in its portfolio form instead of direct form o Theory is based on assumption of perfect competition o Int rates differentials play NB role in det capital movements, since no transaction costs,

investors can take their savings where returns are highest o Main prediction is that MNEs will originate in countries where marginal productivity is low &

transfer capital to host countries where marginal productivity of capital is higher

48

o Theory fails to differentiate btwn FDI & portfolio inv & uses narrow definition of foreign investment that only captures finance capital (contracts) so neglects other aspects of foreign inv like tech, access to markets, entrep & M styles

o Features of FDI are inconsistent with capital arbitrage theory & led to emergence of industrial org theories which provide fuller explanation of FDI-embodied MNEs

Industrial org theories

1. Int operations of MNEs o Hymer took theory of FDI out of int trade & fin & into industrial org theory by dev structural

market imperfection theory o Focused on MNE as inst for int production as opposed to int trade o To explain FDI, noted that firms have ownership-specific adv in form of non-fin & intangible

assets like patents & tech, economies of scale, M skills & prod reputation that MNEs transfer across subsidiaries

o Main motivation for FDI by MNEs is they want to regain control of assets o By est foreign operations, MNEs aim to appropriate all returns from tech advancements,

feasibility dep on absence of market imperfections o Main critique is fails to discuss adv & disadv of FDI & tech transfer

2. Prod life cycle theory o Vernon dev to explain in trade in goods & FDI, theory pertains to timing of investments by MNE o NB point is life cycle patterns of MNEs main prods det foreign inv o Life cycle involves 3 stages

1. Innovating country uses tech edge to produce new prods giving it an export adv 2. Due to incr competition, production moves to lower income country where cost of

labour is lower so manuf is sensible 3. Prod is standardised & moves into mature stage which induces exports, FDI replaces

exports & then export FDI-embodied MNEs prods back to home country o Main critique is firms usually make decisions simultaneously not in the 3steps & also doesn’t

address org issues & determinants of FDI 3. Transaction cost economics (internalisation theory)

o Also termed natural market imperfection theory & internalisation of markets o MNEs exist to organise interdependencies btwn subsidiaries in diff countries o Decision making based on comparison btwn organising activities though market/ firm o Due to market imperfections, firms incur transaction costs which they escape by using internal

markets o Firms internalise production coz knowledge has nature of a public good, centred on

importance of tech o Profit-maximising MNE is interested in preventing tech spillovers to other firms to maintain its

comp adv o When deciding to invest abroad, MNEs must consider strat risks of imitation & eventual

replacement by local firms o For firm to invest abroad, tech must have characteristics of public good within firm, outside

firm, tech asset must be private good which is completely excludable o Difficulty in completely appropriating all new tech generated benefits results in investor’s

reluctance to engage in research & dev (spillovers are negative) o Critiques are analysis is static rather than dynamic (concentrates on current assets & disregards

future assets), failure to consider economic variables like social & political matters leaves theory incomplete

4. Eclectic paradigm (ownership-location-internalisation framework) o Dunning provides integrative framework which brings various theoretical traditions of int

production into more general frameworks o Industrial economic theory is captured by focus on ownership factors (O) o International trade theory by location factors (L)

49

o Internalisation theory by market failure factors (I) o Combining these factors, came up with OLI factors that produce more comprehensive

understanding of FDI & MNEs o Research qu ask why firms invest overseas & what determinants are of amount & composition

if int production Ownership adv (O)

Why firms go abroad

Comp adv incl size, monopoly, better res capability & uses, adv of being part of multiplant enterprise like economies of scale, multinationality, greater opp & ability to exploit diffs in factor endowments

Adv offset disadv of not being local firm (monopolistic adv) Location adv (L)

Why firms choose to produce in 1 country rather than another

Emphasis on more profitable to use its O adv together with factor inputs outside home country

Other adv incl spatial distr of inputs & markets, transport & comm costs, gov intervention

Internalisation (I)

Responds to how & by which route

Incl use of O adv internally rather than exporting them to foreign market

OLI are the 3 cond that det if firm will engage in FDI

CHANNEL O O + I OLI

Licensing Yes No No

Exporting Yes Yes No

FDI Yes Yes Yes

o If have ownership adv – choose from licensing, exporting & FDI indifferently o If ownership adv can be successfully internalised – won't license but decide btwn exporting &

FDI indifferently o Combining the 3 adv – only main option is FDI o Critique of OLI is Kojima hypothesis which takes into consideration cross border transactions of

intermediate skills & notes OLI is too micro-oriented & fails to acc for policy which is usually formulated at macro level

o Paradox noted where OLI specifies that MNEs invest in host economies to minimise spillovers, yet MNEs are source of spillovers since FDI is spillover mechanism

5. Investment dev path theory (IDP) o Using OLI as base, Dunning dev IDP which predicts U-shaped relat btwn country’s level of

economic dev & net outward flows of FDI o U-shaped curve is explained by 4 stages

Low income stage characterised by low FDI inflows & minimal outflows, low outflow coz ownership adv of domestic firms isn’t dev, low inflow coz location adv aren’t strong enough to provide incentives

Economies where location adv has improved, incr FDI inflows but minimal outflows Net outward flows are still negative but incr FDI outflows are greater than inflows, domestic firms have incr O adv

6. New trade theory & knowledge capital model o Use proximity-concentration trade-off (PCTO) used to explain why country would choose

foreign production rather than exports o Producers analyse costs of FDI compared to trade costs o Gave rise to horizontal FDI (MNE replicates same production across diff locations) & vertical

FDI (MNE locates production stages according to factor costs)

MACRO-LEVEL THEORIES MICRO-LEVEL THEORIES INTEGRATED FRAMEWORK

50

International trade theory

Neoclassical trade theory

New trade theories & knowledge capital model

Global reach school

Industrial organisation theory

Prod life cycle hypothesis

Transaction cost economics (internalisation theory)

Eclectic paradigm

OLI factors

Investment dev path theory

Tech transfer, absorptive capacity & economic growth aspects of FDI

Tech transfer

MNEs are main source of tech transfer from home country to host countries of subsidiaries

Findlay’s early model of FDI & tech transfer related tech advanced countries to tech backward countries based on idea that greater the tech gap btwn them, faster the catch up rate was

Rate at which tech is diffused to backward economies is positively related to gap existing btwn advanced & backward country

Model doesn’t explain forces behind tech transfer

Oligopoly theory by Das fills gap by detailing process of tech transfer from parent firm to subsidiary

Analysis incl tech spillovers from MNEs to domestic firms in host country of subsidiary, in spite of leakages to domestic firms, MNE subsidiary still benefits from tech transfer

Strat interaction btwn MNE & local firm det tech transfer via consideration of spillover costs to MNE

Once MNEs have transferred tech to subsidiary, tech diffusion to host country firms becomes possible (nature of tech as partially excludable makes tech spillovers possible)

Arrow was 1st to realise that knowledge spills over from 1 country to another due to public-good nature of knowledge (non-rivalry & non-excludable)

Investors who risk failure to appropriate all benefits of their investment view tech spillovers as negative, but actually contr to economic growth of host country

For host country to realise tech benefits from MNEs, transfer must occur more swiftly & cheaper than alt methods of tech diffusion through free flow of discoveries, licensing of patents & transfer of knowledge & embodied tech through trade

2 basic forms tech can be transferred o Tech embodied in physical assets like tools, equip & blueprints o Methods of organisation, quality control & manuf procedures req to make embodied tech

useful

Alt way to view FDIs spillover properties is by considering 3 main spillover channels o Demonstrative effects o Level of labour turnover o Number of vertical linkages

Spillover potential of FDI dep on type of FDI (licensing, JV/ full ownership)

JV has highest potential for spillovers

Not only positive spillovers occur, also get negative 1s if MNEs compete with local firms for domestic demand & take the high quality labour

LICENSING JV FULL OWNERSHIP

Demonstration effects X X

Labour turnover X X

Vertical linkages X X

Absorptive capacity

With tech transfer, can receiving end absorb the tech

Regarding estimated size of spillovers from FDI, dep on absorptive capacity

Instead of asking if FDI leads to economic growth, focus is also on enabling cond for this to materialise

Ways to measure absorptive capacity of country, measurements differ dep on gauging across countries/ within country (firm-level)

At firm level

51

o Within country, its measured as distance of firm from tech frontier firm in relevant industry / country

o Firm operating close to tech leader has high absorptive capacity & is more capable of appropriating incoming tech

At country level o Bulk of evidence appears at country level (cross-country basis) o Indicators used are

1. Per capita income 2. Trade openness 3. Level of edu of labour force (dominant variable – social capability) 4. Level of dev of fin markets 5. Efficiency of tech use 6. Domestic research & dev

o Human capital is measured as cumulative effects of activities like formal edu, on the job training

o FDI is positively but insignificantly related to GDP until after incorporation of minimum threshold level of human capital, only then are spillover effects of FDI significant

Economic growth theories

Solow’s growth model is work horse for most economic growth analyses

Assumed exogenous tech change with obj of IDing relat btwn growth & tech change

Result was that growth is explained by capital accumulation & tech progress

FDI is addition to capital stock & given same treatment as domestic capital

Importance of knowledge accumulation as explanation for economic growth

Arrow pointed out that incr returns occur coz of discovery of new knowledge that occurs as investment & production take place, successful application of MNEs stock of knowledge is key to economic growth of host countries

Effects of FDI on growth of most firm-level studies focused on manuf sector coz perceived to be sector where int knowledge spillovers are more likely to materialise (more in developing countries, in developed countries, services sector is growing)

Causality issues btwn FDI & economic growth in developing countries o Causality btwn FDI & eco growth runs from GDP growth to FDI o For some it runs from FDI to GDP growth o Others it runs in both directions, from FDI to GDP growth & vice versa

In developing countries, FDI inflows by themselves only marginally affected growth, where FDI interacted with level of edu of country’s labour force, had significant positive impact on growth

Gov incentives for attracting FDI

Investment incentives are measures designed by gov to make their countries attractive investment destinations by

1. Infl size, location/ industry of inv 2. Affecting its relative cost/ potential for profit 3. Altering risks attached to it

For det FDI, incentive schemes have played subsidiary role compared to factors like strong macroeconomic fundamentals, availability of natural res, market size (measured by level of income), human capital (quality), infrastructure available & political & economic stability

Recent proliferation of investment incentives suggest shift in direction regarding importance of inv incentives (way of providing absorptive capacity to appropriate benefits of FDI)

Main reason for proliferation is internationalisation of world economy, with trade integration, smaller countries are able to reach rest of world

Regional integration has effect of allowing MNEs to reach out larger num of countries through various production networks, policy makers use subsidies to promote domestic production, employment & welfare

52

Rationale for incentives comes from belief that FDI produces externalities in form of tech transfers & spillovers (spillovers aren’t change events & must be obtained)

Functions of investment promotion agencies 1. Image building achieved by focused advertising & good PR 2. Investor facilitation & servicing gives investors info & assistance that allows them to set up

projects (achieved by providing info, 1stop shops that expedite approval systems, site identification & access to utilities)

3. Investment generation aims to create inv leads by IDing potential sectors & investors through investor forums

4. Policy advocacy takes place where IPA supports country initiatives targeted at improving inv climate, activities incl private sector surveys, policy & legal proposals, lobbying

2 main types of investment incentives 1. Fin incentives – common in developed countries, form of grants/ loans to assist investor in

acquisition of capital assets, provision of infrastructure, training of workers by host gov 2. Fiscal incentives – common in developing countries where ltd funds available for fin incentives

Most inv incentives apply to greenfield investment rather than JVs/ acquisitions

Consistency of policies is NB, tax admin is NB as infl admin of tax incentives

Policy issues regarding inv incentives incl debate on desirability of strat intervention by gov in FDI

9: International M & leadership Essence of int M& leadership is to formulate & implement strats that enable firms to enter & compete

in variety of global busn env

4 main strats they use are international, multidomestic, global & transnational strats

International M & leadership

Role of M & L in guiding firms response to dynamics of global env is MN as can involve revisiting mission, identity & strats with future in mind

To respond appropriately, need to understand forces that can affect success

Traditional M mindsets inhibit attempts at achieving global success & are characterised by 1. Internal focus 2. Oriented to & satisfied with domestic market & its needs 3. Attitude implying diff is dangerous 4. Disinterested in other markets & cultures, insensitive to busn opp in foreign markets 5. Absence of effort to cultivate/ understand foreign clients, comp/ markets 6. Assuming inhospitable attitude to foreign element in domestic market 7. Reliance on gov to protect itself from foreign competition 8. Willing to limit foreign advertising, production/ distr

