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    International Business: The New Realities Fifth Edition S. Tamer Cavusgil Gary Knight John R. Riesenberger 6olutLon Manual for International Business: The New Realities by Marta Szabo White and Gary Knight

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    USMCA Agreement International Business: The New Realities, 5th Edition Cavusgil, Knight, & Riesenberger p g . 1 Explanation of the USMCA Agreement In January 2020, Canada, Mexico and the United States concluded the U.S.‐Mexico‐Canada Agreement (USMCA), replacing the North American Free Trade Agreement (NAFTA) which took effect in 1994. The USMCA is mostly an updated version of NAFTA. Like NAFTA, the USMCA is a free trade agreement – tariffs and other barriers to trade in products and services have been reduced or eliminated among the signatory countries. Both NAFTA and the USMCA imposed local content requirements, which specify that products produced within the region must contain a minimum proportion of locally manufactured parts, components, and labor. If the content requirement is not met, the product becomes subject to the tariffs that member governments normally impose on nonmember countries. The broad aim of NAFTA and the USMCA is to encourage international trade and investment among North America’s three economic powers. The combined population of the USMCA region is approximately 500 million people, which is much larger than that of any of the member countries and slightly larger than the European Union. Thus, companies within the USMCA zone can access a much larger customer base, within a contiguous free trade area. Experts argue the resultant increase in economic activity in the USMCA zone should lead to job creation and rising gross domestic product in each country. In addition to ensuring free trade and investment among the member nations, NAFTA had enhanced intellectual‐property rights and protections, including strict measures against industrial theft. NAFTA included provisions to protect worker rights and the natural environment, as well as formal rules for resolving disputes between investors and participating countries. Overall, experts say that about 85 percent of the USMCA agreement is a modernized version of NAFTA. Consequently, the USMCA has been labelled "NAFTA 2.0”. The USMCA continues the rules, regulations, and procedures present in NAFTA. The USMCA also improves rules for investment and intellectual property rights, as well as procedures on dispute settlement in such areas as investment, unfair pricing, labor issues, and the environment. The USMCA enhances rules particularly for three industries: automobiles, chemicals, and agriculture. For example, the USMCA increased the local content requirements on vehicles from 66 percent (the NAFTA standard) to 75 percent, with the goal of increasing jobs in the auto industry. The USMCA gives U.S. farmers better access to the Canadian market. The USMCA mandates stronger labor rights and working conditions for factories in Mexico, but also requires that 40‐45 percent of auto content be made by workers earning at least $16 per hour, a provision intended to shift some auto industry jobs to the United States and Canada. Critics have charged the USMCA is largely ‘window‐dressing’, a political maneuver and will have relatively limited impact on the economies of the three member countries. In terms of the specific impact, the International Trade Commission, an agency of the United States, has forecast that the USMCA will add 176,000 U.S. jobs, increasing employment by a modest 0.12%, and raise U.S. GDP by $68.2 billion, or 0.35%, by its sixth year. Companies in the automotive, chemical, and agricultural sectors are expected to feel the biggest impact. The expected impacts are summarized below.

