(Solution Manual) International Business A Managerial Perspective

Griffin, Pustay, 9

Business

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9th Edition

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Author(s): Griffin, Pustay

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1 Copyright © 2020 Pearson Education, Inc. CHAPTER 1 An Overview of International Business Chapter Objectives After studying this chapter, students should be able to: 1. Discuss the meaning of international business. 2. Explain the importance of understanding international busine ss. 3. Identify and describe the basic forms of international busin ess activities. 4. Discuss the causes of globalization. LECTURE OUTLINE OPENING CASE: The Business of the Olympics The opening case explores the relationship between internationa l business and the Olympic Games. Key Points • The Olympic Games have come to reflect international business at its most intense. • The Olympics are governed by the International Olympic Committ ee (IOC), which decides where the games will be held, which sports will be repr esented, and oversees the selection of judges and referees. • Each country that wants to participate in the Olympics must es tablish its own committee, which then reports to the IOC. • Host cities are important to the Olympics because they are res ponsible for providing facilities, a volunteer workforce, and related organizational s upport. • Cities compete aggressively as they bid to be hosts. For citie s, the Olympics mean a boost to tourism that continues long after the games are over, a chance to be in the international spotlight, and a catalyst for infrastructure impr ovements. 2 Copyright © 2020 Pearson Education, Inc. • Running the Olympics requires large revenues, and host cities, along with the IOC, are constantly seeking additional sources of funds, such as tel evision coverage and corporate sponsors. Additional Case Application An exercise that can help students make the connection between the Olympics and international business is to ask them to imagine the Olympics w ithout the involvement of corporations. Students can be assigned to play the role of the different players involved in the games. For example, one student can play the role of an athlete, another the role of the mayor of the host city/cities, a third the head of the I OC, a fourth the head of the national committee, a fifth the role of a spectator, and so for th. CHAPTER SUMMARY Chapter One introduces the topic of international business by i nitially asking “what is international business” and then moving on to ask “why is it im portant to study international business?” The chapter then provides an introduct ory definition and explanation of some of the basic international business termino logy, such as importing, exporting, and multinational corporation. The chapter moves on to explore the evolution of international business going back to 2000 B.C. examining major developments that have resulted in th e growth and maturation of international business as we know it today. The c hapter concludes with an overview of the text. WHAT IS INTERNATIONAL BUSINESS? • International business involves any business transaction between parties from more than one country. It includes such activities as buying an d selling raw materials, inputs or finished products across borders, operatin g plants in other countries to take advantage of local resources, and borrowing m oney in one country to finance operations in a second country. • International business is different from domestic business in that it necessarily involves transactions that cross national borders while domesti c business does not. Thus, at least one party will have to adjust to a different leg al, economic, and cultural system; convert its currency into the other party’s currency; a nd make changes in how products are produced or the types of products that are pro duced. Teaching Note : Instructors may wish to pause for a moment at this point and as k students why a particular foreign company chose to invest in th e United States. It is helpful to choose a company that is in the local area; however, some well-known examples that should also generate good discuss ion include Honda, Sony, and Nissan. While students probably won’t pick up on the finer points of why the investments were made, the question should at least get them to think about international business, and the question can be raised ag ain later in the course. 3 Copyright © 2020 Pearson Education, Inc. BRINGING THE WORLD INTO FOCUS Borders Do Matter This section points out that, despite previous expert predictio ns of a boundaryless world, boundaries and borders do matter. That real ity impacts all aspects of international business, including, legal systems, po litical systems, social structures, cultural values, taxes, labor, land and othe r resources. The CAGE System developed by Pankaj Ghemawat provides a useful fram ework for understanding the operating challenges facing international bus iness because of these national differences: 1) Cultural distance, 2) Administra tive distance, 3) Geographic distance, and 4) Economic distance. WHY STUDY INTERNATIONAL BUSINESS? Teaching Note : It is interesting to ask the question “why study international business?” before actually discussing the material in the text. Instructors will probably find that, with a little prompting, s tudents will eventually come up with all or most of the reasons listed below. • Students need to study international business for a number of different reasons. First, students will almost certa inly work for a company that i s either foreign owned, domestically owned but has some foreign operations, or domestic ally owned but is affected by the global economy. Thus, if students are to be suc cessful and productive in their careers, it is important that they understa nd at least the basics of why companies conduct business across borders. Secondly, sin ce even small businesses are becoming more active in the international busine ss environment through activities such as buying and supplying components, stu dents who are planning to start their own businesses should also be cognizant of international business. • Cultural literacy is another reason for studying international business. Because business today often means international business , it is critical that students develop the type of cultural literacy that will enable them to be conversant with the global economy and international marketplaces. Furthermore, stu dents who fail to develop such skills will find themselves losing ground to their future “competitors” (students, particularly those from Europe and Japan, who have l earned multiple languages, have had job experiences in other countries and trav eled widely). • Finally, since not all business techniques and tools are devel oped in the United States, students need to study international business so that t h e y a r e a w a r e o f developments taking place in other parts of the globe, such as the use of just-in- time (JIT) systems. INTERNATIONAL BUSINESS ACTIVITIES • International business can take various forms. Exporting involves selling products made in one’s own country for use or resale in other countries. Importing involves buying products made in other countries for use or resale in on e’s own country. Many companies begin their international operations with either importing or exporting since the risk involved is minimal. 4 Copyright © 2020 Pearson Education, Inc. • Merchandise exports and imports refers to trade in goods (also known as visible trade) while service exports and imports refers to trade in intangible products (also known as invisible trade). See Figure 1.1 (Exports of Goods and Services as a Percentage of GDP for Some Key Countries) here. Exporting is important to both large and small firms. For examp le, the text notes that in a normal year, 70 percent of Boeing’s commercial aircra ft sales, which generated $57 billion of revenue in 2017, are to foreign custom ers creating tens of thousands of jobs, and that Task Force Tips, a small Indiana ma nufacturer of fire hose nozzles, exports its specialized products to 100 countries . BRINGING THE WORLD INTO FOCUS The Early Era of International Business International business has been around for centuries. In fact, its origins can be traced back as far as 2000 B.C. to the trading that took place between North African tribes and parts of the Middle East. Greece and the Rom an Empire owe part of their early prosperity to international trade and its a ssociated political and military power. Some significant trading relationships that end ure today were developed during the Middle Ages. The colonization of America, brought about in part because impo rtant trading routes to the Middle East were cut off when the Turks c onquered Constantinople, brought new trading avenues, particularly with Europe. During the colonial period and the subsequent Age of Imperialis m, foreign direct investment and multinational companies grew rapidly as E uropeans invested in their