Chapter 03

International Institutions
from an International
Business Perspective
McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
LO1: Explain the importance of international
business institutions to business decision makers and
their firms.
LO2: Outline the United Nations as an institution
and its relevance to international business.
LO3: Describe the purposes of the two global
monetary institutions, the IMF and the World Bank.
LO4: Discuss the purposes of the World Trade
Organization and its impact international business.
LO5: Identify the levels of economic integration.
LO6: Discuss the EU and its impact.
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What Are Institutions and

Why Are They Useful?
Organizations of
groups, societies, or
cultures to achieve a
common goal: to
provide stability and
meaning to social
life

A collection of norms
that regulate the
relations of
individuals to each
other

Institutions are socially constructed, limit behavior,

and set the rules of the game!
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Institutions Influence Behavior

New
Institutional
Theory
Social Constructs:
norms that
structure
relations
between people

Formal Institutions
Influence behavior through
laws and regulations

Informal Institutions
Influence behavior through
norms, values, customs,
ideologies

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Examples

Institutions Influence Behavior

New
Institutional
Theory:
Societal
Expectations:
basic rules &
social expectations
of groups, written
and unwritten

Formal Institutions:
City, State, and National
Governments, EU
Operate through Laws & Rules

Informal Institutions:
Normative set Standards:
NGOs & Professional
Organizations
Cognitive shared conceptual
ideals
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Examples

Institutions Influence Behavior

Formal Institutions
Tax Laws, Speed Limits
Membership Rules

Informal Institutions
Normative
Organizational standards & Principles

Cognitive:
Function as frameworks for behavior
China guanxi
Japan supplier game

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3-7

The United Nations (UN)

192 member countries
dedicated to world peace
and stability
Fosters global business
relationships
Helps write
international law
Helps stabilize global
economy
Headquartered in New
York City
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The UN Impacts IB
UN Center for Trade
Facilitation and
Electronic Business
(UN/CEFACT)
Technical standards
and norms
Standardized trade
documents
Standards for E-data
exchange

UN Educational,
Scientific and
Cultural
Organization
(UNESCO)
Investment in
emerging economies
Development in
health, education,
governance &
political stability
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The UN Impacts IB
UN Agencies deal
with downsides to
globalization:

Terrorism
Crime
Drugs
Arms Traffic

UN Environmental
Programme (UNEP)
Climate control
Convention
Kyoto Protocol
Sustainable Business
Practices

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The UN Impacts IB
UN Addresses
Global Education &
Health
The Global Compact
Education and health
issues needing private
industry/developing
nation partnerships

UN Economic and
Social Council
promotes:
Social Justice
Human Rights
Labor Rights

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The UN Global Compact

Framework for businesses committed to
aligning operations and strategies
10 universally accepted principles for:
Human rights
Labor
The Environment
Anticorruption

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The UN and the

Conduct of Global Business
Ships sail protected across international waters.
Commercial airlines fly across borders and land in emergencies
International Civil Aviation Organization.
WHO sets quality standards for drug names and quality.
Universal Postal Union protects mail and allows cross-border
mailing.
International Telecommunications Union keeps airwaves
unclogged and avoids radio interference.
World Meteorological Organization shares global weather data.
UN Sales Convention and UN Convention on Carriage of Goods
by Sea set rights and obligations of international buyers/sellers.

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UN Organization
5 working bodies/organs:
1. The General Assembly
2. The UN Security Council
3. Economic and Social Council
(ECOSOC)
4. International Court of Justice (ICJ)
5. The Secretariat

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UN Organs
General Assembly
(1 vote/member)
Adopts resolutions
Decisions reflect world
opinion
Decisions NOT legally
binding

The UN Security
Council
Maintains international
peace & security
15 members including 5
permanent members

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UN Organs
Economic and Social
Council (EOCSOC)
Economic & social issues

Trade & Transport

Industrialization
Economic development
Population growth
Children
Housing
Womens rights
Racial discrimination
Illegal drugs & crime
Social welfare & youth
The human environment

International Court
of Justice (ICJ) or
World Court
15 judges
Worldwide
jurisdiction
Legal decisions
between national
governments

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UN Organs
The Secretariat
UN staff 40,000 people worldwide
Headed by the Secretary General
The Secretary General is recommended by
the Security Council and appointed
by the General Assembly for
5 year renewable terms.

