Rational for Govern Intervention UnitII

8/3/2019 Rational for Govern Intervention UnitII

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International Business: Strategy, Management, and the New Realities 1

Government Intervention inInternational Business


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The Nature of GovernmentIntervention

An important dimension ofcountryrisk.

Governments intervene in trade and

investment to achieve political,social, or economic objectives. Intervention alters the competitive

landscape by hindering or helping the

ability of firms to competeinternationally. But, intervention is at odds with the

theory of comparative advantage,

which argues for more internationaltrade, not lessInternational Business: Strategy, Management, and the New Realities 2


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Key Concepts Protectionism: national economic policies

that restrict free trade, usu. intended to raiserevenue or protect domestic industries fromforeign competition.

Government intervention arises in various

forms: Tariff-- a tax on imports (e.g., citrus,

textiles) Nontariff trade barrier -- government

policy, regulation, or procedure thatimpedes trade

Quota -- quantitative restriction on importsof a specific product (e.g., imports of

Japanese cars)



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Example of Protectionism: U.S.Steel Industry

Bush administration imposed tariffs onimports of foreign steel to protect U.S.steel manufacturers from foreigncompetition, aiming to give the U.S. steel

industry time to restructure and reviveitself.

Resulting higher steel costs:

increased production costs for firms that usesteel, such as Ford, Whirlpool and GeneralElectric

reduced prospects for selling products in worldmarkets

made U.S. steel firms less competitiveInternational Business: Strategy, Management, and the New Realities 4


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Example of Protectionism: AutoIndustry

In 1980s, the U.S. government imposedvoluntary export restraints (quotas) onimports of cars from Japan, to insulateU.S. auto industry.

Result 1: Detroit automakers had less ofan incentive to improve quality, design,and overall product appeal.

Result 2: Detroits ability to compete inthe global auto industry was weakened.



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Consequences of

Protectionism Reduced supply of goods to buyers Price inflation Reduced variety, fewer choices

available to buyers Reduced industrial competitiveness Various adverse unintended

consequences (e.g., while the U.S.dithers, other countries can race ahead)



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Rationale for GovernmentIntervention

1. Tariffs and other barriers can generategovernment revenue.

2. Safety, security, and welfare of

citizens (e.g., FDA barriers on drugimports; barriers intended to protectnational security)

3. Broad-based economic, political, or

social objectives (e.g., job creation)4. Reduce foreign competition

5. Protect infant industries

6. Preserve national culture and identityInternational Business: Strategy, Management, and the New Realities 7


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Special Interest Groups TriggerProtectionism

In a trade dispute, the U.S. governmentimposed a $50 per ton duty on theimport of Mexican cement after U.S.cement makers lobbied the U.S.Congress.

Mexican imports can reach 10 percentof U.S. domestic cement consumption.

The U.S. is one of the worlds largest

cement consumers and, suffers fromshortages, which are exacerbated byimport restrictions.

Mexico proposed substituting import

quotas instead of the high cementim ort tariffs.International Business: Strategy, Management, and the New Realities 8


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Tariffs are Widespread

Developing economies -- tariffs arecommon.

Advanced economies -- tariffs still a factormainly in textiles, clothing, andagricultural products (e.g., the U.S.recently collected more tariff revenue onshoes than on cars; $1.63 billion vs. $1.60billion in 2001).

The European Union applies tariffs of up to236 percent on meat, 180 percent oncereals, and 17 percent on tennis shoes.

United Nations estimates that tradebarriers in general cost developing

economies over $100 billion in lost tradingopportunities with developed countriesInternational Business: Strategy, Management, and the New Realities 11


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WTO: A Force for ReducingTariffs

Governments have tended to reducetariffs over time.

Tariff reduction was the primary goal ofthe General Agreement on Tariffs and

Trade (GATT)

In 1995, the GATT became the World

Trade Organization (WTO). Countries as diverse as Chile, Hungary,

Turkey, and South Korea haveliberalized their previously protectedmarkets, lowering trade barriers.International Business: Strategy, Management, and the New Realities 14


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Nontariff Trade Barriers

Government policies that restrict trade withoutimposing a

direct tax or duty. Quotasrestrict the physical volume or value of

products that firms can import into a country. Voluntary export/import restraints are

voluntary quotas imposed bygovernmentswhereby firms agree to limit exports or imports ofcertain products.

Import license a formal permission to import,which restricts imports in a way that is similar toquotas- a complicated, bureaucratic process insome countries

Government regulations and technicalstandards e.g., safety regulations for motorvehicles, health regulations for hygienic foodpreparation, labeling requirements identifyingcountry of origin, etc.