colonial empires in America, Asia, and Africa. The inv ention of the steam engine, and its associated low cost transportation, further enc ouraged foreign investments in the nineteenth century. • International investments , in which residents of one country supply capital to those of a second country, constitute the second major form of intern ational business activity. Foreign direct investments (FDI) are investments made for the purpose of actively controlling property, assets, or companies located in foreign host countries. The country from which the investment flows is referred to as t he home country . The country to which the investment flows is referred to as the host country . Portfolio investments involve purchases of foreign financial assets (stocks, bonds, certificates of deposit) for purposes other than control. • Other forms of international business activity . A licensing agreement allows a firm in one country to use all or some of the intellectual prop erty of a firm in a second country in exchange for a royalty payment. A franchising agreement allows a firm in one country to use the brand names, logos, and operating techni ques of a firm in a second country in exchange for a royalty payment. Management contracts involve an agreement in which a firm in one country agrees to operate f acilities or provide other management services for an agreed-upon fee. 5 Copyright © 2020 Pearson Education, Inc. There are several ways to describe the extent of a firm’s inter national orientation. At the broadest level is the international business: an organization t hat engages in commercial transactions with individuals, private firms, or public sector organizations that cross borders. The term multinational corporation (MNC) is used to id entify firms with extensive involvement in international business. More precisely , an MNC is a firm that “engages in foreign direct investment and owns or controls valu e-adding activities in more than one country.” MNCs also typically buy resources, crea te goods and/or services, and then sell those goods and services in a variety o f countries. Control and coordination usually come from headquarters with subsidiaries m aking adjustments as necessary. Non-corporations may s ometimes be known as multinati onal enterprises (MNEs), while not-for-profits are sometimes known as multinatio nal organizations (MNOs). See Table 1.1 here. CONTEMPORARY CAUSES OF GLOBALIZATION • Globalization can be defined as “the inexorable integration of markets, nati on- states, and technologies…in a way that is enabling individuals, corporations, and nation-states to reach around the world farther, faster, deeper , and cheaper than ever before.” This is evidenced by the dramatic growth of inte rnational trade over the last several decades. You may also note the impact of the g lobal recession. In 2009, trade volumes decreased more than the world’s GDP did, th us causing the ratio of trade to GDP to fall. In 1960, merchandise trade accou nted for 9 percent of the total GDP of the world’s nations: by 2017 it represented 22 percent. The growth in foreign direct investment (FDI) has also been tremendous (by 2017, the stock of FDI equaled almost 39 percent of that years GDP). See Figures 1 .2 and 1.3. Today, firms expand internationally for a variety of reasons. S ome of the reasons are strategic, others are environmental. • Strategic Imperatives To leverage core competencies. That is, firms that have skills that help them compete successfully in one country will often expand in order to further benefit from those skills. To acquire resources and supplies. The price and availability o f materials, land, labor, capital, and technology varies across countries. Firms m ay be able to acquire resources or produce more efficiently by expanding inte rnationally. To seek new markets. Once a company’s home market becomes satur ated, sales can be increased by expanding to markets beyond the firm’s home country’s borders. To better compete with rivals. Firms often prefer to not conced e markets to a rival. Therefore, when one firm expands into a new market, other firms in the same industry may follow. • The Environmental Causes of Globalization Changes in the political environment. The collapse of trade bar riers (especially since WWII) and the establishment of new trade agreements (e.g. , NAFTA, CAFTA-DR, GATT/WTO) have promoted greater international trade a nd investment. 6 Copyright © 2020 Pearson Education, Inc. Technological changes, Improvements in technology, particularly i n communication, transportation and information processing have m ade international business more feasible and profitable than ever before. • Globalization and Emerging Markets International business activity has expanded geographically wit h the collapse of European communism and policy changes in China and India. The m arkets beyond North America, Western Europe, and Japan are often refer red to as emerging markets. Some scholars limit emerging markets to Brazil, Russia, India, and China ( BRIC countries ). Others have used the term to describe the so- called “ Big Ten ”: Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Table 1.2 , which provides demographic information on emerging markets, should be discussed here. In a ddition, you should also include a discussion noting that two if these emerg ing markets China and India, together account for more than one-third of the worl d’s population (see Map 1.1) EMERGING OPPORTUNITIES Is Globalization Good for Us? This box considers the conflicting aspects of globalization as described by Thomas L. Friedman in his book The Lexus and the Olive Tree . The economic integration associated with globalization may lead to many economic benefit s (i.e., the Lexus), but it may also create costs as traditional values and norms (t he olive tree) are forsaken. AN OVERVIEW OF THE BOOK • The text takes the perspective of the manager or employee who is or will be competing in the international marketplace and identifies the m ajor similarities and differences between doing business domestically and doing busin ess internationally. • The text develops the more macro, general issues before moving on to explore the more micro, specific areas that managers face on a regular basi s. In doing so, students will become familiar with the context within which int ernational business takes place before examining the international manager’s tasks. • Part One provides an overview of the world's marketplaces. Par ts Two through Four move from broader issues, such as the international environment , to the international firm, and finally to discussing specific functions within inter national firms. CHAPTER REVIEW 1-1 What is international business? How does it differ from domestic business? International business involves any business transaction betwee n parties from more than one country. It differs from domestic business in that internat ional business transactions cross national borders while domestic transactions do not. More specifically, international business involves foreign currency transactions for at least on e party, it may require a company to adjust to a foreign legal system and/or culture, and the way products are produced or the types of products that are produced may vary ac cording to the availability of 7 Copyright © 2020 Pearson Education, Inc. resources in different countries. (LO 1.1, AACSB: Application o f Knowledge, Learning Outcomes: Define the fundamental concepts of international busi ness) 1-2 Why is it important for you to study international business? There are at least five reasons why it is important to study in ternational business. First, students will probably work for a company with international op erations or one that is affected by the global economy. Second, students may actually w ork for a firm that is owned by a corporation based in another country. Third, it is importa nt to keep pace with future “competitors” (other job seekers) who are well versed in intern ational business. Fourth, it is important to stay abreast of the latest business techniques and tools, which may actually be developed outside of the United States. Finally, it is importan t to avoid cultural illiteracy, a label given to those who are not conversant with the global eco nomy and international marketplaces. (LO 1.2, AACSB: Application of Knowledge, Learnin g Outcomes: Define the fundamental concepts of international business) 1-3 What are the basic forms of international business activity? The basic forms of international business activity are importin g and exporting, international investments, licensing, franchising, and management contracts. Exporting involves selling products made in one’s own country for use or resale in other c ountries, while importing involves buying products made in other countries for use or res ale in one’s own country. International investments include foreign direct investment and portfolio investments. Foreign direct investments are investments made for the purpose of actively controlling property, assets, or companies located in