International Business Strategy, Management & the New Realities by Cavusgil, Knight and Riesenberger

1. International BusinessStrategy, Management & the New Realitiesby Cavusgil, Knight and Riesenberger Chapter 7 Government Intervention in International Business International Business: Strategy, Management, and the New Realities

2. The Nature of Government Intervention • An important dimension of country risk. • Governments intervene in trade and investment to achieve political, social, or economic objectives. • Intervention alters the competitive landscape by hindering or helping the ability of firms to compete internationally. • But, intervention is at odds with the theory of comparative advantage, which argues for more international trade, not less International Business: Strategy, Management, and the New Realities

3. Key Concepts • Protectionism: national economic policies that restrict free trade, usu. intended to raise revenue or protect domestic industries from foreign competition. • Government intervention arises in various forms: • Tariff -- a tax on imports (e.g., citrus, textiles) • Nontariff trade barrier -- government policy, regulation, or procedure that impedes trade • Quota -- quantitative restriction on imports of a specific product (e.g., imports of Japanese cars) • Investment barriers – rules or laws that hinder FDI (e.g., Mexico’s restrictions in its oil industry) International Business: Strategy, Management, and the New Realities

4. Example of Protectionism: U.S. Steel Industry • Bush administration imposed tariffs on imports of foreign steel to protect U.S. steel manufacturers from foreign competition, aiming to give the U.S. steel industry time to restructure and revive itself. • Resulting higher steel costs: • increased production costs for firms that use steel, such as Ford, Whirlpool and General Electric • reduced prospects for selling products in world markets • made U.S. steel firms less competitive • The steel tariffs were removed within two years. International Business: Strategy, Management, and the New Realities

5. Example of Protectionism: Auto Industry • In 1980s, the U.S. government imposed ‘voluntary’ export restraints (quotas) on imports of cars from Japan, to insulate U.S. auto industry. • Result 1: Detroit automakers had less of an incentive to improve quality, design, and overall product appeal. • Result 2: Detroit’s ability to compete in the global auto industry was weakened. International Business: Strategy, Management, and the New Realities

6. Consequences of Protectionism • Reduced supply of goods to buyers • Price inflation • Reduced variety, fewer choices available to buyers • Reduced industrial competitiveness • Various adverse unintended consequences (e.g., while the U.S. dithers, other countries can race ahead) International Business: Strategy, Management, and the New Realities

7. Rationale for Government Intervention • Tariffs and other barriers can generate government revenue. • Safety, security, and welfare of citizens (e.g., FDA barriers on drug imports; barriers intended to protect national security) • Broad-based economic, political, or social objectives (e.g., job creation) • Reduce foreign competition • Protect infant industries • Preserve national culture and identity International Business: Strategy, Management, and the New Realities

8. Special Interest Groups Trigger Protectionism • In a trade dispute, the U.S. government imposed a $50 per ton duty on the import of Mexican cement after U.S. cement makers lobbied the U.S. Congress. • Mexican imports can reach 10 percent of U.S. domestic cement consumption. • The U.S. is one of the world’s largest cement consumers and, suffers from shortages, which are exacerbated by import restrictions. • Mexico proposed substituting import quotas instead of the high cement import tariffs. International Business: Strategy, Management, and the New Realities

11. Tariffs are Widespread • Developing economies -- tariffs are common. • Advanced economies -- tariffs still a factor mainly in textiles, clothing, and agricultural products (e.g., the U.S. recently collected more tariff revenue on shoes than on cars; $1.63 billion vs. $1.60 billion in 2001). • The European Union applies tariffs of up to 236 percent on meat, 180 percent on cereals, and 17 percent on tennis shoes. • United Nations estimates that trade barriers in general cost developing economies over $100 billion in lost trading opportunities with developed countries every year. International Business: Strategy, Management, and the New Realities

14. WTO: A Force for Reducing Tariffs • Governments have tended to reduce tariffs over time. • Tariff reduction was the primary goal of the General Agreement on Tariffs and Trade (GATT) • In 1995, the GATT became the World Trade Organization (WTO). • Countries as diverse as Chile, Hungary, Turkey, and South Korea have liberalized their previously protected markets, lowering trade barriers. International Business: Strategy, Management, and the New Realities

15. Nontariff Trade Barriers Government policies that restrict trade without imposing a direct tax or duty. • Quotasrestrict the physical volume or value of products that firms can import into a country. • Voluntary export/import restraints arevoluntary quotas imposed bygovernments whereby firms agree to limit exports or imports of certain products. • Import license – a formal permission to import, which restricts imports in a way that is similar to quotas- a complicated, bureaucratic process in some countries • Government regulations and technical standards – e.g., safety regulations for motor vehicles, health regulations for hygienic food preparation, labeling requirements identifying country of origin, etc. • Administrative or bureaucratic procedures International Business: Strategy, Management, and the New Realities

