IB - Exam 1 Review

8/13/2019 IB - Exam 1 Review

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Exam 1 Review


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Causes of Globalization


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Strategic imperatives that motivate companies

to go global

Environmental changes that facilitate going

gloabl


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Strategic imperatives


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Companies want to

Leverage their core competencies

If a company is doing well domestically they usual will dowell globally

find new markets

Primarily because of economies of scalemass productionreduces costs

To not solely depend on one countries market

Acquire scarce resources Better compete with their rivals

Especially with oligopoly industries


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Environmental Changes


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Political Changes GATTGeneral Agreement on Tariffs and Trade

Smoot Hawley Act of 1930stopped international trade between WWI andWWII

After WWII world powers got together to make sure this will never happenagain and came up with GATT

A multilateral agreement

Reverse restrictions on foreign investment and international tradebringingtariff rates down

WTOReplaced GATT in 1995 Also added dispute settlement mechanism to allow countries to present

evidence about other countries involved in unfair trade practices

Protections for intellectual property rights Regional Trade blocsEU, NAFTA, MERCOSUR

Technological Changes Improved communication tech, transportation methods, information

processing


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EU


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28 countries

Austria, Belgium, Bulgaria, Croatia, Cyprus,

Czech republic, Denmark, Estonia, Finland,

France, Germany, Greece, Hungary, Ireland,

Italy, Latvia, Lithuania, Luxembourg, Malta,Netherlands, Poland, Portugal, Romania,

Slovakia, Slovenia, Spain, Sweden, UK


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Eurozone


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17 Countries

Use the euro

Austria, Belgium, Cyprus, Estonia, Finland,

France, Germany, Greece, Ireland, Italy,

Luxembourg, Malta, Netherlands, Portugal,

Slovakia, Slovenia, Spain


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NAFTA


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Canada, Mexico, US


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MERCOSUR


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In Latin America

Argentina, Brazil, Paraguay, Uruguay, and

Venezuela

Boliviaaccessing member

Meaning its entrance is pending


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Worlds richest countries have either high

globalization trade, high bandwidth or both

The poorest countries had low bandwidth and

international trade

Hungary, Mexico, Tanzania

Shows correlation not causation


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KOF Index of Globalization


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By the Swiss Economic Institute

Created an overall globalization index with three subindices Economiclooks at trade flows, foreign investment, tariff

rates, and other barriers to trade and investment Socialamount of international phone and internet

activity in a country and international tourism andimmigration

Also the number of McDonalds and IKEAs in a country

Seen a signal that a country is open to foreign business Politicalnumber of embassies in a country, number of

treaties signed, number of international orgs its a part of

Increase since 1980


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KOF Index top 15 countries of

2012


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1. Belgium

2. Ireland

3. Netherlands

4. Austria5. Singapore

6. Sweden

7. Denmark

8. Hungary

9. Portugal10. Switzerland

11. Cyprus

12. Luxembourg

13. Czech Republic

14. UK15. Canada

US did not make this listmost of the top Global countries areEuropean because they are typically small and close together


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Global Cities Index


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Created in 2012 by AT Kearney Management Consultants

Gauge how global a city is by business activity, human capital, info exchange,cultural experience, and political engagement

1. New York

2. London3. Paris

4. Tokyo

5. HK

6. LA

7. Chicago

8. Seoul9. Brussels

10. DCdue to high political engagement

Also looks at strengths and vulnerabilities of emerging cities StrengthsGDP growth, growth of middle class, improving infrastructure, and ease of doing

business

Vulnerabilities

pollution, insecurity, instability, and corruption High Strength and Low Vulnerabilityall cities were in Asia and Bogota, Colombia

Shanghai, Mumbai, Beijing, Taipei

Low Strength High Vulnerabilitycities in Sub Saharan Africa

These Classifications are controversial


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Cold War


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from WWII to mid 1990sideological battle between US andSoviet Union Countries on the US side created NATO (North Atlantic Treaty Org)

Countries on SU side created Warsaw Pact

Countries Divided into 3 groups: First WorldUS, allies, and Japan Second WorldSU and allies

Third Worldmiddle and low income countries Latin America, Africa, most of Asia

Most international trade happened between first world countries

Second world countries were politically powerful but avoidedcommerce with first world

First world got raw materials from 3rdworld


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After fall of Berlin Wall


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Countries now divided into two groups

Developed countries

Emerging markets

Experience rapid growth Potential for future growth exceeds traditional markets

Least developed countries (LDC)non highincome countries

Concentrated in sub Saharan Africa, some of Asia andthe pacific

Haiti only LDC in western hemisphere


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BRICS


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Brazil, Russia, India, China, South Africa

Emerging markets


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Big 10


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Emerging markets

Argentina, Brazil, China, India, Indonesia,

Mexico, Poland, South Africa, South Korea,

and Turkey


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Video: New Global Challenges


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Convergence of consumer tastes and

preferences

People are developing common interests

Easier for companies to see the global

marketplace as a single unified marketplace

More firms are using same marketing

approaches worldwide


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Benefits and Challenges of

Globalization


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Harms companies that:

Domestically produce and find foreign companies come inand become competitors

Causes prices to fall

Benefits companies that: Produce new extremely innovative products

Start ups

Large older companies are not nimble enough to

change and adapt and take advantage of globalization Start ups are nimble enough to take advantage of it


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Characteristics of Emerging

Markets


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27 countries 43% of World GDP

33% of world exports

67% of worlds population

Relatively young populations Contrast of the US and Western Europe with aging populations

Moving towards free trade and open investment Liberalizinglifting trade restrictions

Large supply of low cost high skilled workers Excellent base for research and development

MNCs have increased budget spent abroad for research and development from 15% in 1995 to22% in 2001

Higher today

Rising living standards Growth of Middle Class

Rapid economic growth


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Challenges of Emerging Markets


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Inadequate commercial infrastructure

Underdeveloped legal system

May not have rights for intellectual property

promote foreign investment

High levels of risk

Corruption is higher in EM countries


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New Global Challengers


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Companies in emerging markets that are quickly becomingimportant players in the world market

Succeeding because: Vast majority of natural resources

Access to a large pool of low cost labor

High amount of managerial and engineering talent in their homecountries

Their countries GDP grows from 8% - 9% US and Europe have averaged 1.5% to 2% GDP growth over the past

decade

Their countries provide:

large increasingly affluent market

low cost sources of manufacturing

pools of high quality labor and knowledge workers


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News ArticlePurchasing Power

Parity


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Poorer economies as a whole have higher

purchasing power parity adjusted GDP than

the advanced economy

Because their economies are growing faster thanadvanced ones

Massive population growth

EXCEPTION: Australia is still seeing highgrowth even though its an advanced country


