International Business
International Business and World
Dynamics
Lecturer’s Notes
By: Dr. Shaymaa Hussein
Topics to be Covered
Impact of Multinationals
Slides 3 – 16
International Business Diplomacy Slides 17 – 22
Muslims Countries, North-South and East-West
Business Slides 23- 35
Implications of International Relations towards
International Business Slides 36- 41
Impact of Multinationals
• Multinational enterprises (MNEs) have their
greatest impact on countries when they engage
in foreign direct investment (FDI) via whollyowned subsidiaries and/or joint ventures.
• Although not all MNEs are huge, the sheer size of
many troubles their critics.
• The global orientation of MNEs causes many to
believe that they are insensitive to national (local)
concerns.
Impact of Multinationals
Trade-offs among Constituencies
Stakeholders, i.e., the collection of constituencies that
an organization must satisfy to survive in the long run,
include:
– shareholders
– employees
– customers
– suppliers
– society
In the long run, the aims of all stakeholders must
be adequately met or none will be attained.
Impact of Multinationals
• Advocates of corporate social responsibility (CSR)
believe that capitalism fails to serve the public
interest and that managers must be pressured to act
responsibly.
• Others argue that:
– managers are best equipped to serve the interests of
their shareholders and
– governments should deal with social issues and
externalities whenever private sector benefits and costs
differ significantly from public sector benefits and costs
Impact of Multinationals
Balance-of-Payments Effects of FDI:
A country must compensate for a long-term trade deficit by:
• reducing its capital reserves
• attracting an influx of capital via the receipt
of foreign direct investment
• the purchase of public or private debt by foreign
governments or individuals
• the receipt of unilateral transfers (e.g., foreign aid)
Ultimately, one country’s deficit is another country’s
surplus.
Impact of Multinationals
Calculating the Balance-of-Payments Effects :
B = (m –m1) + (x – x1) + (c – c1)
where B = balance-of-payments effect
m = import displacement
m1 = import stimulus
x = export stimulus
x1 = export reduction
c = capital inflow for other than import
and export payments
c1 = capital outflow for other than import
and export payments
Impact of Multinationals
Host Country BOP Effects:
• The net import effect (m – m1) is positive if the FDI
results in the substitution of local production for
imported products and is negative if it results in an
increase in imports.
• The marginal propensity to import represents the
fraction of an increase in imports that are due to an
increase in income.
• The net export effect (x – x1) is positive if the FDI results
in the generation of exports but negative if it results in a
decline.
• FDI may also stimulate home country exports of
complementary products to the host country.
Impact of Multinationals
• Net capital flows (c – c1) are difficult to assess because of
the time lag between
 the outward flow of investment funds and
 the subsequent inward flow of remitted
earnings from that investment.
Although initial capital flows to the host country
are positive, they may be negative in the long run if
capital outflows eventually exceed the value of the
investment.
Impact of Multinationals
Selected Economic Growth and Employment Effects of FDI:
• Home Country Losses—FDI outflows may create jobs
abroad at the expense of jobs in the home country.
• Host Country Gains—FDI inflows may result in the
transfer of capital, technology, and/or managerial
expertise, and well as the creation of new jobs.
• Host Country Losses—FDI inflows may:
cream off premium resources
drive up local labor costs
displace domestic investment
disadvantage local competitors
destroy local entrepreneurship
Impact of Multinationals
Cultural Foundations of Ethical Corporate Behavior:
• Cultural relativism holds that ethical truths depend
upon the groups subscribing to them; thus,
intervention in local issues and traditions by outsiders
is clearly unethical.
• Cultural normativism holds that there are universal
standards of behavior that everyone should follow;
thus, non-intervention in local violations of global
standards is clearly unethical.
While many actions elicit universal agreement on
what is clearly right and wrong, others are less clear.
Impact of Multinationals
Legal Foundations of Ethical Corporate Behavior:
• Ethics teaches that people have a responsibility to do
what is right and to avoid doing what is wrong.
• The appropriateness of behavior can be measured in the
sense that individuals and organizations must seek
justification for their behavior, and that justification is a
function of both cultural values and legal principles.
• Civil law countries tend to have a large body of law
dealing with business operations; common law countries
rely more on precedent than statutory regulations.
Impact of Multinationals
• Extraterritoriality: the extension by a government of the
application of its laws to the foreign operations of its
domestic firms
 In cases of health and safety standards, differences may
not be insurmountable, but in other instances differences
in home- and host-country laws may pose challenging
conflicts.
• Externalities: the by-products of activities that affect the
well-being of people and/or the environment
 Although externalities are not reflected in standard cost
accounting practices, they must be include in the
determination of stakeholder value
Impact of Multinationals
Ethical Behavior and Environmental Issues:
• Sustainability: meeting the needs of the present without
compromising the ability of future generations to meet
their own needs, while taking into account what is best
for people and for the environment
 The Kyoto Protocol: signed in 1997, the Protocol is an
extension of the UN Framework Convention on Climate
Change that obligates signatory countries to reduce their
greenhouse gas emissions to 5.2 percent below 1990
levels between 2008 and 2012
 Global warming results from the release of greenhouse
gases that trap heat in the atmosphere, rather than
allowing the heat to escape.
Impact of Multinationals
Ethical Dilemmas and Pharmaceutical Sales:
• Research-based pharmaceutical firms sell products at high
prices so long as their products are covered by patents.
 Legal generic products comply with patents while allowing
for the purchase of drugs at lower costs; unauthorized (illegal)
generic products may or may not be reliable.
 The WTO Agreement on Trade-Related Aspects of Intellectual
Property (TRIPs) provides a mechanism for poor countries
facing health crises to either produce or import generic
products.
 Governments and private foundations enable countries to