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    USMCA Agreement International Business: The New Realities, 5th Edition Cavusgil, Knight, & Riesenberger p g . 2 Auto industry. The USMCA will require vehicles to have 75% of their parts manufactured in North America, up from 65% under NAFTA. Automotive parts will be classified as core parts, principal parts, and complementary parts. In addition, the USMCA contains a new ‘Labor Value Content’ provision that requires 40% to 45% of automotive parts be produced by workers earning at least $16 an hour — a change intended to shift manufacturing from Mexico to the United States and Canada. From the U.S. perspective, the overall goal of these changes is to increase the number of vehicles manufactured in the United States. Chemical industry. The rules of origin have been made more transparent. Documentation requirements have been simplified so that many chemical manufacturers no longer need to determine regional value content and submit associated documentation. Simultaneously, the new rules include offering additional qualification options aimed at increasing the amount of products produced within the member countries. These changes are intended to favor chemical companies based within the USMCA region, and to reduces advantages for chemical firms based outside the USMCA region. Agriculture. The agricultural provisions mainly benefit the U.S. sector. Farmers based in the United States will gain more access to the Canadian market, especially for dairy and poultry, with an expected new market of $70 million. U.S. farmers will be able to export more milk, ice cream, cheese, and other dairy products in Canada. U.S. farmers will be able to export more poultry to Canada. Overall, the USMCA is expected to increase annual U.S. agricultural and food exports by $2.2 billion. The above noted changes in the USMCA (as compared to NAFTA) will require companies in the three member countries to substantially restructure aspects of their supply chains and established manufacturing methods. The USMCA includes additional provisions, which are summarized below. Labor. The agreement requires Mexico to pass legislation that improves the collective bargaining capabilities of labor unions. This is intended to improve worker rights and working conditions in Mexico. Intellectual property. The USMCA extends copyright length in Canada to life plus 70 years. In addition, the ‘exclusivity period’ for biotechnological firms will increase from 5 years to 10 years, and for industrial designs from 10 to 15 years. An exclusivity period refers to the delays and prohibitions on approval of competitor products. E.g., in the biotechnology and pharmaceutical industries, an exclusivity period is intended to promote a balance between new drug innovation and greater public access to drugs. Exclusivity is similar to having a patent, and prevents potential competitors from bringing to market products that replicate or directly compete against the products invented by a given firm. Dispute settlement. The USMCA contains new provisions for resolving disputes between companies and countries. E.g., if a company believes that another firm, or a country, has violated the USMCA, that company can seek recourse through the domestic legal system, via a USMCA‐ developed Panel that acts as an International Trade Court in arbitrating the dispute, or by suing the government over perceived violations.

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    USMCA Agreement International Business: The New Realities, 5th Edition Cavusgil, Knight, & Riesenberger p g . 3 Others. The USMCA has provisions aimed at stabilizing the exchange rates among the currencies of the three member countries, and against government support of state‐owned enterprises. The USMCA will be valid for 16 years with a mandatory review every six years. Proponents believe the USMCA will trigger a cycle of market disruption and risk‐taking, which should lead firms in the member countries to innovate in order to increase their competitive advantages. This will arise partly because affected companies will need to explore new sourcing and manufacturing options, including adding supply and trade diversity to their supply chains. It is hoped that such changes will potentially reduce costs, increase efficiency, and increase revenues. Sources: Office of the United States Trade Representative, United States‐Mexico‐Canada Agreement, https://ustr.gov/trade‐agreements/free‐trade‐agreements/united‐states‐mexico‐canada‐agreement; Ed Garsten, “USMCA Trade Deal Is Now In Force–And Mandating Higher Wages, More Paperwork,” Forbes, July 1, 2020, www.forbes.com; Lecharo Owens, “USMCA expected to deliver small positive economic impact and big changes for 3 industries,” Thomson Reuters, February 4, 2020, https://blogs.thomsonreuters.com/answerson/usmca‐economic‐impact/; Ana Swanson and Jim Tankersley, “Trump Just Signed the U.S.M.C.A. Here’s What’s in the New NAFTA,” New York Times, July 1, 2020, www.nytimes.com

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    1 | Page PART 1 FOUNDATION CONCEPTS CHAPTER 1 INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS? Instructor’s Manual by Marta Szabo White and Gary Knight I. LECTURE STARTER/LAUNCHER ■ Consider having everyone in class introduce themselves. One way to initiate introductions is distribute random pages torn from business magazines, in which each person receives one page. Next each student circles words on the page that describe him/her. In groups of two or three, each student shares the rationale behind each word that he/she circled. Finally, one of the group members introduces another group member to the class. This process enables students to immediately know at least one other student in the class. The circled words and explanations are often humorous, which serve as icebreakers during your first classroom encounter. ■ globalEDGE™ ( globaledge.msu.edu ) assembles a collection of tools and games that will allow you to compare countries on a variety of statistical indicators, rank countries based on these indicators, and test your knowledge of country capitals from around the world. Get Insights By Country: http://globaledge.msu.edu/Global-Insights/By/country Currency Converter : http://www.xe.com/ Country Comparator : http://globaledge.msu.edu/comparator Ranking Countries : http://globaledge.msu.edu/global-resources/resource/5128 Country Tools and Data : http://globaledge.msu.edu/tools-and-data Global Resource Directory: http://globaledge.msu.edu/global-resources/ ■ Under Country Insights click on a region, then select a country, Zimbabwe for example. http://globaledge.msu.edu/Countries/Zimbabwe Everyone in the class should be assigned a different country. Each student is then responsible for becoming an expert on that country. Twice during the term, each student could report on their country, and summa rize a newspaper article published in their country, i.e. an International Newspaper Memorandum assignment.