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Global Poverty Paradox


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Although poverty rates have gone done significantly since the 1980speople in reality are not that much better off now than they werebefore

Rates look like they have decreased because of Chinas peopleemerging from poverty

Other countries, such as India, have significant economic growth buthas only slightly outpaced population growth

World economic process is slower than what we expect if we takeChina out of the question

Inflation adjusted per capita GDP is not that much higher todaythan a few decades ago

Sub Saharan Africas poverty increased during the 80s and 90s More countries should adopt capitalist system


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Overview of the Entire Global

Economy


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1970US had largest share of GDP US GDP was 36%

EU GDP was 26%

Other countries (not including US, CA, J, and EU)GDP was 28%

2009EU has largest share of GDP

US GDP decreased to 24%

EU GDP increased to 28%

Other countries GDP increased to 37%


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Marketplace of North America


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US

Canada

Mexico

Caribbean

Central America


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US


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Has the worlds largest GDP 24%

Has the worlds largest economy

High amounts of foreign investment due to High political stability

Large middle classprime for an export market

Trade only accounts for 12.3% of the US GDP Due to the fact that trade is difficult since its so large compared to

other countries like France and Germany since they are small and

close together US dollar is very important

Worlds invoicing currencycurrency in which the sales of goods andservices are denominated

Even if the US is not part of the transaction

Investors flee to safety by buying dollars Individuals and firms facing political or economic instability turn to US dollars Invest their flight capital in the US to minimize risk

US is a huge recipient of FDI27% of the worlds 500 largest MNCsheadquartered in the US


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Canada


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1/10 of the population compared to the US Worlds Second largest country in terms of landmass

Exports are 24% of its GDP

Natural Resources: petroleum, timber, minerals, and grain

Canada and the US have the largest bilateral traderelationship in the world

Several Advantages for international investors and MNCs Close to the US

High political and legal stability

Good education and infrastructureattractive to foreign firmsand investors


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Mexico


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Has a federal government

President serves for 6 years

Moving towards open trade in the past 2

decades

Signed NAFTA in 1994

Entered other bilateral and regional trade pacts

with numerous other countries


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Central America and the

Carribean


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Collectively have twice the population size as CA buttheir GDP collectively is 1/3 of CA

Face significant structural challenges Political instability

US military intervention

US doesn'tt hesitate to get involved in political affairs

Poor infrastructure, education, and economic policies

High poverty and weak middle class Without a strong middle class domestic firms cannot sell their

goods and services domesticallyhinders economic growth EXCEPTION: Costa Rica

Has meaningful economic growth


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Gross Domestic Product


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GDP

Market value of all final goods and services

produced within a country in a given year

Goods must be produced within the nation

Cannot be used

Does not include spending on parts to make a

good just the final good itself


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Gross National Income


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GNI

GDP + net income received from other

countries

Total dividends and interest


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Per capita measure of income


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Shows how rich or poor and country is on a

global scale

Per capita GDP

Per capita GNI


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High Income Nations


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Per capita incomes of $12,196 or more

Include:

Oil rich countries

OECD countries

Small but rich island countries (SMICS)

Small and industrialized island countries


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Upper Middle Income Nations


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Per capita between $3,946 and $12,196

Mexico, former USSR, BRICS, Big 10, Costa Rica


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Lower Middle Income Nations


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Per capita income of $996 to $3,945

Armenia, Iran, Nigeria, Pakistan, Thailand,

West Bank/Gaza Strip


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Low Income Nations


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Per capita income is $995 or less

Afghanistan, Haiti, Somalia, Nepal, Zimbabwe


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Western Europe Marketplace


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European Union Includes former communist countries

Croatia last country to enter

Also includes:

High income countriesIceland, Switzerland, Norway,Andorra, Monaco, and Liechtenstein

Middle Income countriesAlbania, Bosnia, Kosovo,Montenegro, Serbia, Macedonia

Andorra, Monaco, and Liechtensteinpostage stamp countries

Because they are so small

Development of middle income countries was hindered by adecade of warfare in Yugoslavia in the 90s


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European Union


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Established in 1993 28 Countries

17 of them use the euro introduced in 1999

Major influential players: Germanyfourth largest economy in the world

Huge impact on world and European history

Francemajor role in European history Pushed for European unification and common foreign and defense policies

Huge advocates for human rights issues

UKdoes not use euro LondonWorlds largest financial center

Largely because of tradition and its centrally placed on the globe

London and the UK major destinations for FDI

Only 3 of the former communist countries that entered the EU are highincome nations Estonia, Slovenia, Czech Republic


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Major Players in the EU


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UK

Germany

France


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Former SU Nations in the EU

with High Incomes


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Estonia

Slovenia

Czech Republic


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Brief History of EU

Started as the European Coal and Steel Community formed in 1951 by F I


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Started as the European Coal and Steel Community formed in 1951 by F, I,West G, Belgium, Netherlands, and Luxembourg Wanted to make European countries more interdependent on one another so

a war like WWII would not occur again

Chose to unify on coal and steel

integral part of production for weaponsand other stuff for war

1957 it became the European Economic Community UK, Iceland, and Denmark tried to enter but were denied until 1973

1979 first Europe wide elections to the European parliament took place

Over the years European Economic Community added several other

members 1993 Maastricht Treaty converted European Economic Community in to

the EU

1999 several countries adopted the euro

After adding the countries they did between 2004-2007 new entrants GDPincreased by 1.75 percentage points and enlarged existing members

export market Now 28 Members


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European Coal and Steal

Community


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1951

France

Italy

West Germany

Belgium

Netherlands Luxembourg


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European Economic Community


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1957 France

Italy

West Germany Belgium

Netherlands

Luxembourg

1973

UK, Iceland and Denmark were added


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Maastricht Treaty


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Signed in 1993

Converted European Economic Community

into the EU


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Euro


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Created in 1999

Adopted by 17 countries of the EU


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Controversies of Some Members

of the EU


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Turkeymany Europeans believe it should notbe in the EU

Because its in the far east

Has a largely Muslim population

MacedoniaGreece doesnt want it in the EUbecause they believe they have first rights to thecountrys name because they have a region

named Greek Macedonia Macedonia was willing to change its name to be

allowed to join the UN


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Eastern Europe and Central Asia


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Modern Russia

Central Asian Republicsthe stans

Kazakhstan

Uzbekistan

Tajikistan

Turkmenistan

Kyrgyzstan


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Historical Influence on Eastern