issue bonds to generate funds needed to purchase vaccines
via the International Finance Facility for Immunization.
Impact of Multinationals
Child Labor Issues:
According to the International Labor Organization:
• more than 250 million children between 5 and 17 are
working worldwide
• nearly three-quarters of those children who work are very
young or are working in ways that endanger their health or
well-being because of hazards, sexual exploitation,
trafficking, and/or debt bondage
 Those who argue in favor of child labor claim that in many
instances, children are better suited to perform certain tasks
than adults, and that if the children were not employed, they
would in fact be worse off.
 While some firms simply avoid operating in countries where
child labor is used, other firms work to establish responsible
operating policies in those locales.
International Business Diplomacy
The Pervasive Impact of Culture on Negotiation Behavior
• Companies and countries do not negotiate—people do
• Cultural differences in negotiation styles can cause
problems in international at the levels of:
 Language
 Nonverbal behaviors
 Values
 Thinking and decision-making processes
International Business Diplomacy
• Four steps lead to more efficient and effective
international business negotiations, which include:
1. selection of the appropriate negotiation team
2. management of preliminaries, including training,
preparations, and manipulation of negotiation settings
3. management of the process of negotiations, that is,
what happens at the negotiation table
4. appropriate follow-up procedures and practices
International Business Diplomacy
• Many companies provide employees with negotiations
training on:
 Language skills
 Social and diplomatic skills
 Knowledge specific to the diplomatic profession
 Including diplomatic history and international relations
 Law
 Economic
 Politics
 International organizations
 Foreign policies
International Business Diplomacy
• The following checklist ensures proper preparation and
planning for international negotiations:
 Assessment of the situation and the people
 Facts to confirm during the negotiation
 Agenda
 Best alternative to a negotiated agreement
 Concession strategies
 Team assignments
International Business Diplomacy
• There are at least seven aspects of the negotiation
setting that should be manipulated ahead of time if
possible:
 Location
 Physical arrangements
 Number of parties
 Number of participants
 Audiences (news media, competitors, fellow vendors,
etc.)
 Communications channels
 Time limits
International Business Diplomacy
• Differences in the expectations held by parties from
different cultures are one of the major difficulties in any
international business negotiation
• Everywhere around the world we have found that
business negotiations proceed through four stages:
 Non-task sounding
 Task-related exchange of information
 Persuasion
 Concessions and agreement
Muslims Countries, North-South and
East-West Business
Religion
• Religion, the shared set of beliefs, activities, and
institutions based on faith in supernatural forces,
remains a critical force in most countries
• Most countries are now seeing a strong growth in
popularity of religions
• Furthermore, even countries such as Russia and China,
where religion was until recently banned, are now seeing
dramatic increases in the popularity of religions
Muslims Countries, North-South and
East-West Business
How does religion impact international business?
• At a fundamental level, religions provide guidance
regarding what is the appropriate way to deal with
societal expectations
• Religions provide individuals with a set of principles to
live by
• However, through its effects on people, religion also
affects both multinational companies and their
operations through its influence on business procedures
Muslims Countries, North-South and
East-West Business
Islam
• The essence of Islam as described in the Qur’an is the
submission to the will of Allah (The only God)
• Islam is currently the second largest of the world’s
religions and has adherents in countries in Africa, the
Middle East, China, Malaysia, and the Far East
• It continues to grow rapidly in many countries, especially
in Europe
Muslims Countries, North-South and
East-West Business
• An important aspect of living in an Islamic society is the
presence of Islamic law
 Islamic law is based on the Qur’an, Islam’s holy book
 The Qur’an expresses the Islamic work ethic and the
rules that should guide Muslims as they encounter
situations in their daily lives
Muslims Countries, North-South and
East-West Business
• Islam has implications for multinational companies on
many levels
 The riba strictly forbids receiving or giving interest
 Such practices of forbidding interest are not just ideals
but are actually respected in many countries, including
Pakistan
 In such countries, governments have instituted financial
laws that see interest as illegal
Muslims Countries, North-South and
East-West Business
• In general, the Qur’an is supportive of entrepreneurship
and earning of profits through legitimate business
activities
• The Qur’an also allows accumulation and protection of
private property
• However, Muslims are naturally concerned with issues of
social justice and fairness
• As such, Muslims are likely to condemn the pursuit of
profits through the exploitation of others
• Multinationals thus have to ensure that their business
activities are conducted in a socially just manner
Muslims Countries, North-South and
East-West Business
• Illustration on Sukuk Structuring
Literal Meaning
Sukuk is the plural of sak which means certificates. Other
similar terms:
 Taskik – process of dividing assets into papers (sukuk)
 Tawriq – to render something into cash
Technical Meaning
Sukuk refers to securities, notes, papers or certificates, with
features of liquidity and tradability (except for salam and
murabahah sukuk)
Muslims Countries, North-South and
East-West Business
• Investment sukuk are certificates of equal value
representing undivided shares in ownership of tangible
assets, usufructs and services (in the ownership of) the
assets of particular projects or special investment
activity”
• Malaysian Securities Commission: A document or
certificate which represents the value of an asset”
• Asset – may include financial asset such as receivables
and debts, as well as non financial assets like tangible
assets, usufructs and services.
Muslims Countries, North-South and
East-West Business
Emerging interest on Islamic finance as viable alternative
to the global financial system …
• Starting in 1971 with the first Islamic bank in Egypt,
there are now more than 600 Islamic financial
institutions in 75 countries.
• UK