Mindset is usually unaware that connection exists btwn activities of foreign competitors & domestic market, when faced with incr comp, prefer to retreat into protective custody of domestic system

In contrast to global mindset based on heightened awareness & enhanced abilities relative to challenges of global env, holds multiple cultural perspective & creates int network of partnerships, relats, alliances that shift over time

Global mindset is state of being, characterised by openness & ability to recognise complex interconnections, global M need certain set of supportive knowledge & skills to sustain global mindset

The dev, cultivation & operation of global mindset explains diff btwn int M & int L, int L display attributes peculiar to cultivation & maintenance of global mindset, unlike int M who are steeped into attributes of traditional mindset & its limitations

Basic concepts

Int M

53

Focus of busn shifts from domestic to global env, L&M need to look for ways to redefine strats & realign orgs to new global reality

Challenge for int M to articulate viable global strat, to facilitate & dev supportive processes by which globalisation can be M, create appropriate cond by which overall strat, process, culture & structure can be meaningfully aligned to achieve org effectiveness

Int M is embracing M functions of POLC across national borders

Int M - process aimed at realising global obj of firm by M procurement, allocation & utilisation of human, fin, intellectual & physical res of firm within & across national boundaries which facilitates achieving desired org goals by navigating firm through global env that is dynamic & hostile

Int leadership

Dev & operation of global mindset explains diff btwn conceptual foundations of M&L

Global mindset is characterised by o Unique time perspective - LT view when dealing with int busn o Unique space perspective – extend personal space beyond immediate surroundings (in terms of

geog & relats with others)

More tolerant of others & their culture, consider cultural diversity an asset, thrive on ambiguity, balance & contradictory forces, rethink boundaries

Also incl emotional connection, capacity for M uncertainty & ability to M tensions & common sense

Int L - L help to shape orgs vision, meaning within which others work & live, M act within a vision, L & vision remain NB to understanding ppl & their inst

L is ability to inspire & infl thinking, attitudes & behav of ppl

Int, multidomestic, global, transnational, multinational

Multidomestic firm - localisation strat focusing on local responsiveness in foreign markets

International strat – create value by transferring core competencies from home to foreign busn units towards balance btwn globalisation & local responsiveness

Global firm – follow global strats that emphasise realisation of local exp curve economies in low cost standardised prods

Transnational firm – focus relentlessly on simultaneous attainment of location exp curve economies in low cost standardised prods, do so through global networks across globe & derive substantial portion of revenue from foreign ops

Multinational firm (MNE) – firm engages in FDI, they own & control value adding activities in more than 1 country

Level of MNE internationalisation can be gauged by transnationality index, can be calc from 3 ratios o Foreign assets to total assets o Foreign sales to total sales o Foreign employment to total employment

Env of int M

Int env for MNE constitutes sum total of env of each country MNE operates in

Key issues & env forces have direct impact on MNEs understanding of opp & threats 1. Changing nature of int env incl demographic shifts, urbanisation, growth of minority groups,

poverty, unempl 2. Changing cons behav & incr demands 3. Trade liberalisation, deregulation, privatisation 4. Advances in info comm tech, progressive dev of biofuels industry resulting in new competitive

forces 5. Emerging markets & new economies as result of new tech (eg ecommerce) 6. Incr proliferation of regional economic integration & formation of trade blocs & agreements 7. Emergence of EU & other trade blocs as economic force & intro of euro 8. Unpredictable env disturbances eg natural disasters & their impact 9. Changing political & economic systems incl undermining communism

54

10. Aggressive manifestation of HIV & its consequences for health, fin & edu 11. Incr consolidation of busn through mergers & acquisitions 12. M becoming globalised as result of restructuring, downsizing & rightsizing & global outsourcing

of activities 13. Unprecedented levels of corruption & social disorder 14. Need to scan competitive env cont & search for busn opp

Competitive intelligence (CI)

Analytic approach to obtain vital info on major env trends

Based on assumption that M seek to become better informed about critical issues

They seek this info on formal & systematic basis, intelligence is distilled info

CI - process of ethically collecting, analysing & disseminating accurate, relevant, specific, timely, foresighted & actionable intelligence regarding implications of busn env, competitors & org itself

Companies should be forewarned about events in external env, to achieve this, need strat capacity to monitor & analyse external env on ongoing basis

Process that enables MNEs to collect, process & analyse high level info from int env

CI analysis is conducted within framework of political, economic & other risk analyses, based on 5 interrelated steps

1. Gather info about company & it’s env 2. Analyse info to evaluate its source & confirm validity 3. Det potential impact info will have on busn & its market position 4. Decide how to react to new info & what strat countermeasures should be dev 5. Busn revises its strat plan to incorporate countermeasures & take steps to implement new

strat busn plan

Risk in int env

Risk can adversely affect planned outcomes & expectations in int busn

Internal risk – threat that internal events will adversely affect company’s ability to implement its strat & achieve its goals, in MNE, risk is heightened since subsidiaries are autonomous & geog free of headquarters & culturally less involved in the firm

Env risk – threat that events in env will adversely affect company’s ability to implement its strat & achieve its goals

Protect from internal risks incl fraud & incompetence by implementing effective risk M systems & encouraging positive org culture

Env risks are harder to predict & incl 1. Unexpected gov imposed discriminatory taxation 2. Import & export controls 3. Country indebtness (bad debts) 4. State interference with operations 5. Unresolved legal disputes (eg labour relations disputes) 6. Unfair competition from local public sector 7. Political events eg gov takeovers 8. Nationalisation of industries, expropriation of assets, piracy of intellectual property rights 9. Public sector corruption 10. Disputes over trade issues, fiscal misM, regional hostilities, wars

Int M should anticipate potential crises & devise ways to deal with them & minimise their effects, calls for competitive intelligence & env scanning systems to provide timely info for proactive action

Country risk profiles which feature in Busn Env Risk Index (BERI) provide info for initial screening of countries as potential for FDI

Ways to protect firm against uninsurable risks incl 1. Investing in countries through FDI & JVs 2. Investing in preferential industries incentivised by host govs 3. Using local fin sources

55

Managing in 21st century

Groups of competing factors

1. Emerging global economy - incl market opp & investment strats of MNEs & highlights importance of developing economies & emerging markets

2. Cust marketing sophistication - highlights importance of cust service excellence, as well as quality, cust care, friendly tech, factors all confirm NB of innovative marketing strats to obtain comp adv

3. Busn culture, empowerment drives tech/ innovation – emphasises need for visionary L, NB of nurturing appropriate busn culture & ability to adapt L style to changing env. Excellence in L, effective M & implementing appropriate HR strats that empower empl as integral res to the busn, will contr to success

4. Competing drive, alliances/ networking, org transformation - NB of strat busn reviews & org transformation in search of comp adv & sustainable growth, strat networking with members in value chain is NB, leads to mutual transfer of busn & service concepts & best practices which can enhance comp edge of MNE

Traits regarded as indispensable for int M

1. Appropriate knowledge skills & exp to deal with complexity & ambiguity 2. Conceptual ability to deal with macro issues peculiar to global M,& micro issues regarding operating

needs of domestic busn 3. Understanding of realistic time frames for implementation of global strats 4. Ability to dev & implement effective networks & appreciation of time & res req 5. Perception of global needs & prods to satisfy those needs in market driven, integrated G process 6. Predisposition for building globally distr teams with members who interact but don’t have frequent

contact, but can still provide globally oriented info

Substantive issues that M in diversified MNEs face

1. Need to consolidate large int acquisitions 2. Demands of instituting perf M, accountability & corporate gov measures in G system 3. Challenge of M & maintaining global supply chain capability 4. Challenge of dev country-specific strats that reflect constraints of that country 5. Pressure to forge collaborative arrangements to capitalise on their benefits 6. Pressure of balancing need for global integration & local responsiveness

To manage these issues, M must

1. Dev global mindset, able to use global strat skills & motivate & reward subords 2. M org transformation (change & transition) 3. M cultural diversity (handle cross cultural M issues) 4. Design & M flexible org structures & work with teams 5. Excel at cross cultural comm, understand culture’s infl on behav in workplace 6. Prepared to learn & transfer knowledge within org 7. Prepared to M uncertainty & resolve disputes 8. Able to negotiate cross culturally

Implies understanding of how cultural factors infl busn structure & systems, can involve delayering, destaffing, merging, diversifying, reengineering, empowerment

Need willingness to change from traditional authority based hierarchy to post-transformational org model

Req redefinition of managerial roles – functionaries of each role req diff set of attitudes, knowledge & skills to M effectively

Cross cultural leadership

NB for L developing global mindset to understand that 1. Culture is peculiar to 1 specific group & not to others

56

2. Culture infl behav of group members in uniform& predictable ways 3. Culture is learned, not innate (passed down through generations) 4. Culture incl system of values 5. Meaning of L varies across cultures 6. Values that L have varies across cultures 7. Behav, power sources & infl of L must be modified to be effective in int env 8. Effective dev of L depends on intercultural competencies

Traditional approach to understanding cross cultural L, where culture was equated to nation state, is out of step with new demands on int L (raising productivity of knowledge & service workers) which will det comp perf

M such workers is main task of cross cultural L, where cultures aren’t just nationally/ ethnically det, but det approaches to managing which cut through & across firms

Managing cross cultural diffs

L in context of cultural diversity alludes to varying L styles across diff cultures & confirms that with G of busn, can't ignore strong cultural dimension to L (variations in what is acceptable as L style dep on national culture)

L is infl by cultural diffs like 1. Perceptual diffs as to nature of culture & its infl on behav 2. Attitudes towards authority differ & affect preferred L style 3. MNEs streamline behav patterns so national & corporate culture is tightly intertwined 4. Styles of decision making vary btwn cultures 5. Motivation & control also varies across cultures 6. Disparities in understanding characteristics & effects of charismatic, transformational &

transactional L styles 7. Attitudes towards laissez faire L differ 8. Attitudes towards universalism (1 set of rules apply to every1, stresses perf) & particularism

(rules must be modified to fit situation, good relats are NB) 9. Disparate worldviews, outer directed L align behav to their situation in life, inner directed L are

more intent on changing their env & pursuing goals (embraces egocentric, manipulative, existential values)

Distinctions affect strat formulation & implementation, staff recruitment & retention, busn-gov relations

10. Diff expectations regarding attributes & skills req by int L, like articulation of vision, dev global mindset, perceptions of M goals

11. Attitudes towards task oriented/ relat oriented behav 12. Diffs in assumptions of what L style to implement & how to do it

Cross cultural L styles

Charismatic L o Dominant, self-confident, convinced of moral righteousness of beliefs o Able to arouse excitement & adventure in subords

Transformational L o Motivate followers by inspiring, offering challenges, encouraging indiv dev o Stresses achievement of higher collective purpose & mission o Indiv treated as NB contributors to workplace o Best to adopt in int busn, consider how culture affects how empl respond to L

Transactional L o Stress specific benefits subords will rec by compliantly accomplishing agreed upon task o Reciprocal negotiations & mutual exchange relats o Use legitimate reward & coercive power to give commands & exchange rewards (rewarded

abased on perf) o Danger is can be taken too far if L view fin success as key perf criterion to gain rewards

57

Cultural contingency – L must adapt L style to cultures of empl & clients

Importance of global mindset

Challenge for global L&M is to articulate viable global strat & facilitate & dev supportive processes by which globalisation can be M, need to dev global mindset

Global mindset – way of being rather than set of skills, it’s an orientation that allows 1 to see certain things that others don’t, the ability to scan world from broad perspective looking for expected trends & opp that can be threat/ opp to achieve obj

Indivs global mindset combines openness to & awareness of diversity (source of LT comp adv)

Global mindset leads to 3 strat L thrusts – formulation & evocation of vision, crafting strat to realise vision & focusing on mobilisation of res

Orgs mindset consists of aggregate mindset of collection of indivs, adjusted for distr of power & mutual infl among ppl

Global mindset of org is described as ability of firm to 1. Be open to new exp, diversity across cultures & markets, change over time 2. Willing to learn new skills & competencies to exploit global opp 3. Operate on premise that can be culturally diff without being better/ worse (firm is against

cultural essentialism) 4. Discover new markets & est presence in key markets to acquire comp adv