foreign host countrie s, while portfolio investment involves the purchase of foreign financial assets, such as stoc ks, bonds, and certificates of deposit for purposes other than control. A licensing agreement allows a firm in one country to use all or some of the intellectual property of a firm in an other country in exchange for a royalty payment. A franchise agreement authorizes a firm in one country to utilize the brand names, logos, and operating techniques of a firm in a second co untry in exchange for a royalty payment. Management contracts involve an agreement in w hich a firm in one country operates facilities or provides other management services to a firm in another country for a fee. (LO 1.3, AACSB: Application of Knowledge, Learning Outcome s: Define the fundamental concepts of international business) 1-4 How do merchandise exports and imports and service exports and imports differ? Merchandise exports and imports refer to trade in goods while s ervice exports and imports refer to trade in intangible products. The former is sometimes referred to as visible trade while the latter is sometimes referred to as invisible trade. ( LO 1.3, AACSB: Communication Skills, Learning Outcomes: Define the fundamental concepts of i nternational business) 8 Copyright © 2020 Pearson Education, Inc. 1-5 What is portfolio investment? Portfolio investments involve purchasing foreign financial asse ts such as stocks, bonds, and certificates of deposit for purposes other than control. (LO 1. 3, AACSB: Application of Knowledge, Learning Outcomes: Define the fundamental concepts o f international business) 1-6 What are the basic reasons for the recent growth of international business activity? A number of factors have led to the recent growth of internatio nal business. The more important factors include market expansion, resource acquisitio n, competitive forces, technological change, and social change. Market expansion has l ed to growth in international business as firms, facing saturated domestic mark ets, seek new market opportunities in other countries. In some cases, firms will als o expand into other markets as they seek resources such as materials, labor, and/or capital. S uch resources may either be scarce or unavailable domestically. The competitive forces that exist in today’s marketplace also encourage the internationalization of business. When a fir m’s competitors expand into new markets, that firm must also internationalize. Changes in t echnology, particularly in areas such as communications, transportation, and information p rocessing, are making it increasingly easier for firms to carry out international transa ctions, thus adding to the growth of international business. Social change is making it possible for firms to sell their products more easily in foreign markets. Consumers today are much more a ware of the products and services being offered in other markets, and are therefore more likely to seek out foreign- made products than in the past. Finally, looser government trad e and investment policies have made it easier for international businesses to capitalize on growth opportunities in the global marketplace. (LO 1.4, AACSB: Reflective Thinking, Learni ng Outcomes: Discuss trends in and the debate over globalization) QUESTIONS FOR DISCUSSION 1-7 Why do some industries become global whereas others remain local or regional? There are a number of factors that play a role in determining w hich industries become global, which become regional, and which remain local. The airl ine industry, for example, is considered a global industry. One of the main reasons for this status is the cost of developing and producing large aircraft, combined with market s ize. The industry is “forced” to be global because it must sell aircraft to a marketplace tha t is big enough to justify the costs of developing and building new jets. No single country ha s a market big enough to justify such costs, thus companies must seek customers around t he globe. On the other hand, the bakery industry tends to be regional or local because its products tend to perish very easily. While improvements in transportation and shipping have created a larger marketplace, for the most part, firms in this industry cater to local customers. From this brief discussion, it is clear that factors such as cost, market size, and product life all play a role in determining which industries will be global and which will not. However, it is important to recognize that many other factors (for example, resource availa bility, government regulations, and similarity of customer taste) also play a role in this determination. (LO 1.4, AACSB: Analytical Skills, Learning Outcomes: Discuss trends in and the debate over globalization) 9 Copyright © 2020 Pearson Education, Inc. 1-8 What is the impact of the Internet on international business? Which companies and which countries will gain as Internet usage increases throughout the world? Which will lose? The Internet has had a significant impact on international busi ness in at least three ways. First, the Internet facilitates international trade in services (e.g., banking, education, and retailing). Second, it has helped level the playing field betwe en large and small firms entering a foreign market, since even small firms can sell thei r products internationally on the Web. Third, the Internet can make business-to-business tran sactions (e.g., bringing together suppliers and buyers) much easier and more efficiently . (LO 1.4, AACSB: Analytical Skills, Learning Outcomes: Discuss trends in and the debate ove r globalization) 1-9 Which markets are more important to international business – the traditional markets of North America, the European Union, and Japan or the emerging markets? Defend your answer. Clearly, the volume of business in the traditional markets is m uch greater than the volume in emerging markets. However, as the traditional markets become sa turated, opportunities for growth will increasingly shift toward emerging markets. (LO 1.4 , AACSB: Analytical Skills, Learning Outcomes: Discuss trends in and the debate over global ization) 1-10 Does your college or university have any international programs? Does this make the institution an international organization? Why or why not? Students who attend a college or university that has internatio nal programs will probably find this question interesting. Students who do not have internation al programs available to them can still find the question worth considering if they use a lit tle imagination. The text defines international organizations to include public sector organizati ons that cross national borders. With this definition in mind, a college or university could ver y well be considered an international organization. However, it is important to conside r the type of international programs an institution has to offer. For example, one could ar gue that a university that simply offers several courses that deal with international busi ness is not an international organization because the institution at that point does not cro ss borders (see definition above). In contrast, it could be argued that a university that offers courses in international business and also offers a student exchange program is an inter national organization because the missing element in the previous example (of crossin g borders) is fulfilled because of the exchange program. The key point in this question , therefore, is to determine exactly when international programs make a college or universit y an international organization. (LO 1.2, AACSB: Analytical Skills, Learning Outco mes: Discuss trends in and the debate over globalization) 1-11 What are some of the differences in skills that may exist between managers in a domestic firm and those in an international firm? When compared to domestic managers, international managers, by definition, are more likely to consider business from a global perspective. In doing so, international managers should consider such variables as exchange rates, cultural diff erences, differences in the political and economic environments, trade barriers, and so for th. In contrast, the domestic manager is not likely to be concerned with any of these variabl es and will instead focus on the domestic marketplace. The international manager will probab ly see the world as the marketplace and in doing so, develop a keen awareness of the di fferences between markets, while the domestic manager will not. (LO 1.2, AACSB: A nalytical Skills, Learning Outcomes: Discuss trends in and the debate over globalization) 10 Copyright © 2020 Pearson Education, Inc. 1-12 Would you want to work for a foreign-owned firm? Why or why not? The answer to this question is, of course, based on a student’s opinion and therefore can generate a lot of discussion. Some students may already work fo r a foreign-owned firm; some may work for a foreign-owned firm and not realize it. Stud ents who work for foreign- owned companies can be asked to contrast their experiences in t he company with positions they may have held elsewhere (or can be