Europe and Central Asia

Soviet Union controlled these regions for decades

Bolshevik Revolution after WWI over threw the Russian tsar giving control to


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Bolshevik Revolution after WWIover threw the Russian tsar giving control tothe communist party Communist party implemented:

New economic policies

Collectivizing farms

Outlawing private property Outlawing market system

Issues: worked to reduce income inequality but avg. living standards fell

Berlin Wall fell in 1989

USSR collapsed in 1991 Caused 15 former SU republics to declare independencecalled the newly independent

states

1992, 12 of the newly independent states formed the Commonwealth ofIndependent States

Transition from communism to free market was difficult Boris Yeltsinfirst president of Russia

Presided over the financial crisis and had to devalue the ruble Suspended payments to foreign creditors for 90 days

Vladimir Putin2ndpresident of Russia In 2000 deregulated small and medium enterprises

Allowed people to own private farmland

Reformed tax system

Had to halt these reforms in 2003 due to major economic pressures Renationalized major companies

Especially oil and gas

Since then Russian politics very corrupt


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Bolshevik Revolution


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After WWI

Over threw the Russian Tsar

Gave control to the Communist Party


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Berlin Wall


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Collapsed in 1989


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USSR


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Collapsed in 1991

15 states declared independence


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Common Wealth of the

Independent States


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12 of the newly independent states formerlypart of the USSR

1992


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Boris Yeltsin


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Devalued ruble during Russia's financial crisisat the end of the 90s


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Vladimir Putin:

First Round of Policies


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2000

tried to move to free market

deregulate small and medium enterprises

Tax system overhauls

Legalization of privatized farmland

2003 had to halt and renationalize major

companies


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Modern Russia


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Worlds largest country in terms of land mass

9thlargest population

A lot of natural resourcesbenefited from recentincreases in oil and raw material prices Minerals

Diamonds

Oil 2ndlargest oil producer and exporter

Gas

Economy growing rapidlyrate of 5.9% a year since 2000

Accumulating reservescurrency reserves are more thanany other country except for China and Japan


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Russias Income Inequality


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Economic growth not shared equally amongRussian people

President Putin and his Cronies have gained

the most from Russias economic growth Oligarchs


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Current President Putin


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Former leader of the KGB Great control over media in Russia

Putin changed Boris Yeltsins policies nationalizingmass media and reforming tax code

Get along with himbecome more rich andsuccessful

Dont get along with himeither flee Russia orinvest money abroad where the Russian govt

cannot touch it Mikhail Khodorkovsky


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Oligarchs


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Extremely wealthy individuals who run Russias largestcompanies

Became rich in the 1990s

Own Russias:

Oil fields Steel factories

Engineering companies

Mass media

Paid little taxes under Yeltsin but changed under Putin

Collective wealth of them increased from $300 billionto $450 billion in 2007


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Mikhail Khordorkovsky


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Russian oil tycoon Company: Yukos Oil

Once Russias Richest man

Criticized Putin in public Putin nationalized his company

Threw him in jail for corruption Facts were so unconvincing Amnesty International labeled

Khodorkovsky as a prisoner of conscience Message from the governmentkeep your

mouth shot or leave the country


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Russias Legal System


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Different from US Defendants appear in court in small barred

cells

Prosecution has the right to appeal verdict


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Central Asian Republics

Characteristics


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All part of or heavily influenced by the SUduring the cold war

Heavily influenced by Russians

Common languages and religionsIslam Lack large amounts of arable landnot good

farmland

Low per capita incomes

Significant fossil fuel reserves


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Currency Reserve


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Foreign currency held by central banks and majorfinancial institutions as a means to pay off international debt obligations

A large % of commodities are usually priced in thereserve currency causing other countries to hold these currencies to pay for

these goods

Holding currencies reserves minimizes exchange raterisks

b/c the purchasing nation will not have to exchange theircurrency for the current reserve currency used to price thegood in order to purchase it


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News Article: Unemployment

Rate

Unemployment rate is calculated by the Bureau of Labor Statistics Call a sample of 60,000 households and ask:

Have you worked for pay in the past week?


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Have you worked for pay in the past week? Even if its an hour

If no, have you looked for work within the past 4 weeks?

Employedhe or she has worked at all in the past week

Unemployedhe or she has looked for work in the past four weeks but hasnot worked for pay in the past week

Discouraged workersthose who currently do not have a job and have notlooked for one in the past 4 weeks

NOT COUNTED IN UNEMPLOYMENT RATE

Rate can decrease because: More workers are getting jobsgood Labor force is shrinking and people are giving up to look for a jobbad

Becoming discouraged workers

Does not tell you anything about wages earned by the work force Many people are taking jobs that pay less than what they had before the

recession

Monthly avg. is the lowest its been since 2007, before the recession began Good news for the economy


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News Article: European Central

Bank


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Headed by Italian Mario Draghi Responsible for setting monetary policies in

Europe

Decide to keep interest rates extremely low.5%

Does not believe global economy is strong

enough to raise interest rates


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Interest Rates


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Cost of borrowing money Recent economic downturn

European central bank and the US federal reserve have beenkeep interest rates extremely low

Goal: promote borrowing, and eventually spending

To stimulate the economy Consumer spending is crucial part of the global economy

Accounts for 75% of the USs GDP Fed Reserve huge impact on USs economy short term

Effects of changes to the interest rates may not be seen

right away Can take up to 4 -18 months


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News Article: Microsoft purchases

Nokias smartphone and cellular

handset business


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Try to compete with the big players n thesmart phone market

Failed to anticipate impact of Apple and

Google on this market They offered software and hardware

Microsoft only offers operating system


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News Article: Verizon purchases

Vodafone


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Huge acquisitionwill require Verizon to take billionsof dollars of new debt

But okay because you need to spend money to makemoney

Bought them because Verizon believes mobile accessto the internet will be very important in the future

And wants complete control over operations and revenues

Stock prices soared as well as futures soared

Consumers will probably not be affected directly Will still offer same services, at least in the short term


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The Olympics


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Will announce the site of the next summer Olympics soon Choosing between: Madrid, Tokyo, and Istanbul

Leaning more towards Madrid

Economists debate whether the tremendous costs of hosting theOlympics is justified Over this past century only 2/3 of the host cities have earned profits

Cities that do earn profits after Olympics are over is sometimes due tothe post hoc fallacy

Olympics committee has to convince taxpayers to host the Olympics Typically overstate the revenues it will generate and understate the

costs

Better when money spent on preparing for the Olympics is oninfrastructure that the country can use after the games have ended


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Post Hoc Fallacy


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The false assumption that A causes B simplybecause A precedes B