Traditional & global mindsets

TRADITIONAL MINDSET GLOBAL MINDSET PERSONAL CHARACTERISTIC COMPETENCY

Specialisation Drive for broader pic Knowledgeable M competitiveness

Prioritisation Balance of contradictions Analytical M complexity

Manage jobs Engage in processes Strategic M alignment

Control results Flow with change Flexible M change

Manage self Value diversity Sensitive M teams

Learn domestically Learn globally Open M learning

Personal characteristics

1. Knowledgeable – technical, busn & industrial knowledge is NB for successful M 2. Analytical – understand diff levels of vision, mission & strat & balance contradictions 3. Strategic – focus on NB issues, adjust to changing demands by reallocating res 4. Flexible – adapt to uncertainty caused by changes in env, calls for intuitive decisions 5. Sensitive – sensitive to others, necessitates cont learning & well dev concept of self 6. Open – openness & reflection lead to cont improvement, perspective for dealing with future challenges

Competency

1. M competitiveness – gather info globally relating to source of capital, tech, suppl, opp & HR, use that info to incr comp adv & profitability

2. M complexity – M complex , global relats that affect competitiveness of firm (M strat alliances, parent-subsidiary relat, prod dev & distr)

3. M alignment – M decision making processes on global basis for various busn, borderless decision making, ability to learn & be responsive, align authority btwn home & field office, moving decision making closer to cust, this resp req

o High tolerance for ambiguity o Ability to ID diverse M behav for ongoing org renewal o Coordinate complicated fin & human res & marketing & manuf interdep o Det which decisions to de/ centralise, formulate strats accompanied by flexible culture

4. M change – M cont change & uncertainty, M transition from independent to dep to interdep, calls for M to act as equals & calls for

o Creation of new opp from change rather than reverting back to old

58

o Use of cyclical process of taking charge then letting go 5. M teams – M cross cultural teams & dispense with home office way of doing things, ensure home

culture doesn’t dominate firm, this means o Acquire insights into cross cultural behav & L styles o Dev flexibility that transcends cultures

6. M learning - M org learning cont through acquisition of new fields of knowledge & cultural perspectives, req integrated approach, to achieve cognitive capacity, need to

o Dev capacity for systems thinking on global basis o Familiarise self with int relations, economics & cross cultural dynamics o Stretch understanding of global busn env to transcend immediate job/ obj

Emotional intelligence (EI)

EI epitomises L innately skilled in motivating & encouraging others, emotionally aware of what goes on in other’s minds

Highlights attributes of self-awareness, self-regulation, motivation, empathy, trustworthiness, credibility, integrity, honesty, social resp, sensitive to diff cultures

Attributes of transformational L are highly correlated with EI, based on prevalence of o Social capital – standing global L has to infl actions of others o Political capital – capacity of global L to dev this skill by acquiring rep as some1 who gets things

done, reflects legitimacy of support & power bases

Int L&M need to be socially & culturally well adapted, catalyst for this is dev EI which is awareness of own emotions & how they affect others with their overt behav

Int leadership development in emerging economies

Training goals must be linked directly to strat goals & can't be done if strats are vague/ out of touch with reality of global economy

Reflects probs of MNEs in developing countries where training & dev needs aren’t met adequately

True for diff types of global operations in emerging economies, these operations incl o Limited relats – MNEs with export offices, sales reps, JVs, distributor relats o Subsidiaries – firms with foreign subsidiaries, staffed by expatriates (emigrants) but will be

replaced by locals eventually o Regional busn – presupposes use of developmental assignments abroad for expatriates prior to

their involvement in busn, req host nationals to have similar training in strat L & fin analytical skills if going to M position

o Global busn – presupposes use of M dev programmes that focus on global aspects of eco, social, political, tech & market trends, req cross functional teambuilding

Pace, magnitude & direction of change in global economy as opposed to emergent, developing economies, emphasises need for training req for foreign nationals working for MNEs in emergent economies

Training needs can be significant coz global economy is characterised by 1. Global marketplace is evolving with diverse & changing cons needs 2. Tech advances eg digital revolution changed how MNEs do busn 3. Incr multiculturalism due to ongoing integration of societies 4. Incr global competitiveness beyond capabilities of foreign nationals in emerging economies 5. Real prospect of widening gap btwn rich & poor nations, leading to indefinite dependencies,

indicate ltd res & infrastructure of host countries unable to absorb emerging tech 6. Scale of busn risks involved is incongruous with foreign nationals exposure, risk taking is

encouraged in new global economy 7. Changing complexities of industries, cust & competitors in advanced global economies 8. Explosion of innovative initiatives transcends traditional bureaucracy, enables MNEs in

developed countries to make innovation & entrep cornerstone of their strat 9. Compare speed which new goods are being introduced in developing countries relative to exp

of developing host countries

59

10. Impact of org downsizing & restructuring 11. Speed which diverse groups are attracted to global economy creates challenges for

multicultural M 12. Privatisation is contrary to public policy in host country, need new mindset 13. Strat alliances, external networks & collaborative agreements respond to incr competitive eco

env, involve relats that extend across geog & cultural boundaries (networks provide access to info, res, markets & tech)

14. Progressive innovation enables firm to compete effectively in domestic & global markets, can use knowledge from partners

15. Changes to structure of industries result from intro of radical tech which affects abilities of firms in emerging economies to penetrate these markets

10: Global competitive & collaborative strats & structures

Global comp adv

Factors used to est comp adv

Comp adv in domestic context achieved when firm successfully matches its internal strengths in its capabilities & res to key factors in domestic industry

Globalisation & internationalisation shifted basis of competition to int env

Interlinking factors that allow MNE to profit from global expansion & est comp adv:

1. Location economies - choice of markets to enter, based on access to comparative res at lower prices/ easier access to markets coz closer to them & avoiding transportation costs & trade barriers

2. Economies of scale, scope & experience o By incr production & sales, MNE will gain cost benefits of incr exp, scale & scope as means of

incr efficiencies o Economies of scale – realised from large incr in production & sales, industries that req high

investment in R&D/ production facilities req this to recoup high capital expenses o Economies of scope – by incr scope of org through global expansion, benefit from sharing res

across org units o Experience – as production & sales incr, production costs drop over time due to growing exp &

capabilities 3. Leveraging core competencies – leverage core comp to incr fin returns by replicating them in other

geog markets 4. Leveraging subsidiary skills – subsidiaries operate in local market & have localised skills that offer adv to

parent MNE 5. Gov incentives – take adv of gov incentives designed to attract foreign inv, eg tax holidays, investment

incentives, cheap loans to make venture more attractive

Goals of MNE

Sustainable profitability & wealth maximisation are overall LT obj, 3 underlying goals:

1. Achieve efficiency – benefit from diffs in factor costs, exploit economies of scale & pursue economies of scope by sharing inv & costs across markets

2. M risk it assumes – M risks from market/ policy induced changes in comparative adv, from balancing scale with strats & operational flexibility, from portfolio diversification of risks

3. Dev internal learning capabilities – able to innovate & adapt to future changes, learn from societal diffs regarding org & M processes, benefit from exp & shared learning

Sources of global comp adv

60

1. National level – following aspects can assist in est comp adv o National factor endowments eg raw materials, culture, comm, infrastructure o Inst env eg legal framework, gov policies, state & its organs o Exchange rates o Related & supporting industries

2. Industry level – should offer best opp for generating profits, factors that affect industry profitability & growth like intensity of competition, threat of new entry, availability of subst, power of buyers & suppl, market size, regulatory infl

3. Org level – access to unique & profit generating res & capabilities

National comp adv

Successful nations create env allowing MNEs to flourish (home-base adv)

Based on Porter’s theory of national comp adv which is det by 4 main factors

1 Factor endowments

Basic factors – natural res, climate & basic skills

Advanced factors – high level skills, infrastructure & advanced tech

Higher-order factor cond provide firms with differentiating factors

2 Demand cond

Comp adv is strengthened by strong local demand for industry’s goods & sophistication of that demand

Provide primary drivers for innovation, quality improvement & competitiveness

High levels of demand incr req rate of production so helps achieve efficiencies

3 Related & supporting industries

Presence can help firm incr comp adv through innovation & quality improvements

Typically service industries/ suppl of parts located near producers & can provide inputs at lower costs compared to distant suppl & can adapt to changing needs

4 Firm strat, structure & rivalry

Do well in industries characterised by intense rivalry where M practices are closely aligned to industry’s sources of comp adv (relates directly to quality of strat M)

Gov & chance events (newly added)

Gov & industry regulators can enhance/ restrict int busn

Chance events like earthquakes have disastrous effects

Porter maintains original 4 must be positive & support e/o for ideal busn climate

International competitive strats

Strat orientation of global firms (internal factors)

Culture of org & M views affect how they choose strats, MNEs are 1 of 4 options

1. Ethnocentric – everything that originates from home country is best, values of parent firm guide all strat decisions, control is centralised, prods standardised & subsidiaries staffed with personnel from parent firm

2. Polycentric – culture of country subsidiary operates in gets priority & det decision making, they have more freedom, decentralised structure & staffed by host country

3. Regiocentric – values of parent firm are blended with subsidiaries to accommodate regional infl 4. Geocentric – globally integrated system & networking approach to decision making, worldwide

attitude, encourage multiculturalism & global learning, decisions made wherever most suited (parent/ subsid), best person for job is appointed

61

Pressures for cost reduction & local responsiveness (external factors)

Pressure for local responsiveness o Originate from diffs in cons tastes, infrastructure, distr channels & host gov relations o Cons tastes are most NB coz if demand for local R is high, firms must adapt & customise prods

unique to cust prefs in each market eg nondurable o End result is duplication across national markets, lack of prod standardisation & higher costs

(can't benefit from economies of scale/ compete on cost)

Pressure for cost reduction o Req firm to reduce costs through mass production od std prods (economies of scale) where

prods don’t need adaptions to suit diff market req o Can realise location economies & incr profitability by leveraging core competencies across

global markets o Used in low cost commodity type/ std prods eg electronic goods

Strats for int busn

Int strat is shaped by tension btwn need for local responsiveness & pressure to reduce costs & leads to 4 possible int strats (industry plays role in choice too)

1 International strat

Eg Microsoft – no pressures to reduce costs/ adapt prod (does same thing globally)

Good eg of int strat coz 1. Valuable core competence/ strat res that indigenous comp

lack 2. Faces weak pressure for local responsiveness & cost

reductions 3. Potential of economies of scale & being sensitive to prefs aren’t NB

Firms pursuing int strat tend to 1. Centralise R&D & prod dev functions at home 2. Gradually est manuf & marketing functions in each country 3. Limit local customisation of prods in foreign markets 4. Retain tight head office control over prod & marketing strat

Comp adv & value creation come from transferring core competencies to markets where they are lacking, but due to duplication, economies of scale may not be achieved & costs may rise (not appropriate if high cost reduction pressures)

Worldwide prod division with ethnocentric staffing to allow for transfer of core comp & overcome lack of qualified M are appropriate (eg IBM, Kellogg, Toys R Us)

2 Multidomestic/ multilocal strat

Use if high pressure for local resp but not cost reductions

Firms customise prods & marketing strats for each country to meet specific prefs & marketing & distr req in foreign markets

Key characteristics 1. Customisation of prods for each foreign market 2. Few system wide opp to realise economies of scale 3. Value creating & adding activities like marketing , production & R&D are performed &

duplicated in each market 4. Competition in each country is indep of comp in other countries & comp adv is inherent in

each separate market 5. Decision making is decentralised, subsids function autonomously, coord of marketing & sales

takes place in each market 6. Ltd / learning & min leveraging of core comp within MNE

62

7. High cost structures with higher priced & customised prods so can’t compete on price, eg MTN need to localise production & marketing

Decentralised decision making & autonomous markets req polycentric staffing that alleviates cultural myopia & enhances host country’s expertise

Other egs are processed foods, fin services

3 Global strat

Use when strong pressures for cost reduction but low demands for local resp

Focus on incr profitability by benefitting from cost reductions from exp curve, economies of scale & location economics

Key characteristics 1. Mutual interdep subsids 2. Marketing std prods worldwide to price sensitive cons 3. Global economies of scale in key activities 4. Leveraging tech across markets 5. Global coord of sales & branding 6. Centralised decision making & control 7. Production, marketing & R&D concentrated in few favourable locations

Eg Coca Cola have strong control over prod dev, branding & intellectual property, ltd localisation is allowed, other egs are PCs, calcs, audio equip

Strong culture is req, use geocentric & sometimes ethnocentric staffing approaches

4 Transnational strat

Use when high pressures for cost reduction & local resp, & significant opp to leverage valuable skills within network

