Exporting and Trading info

In 1990, the management of Bata, Ltd. had a critical decision to make concerning the possibility of reinvesting in Czechoslovakia (now the Czech and Slovak Republic). This may not seem like a major concern at first, but there is significant history between Bata and Czechoslovakia. As war swept across Europe in 1939, Tom Bata, Sr., was faced with a difficult situation. His father, the ninth generation of a family of shoemakers in Czechoslovakia, had built a worldwide shoe net- work in 28 countries, using machinery and the mass-production technology of the 1920s. Tom was left with the responsibility of panding that empire during a period of great uncertainty world- wide. Because of the invasion of the Nazis and the uncertain future that occupation held, Bata took 100 Czech families and emigrated to Canada to preserve his father's business.    Since that time, Bata's decision has been rati- fied through strong growth worldwide. Bata, Ltd. is a-family-owned busin...

Summary of the Legal,Political,and Economic Environments Facing Buciness   The role of the political system is to integrate the society; the role of the   economic system is to allocate scarce resources.   Most complex societies are pluralistic; in other words, they encompass a variety of ideologies   In ^democracies there is wide participation in the decision-making process.   whereas in totalitarian states only a relative few may participate. Totalitarian   regimes can be communistic, theocratic, or secular. Totalitarian regimes are   beginning to accede to greater participation in the decision-making process.   jMost  democracies have multiple  political parties, whereas some, such as   Mexico, have one dominant political party. i The economic system determines who owns and controls resources. In a mar-   ket system individuals  allocate and control resources; in a command econ-   omy the government ...

          The major changes in the future will involve important political           and economic developments. It is clear from the events of the late 1980s and early 1990s that totalitarianism is being challenged—but is fighting back—throughout the world. Significant political instability will be the rule rather than the exception in countries with shifting political ideologies. In the Soviet Union and China, the pressures for  political liberalization  will con- tinue, although the  price is likely to be significant human loss. A new gen- eration of leaders may have to rise up to lead these countries into the twenty- first century.     Economically, the same type of liberalization will take place in the cen- trally planned economies. Those countries, however, will probably opt for a form of democratic socialism rather than a pure laissez-faire capitalist system such as that found in Hong Kong. Tra...

Multilateral Institutions Multilateral Institutions The road to development is complex, and it is difficult for the developing countries to meet the challenges alone. The International Monetary Fund (IMF) and World Bank are instrumental in the development process. The IMF provides financial support for countries suffering severe balance-of-payments problems, a group that includes most of the  developing countries. As noted earlier, this financial assistance, although multilateral, comes with strings at- tached. Countries are often forced to make substantial and politically unpop- ular concessions for  IMF support. At  times, countries have felt that IMF financing entails too much  loss of sovereignty.     The  World Bank also provides financing to  low-income developing countries, especially in infrastructure development, such as transportation, communications, and power.  The World Bank tends to take a more active role in hel...

NORTH-SOUTH DIALOGUE In 1964, in Geneva, the first session of the United Nations Conference on Trade and Development (UNCTAD) was held, leading to what is now called the North-South dialogue. (The North refers to the industrialized countries and the South to the developing countries.)     None of the pronouncements emanating from the session was particu- larly new, but the collective  resolve of the developing countries (i.e., the South) appeared to be stronger than ever.     Since 1974 various meetings focusing on specific  problems  have been held in order to continue the North-South dialogue. In  particular, the  devel- oping countries have expressed concern in the following areas: stabilization of export earnings and commodity prices, reduction of trade barriers  in the developed countries, increased aid, debt moratorium, and additional private investment. Their basic concern is how to transfer wealth from the develope...

Poverty The 1990 issue of the World Development Report focused on poverty. In spite of the rapid growth in the world over the past three decades, especially in income, consumption, and some broader measures of well-being, over 1 bil- lion people in the developing countries live in poverty.  The poverty  line is only $370 per year.  Even on broader issues of well-being conditions are sig- nificantly worse in the developing countries than they are in the high-income countries.  For example, life expectancy in Sub-Saharan Africa  is only 50 years, whereas it is 80 years in Japan.     Table 2.5 identifies some broad measures for poverty in the  developing world. Africa and developing Asia  are significantly worse off  than Latin America. The mortality and life-expectancy rates are not significantly differ- ent, but the gross numbers and percentage of the population below the pov- erty line are much worse.     The Wo...

National Debt One of the consequences of the rapid increase in the cost of oil during the 1970s was the equally rapid increase in debt as developing countries sought assistance from private or government institutions in other countries to fi- nance oil imports and other products necessary for development. Debt in the developing countries increased from less than $100 billion in 1970 to $1336.6 billion in 1990.22 The two largest borrowing regions were Latin America and Africa.     Figure 2.7 identifies the major developing country debtors. Note the tre- mendous size of the debt in countries such as Brazil and Mexico. It  is inter- esting to note that in 1986 South Korea  was in third place, whereas it dropped to tenth place in 1988. A major problem with debt is that countries have a difficult time paying it off. The debt service ratio, the ratio of interest payments plus..principal amortization to exports, is quite high,  especially in the wester...

