MGT240—INTERNATIONAL MANAGEMENT. MID-TERM EXAM. Business & Marketing

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Mid-Term Exam
1. Globalization & Internationalization
Typically, companies develop different market entry strategies to gain a foothold into one or more local and/or international markets. The expansion into international markets is, generally, a reflection of sustained local/national growth and could also be one way to overcome a range of challenges including, but not limited to, declining growth, stricter regulatory barriers, market saturation and/or surging import/export duties. For market expansion, companies, big and small, can adopt a globalization or an internationalization approach (Rooney and Chavan). In a conventional expansion form, companies usually move from an internationalization phase into a globalization one. The internationalization phase is characterized by separate market entry strategies whereby single (national) markets are considered stand-alone markets. More specifically, in an internationalization approach, companies develop an overall corporate strategy cutting across all business lines for each separate national market. In so doing, national markets are considered independent markets from one another and, usually, report to a main headquarter in country of origin. The maturation of several independent national markets could initiate a strategy change into globalization. That is, if a number of independent, national markets develop similar market patterns (e.g. converging consumer preferences, development of joint economic bloc agreements, and further integration of logistic, operation and/or business processes),
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companies move on to a globalization approach whereby a number of national markets are
considered as one single, independent market. In a less conventional approach market expansion,
companies could start global. This is now a more common pattern since early 2000s. Thanks to
more flexible rules and regulations on flow of people and goods and, of course, Internet, even
smaller companies can sell products and services, according to integrated, streamlined strategies,
to consumers, individual or corporate, at a global scale. Thus, internationalization and
globalization can be said to be different phases of market expansion process. In expanding
internationally, companies usually undergo an internationalization process whereby markets,
existing and potential, are considered, independent, stand-alone markets of different market
strategies. Upon maturity, several international markets could emerge as one, globalized market
sharing one and same overall corporate strategies although some localization elements could be
introduced in order to account for understandable local/national differences.
1 Jeffrey Sachs and Andrew Warner: Theory of Comparative Advantage
Trade liberalization is key to understand how Sachs and Warner characterize economic reform. In essence, Sachs and Warner underscores economic reforms aimed at broader liberation of national economies, particularly of closed and least developed economies, as a critical prerequisite to attain higher GDP and, more broadly, improved macroeconomic performance. To do so, less performing economies, argue Sachs and Warner, need to integrate more into world economy by enabling commerce and economic relations, externally, and reforming a range of economic and fiscal policies including, but not limited to, price liberalization, budget restructuring, privatization, deregulation, and social safety net installation (2). This should allow for more economic convergence between least developed (and more closed) and more developed
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(and more open) economies. One major method to achieve economic convergence is, for current
purposes, comparative advantage. For economies in early liberalization phases, competition,
particularly against more developed economies over more sophisticated, highly industrialized
products is at best unfeasible. Instead, less developed economies, according to Theory of
Comparative Advantage, are best positioned by realigning resources efficiently in order to gain a
competitive advantage in international markets whereby such economies could generate higher
revenues and, ultimately, attain higher growth rates required for economic convergence with
more developed economies. The connection to Theory of Comparative Advantage is put
succinctly by Sachs and Warner as follows:
The power of trade to promote economic convergence is perhaps the most venerable tenet of classical and neoclassical economics, dating back to Adam Smith. As Smith's followers have stressed for generations, trade promotes growth through a myriad channels: increased specialization, efficient resource allocation according to comparative advantage, diffusion of international knowledge through trade, and heightened domestic competition as a result of international competition. (3)
Trade liberalization, mediated by effective resource management for competitive advantage, is a critical connection in Sachs and Warner to Theory of Comparative Advantage.
3. The Importance of Reputation for Competitive Advantage
Companies operate different in different markets. In mature markets, established regulatory conventions, coupled by an overall encouraging investment climate, enable companies to compete more fairly. In emerging markets, however, lack of properly enforceable laws, coupled by increasing investment disincentives, makes market ground hardly, if at all, level.