Extensive global networked ops where core comp flow from parent to subsid, but also subsid to parent & btwn subsids (global learning)

Req strong org culture, effective cord & geocentric staffing

Key characteristics 1. Production facilities est in few favourable locations for where customisation is req, use

multipurpose components to pursue low costs 2. Decision making is bot de/ centralised, structures are complex & often matrix

Eg Caterpillar, Unilever, Nestle, Sasol, global consulting firms

Complex in structure, knowledge exchanged btwn all units, decision making occurs at all levels in org

INT STRAT GLOBAL STRAT MULTIDOMESTIC STRAT TRANSNATIONAL STRAT

When it’s appropriate

Unique res/ core comp

Low cost pressure

Low demand for localisation

High cost pressure

Low demand for localisation

Low cost pressure

High demand for localisation

High cost pressure

High demand for localisation

Opp for leveraging valuable skills

Key characteristics

Centralised R&D & prod dev

No localisation

Decentralised production & marketing

Mutually interdep subsids

Std prods

Global economies of scale & scope

Centralised sources of comp adv

Decentralised & duplicate key functions

High localisation

Localised comp adv

Both de/ centralised

Matrix structure

Strong focus on knowledge sharing across org units

Paradigm (state of mind) rather than org form

Adv Tight control over

sources of comp High

efficiencies Highly localised &

responsive Benefits from

scale & scope

63

adv achieved efficiencies

Benefits from exp effects

Benefits from local resp

Disadv

High cost structure

Lack local resp

Lack local resp High cost structure due to duplication

Few opp for economies of scale

Complex structure to M

Dep on strong culture which is hard to achieve

Key organising principles

Tight HQ control over prod & marketing strat

Foreign ops build on & exploit parent firm abilities

Knowledge dev at centre & transferred

Sources of comp adv are centrally controlled

Foreign ops implement HQ strat

Knowledge dev at centre

Duplications of key functions across markets

Decentralised decision making & exploiting local opp

HQ role to ensure optimal autonomous functioning of subsids

Knowledge dev in each unit

Dispersed but interdep

Complex matrix structure, dual reporting

De/ centralised decision making

Knowledge dev jointly & shared worldwide

Req strong culture

Types of industries most suited

Wine

High end food prods

Microchips, PCs

Global fashion

Fast moving cons goods

Durable cons goods

Processed food

Mobile phones

Fin services

Management consulting

Foreign market entry

Qu to consider when deciding specifics of foreign market entry 1. Which markets to enter – req int research & assessment of attractiveness of markets based on

comparison of benefits & risks 2. Timing of entry – understand firms strat priorities & availability of res 3. Scale on which to enter market – relates to foreign market scope & res commitments 4. Mode of entry – 10 diff modes

Types of entry modes

1. Exporting o Manuf firms normally begin exporting o Indirect exporting – firm is in hands of domestic export agent & has little control over process o Direct exporting – firm in control of exporting process & gains exp, little control over what

happens in foreign market o Adv

Potential to realise economies of scale from larger market & avoid cost of setting up manuf facilities elsewhere

Incr production means incr employment, export sales generate foreign exchange o Disadv

High transportation costs, trade barriers to imports Probs with foreign marketing agents

o Overall low risk entry mode with little capital req 2. Turnkey projects

64

o Found in engineering & processing industries eg building a dam/ mine o Allow firms to export their know how to countries that restrict FDI o After completion of project, firm trains operating staff & turns key over to owner (used coz

local knowledge isn’t available) o Adv

Less risky than FDI esp if country is politically unstable o Disadv

Ltd duration with no permanent market presence Can create comp since knowledge is transferred

3. Licensing o Licensor grants rights to intangible property to licensee who can then produce & sell prod on

behalf of licensor o Adv

Licensee pays license fee/ royalty & bears all costs & risks of est foreign busn No capital inv by licensor is req

o Disadv Little control over licensee to promote prod Little direct control over quality of end prod Global coord of activities is hard Risk of losing tech know how to licensee & creating future rival

4. Franchising o Similar to licensing, franchisor sells intangible property (trademark) to licensee o Adv

Low dev costs as franchisee bears costs & risks o Disadv

Hard to maintain stds & quality of distant foreign ops Global strat coordination is hard

5. Contract manuf o Take adv of location economies by access to cheap labour overseas o Contracted to produce certain goods which are then reimported & sold in host country/

exported o Adv

Req little capital inv & developing countries eg China are good sources o Disadv

Hard to control M practices, reliability & quality Risk that intellectual capital may dissipate

6. Service sector outsourcing o Availability of highly skilled knowledge workers at low wages makes outsourcing white collar

jobs to developing countries popular o Knowledge based services eg call centre operators, software programming

7. Strat alliances o Collaborative agreements btwn 2 firms, often in same industry but not necessarily same

country o Work toward common purpose but each retains its identity o In some countries, political considerations make SA & JVs only feasible mode o Adv

Benefit from local partners knowledge Partners share risks & costs of R&D

o Disadv Relinquish control over tech Little control over subsids in alliance agreement Incompatible M styles, org culture, control systems leading to conflict

8. Management contracts

65

o Foreign company gains right to run company day to day but can't make decisions regarding ownership, financing/ strat changes

o Low risk but ST unless permanent arrangement made 9. Joint ventures

o Est new firm with new identity jointly owned by partners (diff from strat alliances coz SA retain their identities)

o Adv Similar to those of strat alliances JV is permanent arrangement with equity holdings by all partners

o Disadv Conflict from incompatible L styles & culture Unclear on LT goals Hard to coordinate diverse global ops

10. Wholly owned subsidiary (MNE) o Firm owns more than 50% of shares & has M control of foreign subsid o Est in 2 ways – set up new venture (greenfield venture)/ take over est firm o Adv

Firm retains control over core capabilities & revenue Retains control over ops in various countries which simplifies global strat coordination Potential for firm to locate subsids to most cost effective locations

o Disadv Costly way to enter market & large capital req Risk of loss is significant esp in unproven markets (greenfield venture) In acquiring est foreign firm, integration of cultures is hard

ADV DISADV KEY SUCCESS FACTORS

Exporting Low risk

Little capital expenditure

Easy access & exit

Transportation costs

Little control over distributors

Choice of distr

Transportation costs

Trade barriers

Turnkey projects

Revenue from core comp where FDI is restricted

Temporary arrangement

Can create new comp

Reliable infrastructure

Availability of local supplies & labour

Repatriable profits

Reliability of partners

Licensing

No asset ownership risk

Fast market access

Avoid trade barriers

Dissipation of intellectual capital & property

Ltd control over M & prod quality

Choice of licensee

Appropriability of intellectual property

Host country royalty limits

Franchising

Little investment/ risk

Fast market access

Small busn expansion

Hard to control quality stds

Dissipation of intellectual capital

Quality control of operations

Contract manuf

Ltd cost & risk

ST commitment

Hard to retain operational control

Human rights violations by contractors affect negatively

Reliability & quality of contractor

Operational control

Human rights issues

Service sector outsourcing

High level skills at low cost Hard to retain op control

Hard to bridge cultural diffs

Reliability & quality of contractor

Op control

Strat alliances

Firm retains own identity

Access to local knowledge

Hard to cooperate with diff partners

Hard to M partnerships with multiple partners

Choice of alliance partners

M alliance & its offerings

Management Low risk Opp to gain LT position

66

contracts Access to further strats

Joint ventures

Insider access to markets

Share costs & risk

Leverage partner’s tech, local knowledge & contracts

Req large capital outlay

Firm relinquishes own identity

Choice of JV partner

Successful integration of partners

Ability to protect key res

Ability to share control

Wholly owned subsidiary (MNE)

Realise all revenues

Full control

Global economies of scale

Protect sources of comp adv

Acquisition provides rapid market access

Req large capital outlay

High risk

Ability to assess & control risk

Ability to gain local acceptance

Repatriability of profits

Guidelines for entry modes

1. If comp adv is mainly in tech know how, want to avoid possible loss of proprietary & valuable intellectual property, so licensing & strat alliances aren’t wise, choose more permanent arrangement with more control over res eg MNE

2. If comp adv is in managerial know how/ intangible res, franchises/ JV, use licensing & MNEs as less risk of dissipation of intellectual capital

3. When entering politically unstable markets, strat alliances/ JVs provide assurance since local partners are involved

Guidelines for strat alliances

1. Choose partners similar to u regarding strat goals to deliver synergy 2. Partners should complement e/o in what they bring to alliance, if too similar then nothing to learn &

end up competing 3. Trust is NB & backed up by clear agreements on how to deal with proprietary info & intellectual

property, guidelines on how to dissolve alliance if it doesn’t work 4. Alliances are temp so partners will move on once goals reached, learn as much as possible &

implement it as quick as possible

Managing global firm

Dev int strat M framework

Generic strat M process – strat formulation, implementation & evaluation

Int strat M process – 8 steps

1. Evaluate current profile of firm - values, culture, mission, strat intent, LT obj 2. Align strat assumptions which current strat is based with envisaged int involvement (align missions & LT

obj) 3. Analyse domestic & int external env

o Scan external env – ID political, eco, legal, social, tech, demographic & physical forces in domestic & int env as threats/ opp

o Analyse internal env – strengths & weaknesses of value chain to ID comp adv & assess readiness for internationalisation

4. Subject outcomes of in & external analyses to SWOT analysis to ID impact on achieving envisaged strat obj (realign mission & LT obj)

5. Strat formulation & choice of strat is more complex than domestic firm, consider 3 distinct strat decisions

o Appropriate generic strat (low cost, differentiation, focus) o Appropriate int strat (int, multidomestic, global, transnational) o Mode of market entry (exporting, turnkey, licensing, franchising, strat alliance, JV, MNE)

6. Regarding mode of entry, if choose MNE, decide on country to locate in, choice of generic & int strat will depend on industry, pressure for cost reduction/ local resp, type of prods

67

7. Implementing the 3 strats is complex, country diffs & geog distance are complicating factors, revision of org structure & procedures is req

8. Ongoing monitoring, eval & control of domestic & int strat processes are req

Relat btwn int strats & structure

Choice of appropriate org form for executing int strat

Choice of structure to follow choice of strat is hard & is infl by many factors

Structure is likely to be combo, as long as it supports busn strat

11: Global manuf, tech, logistics & supply chain Operations M aims to ensure diff busn functions interactively deliver goods that add value to cons &

orgs profit obj

When integrating ops & M, production/ manuf & service delivery are NB facets

To create comp adv, global ops demand M understand importance & interrelats btwn global manuf, tech used, logistics & supply chain

Operations M

Ops M is concerned with M of res & processes req by org to produce goods for cust

Value chain is way of presenting how value is added in ops process, taking into account manuf, service delivery, logistics & supplies

Value chain in association with transformation model, NB to understand value chain as aim of profit driven firm is to produce value that meets needs of cust

VC incorporates busn functions divided into o Primary functions – logistics, production, sales & marketing o Secondary functions – support delivery of primary functions like HR, info tech M, fin M, risk M

Transformation process o Inputs are acquired in/externally through suppliers o Moved through transformation process (input > transformation > output) o Inputs can be classified as

Transformed res – res transformed in some way & become part of final prod eg materials, info, cust

Transforming res –res needed for transformation to take place & aren’t part of final output eg facilities, consumables, ppl

Strat, operations, logistics & supply chain

Org strat aims to est what prods to offer to which cons, considering existing & potential competition, to meet its overall obj like profitability (strat is infl by org obj)

Top M is resp for dev & implementing strats, strat decisions req attention are 1. Org goals eg local/ global busn 2. Prods to offer locally vs internationally 3. Org structure considering level of internationalisation 4. Scope of busn & level of diversity 5. Admin systems used

Int strat & mode of market entry have direct strat impact on supply, logistics & ops

Effective ops are directly related to & infl by M of logistics & supply chain

Operations focuses on production & manuf (all activities req to create tangible prod)

Logistics focuses on activities that ensure flow of materials acquired for production by means of procurement throughout manuf process & to distr of final prod

68

Successful manuf is dep on ability of purch function to ensure acquisition of correct materials throughout supply chain (made available through effective logistics & ops)

3 areas have direct impact on this strat o Supply of res – decide where & how to acquire res o Location – where to locate facilities o Logistics – how to distr components, prods & control inventory

Effective (doing right things) & efficient (doing right things right) production leads to comp adv which can be result of various scenarios where effective & efficient production:

1. Reduce costs of prods 2. Incr revenue through incr cust satisfaction due to quality goods 3. Reduce amount of investment resulting in