Payments Imbalances  Table 2.4 highlights the current account balances (exports minus imports of _ goods, services, and  unilateral transfers) of different categories of countries  during the period 1981-1990.  The performance in the developing countries  has been mixed. Overall, the deficit improved until the mid-1980s, and it has  fluctuated over the last half of the decade. It has definitely improved in the  Asian region, however.       The industrial countries as a group did not do very well, largely because  of the performance of the United States. The U.S. deficit on its current account Germany. The huge  U.S. deficit has been a constant  source of contention between the United States and the rest of the world. Since a country's balance of payments must always be stable, the United States has been able to offset its current account deficit with an inflow of capital from abroad. Foreign gov- ernments an...

Trade strategy Different countries have very different trade strategies. Investments by MNEs in industrial countries typically are established to service local markets, which also tend  to be relatively free to exports and imports. Developing countries, however,  often have  adopted specific, strategies to encourage exports or impede imports. MNE management must understand a country's attitude to- ward  trade, since it may affect the type of investment undertaken. Countries such as Korea, Hong Kong, and Singapore have developed policies that en- courage firms to produce for the export market. Other countries, such as Ar- gentina and the Philippines, have established trade barriers and incentives to favor  production for the domestic market.     Explanations for why firms trade and why governments intervene in trade  are  discussed  in Chapters 4 and  5. There are some interesting facts on rnacroeconomic performance of...

Inflation Inflation is an important part of the economic environment (see Chapter 8) because of its effect on interest rates, exchange rates, the cost of living, and general confidence in a country's political and economic system. For example, fear of inflation in Japan  and Germany accounts for  the  unwillingness of those countries  to stimulate their economies in order to achieve more rapid economic growth. The magnitude of inflation seen in many developing coun- tries  is incomprehensible to most people in the industrial world. During the period 1980-1988, inflation increased in Argentina by 290.5 percent,  in Bra- zil by 188.7  percent, in Bolivia by 482.8 percent, in Peru by 119.1 percent, and in Israel by 136.6 percent.20 By the end of the 1980s, inflation in Brazil was  1000 percent per annum.     In highly inflationary environments, it is difficult for firms to plan for the future and run profitable operations. Co...

Key Economic Issues in industrial and developing countries A variety of cultural, legal, political, and economic factors influence the man- agement of the MNE. The impact of these factors varies considerably from country to country. Obviously, the environment in a developing country such as China is very different from that of an industrial country such as Germany.     Even though there is great disparity  among the developing countries, they share many common problems and characteristics. Some of the most frequently mentioned problems are inflation, external debt, weakening cur- rencies, shortage of skilled workers, political instability, economic instability, overreliance on the public sector in economic development, war and insur- rection, mass poverty,  rapid  population growth, weakening  commodity prices, and reliance on imported oil.     We cannot discuss in this chapter every problem of concern to industrial and developing c...

Economic Growth  The MNE would prefer that every country in the world have political stability, low rates of inflation, and high rates of real growth. Even if the firm does not expand market share in each market, it would be able to increase revenues at the same pace as the general economy. Developing countries provide large market potential and exhibit strong economic growth overall, but investing there tends to be riskier than in the industrial countries. Figure 2.5 illustrates real growth in GDP between industrial and developing countries during the periods 1973-1980, 1980-1989, and the year 1989. Although growth in de- veloping countries has been slightly better than it has been in the industrial countries, the two have essentially kept pace with each other.     Growth in recent years has been especially strong in East Asia and South Asia. (See Fig. 2.5.) There is tremendous market size and growth in Asia. The relatively slower growth in the industrial ...

THE CLASSIFICATION OF ECONOMIES There is no uniform classification of countries, and even the existing classifi- cations are changing because of changes in political and economic systems. Table 2.1 identifies the classifications provided each year in the World Devel- opment Report.     Countries  have traditionally been  classified  as belonging to the First World, Second World, or Third World. The First World countries have high- income economies. The First World includes the industrial world and some of the high-income oil-producing states. The Second World countries have centrally planned economies, which are in a state of flux. According to the World Bank, the Second World countries have  low- and  middle-income economies. It is difficult to know how to refer to centrally planned economies (CPEs), because most of them are in various stages of transition to a  market economy. The World Bank has decided to refer to  them as h...

