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COMPARATIVE ECONOMICSEconomic Systems: A Research Project (350 Points)A final project for the course requires that students select and critically evaluate a research topic based on the concepts covered in any module (or modules) of the course. This topic should include but not be limited to specific issues about economic systems currently or recently (within three years) covered in the news media.Students should use and cite at least five credible published sources to support their positions, arguments and analyses in addition to citing at least one discussion of economic system theory in the textbook. At least three of the sources should be written by economists in academic journals, and at least two of the sources should present arguments or perspectives that differ from or oppose each other. The CSU-Global Library is a good place to find these sources.The completed project will include the following elements:•Description of the current state of economic condition of your selected country or region, based on at least a couple of credible sources, which can be news or scholarly.•Examination of the historical evolution of the economic system of your selected country or region--how it originated and came to its current status, what are or were the issues and obstacles encountered in the transition.•Discussion of the implications of the system change in your selected country or region on the standard of living, well-being of its citizens and competitiveness of its enterprises in a global economy.•Evaluation of the economic performance of your selected country with countries in similar economic systems, identifying both similarities and differences between your country and those being compared to it.•Summation of your findings, including at least two policy recommendations for future improvements.Papers will be 8-10 pages in length, well written, and formatted per CSU-Global guidelines for APA Style. The following Module 2 and 4 assignments are required deliverables for the Portfolio Project:Module 2: Submit your Portfolio Project topic to your instructor via email for approval. Module 4: Prepare a detailed outline of your Portfolio Project, highlighting some main points you intend to cover for each of the following criteria (as found in the final Portfolio Project description):•Description of the current state of economic condition of your selected country or region, based on at least a couple of credible sources, which can be news or scholarly.•Examination of the historical evolution of the economic system of your selected country or region--how it originated and came to its current status, what are the issues and obstacles encounter in transition.•Discussion of the implications of the system change in your selected country or region on the standard of living, well-being of its citizens and competitiveness of its enterprises in a global economy.•Evaluation of the economic performance of your selected country with countries in similar economic system and contrast the economic outcomes with countries in different countries, too.See the Module 4 Assignments page for more details about this deliverable.»Module 1: World Economic Systems in the Twenty - First CenturyModule 1 Module 1 summarizes the history of economic development since 1800 and discusses the present state of economic well-being in different countries. It uses a multidimensional framework to classify three typical economic systems: capitalism, planned socialism and market socialism. Additionally, it will cover five performance criteria used frequently to assess different economic systems. This module is designed to introduce general themes relevant to understanding the field of comparative economic systems.This module provides a brief examination of multidimensional frameworks and assessment criteria that are used to define and measure the performance of economic systemsAccording to economist and professor Angus Maddison (n.d.) in the last 100 years, “world population rose 22–fold. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income. From the year 1000 to 1820 the advance in per capita income was a slow crawl — the world average rose about 50%. Most of the growth went to accommodate a fourfold increase in population” (para. 1-2).Since 1820, however, world development has been much more dynamic. Angus Maddison’s data shows that over the past 200 years, the world’s population grew roughly five-fold, total real output increased forty-fold, and, therefore, per capita real output increased about eight-fold. This surge in growth contrasts with the prior 99.9% of human history. Real per capita output remained at or near subsistence for nearly all of human history, but suddenly around 1800, things changed dramatically (Maddison n.d.). See these trends in the following tables: http://www.theworldeconomy.org/MaddisonTables/MaddisonTable1-3.pdf http://www.theworldeconomy.org/MaddisonTables/MaddisontableB-10.pdf http://www.theworldeconomy.org/MaddisonTables/MaddisontableB-18.pdf The history of economic development shows that economic growth and prosperity depends on the right combination of economic institutions that direct, organize, and facilitate economic activities. According to Professor Elliott Parker of the University of Nevada, Reno: “ Prior to the end of the 1990s, the world was divided into two seemingly monolithic systems - the socialist and the capitalist worlds -- engaged in a long-standing conflict, the Cold War. Countries were either in the first (capitalist), second (socialist), or third (developing) world. After 1989-1991, that all changed. By 1992, Francis Fukuyama (1992) argued that liberalism (private property rights, free economic activity, market exchange) was the only surviving alternative. What we then experienced was one of the greatest economic experiments in history. Socialist economies began to transition into market economies, and we could observe and participate in the construction of economic systems and learn how they really work.The journalist Thomas Friedman (2000) even argues that the Cold War was the world’s economic system, and the new world system is Globalization. The new conflict is no longer between communist and democratic ideology but between the Lexus (the modern economy, with trade, technology, and human capital) and the Olive Tree (traditional economies, with traditional values, and nationalism). (As cited in Parker, n.d., Slide 5)All societies, ancient or modern, need to answer three fundamental questions: 1.What goods and services will be produced with our limited resources? 2.How will we produce the goods and services we select? 3.For whom will goods and services be produced –that is, who gets what? Economies answer the questions differently, depending on who owns their resources (private or public) and how economic activity is coordinated (through markets or commands).“An economic system is the set of rules and institutions that define and constrain the production and consumption of goods and services. Institutions include households and the family, government policies and instruments, enterprises (or firms), labor organizations, non-governmental organizations, and markets. Rules include the legal framework and the extent of enforcement, organizational rules, procedures, customs, norms, culture, and tradition (Parker, n.d., Slide 7).Based on these five characteristics, economic systems are classified as one of three basic structures: capitalism, market socialism, and planned socialism.The organization of decision-making arrangments: Centralized, decentralized, or mixed. The concepts of centralization and decentralization are defined in terms of the distribution of authority and utilization of information in an economic systemMechanisms for providing information and for coordination Market versus plan. Market and plan are compared with respect to who makes decisions in the system, that is, consumer sovereignty versus planners' preferences.Property Rights Public, cooperative, private. Property rights are defined in terms of rights to use, dispose of, and/or benefit from the objects generated from the property in question. Private rights are never total; zoning laws, for example, prevent many uses of private property, and taxes limit residual income.Incentives Material and/or moral. According to Gregory & Stuart (2004), "An incentive mechanism should induce participants at the lower level (agents) to fulfill the directives of the participants at higher levels (principals)" (p.28). Upper management often incentivizes their subordinates in one of two ways: material incentives which may come in the form of a bonus or salary increase; or moral incentives, which may come in the form of public recognition. Material incentives give the recipients "greater claim over material goods," while moral incentives appeal to the recipient's sense of "responsibility to society (or the company) and accordingly raises the recipient's social stature within the community" (pp. 28-29).Organization of public choice Dictatorship or democracy. An economy's public choice is driven by its governing body. On one end of the spectrum are dictatorships where public choice is controlled by one individual or a very small group; on the other end are pure democracies where every individual in the economy has a vote. In the middle lie the representative democracies where representatives are sent to make choices on behalf of the electorate (Gregory & Stuart, 2004When we observe an economic system functioning in a real-world context, the results or outcomes that we observe are a function of many forces. This text introduces a mathematical model that identifies the relationship of these inputs, or forces, to the economic output. The main forces are the economic system, environmental factors, and policies; and the outputs include economic growth, efficiency, income distribution, stability and viability.»Module 2: Economic Systems in TheoryModule 2 Module 2 examines the philosophical foundations of capitalism, planned socialism, market socialism and the links between social theory, politics, and economics.Module 2 takes you further into specific economic systems: capitalism, planned socialism, and market socialism. You’ll get the greatest insight into these three systems from the textbook readings for this week, but the following module content is a good supplement, including an interesting sound bite from National Public Radio regarding property rights in ChinaLaws about resource ownership and the extent to which the government attempts to coordinate economic activity vary among economic systems from the most free (the capitalist system) to the most regimented (command system). A capitalist system is characterized by private ownership of all resources and coordination of all economic activity based on prices generated in free markets, where supply and demand are allowed to reach their point of equilibrium without intervention by the government. Productive enterprises are privately owned, and the role of the state is limited to protecting the rights to life, liberty, and property. The invisible hand of the marketplace guides the self-interest of buyers and sellers into promoting general economic well-being. Despite decentralized decision making and self-interested decision makers, free markets lead to an efficient outcome.Markets provide information about the price, quantity, and quality of products for sale—information that a potential buyer needs to make a decision. Markets also reduce transaction costs because buyers need less time to gather information and make a purchase. The interaction of the buyers and sellers is coordinated in a way that guides resources and products to their highest valued uses. Private markets may fail to safeguard private property and enforce contracts. In a completely private market, firms may collude to avoid competition. Certain industries may be most efficiently organized as monopolies, but the private market may allow such industries to charge prices higher than are socially optimal. Private firms may not find it profitable to produce public goods. Prices set freely by the market often fail to reflect the costs or benefits imposed by externalities. Private markets can lead to a very unequal distribution of income. Finally, private markets do not guarantee full employment and price stability. Due to these imperfections or market failures, there is rationale for government intervention in the economy. The seven basic roles for government are (1) protecting private property, (2) promoting competition, (3) regulating business, (4) providing public goods and services, (5) promoting positive externalities and discouraging negative ones, (6) promoting equality in the distribution of income, and (7) promoting full employment and price stability.Even strictly communist countries like China have seen the benefits of a free society with a protected private sector. Click below to listen to a 3-minute news clip from National Public Radio regarding China’s move toward private property rights.A pure command economy is characterized by a strong central state, through state ownership and political power exercising considerable influence over what is to be produced; usually the output mix favors the producer goods, public goods and military goods over consumer goods. The state dictates arrangements for production, central planning used as a mechanism to organize resource allocation.The primary source of income is labor; the egalitarian distribution of output is pursued; the socialist economy places greater emphasis on economic equity and socialization. State policies are used to offset the problems of unemployment, inflation and slow economic growth, which are perceived as inevitable under capitalism. Those who argue against planned economies assert that “planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose)” (Planned Economy, para. 14). For example, even though the Soviet Union had its own passenger car manufacturing industry going back to the 1940s, it was not possible for a Soviet consumer to walk into a store and buy a car as the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand, suggesting that planners have misjudged the demand for the product, the equilibrium price, or both.Polish born economist and diplomat Oskar Lange is often credited with establishing the first laws of market socialism.Market socialism has had considerable appeal over the years, probably because it has been thought to combine attractive features of socialism (a more egalitarian distribution of income) and market capitalism (the efficiency of markets). “Market socialism refers to various economic systems where the means of production or dominant economic institutions are either publicly-owned or cooperatively-owned but operated according to the rules of supply and demand.“In the Oskar Lange’s model of market socialism, prices would be determined by a government planning board through a trial-and-error approach until they equaled the marginal cost of production as to achieve perfect competition and pareto optimality. In this model, firms would either be state-owned and managed by their employees.” (Market economy, n.d., Section 2: Market Socialism) In addition, the Lange model is useful as a formal mechanism through which to discuss important issues such as the role of prices in resource allocation (Friedman 1946). “The distinguishing feature between non-market socialism and market socialism is the existence of a market in the means of production and the criteria of profitability for enterprises. Profits derived from the public enterprises can either be used to reinvest in production or finance government and social services directly and/or be distributed to the workforce or public at large through a social dividend. Unfortunately, there is limited real-world experience with any variant of market socialism. Even a variant of market socialism is not readily available for analysis.” (Market economy, n.d., Section 2: Market Socialism)»Module 3: Economic Systems in Practice - CapitalismModule 3 Module 3 assesses the American economy from a systems perspective. It describes the European experience in pursuit of economic integration. This module also focuses on the basic Asian approach to economic development, change, and growth. Primarily, this lecture explores how economic practices have evolved into their present form and the manner in which system, policy and setting have unfolded throughout Asia.It is interesting to see how a specific system can manifest itself in different ways. Module 3 focuses on the capitalist system, highlighting three models for comparison: the Anglo-Saxon model, the European model, and the Asian model specifically. For success in Module 3:We study the U.S. economy as an example of the Anglo-Saxon model. The U.S. economy is a large and wealthy economy that has enjoyed considerable success. It relies predominantly on markets with less government intervention. It is also the most technologically advanced economy.The following information from the Michigan State International Business Center (2012) web site (globalEDGE) outlines the recent history of America’s economy:The U.S. has the largest and most technologically powerful economy in the world, with a per capita GDP of $46,900. In this market-oriented economy, private individuals and businesses make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. U.S. businesses enjoy greater flexibility than their counterparts in Western Europe and Japan in their decisions to expand capital, to lay off surplus workers, and to develop new products. At the same time, they face higher barriers to enter their rivals’ home markets than foreign firms face entering U.S. markets.U.S. businesses are at or near the forefront in many technological advances, especially in computers and in medical, aerospace, and military equipment. Their advantage has narrowed since the end of World War II, with the global expansion of technology largely explaining the gradual development of a “two-tier labor market” in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. Since 1975, practically all gains in household income have gone to the top 20% of households.