asked to simply comment on their experiences if they have not held other positions). This can set the stage for a discussion of the merits of working for or not working for foreign-owned companies. (LO 1.2 , AACSB: Analytical Skills, Learning Outcomes: Discuss trends in and the debate over global ization) BUILDING GLOBAL SKILLS Essence of the exercise This exercise is designed to help students realize just how ext ensive the effect of international business is by asking them to consider the country of origin of items that are part of their daily lives, such as their cars, clocks, coffee makers, and computers . The exercise requires students to compile a list of products they use on a regular basis and f ind out more about the companies that produce them. Answers to the follow-up questions: 1-13 In which country is the firm headquartered? Student answers may vary. (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and the debate over globalization) 1-14 What percentage of the firm’s annual sales come from its home market? What percentage comes from other countries? Student answers may vary. (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and the debate over globalization) 1-15 Where was the item most likely manufactured? Student answers may vary. (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and the debate over globalization) 1-16 Why do you think it was manufactured there? Student answers may vary, but will probably include cost or loc ation factors, or access to resources and/or materials. (LO 1.4, AACSB: Analytical thinking , Learning Outcomes: Discuss trends in and the debate over globalization) 11 Copyright © 2020 Pearson Education, Inc. 1-17 Discuss the relative impact of international business on your daily lives. If this exercise is used at the beginning of class, prior to co verage of the chapter material, many students will probably be at a loss as to how internationa l business affects their daily lives. If the exercise is used after the chapter material has b een covered, students will probably be able to discuss things such as the fact that their cars may be made by a foreign company or that they work for a company that is foreign-owned. (LO 1.2, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and the debate o ver globalization) 1-18 Compile a combined list of the 10 most common products the average college student might use. The lists that students compile will vary; however, some of the more common items that might appear are pens, computers, cars, and beer. (LO 1.4, AACS B: Analytical thinking, Learning Outcomes: Discuss trends in and the debate over global ization) 1-19 Try to identify the brands of each product that are made by domestic firms. Students will probably identify different brands; some of the m ore common ones that are related to the products listed in Question 2 above are: Paper M ate, IBM, Ford, and Budweiser. (LO 1.4, AACSB: Analytical thinking, Learning Outcom es: Discuss trends in and the debate over globalization) 1-20 Try to identify brands of each product that are made by foreign firms. Students will probably have more difficulty with this question. Again, using the products listed in Question 2 above, foreign brand names might include: Bic, Goldstar, Honda, and Bass. (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: D iscuss trends in and the debate over globalization) 1-21 Does your list of 10 products include items with components that are both domestically made and foreign made? The answer to this question will probably require a bit of gues swork. However, of the products listed in Question 2, one could argue that the car and possibly the computer are probably assembled with both U.S.- and non-U.S.-made components . (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and t he debate over globalization) Other Applications Instructors can develop a “quiz” to be handed out on the first day of class, perhaps even before discussing the chapter material. The quiz should be in m ultiple-choice format and should ask students to identify the country of origin of variou s companies and/or products. Instructors will probably find that students are amazed to find out that products they think are American-made are not and that products they think are Germ an-made are actually Japanese-made, etc. Instructors should provide the correct answ ers right after students have taken the quiz, using a discussion format. This method wil l not only help students realize the extent of international business, but it will also help them realize that they and their classmates have a lot to learn. This type of quiz requires a bit of legwork on the part of the instructor in that companies and/or products must be researched in order to develop the quiz , but it is well worth the 12 Copyright © 2020 Pearson Education, Inc. effort. (LO 1.4, AACSB: Analytical thinking, Learning Outcomes: Discuss trends in and the debate over globalization) CLOSING CASE Demography Is Destiny The closing case describes the challenges facing countries as t heir population ages and eventually shrinks. Key Points: • Changes in national demographics have led to changes in labor policies in various countries, such as France, the U.S., England, and China. • The traditional population pyramid (broad base of youngsters, shrinking in size as age increases) is becoming a population oval or rectangle as di sease and famine are tamed. • The populations of many major economic powers are predicted to become older and smaller over the next two decades. • This will lead to fewer young workers to support each elderly retiree – also referred to as a rising old-age dependency ratio. • As the supply of labor is reduced, labor costs will likely go up. Taxes will also go up as the expenses associated with caring for the aged increase. • Consumption patterns will also change, as an aging population consumes more medical-related products and fewer new homes, automobiles, etc. Case Questions 1-22 What challenges do graying populations create for companies? The challenges are primarily in maintaining their workforce and forecasting changes in consumption patterns. Companies like Toyota are already designi ng their work areas to make them comfortable for an aging workforce. Companies also ne ed to tailor and effectively market products to aging consumers. (LO 1.4, AASCB: Reflective Thinking, Learning Outcomes: Discuss trends in and the debate over global ization) 13 Copyright © 2020 Pearson Education, Inc. 1-23 What opportunities do graying populations create for firms? There will be increasing demand for a host of new products. The case illustrates this in terms of medicine, eye care, cookware, financial services, and so on. (LO 1.4, AASCB: Reflective Thinking, Learning Outcomes: Discuss trends in and t he debate over globalization) 1-24 How will demographic changes affect the competitiveness of countries in the international marketplace? The burden of caring for the elderly will be borne disproportio nately by countries with low or negative population growth rates. These countries will have a s maller labor pool and higher age-dependency ratios. Countries with higher population growth rates (such as India) will have lower wage rates (because of an abundance of labor) and th e expense of caring for the elderly will be spread across a larger group of young worke rs. (LO 1.4, AASCB: Reflective Thinking, Learning Outcomes: Discuss trends in and t he debate over globalization) 1-25 What can countries do to counteract the impact of these demographic changes on their economic competitiveness? Nations will have to find ways to support older citizens and pr epare for the impact of an aging population upon the public treasury. This may impact tax policies and governmental spending. Nations will also have to address labor concerns as a n increasing portion of the labor supply will be employed caring for retirees, thereby decr easing the availability of labor in other sectors. (LO 1.4, AASCB: Reflective Thinking, Learning Outcomes: Discuss trends in and the debate over globalization) 1-26 What has been the impact of the one-child policy on China’s economic fortunes? Perhaps the policy worked too well. China’s working age populat ion is expected to start shrinking in 2015. The one-child policy means that as parents r etire from the workforce, there will only be one young worker to support them. As life ex pectancy increases, there may only be one young worker to support the two parents and fou r grandparents as well. Further, the one-child policy has led to an imbalance in the nu mber of males and females (more male than female children being born), which will affect the marriage market, family formation, and eldercare in China. (LO 1.4, AASCB: Reflective T hinking, Learning Outcomes: Discuss trends in and the debate over globalization) 1-27. Go to the U.S. Census Bureau’s international data base at www.census.gov. Pick two countries and analyze their changing demographics. Which one faces the more favorable demographic future? Student answers may vary. (LO 1.4, AASCB: Reflective Thinking, Learning Outcomes: Discuss trends in and debate over globalization) 14 Copyright © 2020 Pearson Education, Inc. CHAPTER 2 Global Marketplaces and Business Centers Chapter Objectives After studying this chapter, students should be able to: 1. Discuss North America as a major marketplace and business ce nter in the world economy. 