Transcript Managing the Multinational Enterprise

Using gravity model to study the degree of integration:
Location choice question – which specific country is relatively more integrated
into the multi-diamond model?
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Cont’d
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Cont’d
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Geographic distance should be an index of all distances between two partners’
major cities weighted by each city’s population density.
Data sources:
[1] Country-pair trade data: ITC at http://www.intracen.org/ (pick a country, then go to its profile of “trade and investment
data”, under which there is a database on “trade in good statistics” / “trade in services statistics”)
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[2] GDP data: World Bank at http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
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[3] Weighted geographic distance data: CEPII at http://www.cepii.fr/anglaisgraph/bdd/distances.htm
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Download the results here:
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[1] EU integration is generally decreasing, although some countries show temporary increase in integration right after their
accession into EU
[2] Smaller (later) EU members are relatively more integrated (through trade), partially because they are more open to trade
[3] Most countries show significant increases in the degree of integration during the recovery period after 07-09 global
financial crisis
Strategic implications: not what you thought…some smaller countries might be a good location choice for trade-intensive
companies.
Course structure
Classes 1-4
International business environment
Regional vs. global
Triad and IB activities
Politics, culture, trade and finance
Classes 5-9
Firm-specific advantages and firm management
Organization
Production
Marketing
International HRM
Political risk management
International financial management
Class 10
Country-specific advantages
Classes 11-14
Locational choice and regional management
European Union, North America, Japan, and Emerging Markets
North America
The most dynamic area in NAFTA is the Great Lakes (e.g., NY, ON)
Most Canadians live along the border
Most Mexicans live around the Mexico City
Introduction
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The North American Free Trade Agreement (NAFTA) is an agreement
signed by Canada, Mexico, and the US, creating a trilateral trade bloc in
North America. It came into force on January 1, 1994.
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It superseded the US-Canada FTA, which was signed on January 2, 1988.
Introduction
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NAFTA has not abolished all trading barriers between the
United States, Canada and Mexico, and therefore is not a
pure free trade agreement [p. 555] – different from EU
Each NAFTA partner retains its own trade laws – different
from EU
A legal mechanism to appeal trade decisions exists.
Although NAFTA is a step toward trade liberalization, business
decisions should not assume that “free trade” makes Canada
and Mexico identical to the United States.
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e.g., the paradox of cultural similarity between US and Canada
Example 1: Canadian First Nations
Example 2: Canadian Democracy/Pluralism
Current profile
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According to ITC database:
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NAFTA is by far the largest trading bloc under an effective FTA
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US’s trade of goods with Canada and Mexico has reached more than $1.1 trillion in
2012, compared to only $655 billion in EU28 in the same year.
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Potential bigger ones: Trans-Pacific Partnership; Trans-Atlantic Partnership (US-EU).
Current profile (cont’d)
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According to ITC database:
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US’s exports of goods to Canada and Mexico have reached more than $508 billion in
2012, representing about 33% of US’s global exports (19% from Canada; 14% from
Mexico).
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The total export value has more than tripled since 1994, when NAFTA was signed (US dept of comm.)
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US’s exports to all EU28 nations in 2012 were only $266 billion.
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Major exported products to Canada are: Vehicles; Machinery, nuclear reactors, boilers;
Electronics; Mineral fuels, oils, distillation products; and Plastics.
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Major exported products to Mexico are: Machinery, nuclear reactors, boilers; Electronics;
Mineral fuels, oils, distillation products; Vehicles; and Plastics.
Current profile (cont’d)
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According to ITC database:
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US’s imports of goods from Canada and Mexico have reached more than $607 billion in
2012, representing about 26% of US’s global imports (14% with Canada; 12% with
Mexico).
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The total import value has more than tripled since 1994, when NAFTA was signed (US dept of comm.)
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US’s imports from all EU28 nations in 2012 were only $389 billion
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Major imported products from Canada are: Mineral fuels, oils, distillation products;
Vehicles; Machinery, nuclear reactors, boilers; Plastics; and Electronics.
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Major imported products from Mexico are: Electronics; Vehicles; Machinery, nuclear
reactors; boilers; Mineral fuels, oils, distillation products; and Optical, photo, technical,
medical, etc apparatus.
Current profile (cont’d)
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According to ITC database:
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Canada’s exports of goods to the US and Mexico represented 76% of its global exports
(75% to US; 1% to Mexico).
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Canada’s imports of goods from the US and Mexico represented 57% of its global
imports (51% from US; 6% from Mexico).
Current profile (cont’d)
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According to ITC database:
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Mexico’s exports of goods to the US and Canada represented 81% of its global exports
(78% to US; 3% to Canada).
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Mexico’s imports of goods from the US and Mexico represented 53% of its global imports
(50% from US; 3% from Canada).
A brief comparison
NAFTA members and EU
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In 1997, Mexico and EU concluded an Economic Partnership, Political Coordination and Cooperation
Agreement (the Global Agreement), which included trade provisions that were developed in a
comprehensive FTA that entered into force in October 2000 for te part related to trade in goods, and in
2001 for that related to trade in services.
On 18 October 2013, Canada and EU reached a political agreement on the key elements of a trade
agreement (CETA), which will remove over 99% of tariffs. It is now awaiting for the approval by the EU
Council and the European Parliament.
In July 2013, the EU and the US held their first of negotiation for the biggest trade deal in the world –
Transatlantic Trade and Investment Partnership (TTIP) – in Washington D.C. The second round will be held in
Brussels, Belgium, on 11-15 November 2013.
