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International BusinessStrategy, Management & the New Realitiesby Cavusgil, Knight and Riesenberger : 

International Business: Strategy, Management, and the New Realities 1 International BusinessStrategy, Management & the New Realitiesby Cavusgil, Knight and Riesenberger Chapter 7 Government Intervention in International Business

Slide 2: 

International Business: Strategy, Management, and the New Realities 2 Learning Objectives Government intervention in international business Rationale for government intervention Instruments of government intervention Government intervention, economic freedom, and ethical concerns Evolution of government intervention How firms should respond to government intervention

The Nature of Government Intervention : 

International Business: Strategy, Management, and the New Realities 3 The Nature of Government Intervention Governments intervene in trade and investment to achieve political, social, or economic objectives. Barriers benefit specific interest groups, such as domestic firms, industries, and labor unions. Jobs are created by protecting industries from foreign competition. Government intervention alters the competitive landscape- by hindering or helping the ability of its firms to compete internationally Government intervention is an important dimension of country risk.

Key Concepts : 

International Business: Strategy, Management, and the New Realities 5 Key Concepts Protectionism refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Government intervention arises typically in the form of tariffs (duty), nontariff trade barriers (e.g. quota), and investment barriers (target FDI). Tariff is a tax imposed on imports, effectively increasing the cost to the buyer. A nontariff trade barrier refers to a government policy, regulation, or procedure that impedes trade. Quota is a quantitative restriction placed on imports of a specific product over a specified period of time.

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International Business: Strategy, Management, and the New Realities 6 Customs refer to checkpoints at ports of entry in a country where government officials inspect imported products and levy tariffs. Governments impose trade and investment barriers to achieve political, social, or economic objective

Examples of Protectionism in the U.S. : 

International Business: Strategy, Management, and the New Realities 7 Examples of Protectionism in the U.S. U.S. tariffs on imported steel: 2000s- The Bush administration imposed tariffs on the import of foreign steel into the U.S. because competition from foreign steel manufacturers had bankrupted several U.S. steel firms, and this was to give the U.S. steel industry time to restructure and revive itself. Higher material costs made these firms less competitive- increased the production costs for firms that use steel, such as Ford, Whirlpool, and General Electric- and reduced prospects for selling their products in world markets. The steel tariffs were removed within two years.

Protectionism May Hinder Competitiveness : 

International Business: Strategy, Management, and the New Realities 8 Protectionism May Hinder Competitiveness Japanese voluntary export restraints: 1980s- The number of Japanese vehicle imports were voluntarily controlled by Japan to help insulate the U.S. auto industry. In this protected environment, Detroit automakers had less of an incentive to improve quality, design, and overall product appeal. Thus, government intervention motivated by protectionism has weakened Detroit’s ability to compete in the global auto industry.

Consequences of Protectionism : 

International Business: Strategy, Management, and the New Realities 9 Consequences of Protectionism Protectionist policies may lead to price inflation- when supply is restricted, domestic prices increase. By restricting variety, tariffs may also reduce the choices available to buyers. In a complex world, there are adverse unintended consequences- thus due diligence- careful planning and implementation- is paramount when considering government intervention.

Rationale for Government Intervention : 

International Business: Strategy, Management, and the New Realities 10 Rationale for Government Intervention Tariffs and other forms of intervention can generate a substantial amount of revenue. Intervention can ensure the safety, security, and welfare of citizens. Intervention can help a government pursue broad-based economic, political, or social objectives. Intervention can help better serve the interests of the nation’s firms and industries.

Special Interest Groups Trigger Protectionism : 

International Business: Strategy, Management, and the New Realities 11 Special Interest Groups Trigger Protectionism Trade dispute - the U.S. government imposed a $50 per ton duty on the import of Mexican cement after U.S. cement makers lobbied the U.S. Congress. Mexican imports can reach 10 percent of U.S. domestic cement consumption. The U.S. is one of the world’s largest cement consumers and, suffers from shortages, which are exacerbated by import restrictions. Mexico proposed substituting import quotas instead of the high cement import tariffs.

Two Types of Rationale for Protectionism : 

International Business: Strategy, Management, and the New Realities 12 Two Types of Rationale for Protectionism Defensive barriers safeguard industries, workers, special interest groups, protect infant industries and to promote national security (export controls). Offensive barriers pursue a strategic or public policy objective, such as increasing employment or generating taxes.

