ECIS591: Lecture 2

1. ECIS591: Lecture 2 Fundamentals of International Business

2. [W]e realize that there are certain industries which cannot now successfully compete with foreign producers because of lower foreign wages and a lower cost of living abroad, and we pledge the next Republican Congress to an examination and where necessary a revision of these schedules to the end that American labor in the industries may again command the home market, may maintain its standard of living, and may count upon steady employment in its accustomed field. - Republican Party Plank, 1928

3. But, what about barriers to trade between countries? • Trade is between a company and a buyer (not between countries) • Not always possible to simply manufacture and export from home country • Consider • Sales are restricted due to tariffs on imports • Product requires natural resources available in only some countries • Competition forces you to produce where it is cheaper

4. Foreign Direct Investment • Traditional theories assume immobility of capital • Not true today… movement of capital has allowed FDI across th globe • If there is competitive advantage to be obtained, the capital can get there…

5. The FDI Decision Sequence The Firm and its Competitive Advantage Change CA Exploit CA from abroad Production at home Production abroad Licensing Control Assets IJV Wholly-Owned Affiliate Greenfield Acquire foreign unit

6. Why do firms go beyond licensing and exporting? • Firms as Seekers • Firms as Exploiters of Imperfections • Firms as Internalizers

7. Firms as Seekers • In the 18th and 19th centuries, firms were seeking valuable natural resources of other countries • Now • Natural resources • Low-cost labor • Knowledge • Political stability • Markets

8. Firms as Exploiters of Imperfections • Not a perfect market (supply and demand) • Government interference leads to imperfections • Aim to support and protect domestic industries • Multinationals invest locally to sidestep these restrictions

9. Firms as Internalizers • Cannot firms achieve competitive advantage through licensing? • Sometimes, core of business is the proprietary knowledge of the production process (Coca Cola, for example) • Internalization is better than an arm’s-length management in such situations

10. Free trade is nice in theory, but… • Theory is one thing… welcome to the real world • All countries place trade restrictions • The extent of the interference varies from country to country • Interference manifests itself in two forms • Tariffs • Non-tariff barriers to trade

11. Tariff barriers to trade • Tax levied on a good when it crosses the boundary of a customs area • Country boundary • “Group of nations” boundary • Also referred to as duties • Broken down into two types • Protective tariffs • Revenue tariffs

12. Tariffs contd. • May be based on the physical quantity (per ton, per yard, etc.) … called a specific tariff • May be based on value of the import … called ad valorem tariffs • May be differentially applied depending on product’s country of origin

13. Protectionism: Case Studies • US customs tariff on dolls is 12% higher than “action figures” • GI Joe action figure re-classified as a doll. Forced to pay higher tariff. • Tariff rates on cars is higher than “trucks” . • US court of International Trade bogged down with SUV claims.

14. Protectionism: Case Studies • Nike shoes had stripes. • Nike claimed these were decorative and do not hold shoes together. • US Customs 1963 regulations claimed shoes held together with material bands attract 20% tariff • Nike lost case - higher tariff. • Lost $100m in disputed past tariff payments

15. Non tariff barriers (NTBs) • Non-tariff barriers (NTBs) include • quotas, • voluntary export restraints, • export subsidies, and • other regulations and restrictions of international trade.

16. Non-tariff barriers (NTBs) • Tariffs have been reduced dramatically over time. • Some forms of NTBs, however, have increased: Why • New Protectionism: Tendency to circumvent WTO rules by using alternative measures • Often use environmental or health regulations • Changing categories of goods • Loopholes in agreements such as anti dumping and VERs

17. Quotas • Quotas • Quantitative restriction on number of units imported… usually applied through import license requirements

18. Voluntary Export Restraints • Voluntary export restraints (VERs) • In 1981 US negotiated a a VER on imports of Japanese motor cars. Us wanted to avoid appearance of protectionism and avoid GAT regulation against tariffs. • Also exist in steel, textiles/apparel. • In 1985 Japan decided to maintain VER, without US insistence.

19. Voluntary Export Restraints • In 1999 EU created similar VER with Japan. • Has effects similar to a quota, but difference is in the administration: • Quota: importing country handles the administration. • VER: exporting country handles the administration. This has implications for distribution of quota rents,

20. Voluntary Export Restraints • Foreign government administers VER quota by assigning export license to each firm. • This restricts competition among exporters and allows the to charge a higher price. • Thus VER’s increase likelihood that foreign producers or exporters will capture a large share of the rents. • Second tendency is for exporters to raise the average quality of their exported goods.