[…] Soaring oil prices between 2005 and the first half of 2008 threatened inflation and unemployment, as higher gasoline prices begin to negatively affect consumers’ budgets. Imported oil accounts for about two thirds of U.S. consumption. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an ageing population, stagnation of family income in the lower economic groups, and sizable trade and budget deficits. The U.S. trade deficit reached a high of $840.00 billion in 2008 before falling to $450.00 billion in 2009. (para. 1-4) Here is the U.S. economy at a glance from Bureau of Labor and Statistics of U.S.http://www.bls.gov/eag/eag.us.htmThe opponents of the Anglo-Saxon model of investment finance argue that stock markets are too volatile and are dominated by emotion. They believe it is better to have knowledgeable bankers deciding who should get investment financing. A disadvantage of the bank financing is that it tends to get too closely linked to the corporation to make impartial investment decisions. The U.S. capital market punishes corporations that fail in their business plan.Financial crisis started at the end of 2007. Banking innovations had allowed the banks to hide much of their bad lending, moving it off their balance sheets, increasing their effective leverage. The new instruments (credit default swaps) were allegedly created for managing risk, but in reality were designed almost as much for deceiving regulators and were so complex that they amplified risk.The mortgages had high transaction costs and variable interest rates with payments that could suddenly spike, but had no protection against the risk of job loss. The designers of these mortgages focused on maximizing their revenues, and their efforts produced a whole range of complicated mortgages that made them a lot of money in the short run and led to temporary increase in homeownership, but at a great cost to society as a whole.European integration has been a predominant feature of the contemporary global economy. Particularly, the varying economic systems of the industrialized European world remain important for our analysis of economic transition and development.Consider the following information from Libby Rittenberg and Timothy Tregarthen (2009):Some European economies, such as France, Germany, and Sweden, have a sufficiently high degree of regulation that we consider them as operating more toward the center of the spectrum. Russia and China, which long operated at the command socialist end of the spectrum, can now be considered mixed economies. Most economies in Latin America once operated toward the right end of the spectrum. While their governments did not exercise the extensive ownership of capital and natural resources that are one characteristic of command socialist systems, their governments did impose extensive regulations. Many of these nations are in the process of carrying out economic reforms that will move them further in the direction of market capitalism.ArrowsClick to EnlargeFigure 2.14 from Principles of Macroeconomics highlights the shift toward market capitalist systems.(Source: http://www.web-books.com/eLibrary/Books/B0/B62/MAIN/images/fwk-rittenmacro-fig02_014.jpg) The global shift toward market capitalist economic systems that occurred in the 1980s and 1990s was in large part the result of three important features of such economies. First, the emphasis on individual ownership and decision-making power has generally yielded greater individual freedom than has been available under command socialist or some more heavily regulated mixed economic systems that lie toward the command socialist end of the spectrum. People seeking political, religious, and economic freedom have thus gravitated toward market capitalism. Second, market economies are more likely than other systems to allocate resources on the basis of comparative advantage. They thus tend to generate higher levels of production and income than do other economic systems. Third, market capitalist-type systems appear to be the most conducive to entrepreneurial activity. (para 24-25)An apropos analogy, Asian markets that emerged ferociously (and admittedly miraculously) victorious in a battle for sustained growth from 1965-1990 have earned the moniker of “Tiger.” The four countries first deemed “Asian Tigers” were Hong Kong, South Korea, Singapore, and Taiwan; “Emerging Tigers,” countries attempting the same sustained growth, include Indonesia, Malaysia, Thailand and, more recently, the Philippines (Pho-Ubol, n.d. p. 1).For 30 years, starting in the 1970s, East Asia has dominated the world stage regarding economic growth:The economies of Japan and the Newly Industrializing Economies (NIEs) of Hong Kong, Singapore, Korea, and Taiwan have been hailed as models of achievement for other emerging economies. Many factors have been identified as the cause of East Asia's relative success - outward orientation, high saving and investment rates, macroeconomic discipline, and other good public policies - although the relative weight of each in explaining the region's success is still a matter of considerable debate. However, no matter how the relative weights are assigned, the experience of East Asia, supported by recent research on growth, has convinced many observers that an outward-looking development strategy, particularly a dynamic export sector, is conducive to growth.Since the East Asian Tigers were relatively poor during the 1960s, these nations had an abundance of cheap labor. Coupled with educational reform, they were able to leverage this combination into a cheap, yet productive workforce. The East Asian Tigers singled out education as a means of improving productivity; these nations focused on improving the education system at all levels; heavy emphasis was placed on ensuring that all children attended elementary education and compulsory high school education. Money was also spent on improving the college and university system. They also pursued an export-driven model of economic development; these territories and nations focused on developing goods for export to highly-industrialized nations. Domestic consumption was discouraged through government policies such as high tariffs.In general conclusion, the common characteristics of the East Asian Tigers are:•Focused on exports to richer industrialized nations•Trade surplus with aforementioned countries•Sustained rate of double-digit growth for decades•Non-democratic and relatively authoritarian political systems during the early years•High tariffs on imports•Undervalued currencies (Pho-Ubol, n.d. pp.2-3).»Module 4: Economic Systems in Practice - SocialismModule 4 Module 4 summarizes the Soviet Command Economy, and more notably, its failure. It also addresses China’s shift into a market-based economy, evaluating its successes and challenges in so doing. Module 4 provides a standard survey of the way the traditional Soviet economic system operated, assesses China’s economic reform and evaluates the performance of command economies. You will also submit a detailed outline of your final Portfolio Project this week, which means you should have selected an economic system currently or recently (within three years) covered in the news media. To help foster your success in this module, consider the following: The most famous, or infamous, command economy is that of the Soviet Union. The government and its heads of state dictated nearly every facet of the economy, determining what was made, how it was made, and how revenues generated by production were spent. Despite its very singular command, the government relied on other officials to assist in governing the economy:The government-certified planners come second in the hierarchy. They distribute the works among the labor class, who actually undergo the toiling part of the entire process. China and former USSR and are perhaps two of the best instances of Command Economy. Though many countries now-a-days are switching off from Planned Economy to Market or Mixed Economy, yet nations like North Korea and Cuba are some countries where Planned Economy still exists in full form. In case of a Command Economy, both state-owned and private enterprises receive guidance and directives from the government regarding production capacity, volume, modes of production and course of their actions. Planned economic system is broadly segregated into two groups – Centralized and Decentralized. The centralized or centrally Planned Economy, as prevalent in former Soviet Union, is a more familiar concept between the two. The decentralized Command Economy, on the other hand, is more theoretical in nature with little or no application in the actual economic spheres. (Economy Watch, 2010, para. 1-3)The Bolshevik revolution in 1917 brought the end of the preceding czarist era. In October 1917 Lenin led the Bolsheviks to power. Initially the Bolshevik control was largely limited to the capital (St. Petersburg) with most of the country in dispute. Reunification of the country took three years of civil war. Russian economic development in 1917 was at a relatively low level (per capita GDP). Two economic experiments were conducted in the decade following the revolution:•War communism (1917-1921) was implemented to promote recovery from the Russian civil war, implemented by Lenin.•The New Econ Policy (NEP), also established by Lenin in 1921, to spark a return to private ownership.Systems of central planning based on compulsory state and party directives were also established (industrial products moved away from consumer goods toward product goods). Rapid industrialization depended on the availability of agriculture surpluses to the industrial sector to provide investments. Agriculture was collectivized into farms called kolkhozy at end of 1920’sAfter Stalin, Nikita Khrushchev took power. He attempted fundamental change in political and economic life. He drew attention to Stalinist abuse of human rights, and put more emphasis on incentives, allowing management to retain a large slice of the profit between the value of sales and the cost of materials; in agriculture, he focused on investments. After a trip to Iowa in 1956 he became a huge enthusiast of corn and decided to introduce it to his country, most of which has an unsuitable climate for growing the crop.Mikhail Gorbachev, the Soviet Union’s last head of state before its dissolution and reconstruction, wanted to create a more open society. He believed there should be the right of freedom of the press, and everyone was allowed to have an opinion. Similarly, he believed the people should have the chance to make a few political decisions, and they should understand the economy better. Gorbachev didn’t want to do away the communist system, but he wanted to renew it or save it from a breakdown. First, he started with reform of central planning, giving more freedom and incentives to enterprise managers. He also revamped the law on state enterprises which tried to put firms on a corporatized and accountable basis. Instead, he wanted firms to have more freedoms in self-management and self-finance. Despite the reforms, the country’s productivity fell, its economic crises became more intense, and there was a shortage of basic consumer goods that contributed to the popular discontent with the reform effort.China is of major interest within the field of comparative economic systems for several basic and important reasons. To begin with, China is a country that adopted the Soviet model but with interesting differences in practice. Moreover, as serious economic reforms emerged in the late 1970s, the path of reform was very different from that of other transition economies—beginning in agriculture and for the most part sustaining many elements of the command era. However, China’s reform combined socialism with important elements of the market and the aggressive use of foreign trade. These reforms have moved China to a position of major importance in the global economy. In addition, they leave China entering a new century with an economic system resembling market socialism and yet with an historical background different from the typical conceptions of market socialism.Though poorly mapped out at its inception, the Chinese government began transitioning away from their planned economy and into a market economy at the end of the 1970s. China has made strides since, though, becoming less and less a command economy and more and more a market-driven economy. Some of the more notable market-based reforms came in the form of “phasing out collectivized agriculture, and extended to include the gradual liberalization of prices, fiscal decentralization, improved autonomy for state enterprises, the development of stock markets and liberalizing foreign trade and investment” (The World Fact Book, 2008, Section X: “Economy Overview”).Much like the evolutions in economies in Eastern Europe (EE) and the Soviet Union (SU), China’s opening up of private enterprise moved swiftly among small private companies but slowly among large-scale firms. Unlike EE and SU’s “big bang” approach to transition, China’s transition was not disruptive to production in the state sectors, which makes the more gradual approach of the Chinese preferable to the “big bang” of EE and the SU (Yifu Lin, Cai, & Li, 1996).The "big bang" approach in Eastern Europe and the former Soviet Union also attempts to replace an inefficient economic system with a more efficient market system. The privately owned small firms emerged immediately after the lifting of the ban on private enterprises. However, the privatization of medium- and large-scale state enterprises was prolonged and proceeded slowly. This resulting enterprise mix is in fact similar to what emerged in China. However, China's approach did not disrupt production in the state sectors. Therefore, China's gradual approach to reform achieved the same positive effects of the "big bang" approach but avoided its costs. If transitional costs and the path-dependence of institutional changes are taken into account, China's gradual approach may be both theoretically and empirically preferable to the "big bang" approach. The overall performance of China's gradual approach to transition is remarkable, but China has paid a price. Because the reform of the macro-policy environment, especially interest- rate policy, has lagged behind reforms of the micro-management institution and resource allocation mechanism, institutional arrangements in the economic system have become internally inconsistent. As a result of the institutional incompatibility, rent-seeking, investment rush, and inflation have become internalized in the transition process. To mitigate those problems, the government often resorts to traditional administrative measures that cause the economy's dynamic growth to come to a halt and retard institutional development. (Yifu Lin, Cai & Li, 1996, para. 44-45)Economic development in the coastal provinces of China has been more rapid than in the interior. The Chinese government faces a number of economic challenges, including the need to reduce corruption and other economic crimes; to sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the workforce; and to contain environmental damage and social strife related to the economy’s rapid transformation.The demise of communism in Central and Eastern Europe (CEE) ushered in a new phenomenon in economics: transition. The break-up of the Soviet Union in 1991 was, in a sense, a two-fold event .The country that was the USSR broke into successor states, such us the Russian federation and Ukraine. The Soviet Union lost its political control over many neighboring countries across CEE and the Baltic states.The economic transition brought increased political freedom but also economic and social depression. The degree of economic and political freedom in the Soviet successor states was quite low in the late 1980s. By the mid-1990s, these states enjoyed approximately two-thirds of the political freedom of the developed, democratic nations of the world. The nations of the former Soviet Union and CEE entered a deep depression in the early 1990s. Economic growth started again in EE by 1994 and in Russia around 1998 and has increased rapidly since. This is an unprecedented process, as no economy has ever moved from a comprehensively controlled economy to a market economy.There are many factors that contribute to such a dramatic transition. Historian and writer Daniel J. Castellano (2011) makes the following assertions:Reagan deserves credit, if not for causing the Communist collapse, then at least for astutely perceiving the internal weakness of the Communist regimes. His conviction in the unsustainability of the Communist system encouraged him to take a firm diplomatic stand with Warsaw Pact nations, refusing to make things easy for them. Reagan’s anti-Communism was not purely pragmatic, but also had a moral dimension, as he recognized how deeply unpopular and injurious Communism was to the people who labored under it. (para 32)»Module 5: Systemic Change in a Global Perspective - TransitionModule 5 Module 5 describes the characteristics of change in capitalist and socialist economies and identifies measurement tools used to assess transitioning economies.Module 5 begins to explain the very intricate and sometimes complicated theory of economic transition. Most notably, you’ll study the 15 nations that emerged when the Soviet