2. Describe Western Europe as a major marketplace and business center in the world economy. 3. Analyze the role of Eastern Europe and Central Asia in the w orld economy. 4. Discuss Asia as a major marketplace and business center in t he world economy. 5. Assess the development challenges facing African and Middle Eastern countries. 6. Evaluate the economic prospects of the South American countr ies. LECTURE OUTLINE OPENING CASE: The Northwest Passage The opening case explores the historic search for the Northwest Passage, which may make Artic trade routes possible. Key Points • The diminishing ice cap may make a Northwest Passage feasible. • One possible route goes from North America, through the Canadi an Artic islands, to Greenland, making a route to Europe or the eastern coast of the Americas possible. • The second route follows the coastline of eastern Siberia and enters the Arctic Ocean through the Bering Strait. • These routes could develop into some of the world’s most impor tant trade corridors. 15 Copyright © 2020 Pearson Education, Inc. • These regions may also hold a great deal of commercially recov erable reserves of oil and natural gas. • The Arctic Council is the primary international organization a ddressing the region’s issues. CHAPTER SUMMARY Chapter Two provides a basic foundation of geographic, economic , and political factors necessary for understanding international business. The chapter considers the major centers of international business and analyzes existing pattern s of trade. It is designed to act as a reference chapter for students as they develop thei r knowledge of the field of international business. Most of the world's current economic activity is concentrated i n the developed countries of North America, the European Union and Japan, and the United States or the Quad (the Triad plus Canada). Include a discussion of Figure 2.1 here . Teaching Note : Students are often surprised to find out that they may actually know very little about basic world geography. An interesting exercise for students at this point in the course is to provide them with a blank world map and ask them to fill in various countries, cities, capitals, etc. This exercise not onl y provides students with a measure by which to gauge their knowledge, but it also provides instructors with a basic idea of what students already know about world geography. THE MARKETPLACES OF NORTH AMERICA The United States, Canada, Mexico, Greenland, the nations of Ce ntral America, and the various island nations of the Caribbean make up North America. The United States • The United States is the world’s largest economy. It accounts for 24 percent of the world’s $80.7 trillion GDP (as of 2017). As Map 2.1 shows, the United States enjoys a per capita income of over $59,500, the highest per capita inc ome in North America. EMERGING OPPORTUNITIES Classifying Countries by Income Level This box discusses the importance of knowing income levels when internationalizing. The box explains the differences among high-income countries (a t least $12,055 GDP/capita), lower middle-income countries (GDP/capita more tha n $955 but less than $12,055), upper middle income countries (GDP/capita betwee n $3,896 and $12,055) and lower-income countries (GDP/capita of $955 or less ) and their attractiveness to foreign direct investment. 16 Copyright © 2020 Pearson Education, Inc. • The size and political stability of the United States provide the country with a unique position in the world economy. It accounts for one-eleventh of world trade in goods and services, and therefore attracts the exports of lower-incom e nations that are trying to develop. Also, it is a favorite target for firms from higher-income countries. In addition, the U.S. dollar serves as the invoicing currency in approximately half of all international transactions, making it an important componen t of the foreign currency reserves owned by governments around the globe. It als o attracts money (known as flight capital ) fleeing political turmoil in other countries and longer-term investments. • International trade, although growing in recent years, is stil l a relatively small component of the U.S. economy. This phenomenon is probably due in part to the large geographic size of the country. Transactions that might c onstitute international trade and investment in other parts of the world are just domes tic transactions in the United States. • The majority of the largest industrial companies (as of the ye ar 2017) are headquartered in the United States and China. 126 of them are i n the United States, and another 111 in China. Discuss Figure 2.2 here. Canada • Although the second largest country in the world, Canada has a relatively small population of 37 million, most of which is concentrated along i ts southern border with the United States. The country has close political and economic ties with the United States, although it has tried to retain a separate cultural ide ntity. • The United States is a dominant market for Canadian products, receiving more than three-quarters of Canada’s output in a typical year. The tradin g relationship between the United States and Canada is the single largest bilateral tr ading relationship in the world. • Canada’s strong infrastructure and proximity to the U.S. marke t make it an attractive location for international businesses. • Canada’s political stability is currently being threatened by a long-standing conflict between French-speaking Canada and English-speaking Canada. The conflict is not only affecting investment in the country, but it is also affect ing international business because firms exporting products to Canada must be aware of the country’s labeling laws. Mexico • Mexico is the world’s largest Spanish-speaking nation. Mexico follows a federal system similar to that of the United States under which a new p resident is elected every six years. • In 1994, Canada, Mexico, and the United States initiated the N orth American Free Trade Agreement (NAFTA). Mexico signed a similar agreement with the European Union in 1999. In 2000 it signed free trade pacts with El Salva dor, Guatemala, and Honduras; and in 2004 it signed pacts with Japan and Uruguay. ( The role of trade in Mexico’s economy is explored in depth in Chapter 10’s opening c ase, “Trade By Prosperity: The Case of Mexico.) 17 Copyright © 2020 Pearson Education, Inc. Central America and the Caribbean • The two dozen other nations that make up the North American co ntinent, Central America and the island states of the Caribbean, have suffered e conomically as a result of political instability, a history of U.S. military int ervention, inferior educational systems, a weak middle class, and economic policies that have c reated large pockets of poverty. The United States and other developed count ries have contributed to the slow economic development of these countries by limiting the access of Central American and Caribbean goods into their marke ts. BRING THE WORLD INTO FOCUS The Canals of Commerce This box discusses the strategic importance of both the Suez Ca nal and Panama Canal, including the impacts upon global trade. This section al so highlights the political and historical significance of the canals. THE MARKETPLACES OF WESTERN EUROPE • The countries of Western Europe make up the second component o f the Triad, and are among the most prosperous nations in the world. They can be divided into (1) the members of the European Union (EU) and (2) the other nation s in the region (see Map 2.2). • The members of the European Union have agreed to reduce barrie rs to trade and investment among themselves in an effort to achieve greater pro sperity. The EU will be discussed in more detail in Chapter Ten. • In 2002, twelve of the EU nations eliminated their national cu rrencies, replacing them with the euro. • Twenty-eight countries belong to the EU (the United Kingdom is in the process of withdrawing from the EU, which will leave it with 27 members). • With a 2017 GDP of $17.3 trillion and a population of 513 mill ion, it is one of the world’s richest markets. • Germany, the fourth largest economy in the world, is the most economically powerful nation in the EU. In 2017 it was the world’s third largest expo rter of goods, after China and the United States, with some $1.5 trillion. (See “Bri nging the World in Focus” section, which provides an account of the impact of Mittelstand f i r m s i n Germany.) • France is politically strong and is a leading proponent of inc reased political, economic, and military union within Europe, and of increasing t he powers of the government of the EU. The United Kingdom has resisted many of t he initiatives to broaden the EU’s powers and, as a traditionally strong supporte r of free trade, provided an important counterweight to the French protectionist tendencies. However, in 2016 the British electorate voted to leave the Euro pean Union. • The newest EU members were either part of the Soviet Union (Es tonia, Latvia, and Lithuania) or allied with the Soviet Union politically and econ omically (Bulgaria, Czech Republic, Hungary, Poland, Slovakia, and Romania). • Other countries in Western Europe that are not a part of the E U include Iceland, Switzerland, Norway, Andorra, Monaco, and Liechtenstein. These countries, considered rich by the World Bank, follow free market-oriented policies. 