International Business International Business Environment Environment

Global – LAWS & CULTUREGlobal – LAWS & CULTURE

Economic Law:Economic Law:Standards & PrinciplesStandards & Principles

Basis of Economic Law Basis of Economic Law

MercantilistsMercantilists Absolute Advantage (Adam Smith), Absolute Advantage (Adam Smith), Comparative Advantage (David Comparative Advantage (David

Ricardo), Ricardo), Heckscher-Ohlin Theory, Heckscher-Ohlin Theory, New Trade Theory, New Trade Theory, National Competitive Advantage National Competitive Advantage

(Michael Porter) (Michael Porter)

Mercantilism (16th to the 18th Mercantilism (16th to the 18th century) century)

MercantilismMercantilism is an is an economic theoryeconomic theory that holds the that holds the prosperity of a nation depends upon its supply of prosperity of a nation depends upon its supply of capitalcapital, and that the , and that the global volumeglobal volume of of tradetrade is is "unchangeable." Economic assets, or capital, are "unchangeable." Economic assets, or capital, are represented by represented by bullionbullion (gold, silver, and trade (gold, silver, and trade value) held by the state, which is best increased value) held by the state, which is best increased through a positive through a positive balance of tradebalance of trade with other with other nations (exports minus imports). Mercantilism nations (exports minus imports). Mercantilism suggests that the ruling suggests that the ruling governmentgovernment should should advance these goals by playing a advance these goals by playing a protectionistprotectionist role role in the economy, by encouraging in the economy, by encouraging exportsexports and and discouraging discouraging importsimports, especially through the use of , especially through the use of tariffstariffs. The economic policy based upon these ideas . The economic policy based upon these ideas is often called the mercantile system.is often called the mercantile system.

Absolute Advantage (Adam Smith),Absolute Advantage (Adam Smith),

A country has an A country has an absolute advantageabsolute advantage over over another in producing a good, if it can produce that another in producing a good, if it can produce that good using fewer resources than another country. good using fewer resources than another country. For example if one unit of labor in Scotland can For example if one unit of labor in Scotland can produce 80 units of wool or 20 units of wine; while in produce 80 units of wool or 20 units of wine; while in Spain one unit of labor makes 50 units of wool or 75 Spain one unit of labor makes 50 units of wool or 75 units of wine, then Scotland has an absolute units of wine, then Scotland has an absolute advantage in producing wool and Spain has an advantage in producing wool and Spain has an absolute advantage in producing wine. Scotland can absolute advantage in producing wine. Scotland can get more wine with its labor by specializing in wool get more wine with its labor by specializing in wool and trading the wool for Spanish wine, while Spain and trading the wool for Spanish wine, while Spain can benefit by trading wine for wool. (Adam Smith, can benefit by trading wine for wool. (Adam Smith, Wealth of NationsWealth of Nations, Book IV, Ch.2.) The benefits to , Book IV, Ch.2.) The benefits to nations from trading are the same as to individuals: nations from trading are the same as to individuals: trade permits specialization, which allows resources trade permits specialization, which allows resources to be used more productively.to be used more productively.

Comparative Advantage (David Comparative Advantage (David Ricardo),Ricardo),

The principle of comparative advantage The principle of comparative advantage shows that even if a country has no shows that even if a country has no absolute advantage in any product (i.e. absolute advantage in any product (i.e. it is not the most efficient producer for it is not the most efficient producer for any good), the disadvantaged country any good), the disadvantaged country can still benefit from specializing in can still benefit from specializing in and exporting the product (s) for which and exporting the product (s) for which it has the lowest opportunity cost of it has the lowest opportunity cost of production production

Heckscher-Ohlin TheoryHeckscher-Ohlin Theory The The Heckscher-Ohlin theoremHeckscher-Ohlin theorem is one of the four is one of the four

critical theorems of the critical theorems of the HeckscherHeckscher-Ohlin model-Ohlin model. It . It states: "A capital-abundant country will export the states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant capital-intensive good, while the labor-abundant country will export the labor-intensive good."country will export the labor-intensive good."

The critical assumption of the Heckscher-Ohlin The critical assumption of the Heckscher-Ohlin model is that the two countries are identical, model is that the two countries are identical, except for the difference in resource endowments. except for the difference in resource endowments. This also implies that the aggregate preferences This also implies that the aggregate preferences are the same. The relative abundance in are the same. The relative abundance in capitalcapital will cause the capital-abundant country to produce will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-the capital-intensive good cheaper than the labor-abundant country and vice versa.abundant country and vice versa.

New Trade TheoryNew Trade Theory New Trade TheoryNew Trade Theory (NTT) is the economic (NTT) is the economic

critique of international free trade from the critique of international free trade from the perspective of increasing returns to scale and the perspective of increasing returns to scale and the network effect. Some economists have asked network effect. Some economists have asked whether it might be effective for a nation to whether it might be effective for a nation to shelter infant industries until they had grown to shelter infant industries until they had grown to sufficient size to compete internationally.sufficient size to compete internationally.

New Trade theoristsNew Trade theorists challenge the assumption challenge the assumption of diminishing returns to scale, and some argue of diminishing returns to scale, and some argue that using protectionist measures to build up a that using protectionist measures to build up a huge industrial base in certain industries will then huge industrial base in certain industries will then allow those sectors to dominate the world market allow those sectors to dominate the world market (via a Network effect).(via a Network effect).