Union collapsed, each transitioning from a planned socialist economy into whatever best suited the needs of the bourgeoning country – in most cases, a market economyTransition economies are those which are shifting from one economic system to another, in most cases from state-planned economies to market-based economies. The transition economies most referenced include the economies that emerged out of the collapse of the Soviet Union, as well as the countries that re-developed after World War II in Eastern and Central Europe. As we learned in Module 3, countries in Asia, most notably China, Mongolia and Vietnam, are working their way through varying degrees of transition. Africa has seen transition as well. Though each country varies in size and capital, all have one thing in common: transition.According to Transition Economies: An IMF Perspective on Progress and Prospects (2000), economists have determined the main components of the transition process as follows:In all transition economies there has been a steady decline of output; some economies have been able to recover modestly but the initial drop is inevitable. It is a “stylized fact of transition” (Iowa State University, n.d., slide 5). This characteristic of transition economies can be attributed to a variety of factors:•The statistical systems of socialist economies were census-based, and were designed to gather data from the state-owned sector. •After liberalization the most dynamic sectors of the economy are services and new private enterprises, and these types of establishments are hard for the authorities to keep track of. •The incentives to report output have changed dramatically since the demise of planning. Whereas enterprises formerly had incentives to overstate output to fulfill planned targets, they are now much more interested in understating production so as to reduce taxes. •Growth in the relative magnitude of the hidden economy could thus explain why the measured output drop is as large as it appears. Tax evasion is a strong incentive to hide income, and with the very high tax rates that enterprises faced they had a survival need to hide. (Iowa State University, n.d.,Slide 5: Output patterns in transition economies»Module 6: Transition in Practice - The ComponentsModule 6 Module 6 examines and compares two primary models of economic transition: The evolutionary approach and the “big bang.”Prior to the collapse of the Soviet and Eastern European socialist economic systems, the subject of economic reform was of limited interest; that is, reform was frequent but with minimal results. Approaches to reform changed in the transition era of the 1990s, and economists began to study past economic reform (especially that of the Gorbachev era), and transition or system change. Transition is now cast in a broader historical context to analyze change along a broad spectrum of different economic systems. The subject matter is messy but essential. It is also useful to be aware that since the transition era there has been increased recognition that the simple dichotomy of shock therapy versus gradualism is an important simplification. As the term indicates, the so-called shock therapy is a process that has an immediate impact on the state, society and economy, therefore it must bring tremendous change on various levels within a very short amount of time. As a result it often creates a negative economic shock. The driving idea behind shock therapy is to implement liberal government structures and economic policies in order to create a fully functional market within a short amount of time. Through the quick application of new policies, the cost of transition should be minimized. A main critique regarding shock therapy is that a functional bureaucracy with its existing networks will be over thrown. Moreover, the applied reforms implicate to reconfigure or create new institutions (e.g., Central Banks) which pose a strong challenge to the bureaucracy. Another burden to society is the downturn of the economy in the first moment that the new agenda is in place. In contrast to shock therapy, the gradualist approach is incremental. It is a slow process in cooperation with the society to transform countries’ political and economic structure. Supporters of the gradualist transition prefer a longer lasting state intervention. The way of dealing with it by the state could be different, but fixed exchange rates, delayed privatization, and wage controls are means to it. The gradualist transition needs the involvement of the public and active participation of state institutions. Economic transition has to be answered on a country-specific basis, and there must be no favored model. The process of economic transition is highly critical; leaders have to be aware of the risks for their country and carefully plan the steps ahead. It is at that stage where failure takes place, and a country could possibly be directed into chaos, anarchy and economic crisis.We now have more than a decade of real-world experience with transition after the collapse of the major administrative command economies. During the past decade, the available literature on the economies in transition has expanded continuously, but most importantly, the themes that have captured our attention have changed significantly. As the administrative command economies collapsed, our focus was on the reasons for collapse, the immediate implications, and most important, the varying models of search for a path to the market. The search for a path soon turned into what would be a lasting if simplistic classification of the big bang and evolutionary transition.Economists generally agreed on the need for speed in carrying out liberalization and stabilization. But on privatization of large enterprises, there was a debate on whether to have a rapid transfer of assets from the state to the private sector or to adopt a more gradual approach.As outlined in Transition Economies: An IMF Perspective on Progress and Prospects, section IV. “Privatization”:Advocates of rapid privatization called for eliminating state ownership by giving assets to citizens, for instance through vouchers that gave their holders the right and means to purchase state-owned companies on sale. They were motivated by considerations of fairness, a desire to give ordinary citizens a stake in the economy. They also perceived a need to seize the window of opportunity that had opened for privatization before the state bureaucracies regrouped and resisted the process. Others advocated a more gradual scaling back of state enterprises as new private sector firms emerged in the economy. They were in favor of the privatization of enterprises through the sale of assets to those likely to work on improving the performance of the companies. They also stressed the imposition of `hard budget constraints' on enterprises so that chronic loss makers would be forced out, leaving the more profitable enterprises to attract investors. Hungary followed this gradualist approach to privatization, and it appears to have proved more conducive to genuine restructuring of enterprises. By contrast, experience has shown some of the pitfalls of the rapid privatization approach. In the Czech Republic, for instance, the assets transferred to millions of ordinary citizens in the first phase of rapid privatization were sold by the recipients and ended up being consolidated in investment funds. But there was no genuine restructuring of enterprises, either because the investment funds lacked the capital to develop them or because the funds were in turn controlled by state-owned banks that did not impose hard budget constraints. The weak growth performance of the Czech Republic in the late-1990s, relative to other CEE countries, is attributed in part to its weak enterprise reforms. Rapid privatization fared even worse in Russia. The country's mass privatization program of 1992-94 transferred ownership of over 15,000 firms into private hands. However, contrary to expectations, insider privatization did not lead to self-induced restructuring of firms. It was hoped that secondary trading would introduce outside ownership, and that transparent methods would be used in the second wave of privatization of remaining firms still in state hands. Neither hope was fulfilled. Insiders were wary of relinquishing control; workers feared the cost-cutting that might occur under outside control, and managers found it easier to keep enterprises alive by lobbying the state for subsidies than to foster competitive performance through involvement of outsiders. The second wave of privatization, in particular the so-called "loans-for-shares" scheme, was non-transparent and systematically excluded foreign investors and banks in favor of parties with ties to government interests. Overall, the experience of the transition economies suggests that privatized firms tend to restructure more quickly and perform better than comparable firms that remain in state ownership, but only if complementary conditions are met. These conditions include the presence of hard budget constraints and competition, effective standards of corporate governance, and an effective legal structure and property rights. (International Monetary Fund, 2000, para. 2-6)In any economy, a primary concern is that of finance. It’s even more important in a transition economy that must remain fiscally viable as it adjusts to the new system. As a result, one of the first systems established in any transition economy is a banking system. The post-communism transition economies that emerged out of Russia elected to set up a two-tiered banking system: a central bank and commerce banks. There were many factors, however, that made this a challenging task.Aristovnik, Bercic (2007) of the University of Ljubljana have this to say regarding fiscal reform in transition economies:At the beginning of the transformation process fiscal policy had an important role in replacing the decline in private consumption which had appeared as a consequence of the collapse of output. Most transition economies implemented major fiscal reforms, some more successfully than others. In the early stage of the transition the need for major fiscal reforms was generally underestimated. The emphasis was more on the need for rapid privatization and ‘getting the state out of the economy’; the need to reform state structures and the public administration in order to perform their very different but crucial roles in a market economy received less attention until a number of fiscal crises emerged. Policy-makers in transition countries have been facing a combination of historical expenditure commitments, uncertainty about new revenue sources coupled with uncertainty about the general macroeconomic situation in the country. Indeed, the state of public finance usually acts as a litmus test of the progress achieved and the degree of internal consistency and soundness of transformation policy. In these circumstances, if fiscal policy is inconsistent there is a substantial and continuing risk that public deficits can leap out of control and eventually become unsustainable. Unsustainable government debt paths can eventually lead to sharp adjustments, if not to a crisis. Hence, fiscal sustainability is a highly desirable quality which should be measured on a regular basis in order to avoid unfavorable macroeconomic conditions. (p. 2)»Module 7: Transition and the Global EconomyModule 7 Module 7 analyzes the impact of globalization on world economy, and transition economies in particular, and examines how the government’s provision of social welfare has shifted since transition.Module 7 looks at transition economies in practice, primarily as it relates to a country’s financial standing. As you have studied and will hear again in Module 7, transitioning from one economic system to another is not as easy as it may seem. May countries struggle significantly to make the shift, while some never quite make it. How, then, does a country ensure a successful transition for its citizens and government? Continue reading to find out. For your success in Module 7: In his policy research working paper entitled “The Integration of Transition Economies into the World Trading System,” special economic advisor at the World Trade Organization, Constantine Michalopoulos (1999), asserts the following regarding transition economies – particularly as they integrate into the world trading system:Integration in the world trading system fundamentally depends on whether policies and institutions are established in a country and its trading partners which are conducive to the mutually beneficial exchange of goods and services based on specialization and comparative advantage. Effective integration of the economies in transition thus, involves not only their own trade policies and institutions but also those of their trading partners which affect market access and the terms of trade. (p. 1)Integration involves abiding by the rules of conduct that govern the multilateral trading system. These rules have been established and are being implemented in the context of the agreements administered by the World Trade Organization (WTO).These agreements include trade in goods (General Agreement on Tariffs and Trade, GATT), trade in services (General Agreement for Trade in Services, GATS), as well as other aspects of international exchange of goods and services, such as trade related intellectual property rights (TRIPS), sanitary and phytosanitary standards (SPS), government procurement, etc. The policies and institutions governing these matters under central planning were either radically different or completely lacking. Thus, membership in the World Trade Organization is an essential element, perhaps even a necessary condition for full integration in the world trading system. (p. 1)While the bulk of the reform and adjustment effort must be made by transition economies, WTO members and especially the U.S. and EU need to make some changes as well. First, both need to review their policy regarding "non-market economies" as it relates to anti-dumping and in the EU case, safeguards, to ensure that countries where market decisions prevail—however imperfect the markets may be—are not subjected to even more opaque and non-transparent procedures than those normally associated with anti-dumping practices; and are not encouraged to enter into cartel like price fixing arrangements. This should be done immediately and irrespective of the status of WTO negotiations. (p. 33 )Second, countries which have gone through the WTO accession process can be judged to be "market" economies and should be excluded from the "non-market" procedures applied in anti-dumping and safeguard measures. Third, consideration should be given to extending the time frames—but not deviating from the principles—regarding the implementation of commitments in WTO areas where transition economies' institutions are weak—e.g. phytosanitary and other standards, customs valuation. Whereas more technical assistance than currently provided to these countries to strengthen their capabilities in this area may be needed, it should be recognized that technical assistance alone does not build institutions and that the latter take time to put in place and become effective. (pp. 33-34)Finally, as many of these countries will be unable to become members before the launching of the new WTO Round of multilateral negotiations, arrangements will have to be made for their effective participation in the Round as observers. There are precedents for this under the GATT Uruguay Round of multilateral trade negotiations. Such arrangements would probably require that they commit to a standstill in trade measures, just like other participants in the Round. One way or the other however, they need to ensure that they do what it is necessary for accession at least by the end of the next Round, so as to be able to participate more effectively in the multilateral trading system. (p. 34) Though many might consider it a positive move to transition out of a command economy and into a free-market economy, there are negative consequences of such a move. According to The World Bank Group (2011), The dismantling of the state-owned enterprise systems have resulted in increases in poverty as wages dropped in the face of disruptions in trade and financial links, unemployment increased in some cases as newly private firms struggle to become competitive, and vulnerable groups generally were not able to rely on heavily state-subsidized support services. These changes were exacerbated by the collapse of historic trading relationships and fiscal shocks to state budgets. In many cases, poverty and increasing urbanization have further stressed and weakened family and community-based coping mechanisms, particularly in Asia. (para 2).The effects on households of these economic swings were dramatic. Under central planning, the command economy promised cradle-to-grave income security. While standards of living may have been quite low in this system, they were secure. There were three legs to the system:a.Benefits in kind: low-cost housing and utilities, cheap transportation, and almost free social services such as childcare, education, and health care. There were quality issues but few access problemsb.A guaranteed job c.Cash payments to households to support dependents—child benefits and pensions to support the disabled and the aging. There were also a range of special subsidies for various groups (either needy groups such as disabled veterans or groups deemed to be of particular merit such as party officials). The transition affected all three legs. The drop in income and the development of a market economy knocked out the guaranteed job. The fiscal crisis that resulted from the income decline and initial difficulties in collecting taxes