18 Copyright © 2020 Pearson Education, Inc. THE MARKETPLACES OF EASTERN EUROPE AND CENTRAL ASIA The regions of Central (Austria, Albania, the former Soviet sat ellite states of Bulgaria, the Czech Republic, Slovakia, Hungary, Poland, Romania, Bosnia- Herzegovina, Croatia, Macedonia, Montenegro, Serbia, and Slovenia) and Eastern Europe (the former Soviet Union) continue to undergo the vast economic change that began in 1986 with glasnost (openness) and perestroika (restructuring the economy). • The Soviet Union collapsed in 1991 as a result of economic and political reforms. The various countries, of which Russia is the largest, are now part of the Newly Independent States (NIS). • The process of transforming their economies from a communist t o a capitalist system was not easy. One of the most important challenges in this proc ess is that of privatization (selling state-owned property to the public sector). The proce ss is a painful one that has caused massive unemployment. • Under the leadership of Boris Yeltsin, Russia's central govern ment staggered from one financial crisis to another. Vladimir Putin, Yeltsin's succ essor, overhauled Russia’s taxation system and has helped somewhat stabilize the economy. The initiative worked, and government revenues increased. • The five Central Asian republics of the former Soviet Union (K azakhstan, Uzbekistan, Tajikistan, and Kyrgyzstan) declared their independ ence when the Soviet Union dissolved in 1991. They are primarily Muslim count ries suffering from scarcity of arable land and from poverty. Per capita incomes ra nge from $801 per year in Tajikistan to $8,837 in Kazakhstan. THE MARKETPLACES OF ASIA Asia, home to over half the world’s population, produces less t han a third of the world’s GDP (see Map 2.4). Asia is unique in that it is a source of bot h high- and low-quality products and of both expensive and inexpensive labor. Further, the region attracts MNC investments, and is a major supplier of capital to non-Asian co untries. Moreover, its companies are increasingly pressuring European and North Americ an companies to improve their operations. Japan • Japan, with a population of 127 million, has enjoyed rapid gro wth over the last 50 years in part because of the close relationship between the Min istry of International Trade and Investment and the industrial sector. • Japan, through the use of keiretsus , has also made it difficult for foreign firms to penetrate its marketplace. A keiretsu is a large family of inte rrelated firms. Sogo Soshas (export trading companies that serve as the marketers for the keiretsu in international markets) facilitate the exports of keiretsu membe rs. • Although Japan is frequently criticized for its exports, it sh ould be recognized that its exports are a smaller portion of its GDP than is the case for m any nations. However, the country seemingly restricts importers from competing for it s domestic market. This topic will be discussed in more depth in Chapter Nine. • Japan's economy slowed in the 1990s, however, since 2009, its GDP has grown at an annual rate of 1.4 percent, however, that is also well below the 2.9 percent average growth in the world economy. 19 Copyright © 2020 Pearson Education, Inc. Teaching Note: The question of whether Japan practices free trade usually gene rates good discussion among students. Instructors can raise the quest ion in a very broad sense, and then play devil’s advocate to really ge t students thinking. Australia and New Zealand • Australia and New Zealand are traditional economic powers in P acific Asia. Some 40 percent of its population lives in Sydney or Melbourne. • Australia is rich in natural resources, but has a relatively s mall workforce. As a result, its merchandise exports, which in 2017 accounted for 17 percent of its $1.3 trillion GDP, are concentrated in natural resource industries (such as g old, iron ore, coal, etc.) and land-intensive agricultural goods (wool, beef, and wh eat). • New Zealand, the other traditional industrial power in Pacific Asia, has aggressively moved to deregulate and privatize its economy. More than two-th irds of New Zealand’s exports are attributable to its extensive pasture lan ds. These exports include dairy products, meat, and wool. Australia, China, Japan , and the United States account for approximately half of New Zealand's exports and imports. The Four Tigers The Four Tigers – South Korea, Taiwan, Singapore, and Hong Kong – enjoy the position of being among the fastest industrializing nations in the world . While many publications still classify the Four Tigers as emerging markets , they have in fact already emerged as indicated by their having achieved high-income classification b y the World Bank for more than a decade. • South Korea has grown rapidly through tight cooperation between the govern ment and chaebol . Chaebol are large, privately owned conglomerates such as Sams ung, Hyundai, and Daewoo. Today, however , many of the chaebol are ex periencing financial difficulties as a result of the Asian currency crisis . South Korea has followed a similar recipe for economic growth as Japan, focusing on gove rnment leadership in the economy, large economic combines for industrialization, and keeping imports out. • Taiwan , the island off mainland China, has relied on private business es and export- oriented trade policies to bring about its phenomenal growth. T he country exports more than 63 percent of its GDP, mainly to the United States, C hina, and Japan. Today, Taiwan has outgrown its status as a low-cost manufacturi ng center, and instead focuses on high-value-added industries, such as electro nics and automotive parts. In fact, many of Taiwan’s companies are investing in Chi na as they search for low-cost labor. • Singapore is another nation that can no longer compete with low-cost lab or countries, and instead has shifted to higher value-added activi ties, including oil refining and chemical processing. The country gains much of its economic growth through the practice of reexporting. So important are exports t o Singapore that, in 2017, they made up 166 percent of the GDP. Singapore thrives on reexporting . Singapore’s firms take advantage of the country’s excellent por t facilities to import foreign goods and then reexport them to other countries (partic ularly neighboring Malaysia).The country also is active in sophisticated communica tions and financial services for companies in Pacific Asia. 20 Copyright © 2020 Pearson Education, Inc. • Hong Kong was ceded back to the PRC in 1997 but will continue to enjoy s pecial privileges under Chinese rule until 2047. Hong Kong has a highl y educated and productive labor force for industries such as textiles and elec tronics. The country is also active in banking and financial services throughout East A sia. In addition, Hong Kong acts as a middleman for companies that wish to do business with mainland China. Hong Kong exported 161 percent of its GDP in 2017. Hong Kong also serves as a bridge between Taiwan and the PRC by converting goods made in the two enemy nations into Hong Kong goods. China • The People’s Republic of China (PRC), the most populous nation in the world, is also the world’s largest communist country. The PRC’s growth has bee n governed by a series of communist policies, the more recent of which have foc used on freer market policies. In fact, it was the freer policies and the hopes for political freedom that led to the Tiananmen Square massacre in 1989. • Today, the PRC continues to adopt market-oriented economic pol icies, but always under the watchful eye of the Communist Party. The country prod uces a unique assortment of goods, the shoddy products of the state enterpris es, and the higher quality products of private firms. • As the private sector has developed, foreign investment in the country has soared, particularly by firms located in the Four Tigers that are seeki ng innovative low-cost labor. Display Figure 2.3 here. India • India, the second most populous country, with 1.3 billion peop le. It is also one of the world's poorest (with per capita income of $1,940/year). It has relied on state ownership of key industries as a key to its economic developmen t. Until 1991, India discouraged foreign investment and limited foreign ownership of companies. In 1991, the government under the guidance of Prime Minister Rao establi shed market opening reforms, which reduced trade barriers, opened doors to increased FDI, and