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International Business Relations Spring 2014

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Course Objectives 1.Analyze how global and regional changes are influencing the way business is conducted. 2.Understanding the institutions and policies of the EU and how they affect the business environment. 3.Critique the level of completeness of the four freedoms (goods, services, persons and capital) which make up the single European market. 4.Determine the optimal business and functional area strategies which can be adopted given the varied cultural, political, and economic environment. 5.Understand the opportunities and modes by which European businesses globalize and foreign businesses enter the European market. 2

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Whats the difference? GlobalizationInternationalization Growing world systems Transnational, Subnational and Supranational actors Driven by free markets and technology Relations between nations Nation state is central actor Driven by national interests 3

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Comparing the Growth Rates of World GDP and World Exports

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Globalization History Eras of Globalization 1.1492-1800 Size L to MColonization (country - size) 2.1800-2000 Size M to SIndustrial (company - amount) 3.2000- Size S to Tinye-Era (individual - speed)

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The World is Flat Thomas Friedman Triple Convergence: 1.10 Flattening Forces Internet and IT integration Outsourcing, Offshoring, Insourcing, Supply Chain Uploading, Informing at individual level Technological speed and cost 2.Productivity Lag / Learning Curve 3.Opening of Countries (3 billion people) USSR, Central Europe, China, India, South America Market economies and integrated financial system

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World 3.0? How Globalized is the World?

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Only semiglobalized? The World in 2050 5 Scenarios -- http://www.youtube.com/watch?feature=play er_detailpage&v=VE0lPTfsBoI http://www.youtube.com/watch?feature=play er_detailpage&v=VE0lPTfsBoI DHL Connectedness Index 10 Take-aways -- http://youtu.be/QvHiZ7Jidi0http://youtu.be/QvHiZ7Jidi0

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What do others think?

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What is the EU? Why does the EU exist? What sort of thing is it? What are the shared social, cultural, political, and economic elements? 12

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The European Union 28 Member States Supranational and Intergovernmental Governance structures Split and shared competencies A single market with 4 freedoms The Euro zone Ongoing debates over integration and expansion

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Integration Theory Can Europe preserve peace and autonomy and promote competitiveness and quality of life in the face of a changing global power environment if its political and economic policies are divided? How can European integration best be done? (normative) How can integration be explained? (empirical)

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16 Model of International Integration Source: SUDER

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Development of the EU 17 Political Union Economic Union Common Market Customs Union Free Trade Area Lisbon EMS EURO Single Europe Coal and Steel European Economic Community

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Federalism a form of government in which power is divided between a central and regional authorities e.g. US federal government and states. Focus on the form How: create common institutions in a federal arrangement Seek optimal balance of unity and diversity Supranational institutions

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Intergovernmentalism Comes from classic realism in IR theory Primacy of the nation state Aim: balance of power (not institutions) Supranational institutions are controlled by the states EU preserves the nation state

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Why Nations Pursue Economic Integration? 1.Expand market size Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc. Example- Belgium has a population of just 10 million; the EU gives Belgian firms easier access to a total market of roughly 490 million. Consumers also gain access to a greater selection of products and services. 2.Achieve scale economies and enhanced productivity Expansion of market size within an economic bloc gives member country firms the opportunity to gain economies of scale in production and marketing. Internationalization inside the bloc helps firms learn to compete more effectively outside the bloc as well. Labor and other inputs are allocated more efficiently among the member countries- leading to lower prices for consumers. International Business: Strategy, Management, and the New Realities 20

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Why Nations Pursue Economic Integration? 3.Attract direct investment from outside the bloc Compared to investing in stand-alone countries, foreign firms prefer to invest in countries that are part of an economic bloc as they receive preferential treatment for exports to other member countries. Examples- General Mills, Samsung, and Tata- have invested heavily in the EU to take advantage of Europe's economic integration. By establishing operations in a single EU country, these firms gain free trade access to the entire EU market. 4.Acquire stronger defensive and political posture Provide member countries with a stronger defensive posture relative to other nations and world regions- this was one of the motives for the initial creation of the European Community (precursor to the EU). International Business: Strategy, Management, and the New Realities 21

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International Trade Groups

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Trade Group Comparison

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Small vs. Large Firms North / South divide What are the small businesses? Do they promote growth? Do they promote efficiency and productivity? Pros and cons 28

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Income discrepancies The distribution of marketable wealth is more unequal than the distribution of income between Member States and inside countries boundaries Five levels of household income: Original income Gross income (deducted direct tax, i.e. income tax). Disposable income (deducted indirect tax, i.e. VAT) Post- tax income (add benefits-in-kind, i.e. free education) income. Final income 30

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GDP per Capita 31

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Hourly Labor Costs

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Price Convergence

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But still differences Comparative Price Levels

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Sapirs model matrix Little Risk of Poverty High Employment Rate