from the non-state sector forced large cuts in (a) and (c). As a result, households became at once poorer and more vulnerable. The vulnerability was exacerbated by the loss of financial savings, wiped out by the initial bout of hyperinflation and/or by subsequent banking system crises. While most households were able to retain their housing (their main source of wealth, and not a liquid one since there was no housing market), some households were forced to sell their consumer durables at low prices in order to survive. Households also suffered serious social and psychological costs, caused by the destruction of “normal life.”Governments were severely limited in what they could do because of the transition-induced fiscal crisis. Governments needed in many cases to scale back their size and scope to a level more consistent with a market economy, but the fall in output imposed an even greater cut in a short amount of time. For the richer countries, expenditures as a share of GDP stabilized in the range of about 40 percent, but poorer countries not only lost large chunks of output, but revenues as a share of the remaining output shrunk as well, to levels more common in very low-income countries.In general, countries should consider trying to move resources out of social insurance programs by tightening eligibility and moving the funds into two areas—means-tested programs and overall social service delivery. Social insurance programs as currently structured have reduced the labor supply of the working-age population at a high cost (e.g., pension systems). Especially in low-income countries, more funding for other social services could improve access for the poor and reduce vulnerability. For example, expenditures could be shifted into programs to reduce the risk of poverty posed by high health expenditures or improve access to education. This is not the most targeted resource re-allocation (most incidence studies would find the benefits accrue to middle-income groups), but since these social services are used more intensively by dependents (the old and the young), this approach would favor households with more dependents, who do tend to be poor. Some pro-poor elements should be included (sliding fee scales, etc.). Of course, parallel efforts need to be made to improve the quality and cost-efficiency of these primarily publicly-provided services (including increased use of non-governmental contractors).Adequate financing for safety net programs is key. Purely local financing of safety net programs seems to ensure poor targeting, as the poorest areas do not have adequate funds. Better results seem to be registered when national financing (ring-fenced or earmarked) is combined with local community administration. However, this result is not strongly robust. It clearly depends on the accountability structures of local administrators and their marginal propensity to spend on the poor. Neglect and exclusion of ethnic minorities is a common problem, which can only be countered by national monitoring. Given the transient nature of poverty, flexibility in program design and regular re-certification of eligibility is also important. Countries with extreme fiscal decentralization could consider a partial national financing (matching requirements), but this approach will continue to favor richer areas.Regional pockets of poverty may benefit from increased use of employment generation programs such as labor-intensive public works, especially if used in combination with back-to-work incentives in other safety net and insurance programs.To view more data regarding global trading trends, check out the following»Module 8: Changing Views of Economic SystemsModule 8 Module 8 evaluates the growth patterns of transition economies and explains how to encourage growth and sustain stability for transition economies. It also provides a few possible trends for the future evaluation of economic systems in a new century. The capstone module for this course, Module 8 evaluates the future of our global economic systems, primarily the transition economies you have been studying to date. It is the belief of many economists that change is inevitable and will be global. As countries are no longer islands unto themselves, it will be interesting to see how economies respond to the ever-flattening globe and in turn, respond to one another. For a strong finish to this course:Beginning with the writings of Adam Smith, economists have recognized the importance of institutions for economic growth. The recent endogenous growth models further emphasize the role of institutions in supporting economic growth; given that technological progress is the critical determinant of long-run economic growth, policy makers must focus on the incentives that drive learning-by-doing, investment that generates positive externalities, and, most importantly, the creation of new ideas.Growth models tell us which variables are critical to the growth process, but it is institutions (incentives!) that determine whether or not growth will actually occur. Only if institutions are compatible with saving, investment, financial intermediation, international trade and investment, investment in human capital, innovation, research and development activity, and a vast range of creative and entrepreneurial activities can economic growth occur. The explosion of real per capita output over the past 200 years must be seen as, primarily, the result of changes in institutions that caused individuals to increasingly choose productive and innovative activities rather than wasteful or destructive activities.The challenge is, therefore, to find a way to speed up the creation of institutions that promote economic growth. Notable economist and professor Paul Romer would classify growth-enhancing institutions as meta-ideas, which is his term for new ideas that are particularly fertile in producing a string of further new ideas. We discuss several institutional meta-ideas. Individual property rights are the subject of one section; another deals with patents and copyrights.To read or listen to a Library of Economics and Liberty interview on economic growth with Paul Romer Click here:http://www.econlib.org/library/Columns/y2007/Romergrowth.html Property rights eliminate the free rider problem inherent in any organization where there is communal ownership and a sharing of the profits. They provide a greater freedom of choice because assets can be accumulated as a store of wealth, which can be converted into other assets or consumption as the need arises. And, resources can more easily move from one application to another as an economy grows and changes because property ownership facilitates sales and purchases of assets and productive factors. Markets for land, equipment, and materials are not possible without well-defined private ownership, and without markets, the transfers needed for the smooth transition of an economy are much more difficult. Property ownership also acts as a great incentive for innovation and investment. Costly innovation can only occur if the entrepreneur is assured the rewards of her innovative activity. And, similarly, the saver and investor will only tie up their wealth in long-term projects and assets if their ownership of the projects and assets is assured. Another important characteristic of well-defined property rights is that they reduce the possibilities for exploitation by groups who, in the absence of well-defined ownership, have arbitrary control over the use of land, equipment, and materials.It is one thing for an economy to emerge, transition, and grow. It is another for that economy, and the government that dictates it, to sustain its growth and the strides it makes both on national and international stages. Assistance from international organizations like the United Nations can help.According to the United Nation’s (n.d.) plan for global economic development: National developmental policies should be formulated in conformity with national needs, conditions and development priorities and should take into account the lessons learned from decades of development experience. Among the latter, the dynamic role of the private sector and the contribution of human resource development in creating wealth figure prominently. The challenge for public authorities is, inter alia, to develop and implement policies that are conducive to prosperity, eradicate poverty and conserve the environment.To this end, Governments should encourage a supportive environment for the private sector, including active competition policies, the application of the rule of law, an open framework for trade and investment and sound fiscal and monetary policies. In the area of finance, policies need both to promote domestic savings and to attract external resources for productive investment. For both purposes, it is necessary to improve the efficiency of domestic financial markets. Addressing the needs of people living in poverty, disadvantaged and vulnerable groups of society and the creation of more and better jobs requires attention to be given to conducive macroeconomic policies and to such issues as human resources development, gender equality, public participation and social integration. Social and environmental factors should be considered as important elements to be taken into account by all countries in the formulation and implementation of macroeconomic policies. Particular attention should be paid to the effect of structural adjustment programs on people living in poverty and on disadvantaged and vulnerable groups of society.Increased economic integration and interdependence places greater responsibilities than before on all countries, but particularly the developed countries, to contribute to ensuring that their domestic policies are favorable to economic growth and development in the rest of the world. National and international actions are closely interrelated and should be seen as mutually reinforcing components of the overall goal of achieving development. In order to foster a supportive international environment for development, countries should pursue economic stability, full employment, a low rate of inflation, sustainable external and internal balances, including the avoidance of excessive budget deficits, low long-term real interest rates and a measure of exchange rate stability. They should also ensure open financial and commercial markets and, where appropriate, provide concessional aid flows. International cooperation in the formulation and implementation of macroeconomic policies should be reinforced with a view to promoting greater coherence and consistency of domestic policies and thereby enhancing their effectiveness. Measures should also be taken to broaden the cooperation among monetary authorities in order to maintain a sound international financial system. This enhanced cooperation should take full account of the interests and concerns of all countries. Multilateral surveillance should correspondingly address the policies and measures of all countries.The market economy has emerged as the dominant paradigm at the end of the 20th century. As the old systems slowly die away, new economic cultures are spreading across the world. Consumerism, international competition, cheaper, faster production and technology are the result of a general acceptance of open trade and industry liberalization.According to the website econp.org and their article titled “Economic system of the future” (2010), sustainability must be met at both the national and global levels:If economic systems are related to the degree of knowledge accumulated by a society, we may be on the verge of a new economic system substantially different from previous. The scientific and technological knowledge are advancing in all fields to a historically unprecedented rate. And also is shortening the length of time between the announcement of an invention and its implementation and widespread use. In addition, new information technologies and communication, computer and Internet are extraordinary advances that are directed specifically to the processing, accumulation and transmission of information so it is even easier to increase and diffusion of human knowledge. (para. 2)Looking to the future economic system, we see no reason to erase the old conflict between the individual and the state, but to change substantially. It is possible that the individual is increasingly free to "pursue happiness", but in the free pursuit is likely to be many losers, falling on the road. It seems very fitting to the state has to intervene to help the most backward, take some of the benefits to be gained by the knowledge accumulated throughout the history of mankind and redistributed among all. That will not change or, in any event, there will be many who demand it. (para 7)But this state must also change substantially. If firms are multinationals and the benefits are global, the redistribution must also be global. The public institutions and international organizations are growing in number, size, diversity, effective ... and aggressiveness. We interpret these phenomena as the rise of an empire, a world government. And that means the weakening of the old states and empires. (para 8)All these phenomena are so different from everything that man has known in its history it possible to consider that the economy is emerging is a completely different from all others. Hopefully better. (para 9)INTERNATIONAL BUSINESSPortfolio Project (350 Points)Identify a local United States business that you will propose should venture into new a new foreign market. (If you are a foreign student, you may use a local business in your own country.) For example: A local microbrewery, a high tech start-up in the mobile area (new app), an eco-friendly new packaging product, a medical service for medical tourism, a corporate wellness program, a new building material, etc. You may choose one of these, but you are encouraged to focus on products or services that you have a personal interest in.Your Portfolio Project should be a comprehensive proposal, written now as a seasoned executive to your company’s executive management. It should include your analysis and recommendations supported by current research findings. As you progress through the course, you will be assimilating your newly gained knowledge into the re-writing and expanding of your idea, culminating in the final delivered assignment, which will be written as a seasoned executive who is certain of those choices and their merits for the company.The writing of the proposal is a process you will undertake throughout this course. In Modules 2, 3, 4, and 6, there are discovery steps you will undertake that will culminate in your submitted final Portfolio Project: a professional proposal.The intermediary deliverables in Modules 2, 3, 4, 6 that are requested of you during the course are designed to help you progress through this process in a productive and controlled manner. Your commitment to deliver those deliverables and go through the discovery process is a way for you to experience the actual critical and analytical thinking required for today’s executives in international business in order to make successful decisions. See further details about the deliverables below.Content Pages»Module 1: Global Marketplaces and EnvironmentsModule 1 In Module 1, students will investigate the meaning of international business. They will also explore the critical importance of understanding international business in today’s world economy, identifying and describing the basic forms of international business activities. This module will also discuss the causes of globalization and the growing role of emerging markets in the global economy.International business is any business conducting cross-border commercial transactions with individuals, private or public organizations, and globalization is the integration of markets, nations and technologies through international trade and foreign investments. The business goals we seek in this environment are to have our business reach farther, faster and cheaper than ever before. One beautiful organization the textbook covers that embodies most of the principles covered in this module is FloraHolland: http://www.floraholland.com/en/AboutFloraHolland/Pages/FloraHollandWherebeautymeetsbusiness.aspx It is the world's largest auction organization, processing more than 12 billion flowers and plants a year. The cooperative flower auction offers growers and customers a network of six national and international marketplaces. It is most likely the source of flowers you yourself have bought or received sometime in your life. As international business students, it is important for you to become familiar with the key geography and political boundaries of the world’s major marketplaces. Then we will be looking into legal issues affecting international trade. One current legal example is Chinese smartphone companies, which are potentially at risk of violating intellectual property rights, since foreign companies, including Google and Microsoft, hold most of the important smartphone patents, whereas the patents held by domestic companies have to do with physical designs rather than technologies. In 2011, with Chinese manufacturers shipping some 4.55 billion handsets, domestic brands have squeezed the market share from overseas rivals to possess nearly 72%. Other issues covered are those you might already be familiar with, such as piracy and counterfeiting. Also, the issues of tax evasion by multinational companies (MNC’s) can be illustrated through the case of Apple. A New York Times article of April 2012 describes how Apple sidesteps billions in taxes:http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?pagewanted=allFinally, Venezuela and its transition from a capital market-driven economy to a