Higher ROI that will det investment decisions Higher return on assets (ROA) that will infl future inv in tech Utilisation of capital (equip & infrastructure) to optimal potential

4. Provides opp for cont innovation through Constantly reviewing busn processes Designing new prods from feedback rec Designing new busn processes to deliver new prods

To ensure comp adv by means of effective & efficient production, ensure obj of ops & req logistics are aligned, these strat obj are

o Minimising costs by ensuring production, logistics & supply of materials are optimised o Incr production quality through min defects which leads to incr level of reliability

Main motives driving internationalisation & affecting busn ops are 1. Consider use of current res & how to access new res 2. Dev core competencies leading to new comp adv (from cont learning) 3. Seek int opp that will allow firm to be more competitive in future 4. Dev new int market for incr profits

Strat role & value of foreign manuf facility allows for 1. Acquisition of low cost labour for labour intensive production 2. Dev expertise & capabilities from global learning

Global manuf strat

2 main reasons orgs consider internationalisation o Access & serve markets outside home country o Access & use res available outside home country

Firm contemplates either market access strat/ res seeking strat

4 key factors to consider

1. Manuf compatibility – extent orgs strat is in line with foreign inv decision, strats to consider are o Cost efficiency by reducing manuf costs o Innovation by dev new prods/ ways of production o Improved quality resulting in incr reliability o Flexibility to changes in market & demands o Dependability by delivering prods at promised prices

2. Manuf configuration – whether manuf facilities are de/ centralised 3. Coordination – extent ops can be integrated & linked as uniform entity 4. Control – control systems ensuring strats are implemented

Global manuf strat implies following functions must be globalised

1. Manuf of components & prods 2. Procurement of suppliers & materials 3. Maintenance & monitoring of foreign facilities 4. Logistics & distr of components & final prods

69

5. Cust service & support 6. Knowledge based processes to distr info & ensure learning 7. Prod dev & innovation for comp adv

Global manuf location decision

1 Prod factors

1st step in deciding if global strat should de/ centralised

When analysing prod, need to consider 2 prod features 1. Does prod serve universal set of cust needs

If can address universal needs, less variation is req & is more attractive to consider 1 optimal location eg manuf matches

Tech is more diversified due to diffs in infrastructure Less diversity drives centralisation, more diversity req decentralisation

2. What is prods value-to-weight ratio Obj is to decentralise lower value-to-weight prods eg petrol & centralising higher

value-to-weight prods like phones & watches Cost of low v-to-w is mainly transport costs due to high weight

2 Country factors

1. Political economy o Det if free int trade/ not in specific country o Trade policy is based on policy instruments like tariffs, subsidies, local content req, import

quotas o Diffs in policies can affect factor costs making it easier/ harder to manuf prod

2. Culture o Det diversity in knowledge, customs, values, laws, beliefs eg labour practices o Need to consider diff cultures of HQ, home country & host country

3. Factor costs o Diffs in cost of res & transport costs o Obj to est facility where input costs (eg labour & materials) are much lower than alt

destinations considered o Can't consider in isolation as factors like trade barriers infl costs too

4. Trade barriers o Result of trade policies & incl trade barriers, tariffs, quotas

5. Exchange rate instability o Exchange rate volatility affects cost of res & pricing strats of good exported

6. Location externalities o External factors that infl free trade eg existence/ lack of skills, facilities & support structures

3 Tech factors

3 types of tech o Prod tech – features & characteristics of prod o Process tech – methods, procedures & equip to manuf prod o Info tech – collection, storage, processing & distr of info via electronic equip

Value adding benefits obtained by new tech like cost reduction, improved quality, faster cycle times, incr productivity & variety

When analysing prod & facilities, consider following factors

1. Fixed costs o Fixed costs have significant impact on fin capacity so must be evaluated o High set up costs suggest single plant whereas lower fixed costs open up opp for various plants

in diff locations (eg land & buildings) 2. Min efficiency scale

70

o Indicates efficient use of orgs facilities & what level of output plant must function to ensure economies of scale

o 1st have optimally used facilities & equip at 1 plant & consider global demand before opening up another plant

3. Lean production o Obtainable from flexible manuf tech & results in

Better scheduling to use equip optimally Min time to set up equip to ensure quick response & less wasted time

o Achieved through mass customisation where activities are grouped by unique needs but with common req for production

Location factors for site selection

Consider the 3 groups of factors – prod, country & tech

Once investigated these, find suitable site

Diff global manuf facilities 1. Offshore factory – manuf specific components/ prods at low cost, exported to foreign market

for further assembly/ direct sales eg manuf shoes 2. Source factory – purpose of ensuring low cost manuf with broader strat than offshore, M have

more infl over supply chain eg manuf shoes but obtain leather & prep processes too 3. Server factory – serve national/ regional markets in foreign destination so minimise hurdles like

tariffs, taxes, transportation, warehousing & exchange rate fluctuations eg manuf shoes for region based on their unique needs

4. Contributor factory – serve national/ regional markets in foreign destination but with incr resp like process engineering, involvement of M in dev & supply chain eg manuf shoes for region based on unique demands & obj to research other alt & options for future growth

5. Outpost factory – function as server/ offshore factory but main obj is to obtain info from advanced suppl, comp & res centres in foreign country eg manuf shoes where high skills level in shoe manuf

6. Lead factory – est in foreign destination with main obj of conducting new research on prods & processes for whole org eg manuf shoes with obj to design new shoes with diff materials to diff markets

Managing the global supply chain

Logistics aims to M distr in supply chain to satisfy cust needs while minimising costs of value creating activities

4 Utilities

Power & water supply

Waste disposal

Fuel availability

Utilities costs

Utility laws & regulations

5 Gov, legal & political

Tax legislation, structure & incentives

Zoning legislation

Health & safety legislation

Regulatory agencies & policies

6 Env, climate, community, quality of life

Climate & living cond

Access to schools, universities & research facilities

Cost of living & property

Health care facilities & safety

Community attitudes

1 Labour

Supply & availability

Costs & rates

Labour-M relations

Skills availability

Labour retention

2 Demand

Location of competition

Vol of traffic & access around facility

3 Transportation

Accessibility to suppliers, markets, diff forms of transportation

Cost of transportation

General – visibility of facility, parking, access for emergencies

71

Supply chain is subsystem of value chain that focuses on physical movement of goods & materials through supply, production & distr processes

Supply chain in global manuf context

Org orders raw materials from suppl, they get transported to manuf for assembly process, final goods then transported to distr centre

Key activities incl 1. Planning & dev strat to ensure balance in demand for prods & res req 2. Sourcing goods & services through procurement of suppliers to meet planned & actual demand 3. Manufacturing prods to meet demand 4. Delivering & transporting manuf prods to custs 5. Handling returned goods that are in excess, damaged/ malfunctioning

2 ways to design & M supply chain o Push system: considers market trends & estimates sales before actual cust demand is est,

based on the figures, prods are manuf & distr through supply chain o Pull system: reacts to actual cust demand & in response, manuf & distr through supply chain

Supplier networks

Sourcing: process of how inputs (res) are obtained from outside suppliers (can be local/ foreign)

Local sourcing: allows companies to avoid typical problems such as

1. Language diffs 2. Currency-related issues & exchange rate fluctuations 3. Extensive transportation distances 4. Import tariffs 5. Politics, political instability, strikes & even wars

Foreign sourcing: reasons for driving this strat

1. Cost reduction based on foreign location with lower labour costs, less restrictive labour legislations & infrastructure costs for land & facilities

2. Incr quality of res 3. Access & exposure to current tech available globally 4. Obtaining & ensuring global presence for future growth 5. To be more competitive due to comp having global sourcing strats 6. Improving supply reliability 7. Acquiring access to res such as material not available locally 8. Improving orgs ability to provide prods to global stds 9. Ensuring comp adv where local suppliers can’t deliver locally

Outsourcing

When considering a sourcing strat, follow either vertical integration by owning whole supply network/ manuf prod & just source req material/ outsource

Outsourcing: takes place when org uses foreign suppliers for components req for assembly/ for finished prods, allows company to reduce transportation/ transaction costs when handled by industrial cluster that allows buyers & suppliers to be centrally located to generate & support busn

Leads to qu of whether firm should make/ buy component/ prod itself

Should org be involved in value adding activities/ should it be outsourced

Org could make prod itself/ in partnership/ choose to buy (length of relat & potential for comp adv is NB)

Aim is to buy from supplier either locally/ foreign who has comp adv

If org has manuf comp adv then shouldn’t consider outsourcing this value-added activity, need to consider trade-offs

Typical factors to consider if going external

72

1. Component/ prod on much larger scale 2. Component/ prod at much lower cost 3. Component/ prod to much higher level of quality

Adv of following vertical integration (making it themselves)

1. Lower costs: good if org has comp adv in manuf more efficiently than others 2. Specialised investments: if dependent on component, don’t want risk of supplier not being able to

provide so developing specialised knowledge internally is better & less risky 3. Improved scheduling: if make most of components itself, all planning, scheduling & coordination of

manuf can be done centrally 4. Protecting product technology: manuf prods that are unique & have superior features allows org to

ensure value adding activities to secure comp adv

Adv of buying components/ prods from an external entity:

1. Flexibility: If demands change, supplier can be changed/ order changed to optimise impact of change 2. Lower costs: manuf in-house brings additional managerial resp such as ltd negotiating power with suppl

& internal transportation costs, external suppl could provide better prods at better costs 3. Creating & expanding markets: opens opp for opening up & capturing new markets through busn

exposure to supplier network

Factors to consider when outsourcing

1. Make outsourcing decisions based on LT strat org goals 2. Refrain from quick, ST solutions 3. Retain critical knowledge to optimise outsourcing practices 4. Dev exit strat in case of change in LT goals that makes outsourcing not viable 5. Dev joint teams to ensure good relats & effective implementation of buyer-suppl agreement 6. Comm outsource strat to all empl affected 7. Invest necessary res in suppl selection process so make informed decisions 8. Set suppl perf criteria beforehand to make objective decisions 9. Provide incentives to stakeholders involved in outsourcing 10. Minimise risk by obtaining relevant insurance

Global outsourcing process consists of 8 basic steps

1. Analyse operating & competitive busn env 2. Est global procurement (purchasing) effort 3. ID & evaluate potential suppliers globally 4. Determine req buyer-supplier relat 5. Acquire & evaluate supplier proposals 6. Select most suitable individual/list suppliers 7. Est contractual relats with selected suppliers & dev buyer-supplier relats 8. Control & evaluate relats, req & capabilities

Inventory M

Inventory includes 1. All types of raw materials & components sourced from in/external suppl 2. Work-in-progress & final prods in manuf facility 3. Finished prods stored at distribution centre

Key factors to consider in inv M are transport distance, time for delivery & uncertain foreign env

Just in time (JIT) o Often req for manuf operations as has direct impact on inv & costs o Economise on inv holding costs by having materials arrive at manuf JIT to enter manuf process

& not before o Req firm to source materials & components at precisely time they are req in production

process

73

o Not easy with foreign suppliers because of transport & time restraints o Global sourcing req firms to hold buffer stock as safety which defeats purpose of JIT

Foreign trade zones (FTZ)

Special locations for storing domestic & imported inv to avoid paying duties until inv is used in production/ sold

Allow org to save on duties by storing, inspecting & manuf prods excluded from normal customs procedures until those materials, components/ prods leave particular zone

Zones are in form of distribution centre/ industrial park & are generally located at border crossings/ shipping ports

Transportation

Documentation, choice of transportation (self/ outsourced to 3rd party) & mode of transport (air, sea) are NB decisions to make

NB link btwn org, suppl & cust

Consider 3rd parties as offer transport & warehousing

Level of de/centralising det whether use own facilities/ rather outsource

Supply chain technology

Supply chain tech is dep on value created by info tech as facilitates interconnection

Typical tech to consider in supply chain for global manuf ops incl 1. Decision support system: info systems used to analyse & present info for decision making by

top M 2. Network design applications: used to analyse LT strat qu relating to manuf facility such as size,

location & transport 3. Warehouse & transportation planning systems: used to ensure optimal logistics capacity

considering org req at a point in time 4. Warehouse & transportation M systems: used to M, locate & control all movements &

transactions btwn partners in supply chain

Global service operations

Global service org is org that transforms res into intangible output that creates utility for its custs

Key characteristics 1. Services are intangible whereas prods are tangible 2. Services are not storable whereas prods are storable 3. Services req cust to participate in process, not generally the case with prods 4. Services are often linked & provided in association with prod

12: Global financial M & disclosure Challenges of int M

1. Diffs in political, economic, cultural & legal env btwn countries hosting subsids of MNE 2. Transacting in diff currencies & resultant diff foreign exchange rate risk exposures 3. Diffs in fiscal regimes like varying tax policies & exchange controls 4. Special institutional infrastructure such as trade area arrangements, bilateral/ multilateral production

arrangements & availability of financing & credit guarantees 5. Cross-country diffs regarding other salient inst infrastructures such as regulatory practices, fin info

disclosure req & resultant corporate governance models.

