international business environment

Prentice Hall, 2002 Chapter 5Daniels

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Chapter Five

Linkages Among Countries


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Chapter Objectives To understand why nations choose to cooperate

with each other To interpret a nation’s incentive to trade goods

and services with other nations To discern the scale and scope of capital links

among nations To realize how the movement of people among

nations creates and fortifies links To appreciate the fragility of links among

nations and the institutions that monitor them To grasp the idea of the Internet in promoting

links among nations


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IntroductionThe world economy during the past 50 years

has become much more international• Many more trades• Much higher direct investment flows• More people moving across national borders

Globalization depends on cross-national links• Links: a convergence of interest or strengthening

of relationships that spurs people, companies, or institutions of one nation to deal with those of another


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Introduction


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Trade Links Among NationsSince 1950, the volume of global trade has

grown 16-foldIn 1999, total worldwide cross-border exports

exceeded $5,460 billion for physical goods produced in agriculture, mining, and manufacturing and $1,340 billion for services such as transportation, tourism, and entertainment

Balance of payments: statistical record of a country’s international transactions for a given time period


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Trade Links Among NationsThe service sector is the largest component of the

U.S. economy• Forecasters see U.S. service exports hitting

$650 billion by 2010Trade in goods and services is perhaps the most

visible way countries create linksIncentives that move nations to trade with other

nations:• Mercantilism: encourages a nation to form

links with two sorts of other nations


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Trade Links Among NationsAbsolute and comparative advantage

• Key question of absolute advantage is figuring out what products a country should specialize in making for exports

• Natural advantage: occurs because of innate features of a nation such as climate conditions

• Acquired advantage: occurs when a nation develops specialized skills and technologies

• Factor proportions


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Trade Links Among NationsNational competitive advantage

• Four country-specific attributes that make up the national or Porter diamond:Factor endowments, demand conditions, related

and supporting industries, and firm strategy, structure, and rivalry

• The theory of national competitive advantage holds that the degree to which a country can achieve international success in a certain industry is a function of its national diamond

• Chance and government can significantly affect the character of a national diamond

Strategic trade theory: suggests that a country may predominate in the export of a good or service simply because it was fortunate enough to have one or more of its firms among the first to produce it

First-mover advantage


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Trade Links Among Nations


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Capital Links Among NationsBretton Woods Agreement: governed world

monetary markets from the end of WW II through the early 1970s• Collapsed due to pressure from persistent U.S.

trade deficits, emergence of growing stocks of Eurodollars, and accelerating inflation

Floating exchange rates: let governments, MNEs, entrepreneurs, traders, and people begin building capital links


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Capital Links Among NationsFinancial liberalization has tremendous effects in three

areas:• Foreign direct investment: a form of international

involvement that involves a company’s significant equity stake in or effective management control of a foreign company

• World Trade Organization (WTO)United Nations Conference on Trade and Development

(UNCTAD)• International bond market: made up of all bonds

sold by governments, issuing companies, and organizations outside their home nationInternational Monetary Fund (IMF)

• International equity market: made up of all stocks bought and sold outside the home country


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People Links Among Nations A vibrant source of links among nations is the many

people who leave one nation for another• International immigrant: a person who takes up

residence or who remains for an extended stay in a foreign countryVoluntary migrantsForced migrants

Current trends:• The wealthier nations continuing to attract and

exchange highly skilled labor, the tech nomads The reality of globalization in business means that few

nations can philosophically or practically close their borders to voluntary or forced international immigration


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Regional IntegrationThe freer movements of products, capital, and people are

powerful tools to build links among countriesVirtually all active alliances today are made up of

integration agreements among the neighboring countries in a particular region of the world

North American Free Trade Agreement (NAFTA)• European Union (EU)• Andean Pact• Association of South East Asian Nations

Regional integration: refers to the formal agreement among a set of nations to reduce and eventually eliminate all tariff and nontariff barriers that impede the free flow of goods, services, and factors of production among each other


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Breaking LinksLinks among nations and regions are not

easily achieved or sustainedIntegration creates enormous economic

benefits but can also impose high costs• Sacrifice of national sovereignty• Sacrifice of cultural heritage• Environmental preservation

Nongovernmental organizations


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Protecting Links Among Nations The globalization of business depends on

maintaining and broadening the existing web of links among nations and regions• World Trade Organization: important to the trade and

capital links Currently, the EU and NAFTA are the key

regional groups expanding their web of links The integrity of the links that support

globalization ultimately depends on an informed global society that sees the virtue and accepts the responsibility of the freer movement of products, people, and capital

Worldwide role of the Internet

international business environment

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