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Doing Business Produced by World Bank Evaluates business regulations and enforcement 180+ countries 10 categories of data www.doingbusiness.org

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Regulation differences (Doing Business 2011) 37 Ease of Doing Business Rank Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business United Kingdom 41716222101615237 Denmark 62710301528135305 Norway 833658462018944 Ireland 9113878155723379 Finland 133255263259656116 Sweden 1439201572283975218 Germany 2288186715938814635 Lithuania 2387597469344311739 Latvia 24537957659 161480 Belgium 25314117746167044218 France 26211914246745526744 Netherlands 307110546 10927132911 Portugal 315911131894473272421 Austria 3212557331513210425920 Cyprus 372675667293321910422 Slovak Republic 4168569151091221027133 Slovenia 422863971162080566038 Luxembourg 4577421291161201532145 Hungary 4635864132120109732262 Spain 491474954469371545219 Bulgaria 514311962644851088783 Romania 5644849215441514754102 Czech Republic 6313076474693128627832 Poland 70113164861544121497781 Italy 8068929589591285915730 Greece 109149511538915474848849

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Institutions of the EU 1. The European Commission 2. The European Parliament 3. The Council of Ministers (Council of the European Union) 4. The European Council 5. The European Court of Justice 38

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1. The European Commission(EC) The EC's major responsibilities are: the initiation, formulation and coordination of Community policy Mainly executive body (but it holds also political, legislative and administrative powers) Exclusive powers to initiate legislation and to set up proposals Executing the budget of the EU Regulator of the European Market Negotiator in relations with international organizations as well as with non-member states 40

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Composition of the EC 41 President Sets the broad policy lines and directs the allocation and reorganisation of portfolios High Representative Coordinate and Represent Common Foreign and Security Policy Governments of the Member States nominate the commissioners, who are given roles by the president, and subject to approval by EP Body of the Commissioners = College Commissioners Renewable term of 4 years; 1 commissioner per country Directorate- Generals Cabinet head Are in charge Appointed by the European Council by qualified majority & approved by EP European External Action Service Appointed by the European Council by qualified majority & approved by EP is in charge of

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The Commission's Policy Areas Agriculture and Rural Development Competition Economic and Financial Affairs Education and Culture Employment, Social Affairs and Equal Opportunities Enterprise and Industry Fisheries and Maritime Affairs Environment Health and Consumer Protection Information Society and Media Internal Market and Services Joint Research Centre Justice, Freedom and Security Regional Policy Research Taxation and Customs Union Transport and Energy The EC also hosts External Relations including Development Enlargement Europe-aid External Relations ECHO The humanitarian aid office Trade Its general services comprise European Anti-Fraud Office Eurostat Press and Communication Publications Office Secretariat General and nine directorates for internal services. 42

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2. The European Parliament The EP's main powers: advisory and supervisory It is the only directly elected institution of the EU It consists of more than 750 delegates of Member States elected by direct universal suffrage, serving a 5 year term The EP's President is elected from among the Members of the European Parliament (MEPs) Location: Brussels and Strasbourg 43

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The Role of the EP Powers to suggest amendments of EC or Council proposals Power to delay legislation Supervisory powers The right to dismiss the entire EC 44

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3. The Council of Ministers (Council of the European Union) Composition 27 ministers of the member states Composition varies by topic Rotating 6-month presidency Intergovernmental negotiation tool Main Activities Passes laws, usually legislating jointly with the European Parliament. Co-ordinates broad economic policies of the Member States. The Council and the European Parliament together constitute the budgetary authority that adopts the Communitys budget. 45

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Council voting Weighted Qualified Majority Voting from 1.11.04 until 31.10.2014 when Lisbon changes take effect 345 votes available Bigger states like France and Germany have 29 votes down to Malta with 3 Qualified majority requires: Majority of countries 50% (or 76% if acting alone) = 14/18 Minimum of 74% of voting weights = 255 States must represent 62% or more of EU population = 311mil Unanimity still applies for limited matters e.g. taxation

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4. The European Council Supreme political decision-making body of the European Union Defines the general political agenda Selects the President and High Representative Composition Heads of state or government of the European Union and the president of the Commission 2 meetings a year Permanent, elected President Set up in 1974, and legally recognized by the SEA in 1986. The TEU provided it with official status in 1992. 47

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The role of the European Council To define the general political guidelines of the European Union (priorities, political direction and resolution of certain issues) The European Council reports to the EP after each meeting and through an annual report 48

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DONT CONFUSE! European Council (Heads of State + President of Commission) Council of the European Union (Ministers) Council of Europe (Not an EU institution, but an institution founded in 1949 to work towards European Integration in areas of democracy, human rights, rule of law, development, and culture. Known for the European Court of Human Rights. Based in Strasbourg with 47 member countries) 49

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EU Competencies 50