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    2 | Page [1] An exciting way to introduce your students to International Business is the CIA Maps, from the CIA World Factbook, which provides an interactiv e and fun tool to introduce to international business: https://www.cia.gov/library/publications/the-world-factbook/ [2] Another great way to introduce student to the world of international business is to direct them to the BBC website: http://news.bbc.co.uk/1/hi/country_profiles/default.stm [3] Comic relief - Humorous (possibly offensive) introduction to IB 2:09 minutes Catherine Tate - Translator : http://www.youtube.com/watch?v=ma8Vwkpx5y8 INTERNATIONALIZATION AT HARLEY - DAVIDSON [ CLOSING CASE] ■ Harley Davidson is the chapter Closing Case. These questions serve as hooks for students to familiarize themselves with the chapter concepts ■ 1908- Harley Davidson sold the first Harley police motorcycle to which police department? ANSWER: Detroit; Nearly every large U.S. police department employed Harley motorcycles ■ 1988- Harley Davidson opened up its first foreign production facility in what country? ANSWER: Brazil (Manaus)… Why is Brazil an important foray into the international arena? It represents a key emerging market country. ■ There have been recent updates to the situation of Harley Davidson regarding its performance and international activities. In particular, Harley management has sought to move more of the firm’s production and marketing activities abroad, in light of highe r manufacturing costs in the United States and the fact that the market for Harley sales is increasingly saturated in the US and Millennials and other younger consumers are less interested in buying large motorcycles. These trends have been reported in numerous accounts in the news media. II. LEARNING OBJECTIVES AND THE OPENING CASE LEARNING OBJECTIVES After studying this chapter, students should be able to : 1.1 Describe the key concepts in international business 1.2 Understand how international business differs from domestic business 1.3 Identify major participants in international business 1.4 Describe why firms internationalize 1.5 Appreciate why you should study international business 1.6 Learn the CKR Intangible Soft Skills™ and the CKR Tangible Process Tools™ to improve your employability and success in the workplace.

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    3 | Page Key Themes ■ In this chapter, there are five themes: [1] Key concepts in international business [2] How international business differs from domestic business [3] Who participates in international business [4] Why firms internationalize [5] Why you should study international business ■ This chapter is the introduction to the text, as well as to the foundation concepts. The first part of this text (chapters 1 - 8) explores globalization from a macro, environmental level, while the second part (chapters 9 -17) examines international business from a more micro, organizational level. The fundamental concepts introduced in Chapter 1 are central to both macro and micro perspectives for understanding international business. Thus, these basic concepts permeate the entire text, and students should be well- acquainted them. ■ In this chapter, use a macro lens to introduce students to some of the fundamental international business concepts. ■ Cross -border trading has been around for centuries; contemporary international business has gained considerable momentum/complexity over the past four decades. ■ International business refers to the trade and investment activities by companies across national borders. Globalization of markets refers to ongoing economic integration and growing interdependency of countries worldwide. Stress the dramatic growth in world trade, which now exceeds some $18 trillion annually. ■ There are two way s to invest internationally- passively ( portfolio investment -financial assets ) or actively ( foreign direct investment - capital, technology, labor, land, plant and equipment ) . ■ Also important are importing (global sourcing)-buying products/services from abroad and bringing them back to the home country. Exporting- manufacturing a product or service in one country and selling it to another. ■ Address the broader questions of: ◘ Why firms go international? - Primarily to increase sales and profits! ◘ What is the difference between internationalization and globalization? Former- Expansion of international business activities vs, Latter- Integration, interdependency & interconnectedness of internationalization (the 4 I’s) Example: Increasing exports vs. Sourcing value-chain activities strategically around the globe to leverage factor efficiencies ◘ How international business is different from domestic business: Complexity and Risks (4) ◘ Who participates in international business- Multinational Enterprise (MNE) Small and Medium-sized Enterprise (SME) Born Global - entrepreneurial firm that is international from almost inception ◘ Why you should study international business - Competitive advantage- for you and your firm! ■ Note that international business is both a cause and a result of increasing national prosperity.

