A very, very brief history of the Global Business System

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A very, very brief history of the Global
Business System

• to point out some facts people need for the
  midterm

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Culture the background for the system (Chapter
3)

• Cultures differ a lot
• Be sure to know
• The differences between values, norms, and mores
• Hofstede dimensions of culture
• Individualism
• Power distance
• Uncertainty avoidance

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Trade theory and trade realities Chap. 5 6

• In the 18th and early 19th centuries, economists
  such as Adam Smith and David Ricardo developed
  the theory of free trade
• FREE TRADE OCCURS when a government does not
  attempt to influence, through tariffs, quotas, or
  other means,
• what citizens can buy from other countries or
• produce and sell to other countries

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• Ricardo pointed out this means producing where
  you have comparative advantage
• Producing in industries where you are relatively
  better compared to other industries.
• That means industries where the ratio
  Resources required in your country .
  Resources required in the other country
• is low
• Thus, Ricardo advocated buying some things abroad
  even when you make them more efficiently yourself

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This had revolutionary effects

• Capitalism, and recently globalization, has been
  transforming the world
• Not all the results were good, and people have
  introduced a variety of new approaches
• In a pure market economy, private individuals
  (and companies) own all productive activities
• In a command economy (Cuba, North Korea), the
  government controls all (or almost all)
  production
• Today most economies are mixed economies the
  majority of production is private, but the
  government plays an important role
• Government owns San Jose State!

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In market economies, economists accepted 2
exceptions to free trade

• In the 1790s, Americans suggested the infant
  industry argument
• Infants are industries that lack comparative
  advantage, but could develop it soon
• Example Textile manufacturing in Vietnam in the
  1980s
• Because few Vietnamese were experienced in
  textile manufacturing, it was relatively less
  efficient than rice-growing
• But as Vietnamese got experienced, they soon
  learned to produce textiles efficiently

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• In the 1980s, economists suggested sometimes when
  a brand new industry is invented, people can
  recognize
• It will have economies of scale (the people that
  produce most will produce cheapest)
• There will be big learning effects (the people
  who produce first will produce cheapest)
• So they supported strategic trade policy, said
  subsidies may be worthwhile
• Example flat-panel computer displays when they
  had just been invented

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Todays trade system

• Nations stopped practicing free trade in the
  1930s, and this contributed to a huge depression
• Todays trade system began with a meeting at
  Bretton Woods, NH, 1944
• General Agreement on Tariffs and Trade (GATT) to
  lower tariffs, other barriers
• Agreement to fix exchange rates to the US dollar

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Chap. 8

• Some regions pushed faster
• Europe created a common market, and then an
  economic union (the European community)
• The US, Canada, and Mexico created a much weaker
  North American Free Trade Agreement (NAFTA) (no
  free movement of factors of production)

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GATT lowered tariffs, etc. through rounds of
negotiation

• As this caused world trade to grow, an
  organization was needed to manage
• The World Trade Organization was created
• WTO free trade rules affect most trade, make it
  difficult to introduce most restrictions

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• To get around WTO rules nations frequently
  propose that other countries adopt quotas
  voluntarily
• Voluntary export restraints (VERs)

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Fixed exchange rates were abolished in 1971
(Chaps. 9 10)

• Fixed rates require discipline
• Countries must be willing to raise interest
  rates, taxes when they import more than export
• Today exchange rates for major currencies are set
  by supply demand
• More demand for a currency causes its value to
  rise
• Demand can be caused by low inflation rates, high
  interest rates

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A global capital market (Packet reading)

• With free trade rules in manufacturing considered
  a success, nations aimed to liberalize services
  as well
• Banking was key banks are market makers
• They connect people with money to invest and
  people who want to borrow
• Free global banking helps us in the US to invest
• But may have contributed to 2008 crash

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As business became international, corruption
became international

• US passed the Foreign Corrupt Practices Act in
  the 1970s
• Other rich countries have agreed to a
  convention to combat bribery
• But not all corruption can be defeated
  internationally Foreign Corrupt Practices Act
  permits facilitating payments, small payments
  to get low-level people to do what theyre
  supposed to do anyway