nationalized economy driven by Hugo Chavez is a case that shows international political forces must be understood in order to acquire the full picture of international business. An article that can provide you plenty of food for thought is this one by Daniel Gross from Newsweek: http://www.thedailybeast.com/newsweek/2012/04/29/myth-of-decline-u-s-is-stronger-and-faster-than-anywhere-else.html In the article, certain figures relating to international business are brought up: America exports $180 billion in goods and services every month. In 2010, 9.2 million American jobs were supported by exports. The same year, for the firms in the S&P 500 stock index, 46.3% of revenues came from outside the U.S., up from 43.5% in 2006. As the article shows, the U.S. benefits directly from its global leadership in international business, a position which has been threatened but sustained as globalization increases. It is also important to understand at least the basics of why companies conduct business across borders. Even small businesses are becoming more active in the international business environment through activities such as buying and supplying components; students who are planning to start their own businesses should also be cognizant of international business. The basic forms of international business activity are importing and exporting, international investments, licensing, franchising and management contracts. Exporting involves selling products made in one’s own country for use or resale in other countries, while importing involves buying products made in other countries for use or resale in one’s own country. Exporting is important to both large and small firms. The term multinational corporation (MNC) is used to identify firms with extensive involvement in international business. MNCs typically buy resources, create goods and/or services, and then sell those goods and services in a variety of countries. The U.S. is home to many world-renowned MNCs like Boeing, Wal-Mart, Apple, Exxon-Mobil, Proctor & Gamble, and others. The Internet has had a significant impact on international business in at least three ways. First, the Internet facilitates international trade in services (e.g., banking, education and retailing). Second, it has helped level the playing field between large and small firms entering a foreign market, since even small firms can sell their products internationally on the Web. Third, the Internet can make business-to-business transactions (e.g., bringing together suppliers and buyers) much easier and more efficient. Amazon sites reached the largest global audience of all Internet sites with more than 282 million visitors in June 2011, or 20.4% of the worldwide Internet population, according to the study covered in this article: http://www.comscore.com/Press_Events/Press_Releases/2011/8/Amazon_Sites_Visited_by_1_in_5_Global_Internet_Users_in_JuneThe U.S. has the largest and most technologically powerful economy in the world, with a per capita GDP of $48,100 (“World Factbook,” 2012). The size and political stability of the United States provide the country with a unique position in the world economy. America accounts for one-tenth of world trade in goods and services, and therefore attracts the exports of lower-income nations that are trying to develop. Also, it is a favorite target for firms from higher-income countries. In addition, the U.S. dollar serves as the invoicing currency in approximately half of all international transactions, making it an important component of the foreign currency reserves owned by governments around the globe. International trade, although growing in recent years, is still a relatively small component of the U.S. economy. This phenomenon is probably due in part to the large geographic size of the country. Although the second largest country in the world, Canada, has a relatively small population of 34 million, most of them are concentrated along its southern border with the United States. The country has close political and economic ties with the United States, although it has tried to retain a separate cultural identity. The United States is a dominant market for Canadian products, receiving more than three-quarters of Canada’s output in a typical year. The trading relationship between the United States and Canada is the single largest bilateral trading relationship in the world.Mexico, the world’s largest Spanish-speaking nation, is the third major economic power in North America. Mexico follows a federal system similar to that of the United States, under which a new president is elected every six years. In 1994, Canada, Mexico, and the United States initiated the North American Free Trade Agreement (NAFTA). Mexico signed a similar agreement with the European Union in 1999. In 2000 it signed free trade pacts with El Salvador, Guatemala, and Honduras; and in 2004 it signed pacts with Japan and Uruguay.The countries of Western Europe are among the most prosperous nations in the world. They can be divided into (1) the members of the European Union (EU) and (2) the other nations in the region. Twenty-seven countries belong to the EU. The members of the European Union have agreed to reduce barriers to trade and investment among themselves in an effort to achieve greater prosperity. In 2002, twelve of the EU nations eliminated their national currencies, replacing them with the euro (but not the UK, for example). Germany, the third largest economy in the world, is the most economically powerful nation in the EU. The newest EU members were either part of the Soviet Union (Estonia, Latvia and Lithuania) or allied with the Soviet Union politically and economically (Slovenia, Croatia, Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania). Countries in Western Europe that are not a part of the EU include Iceland, Switzerland, Norway, Andorra, Monaco and Liechtenstein. These countries, considered rich by the World Bank, follow free market-oriented policies.Asia, home to over half the world’s population, produces less than 25% of the world’s GDP. Asia is unique in that it is a source of both high- and low-quality products and of both expensive and inexpensive labor. Further, the region attracts MNC investments, and is a major supplier of capital to non-Asian countries. The People’s Republic of China (PRC), the most populous nation in the world, is also the world’s largest communist country. The PRC’s growth has been governed by a series of communist policies, the more recent of which have focused on freer market policies. India, the second most populous country in the world (with more than one billion persons), is also one of the world's poorest (with per capita income of $1,180/year). It has relied on state ownership of major industries as a key to its economic development. Japan, with a population of 128 million, has enjoyed rapid growth over the last 50 years, but Japan's economy slowed in the 1990s, averaging today less than 1% annual growth. The continent of Africa covers roughly 22% of the world's total land area and is composed of 54 countries. The African continent is home to 1 billion people. Though countries on the African continent are now independent, some vestiges of colonialism remain and affect international business. Natural resources, particularly oil, and agricultural production are important to the African economy. Much of the economy still revolves around subsistence farming. South Africa is expected to be the dominant power in the continent during the twenty-first century. Most of the continent will remain as emerging markets.South America's 13 countries share not only a common political history, but also many economic challenges, such as inflation, inefficient producers, and widespread poverty. The nations of South America are adopting free trade agreements with neighboring countries and are following a policy of privatization; therefore, the region’s role in world trade is expected to increase.Emerging markets are countries whose recent growth or prospects for future growth exceed that of traditional markets. Economic growth is defined as the increasing capacity of the economy to satisfy the wants of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs (labor, capital, material, energy, etc.) for a given amount of output. Lowered costs increase demand for goods and services. Economic growth is also the result of population growth and of the introduction of new products and services. Brazil is one of the big current emerging markets (as opposed to China and India, which have already become global market leaders in the last 5 years).Trading blocs, such as the North American Free Trade Agreement and the European Union, stand to have a great impact on international business because they change the rules of trade and, in some cases, investment, presenting new opportunities but also new threats to both foreign and domestic companies. The EU in 2011-2012 is facing one of its greatest challenges. Christine Lagarde, executive director of the International Monetary Fund (IMF) was interviewed about the need for a new “grand vision and collective approach for the euro in relation to the global economy”:http://www.reuters.com/video/2012/06/05/reuters-tv-grand-vision-still-needed-to-address-glo?videoId=235839072&videoChannel=117853This challenge, as EU members face the possible dropping of Greece from the EU group and the banking crisis in Spain (after previous debt challenges faced by Portugal, Ireland and Iceland), is impacting international business all over the worldLegal systems vary across countries for historical, cultural, political and religious reasons. Access to the legal system also varies from country to country. For example, the United Kingdom and its former colonies all follow a legal system based on common law. Common law is law based on the cumulative wisdom of judges’ decisions on individual cases through history. Thus, each country’s legal system evolves as individual cases set precedents. Many governments place constraints of foreign ownership of firms in certain industries. For example, the U.S. limits foreigners to 25% ownership of U.S. television and radio stations (similar rules also currently exist in Europe). Most existing laws predate the Web and the Internet. Adjusting these laws to the needs of the global Internet is a difficult task. Activities sponsored by a Web site may be legal in one country but not in another. This NY Times article addresses privacy laws as they pertain to European laws:http://www.nytimes.com/2012/01/24/technology/europe-weighs-a-tough-law-on-online-privacy-and-user-data.html?pagewanted=allTable 3.1 in Chapter 3 of the textbook shows losses due to software piracy for different areas of the world. Trademarks, patents, copyrights and brand names all require protection from piracy. This article from the Times of India states, “Microsoft Corp and Adobe Systems Inc. are among software companies that lost $13.5 billion to program pirates and counterfeiters in Europe last year” (Bloomberg, 2011, para 1).Insufficient fines are being blamed for part of the problem as the European Union is working to change its intellectual property rules.Accounting rules differ from one market to another. Differing accounting standards make it difficult to compare the financial reports of firms from different countries. A country’s accounting procedures will reflect its legal, cultural, political and economic situation. For example, a common law country develops accounting practices via the decisions of independent standards boards, while in a code law country, accounting practices are determined by law. The U.S. Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002, commonly known as the Sarbanes-Oxley Act. The act requires tighter internal and external auditing controls. Complying with the act can be expensive for firms, and as a consequence it appears that more foreign firms are choosing the London and Luxembourg stock exchanges over the NYSE. But legal and accounting considerations are not the only ones impacting international business transactions. Political risks are a key consideration as well. They include any changes in the political environment that may adversely affect the value of the firm’s business activities. Some degree of political risk exists in every country. The depth of analysis necessary to assess its magnitude depends on the type of business and its likely duration in the host country. Firms can then make a tradeoff between political risk and the likely rate of return of a particular investment. For example, Hugo Chavez’s policies in Venezuela have hindered foreign investment in the petroleum sector and production levels in the oil fields have declined because of under-investment in infrastructure and in the development of new oil fields. Chavez has also ordered oil to be sold to Cuba, Argentina, Ecuador and numerous Caribbean nations at well below market prices. These anti-business policies have caused many foreign firms to leave Venezuela, and to move capital and investments out of the country.Assessing political risk is a matter of balancing risk and rewards. In a high-risk situation, it is imperative that the rates of return are high enough to offset the risks. A firm can take steps to reduce its vulnerability by reducing its net investment, and selling shares in the business to host country citizens. Additionally, the firm might attempt to build some domestic political support in the host country by being a good corporate citizen (e.g., purchasing products from local suppliers, and employing host country citizens in management and administrative positions). Backward»Module 2: Culture, Ethics and Social Responsibility in International BusinessModule 2 This module deals with the primary characteristics of culture and how they influence international business. It explores the world’s major cultural clusters and their usefulness for international managers. It uses Hofstede’s primary findings about differences in cultural values to explain how cultural conflicts may arise in international business. It also discusses ethics in a cross-cultural and international context and how to manage ethical behavior across borders. This module explores the “softer” business dimensions of culture, ethics and social responsibility. These dimensions are key to the successful management of an international enterprise even in cases of giants such as Walmart. Make sure you gain insight into these dimensions through the lectures and suggested links and are able to put yourself in a position of making a managerial presentation covering the studied case of cultural class in the boardroom. Elements of Culture and their Interaction - Social Structure, Language, Communication, Religion, and Values and Attitudes and How They Affect the Local Environment in Which International Businesses OperateWhy is culture a topic necessary to be addressed in international business? Did you know that loans that collect interest are considered by some to be sinful under Islamic Sharia law? See, for example, this newspaper report:http://www.mndaily.com/2012/02/07/minneapolis-helps-muslim-businesses-follow-sharia-law Sharia is the moral code and religious law of Islam. Saudi Arabia and Malaysia are countries that follow Islamic banking, therefore avoiding the prohibition of interest by following the practice of sharing profit and loss. Likewise, in Israel, Jewish law prohibits commerce on Saturday, the Sabbath. Sunday, though, is a full working day. Now, when it comes to values and attitudes, South Asian countries and India are societies with strong patriarchal norms, a high degree of son preference and pervasive gender discrimination.And while Indian senior managers may encourage women, younger men may still question their qualifications and their right to work, as relayed in this BBC story:http://news.bbc.co.uk/2/hi/7570192.stm As for language-based biases, Mark Vanderbeeken claims, “There are many reasons for the international business community to be grateful to the English language. English is the dominant business language precisely because it gives the global community access to itself – it is widely spoken, lacks the grammatical complications of the romance languages, and has a simple alphabet that lends itself easily to use on the Internet” (Sterling, 2012, para. 4).Mr. Vanderbeeken writes about Italy and how the English language bias impacts innovation in that country as it struggles during the current European economic crisis.Hofstede's Five Dimensions: Social Orientation, Power Orientation, Uncertainty Orientation, Goal Orientation, and Time Orientation. Here is a substantial article in the International journal of Advertising from 2010, which discusses Hofstede's Five Dimensions and their impact on international advertising:http://www.mariekedemooij.com/articles/demooij_2010_int_journal_adv.pdf Why are Hofstedes’ dimensions important? Because in order to develop effective advertising, the consumer must be central to the process. Cultural values define the self and personality of consumers. For example, in large power distance cultures, one’s social status must be clear so that others can show proper respect. Therefore, global luxury brands appeal to those particular cultural social status needs in countries such as India and China.Definition of Ethics and Ethics in International BusinessTrust is the backbone of business. In the current economic downturn, as businesses face the challenge of restoring people’s faith and confidence, ethics can play a key role. Business Ethics is an online magazine with a strong heritage in the fields of ethics, governance, corporate responsibility and socially responsible investing. A lot has changed in the more than two decades since it was founded. Ethics has emerged as front-page news and as lead agenda items in corporate board rooms and the halls of Congress. In a recent issue, the magazine’s key feature is about British bank Barclays, which has been slapped with $450 million in fines and penalties for manipulating information, used to set a critical interest rate, which caused this CEO and President to step down and issue a public apology (Currier, 2012, paras. 