Administrative or bureaucratic proceduresInternational Business: Strategy, Management, and the New Realities 15


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Investment Barriers

FDI and ownership restrictions are common inindustries

such as broadcasting, utilities, air transportation,military

technology, and financial services, oil, fisheries,etc.

Examples-

Canada government restricts foreignownership of local movie studios and TV showsto protect its indigenous film and TV industryfrom excessive foreign influence.

Mexico government restricts FDI by foreign

investors to protect its oil industry. Services sector FDI and ownership restrictionsInternational Business: Strategy, Management, and the New Realities 16


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Currency Controls

Restricts the outflow ofhard currencies(such as the U.S. dollar, the euro, andthe yen), and occasionally the inflow of

foreign currencies.

Repatriation of profits restrictions onrevenue transfer from profitable

operations back to the home country. Used to conserve valuable hard

currency, reducecapital flight;particularly common in developing

countries.International Business: Strategy, Management, and the New Realities 17


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Subsidies

Government grants (monetary orother resources) to firms orindustries, intended to ensure their

survival by facilitating production atreduced prices, or encouragingexports.

Examples: cash disbursements,material inputs, services, tax breaks,provision of infrastructure,government contracts at inflatedprices.

For example, in France thegovernment provides large subsidiesInternational Business: Strategy, Management, and the New Realities 18


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Examples of Subsidies

China- Firms such as China Minmetals ($12 b.annual sales) and Shanghai Automotive ($12 b.annual sales), are in fact state enterprisespartly owned by the Chinese government,

receiving huge financial resources. In Europe and the U.S., governments provide

agricultural subsidies to supplement theincome of farmers and help manage the supplyof agricultural commodities.

In Europe, the Common Agricultural Policy(CAP) is a system of subsidies that representsabout 40 percent of the European Union'sbudget, amounting to billions of eurosannually.

The U.S. government grants subsidies for suchcommodities as wheat, barley, cotton, milk,International Business: Strategy, Management, and the New Realities 19


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Investment Incentives

Similar to subsidies, transfer paymentsor tax concessions made directly toindividual foreign firms to entice them

to invest in the country.

Examples Hong Kong government put up most of

the cash $1.74 billion to build HongKong Disneyland.

Austin, TX and Albany, NY competed tohave Samsung Electronics build asemiconductor plant in their regions.

Austin won, offering $225m in tax reliefInternational Business: Strategy, Management, and the New Realities 20


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Market Liberalization inIndia

Independence from Britain in 1947.

Adopted quasi-socialist model of isolationismand strict government control.

Poor economic performance due to high tradeand investment barriers, state intervention inlabor and financial markets, a large publicsector, heavy regulation of business, andcentral planning.

Early 1990s markets opened to foreign tradeand investment, free-trade reforms,privatization of state enterprises.

Protectionism has declined, but high tariffs

(averaging20%) and FDI limitations are still in lace.International Business: Strategy, Management, and the New Realities 21


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Market Liberalization in China

1949 Mao Tse Tung established acommunist regime, featuring centralizedeconomic planning, agricultural sector,

inefficient state-run industries, verylimited international trade.

1980s began to liberalize economy.

1992 joined Asia-Pacific Economic

Cooperation (APEC) group, a free-tradeorganization.

2001 joined the WTO; committed toreducing trade barriers and protectingintellectual property.

2004 Chinas GDP was four times theInternational Business: Strategy, Management, and the New Realities 22


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How Firms ShouldRespond to

Government Intervention1. Research to gather knowledge and

intelligence. Understand the extentand nature of trade and investment

barriers, and governmentintervention in each target market.

2. Choose the most appropriate entrystrategies. Most firms chooseexporting as their initial strategy.But, if high tariffs are present, FDI,joint ventures, or licensing may bebetter alternatives.



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How Firms Should Respond(contd)

3. Take advantage of foreign trade zones.Areas where imports receive preferentialtariff treatment. E.g., maquiladoras, assemblyplants in northern Mexico that produce

components typically destined for the U.S.Maquiladoras enable firms from the U.S.,Asia, and Europe to tap low-cost labor,favorable tariffs, and government incentives.

4. Seek favorable customs classifications forexported products. Reduce exposure to tradebarriers by appropriately classifying productsaccording to the harmonized product code.



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How Firms Should Respond(contd)

5. Take advantage of investment incentivesand other government support programs.Government assistance in the form ofsubsidies and incentives helps reduce costs.

6. Lobby for freer trade and investment. Forexample, Mid-2000s the Doha round of WTO

negotiations sought to make trade moreequitable for developing countries.

To increase lobbying effectiveness, foreignfirms may hire former government officials.

In the long run, firms undertakenegotiations with public-sector decisionmakers

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Rational for Govern Intervention UnitII

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