16. Investment Barriers FDI and ownership restrictions are common in industries such as broadcasting, utilities, air transportation, military technology, and financial services, oil, fisheries, etc. Examples- • Canada – government restricts foreign ownership of local movie studios and TV shows to protect its indigenous film and TV industry from excessive foreign influence. • Mexico – government restricts FDI by foreign investors to protect its oil industry. • Services sector – FDI and ownership restrictions are burdensome because services usually cannot be exported; must establish physical presence in the market International Business: Strategy, Management, and the New Realities

17. Currency Controls • Restricts the outflow of hard currencies (such as the U.S. dollar, the euro, and the yen), and occasionally the inflow of foreign currencies. • Repatriation of profits – restrictions on revenue transfer from profitable operations back to the home country. • Used to conserve valuable hard currency, reducecapital flight; particularly common in developing countries. International Business: Strategy, Management, and the New Realities

18. Subsidies • Government grants (monetary or other resources) to firms or industries, intended to ensure their survival by facilitating production at reduced prices, or encouraging exports. • Examples: cash disbursements, material inputs, services, tax breaks, provision of infrastructure, government contracts at inflated prices. • For example, in France the government provides large subsidies to Air France, the national airline. International Business: Strategy, Management, and the New Realities

19. Examples of Subsidies • China- Firms such as China Minmetals ($12 b. annual sales) and Shanghai Automotive ($12 b. annual sales), are in fact state enterprises partly owned by the Chinese government, receiving huge financial resources. • In Europe and the U.S., governments provide agricultural subsidies to supplement the income of farmers and help manage the supply of agricultural commodities. • In Europe, the Common Agricultural Policy (CAP) is a system of subsidies that represents about 40 percent of the European Union's budget, amounting to billions of euros annually. • The U.S. government grants subsidies for such commodities as wheat, barley, cotton, milk, rice, peanuts, sugar, tobacco, and soybeans. International Business: Strategy, Management, and the New Realities

20. Investment Incentives • Similar to subsidies, transfer payments or tax concessions made directly to individual foreign firms to entice them to invest in the country. Examples • Hong Kong government put up most of the cash – $1.74 billion – to build Hong Kong Disneyland. • Austin, TX and Albany, NY competed to have Samsung Electronics build a semiconductor plant in their regions. Austin won, offering $225m in tax relief and other concessions to attract the $300m plant; employs 1,000 workers. International Business: Strategy, Management, and the New Realities

21. Market Liberalization in India • Independence from Britain in 1947. • Adopted quasi-socialist model of isolationism and strict government control. • Poor economic performance due to high trade and investment barriers, state intervention in labor and financial markets, a large public sector, heavy regulation of business, and central planning. • Early 1990s – markets opened to foreign trade and investment, free-trade reforms, privatization of state enterprises. • Protectionism has declined, but high tariffs (averaging 20%) and FDI limitations are still in place. International Business: Strategy, Management, and the New Realities

22. Market Liberalization in China • 1949 – Mao Tse Tung established a communist regime, featuring centralized economic planning, agricultural sector, inefficient state-run industries, very limited international trade. • 1980s – began to liberalize economy. • 1992 – joined Asia-Pacific Economic Cooperation (APEC) group, a free-trade organization. • 2001 – joined the WTO; committed to reducing trade barriers and protecting intellectual property. • 2004 – China’s GDP was four times the level it was in 1978, and foreign trade exceeded $1 trillion. International Business: Strategy, Management, and the New Realities

23. How Firms Should Respond to Government Intervention • Research to gather knowledge and intelligence. Understand the extent and nature of trade and investment barriers, and government intervention in each target market. • Choose the most appropriate entry strategies. Most firms choose exporting as their initial strategy. But, if high tariffs are present, FDI, joint ventures, or licensing may be better alternatives. International Business: Strategy, Management, and the New Realities

24. How Firms Should Respond (cont’d) • Take advantage of foreign trade zones. Areas where imports receive preferential tariff treatment. E.g., maquiladoras, assembly plants in northern Mexico that produce components typically destined for the U.S. Maquiladoras enable firms from the U.S., Asia, and Europe to tap low-cost labor, favorable tariffs, and government incentives. 4. Seek favorable customs classifications for exported products. Reduce exposure to trade barriers by appropriately classifying products according to the harmonized product code. International Business: Strategy, Management, and the New Realities

25. How Firms Should Respond (cont’d) 5. Take advantage of investment incentives and other government support programs. Government assistance in the form of subsidies and incentives helps reduce costs. 6. Lobby for freer trade and investment. For example, • Mid-2000s – the Doha round of WTO negotiations sought to make trade more equitable for developing countries. • To increase lobbying effectiveness, foreign firms may hire former government officials. • In the long run, firms undertake negotiations with public-sector decision makers International Business: Strategy, Management, and the New Realities