Download International Business

Chapter 1:
Business Across Borders
Keith Head
Sauder School of Business
Objectives of this chapter
• Define “international.”
• Introduce the key international
business (IB) transactions and
entities.
• Analyze the factors that make
International Business more costly
than domestic business and—
potentially—more rewarding: The
Six Forms of Separation.
What kind of transaction is it?
• German-resident honeymooners pay to
stay in Sun Peaks Lodge (a hotel owned
by Germans residing in Canada)
• Volkswagen, a German multinational
corporation, exports cars built at its
Mexico subsidiary to Canada
• KH (US citizen residing in Canada), buys
an Apple (California-based corporation)
iPod assembled in China, including a
Toshiba (Japan) disk drive.
What makes a transaction
“international”?
Residence Test: are the
permanent addresses (“centres
of economic interest”) for buyer
and seller in different countries?
Other criteria: nationality, “origin”
Transaction types
• Trade: exports (+) & imports (-)
– Merchandise
– Services
– Goods for processing
• Income receipts (+) & payments
– Investment income
– Employee compensation
• Investment sales (+) & purchases
– Portfolio Investment
– Direct Investment
– Acquisitions of intangibles (IP)
Canada’s 2006 IB transactions
Transaction + Money in
(Bn C$)
Goods trade
- Money out
(Bn C$)
456 (exports) 404 (imports)
Service trade 67 (exports) 82 (imports)
Inv. Income
(receipts+)
Portfolio Inv.
62 (receipts)
73 (paymts)
32 (sales)
79 (purchases)
Direct Inv.
78 (FDI->C)
51 (C->DIA)
I.B. Entities
• Uninational Enterprises
• Multinational Enterprises
– MNCs
– MNPs
• Multinational Contractual Networks
– Supply & distribution networks
– Alliances between competitors
Six Forms of Separation
• Political Separation
• Physical Separation
• Relational Separation
• Environmental Separation
• Developmental Separation
• Cultural Separation
Political Separation
Physical Separation
Political Borders Impede
• Movement
• Movement
• Movement
exchange
• Movement
Taxation
• Movement
Firewalls
of Goods: Customs
of People: Immigration
of Money: Currency
of Capital: Regulation,
of Ideas: Censorship,
Physical Separation
• Natural barriers to movement of
goods, people, and information.
– Oceans
– Mountains
– DISTANCE
• Costs of
– transport (goods)
– travel (people)
– communication (information)
Physical Separation
Relational Separation
Relationships, Trust, & IB
Transactions
• Transactions rely on trust
– Between buyers and sellers
– Of public officials
– Of intermediaries
• International transactions undermine trust
– Lack of information about reputations.
– More unforeseen contingencies make contracts
incomplete.
– Unfamiliar legal systems
– Distant and possibly biased courts
Environmental Separation
Environmental Separation:
Why?
• Foreign countries are far away (phys.
sep.)
• Far away countries tend to be
different (env. sep.)
– Climate
– Surface and sub-surface resources
– Topography (population density)
Environmental Separation:
So What?
• Differences create opportunities for
gains from trade
• Differences change consumer
demands and require market
adaptations in product attributes
• Differences raise difficulties for
expatriate managers (“hardship”
areas)
Environmental Separation: the coffee belt
(top 10 in yellow)
Environmental Separation: wine producers
Environmental Separation:
Tropical diseases
Developmental Separation
Developmental Separation:
How to Measure it?
Two things that matter: life expectancy and
extreme poverty
• Canada: 80.3 years, 0% live on <$1/day
• China:
72.5 years, 9.9% live on <$1/day
• Indonesia: 69.7 years, 7.5% live on <$1/day
• Nigeria:
46.5 years, 70.8% live on <$1/day
source: UN Human Development Report 2007/2008.
Developmental Separation:
How to Measure it?
• Economists focus on Real Income per
Person (y), or the closely related
gross domestic product (GDP) per
capita
• The idea is to measure the total
amount of goods and services the
average person could buy (the
“material standard of living”).
Developmental Separation
But keep in mind: averages
don’t tell the whole story
A Big Problem for Comparing
Country’s Development Levels
• Prices differ a great deal across countries
• Low average income countries tend to
have lower price levels (the Penn Effect)
 See figure
• $100 can usually buy more goods and
services in a poor country than a rich
country
• To compare standards of living we need to
use special exchange rates, called PPP
rates to convert local currency GDP per
capita into price-adjusted incomes.
The “Penn” Effect
Developmental Separation:
Why?
• Differences in income per capita
arise mainly from
– different rates of economic participation
– differences in “capital”* per worker.
y =Y/N = (Y/L)(L/N)
*broadly defined (narrowly defined capital
per worker cannot explain development
differences)
Capital takes many forms
– Physical capital (plant & equipment)
– Natural capital (rivers, sunshine, oil
reserves)
– Human capital (skills from education &
experience)
– Intellectual capital (patents & brands)
– Social capital (trust, associations &
institutions)
Developmental Separation:
So What?
• Income differences affect how much
consumers can purchase and also
the attributes of goods that they
demand.
• Incomes differences reflect
differences in capital endowments
that determine worker productivity.
Poor countries are often not cheap
countries due to corruption, lack of
infrastructure, etc.
Further consequences (?) of
developmental separation
Cultural Separation
Cultural Separation: Two
Mechanisms
I. Legacy of a predominately common
heritage
– We teach our children what our parents
taught us, which they learned from their
parents…
– Examples: surnames, religion,
language, politics, family recipes, home
remedies.
Cultural Separation: Two
Mechanisms
II. Imitation of “peers” ( local
interactions)
– Conformism (direct desire to imitate)
– Social learning
– Conventions (coordination)
Deal-killing Faux Pas
• Business card rituals
– Do study carefully upon receiving
– Don’t use as tooth pick, bend, shove in
pocket w/o glance, scribble notes, toss
• It’s ok to act like a foreigner—within
limits!
– When to bow
– When to speak English
– How to drink
The Takeaway
• Residence test is the traditional way to
define international transactions.
• Transactions include trade, income, and
investments
• Differences between nations both motivate
and impede international transactions
• Don’t believe the small (or flat) world hype.
Due to the 6 forms of separation, we don’t
live in a global village (and perhaps we
never will).