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McGill University
Management Core
MGCR 382
John Saba

India  Index of econ freedom – mostly not free (below Vietnam but higher than Russia)  Regionally below other major Asian economies  GCI – 59 , less competitive than Brazil & China but better than Russia. Competitiveness been declining from 40 to 59 th  Most problematic factors: inadequate supply of infrastructure, corruption, inefficient gov bureaucracy Objective 7: Developmental challenges of SEA, Africa, Middle east, South America self-study Marketplaces of Africa [Africa] [Middle east] – a region that spans southeastern Europe, northwestern asia, & northern Africa. It has no clear boundaries. Synonym to Near East in opposition to Far East  Saudi Arabia has ¼ of world’s oil revenues and used it to strengthen its regional power base  Historically, iran has been region’s military power, used oil revenues to promote muslim fundamentalism throughout the region  Iraq has world’s 2 largest proven oil reserves  Energy o Location of oil, natural gas, coal determines sources of world’s energy o Middle east has 65% of world’s oil & 41% of world’s natural gas [Sovereign wealth funds] – VENTURING ABROAD, new player in global capital markets SWFs are a new & controversial source of capital in world economy. Definition: SWFs are state-owned investment funds composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments. SWFs invest globally, their goal is to improve the financial rate of return on the assets. Size: manage $5.4 trillion of assets i.e. 50% of world’s official reserves SWFs – 58% funded by oil & gas-related. By region, 38% in asia, 35% in middle east, 18% in Europe, 2% in Americas The money that SWFs invest result from 3 sources: 1. Revenues generated by sale of country’s natural resources e.g. oil. Most SWFs are owned by oil-rich countries. a. Gov pension fund of Norway ($716b assets) b. Abu dhabi investment authority ($627b assets) c. Saudia Arabia SAMA foreign holdings ($533b assets) 2. Some SWFs are owned by gov benefitting from large BOP trade surpluses. These SWFs are held solely by a central bank that accumulates the funds while managing a country’s banking system. a. SAFE ($567.9b assets) b. China investment corporation ($482b assets) c. Hong kong monetary authority investment portfolio ($298.7b assets) d. GIC Singapore ($247.5b assets) 3. Some SWFs are simply state savings that are invested by various entities for the purposes of investment return a. E.g. one of the largest in the world is Caisse de depot et placements du quebec, manages $259.1b+ CDN assets Growing role of emerging markets in world economy is reflected in increasing control of major firms through SWFs. Theory – most SWF investments seek passively to improve financial rates of return & NOT to actively control of the assets. Concerns about SWFs  Rising political resistance to foreign SWFs controlling certain important firms  Some countries worry that foreign investment by SWFs raises national security concerns because purpose of investment might be to secure control of strategically=impotajg industries for political rather than financial gain e.g. Germany law requires parliamentary approval for foreign inn  SWFs’ inadequate transparency concerns investors & regulators CHAPTER 5: I-trade & investment Objectives 1,2,3, midterm only cover objective 1 & 2 Objective 1: motivation for i-trade Q: Why does i-trade occur? A: It follows directly from our definition of trade: both parties to the transaction, who happen to reside in different countries, believe they benefit from the voluntary exchange. Behind this simple truth lies much economic theory, business practice, gov policy & international conflict. Trade – voluntary exchange of goods, services, assets, or money b/w a person/org. Volume of i-trade: world trade (as measured by exports) is growing faster than world GDP 80% of world trade are goods ($18+trillion), 20% are services ($4.15+trillion). Quad countries account for 52.4$ of world merchandise exports. China – 9.6% & rising. Asia 30%, China became world’s biggest exporter & USA remains world’s biggest importer in 2009 Objective 2: difference among classical country-based theories of i-trade Country-based theories (emerged prior to WWII, developed by economies, explain inter-industry trade, includes: merchantilism, absolute advantage, comparative advantage, relative factor endowment)  First theories of i-trade that developed with the rise of great European nation-state  These theories focus on: o Individual country in examining patterns of exports & imports o Trade in commodities i.e. standardized, undifferentiated goods that are bought on the basis of PRICE rather than brand name 5 classical COUNTRY-based trade theories 1. Mercantilism (dominant from 1500 to 1800) a. The mercantilism economic philosophy arose in Western Europe in 1500s – the period when modern nation- states were emerging from feudal monarchies. b. Mercantilism: a country’s wealth is measured STATICALLY by the stock of precious metals the country possesses. Trade is a zero-sum game => one guy win = the other guy lose c. Favours trade protectionism d. Principles of mercantilism i. Nation-building process depends on a country enlarging its holdings of gold & silver. Country accumulates gold & silver if foreigners buy more goods from you than you buy from them (increase exports, reduce imports) => trade surplus ii. Uses accumulated gold & silver to achieve 2 objectives 1. Pay off deficits it has with those countries that it has trade deficits 2. Invest such surplus revenues in “nation building” activities of “building armies & national construction projects” 3. Effect: central gov & their monarchs consolidate control e. Supporters of mercantilism i. Export-oriented manufacturers 1. Favour policies establishing ta rebates or subsidies that stimulate sales to foreigners ii. Domestic manufacturers threatened by foreign imports 1. Favour policies imposing tariffs /quotas, protect them from foreign competition iii. These firms’ workers (& their unions), their suppliers, their communities, & local politicians (that rep the communities in which the manufacturers have production facilities) f. Opponents (most citizens are hurt) i. Consumers pay for gov import restrictions in the form of higher prices & less variety ii. Tax payers pay higher taxes to cover gov subsidies 2. Absolute(cost) Advantage a. Adam Smith challenged mercantilist views by advocating free trade among countries as a means of enlarging a country’s wealth b. TRADE THEORY TODAY i. Country’s wealth is measured DYNAMICALLY by stock of factor of production the country possesses. ii. Trade is a POSITIVE-sum game, i.e. ALL countries benefit from