Activities, scope & goals of multinational fin M

Activities & scope of int fin M

74

3 main areas of decision making

1. Capital budgeting: det what new production activities (investments) would add value to firm’s current wealth

2. Capital structure: det mix of fin sources (btwn debt & equity funding) that would be most efficient in funding activities chosen as value-adding during capital budgeting

3. Working capital management: How to M day-to-day (interim) non-capital funding needs of firm to permit it to remain a viable going concern as capital activities yield fruit over staggered gestation

Inherent in capital budgeting & structure is dividend policy decision which involves elements of investment & fin decisions

Effective fin M is source of comp adv for firm

Competitive cost adv: attained for MNE if astute int fin managers are successful in: 1. Seeking external funds from capital market locations of their production where costs of funds

are cheaper 2. Making astute use of multilateral netting of liabilities & receivables 3. Leveraging via transfer pricing, opp provided by diffs in tax & fiscal regimes across various

national production locations

The int macro env of MNE: o Makes consideration of foreign exchange rates of paramount importance o Broadens MNEs access to finance o Creates opp for diversification of operational & fin risks across distributed foreign subsidiaries

Goal of multinational fin M

Goal of fin M classified into 2 models of wealth maximisation 1. Shareholder wealth max model: max shareholders returns, seen as sum of capital gains & dividends for

a given level of risk

Criticism – saying max s/holder wealth is synonymous with max sum of gain capital & dividends speaks to equity valuation instead of firm valuation

2. Corporate wealth max model: stresses max of corporate wealth where shareholders are not the only ones looked after but there are many stakeholders (empl, M, community, cust, suppliers & gov), based on LT perspective & incl tech, market & human res & is based on total risk not efficient markets

Criticism – considering stakeholders isn’t practical when det value of production unit

Main goal of multinational finance is maximisation of MNEs wealth

Int working capital & global money M

Based on goal of wealth max, obj of multinational fin M incl o Effective M of: global cash flows, foreign exchange risk, investments, capital structure o Leveraging efficient financing fostered by fin info disclosure

Working capital – current assets & current liabilities

Global money M (effective M of global cash flows)

1 Minimising cash balances

Firm should keep cash balances as low as possible without jeopardising firm’s continuity

When firms hold too much cash in excess of min req for continuity of firm, they incur opp costs on interest/ return lost on best available investment opp for firm

Need to know how much cash is needed, 3 motives det cash & liquidity levels: 1. Transactionary motive: hold cash to satisfy normal payments regarding firm’s ongoing

operations 2. Precautionary motive: hold cash as safety margin to serve as fin reserve 3. Speculative motive: hold cash to take adv of potentially beneficial opp

75

By centralising M of total global cash reserves instead of each subsidiary det & M own cash reserves, can substantially reduce amount of low-interest-bearing liquid funds company needs to hold & therefore incr rate of ROI

2 Centralising depositories

Centralising pooling of cash reserves gives firms larger amounts of deposits so they earn higher rates of return, esp if they are situated in major financial centres

By pooling cash reserves MNEs can reduce total amount of overall cash-holding

3 Reducing transaction costs

Transaction costs incl commission paid on fees to foreign exchange dealers each time foreign exchange transaction takes place & incl transfer fee for moving cash from 1 location to another

These costs due to intra-firm transactions & transfers can be substantial for MNEs with networks of foreign subsids in diff countries

Multilateral netting is an approach MNEs can use to reduce transaction costs

4 Optimal use of internal funds

MNEs use number of techniques to transfer funds btwn countries, incl dividends, royalty payments, licencing fees, transfer prices & fronting loans

When MNE’s want to expand int ops, obvious source of funding is their working capital, loans from local bank/ subsid, / parent company can incr equity investment

5 Positioning funds optimally

To extent gov authorities allow unrestricted transfer of funds, use techniques to position funds to optimise internal res

1. Transfer pricing o Common practice in MNE’s to transfer goods & services btwn parent & foreign subsid & btwn

foreign subsids themselves o Transfer price is internal price at which goods & services are transferred btwn entities within

MNE o With view to optimising fin res within firm, transfer pricing used to effectively position funds

within MNE o This can be done by setting high transfer prices for goods supplied by country A (large funds

outflow) & setting low transfer prices for goods sourced from subsid in country A (low inflows) / opposite

o Inherent problems: Gov do not take kindly to loss of potential tax revenues & duties If transfer pricing is used to circumvent restrictions gov place on paying dividends,

these manipulative measures are frowned upon When M incentives for subsidiaries are based on perf, bottom line effects of transfer

pricing defeats that purpose 2. Multilateral netting

o Where subsids of MNE are involved in intracompany business, each subsid would generally owe money to other subsids & in turn be owed by others

o Allows MNEs to reduce sum of stand-alone attendant transaction costs o By computing net amounts owed to each subsidiary, num of payments & associated costs can

be reduced considerably 3. Tax havens

o Use to minimise MNEs tax liability o Tax havens have low/ non-existent income tax rates, which permits MNE to avoid/ defer

income taxes dep on tax laws of home country o Wholly owned non-operating subsidiary in the tax haven is est by MNE which owns ordinary

shares of the MNE’s operating foreign subsids

76

o All transfers of funds from foreign subsids to parent company are channelled through tax haven subsidiary

o Tax on foreign source income by parent firm’s home gov can then be deferred until dividend is declared/ paid to parent firm by tax haven subsid

4. Fronting loans o Described as parent–to–subsidiary loan that is channelled through fin intermediary which is

usually a large int bank o In direct intrafirm loans, parent company makes loan direct to foreign subsid which later

repays the loan o Parent company deposits loan amount in int bank, which then lends same amount to

borrowing foreign subsid o From bank’s POV, loan is risk free coz has 100% collateral in form of parent firm’s deposit

Foreign exchange rate risk M

Types of foreign exchange rate risks/ exposures

1 Translation exposures

Effects on fin statements of translating busn activities of variously distributed foreign subsids expressed in corresponding foreign locations currency to the home currency of parent MNE

Parent company must consolidate fin statements of all its foreign subsids into parent company statement

Fin statements usually done in terms of host country currency so need to be translated in home currency to allow components to be added to balance of parent firm at yr end

When exchange rates fluctuate, value of account balances as measured in home currency, will change to produce loss/ gain

Fin Accounting Stds Board (FASB), req translation of foreign currency statements by current rate method:

o Balance sheet assets & liabilities are translated at exchange rate on date of balance sheet assembly

o Income statements accounts incl depreciation & cost of goods sold are translated using actual exchange dates on dates that the income, expenses losses & profits were incurred/ using avg weighted exchange rate

o Dividends are translated at exchange rate on the date of payment o Equity accounts are all translated using historical exchange rate at the time accounts were first

introduced to balance sheet

Transactions among members of corporate fam are incl in consolidated fin statements, only 1s with 3rd parties are reported

Gains/ losses from translation adjustments aren’t shown in calc of consolidated net income, they are reported in separate equity reserve acc

Gains & losses from translating are said to be unrealised (don’t affect cash flow), but fin markets can transmit perceptions onto valuation of MNEs ownership share which will affect cost of raising funds by MNE

Decline can have 2 effects o Total R value of parent MNEs equity in consolidated balance sheet would be reduced & affect

perceived solvency & debt capacity so little room for borrowing o Perceived negative effect on earnings from translation can lead to decr in share price & affect

market capitalisation so affects MNEs cost of raising capital

2 Transaction exposures

MNEs cash flow resulting from int transactions is affected by changes in exchange rates

Common outstanding obligations of most MNE incl foreign currency to be rec for exports/ paid for imports, credit purchase of services from foreign sources & what has been obtained from borrowing/ lending in foreign currency

77

These foreign exchange entitlements & obligations are susceptible to eventual value uncertainty due to fluctuations in exchange rates, which affects original cash flows agreed upon when transaction occurred

Transaction exposure can occur to buyers & sellers & gain/ loss dep on strength of currency in which transaction was invoiced

3 Economic exposures

Extent to which change in bilateral exchange rate btwn 2 currencies of MNE’s dealings, affect present value of expected future cash flows

Differs from transaction & translation exposure in 2 ways: o Economic exposure is subjective concept not easily ID’d/ measured o Coz of its LT implications, recognising & dealing with economic exposure is more NB than

dealing with ST effects of transaction & translation exposure

It is complex & covers wide range of diverse risks & differs from transaction exposure since transaction exposure is exclusively concerned with effect of changes in exchange rates on indiv transactions

Problem is that causes/ benefits of economic exposure aren’t readily apparent & incl trends in exchange rates & dev where subsids are located

Strategies/tactics for M foreign exchange rate risks

Managing transaction & translation exposure

1. Operating fin strats o Obj is to minimise effect of changing exchange rates on local firm’s profitability o In economies with high inflation, where currencies are expected to depreciate & prices to rise

host country subsidiaries should: 1. Collect all debts as quickly as possible 2. Concentrate & encourage cash sales relative to credit sales 3. Delay payment obligation denominated in local currency 4. Pay all debts denominated in strong currencies as quickly as possible 5. Take the opp to buy fixed assets that have beneficial effects on cash in inflationary

cond o Use lead & lag strats to protect cash flows

Lead strats - collection of foreign currency debt before due, if currency is expected to depreciate & to remit foreign currency payables before due if it is expected to appreciate

Lag strats - delaying collection of foreign currency debts if expectation that currency will appreciate & delaying payables if currency is expected to depreciate

Probs incl firm’s lack of control over terms of payment & weak bargaining position o When in inflation times inventories are kept to minimum, for imports, subsids will attempt to

incr stocks before currency weakens o Hedging strats: form of protection against adverse movement of exchange rate so can be

considered as an operating fin strat (currency forward contracts, currency swaps & options protect against transaction exposure)

2. Currency forward contracts

o Financial contract that entitles & obligates its holder to buy/ sell unit of currency at an exchange rate agreed to on date of contracts for execution at stipulated future date

o Purpose is to minimise risk related to foreign exchange fluctuations

3. Currency swaps o Financial contract that permits parties exposed to currencies for which they do not hold their

wealth to swap them for preferred currencies for predet notional values & at stipulated future date

78

o It avoids both transaction & translation exposures so neither LT receivable/ debt is created on balance sheet

4. Currency options

o Contract giving option buyer the right but not obligation to buy/ sell given amount of foreign exchange at fixed price unit (strike/ excise price) for specified time period (until expiry date) at price called option premium

o Provide more flexibility than forward exchange contracts coz buyer is not obliged to exercise the option & buyer can’t lose more than the premium paid for option

5. Other tactics to reduce transaction & translation exposure

o Using transfer prices to move funds where there is a decline in currency values of those countries

o Using local debt financing to hedge against foreign exchange risk o Accelerating dividend payments from subsidiaries based in countries with weak currencies o Adjusting capital budgeting techniques to reflect potential foreign exchange risk

o Translation exposure can also be reduced by using balance sheet hedge where int firm matches

its assets denominated in given currency with its liabilities denominated in that same currency across MNEs subsids (results in lower amounts to be translated & less items for consolidated fin statements)

Reducing economic exposure

Coz of LT nature & difficulty of timely recognition, req strat choices outside fin M

Distribution of firm’s facilities & productive assets to various optimal int locations will reduce effects of adverse changes in exchange rates compared to exposure to indiv single locations

Monitor underlying factors that infl exchange rates (macroeconomic factors): 1. Interest & inflation rates in countries where subsids are located/ with whom MNE deals 2. Balance of payments performance of locations of MNE 3. Cost of key production inputs like labour, raw materials & other res 4. Overall productivity in locations of MNE’s business

Summary of how MNEs can M foreign exchange rate risk (basis for policy guidelines)