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    4 | Page Teaching Tips ■ In this chapter, use a broad brush approach in generating excitement about the importance of international business activity. Ask students to examine their clothing, watches, iPhones, iPods and report where in the world each item was manufactured. This discussion underscores the profound and pervasive impact that globalization has had on all of us. ■ Next, ask students what they would like to do professionally, after they gradua te. Once they respond, ask if they can accomplish that successfully without understanding international business, and the impact of global trends on their industry and business? The answer is, of course, a resounding NO!!! Commentary on the Opening Case : FACEBOOK: A GLOBAL PHENOMENON  Key message Instagram is a photo- and video-sharing network enjoyed by smartphone owners worldwide who use the service to share photos and short videos with others. The site has more than 700 million active monthly users, and was acquired by Facebook in 2012. Instagram and Facebook underscore the economic, political and personal interconnectedness among countries, companies, and consumers.  Uniqueness of the situation described ■ What is striking about this case is that by the time the reader finishes this case, Instagram usage will have again jumped globally. One of every ten people on the planet- about more than 700 million users - has an Instagram account. ■ Available in 33 languages, Instagram has a dual identity — a for-profit business and a vehicle for our personal lives. ■ Instagram is the sixth most popular social media platform worldwide, after Facebook, Twitter, LinkedIn, YouTube, and Google+.  Classroom discussion ■ This example illustrates how the global economy has permeated our everyday lives. ■ International business activity is increasingly complex and impacts our everyday lives - shopping, listening to music, watching a movie, or surfing the Internet- involve international business transactions that connect us to the global economy, and influence quality of life, standard of living, and economic well-being. ■ The vision of both Instagram and Facebook mirrors this activity by empowering individuals, mapping the social relationships among them, and creating a new system for exchanging information that many find indispensable. ■ Mode of Entry: ◘ FDI - foreign direct investment establishing offices around the world. ■ Which countries is it e specially popular in? ◘ Instagram is especially popular in Russia, Brazil, Turkey, Poland, the United Kingdom, and the United States. It enjoys fast growth in Asia. ■ What are the most photographed countries among Instagram users?

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    5 | Page ◘ Italy, Japan, Indonesia, Kuwait, Thailand, and France ■ Primary revenue generation: ◘ Advertising - Brand awareness- Key ■ How does Instagram market itself in less developing economies, where incomes are lower? ◘ The platform allows people in such countries to take and share high-quality photographs using low-resolution phones, as they often cannot afford expensive smartphones or fast Internet connections. ■ Key revenue source: ◘ Retailers and other companies leverage Instagram to market their products and services at low cost. Most of the world’s top brands— for example, Apple, BMW, and Sony — have established Instagram pages, to facilitate sharing photos about their brands. ■ Specific country examples ( Russia, Turkey, Brazil, Poland, United Kingdom, United States) enrich the overall theme: the Instagram phenomenon illustrates how converging lifestyles, modern communications technology, and imaginative entrepreneurship are facilitating the emergence of global enterprises. ■ Use this case as a springboard for the first teaching tip offered above. ■ Also ask students to update the Instagram saga since its sales to Facebook in 2012. Break students into small groups to work on the following questions, with each group providing a brief presentation of their answers. QUESTIONS 1 - 1. What advantages does Instagram obtain from doing business in international markets? (LO 1.4; AACSB: Application of knowledge) ■ Capitalizing upon the global interdependency and interconnectedness among economic, political, social forces on professional and personal levels. ■ Instagram appeals to people worldwide who enjoy taking photos and sharing them with others around the world. Many countries constitute key markets for the firm’s photo/video sharing services. Instagram earns more than $5 billion in annual advertising revenue worldwide. ■ The tendency of people to create photos and videos of their favorite brands is valuable to brand managers in a world of targeted advertising; reach is enhanced. 1 - 2. What attributes of Instagram have allowed it to gain rapid acceptance in countries around the world? (LO 1.1; AACSB: Reflective thinking) ■ Widespread adoption of smartphone a pps. The number of smartphone users worldwide has reached 3 billion, about 40 percent of world population. ■ Instagram management has developed the service so that it has a truly global platform. Management has used foreign direct investment to establish offices around the world, to support customer adoption and better understand Instagram’s most popular