21. New Protectionism: Case Studies • Again exporters can use definition loopholes to circumvent quota restrictions • Quota’s on two piece suits • sewed tops to jacket to trousers and imported as a “jumpsuit” • Ski Jackets versus Sleeveless vest • Cut off sleeves and importer as “sleeveless vest”. Then used zips to sell as “ski jackets”

22. New Protectionism: Case Studies • Captain Kirk dolls allowed But Mr Spock ? • Father was Vulcan but mother was human • EU customs ruled that Mr Spock was non-human on account of the size of his ears. • Batman and Robin dolls escaped quota - clearly human.

23. Other forms of Protection: Technical Trade barriers • Domestic content requirements • Eg. cars sold in US must have • domestic components requirement • employ US labour • Rules can raise costs to foreign competitors and • limit outsourcing by domestic producers • Rules of Origin • Prevent Korea importing goods to, say, Canada, via USA . • return to this when discussing FTA’s

24. Other forms of Protection: Technical Trade barriers • Technical, Administrative, and Regulatory Standards • Governments regulate various aspects of activity within their economies and carefully guard their rights to do so. • Eg health, safety, and product-labeling requirements, entry into professions.

25. Technical Trade barriers • Columbian TV 70% requirement • Malaysia: advertising must not “promote foreign lifestyle” • German beer purity law. • Replaced by packaging law to promote recycling: Beer must be in glass bottles • Glass bottled beer difficult to transport internationally • Clearance of fruit at South Korea customs takes 1 month

26. Technical Trade barriers • Thus difficulty in sorting out projectionist rules from legitimate ones • Environment and human rights law open up new opportunities.

27. Other non-tariff barriers • Germany’s Beer Purity Law • Japanese Ministry of Posts and Telecommunications • South Korean perishables • France’s reserved time for French songs • EU bans hormone-treated beef • EU on brink of trade war over…what product?

28. Why place such restrictions? • Revenue • Infant-industry argument • Environmental concerns (Mexican tuna) • Competition from low-wage countries • National security and defense

29. Trade Agreements • May be bilateral or multilateral • Bilateral Agreements • Reciprocity • MFN Status • Multilateral • GATT • OECD • WTO

30. General Agreement on Tariffs and Trade (GATT) and the WTO • Multilateral agreement that acts charter for most countries of the world (except most communist countries) • Signed in Geneva Oct. 1947: 23 countries which accounted for 4/5ths of world trade • Has gone through a number of rounds: Kennedy(1964-67), Tokyo(1973-79), Uruguay (1986-?)

31. Main WTO Principles • No trade discrimination (MFN status for all members) • Free trade groupings are acceptable as long as third countries do not face discrimination • Many, many exception clauses

32. Organization for Economic Cooperation and Development (OECD) • Originally formed by European nations in response to US offer of economic aid (post WWII) • Did much to improve trade within Europe • Expanded in 1960s and 70s to include USA, Canada, Japan, Australia, New Zealand

33. Goals of OECD • Promote economic growth of member nations • Contribute to growth of lesser developed countries • Foster conditions for world trade

34. Economic Integration • Takes many forms • Free Trade Association • No duty on imports from member states.. Each member may charge different duties to non-members (EFTA) • Customs Union • All member states agree to charge same duties on non-member imports

35. Economic Integration contd. • Common Market • Extends the Customs Union concept to include free flow of labor/capital between member states • Economic Union • Common market members agree to harmonize economic policies • Total Economic Integration

36. European Union • Most nations in Western Europe • Works toward economic and political integration • Also covers unified action in security, foreign affairs, and police matters • Common currency

37. Other Regional Groups • Central American Common Market (El Salvador, Guatemala, Nicaragua, Costa Rica) • The Latin American Integration Association (11 countries) • Andean Group is a sub group of LAIA • The Caribbean Community and Common Market (CARICOM)

38. Types of global enterprises • International • Global • Multinational • Transnational

39. The International Strategy • Subsidiaries leverage parent competencies • Coordinated federation

40. Global • R&D, manufacturing done at HQ • Strategic decisions are centralized • Central hub

41. Multinational • Multidomestic • Aims at local responsiveness • Knowledge developed/retained at subsidiary level • Decentralized federation

42. Transnational • Shared decision-making • Complex coordination • Centers of excellence • Dispersed resources • Integrated network