Most foreign firms face the challenge of adjustment. For example, a firm based in the United States is accustomed to the legal, political, and economic systems of that country and has devised ways to survive profitably in that particular environment. Upon  entering another country for the first time, the firm needs to answer questions such as:  1.  What is the country's political structure?  2.  Under what type of economic system does the country operate?  3.  Is the firm's industry in the public or private sector?  4.  If it is in the public sector, does the government also allow private com-     petition in that sector?  5.  If it is in the private sector, is it moving toward public ownership?  6.  Does the government view foreign capital as being in competition or in     partnership with public or local private enterprises?  7.  In what ways does the government control the na...

POLITICAL-ECONOMIC SYNTHESIS Except for the discussion on communism, we have made no attempt to link an economic philosophy with a particular political regime, nor a particular political philosophy with any of the economic systems discussed in the pre- vious section. In general, a totalitarian political regime encompasses public ownership of the means of production and a command economy. Prior to the late 1980s, the  countries that took this approach were the East European nonmarket economies, such as the USSR, Poland, Yugoslavia, Hungary, Al- bania, Bulgaria, and East Germany; many African countries, such as Libya, Zambia, Ethiopia, Mozambique, and Angola; Cuba; and China.     There are many examples of totalitarian regimes and mixed (primarily capitalistic) economies, especially among the secular totalitarian countries. Some Middle Eastern examples include Jordan, Saudi Arabia, Bahrain, and Kuwait. African examples include Cameroon, Gabon, Kenya, and Zair...

Mixed Economies No economy is purely market determined or centrally planned. The United States and the Soviet Union (prior to recent reforms) represented opposite ends along the spectrum of mixed economies. In practice, however, what we call mixed economies generally have a  higher degree of government inter- vention than is found in the United States and a greater degree of reliance on market forces than is found in the Soviet Union. Government intervention can be regarded in two ways: actual government ownership of means of pro- duction and government influence in economic decision making. Ownership is easy to quantify statistically, but since influence is a matter of policy and custom, it is difficult to measure precisely.     Many industrial countries such as Germany and Sweden have relatively low levels of government ownership but a strong tradition of social welfare. The United Kingdom also has a strong welfare system supported by taxes, although the...

Centrally Planned Economies In centrally planned economies, the government tries to coordinate the activ- ities of the different economic sectors. In the extreme form of central com- mand,  goals are set for every  enterprise in the country; the government determines how much is produced, by whom, and for whom. The assumption is that the government is a better judge of how resources should be allocated than is the economy in general or the consumer in particular.     At the heart of a centrally planned economy is its blueprint, generally a five-year plan. Based on this overall plan, specific targets are set each year for each sector of the economy. The governmental plan attempts to coordinate all sectors, since the output of one firm becomes the input of another. A cen- trally planned economy must rely on the accuracy  of government targets in- stead of on market prices to allocate resources properly. The Soviet Union was the foremost example of a...

Market Economy In a market economy, two societal units are very important: the individual and the firm. Individuals own resources and consume products, while firms use resources and produce products. The market mechanism involves an in- teraction of price, quantity, supply, and demand of resources and products. Labor is supplied by the household if the firm offers an adequate wage. Prod- ucts are consumed if the price is within a certain range. A firm bases its wages on the quantity of labor available to assume a job.  Resources are allocated as a result of the  constant interplay between households and firms, as well as the interplay between households and between firms, such as when the input of one firm is the output of another. The key factors that make the market economy work are consumer sovereignty and  the freedom of the enter- prise to operate in the market.  As  long  as both units are free to make deci- sions, the interplay of supp...

THE ECONOMIC ENVIRONMENT Economic systems are usually categorized as capitalist, socialist, or mixed. It is possible, however, to classify them according to method of resource allo- cation and control (market economy or command economy) and type of property ownership (private ownership or public  ownership). Ex- panding this concept to include mixed ownership and control results in the taxonomy shown in Fig. 2.2. For example, Hong Kong would most likely fit in block A, whereas the  People's Republic of China would probably fit in block I, although it might be in the upper left-hand corner of block I. The United States might fit in block D, although it would be in the upper part of that block.     The ownership of the means of production range from complete private ownership at one extreme to complete public ownership at the other extreme. In reality, the extremes do not actually exist anywhere. The United States, for example, is considered to be the p...

Measures of Freedom The events of 1989 and 1990 continued a trend that had gained momentum in the early 1980s. According to a study by Freedom House, by 1975, most Third World democracies had disappeared.  The number of countries espous- ing Marxism had expanded from 6 at the end of the 1960s to 17  at the be- ginning of the 1980s. Since 1980,  however, no additional countries became Marxist, and by the end of 1988, 38.3 percent of the world's population lived in free countries." Since the late  1970s, when the  Freedom House survey became established, there have been  "30 transitions from military or one- party domination to formal civilian, elected rule,  as well as 10 reversions to military rule."12 The transition from totalitarianism to democracy was taking hold.     In the Freedom House survey countries are categorized as "free," "partly free," and "not free." The groupings are based on  two major factors: political ...