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    6 | Page markets worldwide. ■ The Instagram platform allows people to take and share high -quality photographs using low-resolution phones, which appeals to users in less-developed economies. ■ Instagram also launched an expanded web version that allows users to skip the app’s wait time, data costs, and storage needs while still providing basic functionality. ■ In general, Instagram benefits from converging lifestyl es, the rise of advanced communications technologies, and imaginative entrepreneurship and skillful management in the firm. 1 - 3. How do companies use Instagram to market their products and services? (LO 1.1; AACSB: Diverse and multicultural work environments) ■ Based in Germany, sportswear company Puma contracts with Instagrammers who have many followers to capture photos that showcase the firm’s products. . ■ Based in Denmark, brewing company Carlsberg launched a marketing strategy called “Happy Hour” that offers half-priced beers in exchange for Instagram posts. ■ In Japan, Instagram’s most popular influencer is a dog, Marutaro, who promotes pet food, real estate, and other ventures through the app. ■ In Brazil, sports teams use Instagram to promote themselves. ■ Worldwide, many firms that market youth-oriented services leverage Instagram to promote their brands. Firms target Instagram for brand promotion among upwardly mobile young managers. III. DETAILED CHAPTER OUTLINE INTRODUCTION: WHAT IS INTE RNATIONAL BUSINESS? ■ International business (cross-border business) refers to cross-border trade and investment activities by firms. ■ Primarily, individual firms engage in international business, yet, governments and international agencies may also conduct international business activities. ■ Exhibit 1.1 - Elements of International Business (Six) 1] Globalization of markets 2] International trade 3] International investment 4] International business risks 5] Participants: Firms, distribution channel intermediaries, facilitators and governments. 6] International entry strategies, including exporting and direct investment ■ Globalization of markets (or the globalization of economies) refers to ongoing economic integration and growing interdependency of countries worldwide. ■ Online platforms - Amazon, Alibaba, Facebook and Instagram underscore this integration and are central to globalization.

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    7 | Page ■ Internationalization refers to the tendency of firms to systematically increase the international dimension of their business activities. ■ This has resulted in the widespread diffusion of products, technology, and knowledge worldwide. ■ Macro perspective (trend) - globalization of markets means intense economic interconnectedness between/among countries. Market globalization is characterized by several related trends: ● Cross - border transactions - unprecedented growth rates - from $ 3 00 billion per year in 1960 to current numbers of $1 6 trillion annually ● Trade = Substantial international flows of capital, technology, and knowledge ● Development of highly sophisticated global financial systems and mechanisms to facilitate cross - border flows of products, money, technology, knowledge , and data . ● Greater collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO: www.wto.org ) and the International Monetary Fund (IMF: www.imf.org ) ■ Micro perspective (focus) - firm level, activity- Value-Chain Perspective - Firms conduct value-adding activities on a global scale, i.e. organize, source, manufacture, market, sell, and employ market entry strategies such as exporting, strategic alliances, and direct investment. ■ The text focuses primarily on the international business activities of the individual firm. ■ Globalization both compels and facilitates companies to expand abroad- international expansion is easier due to market and product globalization. ■ A “level playing field” has made cross -border activities appealing to all types of firms- large and small; manufacturing and service sectors (e.g. banking, engineering, insurance, and retailing). ■ Globalization impacts everyone, as evidenced by the global financial crisis (2008). The economic contagion, or interconnectedness was underscored as the crisis began in the U.S. and rapidly spread to U.S. trade partners, eventually impacting Canada, Mexico, Japan, China and the world. This manifestation illustrates the integration and interdependency of national economies throughout the world. WHAT ARE THE KEY CONCEPTS IN INTERNATIONAL BUSINESS? ■ International trade and investment are the most conventional forms of international business transactions. International Trade ■ Cross -border exchange of products (merchandise) and services (intangibles) typically through exporting and importing.