Gov’t sets an objective to ‘entrench London as a global
gateway for Islamic finance

5 FSA-approved Islamic banks and Takaful operators

Plans to issue sovereign sukuk, amend tax law on IF
Muslims Countries, North-South and
East-West Business
• France

Passed rules/regulations to support Islamic finance
activities

In process of licensing Islamic banks
Made fiscal & legal adjustment for IF transaction i.e.
taxation guidelines on sukuk & murabaha.
• Germany


Saxony-Anhalt state issued government sukuk

First Islamic bank to operate in 2010
Muslims Countries, North-South and
East-West Business
• Malta
Plans to position as Islamic finance hub for the
Mediterranean.
• Jordan

Plans to tap sukuk market to finance its deficit.
• Turkey
 Announced IFC Istanbul in Sep ’09 with focus includes
interest-free financial business

Muslims Countries, North-South and
East-West Business
• South Korea
 Parliament expected to pass the law related to offering of
tax waiver on foreign investors’ interest income from
sukuk issued
• Japan

Law passed allowing banks to do Islamic finance.
• Hong Kong

Aims to become Islamic finance gateway to China

Plans to issue sovereign sukuk

Hang Seng Islamic China Index Fund in 2007
Muslims Countries, North-South and
East-West Business
• Singapore

Established first Islamic bank

Introduced tax neutrality for Islamic finance
Aspiring to be center for Islamic finance
• Brunei


Aim to become Islamic financial services hub for Asia
Implications of International Relations
towards International Business
• Over the last two decades there has been a dramatic
change in the political systems of many countries.
• In particular, there has been a move towards marketdriven economies in Eastern Europe and China.
• Economic systems
 Market-driven economy
 Centrally determined economy
 Mixed economies
Implications of International Relations
towards International Business
• Government control of assets:
• Privatization: The process of selling government assets
to private buyers.
 Divestiture: A process by which a government or
business sells assets.
 Contract Management: A process by which an
organization (such as the government) transfers
operating responsibility of an industry without
transferring the legal title and ownership.
• Nationalization: A process by which the government
takes control of business assets, with or without
remuneration of the owner.
Implications of International Relations
towards International Business
• Although governments are privatizing assets, this does
not mean that they are not involved in business.
• Business-government cooperation continues to be
beneficial, particularly in the EU and Japan.
Economic integration:
• The establishment of transnational rules and regulations
that enhance economic trade and cooperation among
countries.
Implications of International Relations
towards International Business
Trade creation and diversion:
• Trade creation: A process in which members of an
economic integration group begin to focus their efforts
on those goods and services for which they have a
comparative advantage and start trading more
extensively with each other.
• Trade diversion: A process in which members of an
economic integration group decreases trade with nonmember countries in favor of trade with each other.
Implications of International Relations
towards International Business
• A strategic alliance: is a business relationship in which
two or more companies work together to achieve a
collective advantage.
• These alliances can take a number of forms:
 research cooperation;
 marketing cooperation;
 licensing of a product or technology for a specific
market region.
Implications of International Relations
towards International Business
• Localization of business operations:
• MNEs must adapt their offering, their expectations and
the way in which they do business to each market in
which they operate.
• These efforts result in the localization of business
operations and typically focus on four areas:
 Products
 Profits
 Production
 Management.