1. Est centralised exchange control facility to devise company-wide ways to protect res 2. Make clear distinction btwn transaction, translation & economic exposure & dev creative strats

particularly for economic exposure 3. Emphasise need to forecast future exchange rate movements 4. Est sound reporting systems to allow M of centralised exchange control facilities & central clearing

accounts to monitor firm’s exposures regularly 5. Produce foreign exchange exposure reports monthly to indicate how foreign exchange is impacting on

cash flows & balance sheet items

International investment analysis & capital budgeting

Int investment

LT strategy to expand markets by capturing new foreign markets, expanding existing foreign markets/ both

Firms engage in foreign capital inv to capitalise on new foreign market opp/ respond to emerging probs in domestic markets eg saturation of local market

FDI will be preferred to exporting & licensing if high transport costs & barriers to trade detract from exporting

Firm must consider eco, political, legal & strategic factors, benefits, costs & risks

Fin M must consider all relevant factors that can affect cash flows, use capital budgeting to evaluate FDI

79

Capital budgeting

Techniques are used to compare viability/ attractiveness of capital investment

Uses same theoretical framework as domestic capital budgeting (estimating after-tax net cash flows & discounting them to present value, NPV & IRR)

Complex for int investments so use following considerations: 1. Make distinction btwn cash flows to project & cash flows to parent company 2. Cash flows to parent company often depend on type of financing for project Operating cash

flows (payments for purch, royalties & licensing) can’t be separated from fin cash flows (dividends, loan repayments & interest payments) as can be done in domestic capital budgeting

3. Differing tax systems & political/ legal constraints that could affect movement of funds 4. Differing rates of inflation can affect comp position & value of cash flows 5. Unanticipated foreign exchange rate changes affect value of local project 6. Capital structure decisions & calculation of cost of capital, esp if from host country 7. Political risks from adverse political events 8. Terminal value is harder to estimate coz purch from host, parent, 3rd party/ other suppl, have

widely divergent perspectives on value of project to them

Parent & project cash flows

Should cash flows be analysed from project (subsid/ host country) / parent (HQ/ home country) perspective

Reasons why parent company is primarily interested in cash flow it will receive: o Subsids (project) may not be able to remit all their cash flows to parent company coz host

country’s gov could block them & they may be taxed at unfavourable rate/ part of cash flows generated may have to be reinvested in host country

o Cash flows to parent company form basis of dividend payments to parent company shareholders, reinvestment at home/ repayment of debts

Most int inv cash flows to parent firm are financial rather than operating cash flows

By incl fin cash flows in capital budgeting analysis, deviate from rule that operating & fin cash flows shouldn’t mix eg if cash flows are blocked they can’t contr to current value of parent company

Manner & form in which project cash flows are remitted to parent firm will det tax liabilities of foreign project & affect cash flow available to remit to parent firm

Adjusting for risk in capital budgeting

1. Political risk o Incl imposition of foreign trade & inv barriers, exchange controls, regulations blocking

remittance of earning to parent companies, new tax regimes & incr tax rates o In extreme cases expropriation of assets & nationalisation of firms pose serious threat o Use country risk profiles & other analyses to quantify effects of risks

2. Economic risk o Possible misM of country’s economy that could adversely affect profitably, growth & survival of

busn located in that country o Expansionary monetary policy can lead to high inflation in host country & thus reduce

attractiveness relative to other economies o Reliable info on macroeconomic trends are int rates, money supply, inflation, BOP, foreign

debt, exchange rate forecasts

Approaches to risk adjustment

Additional risk from location of foreign project can be dealt with in 2 ways: o Treat all foreign risk as single issue by incr discount rate applicable to foreign projects relative

to rate used for domestic projects o Adjust all cash flow forecasts selectively during estimated lifespan of project to reflect foreign

risks

80

Int capital budgeting analysis req extensive info inputs, which relate to economic, fin & risk characteristics of project in foreign location

Following is NB for capital budgeting analysis o Initial outlay of investment which could occur over several years o Working capital req, with consideration for their recoverability at investment’s life end, can be

sourced from diverse locations o Variable & fixed costs & inflation effects relating to foreign inv are more involved o Salvage value on termination of project could be net cash in/outflow o Tax implications such as operating income & depreciation can be more flexible & responsive to

higher cost savings o Cost of capital/ required rate of return can be more flexible due to wider access to external

financing

International financing decisions

1 Sources of funds

1. Internal sources of funds o Funds generated internally by subsid - depreciation & non-cash charges, retained earnings o Funds from within corporate fam

From parent firm - equity inv (cash/ assets), cash loans, leads & lags in paying intracompany accounts

From sister subsid - cash loans, leads & lags in paying intracompany accounts Borrowing with parent firm’s guarantee

2. External sources of funding o Borrowing from home country - banks, fin inst, securities o Borrowing from outside home country - local currency loans, 3rd country loans, Eurocurrency

loans o Obtaining local equity - indiv shareholders/ JV partners

2 Financial structure & cost of capital

Int fin decisions should be based on fin structure that minimises cost of capital

Issues to consider for optimal fin structure 1. Minimise cost of external funds after adjusting for foreign exchange & political risks 2. Select internal financing that will minimise these risks 3. Minimise MNEs worldwide consolidated cost of capital 4. Optimally position all funds in parent company & all subsids

MNE should choose fin structure that minimises its own consolidated cost of capital, rather than that of foreign subsid

Financing int trade

Int trade relats

Unaffiliated unknown: importer has no prev relat with exporter, need to enter into contract & exporter seeks protection against non-payment

Unaffiliated known: importer is long standing cust of exporter, should still consider contract as exporter may want 3rd party protection against non–payment

Affiliated: importer is foreign subsid of exporting parent company, called ‘intrafirm trade’ where there is no contract/ protection against non-payment/ completion

Trade dilemma & import/ export finance

Ways to reduce uncertainty associated with lack of trust

1. Letter of credit (L/C)

81

o Can be revocable without prior notification to beneficiary, an irrevocable 1 can’t be cancelled/ amended without their consent

o Bank issuing the L/C on request of importer makes payment to beneficiary (exporter) on presentation of docs that meet req & cond in the L/C

o Additional docs req are bill of exchange, commercial invoice & bill of lading 2. Bill of exchange

o Used to effect payment o Unconditional order by exporter instructing importer to pay the face amount of draft on sight/

at later date o Banker acceptance - time draft drawn on & accepted by bank o When presented under L/C, draft repr exporter’s formal demand for payment

3. Bill of lading o Issued to exporter by common carrier transporting prod, serves 3 purposes

Receipt - confirms carrier has received prod Contract - specifies obligation of carrier to transport prod at a cost Document of title - used to obtain payment before release of prod to importer/ used as

collateral for loans to be offered to exporter 4. Commercial invoice

o Exporter’s description of prod being shipped to importer o Contains info such as

Name & address of seller & buyer Date Terms of payment Price (incl freight, handling & insurance) Quantity Weight Packaging & shipping info

Financial disclosure

1 Essence of disclosure

Disclosure is broadly defined as release of relevant info

Company’s annual report serves as a mode for release of this info

Info is presented quantitatively through fin statements & qualitatively through notes to fin statements, schedules, M discussion analysis & shareholder report

Fin info should be of such a nature that can be used to make informed decisions

2 Mandatory disclosure

Info that is req by statute, stock exchanges/ prescribers of acc stds

Accomplished through fin statements – balance sheet, income S, cash flow S, notes

Companies use Int Financial Reporting Standards (IFRS)/ US Generally Accepted Acc Principles (GAAP)

Firms still have substantial discretion about amount of info they provide

3 Voluntary disclosure

Disclosure of info in excess of that req by acc stds

M provide info additional acc & other info deemed relevant for decision making

Can be in form of press releases / conference calls

1 of the reasons to engage in this disclosure is to control conflict of interests among shareholders, debt holders & M & provide non-fin info

2 main benefits o Offsetting of shortcomings of capital-market-oriented traditional fin reporting o Reduction in share-price volatility & insider trading, which decr costs of equity capital

82

Attributes infl mandatory & voluntary disclosure – ownership structure, dual listing, num of indep directors on board, audit committee, gov ownership, size, age, profits

4 Disclosing company info through fin statements

1. Income statement & statement of comprehensive income o Income statement - discloses info about perf of company in terms of revenue, expenses &

profit o Accrual acc system is used so income statement & balance sheet are interrelated o Statement of comprehensive income - indicates how shareholder’s wealth has incr through

trading & non-trading activities eg gains on revaluation of property, translation adjustments o Also included are accumulative translation adjustments, pension liabilities & unrealised gains &

losses on available-for-sale securities 2. Balance sheet (statement of fin position)

o Shows the company assets & liabilities, further classified into non/ current o Assets are either purch by firm/ generated through operations o Assets & liabilities should be equal for it to be balanced

3. Statement of cash flows o Reports cash receipts & payments for period in which they occurred o Classified in terms of operating, investing & fin activities o Info explains changes in balance sheet & supplements info provided in income statement

4. Statement of changes in equity o Reports amounts & sources of changes in equity from capital transactions by owners o Incl shares, additional paid in capital retained, earnings & repurchased equity

Harmonising accounting stds

In USA acc stds are set by Fin Acc Std Board (FSAB) & augmented by Securities & Exchange Commission (SEC), called US Generally Accepted Acc Principles (GAAP)

Internationally acc stds are set by Int Accounting Standard Board (IASB) est to harmonise acc stds of diff nations, called Int Fin Reporting Stds (IFRS)

2 main adv of harmonising o Comparability – easy to compare similar firms in diff countries coz use similar acc policies &

systems o Consistency – use same policies & systems over time so achieve consistency

Problem is acc stds still allow firms to choose btwn diff acc methods

Role of the auditor

Auditor is an indep accountant resp for examining fin statements prepared by M to det if they are fairly presented & are in compliance with IFRS/ US GAAP

They attest to proper disclosure of firm’s fin perf & position

Play NB role in corporate governance coz they report on extent to which company practices good corporate governance

Auditors opinion is not a method of disclosure but an unqualified opinion viewed as indication that level of disclosure is adequate

3 other levels auditor can offer: o Qualified opinion: indicates fin statements are presented fairly except for those aspects to

which qualification relates, used when circumstances prevent auditor from performing all procures req to comply with IFRS/ GAAP / fin statements are incomplete/ contain material departure

o Disclaimer opinion: states that auditor can’t express an opinion on fin statements coz concern about viability of the company as going concern in the foreseeable future/ auditor has not been able to gather all necessary evidence to support some line items

o Adverse opinion: expressed when fin statements aren’t prepared according to IFRS/ GAAP

Other governance initiatives aimed at enhancing di sclosure

83

Sarbanes Act – protects shareholders & general public from acc errors & fraud by companies, administered by SEC which sets deadlines for compliance

In SA, King III elaborates on req for companies that apply King Code, it req BOD to ensure appropriate systems in place to produce reliable report for stakeholders giving complete pic of companies non/fin profiles

To comply, reporting should be integrated across all areas of perf, reflecting choices made in strat decisions of board & incl reporting of triple bottom line (social, economic & env issues)

13: Busn in emerging markets: case of Africa Africa is perceived by foreign entities as a high-risk, relative to returns location

Key diff is that little is known about the env in Africa while int companies are learning to adjust their busn strats to their new locations elsewhere

Due to very ltd investment in Africa which meant ltd learning (catch 22)

NEPAD (New Partnership for Africa’s Dev) - Africa’s response to challenge of underdevelopment

Recognises key areas that African countries need to address to position themselves as participants in process of economic dev

Deals with political governance, democracy & security, eco & corporate governance, regional approaches to dev

Fundamentally NEPAD declares Africa open for business

NEPAD emphasises importance of markets & providing env conducive to FDI & is primarily concerned with reduction of risk of doing busn in Africa

Seek to provide int busn with familiar env, where rules better understood & are more similar to those in other inv destinations

Africa’s economic performance

Africa’s growth perf

Economic growth perf of Africa & esp sub Saharan Africa (SSA) is puzzling

Post–war/ old growth theory believed that by mobilising right quantity of savings & investment, an incr in rate of aggregate growth would be generated & lead to a higher equilibrium growth path & higher level of per capita GDP & capita stock

Net result was that theory predicted that conditional convergence btwn low & high income countries, this has not been borne out of Africa over past few decades

New/ endogenous growth theory has provided some answers as to why Africa has not experienced convergence with the industrialised world

Africa’s participation in globalisation

SSA performs consistently below world avg in terms of avg annual growth rates of exports & those of developed countries

Been exp more rapid export growth led by incr demand for primary commodities

Lack of FDI has external & internal dimension, reason why inv is not forthcoming is risk of doing busn is seen as too high coz of high levels of political & policy instability