1, 15).Social Responsibilities that Companies Have Toward Their Stakeholders, the Natural Environment, and General Social Welfare in Each International CommunityForeign affiliates of multinational companies work to improve their social legitimacy and overcome foreignness by demonstrating social commitment to host-country constituents through corporate social responsibility. Walmart issues a Global Social Responsibility Report annually. For example, the company has committed to improving energy efficiency by 20 percent at the top 200 factories in China from which we source by the end of 2012 (GreenSCM, 2012, para. 4).You can read more about Walmart’s commitment to sustainability on its Website by clicking below:http://www.walmartstores.com/Sustainability/7951.aspx Walmart is particularly sensitive right now to the issue of social responsibility after the NY Times published an expose about their how their Mexico division had orchestrated a campaign of bribery to win market dominance:http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html?_r=1 Attempts by Countries to Legally Regulate Ethical and Socially Responsible International Business Conduct and Potential ConflictsMany countries attempt to regulate ethical business conduct. The new EU Internet Cookie Law (e-Privacy Directive) from 2011 applies to how you use cookies and similar technologies for storing information on a user’s equipment, such as a computer or mobile device. Cookies must not be used unless the subscriber or user of the relevant equipment is provided with clear and comprehensive information about the purposes of the storage of, or access to, that information, and has given his or her consent. Read further about the ICO guidance for cookies: http://www.ico.gov.uk/for_organisations/privacy_and_electronic_communications/the_guide/cookies.aspx Needless to say, American companies must comply for their European users with such a legal requirement even though it does not apply in the U.S.🎬MGT455 Module 2»Module 3: International Trade, Investment and CooperationModule 3 This module covers international trade and its theories in order to describe global strategies adopted by businesses, such as international foreign direct investment, and how supply, demand and political factors influence it. It explores the major arguments in favor of and against government intervention in international trade and the importance of GATT and the WTO to international businesses. It covers the different forms of economic integration among cooperating countries, such as the one supported by the EU.Underlying Economic Forces that Shape and Structure International Business When it comes to economic forces that shape international business, the latest developments concerning world markets have been occupying headlines all over the world and have impacted more than just business, but also political situations, such as the 2012 elections in France, which moved the country back to the left after many years. China’s diminishing rate of growth in 2012, after years of phenomenal growth that outpaced every other country, may have a direct influence on companies actively seeking to exploit the Chinese market ‘s consumer demand. Here is the full text of an article for further analysis of the situation:http://www.forbes.com/sites/85broads/2012/01/27/the-international-forces-that-shape-your-business-strategy/Major Theories that Explain and Predict Trade and Investment - Classical Country-Based Theories, Modern Firm-Based Theories, and International Investment TheoriesAccording to Beim (2011), International investment theories explain the flow of investment capital into and out of a country by investors who want to maximize the return on their investments. Should the Chinese growth rate slow even further, would foreign direct investment in China slow down as well? International investors compare various investment alternatives and select the opportunity that is likely to maximize returns. The fundamental problem China faces is that rising wages will undermine the export model, which is based on being the lowest-cost supplier. In order for China to re-charge its growth, the emphasis needs to shift away from producers and toward consumers, with businesses raising wages, banks raising deposit rates and increasing consumer loans, government offering expanded health and education services. Raising wages to enable greater consumerism will impact export competitiveness immediately, but the benefits of wealthier consumers buying more may take many years to evolve (para. 54).The Drivers for Foreign Direct Investment and How Supply, Demand, and Political Factors Influence FDIThe growth of Foreign Direct Investment (FDI) has accompanied the rise in globalization but Global FDI has declined because of the financial crisis and global recession. The World Bank uses an index to rank countries in terms of the ease of doing business in each country. The index uses several criteria, including how long it takes to start up a business, amount of documentation required, and how much time is taken up dealing with tax administration. In 2009, the top five countries regarded as the easiest to do business in were Singapore, Hong Kong, New Zealand, the UK and USA (“FDI,” n.d.,para. 15). For further information on national economy rankings, please see:http://www.doingbusiness.org/rankings/However, as general uncertainty and the need to retain liquidity during the financial crisis meant that many large investors cancelled investment projects (FDI) abroad. This affected all investing countries, but notably the USA, where outward investment to the rest of the world fell by 41%” (“FDI,” n.d., para. 39).Why Governments Intervene In The Free Flow Of Trade The political crisis being faced by the government of Iran, that of refusing to stop development of nuclear facilities that may end up being used for military purposes, has forced a series of sanctions. including on buying oil from the country. The sanctions aim to cut the flow of petrodollars that fund Iran's nuclear program. Singapore was absent from the list of countries that have adopted the U.S. stand in 2012, but in order not to risk deteriorating relations with the U.S., Singapore has started to lean on oil firms to stop Iran trade (Lim & Pachymuthu, 2012, para. 4). Types of Trade Barriers and How They Are Used A European Union embargo on Iranian crude oil took full effect on July 1, 2102. Prices of goods have soared and the Iranian rial has plunged in value. This is not the first time this has happened. The United States imposed economic sanctions in 1979, soon after the Islamic Revolution that overthrew the Iranian monarchy. Please click on this Reuters report for further detail on the sanction:http://in.reuters.com/article/2012/07/11/iran-sanctions-idINL6E8IB83Q20120711The Role Of Domestic Politics In Formulating A Country’s International Trade PoliciesAyvazyan (2012) reports that China, as a result, has become Iran's number one trading partner and the two countries have announced plans to more than double their annual bilateral activity to $100bn by 2016. Through its economic cooperation and deal-making with China, including a barter agreement designed to facilitate trade despite sanctions against banks doing business with it, Iran has blunted the impact of the international sanctions regime on the country.GATT and the WTO As the Reuters article, “Russia Talks Tough” (2012) reports, Russia is finally set up to join WTO in 2012, just like China did 2001. The move will bring investment to Russia and give it more powerful negotiating status. However, when China did it, it was a critical event that created a power stalemate that has held up the broader discussion on opening up global commerce. Russia has long been the largest outsider in the global trade arena. Russia has made it clear that it will use economic measures to protect its domestic markets in the car and alcohol industries, for example. Russia has been seeking entry into the global trade arena ever since it sought to join GATT in 1993. in order to be finally integrated in the world economy. Read the original 1993 New York Times report here:http://www.nytimes.com/1993/06/12/business/russia-asks-gatt-entry.htmlEconomic Integration and Types Of Regional Trading (NAFTA, Other Free Trade Agreements in the Americas, and Trade Agreements In The Asia-Pacific Region) Australia is a country that highly promotes free trade agreements. In 2012 the government was engaged in negotiating eight of them in various parts of the world. The countries covered by these negotiations account for a further 44% of Australia's trade. One of the key bilateral agreements under negotiations is with China. China has become Australia’s largest two-way trading partner and is vital to Australia’s future economic prosperity. For further exploration of Australia’s free trade agreements see:http://www.dfat.gov.au/fta/index.htmlThe European UnionThe EU, beginning as a common market with initial subsidies to farmers, evolved into a community with coordinated foreign and trade policies. The Maastricht Treaty, signed in 1992, began the process of European monetary union and -- supposedly -- economic convergence among member states. The first part happened; the second did not, as governments, such as Greece, allowed debt to rise and failed to liberalize their labor markets, supervise their banks or harmonize their tax systems. The recent European financial crisis is a big threat to the world economy. There are many analysts, like historian Niall Ferguson, who believe the Union has failed because the economic integration has actually enabled the emergence of two Europes—rich and poor—with 50-percent youth unemployment in countries like Spain, versus Germany, which has now become Europe’s core, reaping the benefits of the weak euro. For a more specific summary view of the arguments, pro and con, click here:http://www.theglobeandmail.com/commentary/munk-debates/the-debate-has-the-european-experiment-failed/article4210624/China’s exports are suffering and its economy faltering because of the drop in demand from the EU, its biggest single market. The International Monetary Fund’s Christine Lagarde warned in April of 2012 during the IMF’s annual meeting (attended by the world’s leading finance ministers and central bankers) that “the eurozone continues to be the epicenter of potential risk” for the world’s economic recovery (“IMF Sees Dark Clouds,’” 2012, para. 6).»Module 4: International Monetary System, Foreign Exchange and Financial ManagementModule 4 This module covers the role of the international monetary system established at Bretton Woods in promoting international trade and investment, the evolution and functioning of the gold standard, and the role of the World Bank. It explains the evolution of the flexible exchange rate system, the balance of payments and how demand and supply determine the price of foreign exchange. It covers the role of international banks in the foreign-exchange market and the primary types of foreign-exchange risk faced by international businesses. It also discusses the primary sources of investment capital available to international businesses.This module takes you further into the history of international business by summarizing the financial aspects of foreign exchanges, for example. It uses the financial crisis as the framework of some of the challenges many businesses are facing globally; therefore, it is advisable that you watch the PBS video giving you an overview of the crisis. Time spent on this module is also important to your portfolio project since your outline is coming due.The International Monetary System and the Balance of Payments Just like in personal finance, the balance of payments (BOP) is the method countries use to monitor all international monetary transactions. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit. Balance of payments is one of the major indicators of a country's status in international trade. As discussed before, several of the EU countries are facing a severe debit crisis, which has put a strain on the whole international financial system.You can get the quarterly report of the U.S. government here to learn more about the country’s international transactions. The international transactions accounts provide information on trade in goods and services (including the balance of payments and the balance of trade), investment income, and government and private financial flows. In addition, the accounts measure the value of U.S. international assets and liabilities and direct investment by multinational companies:http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htmThe History of the International Monetary System Beginning with the Gold Standard and Ending with the Current System of a Managed Float According to the Chatham House Gold Taskforce (2012), in 2011 Chatham House of the UK set up a global taskforce of experts to assess what role, if any, gold could play in the international monetary system in the wake of the current financial crisis. As Chatham House also notes, despite widespread concerns with the performance of the system in recent years, repeated calls by policy-makers across the world for the implementation of far-reaching reforms to the post-Bretton Woods, very few tangible results have been reached. The Chatham House Taskforce (2012), moreover, says a number of influential policy-makers have made allusions to the fact that gold could perhaps once again play a useful role in the international monetary system. Chatham House says it carried out the first in-depth examination of all the different suggested roles for gold in nearly 30 years. The taskforce also notes it even considered the possible role of “digital gold” in a rapidly evolving international monetary system, which some gold analysts believe could offer a viable alternative to currencies. Their conclusion is that reintroducing gold as an anchor would undoubtedly be impractical or even damaging. However, as the world becomes increasingly multi-polar, interdependence becomes the rule; the global economy can be expected to suffer from bouts of great volatility and uncertainty. In such an environment, gold is likely to continue playing a useful role as an effective hedge and safe haven but there is little chance for it to play a more formal role in the international monetary system (p. 28).The Practical Aspects of the Foreign-Exchange Market The foreign exchange market is a worldwide, decentralized, over-the-counter financial market for the trading of currencies. Financial centers around the world function as centers of trading between a wide range of different types of buyers and sellers. The purpose of the foreign exchange market is to assist international trade and investment. The foreign exchange market allows businesses to convert one currency to another foreign currency. For example, it permits a U.S. business to import European goods and pay in euros, even though the business's income is in U.S. dollars. This video is a good introduction to how foreign exchange markets work:(Macro) Episode 33: Exchange RatesSource: http://www.youtube.com/watch?v=xwtgByffoUwWhen you understand how foreign exchange markets work, you can see why Facebook has decided to enable users worldwide to make payments in local currency without being pegged to the U.S. dollar. Allowing payments in local currency should make it easier for developers (who might otherwise be penalized by a system pegged to the U.S. dollar) reach international users (Letzing, 2012, para. 2). How Currency Prices Are Determined With the financial crisis in Europe, the euro is facing serious threats. German Chancellor Angela Merkel has said repeatedly that the euro is the glue that holds Europe together. “A currency is about trust,” she said. “There is a need for an emotional sense of shared citizenship to have a common currency. It is good to have a shared sense of belonging” (Hickley, 2012, para. 26).As Sivy (2012) says, should European countries start leaving the euro zone one by one, that would cause a series of shocks to major banks that hold their debt. On the plus side, after countries left, they would be able to set their economies on a course for recovery. Argentina, which had tied its currency to the dollar in the early 1990s, suffered a major recession after it devalued its currency in 2001. But by 2003, its economy was booming again (para. 6).The Role and Activities of International Banks in the Foreign-Exchange MarketsChinese banks' profits soared amid the euro crisis. Chinese banks accounted for 4% of profits in 2007, but following the economic downturn, now make up nearly one-third (29.3%) of total global profits.Eurozone banks, by contrast, now make up just 6% of total bank profits, compared to 46% five years ago (Gray, 2012, para. 4).http://www.cnn.com/2012/07/03/world/asia/china-banks-rankings/index.htmlIn this video from the Wall Street Journal, analysts claim that the world's central banks can do no more to resolve the euro zone crisis and therefore governments must now take over:http://live.wsj.com/video/what-role-for-central-banks-in-euro-zone-crisis/F11FEBA9-1F65-41D8-AA01-C777FF1E7A5E.html#!F11FEBA9-1F65-41D8-AA01-C777FF1E7A5EIssues Relating to the International Capital MarketsAn international capital market is a world financial center where shares, bonds, currencies, hedge funds, mutual funds and other long term securities are purchased and sold. Ireland and Portugal, two euro zone countries bailed out by EU/IMF rescue packages, are returning to long-term capital markets, but analysts wonder if their struggling economies are actually ready. Ireland and Portugal were forced to turn to the European Union and the International Monetary Fund for financial help after they were devastated by the 2008-2009 global financial crisis. July 2012 was the first time in two years that Ireland had been able to borrow on the open market. Investors think Ireland is doing better than Portugal (“Troubled Eurozone,” 2012, para. 14).The global financial crisis and worldwide recession abruptly halted nearly three decades of expansion for international capital markets, says a McKinsey report from 2009. One of the most striking consequences of the financial crisis was a steep drop-off in cross-border capital flows, which include foreign direct investment (FDI), purchases and sales of foreign equities and debt securities, and cross-border lending and deposits. These capital flows fell 82 percent compared to 2007. The report concludes: Going forward, our research suggests that global capital markets are entering a new era in which the forces fueling growth have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by the rapid growth of equities and private debt in mature markets. Looking ahead, these asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand. (McKinsey Global Institute (2009, p. 7)»Module 5: International Strategic ManagementModule 5 This module covers the components and challenges of international strategic management and the international strategic management process. It outlines the process by which firms choose their mode of entry into a foreign market through forms of exporting and the types of intermediaries available to assist firms in exporting their goods. It identifies the basic issues in international licensing and franchising and discusses the advantages and disadvantages of both. Strategic options such as contract manufacturing, FDI, joint ventures and strategic alliances are discussed.In order to ensure a successful outcome in any business venture, it is important to begin with a strategic plan. In this module you will look into the specific strategies used for entering foreign markets, some of which may apply directly to your own recommended choices for your final portfolio project. You will explore strategies having been used by the Disney company, some successful and some not, therefore providing you with a reference for your own choices. 