Globalization

- has had periods of stops and starts (ex. stopped during WW2)
- about ideas, not necessarily about trade
- Thomas Friedman (Globalization 1.0, 2.0, 3.0) suggests that imperialism and religion
contributed to globalization 1.0
- globalization 2.0 was driven by multinational corporations and technological
innovation, this period ended w/ the breakdown of the USSR
- globalization 3.0 is right now. individuals, moreso than countries or companies, are
the ones causing it. Caused by software and NOT hardware. Driven mainly by nonWesterners
- accelerated by education, liminited liability forms of business ownership

Political Economy
- political, economic and legal systems of a country are interdependent
- political systems are trending towards individualism and economic systems are
trending towards free-market
Types of Economies:
- market: privatization, supply and demand
- command: goods and their prices controlled by government
- mixed: combination, govt. takes control when necessary. MOST COMMON

Legal Systems:
- common law system: based on tradition, precedent and custom. originated in Britain.
This is the US law system
- civil law system: relies on detailed legal codes, judges have less flexibility
- theocratic law system: law is based on religious teachings (ex. Islamic law)
there are many legal barriers in IB. for example, in France there are restrictions on
using English in marketing
- youre usually dealing with two sets of laws in IB and one set has more clout
contract law: specifies conditions of an exchange and the obligations of parties
involved. CIGS is a UN convention that many countries have ratified to establish
uniform contract rules
property rights are applicable to any resource that an individual or business owns,
including the income that is derived from that resource
Can be violated through either Private Action or Public Action:
- private action: theft, piracy blackmail, etc. by private individuals or groups (ex. the
Russian mafia charging business owners for protection)

- public action: when public officials extort income, resources or property itself from
property holders. CAN be done through legal mechanisms (ex. excessive taxation or
expensive permits)

intellectual property laws: no worldwide patent system but there are worldwide
treaties for protecting IP. Often the laws are weakly enforced (ex. piracy)
- corruption across countries is measured by Transparency International. High
corruption reduces FDI and economic growth
Foreign Corrupt Practices Act: passed in the 1970s by the US. Makes it illegal for US
businessmen to bribe foreign officials to win lucrative contracts
- controversial because it allows grease payments and expediting the performance of
a govt. action
- also controversial because it focuses too much on US corruption and it prevents US
companies from being able to play ball in foreign markets
- the definition of a company in the FCPA is very broad
FAIR TRADE:
- controversial because often times Fair Trade cooperatives make a lot of the money
from fees
- still, Fair Trade is slightly more lucrative than the open market for most growers

Trade Theory
Types of International Trade Theories:
Mercantilism (1500 to 1800): a country will gain wealth when exports exceed imports
- increased exports and wealth eventually lead to growth and inflation. Imports keep
inflation lower
- IMPOSSIBLE to keep a trade surplus in the long run
- neo mercantilists are protectionists
Comparative Advantage: it makes sense for a country to specialize in goods that it
produces most efficiently and to buy goods that it produces less efficiently
- useful theory, but it limits the world to two countries
Product Life Cycle Theory: a product is initially made in the area in which it was
invented but eventually production shifts to foreign countries and the original country
becomes an importer
- goal is to maximize profit at all points in the cycle
- ex. Computer printers

New Trade Theory: emerged in the 1970s. Says that through economies of scale
(unit cost reductions through a large scale output) trade can increase the variety of
goods available to consumers. Firms who were first-movers can dominate world trade in
certain products. More industry focused than previous trade theories
National Competitiveness Advantage: industry is a function of factor endowments
(position in infrastructure, labor), demand conditions (home demand for the industry),
relating and supporting industries (presence or absence of competitors), and firm
strategy
Apple Article ex. Apple moved to China because of faster supply chain and scaling up
and down in factories