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    8 | Page ■ Exporting (outbound activity) - entry strategy involving the sale of products/ services to customers located abroad. ■ Importing ( global sourcing ; inbound activity) - the procurement of products/services from foreign suppliers for consumption in the home country or a third country ■ Exporting and importing may include both intermediate (raw materials and components) and finished products. International Investment ■ Cross -border investment is the transfer of assets to another country or the acquisition of assets in that country. ■ The factors of production (assets) include capital, technology, managerial talent, and manufacturing infrastructure. ■ Trade = products and services cross national borders. ■ Cross-border investment = the firm itself crosses national borders. Two Types of International Investment: ■ International portfolio investment (typically short-term) is the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. ■ Foreign direct investment (FDI) (typically long-term) is a foreign-market entry strategy that gives investors partial or full ownership of a productive enterprise. The firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment. The Nature of International Trade ■ Macro -International Trade: Aggregate export and import flows of products and services between nations. ■ Micro -International Business: Cross-border transactions of an individual business enterprise. ■ Gross domestic product (GDP) is the total value of products and services produced in a country during a year. ■ Exh ibit 1.2 contrasts the growth of total world exports to the growth of total world gross domestic product (GDP) since 1980. ■ Due to the global recession, world trade declined in 2009, ending a 27 -year boom period. ■ T rade revived and returned to normal levels in 2012. ■ R emarkable- since 2008, annual rate of growth in world exports surpassed world GDP by almost 2x (5.3% versus 2.8%). Trade Growth > GDP Growth: [1] Significant rise of emerging markets during the past three decades, which are home to growing middle class households equipped with substantial disposable incomes. [2] Advanced (or developed) economies such as the U.S. and the European Union are now sourcing many of the products from low-cost manufacturing locations such as China, India, and Mexico.

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    9 | Page [3] Advances in information and transportation technologies, decline of trade barriers, and liberalization of markets fuel the rapid growth of trade. ■ Exhibit 1.3 identifies the leading nations in merchandise exports (not including services). ■ During the recent global recession, China surpassed the U.S. as the world’s l eading exporter in total dollar terms, trade accounts for about 31% of its GDP (in the U.S., trade is 19% of its GDP). ■ For other economies, merchandise trade is a much larger component of economic activity: e.g. Netherlands (125%), Mexico (68%), and South Korea (68%). ■ Exhibit 1. 4 identifies the top 25 countries in international merchandise trade (not including services). The 25 countries shown account for the vast majority of world merchandise trade. ■ Entrepôt economies ( intermediate depot ; exports = imports): Singapore, Hong Kong and Malaysia export more than 100% of their respective GDPs. ■ Such countries import a large volume of products, some of which they process into higher value-added products and some they simply re-export to other destinations. The Nature of International Investment ■ Foreign Direct Investment (FDI) - (asset ownership and long time frame) is the ultimate commitment-level of internationalization, and thus this text focuses primarily on FDI (most common mode of entry strategy) as opposed to International Portfolio investment. ■ New legal business entity, recognized by the host country and subject to its regulations. ■ Motivations for firm FDI: (Note how these fit into the value chain) (1) Primary Activity: Set up manufacturing/assembly facilities to produce products/services; (2) Primary Activity: Open a sales/representative office to conduct marketing or distribution activities; or (3) Support Activity: Establish a regional headquarters ■ FDI and Competitive Advantage : Large, resourceful companies with substantial international operations are better able to leverage FDI to: (1) Manufacture/assemble products in low-cost labor countries (or for other resources), i.e. China, India, Russia, Brazil, and Mexico: ■ Example - ◘ Ford invested some $3 billion to build a new car factory in Mexico to manufacture Fiesta automobiles.