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International Monetary
Institutions
IMF coordinates and enforces
international monetary rules
World Bank lends money for
development projects
Established in 1944 at Bretton Woods by
treasury and central bank representatives
from the Allied Nations of WWII

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IMF
Basic Premise:

IMF Promotes

all nations seek a

workable
international
monetary system
which transcends
their conflicting
national interests

International
monetary cooperation
Orderly exchange and
payment systems
Available funds for
BOP corrections

Each of the 186 members contribute funds

based on the countrys relative size
in the world economy.
These funds are called quotas.
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IMF and Exchange Rates

Articles of Agreement (1945)

Set fixed exchange rates between member nations

Par value based on U.S.$ and gold @ $35/oz
U.S. would redeem U.S.$ for gold
U.S.$ was only currency redeemable for gold
U.S.$ was method of international payment and
reserve currency
In 1971 President Richard Nixon
took the U.S. off the gold standard
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The World Bank

2 Major Institutions:
International Bank for
Reconstruction and
Development (IBRD)
International
Development Association
(IDA)

3 Minor Institutions:
International Finance
Corporation (IFC)
Multilateral Investment
Guarantee Agency
(MIGA)
International Center for
the Settlement of
Investment Disputes
(ICSID)

A World Education Bank to set up primary

schools and train teachers
was called for in 2008
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WTO

Deals with rules of trade between nations

Goal: Reduce or eliminate trade barriers
and restrictions
Established in 1995
153 members set and implement trade rules between
nations
Minimize government action against trade

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WTO Principles:

WTO

1. Trade without discrimination (MFN

Principle)
2. Freer trade through negotiation
3. Predictability through binding and
transparency
4. Promoting fair competition
5. Encouraging development and economic
reform
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WTO
Doha Development
Agenda
provides market access to
least developed nations
Duty and quota-free
imports on manufactured
goods
Agriculture hard to agree
on

Trade-related
Intellectual Property
Rights (TRIPS)
Copyright, trade mark,
trade secrets and
intellectual property
protection

Over 400 Regional Trade Agreements

(EU, NAFTA, etc.) may weaken the WTO

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Economics Integration
Agreements
Free Trade Area (FTA) tariffs
among members eliminated but external
tariffs remain

Customs Union collaboration that

adds common external tariffs to an FTA

3-25

Economics Integration
Agreements
Common Market customs union that
includes mobility of services, people, and
capital within a union
Complete Economic Integration
integration on economic and political
levels
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3-27

Examples of
Economic Integration Agreements
North America:
North American Free Trade
Agreement (NAFTA)

Central & South America:

Mercosur
Central American Free Trade
Union (DR-CAFTA)
Andean Community (CAN)

Europe:
European Union (EU)

Africa:
Economic Community of West
African States (ECOWAS)
Common Market for Eastern
and Southern Africa (COMESA)
Southern African Development
Community (SADC)
African Free Trade Zone (AFTZ)
African Union (AU)

Asia:
Association of Southeast Asian
Nations (ASEAN & ASEAN+3)

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The European Union

EU Development
Countries committed to
economic and political
integration
Established in 1993 by
the EC in the Maastricht
Treaty

3 Areas of
Integration:
1. Economic Community
2. Foreign Policy
3. Domestic Affairs

EU Profile Today
27 member countries
500+ million people
7.3%+ of world
population
20% of global imports
& exports
Supranational body
with regional
government
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 European Monetary Union (EMU) or

Economic and Monetary Union
EU group using in 16-country euro zone
EU Institutions

European Parliament legislative body;

members popularly elected from member
nations
Council of the European Union the EUs
primary policy setting institution
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 European Commission
27 commissioners responsible for EUs daily operations

Court of Auditors
Reviews spending of EU funds

European Economic and Social

Commission (EESC)
Focuses on occupational & social interests

Committee of Regions (CoR)

Local views on transportation, education & health

European Investment Bank

Finances projects of EU objectives
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 European Central Bank (ECB)

sets and implements EU monetary policy

European Court of Justice

rules on issues related to EU policies under the
Treaty of Rome

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EU Impact on IB
The Changes:
Harmonized national
standards, labeling laws,
testing procedures &
consumer protection
issues
Eliminated shared border
taxes and customs laws of
member nations
Common currency the

The Results:
The Worlds largest
trading economy
FDI outflow = 26% of
World output
Cost of Doing Business in
EU is reduced
EU regulations set new
global standards

EU market access means firms play by ER

rules globally AND within the EU!
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GLOBAL gauntlet
Do International
Institutions Weaken
the Nation State?

Issues:
National
Sovereignty?
Member Alliances?
Member Relations?
Common CrossBorder or Regional
Issues?
Global Issues?

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