modernized the country’s financial sector. These reforms have s tarted to pay off, and foreign companies now consider India for investment and expansi on. Southeast Asian Countries Other countries in Asia that are affecting international busine ss include Thailand, Malaysia, and Indonesia, countries with low labor costs that ha ve been recipients of significant FDI in the last four decades. Their GDPs enjoyed an nual growth rates averaging over 7 percent from 1980 to 1995. However, the 1997-1 998 currency crisis seriously hurt these countries (See Chapter 7). Even so, they h ave continued to be the target of large flows of foreign investment, particularly by Ja panese companies seeking low-cost labor. U.S. and European MNCs have used these countrie s as production platforms as well. THE MARKETPLACES OF AFRICA AND THE MIDDLE EAST The continent of Africa covers roughly 22 percent of the world' s total land area and is composed of 54 countries. Egypt occupies the northeastern tip o f the African continent and represents the western boundary of what is commonly known a s the Middle East. 21 Copyright © 2020 Pearson Education, Inc. Africa • The African continent is home to 1.3 billion people. Though co untries on the African continent are now independent, some vestiges of colonialism rem ain and affect international business. The text provides an example of colonia l ties, specifically that Chad, Niger, and the Ivory Coast retain their ties with France and in doing so, link their currencies with the French franc and follow the legal, ed ucational, and governmental procedures of France. (see Map 2.6) Similarly, the public institutions of Kenya, Zimbabwe and the Republic of South Africa are modeled al ong British lines, giving British firms a competitive advantage in these countries . • As Africa has shed its colonial rule, the region has undergone political unrest and civil war; but today, it is turning toward market-oriented poli cies and multi-party democracies, and is attracting international businesses. • Natural resources, particularly oil, and agricultural producti on are important to the African economy. Much of the economy still revolves around subs istence farming. • South Africa is expected to be the dominant power in the conti nent during the twenty-first century. Middle East • The Middle East (the region located between northwestern Asia and northeastern Africa) is home to many oil-rich countries. It is also home to political unrest and conflict, and the region has been plagued with various wars in the last century, including the Arab-Israeli wars, the Iran-Iraq war, and the Per sian Gulf wars. • In 2017, Saudi Arabia had the largest economy ($684 billion GD P), but Qatar had the highest per capita income ($63,506 per year). • Countries in the region are trying to plan for a life after oi l and are beginning to diversify their economies. Dubai, for example, is attracting in vestors by offering all the benefits of a foreign trade zone (see Chapter 9), an excell ent infrastructure, and an entry point for exports to the region. Dubai, Qatar and Abu Dhabi have implemented another strategy to diversify their economies by le veraging their location to aid three local airlines – Emirates Air, Qatar Airw ays, and Etihad Airways. In Practice Sovereign Wealth Funds Sovereign wealth funds are a new and controversial source of ca pital in the world economy. These are monies derived from a country’s reserves that have be en set aside as an investment benefiting a country’s economy and citizens. These f unds come from a country’s central bank’s reserves that are a result of trade surpluses an d revenues generated by the sale of a country’s natural resources (i.e. oil). THE MARKETPLACES OF SOUTH AMERICA • South America's 13 countries not only share a common political history, but also share many social and economic challenges, such as inflation, i nefficient producers, and widespread poverty. (see Map 2.8) • Until recently, most South American countries have followed an economic policy of import substitution . Under such a policy, a nation attempts to stimulate the development of local industry by discouraging imports through h igh tariff and nontariff barriers. The trouble with the policy is that in most cases the domestic market is too small to allow producers to gain the necessary ec onomies of scale and 22 Copyright © 2020 Pearson Education, Inc. mass production. Consequently, domestic prices rise above price s in other markets, putting exporters at a competitiv e disadvantage. To improve the competitiveness of the companies and maintain employment levels, governments usual ly resort to subsidies and even nationalization. As a result, the government runs a budget deficit, which leads to inflation and the destruction of middle-class sa vings. • The opposite of import substitution, and the successful policy used by countries such as Taiwan, Singapore, and Hong Kong, is export promotion , in which a country grows by expanding its exports. • Today, the nations of South America are reversing their import substitution policies in favor of free trade agreements with neighboring countries, and are following a policy of privatization. As the policies begin to “go into action,” So uth America’s role in world trade is expected to increase. CHAPTER REVIEW 2-1 Describe the U.S. role in the world economy. The United States has a unique position in the world economy be cause of its size and political stability. Approximately 21 percent of the world’s GD P is accounted for by the United States. Furthermore, it acts as a magnet for lower-incom e nations that are attempting to raise their standard of living through export-oriented econo mic development strategies and for higher-income country firms that target the country’s l arge, well-educated middle class. The U.S. dollar plays an important role in global financ ial markets. Approximately one- half of all international transactions are denominated in U.S. dollars, and it is an important component of foreign currency reserves owned by governments thr oughout the world. As a result of the country’s political stability, investors frequent ly invest their money in the United States whenever political conflicts and instability flare up. T he United States is also a recipient of long-term investment. International trade remains a relatively small component of the U.S. economy, although it is becoming increasingly more important. (LO 2.1; AACSB: Analytical Thinking; Learning Outcome: Discuss the trends and d ebate over globalization) 2-2 How do differences in income levels and income distribution among countries affect international businesses? A country’s income level is a key indicator of how attractive i t will be to international businesses because it provides companies with information about the nature of a nation’s consumers and the country’s value as a production site. Countri es are typically classified according to the World Bank scheme as being high-income, middle -income, or low-income nations. Firms can use this information to help identify the be st markets for their products. For example, a firm with a range of products in different price categories might export the most expensive, sophisticated products to high-income countries , and the low-priced, standard products to low-income countries. Similarly, a firm se eking sources of low-cost labor would consider low-income countries, while a firm needing a well-developed infrastructure would look at higher-income countries. (LO 2.1, AACSB: Analytical Thinking; Learning Outcome: Discuss trends in and the debate over globali zation) 23 Copyright © 2020 Pearson Education, Inc. 2-3 What role did MITI serve in the Japanese economy? MITI, a government agency, partnered with Japanese businesses t o help guide corporate production and investment strategies in a manner that helped Ja panese businesses concentrate initially on basic industries such as steel, and th en later to move into automobiles, electronics, and so on. In this manner, MITI contr ibuted to the rebuilding of the Japanese economy after World War II. (LO 2.4, AACSB: Applicatio n of Knowledge; Learning Outcome: Describe how differences in political economy influenc e economic development) 2-4 What is a keiretsu? A keiretsu is a large family of interrelated companies that sha re ownership among each other. Typically, a keiretsu is centered around a major Japanes e bank that takes primary responsibility for meeting the keiretsu's financing needs. The members often act as suppliers, buyers, and distributors for one another. (LO 2.4, A ACSB: Application of Knowledge; Learning Outcome: Describe how differences in politi cal economy influence economic development) 2-5 Who are the Four Tigers? Why are they important to international business? The Four Tigers are South Korea, Taiwan, Singapore, and Hong Ko ng. The Four Tigers are important to international business because of their rapid stri des toward economic development. South Korea is one of the world’s fastest-growing nations. Much of its growth has come through exports. Taiwan also