IntBus1.ppt

International Business,Gaston Fornes, PhD ,Outline,Globalisation and world trade Economic integration Foreign Direct Investment Emerging markets Consequences for companies,Globalisation,Decoupling the firm from the factor endowment of a single nation Raw materials, components, machinery, and other services available globally on comparable terms Transportation improvements have lowered the cost of exchanging factors or factor dependent goods among nations It may well be a disadvantages if there are national policies or pressures that promote purchasing from high-cost domestic suppliers Porter 1998,The global economy: five aspects,Cultural: international trade has brought products from one country to the rest of the world. These products carry a cultural attachment and disseminate the country of origins culture to the consumers in the host nation Economic: national domestic markets have declined in importance and now international markets are the companys main focus. This change has taken place not only in final goods, but also in intermediate goods or the procurement of production factors such as labour and capital. Geographical: distance has diminished its importance. This is mainly the consequence of the reduced time and cost of travel along with the possibility of rapid exchanges of information.,The global economy II,Institutional: the creation of global institutions and the pursue of strategies influenced by global trends. The WTO is an example of the former, where companies taking similar policies due to competitive and regulatory pressures are an example of the latter. Political: the relation between the nation-state and the market has changed over the last 50 years. From cooperation after WWII to the firms distinctive role in the allocation of resources of the last 15 years,(Brakman, Garretsen, van Marrewijk, and van Witteloostuijn, 2006, McDonald, and Burton, 2002),International trade: facts and figures,The economic advantages of trade Organised under supervision of the GATT, from the 1940s, which became the WTO in 1995 Growth of world trade since 1945 Dominance of the Triad Significance of trade for small states Shifting balance in world trade?,International trade as an engine of economic growth and wealth creation,Source: (WTO 2009),(WTO, 2010),Source: EuroStat-Comext; UN-Comtrade billions of Euros,USA,Japan,EU,110.30,59.50,151.65,34.47,65.78,160.52,Intra-Triad merchandise flows (1998),North America 905,Asia 1,638,Europe 3,651,430,279,314,604,366,708,Extended Triad Intra-and inter-regional trade,Source: WTO 2007,+75% of world trade,Intra-and inter-regional merchandise trade,Source: WTO 2007,Source:,Outline,Globalisation and world trade Economic integration Foreign Direct Investment Emerging markets Consequences for companies,Common non-tariff barriers to trade,Economic integration,Economic integration theory A larger market: more demand and more competition More competition encourages price reductions and more efficiency, especially through economies of scale and specialisation Economic welfare is maximised and there is a greater optimisation of economic resources (i.e. labour and capital) This leads to more investment, more jobs and economic growth,The course of economic integration,Free trade area Customs union Common market Monetary union Economic union A logical progression to capture the benefits of economic integration,What is a Free Trade Area?,Trade between member states is tariff free Borders within the FTA remain in place External trade policies of individual states remain unaffected Rules of origin Very little centralisation of political power BUT How to deal with non-tariff barriers? Differing labour and environmental standards Enforcement of FTA decisions,Free Trade Areas: history,Greek states and ancient Rome Hanscatic League The Zollverein in Germany Colonial preferences (i.e. Britain and France) The United States of America The Swiss confederation after 1848 Post-War Europe: EFTA and the EEC,FTA development since 1945,EFTA, now mostly EEA NAFTA ASEAN MERCOSUR APEC BILATERAL FTAs FTAA,Customs union,Examples: EEC (now EU) Characteristics: Trade between member states is tariff free Common external trade policy Centralised decision-making No need for internal borders A centralised source of revenue Trade creation versus trade diversion,Common Market,Example: EU (formerly EEC) Characteristics: Free movement of goods, people, services and capital (4 freedoms) Common rules concerning market access for goods, services, capital and people Centralised decision-making and enforcement,Preferential trade share of intra RTAs trade in merchandise imports of major regions,Outline,Globalisation and world trade Economic integration Foreign Direct Investment Emerging markets Consequences for companies,Foreign Direct Investment,The concepts of the flow of FDI and the stock of FDI The biggest investors abroad are the USA, the UK, Germany and Japan. See position of Chile within Latin America The major recipients of FDI are currently China, USA, Eastern Europe, Russia and Mercosur International trade and FDI are inter-related (example of EU single market) Trends in FDI over time. FDI is not a new phenomenon!,Reasons for FDI,High local profile Advantages of being close to the market Tailored production to local market needs Cheap local assets or labour costs or energy costs Saturation of home market Financial incentives from host countries Availability of skilled labour, and/or other resources (land, capital, energy) Available supply network,FDI in the 20th Century,FDI and M&As evolution,Source: Adapted from United Nations Conference on Trade and Development, Trade and Investment Report, United Nations, 2001; in in Alfaro, L.,Foreign Direct Investment, HBSP, Boston, 2002,Latin America FDI flows by source, end of 2003 (millions of Euros),Cumulative net investment by some Spanish firms in Latin America (millions of Euros),Outline,Globalisation and world trade Economic integration Foreign Direct Investment Emerging markets Consequences for companies,Emerging markets,Countries that are experiencing rapid economic development Countries where their governments policies are aimed at economic liberalisation and the adoption of a free-market system (Arnold & Quelch, 1998). 64 emerging markets in the world: 51 developing countries in Asia, Latin America, Africa, and the Middle East identified by the International Financial Corporation, 13 transition economies listed by the European Bank for Reconstruction and Development (Hoskisson, et al., 2000).,EMs main characteristics: 1. weaker institutions,Institutional theory: institutions surrounding organisations mould their social and organisational behaviour and, as a consequence, affect their decision-making processes as well as their available options. The institutions in a country market should reduce uncertainty and provide a stable level playing field that facilitates interactions and diminishes both transaction and information costs. Firms in emerging economies are influenced by existing institutional frameworks in some cases this influence was negative where other works showed a more positive influence. The positive effect was found when institutions facilitate strategy-setting activities, giving the opportunity for organisations to react and take more active roles.,EMs main characteristics: 2. higher transaction costs,Transaction costs in EMs are higher than those in developed economies mainly when: the price system does not give reliable information for the efficient allocation of resources, and the governments discretion (rather than the rule of law) determines property rights and makes their enforcement more costly Higher transaction costs are the reason behind the high prevalence in emerging markets of: unrelated diversification by large business groups, due to their underdeveloped capital and labour markets and countertrade, as it creates mutual commitments that can discourage opportunistic behaviour,EMs main characteristics: 3. difficulty in developing internal capabilities,The development of these kinds internal capabilities is difficult and, most of the time, implies the establishment of good relationships with the local government. This could be one of the reasons why diversified business groups have grown in emerging markets, because they could obtain licences and other benefits due to their close links with the home government and, as a consequence, protect their operations from domestic and international competitors. Business groups may have developed capabilities for relationship-based management in their environment that substitute for the lack of institutional infrastructure and base their competitive advantage on links with the authority. Many competitive advantages seem to be based on network relationships and close business-government ties, and that, consequently, many firms have become “effective monopolies in their home markets,FDI to emerging markets,Source: (UNCTAD 2011),Source: (UNCTAD 2010),Inward FDI stocks as a percentage of GDP (average),Outline,Globalisation and world trade Economic integration Foreign Direct Investment Emerging markets Consequences for companies,Greater Competition,New entrants into domestic markets New entrants in foreign markets Bigger pool of capital and labour Consolidation, rationalisation, and reconstruction of sectors Small businesses may find a new niche or they may get taken by bigger firms Constant search for Innovations, Efficiencies, Cost reductions Constant need for better use of: Available technologies More investment Better market penetration,Multiple sources of