National Competitive Advantage National Competitive Advantage (Michael Porter) (Michael Porter)

What is Economic LawWhat is Economic LawInternational Economic Law International Economic Law encompasses both the conduct of encompasses both the conduct of sovereign states in international sovereign states in international economic relations, and the conduct of economic relations, and the conduct of private parties involved in cross-border private parties involved in cross-border economic and business transactions. economic and business transactions. This interpretation will evolve as This interpretation will evolve as economic interrelationships among economic interrelationships among countries continue to grow, and new countries continue to grow, and new challenges appear on the horizon challenges appear on the horizon

Components of Economic LawComponents of Economic Law

1. Trade Law, trade in goods and 1. Trade Law, trade in goods and servicesservices

2. Financial law2. Financial law 3. Economic integration3. Economic integration 4. Development law 4. Development law 5. Business(Government) regulation5. Business(Government) regulation 6. Intellectual Property Law6. Intellectual Property Law

Trade LawTrade Law

Domestic Trade Laws were in force since Domestic Trade Laws were in force since the inception of Trade: however the inception of Trade: however institutionalized in 19institutionalized in 19thth Century Century

Rapid globalization after first world war Rapid globalization after first world war drove global mind to think on this area as drove global mind to think on this area as wellwell

International Trade Law was International Trade Law was institutionalized by General Agreement on institutionalized by General Agreement on Tariffs & Trade (GATT) 1947Tariffs & Trade (GATT) 1947

Driven by WTO at presentDriven by WTO at present Covers both Trade in Goods & ServicesCovers both Trade in Goods & Services

Financial LawFinancial Law

Domestic Banking regulationsDomestic Banking regulations International Financial Law International Financial Law International Financial InstitutionsInternational Financial Institutions

Economic IntegrationEconomic Integration

Regional Trading Arrangements, FTA, PTARegional Trading Arrangements, FTA, PTA Multilateral and bilateral investment treatiesMultilateral and bilateral investment treaties Double Taxation AgreementsDouble Taxation Agreements ADB, ISDB, AMF(proposed)ADB, ISDB, AMF(proposed) EU and Economic UnionsEU and Economic Unions Dependency theory and economic integrationDependency theory and economic integration

Development LawDevelopment Law

UN SystemsUN Systems NGOsNGOs World Bank and such institutionsWorld Bank and such institutions

Business (Government Regulations)Business (Government Regulations)

Commercial LawsCommercial Laws Competition LawsCompetition Laws Trade Policy and IncentivesTrade Policy and Incentives Domestic Industry support regimesDomestic Industry support regimes

Intellectual Property LawIntellectual Property Law

WIPOWIPO WTO/TRIPSWTO/TRIPS Conventions and TreatiesConventions and Treaties Domestic IPR LawsDomestic IPR Laws InfringementsInfringements

Paradigms of International Economic Paradigms of International Economic LawLaw

1. Transactional1. Transactional Transaction carried out in the context of Transaction carried out in the context of

international trade in goods and servicesinternational trade in goods and services Focuses on the way mostly private entrepreneurs Focuses on the way mostly private entrepreneurs

or other parties carry out their activities.or other parties carry out their activities.

2. Regulatory2. Regulatory Focuses on role of Governments (national Focuses on role of Governments (national

and international)and international)

Regulating Cross Border Economic Regulating Cross Border Economic ActivityActivity

Role of national governments Role of Regional trading arrangements Role of Multilateral institutions such as WTO

International Economic Law : PRINCIPLESInternational Economic Law : PRINCIPLES

HarmonizationHarmonization, of various economic , of various economic regulations and structures towards a uniform regulations and structures towards a uniform approach.approach.

ReciprocityReciprocity, system of continuous “trades” or , system of continuous “trades” or “swaps” of measures to liberalize (or restrict) “swaps” of measures to liberalize (or restrict) trade.trade.

InterfaceInterface, which recognizes that different , which recognizes that different economic systems will always exist in the economic systems will always exist in the world and tries to create the institutional world and tries to create the institutional means to ameliorate international tensions. means to ameliorate international tensions.

International Economic Law: STANDARDSInternational Economic Law: STANDARDS

Labour StandardsLabour Standards Commodity Agreements and regulationsCommodity Agreements and regulations Product StandardsProduct Standards InsuranceInsurance Banking and Fiduciary InstitutionsBanking and Fiduciary Institutions Investment ProtectionInvestment Protection Securities regulations and institutionsSecurities regulations and institutions Government Procurement procedures and preferencesGovernment Procurement procedures and preferences Shipping and transports(including air)Shipping and transports(including air) Intellectual property protection and regulationsIntellectual property protection and regulations TaxationTaxation

IEL: Still in Question?IEL: Still in Question?

Rule Making at international level…..Rule Making at international level….. International dispute settlement procedures….International dispute settlement procedures…. Transparency and democracy in such Transparency and democracy in such

procedures…..procedures….. Relation of international rules to domestic Relation of international rules to domestic

constitution and other laws….constitution and other laws…. Activity of interest groups and their influence on Activity of interest groups and their influence on

national and international rule making…..national and international rule making….. Problems of regulatory competition…..Problems of regulatory competition…..

CULTURE and Value CULTURE and Value System System

Values Values Culture Culture Social StrataSocial Strata Religious and Ethical SystemsReligious and Ethical Systems LANGUAGELANGUAGE Education Education International Movements/ InclinationInternational Movements/ Inclination

Culture & Work Place Culture & Work Place

HOFSTEDE’s ModelHOFSTEDE’s Model Power Distance Power Distance Individualism Vs Collectivism Individualism Vs Collectivism Uncertainty AvoidanceUncertainty Avoidance Masculinity Vs Femininity Masculinity Vs Femininity