Can also be seen at corporate level where transnational corporations (TNCs) play NB role in applying advanced tech & M practices & stimulating int trade & capital flows

Africa’s sociopolitical & intuitional perf

1 Living stds

Africa’s economic marginalisation has been accompanied by widening gap on social front

Living stds have improved but not kept pace with improvements elsewhere

Income levels across countries have been both diverging & converging

84

Poverty & inequality measures translate into poor human dev indicators

Most telling reality is the extremely low life expectancy

SSA scores worst in edu enrolment, global per capita & overall human dev index

2 Health

Health indicators where SSA fairs dismally – undernourished, under-5 mortality rates, tuberculosis, HIV\AIDS

Implications of HIV - acute shortages of skilled labour & further eroding formation of human capital as it decimates working-age populace, falling life expectancy, AIDS orphans

Losses from absenteeism, labour productivity & income, which affects savings, slows down inv rates & lowers economic growth

3 Governance

Large part of the blame regarding Africa’s marginalisation can be poor governance

African countries plagued by political instability & kleptocratic dictatorships which led to economic misM

Diffs in economic growth rates traced back to capacity of state & its ability to provide env conducive to growth

New growth theory emphasises importance of political stability & good insts that protect property rights, enforce contracts & provide transparent, accountable gov

African leaders are notorious for their long tenure

Insecure power base is likely to encourage either reckless gambling for immediate returns/ highly cautions strats to preserve political capital, unlikely to promote measured actions to obtain long-range returns

Democracy leads to legitimacy & more secure power base which promotes sound economic policy

4 Civil war & conflict

Prevalence of civil war & conflict in many African countries

NB role of ethnic diversity in infl economic growth (cross country diffs in public policies, political instability & LT growth factors)

Constant conflict & reasons relate to probs of ethnicity, power sharing, factional rivalries, destabilisation by mercenaries, human rights violations & geopolitics

Costs associated are impossible to calc fully, but ID’d 5 effects: 1. Destruction of physical & human capital 2. Reduction in savings 3. Diversion of portfolios from domestic inv to capital flight 4. Disruption of economic transactions 5. Distortion of gov expenditure from provision of public services to military expenditure

5 Corruption

Prob in Africa, as it is elsewhere, it undermines dev, raises transaction costs, incr insecurity & uncertainty, & undermines gov actions

More problematic in developing countries coz its cost is higher & borne disproportionately by poor (pay brides &suffer when economy declines)

Also results in capital outflows as money is siphoned off into foreign bank accs

Cost corruption is substantial - raised cost of doing busn & acted as disincentive to foreign inv, cost manifests in other ways too:

1. Incr price tag of dev programme 2. Undermines revenue collection & contr to macroeconomic imbalance 3. Leads to diversion of res from their intended purpose & distorts public policy 4. Encourages public officials to spawn projects of little economic merit & subverts essential

public regulatory frameworks

85

6 Democracy

Good gov is necessary but insufficient cond for economic dev

Gov accountability, in whatever form, is cond of good gov

Must be more than regular elections to be meaningful, must incl checks & balances on gov power, freedom of press, freedom of association & expression, rule of law & respect for constitution, access to info

Democracy makes gov accountable & is fundamental component of what dev is about, namely freedom of choice, freedom from servitude & freedom from need

Impact of tech on Africa’s prospects

Tech as driver of economic growth

Tech advances are key driving force in economic growth process

Contr of tech advances to economic growth has been significant eg when comparing contr by factors of production & tech progress to growth in real per capita GDP in industrialised economies, most of it was from tech

If tech holds key to future growth, instrument of either greater prosperity/ inequality

Technological progress accounted for mortality reductions, green revolution of incr food production & reduced food prices, cost of transmitting info has decr & bio-tech holds promise of benefits for human dev

Technology hubs

Locations that mattered most in new digital geog, rated in 4 areas: 1. Ability of area universities & research facilities to train skilled workers/ dev new tech 2. Presence of est companies & MNEs to provide expertise & economic stability 3. Population’s entrepreneurial drive to start new ventures 4. Availability of venture capital to ensure ideas make it to market

Investment in tech

Tech outcomes are result of LT inv made in human capital creation & R&D

Tech can cause Africa to leapfrog dev stages & catch up/ cause its ultimate marginalisation

Adv of not being frontrunner - followers don’t face same risks, can avoid mistakes, adapt tech appropriately

Possible for developing countries to jump to tech frontier coz of decentralised nature of electronic revolution - falling price of comm & transport means can borrow knowledge & tech from rich countries

Africa in the global economy

To participate in global economy & reap rewards of globalisation, Africa must be partnered by industrialised world but this has not been forthcoming

Inconsistency with which rich countries promote globalisation, & how they attempt to appropriate resulting gains while pushing necessary costs onto poor countries, rich countries have their cake & eat it, exacerbating poverty

Rich countries control int insts that push developing countries to liberalise every facet of their economies & yet these same countries then impose barriers to fair trade on the developing world (higher than for rich countries)

While developing countries were given commitment from developed world to open up market access to those prods in which they were competitive, has not been realised (industrial prods - primarily textiles, clothing & leather prods)

2nd area where developing countries have comparative adv is agriculture, fair trading system doesn’t exist despite promises for fair, market-oriented agricultural system

EU use of export subsidies for agricultural commodities means uneven playing field

86

Developed world has taken adv of market openings they have thrust on developing countries while failing to open their own markets

If developed world is serious about helping underdev, need to act decisively: 1. Rich countries must open their markets to exports from developing countries & reduce their

enormous agricultural subsidies 2. Wealthy countries should increase their foreign aid 3. Support debt relief for reformers which will allow Africa to participate more in globalisation 4. Promote fairer patent rules to ensure poor countries can afford new tech & basic meds

High-income countries have chosen to ignore crisis in Africa & have contr to it

G is seen as zero sum game, countries gain at other’s expense

African development going forward

Africa has to accept most blame for its economic marginalisation

When rest of world opened up their economies & adopted market-oriented policies, Africa turned inward & isolationist

Led to uncertain policy decisions & along with lack of inst capacity, created unattractive busn env

Africa was seen as high-risk investment & avg expected rate of return was higher than elsewhere (was not forthcoming though)

African currencies are often not tradable so US $ has become de facto African currency which incr costs

Steep costs are fuelled by lack of infrastructure; rail freight costs; lack of decent roads so need to use charter planes; & ports are expensive

Kleptocratic dictatorships make busn nervous coz rules are unclear & too fluid

Africa’s response has been poor & reactionary

Developing countries need to adopt programme of action that addresses domestic & int features of their underdev - New Partnership for Africa’s Dev (NEPAD)

Key principles on which NEPAD is based: 1. African ownership & resp for continent’s dev 2. Promotion & advancement of democracy, human rights, good governance & accountable

leadership 3. Self-reliant development to reduce dependency on aid 4. Building capacity in African insts 5. Promoting intra-Africa trade & investment 6. Accelerating regional economic integration 7. Advancing women 8. Strengthening Africa’s voice in int forums 9. Forging partnerships with Africa civil society, private sector, other African countries & int

community

Improvements in Africa’s economic performance from change already implemented

Challenges facing Africa that need to be addressed to ensure sustainable economic progress, incl: 1. Strengthen & sustain progressive political leadership 2. Build capacity of African insts-national gov, regional economic communities & African Union

(AU) 3. Address burden that diseases, esp AIDS, TB & malaria, place on socioeconomic dev 4. Speed up integration of NEPAD indicative plans into national dev programmes which enable

sustainable development 5. Change manner in which multilateral dev fin insts, esp African Dev Bank, World Bank & EU

Commission, support infrastructure dev in Africa 6. Strengthen private sector & attract more FDI 7. Speed up implementation of African Peer Review Mechanism to foster political, economic &

corporate good governance 8. Address impediments to effectiveness of dev assistance to incr its capacity to absorb &

efficiently use incr funds

87

9. Convert promises of highly industrialised countries into concrete actions like incr in dev assistance flows, harmonisation & simplification of aid procedures, 100% cancellation of debt & phasing out trade-distorting agricultural subsidies

Business env in Africa

Regulatory env

World Bank report outlines regulatory env that busn face & highlights higher costs of doing busn in developing vs developed economies, concludes following:

1. Busn in poor countries face larger regulatory burdens (admin costs, bureaucratic procedures & delays, fewer protections of property rights)

2. Heavy regulation & weak property rights exclude poor from doing busn 3. Payoffs from reform appear large

Rigidity of Employment Index, African countries score among worst in terms of labour market flexibility, avg of 3 sub-indices:

1. Difficulty-of-hiring index: mandated min wage to avg value-added per working population & max duration of term contracts

2. Rigidity-of –hour index: whether night & weekend work is allowed, length of work week & num of paid vacation days

3. Difficulty-of-firing index: whether redundancy is grounds for dismissal & procedures concerning firing redundant workers

Disclosure Index captures NB dimensions of investor protection & incl info on: 1. Ownership 2. Voting agreements btwn shareholders 3. Audit committees 4. Accessibility of all ownership & fin info to current & potential investors

Contract enforcement measures efficiency of judicial/ admin system in collection of overdue debt in terms of enforcement costs expressed as % of debt value

Impact of regulatory reform

Impact of regulatory reform is highly significant

Countries that have reformed the most attract more inv & higher growth, & have better human dev indicators

Gains come from 2 sources: o Busn spend less time & money dealing with regulations & chasing scarce sources of fin, &

instead spend energies on producing & marketing goods o Gov spends fewer res regulating & more providing basic social services

Few govs are eager to reform, arguing that ltd capacity, long time & costs a lot

Why do busn in Africa?

Answer lies in the fact that profound change is underway

Cond for growth, dev & profits are incr – inst env has improved, democratic wave is underway, int busn is welcomed

Africa does not provide risk profile today that it did in past, doing busn in Africa will be challenge, but opp are greater than almost anywhere else

Positive aspects related to busn dev in Africa 1. Africa offers highest return on FDI in world & isn’t as competitive 2. If Africa were single country, would be 10th largest economy 3. Offers extremely large cons base & growing so many opp

In terms of busn opp, the following are underscored 1. Ironically, Africa’s poverty creates opp in edu, health care, infrastructure, banking the

unbanked & middle-class aspiration cons goods 2. 1 of fastest growth areas is telecomm (cell phone use growing)

88

3. Increasing strat interest to global economy, provide US with petroleum, incr int busn dealings 4. Risks of investing remain high but perceived risk is greater than real risk 5. Large, complex continent, incr regional integration, intention is to create single unified market

making it even more attractive & simpler to do busn

How to do busn in Africa

Busn env is highly complex in Africa coz of unique history, diversity, geography & political & inst landscape, can't do busn without recognising apartheid legacy

Note BEE which legislates ownership req to redistribute assets to prev disadv

From int busn perspective, raises apparent costs of doing busn & may elicit qu of why it should have to pay for crimes of past

Local empowerment companies bring local knowledge & contacts which benefit & allow MNEs effective access to local market

Card of Africa exceptionalism is played too frequently, dictators make claims that western democratic values are inappropriate for Africa given its diversity & culture, & in same breath criticise concept of universal human rights

Used as excuse for incompetence & violation of rights (indiv, communal & commercial)

Exceptionalism used by foreigners to justify not entering African market coz it is ‘too foreign’ / ‘too different’ & which reinforces cycle

Any company doing busn in Africa must consider complexity of leading in diverse context, recognising L style is det by leader & follower characteristics, understanding these components req historical, political, social & economic context

Sense of social resp that goes with L in Africa, impossible to be only profit driven & be sustainable on this continent with its culture, its challenges & its history

Need to deal with poverty, unempl & HIV coz need to serve community as well

This affects human res env in Africa & allows 1 to understand why dev such a complex labour relations system & why trade unions have their particular roles

Africa market repr attractive markets for appropriate products like basic infrastructure (roads, schools, hospital); staples (food, cons packaged goods, meds) ; early life-stage prods (baby prods, children’s clothing, edu prods, toys)

Busn needs to ensure its prods are affordable in the market it is entering (lack of purch power, infrastructure & competencies affect prod usage)

NEPAD seeks to provide busn with predictable env in which rules of game are understood & more familiar to make adaptation easier

NEPAD has not rec uncontested support from general populate, who question its pandering to western ideas/ from renegade regimes clinging to power

Potentially higher risk in Africa is matched by significantly higher returns, recent scramble for quality assets in Africa as companies recognise potential of these large untapped markets

Look at Africa soon as other markets becoming saturated, try get in early to capture market share & est brand loyalty & distr chains before competitors