Do not confuse correlation with causation

Example: Roosters all around the world crow asthe sun comes up

There is a correlation between roosters crowing and

the sun rising

Does not mean cause:

We cannot say that the sun rises because the rooster crows


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Asias Marketplace


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Japan

Australia and New Zealand

Four Tigers

S. Korea

Singapore

Taiwan

HK

China India


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Economic Situation in Asias

Marketplace


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Share of world output has fluctuated throughout human history 1000 C.E.2/3 worlds output

1800s198020% of worlds output

200933% of worlds output

Sever economic crisis hit Asia in the late 1990s Widespread currency collapse

Asias market share of GDP fell

Purchasing Power Parity adjusted measure of GDP market shareincreased

Because of cost of living also fell more than GDP fell

PPPcalculates value of GDP based on the cost of living

Still accounts for only a small % of worlds financial assets20% Becoming and increasingly important force in the global economy


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Japan


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Worlds 3rd

largest economy Island nationpopulation 127 million

Aging populationby 2025 30% of the pop. Will be65 years or older

Even more than the US Strong economic growth in the past due to strong

partnership between Ministry of internationaltrade (MITI) and highly concentrated industrialsector

Firms are organized in large families of companiescalled keiretsu


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Keiretsu


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Large families of companies These companies control Japanese industry

Act as suppliers and financers of each other

Cross ownership is common as well Gives company stake in anothers success


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Japans Lost Decade


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Real estate bust at the end of the 80s led tolow economic growth in the 90s

Growth did not pick up till the 2000s

Growth rate was only 1.1% during this decade

Worlds avg. 2.9%

Issue: slow to adjust to world economicchanges

Rising importance of emerging markets

Growth of e-commerce


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Japans Trading Practices


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Notorious for unfair trading practices

Dumpinga country promotes its exports byselling them lower abroad then they would athome

Japanese firms do this to drive other firms out ofthe industry and gain a large share of the exportmarket

Have nontariff barriers that block importsfrom the rest of the world


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Japans New Paradigm for the

Workforce


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Historically firms hired workers and promisedlifelong jobs

Now due to weak sales firms have moved

from hiring full time workers to temp workersvs. permanent ones

Has caused increase n unemployment and

underemployment This has caused the rise of the deflationary spiral


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Deflationary Spiral


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People who dont have jobs dont spendmoney

Puts downward pressure on demand and prices

Businesses earn less profits thus hire lessworkers

Causing people to spend even less


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Deflation


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Central banks usually focus on fightinginflationbut consequences of deflation are

much worse

They have policies to control inflation Have fewer policies to fiz deflation

Deflation was a major factor that caused the

great depression to be as long and severe as itwas


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Stimulus efforts have not worked well in Japan Growth has been stagnant for 2 decades

Risk of another lost decade

Economy has started to rebound slightly

Two issues of concern whether Japan will recover: Economic strength of the US and china

They are Japans major trading partners

Economic slowdowns with them can contribute to Japan's continuedstagnation

Strength of the Yen

Yen is another safe haven currency in times of uncertainty Has caused yen to appreciate

Increased the prices of Japanese exports to the rest of the world

Cause exports to decrease for them and has hindered recovery


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Australia and New Zealand


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Geographically near Asia More akin with the US, UK, and Western

Europe in terms of politics, culture, and

economy


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Australia


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Pop. is 22 million Concentrated in the huge costal citiesSydney and

Melbourne

Merchandise exports17% of GDP in 2009

Rich in several natural resources: Gold

Coal

Iron ore

Wheat

Beef


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New Zealand


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Made up of several islands 80% of pop. Live on the 2 major islands

Merchandise trade20% of GDP in 2009

Major Exports: Meat

Wool

Dairy products


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Four Tigers


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South Korea Singapore

Taiwan

Hong Kong

Achieved remarkable growth over the past

few decades

Largely driven by open trade policies


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South Korea


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After WWII a civil war divided Korea intoNorth and South

Northcommunist

faces perpetual economic stagnation Southdemocratic

Vibrant export led economy

Exports44% of GDP

Followed Japans after WWII economic path to

successful economy


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Singapore


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Great Britain founded them as a colony in1819

Received independence in 1963

Growing rapidly ever since

Regional technological hub

Rapidly growing communications and financialservice sectors

Exports148% of GDP Excellent ports that engage in re-exporting


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Receiving goods repackaging them or modifying them slightly

Then sending them back out


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Taiwan


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When Chinese communist party took over mainland chinain 1949 2 million nationalists fled the country

They established what they considered a new countryRepublic of China What we call Taiwan

One of the fastest growing regions in the world over thepast three decades Growth driven by tradeExports64% of GDP

Political battle over independent status of Taiwan betweenmainland china and Taiwan

But Taiwan still maintains its independence These tensions are important cultural and economic ties

between China and Taiwan


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Hong Kong


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British colony until 1997 Control was then given to China

Technically still part of china but operates fairly

autonomously

Major port

Engages in significant amount of re-exporting

Exports

194% of GDP


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Chinas History


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Worlds oldest continuous civilization

Republic of China established in 1912

Rise of the communist party caused a civil war

Communist leader Mao Tse-tung took controlin 1949established Peoples Republic of

China


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China under Maos Rule


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Suffered economically under his rule

Great Leap Forward 1950s and 1960s Series of economic and social reforms focused on

collectivism and central planning Tremendous failure

Resulted in millions of deaths Cultural Revolution1960s and 1970s

Sought to instill communist orthodoxy in the ocuntry

Remove cultural remnants of capitalism and the formerregime

Wanted the the countrys communist ethos to reignsupreme


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Great Leap Forward


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Mao Tse-tung

1950s and 1960s

Economic and social reforms

Focused on collectivism and central planning


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Cultural Revolution


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Mao Tse-tung 1960s to 1970s

Sought to instill communist orthodoxy in the

country


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China After the Death of Mao


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Chinas leaders implemented series of free marketreforms

Legalized some small business and privatized agriculture

Trade liberalization and free market policies led to severaldecades of outstanding economic growth

Still criticized for restricting political freedoms

According to china economy grew at an avg. of 10.9%between 20002009

Has a reputation to fudge numbers so most analystsbelieve its a few percentage points less

Still this is amazing growth


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Chinas Territorial Disputes


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China and Japan: Dispute over Diaoyutai Islands (Japan calls it Senakaku Islands)

Currently under the control of japan but china feels it should have it

Disagree where to draw the line between their exclusive economic zones 2008 agreed to joint development in the disputed area of exclusive economic zones

Japan is angry about the gas field, Chunxiao (J calls it Shirakaba), exploited by China Because disadvantage to Japan