📖1. International Strategic Management Components and Issues of International Strategic ManagementChanneling business into previously unexplored territories can be as daunting as it is tempting. Companies often try to do too much and fail to realize their true international potential. Typically, a company will profit from an international strategy development if its CEO and senior managers are committed to growing the business overseas not simply by becoming an exporter, but by developing a sustainable business. Steps recommended should include:1.Understanding everyone’s ideas for growing the business and evaluating the range of options2.Developing a common international vision 3.Transforming that vision into a sustainable strategy4.Testing the strength of the chosen strategy5.Assessing and building the management team to deploy the strategy6.Creating an action plan with key steps to realize the strategy7.Establishing an implementation plan to ensure these actions are executed correctlyA successful international strategy development effort should contribute towards a company’s sustainable growth in revenue, profit and market share and increased competitiveness. Andy Bird, Chairman, Walt Disney International, said in January 2012 after Disney announced the acquisition UTV, one of India's premier media and entertainment companies, "Increasing our brand presence and reach in key international markets is a cornerstone of our growth strategy. This acquisition expands our footprint significantly and allows us to more effectively build, monetize and brand multi-platform franchises, and deliver a rich library of content to the world's second largest population" (as cited in “Disney to Acquire,” 2012, para. 2).Strategy Formulation and Implementation Process"In combining the creative capabilities of each company we will integrate a large stable of vibrant brands and franchises in the branded entertainment space," said Mr. Screwvala, UTV’s CEO. "With the middle class expected to grow from 50 million to more than 500 million people by 2025, this market offers huge potential for us to deliver quality branded entertainment to consumers," he said (as cited in Bhushan, 2012, para. 10). As a result of this acquisition and building on UTV's success in the market, Disney will become India's leading film studio. Bushan (2012) also notes that Disney first acquired a 14.9% stake in UTV for about $15 million in 2006. Subsequently in 2008, Disney upped its stake to 32.1%for about $230 million, which also gave Disney a 15% stake (valued at about $30 million) in UTV's broadcasting unit UTV Global Broadcasting Limited. Last year, Disney upped its stake in UTV to 50.44%. As a leading broadcaster running 6 channels with distribution in 20 countries, UTV's acquisition further boosts Disney's position in television, expanding its reach to over 100 million viewers weekly in households across India. Disney will also gain a significant presence in digital media with the addition of UTV’s mobile gaming company Indiagames (para. 10).Strategy Development at the Corporate Level, the Business Level, and the Functional LevelGarrahan (2012) explains that the Indian media sector is growing sharply. In 2010 the Indian media and entertainment industry grew 11% compared with 2009 and generated $13.2bn in revenues due to strong advertising sales, which grew 15%. The deal was completed after a public tender offer for the 20% of UTV shares owned by individual investors. Disney plans to delist UTV from the Indian stock exchange and create Walt Disney Company India, a new holding company that will manage UTV alongside its other assets in the country (paras. 4-5).Various Entry Modes Available To Companies As They Expand Internationally As the interview with Walt Disney International Chairman Andy Bird, “Disney Eyes Growth in Asia” (2009), explains, Disney has also invested in other emerging markets: the group recently struck a deal to begin broadcasting a free-to-air TV channel in Russia after buying a stake in UTH, the Russian media group. Under the terms of the deal, Russia’s Seven TV broadcasting company is being rebranded as The Disney Channel. Like India, Russia is becoming an increasingly important market for Disney. Disney has a three-pronged entry strategy, which takes into account the economic health of a country, the advances in technology made there, and its infrastructure. “When you look at the combination – certainly of the latter two – that really starts to drive our market entry strategy,” said Bird (as cited in “Disney Eyes Growth in Asia,” 2009, para. 4). The article also points out that China, for example, has strict media regulation around television and movies, so that Disney’s entry strategy focuses on consumer retail, which is very developed in the Chinese market, with a lot of other foreign entrants also in the marketplace.Click here to listen to an interview with Bird on their international strategy:http://knowledge.insead.edu/Disney090323.cfm?vid=197Choice of Entry Modes and their Advantages and Disadvantages“China's First Disney Store’’ (2011) reports that one of the modes of entry Disney has is licensing, especially in their consumer products business. The company licenses everything from admissions and hotel bookings at one of the theme parks to subscription and advertising revenues on one of their television networks or theatrical admissions and DVD sales from any of their movies. The article also says the company plans to open its first direct sales store in China by the middle of 2013 as it moves to cash in on the country's fast growing retail market. Outside China, Disney said it was on track to add more than 25 new and remodeled stores in 2012 and ultimately planned to refresh its more than 350 locations worldwide. “China's First Disney Store’’ (2009) also explains that for Disney Park Shanghai, Disney has said that although its discussions with the Shanghai government were advancing, China's central government has yet to approve the joint venture companies and regulatory requirements for the project (“China's First Disney Store,” 2011, paras. 1, 8).Various types of strategic alliances and their scopes and relevant pitfalls and benefits According to The Independent (U.K.) article “Loosing the Magic” (2010), Euro Disney has been blighted with bad luck since its gates opened in 1992 as a world-wide recession loomed and the park came close to bankruptcy. Its gates were kept open by the debt being restructured twice and a bailout from real-life white knight Saudi investor Prince Alwaleed, who injected $415m into the company in 1993 (“Loosing the Magic,” 2010, para. 12). In 2002, Euro Disney opened the Studios Park, just as the post-September 11th tourism downturn began. This time, its savior came in the form of a $395m rights issued in 2005 with Alwaleed again riding to the rescue by personally putting in $40m (“Loosing the Magic,” 2010, para. 12). It left 10% of Euro Disney's shares in his hands, with 50% floated on the Paris Stock Exchange and the remainder held by the Walt Disney Company (para. 13).“Loosing the Magic” (2010) also reports that Euro Disney has made a net profit only once from 2005 to 2011 and, in an attempt to stop the financial bleeding, the company's chief executive, Philippe Gas, said that he had set a target of paying back 25% of its debt by 2013. This would mean making repayments of around $235m a year for three years but Euro Disney's results revealed that the park paid back only $190m in 2011 (para. 9).Euro Disney has long wanted to build a third park to increase visitor numbers and thus revenues. Its original agreement with the French government allowed it to build a third park by 2017 but it recently extended this time frame until 2030 (“Loosing the Magic,” 2010, paras. 12, 17).Analysts question whether Euro Disney will ever make a profit. Some claim its use for the Walt Disney Company is only to get promotion and attendance in Europe.How Strategic Alliances Should Be ManagedIn 2012, Eurodisney celebrated its 20th birthday with over $3 billion in debt. As Neate, Sylt and Reid (2012) report, the park is now the most popular tourist destination in Europe, with more than double the number of visitors as to the Louvre. Its management, however, in a bid to boost attendance at a time when Europe is struggling, has been offering discounts of up to 50% on the price of various packages, which include tickets to the two parks and accommodations at Disney’s seven on-site hotels. The company also has a history of difficult relations with its staff. In 2009, on one of Disneyland Paris's busiest days of the year, staff protested against a pay freeze by striking and marching through the park, causing the first ever cancellation of the famous daily parade anywhere in the world (paras. 5- 15).Philippe Gas, the park's sixth CEO, declared in 2012, “Now we have a calendar of payment that will see all the debt wiped out by 2024. We no longer need Mommy and Daddy to help us" (as cited in Neate, Sylt & Reid, 2012, para.16).http://www.guardian.co.uk/world/2012/apr/11/disneyland-paris-20th-birthday-debt»Module 6: Organizational Behavior, Leadership, and HRM in International BusinessModule 6 This module explores the nature of human resource management in international business through a discussion of basic perspectives on individual differences in different cultures and employee motivation in international business, while looking into managerial leadership and decision making. It describes how teams are managed across cultures and details how firms recruit and select managers for international assignments.This module shifts you away from the economic issues into the human resource ones. Those are analyzed with examples given by the Society of Human Resources (SHRM), and allow you to utilize what you’ve learned about culture in Module 2 to better understand human resource managerial challenges in an international workforce environment. There are two videos that are highly recommended for your viewing that can “bring it home.” Finally, it is also the time for you to submit your draft portfolio project for input from your instructor to ensure you are on target.The Behavior of Managers and Employees in Different Cultures In one of the Wharton School of Business studies of how culture affects work practices in Latin America, there is an observation made by the researchers that companies are expected to behave like a family. Management is to follow a benevolent, paternalistic leadership style. The senior executive has the personal obligation to protect subordinates, and even take care of the personal needs of workers and their families. Wharton concluded that Latin Americans value status within a hierarchy because it indicates social distance between the higher-up and his subordinate (“How Culture Affects Work,” 2005, para. 6).The Wharton study says that in Chile, for example, given adherence to social status, a key cultural element, executive selection and promotion generally reflect physical appearance, age and sex, in addition to social contacts, birthplace and other factors. Employees value social relationships based on personal communication and empathy, concepts that are essential to teamwork. Geographical mobility, it was found, is not favored since executives prefer to stay close to their nuclear families. But the researchers also noted differences between the various Latin American countries due to culture. For example, each country has its own style of confrontation in time of conflict. Mexicans like a style that involves concern for others; Argentines prefer a style that involves mediating between parties (“How Culture Affects Work,” 2005, para. 9).Hofstede’s Work Concerning Individual Behavioral Differences Regarding Motivation, Leadership, and Decision MakingIn Asian cultures, many bosses and managers have not received recognition or praise in their upbringing, and have perpetuated the myth that appreciation is not an important aspect of job. The typical view is that there's no need to recognize or praise employees for doing the job they're supposed to do well. But in today's global marketplace, even in Asia, desire for such positive work experience is becoming an employee demand, especially among younger employees. For example, see this article, “Top 10 factors that motivate employees”:http://www.smbworldasia.com/en/content/top-10-factors-motivate-employeesThe French anthropologist Philippe d’Iribarne did in-depth interviews in three production plants of a French-owned aluminum company, one in France, one in the USA, and one in The Netherlands. The plants were technically identical, but interactions on the shop floor differed dramatically. D’Iribarne in his book identified three different philosophies that control the local management: honor in France, fair contract in the USA, and consensus in the Netherlands. As Hofstede (2007) observed: “Universal solutions to management problems do not exist; they would presuppose one universal type of human being in one universal type of society” (p. 415).Finally, this video is a good illustration of cultural differences impacting businesses:🎬cultural Differences-Team Challenge 2Source: http://www.youtube.com/watch?v=QlifMpIwPusIssues Related to Creating and Managing Cross-Cultural Teams In 2011, Dr. Wendi Adair, Associate Professor of Organizational Psychology at the University of Waterloo, gave a TED presentation on cross-cultural communication, negotiation and teamwork. It uses metaphors to explain this topic with examples from countries such as Russia:🎬TEDxUW - Wendi Adair - Building a new cultural metaphorSource: http://www.youtube.com/watch?v=xb4BousMeZMThe Strategic Significance of Multi-National Human Resource ManagementThe Economist Intelligence Unit published this report in 2010 together with the Society of Human Resource Management: http://www.shrm.org/Research/SurveyFindings/Articles/Documents/Economist%20Research%20-%20Global%20Firms%20in%202020.pdfIn it, Laszlo Bock, vice-president of people operations at Google, is quoted to say: As you get bigger, you feel more removed from other people. You find that people are a little more anonymous, a little less likely to lend a helping hand, and innovation comes a little less naturally. It becomes easier for people to join and say, “I’m just going to worry about what’s going on in the Hamburg office. I’m not going to worry about what’s going on in Paris, let alone Hyderabad. To counteract this, the company advocates communication and transparency” (as cited in “Global firms in 2020,” (2010, p. 11)The report, “Global firms in 2020 - The Next Decade of Change for Organizations and Workers” (2010), stipulates that over the next decade, companies will continue to localize the management of overseas operations, including the management of human resources. Managers will be chosen for foreign assignments based on their ability to work across cultures and learn best practices that can be transferred to other markets (p. 11).Labor Relations in International Business and Issues related to Non-Managerial Employees Labor Relations in International Business including Collective Bargaining, Unions and the Comparative Labor Relations among CountriesIn a 2007 paper published by the IBM Institute for Business Value, the authors, Eric Lesser, Tim Ringo and