What’s different about International Business? The basic facts we need to consider when thinking about whether, or how, to go international are the same as domestic, in terms of categories, But enormously variable in terms of answers. Three categories in particular become variables in the international context which we tend to take for granted, or assume are fixed, in the domestic context: -Law - Government -Culture
What is a market? A market is Enough people -with enough money -who want
Population -High rate of growth in developing countries - Static in Europe, Japan, North America -Emerging middle class, particularly China Mexico India Chile Brazil Argentina Indonesia? - Shift in age distribution -Impact of disease - AIDS - malaria, TB making a comeback
Population (cont. ) -Migration from countryside to cities - urban/rural tensions Canada is typical - during 20 th c. we went from 95/5 to 5/95 rural/urban split -Migration from one country to another - Colonial inheritance Have both generated -ethnic/tribal/linguistic tensions Canada Indonesia Yugoslavia Israel South Africa Nigeria USA Central America
Income Distribution Does development increase poverty? Problem of interpretation of urban poverty - People are rational - they are better off than in the countryside Urban poverty is more visible Perceptual bias - idealistic notions of a rural utopia Family structure - Nuclear and sub-nuclear families Erosion of the extended family Shift from polygamy to monogamy eg. in the Middle East Breakdown of two-parent family structure in the West
Problems with Economic Data 1. Bad counting - e. g Zimbabwe census 1981 2. Outside the cash economy - subsistence agriculture - barter - household production 3. Outside the statistical net “black economy” “unofficial economy” “informal sector” - Partly tax evasion - Partly simply not recorded - but often surprising results -age - entrepreneurship - average income
Problems of Comparability Foreign Exchange - Market rate? - or PPP (Purchase Power Parity) - or the Mc. Burger Index?
PPP vs. Exchange Rate - Examples 1. Petrol/Gasoline per litre For’n X/C Market Bahrain 1 BD Bahrain price 100 fils = 0. 1 BD Actual Local price =0. 1 PPP Exchange Rate UK = £ 1. 65 = 0. 16 =£ 0. 80 =0. 80/0. 1 = 8. 00 Canada = $4. 00 =$0. 40 =$0. 65 =0. 65/0. 1 =6. 50
PPP vs. Exchange Rate - Examples 2. Unskilled Labour - per hour Bahrain 1 BD UK = £ 1. 65 Canada = $4. 00 Bahrain price 800 fils = 0. 8 BD = £ 1. 32 =$3. 20 Actual Local price =0. 1 =£ 3. 00 =$7. 00 For’n X/C Market PPP Exchange Rate =3. 00/0. 8 = 3. 75 =7. 00/0. 8 =8. 75
PPP vs. Exchange Rate - Examples 3. Rent - 3 br furnished bungalow -middle class part of town - per month For’n X/C Market Bahrain price Actual Local price PPP Exchange Rate Bahrain 1 BD UK = £ 1. 65 Canada = $4. 00 BD 450 = £ 742. 50 =$1800 =£ 6001000 =$8001000 =600 - 1000/450 = 1. 33 - 2. 22 =800 -1000/450 =1. 78 - 2. 22
Trends in Trade Foreign Trade is distributed very unevenly throughout the world: 1. Difference in absolute size of trade 2. Differences in relative importance of trade to economy 3. Differences in the economic basis of trade - commodities - manufactured goods -services - tourism - finance - consultancy/accounting/lawyers
Trends in Foreign Trade 1. National economies (especially developed countries) going toward service economies 2. Trade in manufactured goods is fastest growing component of international trade 3. Trade is becoming more multilateral (But Canada is an exception - our trade is more heavily dominated by the USA) 4. Composition of trade has changed
Reasons for Changes 1. Spread of technology and know-how 2. Cheaper, more efficient transport 3. Rising real wages in some countries, causisng shifts in production to low wage areas 4. Effects of quotas and other administrative barriers in shifting production 5. Development of export promotion strategies by Newly Industrializing Countries
Foreign Direct Investment ( capital exports by the private sector) - Heavily concentrated among wealthy countries - 3/4 to Europe, Japan and America - Growth of MNE’s - about 1/3 of total world trade is intra-firm
Non Economic Issues Becoming More Significant: - Environment - Human Rights - Democracy There is increasing concern for non-economic costs, or better yet, Externalities: costs incurred by the society, but not absorbed by the company or reflected in its balance sheet. Non-economic issues raise ethical and legal problems. Initiatives for change often come from the developed world, but LDC’s often respons “we can’t afford that!”
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