trade BUT some countries benefit more than others iii. Favours freer trade c. 2 important effects of free trade: i. Resulting international specialization of factor inputs (e.g. labour) in the most suitable COUNTRY would cause increase in world production ii. This increase in world production could be shared by countries TRADING with each other such that ALL COUNTRIES could simultaneously enjoy benefits of trade d. Specialization & i-trade will be beneficial when 2 processes occur: i. Specialization 1. Each country speicalize in the production of the particular good in which it has an absolute cost advantage 2. Export good which I am more productive and import good which I am less productive 3. Comparative advantage a. Absolute advantage theory looks at absolute differences in productivity. BUT, the theory is flawed since it incorrectly suggests that if 1 country has an absolute advantage in both production, no trade will occur b. If that happens, CA comes into place c. Suggests that a country should produce & EXPORT those goods & services for which this country is relatively more productive than other countries d. Shows that trade depends on differences in comparative cost, any country can profitably trade with another even if its real costs are higher in ALL products it produces 4. Relative factor endowments a. CA fails to answer a broader question: WHAT determines the products for which a country will have CA? b. Generally: States that countries produce & export goods that require resources (factors) that are abundant & import goods that require resources in short supply. Specifically: focuses on productivity of the production process. c. 2 basic observations i. Types & quantities of FOP vary e.g. land, labour, capital (aircraft, pharm, satellites) ii. Goods differ according to types & quantities of FOP e.g. wheat & beef require fertile land, oil production require crude oil reserves, textiles require unskilled labour d. Theory states that i-trade patterns are determined coz of NOT ONLY diff in efficiency of productions BUT ALSO diff in type & quantity of FOP held by countries e. LEONTIEF PARADOX read at home 5. comparative advantage with money (READ AT HOME including Lincoln fallacy) TESTED FOR MIDTERM UNTIL HERE CHAPTER 3: legal, technological, accounting, and political environments Objective 1:4 Major types of legal systems confronting international biz Common law, civil law, religious law, bureaucratic law Civil Law Common Law Tradition Continental European countries (incl. france, England (incl. England, Scotland, Wales) developed this Germany, Italy, spain, turkey), japan, & much of legal system latin America developed diff versions of this Britain exported its approach to former british colonies approach… incl. USA, Australia, India, Malaysia, Canada France exported its approach (code napoleon) to Based on the cumulative wisdom of judges’ decisions its colonies in north Africa, middle east & quebec on individual cases through history. (private law) MOST prevalent in the world Common law has evolved differently in each common law country, e.g. manufacturers are more likely to be found liable for defective products in the US than in UK or Canada Key source of law 1 : code makes legislature-made law the key 1 : court decisions (e.g. Case law) makes judge-made source of law. The CODE comprehensively law the key source of law. includes all general legal principles on a subject of subjects e.g. QC’s private law is in its civil code The principle of judicial precedent (i.e. state decisis) is passed by National Assembly & govens all the basis such that judges are bound by previous court contracts, wills, family law, property decisions (i.e. precedents) of upper or equal rank courts nd 2 : CASE LAW is only a secondary source of law. when deciding a case on a similar issue. Judges apply code principles to diff situations (English system is more complicated & flexible than the civil law approach) Difference Judge takes on many of the tasks of the lawyers, Judge serves as neutral referee, ruling on various determining the scope of evidence to be motions by the opposing parties’ lawyers (who are collected and presented to the court responsible for developing clients’ cases & choosing which evidence to submit) Canada is a special hybrid case  Public law (constitutional, criminal) o All canada (incl. quebec) uses English common law approach  Private law (e.g. contracts, wills, property) o QUEBEC uses CIVIL law approach Religious/theocratic law Bureaucratic law A country that applies religious law to civil & criminal Is the legal system followed by communist countries & conduct is called a theocracy. Its law is based on dictatorships officially estabilished rules governing faith & practice of It is whatever the country’s bureaucrats say the law is, a particular religion. regardless of the formal law of the land. Frequently Most important religions legal systems based on Hindu, inconsistent, unpredictable & lacking in appeal procedures e.g. Jewish, & Islamic law china & a few states in Africa e.g. Islamic law spells out norms of behaviour regarding Most of these systems are based on civil law, with elements of politics, economics, banking, contracts, marriage & socialist principles that emphasize: state ownership of property, many other social & biz issues state rights take precedence over individual rights. Tends towards loose treatment of property & IPR Found in north Africa, middle east, SEA In countries relying on bureaucratic law, ability of an international biz to manage its ops is compromised by bureaucrats & arbitrary rules e.g. religious law affects company’s loan opportunities in an Islamic country Objective 2: how domestic laws affect ability of firms to conduct IB Domestic country laws affect BOTH a firm’s domestic ops AND international ops (3 ways) 1. Domestic laws regulate IB activities that originate inside a country’s borders  Gov impose laws & regulations on how the firm:  Manages its work force (recruitment, compensation)  Finances its ops (laws on banking, credit & securities)  Develops & uses tech (patents, copyright, trademarks)  Regulation in 4 areas 1. Product safety & liability  Holds manufacturers, sellers & others responsible for damage, injury, or death caused by defective products.  US, Canada, EU have toughest product liability laws, developing & emerging countries have weakest laws  SPECIAL CASE: tobacco litigation  Litigants have pursued & sometimes won against tobacco firms in EU & US  Effect: firms shifted production & marketing to developing & emerging markets 2. Marketing & distribution  Purpose: determine which practices are allowed in advertising, promotion, distribution
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