Chinas Claims to the South Contention with: Vietnam, Philippines, Brunei, Malaysia, and Indonesia

Tensions are growing in the areaespecially with Vietnam

China and India: Border war in 1962 and still continue to disagree over the Himalayas

China and Taiwan:

Fear the Taiwan might officially demand independence


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Chinas Economic Situation


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Worlds largest population Rapid economic growth in recent years increased FDI

Especially from 2000 -2008

Slight decrease due to global recession

Workforce has a reputation for hard working and lowcost labor

Attractive to foreign firms looking to outsource

Chinese firms and individuals are becoming wealthier

Investing more in other parts of the world Including: Taiwan, Singapore, HK


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China: Rural vs. Urban

Populations


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Economic disparity between rural and urban people 750 million people still have not benefitted from economic

boom

Growth largely occurred in its large coastal cities

Rural unrest has caused political issues

Economic prosperity has driven 160 million to migratefrom rural to urban areas Migration accounts for 20% of economic growth since

2001

Some businesses have moved to poorer areas Promoting growth there

Trend may lessen disparity but not guaranteed


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China and the Internet


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Has become important part of their economy Shown that an authoritarian government can benefit economically

from the internet Maintain power through censorship

More expensive and difficult than in countries relatively free of censorship

More than 40% of pop. are online

Has begun to spread to rural areas as well E-commerce has grown rapidly

May surpass the USs market

Many sites are blocked by Chinas firewall

Incudes: YouTube, Facebook, and Twitter

Have created their own alternatives Grown to be very popular Still monitor for posts about sensitive issues


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India

ld d l l


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Worlds second largest population

Worlds largest democracy Government structure still reflects a strong British influence

Gained independence in 1947

After WWII relied on govt ownership of businesses in key

industries to increase economic growth Mixed success

1991 implemented series of market reforms andprivatization Attracted inflows of FDI

Grown on Avg. 7.8% per year since 2000


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Challenges India Faces

P i d t ti t idl b t f h ll


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Poised to continue to grow rapidly but faces many challenges Corruption

Govt corruption is widespread in all levels

Bribes are necessary to do business in many industries

Poor infrastructure Last summer 700 million people lost power for hours

Government red tape

Jump through a lot of hoops to do business in India Makes FDI less attractive

Population is mostly young and poor Pop. density in the north is very high

India remains mostly rural Nearly 50% of the population relies on agriculture to make a living

Cities are growing and education is improving

Urbanization is increasing

Successful city in IndiaSurat May soon grow to be larger than London


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Assigned Article:

Indias Economic Trouble

Economy has been suffering in the recent years due to structural problems prevented the country from achieving China-like levels of sustained growth

Short Term Problems: Depreciation of the Rupee

Depreciated against the dollar by 20% since May

This makes imports more expensive Especially goods priced in dollars


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The price of diesel has increased significantly Very important to Indias economy

Falling Stock Market Fallen by 8%

Decreasing the wealth of many Indians

Other poor economic indicators Inflation rate is 10% per year

Widening budget and trade deficits

Long Term Chronic Problems: Poor infrastructure

Poor roads make it costly and time consuming to get goods to ports

Energy distribution less efficient than Chinaelectricity costs are high

High Real Estate Costs Govt regulations make it difficult to replace old buildings

Shortage of appropriate industrial real estates in highly populated areas Driven prices up

Bloated State Run Enterprises India has largely ignored manufacturing sector

Govt has not developed a thriving export industry

Burdensome Regulation Extensive labor regulation discourages firms from growing beyond a certain size

Govt regulators ask for bribescost of business increases

Difficult for manufacturing sector to thrivedifficult for the poor to move to the middle class

FDI are not reinvesting into India due to chronic problems


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Southeast Asia

Includes number of island nations


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Includes number of island nations Indonesia, Malaysia, Thailand, Vietnam

Many US, J, and European firms use this area for production ofgoods These goods require low skilled low cost labor

EX: textiles

FDI generated exports have caused these economies to growrapidly These countries are now solid middle income nations

Known for their cheap labor

Companies have begun building high tech operations here as well

EX: 2010 -- Intel opened a plant to test computer chips in Ho Chi MinhCity, Vietnam


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News Article: Employment

Numbers

Unemployment rate 7 3%


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Unemployment rate7.3% Lowest level in nearly 5 years

But this may not be a good thing

Decrease in unemployment rate is due to decrease in sizeof labor force

Lowest its been since 1970 Reason may be:

Aggregate demand is still low

Businesses do not want to invest money in hiring when there isstill uncertainty in the economy

Obama Care will negatively impact the labor force as well Companies will scale back on number of employees to avoid

buying mandatory health insurance for them


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News Article: Federal Reserve


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Have keep interst rates low Fed Chairman is about to retire

Obama must choose between two people:

Lawrence Summers

Gradually increase interest rates

Janet Yellen Likely to keep interest rates low

Probably will choose Yellen

Summers made inappropriate comments about women

Yellens economic predictions have been more accurate


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News Article: Sept. 11th

Had a huge economic impact


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Had a huge economic impact

Caused Fed to drop IR to 0% to stave off catastrophic economiccollapse

Required Fed Govt to spend more on national securityincreaseddeficit Explicit costs

Wall Street spent a lot of money increasing security against a cyberthreatsafest its ever been

Implicit costsopportunity costs such as waiting in line in theairport for security and lives lost in car accidents because of thefear of flying

Deficita flow variable measured on an annual basis

Debtstock variable that amounts to the sum of all our deficits


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Africa

55 countries


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55 countries

More than a billion people

Rich in natural resources Huge oil deposits

Algeria, Angola, Nigeria, and Libya

Major mineral deposits Zambia, Botswana, and the Democratic Republic of Congo

Many Africans are very poor and are farmers Have to work the fields so they can have enough food to survive

Makes it difficult to achieve meaningful growth if a large portion

of the pop. cant even feed themselves Agriculture40% of GDP of the poorest African countries


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Africas History


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Largely been defined by Europeancolonization

Occurred in the 1800s

Lasted until the 1950s

Colonization caused ongoing politicalproblems

Colonizers constructed artificial political borders

that cut across ethnic and cultural lines Rwanda Genocide of 1994


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South Africa

Most economically successful African country


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Most economically successful African country Africas powerhouse

Has grown rapidly after the end of the apartheidand the election of Nelson Mandela in 1994