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    10 | Page (2) Global challengers originating in rapidly developing economies invest in western markets: ■ Examples - ◘ Chinese company Haie r purchased General Electric’s appliance division for $5.4 billion, in 2016. ◘ Turkey in 2014- Yildiz paid over three billion dollars to acquire British based cookie and snack maker, United Biscuits. ◘ India's Mittal Steel Co. acquired the Belgium-based Arcelor SA in August 2006, creating a $38 billion conglomerate -- the world's largest steel company. ◘ Russian oil and gas firm Lukos established thousands of service stations in the U.S. and Europe. ■ Exhibit 1. 5 shows the dramatic growth of FDI since the 1980s. ■ September 11, 2001 interrupted FDI inflows with the worldwide panic that ensued following the terrorist attacks in the U.S.; then interrupted again in 2008 by the global recession. Stability in world economy is key. ■ Developed (Advanced) economies = Japan, Australia, Canada, the U.S., and most countries in Western Europe. Dollar volume of FDI has grown immensely since the 1980s, in developed economies. ■ Developing economies = Parts of Africa, Asia, and Latin America. ■ Significant- is the growth of FDI into developing economies (surpassing advanced economy inflows in 2010) despite widespread poverty, lower incomes, less-developed industrial bases, and less investment capital than advanced economies, and represent the need for modern industrial infrastructure. Services as Well as Products ■ Key international players: Tangible merchandise (products) and intangibles (services - e.g. banks, consulting firms, hotels, construction companies, retailers, airlines, etc.). ■ International trade in services accounts for about one-quarter of all global trade and is growing faster than products, however the value of merchandise trade is still much greater than the value of services trade. ■ Challenges unique to se rvices: ◘ Not all services can be exported. ◘ Physical presence in host country is a prerequisite for many services. ■ More than $2 trillion worth of services are sold abroad every year. ■ Exhibit 1. 6 identifies the leading countries in total international services trade. ■ Larger, developed economies account for the greatest proportion of services - as services typically comprise more than 2/3 of the GDPs of these countries. ■ EBay - the giant Internet retailer earned $9 billion in 2017, of which more than 50% came from international sales. ■ EBay expanded to India, China, Korea, and Europe in anticipation of most of its future revenue growth coming from abroad. ■ When developing its business in India, eBay acquired the Mumbai-based e-retailer Baazee. ■ Exhibit 1. 7 (great chart) illustrates the diversity of service sectors that are internationalizing.

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    11 | Page The International Financial Services Sector ■ Banking and financial services are the most active cross-border services. ■ Explosive growth of global capital markets is attributed to: (1) Internationalization Banks/Financial institutions → increased amount of cheap, local investment capital, stimulating local financial markets and encouraging savings (2) International Flow of Money → into pension funds and portfolio investments ■ D eveloping economies- banks/financial institutions have fostered economic activity by increasing the availability of local investment capital, which stimulates the development of financial markets and encourages savings. ■ International banking is primarily conducted by very large banks. ■ Governments worldwide imposed many new regulations in the banking industry following the global financial crisis that arose in 2007 – 2008. ■ Consumers and local businesses generally prefer to deal with local banks, obtaining financial services from homegrown “brick -and- mortar” branches and personnel who understand local conditions. ■ China is now home to three of the world’s five largest banks, specifically ICBC, China Construction Bank, and the Agricultural Bank of China. ■ London long has been the banking hub of Europe, but the status may be threatened if the United Kingdom ends its membership in the European Union (EU) under the Brexit arrangement. HOW DOES INTERNATIONAL BUSINESS DIFFER FROM DOMESTIC BUSINESS? ■ Complexity - Macro forces differ from country to country- economic conditions, national culture, legal and political systems- vary by country. ■ Risk - Uncontrollable variables- the firm has little or no control over these. ■ Foreign environments involve new risks that firms must manage. ■ Instagram (opening case)- exemplifies how distinctive conditions in each country lead businesses and consumers to utilize services differently, from country to country. The Four Risks of International ization The Four Risks of International Business ■ Exhibit 1. 8 summarizes the four major risks: cross - cultural risk, country risk, currency risk, and commercial risk. Cross - Cultural Risk ■ S ituation where a cultural misunderstanding places some human value at risk. ■ Differences in language, lifestyles, mind -sets, customs, and religion. ■ Cross-cultural literacy - critical to embrace culturally-valued mind-set and/or work style. ■ Cultural blunders - hinder the effectiveness of foreign managers.

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