Trade Policies
The Seven Instruments of Trade Policy:
tariffs: oldest form of protection
- (+) good for government because it generates revenue $, (+) good for producers
(protects them from foreign competitors)
- (-) bad for consumers
- lead to inefficiency
- specific tariffs are levied as a fixed charge for each unit of a good (ex. $3 per box)
- ad valorem tariffs are levied as a proportion of the value of the imported good
subsidies: a government payment to a domestic producer, can be direct or indirect
- has many forms: cash grant (direct), low-interest loans (indirect), tax breaks, etc.
- helps domestic producers to compete with foreign imports and gain new export
markets
- agriculture is usually one of the largest beneficiaries of subsidies
import quotas: a direct restriction on the quantity of a god that can be imported into a
country
- hurts consumers (raises prices of imported goods) and helps producers (limits
competition)
local content requirements: a requirement that a specific fraction of a good be
produced domestically
- ex. a % of component parts or a % of the value of the good
ex. buying local - US Govt. must give preference to American products when putting
contracts out unless foreign products have a significant price advantage (Buy America
Act)
Administrative Policies: bureaucratic rules making it difficult for imports to enter a
country

ex. Customs formalities protection of culture by Mexican customs officials when

opening packages
ex. Licensing restrictions Limit on foreign artists on Quebec radio
Antidumping Policies: protects against foreign goods that are sold below fair market
value or production costs
- dumping is often used to unload excess production
- protects domestic producers from unfair foreign competition

BOP and FDI

Balance of Payments (BOP) accounts for a companys international transactions for a
period of time, usually a year
- includes the current account and the financial account
- each current account entry is offset by a financial account entry
- positive (+) transactions on current account result from receipt of payment from
foreigners (exports, gifts received, income received, aid received, etc.)
- negative (-) transactions on current account result from making payments to foreigners
(imports, gifts given, income paid on investments, etc.)
- current account surplus occurs when a country exports more than it imports
- current account deficit occurs when a country imports more than it exports
the sum of the current account balance and the financial account should ALWAYS BE
ZERO. In practice, though, there are always statistical discrepancies
Foreign Direct Investment (FDI): when a firm invests directly in facilities to produce or
market a product in a foreign country
- involves at least 10% ownership in: production, marketing, R&D or raw materials
- if there is no managerial involvement, its considered a portfolio investment
FDI takes on two forms:
1) a greenfield investment: the establishment of a new operation in a foreign
country
2) acquiring or merging with an existing firm (can be a minority stake as long as
its more than 10% ownership)
can be horizontal (FDI is in the same industry as the firms home operation) or vertical
(backward if the firm is providing production inputs, forward if the firms outputs are sold
abroad)
Pros of FDI:
- circumvents potential future trade barriers and transportation costs
- potentially profitable

Cons:
- risky and expensive in comparison to licensing or exporting
free-market view is that FDI should be encouraged because it increases world
economic efficiency
radical view says that inbound FDI is harmful because its an exploitative, imperialist
tool used by home countries

Currencies and Exchange Rates

Three types of foreign exchange risk:
1) translation (past) the extent to which the reported consolidated results and
balance sheets of a corporation are affected by fluctuations in foreign exchange values
2) transaction (current, open) the extent to which income from individual
transactions is affected by fluctuations in foreign exchange.
- ex. you are buying something and theres a currency difference between the time it
takes you to place the order and pay,
3) economic (future) the extent to which a firms future international earning power (or
costs) are affected by changes in exchange rates
GBP, JPY, USD and EUR are primary hard (or liquid) currencies
law of one price in competitive markets free of trade barriers, identical products sold
in different countries must be sold for the same price (ex. 1 USD = .6 euro, $100=60
euros for a pair of jeans
purchasing power parity: its hard to determine PPP by comparing identical items, but
it can be found by comparing a bundle of different items
ex. the Big Mac index tells us that prices are not always uniform across nations. This
can vary due to many factors including cost of labor. it shows trends in how currencies
move against one and other
trading at a premium when a currencys forward rate is stronger than the spot (in
comparison to the other currency)
trading at a discount weaker than the spot