Protection of the National Economy : 

International Business: Strategy, Management, and the New Realities 13 Protection of the National Economy Proponents argue that firms in advanced economies cannot compete with those in developing countries that employ low-cost labor, thus governments should impose trade barriers to block imports. Critics counter that protectionism is at odds with the theory of comparative advantage, which argues for more international trade, not less- trade barriers interfere with country-specific specialization of labor, which in turn delivers superior living standards. Blocking imports reduces the availability and increases the cost of products sold in the home market.

Protecting an Infant Industry : 

International Business: Strategy, Management, and the New Realities 14 Protecting an Infant Industry Emerging industry firms may lack experience, technological expertise and economies of scale. An infant industry may need protection from foreign competitors, e.g. temporary trade barriers on foreign imports. Infant industry protection has allowed some countries to develop modern industrial sectors. Drawbacks: Difficult to remove - tend to persist indefinitely. Tend to remain dependent on government protection. Industry inefficiencies result in higher prices.

National Security Arguments : 

International Business: Strategy, Management, and the New Realities 15 National Security Arguments Countries impose trade restrictions on products viewed as critical to national defense and security, such as military technology and computers. Trade barriers can help retain domestic production in security-related products- computers, weaponry, and certain transportation equipment. Export controls- governments manage or prevent the export of certain products or trade with specific countries; e.g. many countries do not allow the export of plutonium to North Korea because it can be used to make nuclear weapons.

Preserving National Culture and Identity : 

International Business: Strategy, Management, and the New Realities 16 Preserving National Culture and Identity Governments seek to protect certain occupations, industries, and public assets central to national culture: Switzerland imposed trade barriers to preserve its long-established tradition in watch making. Japanese restrict the import of rice because it is central to the nation’s diet and food culture. U.S. opposed Japanese investors’ purchase of the Pebble Beach golf course in California, New York’s Rockefeller Center, and the Seattle Mariners baseball team, all considered to be part of the national heritage. France does not allow significant foreign ownership of its TV stations because of concerns that foreign influences will taint French culture.

National Strategic Priorities : 

International Business: Strategy, Management, and the New Realities 17 National Strategic Priorities Intervention encourages the development of industries that bolster the nation’s economy. Countries with many high-value-adding industries —such as IT, pharma, automotive, or financial services — create better jobs and higher tax revenues. Examples: Germany, Japan, Norway, South Korea—devise policies that promote the development of relatively desirable industries. Deciding which industries to support is challenging; it is difficult to predict which industries will produce comparative advantages. May result in continuous subsidization of underperforming industries.

Increasing Employment : 

International Business: Strategy, Management, and the New Realities 18 Increasing Employment Import barriers may be imposed to protect employment in designated industries. By insulating domestic firms from foreign competition, national output is stimulated, leading to more jobs in the protected industries. Most effective- import-intensive industries that employ much labor to produce normally imported products. Example- A joint venture between Shanghai Automotive Industry Corporation (SAIC) and Volkswagen created jobs in China.

Instruments of Government Intervention : 

International Business: Strategy, Management, and the New Realities 19 Instruments of Government Intervention Primary types are tariffs and nontariff trade barriers. Nontariff trade barriers such as quotas, local content requirements, and bureaucratic procedures, can be more of a challenge for firms as they may be applied is it discretionary form of market protection. The United Nations estimates that trade barriers alone cost developing countries over $100 billion in lost trading opportunities with developed countries every year.

How Firms Should Respond to Government Intervention : 

International Business: Strategy, Management, and the New Realities 22 How Firms Should Respond to Government Intervention Take advantage of foreign trade zones. FTZs (or free ports) create jobs and stimulate local economic development. FTZs are areas where imports receive preferential tariff treatment. Example- A successful experiment with FTZs has been the maquiladoras—export-assembly plants in northern Mexico. They produce components typically destined for the U.S. Maquiladoras enable firms from the U.S., Asia, and Europe to tap low-cost labor, favorable taxes and duties, and government incentives, while serving the U.S. market. 4. Seek favorable customs classifications for exported products. Reduce exposure to trade barriers by appropriately classifying products according to the harmonized product code.

How Firms Should Respond to Government Intervention : 

International Business: Strategy, Management, and the New Realities 23 How Firms Should Respond to Government Intervention 5. Take advantage of investment incentives and other government support programs. Government assistance in the form of subsidies and incentives helps reduce the impact of protectionism. 6. Lobby for freer trade and investment. Increasingly, nations are liberalizing markets in order to create jobs and increase tax revenues: Mid-2000s -the Doha round of WTO negotiations sought to make trade more equitable for developing countries. To increase the effectiveness of their lobbying efforts, foreign firms may hire former government officials. In the long run, firms should take a seat with public-sector decision makers who negotiate interventionist activities with foreign governments.

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