Chapter Five

1. Chapter Five Linkages Among Countries

2. Chapter Objectives • To understand why nations choose to cooperate with each other • To interpret a nation’s incentive to trade goods and services with other nations • To discern the scale and scope of capital links among nations • To realize how the movement of people among nations creates and fortifies links • To appreciate the fragility of links among nations and the institutions that monitor them • To grasp the idea of the Internet in promoting links among nations

3. Introduction • The world economy during the past 50 years has become much more international • Many more trades • Much higher direct investment flows • More people moving across national borders • Globalization depends on cross-national links • Links: a convergence of interest or strengthening of relationships that spurs people, companies, or institutions of one nation to deal with those of another

4. Introduction

5. Trade Links Among Nations • Since 1950, the volume of global trade has grown 16-fold • In 1999, total worldwide cross-border exports exceeded $5,460 billion for physical goods produced in agriculture, mining, and manufacturing and $1,340 billion for services such as transportation, tourism, and entertainment • Balance of payments: statistical record of a country’s international transactions for a given time period

6. Trade Links Among Nations • The service sector is the largest component of the U.S. economy • Forecasters see U.S. service exports hitting $650 billion by 2010 • Trade in goods and services is perhaps the most visible way countries create links • Incentives that move nations to trade with other nations: • Mercantilism: encourages a nation to form links with two sorts of other nations

7. Trade Links Among Nations • Absolute and comparative advantage • Key question of absolute advantage is figuring out what products a country should specialize in making for exports • Natural advantage: occurs because of innate features of a nation such as climate conditions • Acquired advantage: occurs when a nation develops specialized skills and technologies • Factor proportions

8. Trade Links Among Nations • National competitive advantage • Four country-specific attributes that make up the national or Porter diamond: • Factor endowments, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry • The theory of national competitive advantage holds that the degree to which a country can achieve international success in a certain industry is a function of its national diamond • Chance and government can significantly affect the character of a national diamond • Strategic trade theory: suggests that a country may predominate in the export of a good or service simply because it was fortunate enough to have one or more of its firms among the first to produce it • First-mover advantage

9. Trade Links Among Nations

10. Capital Links Among Nations • Bretton Woods Agreement: governed world monetary markets from the end of WW II through the early 1970s • Collapsed due to pressure from persistent U.S. trade deficits, emergence of growing stocks of Eurodollars, and accelerating inflation • Floating exchange rates: let governments, MNEs, entrepreneurs, traders, and people begin building capital links

11. Capital Links Among Nations • Financial liberalization has tremendous effects in three areas: • Foreign direct investment: a form of international involvement that involves a company’s significant equity stake in or effective management control of a foreign company • World Trade Organization (WTO) • United Nations Conference on Trade and Development (UNCTAD) • International bond market: made up of all bonds sold by governments, issuing companies, and organizations outside their home nation • International Monetary Fund (IMF) • International equity market: made up of all stocks bought and sold outside the home country

12. People Links Among Nations • A vibrant source of links among nations is the many people who leave one nation for another • International immigrant: a person who takes up residence or who remains for an extended stay in a foreign country • Voluntary migrants • Forced migrants • Current trends: • The wealthier nations continuing to attract and exchange highly skilled labor, the tech nomads • The reality of globalization in business means that few nations can philosophically or practically close their borders to voluntary or forced international immigration

13. Regional Integration • The freer movements of products, capital, and people are powerful tools to build links among countries • Virtually all active alliances today are made up of integration agreements among the neighboring countries in a particular region of the world • North American Free Trade Agreement (NAFTA) • European Union (EU) • Andean Pact • Association of South East Asian Nations • Regional integration: refers to the formal agreement among a set of nations to reduce and eventually eliminate all tariff and nontariff barriers that impede the free flow of goods, services, and factors of production among each other

14. Breaking Links • Links among nations and regions are not easily achieved or sustained • Integration creates enormous economic benefits but can also impose high costs • Sacrifice of national sovereignty • Sacrifice of cultural heritage • Environmental preservation • Nongovernmental organizations

15. Protecting Links Among Nations • The globalization of business depends on maintaining and broadening the existing web of links among nations and regions • World Trade Organization: important to the trade and capital links • Currently, the EU and NAFTA are the key regional groups expanding their web of links • The integrity of the links that support globalization ultimately depends on an informed global society that sees the virtue and accepts the responsibility of the freer movement of products, people, and capital • Worldwide role of the Internet