Andrea Blumberg cited seven keys to succeeding in the globally-integrated world of business. They are:1.Understanding the demographics and capabilities of the workforce.2.Predicting future labor supply and demand.3.Utilizing social networks to increase visibility and application of knowledge across the organization.4.Enabling individuals to perform work regardless of location.5.Facilitating collaboration across traditional organizational boundaries.6.Driving the rapid development of skills and capabilities to meet changing business conditions.7.Evaluating employee performance and providing appropriate feedback.Key for any globally integrated organization is the critical capability to move human capital skill and expertise to business opportunity—or, to put it more simply, to get the right person, with the right skills, at the right time, place and cost (as cited in Boudreau, 2010, p.3).The rest of the IBM case: IBM’s Global Talent Management Strategy: The Vision of the Globally Integrated Enterprise can be found in another report, sponsored by the Society of Human Resource Management: http://www.shrm.org/Education/hreducation/Documents/Boudreau_Modify%20IBM%20Case%20Study_PDF%20Only-CS5-partA-FINAL%20TO%20POST.pdf»Module 7: International Organization Design, Control, and Operations ManagementModule 7 This module explores the nature of international organization design and describes the impacts of international business activity on organization design, as well as the levels of control in international business. It focuses on international operations management through supply chain management vertical integration decisions facing international production managers. It analyzes the meaning of productivity and how international firms work to improve it through quality control and total quality management.It concludes by discussing how international firms control the information their managers need to make effective decisions.One of the key remaining ingredients of international business is the way an international organization needs to be designed and controlled while fully aligned with operational management processes and information technology resources in order to maximize quality and productivity. In this module you will need to virtually visit companies such as ABB, Revlon, GM, Google and BMW in order to gain a perspective on the various ways multi-national companies have addressed this. One of the most important processes in international business is supply chain management. You will have a chance to use a new and exciting social media tool to experience first-hand what an international process like this is all about.Asea Brown Boveri (ABB) is a global organization. It is actually about 1,000 companies operating in more than 140 countries around the globe. The whole operation is managed by just eight top executives at headquarters in Zurich, Switzerland, but each individual company has its own products, resources and so on. Visit Asea Brown Boveri to understand the structure of one of the most successful multi-national companies in the world: www.abb.com. Click around the site thoroughly and familiarize yourself with it. Whole Foods Market, Inc., whose international expansion has (so far) reached only the UK and Canada, is structured entirely around teams. Each store anywhere in the world is composed of an average of 10 self-managed teams with a designated team leader, and the team leaders in each store are a team, called the store team. Visit Whole Foods Market, Inc. at: www.wholefoodsmarket.com. This structure is designed to build an organization that responds faster and more effectively to shifting constraints and opportunities.Walmart International, which is present in 27 countries around the world, is part of Walmart’s organization by divisions such as Walmart Realty, Walmart Specialty Stores, Sam's Clubs, and Supercenters. Visit Walmart Inc.: at www.walmart.com. Organizations designed by divisions stress a particular set of products, markets, services, technologies, and the like. Such organizations are decentralized, with authority for decisions dispersed throughout the organization. Divisional organizations can be flexible and responsive to a changing environment.Revlon, Inc. is organized globally around the functions of operations, finance, human resources, and product research and development. Revlon International is present in 15 different countries. Visit Revlon, Inc. at: www.revlon.com. Functional organizational design puts specialists together and separates them from other specialists. Such organizations emphasize developing and using technical skills, an emphasis that can distract members from the larger goals of the organizationIn order to discuss operations management, we will focus on the automotive industry. BMW announced in 2012 its investment of $400 million on manufacturing its Mini car in Britain. BMW is also considering whether to build Minis in another European location apart from the UK and at Graz, Austria, where third-party carmaker Magna Steyr currently builds the Mini Countryman sport utility vehicle. "Our preferred option is to establish a contract manufacturer as a satellite production as close to our UK operations as possible, at the Nedcar plant in the Netherlands, with whom BMW is in discussions," Harald Krueger, a member of BMW's management board responsible for the Mini brand, said (as cited in Hetzner, 2012, para. 12).But as Reuter’s points out, German daily Handelsblatt in 2012 cited company sources as saying that BMW was examining whether to build plants in Mexico and Eastern Europe. Just like its peers, BMW sees sales volume growing faster abroad in coming years than in Europe, where the market is shrinking amid the euro zone debt crisis (“BMW Eyes New Production,” 2012, paras. 2-3).Another example of BMW’s international operations has to do with strategic partnerships for making auto parts. In 2011, French carmaker PSA Peugeot Citroen and Germany's BMW extended their engine partnership by creating a joint venture to develop, purchase and produce powertrain components for hybrid vehicles. This enabled both companies to standardize key components needed for hybrid power vehicles (“Pugeot and BMW,” 2011, para. 1).International Service OperationsBMW is not only a manufacturing company. In 2011, ING announced it has completed the sale of its car lease activities to BMW Group fleet management division, Alphabet, for 700 million euros (“ING Closes Sale, 2011, para. 3). Through the acquisition, Alphabet is now able to provide its corporate customers with broadened services in 16 European countries. Corporate Car Sharing within the fleet management, for example, is one of the current initiatives of Alphabet to be prepared for future demands. See this article for further explanation of the deal:https://www.press.bmwgroup.com/pressclub/p/pcgl/pressDetail.html?outputChannelId=6&id=T0117994EN&left_menu_item=node__2217Productivity, Quality Control, Total Quality Management and Information Control in International Business How International Firms Manage Productivity and QualityABB’s automotive parts division makes robotics used by companies such as GM. In this short film, you can see how the use of the ABB robotics increases productivity and quality in the welding of transportation equipment:http://www05.abb.com/global/scot/scot241.nsf/veritydisplay/1753ea8c7d386b17c1257751003e00c3/$file/ABB_Drake.movAs you can see on this next video, ABB robots contributed to 70% improvement in productivity for this Australian defense contractor, while maintaining high-level quality and reliability:http://www05.abb.com/global/scot/scot352.nsf/veritydisplay/247583181d2057d4c12576e70051fdc7/$file/CSF_SD_version.mov How to Make Effective Decisions through the Management of InformationAnother automotive giant, GM, provides a great example of the critical use of information technology when making strategic decisions in international management: “We're dancing as fast as we can. There are 167 plants globally in the General Motors universe. We're in 33 countries. At any one time we have about $90 billion of product being shipped to supply those plants. It is formidable. We do manage our products on a global basis. We develop them on a global basis, and we link our development and design centers around the globe,” says GM’s CEO, Dan Akerson in an interview in 21012. “We're looking at our IT systems real hard,” (as cited in Colvin, 2012, para. 9).A 2011 article in Fortune magazine asks the question, “Does Google plan to extend its digital mastery into the automotive industry as a supplier, partner, or original equipment manufacturer” (Taylor, 2011, para. 2)? Google is working on a driverless car with the idea that autonomous cars would reduce highway congestion, cut down on accidents, maximize fuel economy, and free up time for drivers to perform other tasks. Its automated cars use video cameras, radar sensors and a laser range finder to "see" other traffic and detailed maps to navigate the road ahead. The Google advantage does not come from traditional operation excellence in the automotive industry. Rather, it comes from its data centers, which can process enormous amounts of information gathered by its cars when mapping their terrain.🎬MGT455 Module 7»Module 8: International MarketingModule 8 The module covers marketing management issues in international business such as: kinds of product policies and decisions, pricing and promotion issues, kinds of distribution decisions and major forms of payment. It also discusses international financial management issues such as management capital for international investments. In this final module, you will tackle international marketing as developed by companies like Coca-Cola and Levi’s. You will then delve deeply into international financial management and familiarize yourself with specifics illustrated particularly in the case of Blizzard so that you may appreciate the complexity of managerial decisions needed when running an international business. With these two topics of marketing and finance covered, you will be able to complete the research needed for your final portfolio project, having put yourself in the position of a decision maker aiming to successfully launch an American business and/or product/service in a new foreign market.Basic International Marketing Strategies One way to start looking into the basic strategies is to read these top “Ten Biggest International Marketing Mistakes of All Time”: worried 1. When Parker Pen marketed a ballpoint pen in Mexico, its ads were supposed to have read, "It won't leak in your pocket and embarrass you." Instead, the company thought that the word "embarazar" (to impregnate) meant to embarrass, so the ad read: "It won't leak in your pocket and make you pregnant.”2. In Spain, when Coors Brewing Company put its slogan, "Turn it loose" into Spanish; it was read as "Suffer from diarrhea."3. When Braniff International Airways translated a slogan touting its upholstery, "Fly in leather," it came out in Spanish as "Fly naked."4. When Pepsi started marketing its products in China a few years back, they translated their slogan, "Pepsi Brings You Back to Life" pretty literally. The slogan in Chinese really meant, "Pepsi Brings Your Ancestors Back from the Grave."5. Chicken magnate Frank Perdue's line, "It takes a tough man to make a tender chicken," sounds much more interesting in Spanish: "It takes a sexually stimulated man to make a chicken affectionate."6. Scandinavian vacuum manufacturer Electrolux used the following in an American campaign: "Nothing sucks like an Electrolux."7. Hair products company, Clairol, introduced the "Mist Stick," a curling iron, into Germany only to find out that “mist” is slang for manure. Not too many people had a use for the manure stick.8. The American slogan for Salem cigarettes, "Salem-Feeling Free," was translated in the Japanese market as "When smoking Salem, you will feel so refreshed that your mind seems to be free and empty."9. PepsiCola lost it dominant market share to Coke in Southeast Asia when Pepsi changed the color of its vending machines and coolers from deep "Regal" blue to light "Ice" blue, as light blue is associated with death and mourning in SE Asia.10. We can't forget Chevrolet's attempt to launch the Nova (Spanish translation, "Doesn't Go") -- in Mexico (turns out this one appears to be an urban legend and cannot be verified). Many sources on the Internet allege this is untrue. (Henderson, n.d.)Clearly, a lot of these mistakes stem from cultural ignorance. But not all marketing efforts are intended to be divided along cultural lines. Coke’s 2011 global marketing campaign for Fanta rolled out in 190 countries.In this video we see another example of how Coca-Cola reinvents its product mix by how now it unifies its actual drink offerings into one machine that can dispense any flavor to any consumer taste based on the buyer’s need in the moment regardless of what market they are in. Coca-Cola's Freestyle Jet Machine puts buyers in the driver's seat and allows them create up to 104 variations of Coca-Cola's sodas, juices, teas and flavored waters:🎬Coca-Cola Freestyle Jet Machine🔗Go to the VideoWhen it comes to choices of distribution, the responsibility lies with Coca-Cola’s bottlers. Here is an extreme example of Coke being distributed in South Africa in the most challenging conditions but still reaching the remote selling point:🎬Coca-Cola in South Africa🔗Go to the VideoThe Choices Between Standardization And Customization Another successful international American brand is Levi’s Jeans. Levi Strauss & Co. in 1999 tried a marketing campaign to promote a new form of mass customization. It became a sensation, yet it failed miserably. For several years, the clothing manufacturer has offered a process called Original Spin at its retail locations, using digital technology to create a pair of jeans totally customized to fit an individual’s proportions. After its failure, Levi decided in 2010 to come back with mass customization to an extent with a new program called Levi’s Curve ID. Levi has introduced jeans built around shape, not size. This time around, Levi isn’t truly engaging in mass customization, as they are not building the jeans to fit but rather creating jeans around three distinct body shapes that get specified by the customer. Levi’s second experiment in personalization seems to be working with revenue up 7 percent in the third quarter of 2010. See the video segment from the Ellen TV show about it: http://treehouselogic.wordpress.com/2010/11/04/levis-second-attempt-at-mass-customization/ Components Of The Marketing Mix: Product, Price, Promotion, And DistributionThe Levi ID Curve jeans are available in select retail locations since stores carrying the line have to have fit experts to help determine the best jean for the customer. They also sell online but customers need to learn how to measure themselves at home. All Curve ID jean orders ship for free. The jeans come in a variety of rinses (gray, black, blues) and styles (skinny, straight, boot) and retail for $59.50-$79.50, which ranks them higher than regular Levi jeans. Their initial promotion met with some controversy, though. The line of customized shape-fitting denims boasts in a print ad, "hotness comes in all shapes and sizes" (Weiss, 2012, para 2). But underneath that message of empowerment are three models with very similar, slender body typesInternational Financial Management The Different Issues that International Financial Managers Must Face International financial managers have to deal with various international customers, shareholders and suppliers. As a result, they are exposed to exchange rate changes, and face issues about raising capital internationally as well as different accounting standards of reporting. They have to take into consideration exchange rate fluctuations as they affect their sales and investment decisions (exchange rate changes change revenues and also make investment decisions difficult because you need to convert back to your home country to see if the return is higher or if the investment is worth it). They also affect the way they report their financial statements because they have various standards to follow (for example, how should they report the profit or loss for the year, in a foreign currency or home currency? They can be making money in the home currency, but losing in the foreign currency!). ZTE, China’s second largest maker of telecommunication equipment, reported an 80 percent profit drop for the first half of 2012, partially due to foreign exchange losses. “The euro and many other emerging market currencies depreciated significantly during the period as the sovereign debt crisis in the eurozone lingered on,”’ said ZTE chairman Hou Weigui (as cited in “ZTE Warns,” 2012, para. 4). The same applies to many other companies.The Management of Foreign-Exchange Risk AND Working Capital When it comes to international companies facing foreign exchange issues in a volatile exchange marketplace, the results for U.S. companies are highly mixed. Unless they are hedged against the risk of an appreciation of the dollar, (in 2012) U.S. companies are taking in less revenue for products sold in places like Brazil, India, Russia and the euro region. The dollar erased year-to-date losses against most major counterparts in the second quarter as investors sought the safety of U.S. assets amid Europe’s credit crisis. The euro had its worst period versus the dollar since the third quarter of 2011, weakening 5.1 percent… The long term hedge has been to protect against a weaker dollar and a stronger euro. […] As a result about 81% of Fortune 100 companies report they are actively hedging currency in some way. (Green, 2012, paras. 7, 13)
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