Growth has been at an avg. of 3.3% but thisnumber is growing

Has joined the BRIC countries and has changedthat name to BRICS

Exports22% of GDP Mostly minerals


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Africas Prospect of Growth

Two differing viewpoints Negative and Positive


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g p g

Negative: continent is rich in natural resources but the people remain poor Africa has had a difficult time turning its natural resources into actual wealth in terms of

dollars and cents

Has gotten caught up in debt/capital flight revolving door

Africa should renegotiate contracts with MNCs So they can be better compensated for their resources

Corruption main cause of poverty

Positive: majority of institutional investors see Africa as the greatest opportunityfor growth in the next decade 33% of them have shifted at least %% of their funds to Africa by 2016

Large emerging middle class Sign that the country will be able to buy firms products

China has invested heavily in Africa Largest trading partner of Africas

Overtook US

Businesses are looking to gain a first mover advantage


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Debt/Capital Flight

Revolving Door

For Africa:


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For Africa: $900 billion in wealth has left the continent

Mostly by small number of wealthy Africans

This has happened b/c government officials andpowerful leaders take the money they borrow and

move out out of Africa for their own personal wealth Capital flight gives rise to borrow more money

Then that money borrowed is moved out of the countryagain

Causing the country to borrow even more to meet its

obligations Africa has $200 billion in debt


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Middle East


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Centrally located on the globe History of conflict and political unrest

Impacted business environmentIncreases risk

Economies are dominated by oil exports

Saudi Arabia has the largest economy

Oil45% of GDP

Exports90% of GDP

Israel has the highest per capita income


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Arab Spring


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Series of uprisings that occurred in 2011 Tunisia

Egyptstill see unrest

Libya

Syriastill see unrest

Has increased the risk of doing business in

some countries, but has opened some new

business opportunity


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Middle East and Oil

Oil rich countries are realizing the finite resource that


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Oil rich countries are realizing the finite resource thatoil is

There will be life after oil

Countries are taking steps to diversify their economies

Dubaiestablished a free trade zone and an export entrypoint

Encourages international ships to pass through there

Countries have been investing their oil revenues for thefuture

By expanding their foreign investments with sovereignwealth funds


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Govt run investment funds Invest in real and financial assets or

alternative investments

Invest globally Funded by revenues from commodity exports

or foreign exchange reserves

Middle East: funded by oil revenues


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South America

13 countries


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Have common social, economic, and political history

Colonized by the Spanish and Portuguese

They subjugated native populations

Exploited natural resources Achieved independence in the 1800s

Began to struggle with Income inequality

Poverty

Political instability

Some still continue to struggle today


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South America: Import

Substitution

Policy where govt restricts imports with tariffs


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Policy where gov t restricts imports with tariffsand non tariff barriers to develop domesticindustries

Policy makes sense in theory but failed in practice

Issue: small domestic markets were not largeenough to allow domestic firms to take advantageof economies of scale

Result: had to charge very high prices for goods

produced After WWII used this policy to grow


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South America: Export

Promotion


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South America used this after WWII toincrease growth

Policy where the govt subsidizes domestic

export industries to boost exports

Issue: the cost of subsidies and nationalization

was passed to the tax payers


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South America and Economic

Problems after WWII


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High taxes due to: Nationalization

Large govt subsidies

High Budget Deficit resulted in: Inflation

Instability


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South America Today


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In the 1980s started to liberalize their market Reduced trade barriers

Privatized industries

Promoted trade with free trade agreements

Economy began to grow rapidly

New policies began to pay of in late 80s and 90s

Increase in demand for raw material and

foodstuffs


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Gini Coefficient


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Measures income inequality Ranges from 0 to 1

0income perfectly distributed

1

income concentrated in one person


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South Americas Income

Inequality

Major lingering problem and results in political instability


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Many countries have a high gini coefficient Income distributed very unequally

Brazil0.65

Reasons for Inequality:

Educationunequal education access Receive an education become rich Do not receive education remain poor

Birth Rateshigher in poor people Children born into poor families have few financial resources to work

with

Ineffective Public Spendinggovt that cannot effectivelyredistribute income cannot address income inequality

One Exception in textbook


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Current Situation in Venezuela

Death of Hugo Chavez and the Election of Nicola


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Maduro

Believe the election was rigged in favor of Maduro

Chavismo severely debilitated without Chavez

Positive for Venezuela in the middle term to long term

Oil production is declining

Lack of infrastructure

Lack of human capital

Maduro will have to invest in this industry in order tohelp the countrys economy to stay afloat and grow


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Chavismo


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Progressive policies the nationalized majorindustries

Spread money and resources to the poor

If Maduro sticks to the policies he may be

voted out mid term

Believe he lacks the personality and political

understanding that Chavez had


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Artic Region


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Important emerging market Important source of natural resources and fish

Global warming is opening up several trade

routes that pass through here Region is becoming more valuabletensions

are rising to claim it


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Artic Five

US, Russia, Canada, Norway Denmark


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The five countries that play the most direct

and active role determining this areas political

fate

Middle PowersDenmark and Norway

Important roles in negotiating deals and

maintaining peace among nations with opposing

claims


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Tensions in the Artic Region

Non artic nations want access to resources and


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trade routes

China and India

Discovery of new reserves of oil outside of the

areas currently controlled by sovereign powerswill present conflict

Cause competing claims over the reserves

If resolution of these disputes are peaceful maybecome a model for other geopolitical issues


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Leverage

The use of borrowed funds to make andi


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investment

Can dramatically increase and investorsreturn on investment (ROI)

Amplifies profits

Issue: amplifies losses as well

Leveraged investors are more likely to lose all or

his or her portion of an investment if things gosouth


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Collateralized Debt Obligations

COD

I t t fi b ht t f l d d


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Investment firms bought mortgages from lenders andpackaged hundreds or even thousands of them in to thisnew kind of security Then sold slices of these securities to other investors

CDOs were sliced into 3 different tranches (level of risk) and

sold to investors safeinvestors who wanted extremely safe investments

okayinvestors who were okay with riskier investments

riskyinvestors willing to accept an extreme risk for a bigpayoff

Also for investors to hedge their funds


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Special type of insurance for Investment


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bankers

For mortgages in the safe tranche

Allowed them to get AAA rating on theseslices of the CDO


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Subprime Mortgages

Mortgages offered by lenders to riskier


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borrowers

Changed their lending practices

Not requiring down payment

Not verifying the borrowers income


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Repo 105 Transaction

Temporarily sell off risky assets that they did


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not want on its balance sheet

After the financial statement was made

Would buy those assets back at a slight premium


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US Financial System Now

vs. Pre- Recession

Safer today than before the collapse

US banking regulations have increased capital requirements on


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US banking regulations have increased capital requirements onbanks Used to be 2%could leverage 50:1