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Instead of conventional institutional and national economy structures for comparative advantage
in emerging markets, Gao, Zuzul, Jones and Khanna emphasize reputation as a salient meta-
resource whereby companies operating in emerging markets active available conventional
resources. Thus, reputation, not conventional institutional resources, is a critical comparative
advantage factor for companies operating in an overall emerging market climate of institutional
void compared to companies operating in mature markets supported (and hence more
resourceful) by more established institutional practices.
4. Oxfam & WTO: The Cotton Connection
Oxfam, a UK-based international non-for-profit, played a key role in a WTO dispute between US and Brazil over cotton subsidies. Essentially a whistleblower, Oxfam helped bring to public awareness a longstanding dispute starting in 2002 and concluding in 2009 over US subsidies to cotton farmers in a clear violation of WTO rules of fair trade practices (“Oxfam Reaction to WTO Judgment”). The US subsidies, at 50 cents per pound and meant to help local farmers sell cotton produce at competitive prices to international markets, depressed cotton prices and hence slashing out 6-14% price increase. The WTO ruling was in favor of Brazil and urged retaliatory measures against US. The subsidies involved, moreover, a major ethical consideration. Specifically, depressing prices for US farmers denied additional income world’s poorest countries could have used to fund a range of urgent needs including, for example, food and schooling. The whistleblowing Oxfam performed against US anti-free-and-fair-trade was, accordingly, critical to highlight distortions in world economy meant to maintain economic advantages for some world players (mostly, more developed economies) at a substantial cost to less developed economies.
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5. Cotton: Virtuous & Vicious Circles
The concepts of virtuous circles and vicious circles are well rooted in economic concept and practice. Fundamentally, both concepts are flip sides of one another. Specifically, if virtuous circles can be defined, generally, as a series of events whose origin and outcomes reinforce a positive feedback loop, vicious circles refer to exact opposite. Consider cotton. As mentioned above, cotton subsidies reinforced a series of events of positive origins and outcomes for one party (US) but in a series of negative events for another (Brazil). For US, subsidies provided by US Government to cotton producers initiated – and maintained – a series of positive events reinforcing one another for US economy. Namely, cotton subsides helped farmers gain competitive advantage in world markets by depressing cotton price per pound. Sold at a competitive price, US cotton was on high demand only to initiate more supply by cotton farmers. By producing (and selling) more, US cotton farmers were set, moreover, on a positive feedback loop whereby higher demand initiates a world cotton market move to increase prices. Having a steady stream of government subsidies, coupled by no actual increase in input costs, US cotton farmers – and, for that matter, US economy – gain more competitive advantage in world markets. Conversely, Brazil cotton farmers, not only not receiving any subsidies but incur mounting input costs, experience a series of events confirming negative feedback loops, i.e. vicious circles. Specifically, selling less and to fewer world markets, Brazil cotton farmers continued to experience lower demand and, as a result, lesser profits. This initiated a domino effect, so to speak, of a downward spiral whereby more cotton farmers, unable to pay off debts, defaulted only to increase loan burden on lending banks and, ultimately, depressing overall economic growth. The reversal of vicious circles can be attained by maintaining an equilibrium between
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world cotton farmers via fairer trade policies. That is, only by ensuring cotton – and, for that matter, similar produces – is sold in world cotton markets based on a fair price informed by actual, not subsidized, input cost would demand pick up for most disadvantaged cotton farmers and, consequently, initiate a series of positive events to revive cotton production, distribution, selling and, more broadly, overall economic performance.
1 Heckscher-Olin, New Trade Theory & Michael Porter: Expansion on Theory of Comparative Advantage
The Heckscher-Olin Theorem (HOT) develops a mathematical model for comparative advantage. Considering for abundant and scarce resources countries have, HOT proposes exchange of goods in order to make up for internal, lacking resources. More specifically, countries of differential natural resources are more likely to engage in international trade, argues HOT, by exporting highly abundant produces, or goods, and importing highly scare ones. Interestingly, HOT accounts for labor costs in accounting for resource abundance/scarcity. This is particularly significant contribution to Theory of Comparativ...