Canada
Picture: Canadian PM Stephen Harper, left, spoke to American President Barack
Obama, right, at the 2011 APEC Summit in Kapolei, Hawaii, Nov 13, 2011.
Largest trading partners at metro-city level:
Houston, TX, and Calgary, AB, in oil and petroleum
US’s leading imported products from Canada
Products
Value in 2012 (US$ million)
%
Accumulative %
Crude petroleum oils
73831.52 22.55
22.55
Cars (incl. station wagon)
45678.90 13.95
36.49
Petroleum oils, not crude
17179.90
5.25
41.74
Commodities not elsewhere specified
11587.28
3.54
45.28
Petroleum gases
10406.12
3.18
48.46
9033.50
2.76
51.21
Parts & access of motor vehicles
Canada’s economy
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Canada’s 34 million people enjoy one of the highest standards of living in
the world.
Based on the availability of goods and services, low personal risk, and
an effective infrastructure, but not climate and the cost of living.
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80 percent of manufacturing activity is located in Ontario and Quebec,
including the entire motor vehicle industry
 One-quarter of all Canada’s manufactured exports (and imports) are
in autos and auto-related products.
Canada’s business environment
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Canada’s industrial climate:
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Characterized by private enterprise.
Some industries, such as broadcasting and public utilities, are
government owned (i.e., Crown companies) or subject to
substantial government regulation.
A trend toward privatization and deregulation.
Small business is a major part of the economy and accounts for
almost 80% of all new employment in manufacturing.
The service and retail trade industries are characterized by a
large number of companies that vary in size.
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70% of Canadians work in service industries.
Canada’s business environment (Cont’d)
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Canada’s regulatory environment:
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Commerce and industry in Canada is regulated at every level of
government: federal, provincial and municipal.
The regulation of anticompetitive practices is handled by the
Federal government under the Competition Act.
Export permits are required for the shipment of goods having
strategic value, and to implement the provisions of various
international agreements.
Import documentation is also required, as well as payment of a
goods and sales tax (GST).
The Canadian federal government has a bilingual policy. But, in
the province of Quebec, French is the official language for
business and education.
Canada’s business environment (Cont’d)
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Banking and finance:
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6 major banks account for 90% of the industry’s assets.
The central bank: Bank of Canada.
Labor relations:
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The Canada Labor Code is the federal law that covers such
matters as wages, employment practices, work safety, and
conciliation in the event of a labour dispute.
Province governments have similar laws to cover employer–
employee relations at the local level.
30% of the total labour force is unionized.
Legislated minimum wage rates.
All provinces prohibit employment discrimination on the basis of
race, religion, national origin, color, sex, age or marital status.
Canada’s business environment (Cont’d)
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Investments:
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The Investment Canada Act (ICA) came into effect on June 30,
1985, and is designed to create a welcome climate for foreign
investment by significantly loosening previous restrictions.
At the same time, however, there are some regulations that
remain in effect.
Business opportunities
in Canada
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FTA and NAFTA have increased the level of integration between Canada
and the US. Some provisions of these agreements are:
 All tariffs on US and Canadian goods were eliminated by 1998.
 Most import and export quotas were eliminated by 1998.
 Use of product standards as a trade barrier is prohibited and national
treatment of testing labs and certification bodies is established.
 Many restrictions on agricultural products, wine and distilled spirits, auto
parts and energy goods have been sharply reduced, if not totally
eliminated.
 The size of the government procurement markets that will be open to
suppliers from the other country is slightly increased.
Business opportunities
in Canada (Cont’d)
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Travel by business visitors, investors, traders,
professionals and executives transferred
intracompany is facilitated.
The opportunity to make investments in each
other’s country is facilitated and encouraged
through the adoption of national treatment.
A binational commission to resolve disagreements
that may arise from the enforcement of the FTA
has been established and dealt with some 20
cases in the first three years of the Agreement.
Mexico’s economy
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Mexico has one of the strongest
economies in Latin America.
Labour
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relatively plentiful and inexpensive;
shortage of skilled labour and
managerial personnel;
turnover is a serious problem;
40% of the labor force is
unionized. In large operations,
80% of the labour force is
unionized;
three-tier minimum wage (rural,
metropolitan, and isolated regions);
at least 90% of the firm’s skilled
and unskilled workers must be
Mexican nationals.
Mexico and trade agreements
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North American Free Trade Agreement (NAFTA)
Latin American Integration Association (LAIA): a free trade group formed to reduce intraregional trade barriers and to promote regional economic cooperation. Argentina, Bolivia,
Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela are all
members.
Free Trade Area of the Americas (FTAA): a proposed regional trade agreement that is
expected to succeed NAFTA and include 34 countries across North, Central and South
America.
Mexico in the diamond model
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Mexico is developing its national competitive advantage
by relying heavily on a series of strategic clusters.
The six major ones, in order of importance are:
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petroleum/chemicals;
automotive;
housing and household;
materials and metals;
food and beverage;
semiconductors and computers.
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In 1992, before the treaty was ratified, independent U.S. Presidential candidate
Ross Perot famously warned voters to prepare for the "giant sucking sound" of jobs
moving across the border to Mexico, where NAFTA would enable companies to take
advantage of cheap labor.
Mexico's average hourly manufacturing wage is still only about 13 percent of that
of the U.S., but even with that persistent disparity, most jobs these days aren't being
shipped to America's southern neighbor.