Now 10%leverage 10:1

Increase in liquidity

Banks are better able to weather a downturn if it occurs Fed regulation have made improvements

Dodd Frank Act

FDIC working on plan to eliminate argument that big banks are toobig to fail FDICFederal Deposit Insurance Corporation

Create a process to allow big banks to fail without tax payer bailout

Reduce moral hazard problems


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Dodd Frank Act

Addresses number of problems with the

k


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market

Made the trading of derivatives more

transparent

Improved procedures of securitization

Increased govt regulatory powers


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Glass Steagall Act

Required investment banking and commercial

b ki b


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banking to be separate

Law was repealed in 1995

Many analysts believe that this contributed to the

financial crisis


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Moral Hazard

Business takes excessive risks because it is

t t d i t ti


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protected against negative consequences

EX: big banks to big too fail

Took huge risky investments


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Legal Environment in Global

Business

Global businesses must follow home and hostcountries laws


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countries laws

Differences in law country to country can havea dramatic impact on a firms profitability and

success Impacts markets it can enter

Cost of inputs

Prices it charges

Where it is located


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Classification of Law

4 types


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Common Law

Civil Law

Religious Law Bureaucratic Law


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Common Law

Based on precedents set by prior judicial

decisions


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decisions

Relies on collective wisdom of judges who have

heard cases throughout history

Derived from law that prevailed in the UK

Often supplemented with statutory laws

enacted by the legislature

Common Law judges act more like referees


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Civil Law

Based on Roman and French Napoleonic law

B d i d h d il h i


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Based on extensive codes that details what is

and is not permissible behavior

Civil law judges take a more active role as a

fact finder or advocate


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Religious Law

Based on one particular faith or religion

Th ti ti


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Theocratic nations

Can impose significant restrictions on business


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Theocracy


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Islamic Law

Example of religious law

Prevents the payment of interest


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Prevents the payment of interest Requires every transaction to be based on tangible

assets

Islamic banking has been around since the 600s

Differs from traditional western banking in two ways: Banks cannot charge interest and profits must be earned on

tangible assets West: earn profits on intangible assets such as mortgage backed

securities

Profits and losses are shared by the business and lender

West: banks expect borrowers to repay their loan whether or not theinvestment worked out


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Bureaucratic Law

Law is simply whatever the bureaucratic says

it is regardless of the official law of the


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it is regardless of the official law of the

country

Dictators commonly ignore the law and do

whatever they want to do

Managers doing business in countries with

dictators often deal with arbitrary and

unpredictable decisions of these dictators Doing business is quite risky in these nations


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World Justice Project

Org funded by the Bill and Melinda Gates

Foundation


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Foundation

Developed Rule of Law index

Also ranks govts in terms of openness in

terms of making laws public and widelyavailable

Measures the comprehensibility of the law to thepublic

Measures stability of the law


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Rule of Law Index

Ranks countries from 010 Measures the extent to which they enforce regulations

Rough measure of the rule of law in a country


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Simply refers to whether a country enforces laws

Strong Regulatory Enforcement: US

Canada

Western Europe Chile

Australia

Japan

Weak Regulatory enforcement: Russia

India Pakistan


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Corruption

Dishonest or fraudulent conduct Bribery

kb k


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Kickbacks

Embezzlement

Lowest in EU and Western Europe

Highest in Eastern Europe, Central Asia, SubSaharan Africa

More countries are perceived to be corrupt thanclean Influential to international business


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Transparency International

Non profit organization

Ranks countries based on their perceived level ofcorruption from 0 to 10


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corruption from 0 to 10 0most corrupt

10least corruptmost clean

Most of the worlds countries rank below 5

Most Corrupt countries: Afghanistan, Burma, N. Korea,Somalia Majority of Africa

Most Clean Countries: New Zealand, Denmark, and Finland

US ranks 19

th

in terms of cleanliness Higher than Russia Lower than Canada and Australia


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Most Corrupt Countries

Afghanistan

Burma


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Burma

N.Korea

Somalia


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New zealand

Denmark


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Denmark

Finland


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% of countrys pop. that has had to pay a bribe

Canada3%


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US7%

Kazakhstan34%

India54%


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Corruption in Sectors

Sectors seen as most corrupt in US, Canada, and W.

Europe: Political Parties


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Political Parties

Sectors seen as most corrupt in Colombia: Legal System

Sectors seen as most corrupt in UK and Egypt: Media

No countries perceived their military, educationalsystem, or NGOs to be most corrupt

This info is important for firms considering to expandoverseas Firms want to avoid corruption whenever possible


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Domestically Oriented Laws

A company operating in a foreign country has to abide by its laws Including laws to regulate domestic economic environment

Work force management EX: wages and benefits


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EX: wages and benefits

Finances EX: required govt filings and disclosures & tax rates

Marketing EX: regulations on advertising & nutrition labeling rules

Developing and using technology EX: safety standards

Laws can impose constraints on a foreign firm Complying with them can increase costs and decrease a firms

competitiveness

Some regulations are essential

Nations must find a balance between protecting the public andunduly constraining business

Laws Directly Affecting


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Laws Directly Affecting

International Business

A company operating in a foreign country

have to deal with national laws that are


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intended to regulate international business

Laws may be put in place for many reasons

Political considerations

To achieve certain military or diplomatic

objectives


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Sanction

A limit on commerce with a country

United States Office of Financial Assets


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Control (OFAC)

Administers sanctions with countries around the

world


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Embargo

Specific kind of sanction

Comprehensive prohibition against all


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p p g

commerce with a country

US has had an embargo with Cuba since 1961

Longest running economic embargo in the world


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Extraterritoriality

When a country tries to regulate business

activities outside of its borders


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EX: anti-boycott provisions of US law

prohibit a US company from complying with a foreign

countrys boycott on products of a country friendly withthe US

Enacted in the 1950s when the League of Arab States

called for a worldwide boycott of firms that do business

with Israel Israel is a strong ally of the US

l


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Helms Burton Act

Most controversial extraterritoriality US law

Intended to punish foreign companies in Cuba


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that use of US property confiscated by the

Castro Regime in the late 1950s

Allows lawsuits in American Courts against

foreigners who use this property

Allows US to prevent executives of these

companies from entering the US

Laws Directed Against Foreign


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Laws Directed Against Foreign

Firms

A company operating in a foreign country must

deal with laws and actions specifically aimed atforeign owned firms


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foreign owned firms

They have no other options but to deal with theselaws because they want to exploit an immobile

resource Examples:

Nationalization

Privatization

Constraints on foreign ownership

N i li i


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Nationalization

Government seizes ownership of a private

firmM t l i d t i l fti t t


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Most commonly carried out in leftist govt

Interested in seizing control of strategic private

sector firms Especially those that are not mobile

Natural resource industries

Capital intensive industries

EX: Venezuelas aggressive confiscation offoreign assets has caused net FDI to fall

E i ti


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Expropriation

Govt offers compensation to the private

owners for seizing ownership of their firm


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C fi ti


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Confiscation

Govt offers no compensation to the private

owners for seizing ownership of their firm


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P i ti ti


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Privatization

When govt owned property is converted to

private property State owned businesses are usually inefficient


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State-owned businesses are usually inefficientand unprofitable

Privatizing them increases economic efficiency Opening up new opportunities for international

businesses to get involved

Wave of privatization during 80s and 90s

Led by the UK

Constraints on Foreign


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g

Ownership

Many countries prohibit foreign firms form

owning a large stake in key industries


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Another form: ability to repatriate

Repatriate


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Repatriate

Inhibiting MNCs from bringing profits earned

abroad back home


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Have negative and positive impacts on host

countries


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Important impacts

Economic

Political

Cultural


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Positive impact

Create local jobs Contribute money to the local economy


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Supports education and infrastructure

Transfer technology and knowledge of it to theirdomestic partners and workers

Negative impact Highly powerful MNCs might drive domestic firms out

of business

Local economy can become dependent on the MNCs If they leave the country or impose layoffs or cutbacks

local economy will suffer

Political Impact of MNCs


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Political Impact of MNCs

Large MNCs have significant political influence

in the countries they operate inC i fl ti l iti l


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Can use influence negatively or positively

Cultural Impact of MNCs


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Cultural Impact of MNCs

They can sometimes change the norms,

standards, and behaviors of the countries theyoperate in


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operate in

For better or worse

Introduction of new or better products and servicesmay improve living standards

Worse: EXNestl's baby formula in developing

countries

Dispute Resolution in


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International Business

When a dispute arises the parties must

decide: Which law applies


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c a app es

Where conflict will be resolved

Technique used to resolve How decision will be enforces

Contracts specify which law applies and wheredisputes must be brought

Most countries honor such contractual provisions

Forum Shopping


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Forum Shopping

When a party to a lawsuit attempts to have

the case heard in a country where the laws aremost favorable


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most favorable

Likelihood of one partys success may be better in

one country compared to another EX: tort of defamation

Easier for plaintiff to win case in the UK than the

US

Comity


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Comity

A country will usually honor the decisions of

foreign courts as long as The two countries extend reciprocity between one


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The two countries extend reciprocity between one

another

Defendant has proper notice Foreign judgment does not violate any statutes

and treaties

Arbitration


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Arbitration

A process in which the parties agree to abide

by the decision of a private non judicial body

Faster cheaper more private and more


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Faster, cheaper, more private, and more

informal than litigation

Litigation is costly, expensive, and time consuming

Sovereign Immunity


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Sovereign Immunity


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Foreign Sovereign


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Immunities Act (1976)

Provides that actions of foreign govts against

US firms are generally beyond the jurisdictionof US courts


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EXCEPTION: commercial transactions

EX: US firm and Venezuela Firm could not go to court to challenge

Venezuelas govt decision to nationalize itsVenezuelan operations

Could challenge Venezuela if the country did notpay for 1000 printers that it had ordered

World Economic Forum


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World Economic Forum

Holds the World Economic Conference

Gives country groupings different names for their economic status Factor drive economieslow income countries

They rely on factors of production Particularly on low skilled labor and natural resources

Efficiency driven economiesmiddle income countries (emerging)

They focus on increasing output by improving production efficiency Innovation driven economieshigh income countries (developed)

They rely on innovation and product development to fuel economic growth

l d d h


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Also determined most competitive nations have: high per capita GDP

Strong correlationno causal link

High levels of debt Debt can be a good thing

Allows a country to have more money to invest which increases competitiveness

Can lead to long run growth

Countries with low levels of debt usually is because they do not have access tocapital markets

Due to low creditworthiness

World Economic Forum:

ld


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Worlds Best Economies

1. Switzerland

2. Singapore3. Finland

4 Germany


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4. Germany

5. US

6. Sweden7. HK

8. Netherlands

9. Japan

10. UK

World Economic Forum:

ld i


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Worlds Worst Economies


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The Technological Environment


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The Technological Environment

Foundation for a country's economy

Countrys resources determine what kind of techenvironment will prevail and the kind of productsand services it will produce and export


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and services it will produce and export

Country will fertile landexport agricultural

goods Country with less skilled laborexport labor

intensive goods

Country with abundant natural resources

export those commodities and their derivatives

Changing and Shaping the

T h l i l E i t


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Technological Environment

Two Ways:

Strategic investments: Investments in infrastructure facilitate the production

and distribution of goods


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and distribution of goods

Investments in human capital improve efficiency,

productivity, and competitiveness Technology Transfer:

Occurs when a foreign firms know-how is passed on tohome-country firms or individuals

Can occur naturally with FDI

Some countries require it to do business there

Intellectual Property Law in

T h l i l E i t


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Technological Environment

Important role

Firms core competencies and competitive advantageare often based on intellectual property rights (IPR)

Want to protect their valuable assets


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Want to protect their valuable assets

Countries with greater protection are more likely

to attract high tech foreign investments Weak IPR

Reduces FDI in middle income and rich nations

Reduce likelihood domestic firms will invest in R&Dnecessary to create new products and technologies

Accounting Environment


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g

Face challenges from international differences

in accounting systems Many rely on accounting data:


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y y g

Managers to effectively run their companies

Useful to outsiders Lenders

Investors

Shareholders

Govt officials

Accounting Standards inC L C t i


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Common Law Countries

Informally established by professional

accounting groups The US Financial Accounting Standard Board


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Most of the countries follow Generally

Accepted Accounting Principles (GAPP) More flexible than civil law countries

Enforcement is usually by private litigation

Accounting Standards inCivil Law Countries


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Civil Law Countries

Civil law = code law

Accounting practices are determined byspecific laws


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p

More strict than common law countries

The govt plays a more active role in

monitoring and enforcing the rules than in

common law countries

Notable Differences in Accounting

Practices Across Countries


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Practices Across Countries


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Valuation and Revaluationof Assets


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of Assets


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Valuation of Inventories


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Two major methods: LIFO and FIFO

LIFOLast in first out During inflationary periods increases the cost of goods

sold and reduces profits


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Therefore reduces taxes

FIFOFirst in first out Provides a better estimate of t

IB - Exam 1 Review

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