enjoys rapid economic gro wth and today focuses on high-value-added industries, such as electronics and automobile s. Singapore is an export intensive nation, exporting 171 percent of its GDP in 2011. It is also an important port and center for oil refining in Asia, and provides sophisticated com munications and financial services for Pacific Rim companies. Finally, Hong Kong’s highly educated and productive workforce makes it attractive to industries such as textiles an d electronics. It also provides banking and financial services for much of East Asia and is an important link for companies that want to do business in mainland China. (LO 2.4, AACSB: App lication of Knowledge; Learning Outcome: Describe how differences in political economy influence economic development) 2-6 What is a chaebol? A chaebol is a conglomerate of privately owned companies. Some examples of chaebol include Samsung, Hyundai, Daewoo, and Lucky-Goldstar. Leaders o f chaebol may be related to each other or to top government officials through ma rriage. (LO 2.4, AACSB: Application of Knowledge; Learning Outcome: Describe how differ ences in political economy influence economic development) 2-7 Discuss the role of natural resources and agriculture in Africa's economy. Much of Africa's economy is tied to its natural resources. Seve ral countries (such as Nigeria, Gabon, and Angola) rely heavily on oil exports to sustain their economies. In other countries (such as Ivory Coast and Rwanda), agricultural products are the ir only major export. Apart from exports, in many countries (such as Gambia, Mozambique, Si erra Leone, Tanzania, and Zambia), a major part of the population is "employed" in su bsistence farming. (LO 2.5, AACSB: Application of Knowledge; Learning Outcome: Describe how differences in political economy influence economic development) 24 Copyright © 2020 Pearson Education, Inc. 2-8 How did import substitution policies affect the economies of Brazil and Argentina? Import substitution policies attempt to stimulate the developme nt of local industry by discouraging imports through tariff and nontariff barriers. The policies create problems, however, when a domestic market is too small to allow producers to gain economies of scale from mass production or to permit much competition betwee n local producers. Thus, prices rise above prices in other markets, making exports uncom petitive. Governments are then forced to subsidize domestic producers, and possibly natio nalize them as a means of preserving jobs. This leads to governmental budget deficits, in flation, and the destruction of the savings of the middle class. Today, Brazil and Argentina ha ve reversed their import substitution policies and are opening up their economies so tha t they can compete in the world marketplace. See also Bringing the World into Focus: Braz il Bolsters its Families. (LO 2.6, AACSB: Application of Knowledge; Learning Outcome: Define the fundamental concepts of international business.) QUESTIONS FOR DISCUSSION 2-9 Regional trading blocs, such as the EU and NAFTA, are growing in importance. What are the implications of these trading blocs for international business? Are they helpful or harmful? How may they affect a firm’s investment decisions? Trading blocs, such as the North American Free Trade Agreement and the European Union, stand to have a great impact on international business because they change the rules of trade and in some cases, investment, presenting new opportuniti es but also new threats to both foreign and domestic companies. Whether they are harmful o r helpful is difficult to state in just a paragraph or two, but will depend on the perspective of the particular company (or individual). For companies inside a trading bloc, such agreemen ts can be seen as helpful since they can have the effect of keeping nonmember companies o ut, thus providing a degree of protection to member companies. Moreover, member comp anies are helped by the increase in effective market size that is a result of such an agreement. On the other hand, since trading agreements essentially create one large mar ket, member companies may find that they face increased competition within the bloc. For companies outside a trading bloc, particularly those that have had a strong trading relationship with a member country, trade agreements can be devastating. Companies may fin d that they face high tariff and nontariff barriers that prevent them from exporting to the companies within a trade bloc. This situation may lead firms to invest in a member country and essentially become an insider. (LO 2.1, AACSB: Reflective Thinking; Learning Outcome: Define the fundamental concepts of international business.) 2-10 Many American and European businesspeople argue that the keiretsu system in Japan acts as a barrier to foreign companies entering the Japanese market. Why do you think they believe this? The fact that the Japanese market is closed to foreign companie s is a popular, and some would argue mistaken, belief among American and European execut ives. The Japanese keiretsu is a family of interrelated firms in which each firm t akes a small ownership position in each of the other companies. The strong ties among keiretsu members may lead to buyer-supplier relationships (if the keiretsu is a vertical one ) and may allow firms to take on high-risk investments. Many American and European executives be lieve that such relationships make it difficult for them to supply their produc ts to Japanese firms, and even break into the market itself. Furthermore, they believe that th e keiretsu puts European and 25 Copyright © 2020 Pearson Education, Inc. American firms at a distinct competitive disadvantage when deal ing with the Japanese. Others, however, will argue that with patience and hard work, c ompanies (for example, Toys “R” Us) can enjoy success in the Japanese market. (LO 2.4, AACS B: Analytical Thinking; Learning Outcome: Discuss trends in and the debate over globali zation) 2-11 Ethnic ties, old colonial alliances, and shared languages appear to affect international trade. Why might this be so? If true, how does this affect international businesses' strategies regarding which markets to enter? Ethnic ties, old colonial alliances, and shared languages affec t international trade because they may provide the basis from which a nation emerged. For exa mple, although the United States, a former colony of Great Britain, declared its independ ence centuries ago, it still shares with its former ruler the same language, cultural herita ge, and many beliefs about issues such as democratic rule. These ties with Britain have he lped to shape the United States into the country it is today. For American companies, th is relationship is beneficial because not only do American companies have easy access to the British market (and British firms to the American market), but they may also find i t easier to enter other markets where, for example, English is the spoken language. In addition , if the countries in question have maintained strong ties, it is likely that they will share enemy countries, a factor that could further impact the strategy of an international firm. (LO 2.1, AACSB: Analytical Thinking; Learning Outcome: Discuss trends in and the debate ov er globalization) 2-12 South Korea is prominently featured in many lists of “emerging markets.” (For example: see Table 1.2 on page 16) Is South Korea an emerging market? Or has it already “emerged”? Defend your answer. How would you define an “emerging market”? Emerging markets are countries whose recent growth or prospects for future growth exceed that of traditional markets. Economic growth is defined as the increasing capacity of the economy to satisfy the wants of the members of society. Economi c growth is enabled by increases in productivity, which lowers the inputs (labor, capi tal, material, energy, etc.) for a given amount of output. Lowered costs increase demand for goods and services. Economic growth is also the result of population growth and of the intro duction of new products and services. (LO 2.4, AACSB: Analytical Thinking; Learning Outcome : Discuss trends in and the debate over globalization) 2-13 What can African countries do to encourage more foreign investment in their economies? The nations of Africa are in a difficult situation. Years of po litical unrest and civil war have labeled the region as a high risk one. If Africa expects foreig n firms to invest in the region, it must try to lose the label. The process has already been starte d with the implementation of new market-oriented policies, and the region is beginning to at tract the attention of international firms. To continue the process, Africa can develo p more tax-free zones such as the one located in Mauritius, and provide other incentives to a ttract foreign companies. In addition, efforts must be made to contain any remaining civil u nrest, particularly attacks against foreigners. (LO 2.5, AACSB: Reflective Thinking; Learni ng Outcome: Describe how differences in political economy influence economic development )