LESSON 1: INTRODUCTION TO INTERNATIONAL Human Rights Issues and Labor Abuses - some workers in

BUSINESS AND TRADE poor countries face labor exploitation, such as physical and
sexual abuses, forced confinement, non- payment of wages,
GI denial of food and health care, and excessive working hours.
GLOBALIZATION - the deepening relationship and BARRIERS TO INTERNATIONAL BUSINESS (TNLE)
broadening interdependence among people from different parts
of the world, and especially among different countries. Tariffs, also called as custom duties - are a form of tax on
certain types of imports. Finished imported goods include
INTERNATIONAL BUSINESS - all commercial transactions tariffs, which increase their prices.
between two or more countries, whether they involve private or Non-tariff barriers - are controls or standards for the quality
public properties. of imported goods set so high that foreign competitors cannot
enter the market.
WHAT IS INTERNATIONAL BUSINESS? Landed Cost - is the actual cost of an imported purchased
DIB item, composed of the vendor cost, transportation charges,
duties, taxes, broker fees, and any other charges.
Domestic Transaction - is the selling of items produced in the
same country. Excise Tax - is a tax on the manufacture, sale, or consumption
of a particular product within a country.
International Transaction - is the selling of items produced in
other countries. These items contribute to the global economy.

Benefits for Business: FLOW OF GOODS AND SERVICES

 Access to markets BALANCE OF TRADE (TT)

 Cheaper labor
 Increased quality of goods  Trade Deficit - a country pays more for imports than
it earns from exports.
 Increased quantity of goods
 Trade Surplus - a country earns more from exports
 Access to resources
than it pays for imports.
THE FIVE P’S OF INTERNATIONAL BUSINESS (5P)
APPROACHES OF INTERNATIONAL BUSINESS (EPRG)
 Product
Ethnocentric Approach - under this approach, target market is
 Price
own country. Excessive production will export due to change in
 Proximity
customer taste or preferences.
 Preference
 Promotion Polycentric Approach - under this approach, the companies
customizes the marketing mix to meet the taste, performance,
NEED FOR INTERNATIONAL BUSINESS
and needs of the customers of each international market.
 Offers consumer new choices
 Permits the acquisition of wider variety of products Regiocentric Approach - under this approach, the company
 Facilitates the mobility of labor, capital, and operating successfully in a foreign country thinks of exporting
technology other neighboring countries of the host country.
 Employment opportunities
Geocentric Approach - under this approach, the company
COST OF INTERNATIONAL TRADE (OH) analyses the tastes, preference and needs of the customers in all
foreign markets and then adopts a standardized marketing mix
Offshore Outsourcing - occurs when businesses decide to for all the foreign markets.
produce all or part of their goods in countries where labor costs
are lower.
LESSON 2: THE EVOLUTION OF INTERNATIONAL principles helps everyone focus on the potential and risks
BUSINESS AND REGIONAL ECONOMIC presented by the global landscape.
INTEGRATION
INFLUENCES AND GOALS OF INTERNATIONAL
INTRODUCTION TO THE EVOLUTION OF BUSINESS
INTERNATIONAL BUSINESS
Companies engage in international business to:
International business is all commercial transactions private
and governmental between two or more countries. Private 1. Expand Sales:
companies undertake such transactions for profits; governments Companies’ sales are dependent on (a) the consumers’ interest
may or may not do the same in their transactions. These in their products or service and (b) the consumers’ willingness
transactions include sales, investments, and transportation. and ability to buy them.
GLOBAL, MULTINATIONAL AND TRANSNATIONAL 2. Acquire Resources:
COMPANY (MGT)
Manufacturers and distributors also look for foreign capital,
MULTINATIONAL technologies and information that they can use at home, to
A Multinational Corporation (MNC) or Multinational reduce their costs.
Enterprise (MNE) is a corporation enterprise that manages 3. Minimize Risk:
production or delivers services in more than one country. It can
also be referred to as an international corporation. They play an Companies seek out foreign markets to minimize swings in
important role in globalization. sales and profits arising out of business cycle recessions and
expansions which occur differently in different countries.
GLOBAL
4. Understanding a Company’s Physical and Social
Global companies have invested and are present in many Environments:
countries. They market their products through the use of the
same coordinated image/brand in all markets. Generally, one 4.1.) Managers need social science knowledge to navigate the
corporate office that is responsible for global strategy. complex external environment
Emphasis on volume, cost management and efficiency.
4.2.) Political decisions and disputes can impact international
TRANSNATIONAL business significantly

Transnational companies are much more complex 4.3 & 4.4.) Domestic and international laws regulate various
organizations. They have invested in foreign operations, have a aspects of international business:
central corporate facility but give decision-making, R&D and
marketing powers to each individual foreign market. 4.5.) Understanding social and cultural factors helps managers
operate effectively in different countries
THE EVOLUTION OF INTERNATIONAL BUSINESS
PROBLEMS OF INTERNATIONAL BUSINESS
Ancient Times (2000BC - 1500S)
 Political and Legal Differences
 Silk Road  Economic Differences
 Spice Trade  Differences in the Language
 Trade Restrictions
Colonial Era (1600s - 1800s)
 Differences in Trade Practices
 New Trade Routes & European Dominance  Cultural Differences
 Foreign Investment & Multinational Companies  Differences in the Currency Unit
 Steam Engine & the Intensification of Trade  Differences in the Marketing Infrastructure
 High Costs of Distance
Post WWII (1945 - Present)
THE REGIONAL ECONOMIC INTEGRATION
 Golden Age of US Business
 Resurgence of Europe and Japan Regional economic integration is a process in which two or
 Oil Crisis more countries agree to eliminate economic barriers, with the
 The New Global Marketplace end goal of enhancing productivity and achieving greater
economic interdependence.
NATURE OF THE INTERNATIONAL BUSINESS
5 LEVELS OF ECONOMIC INTEGRATION (FCCEP)
International business deals with unique challenges and
opportunities arising from operating across borders. While 1. Free trade area
domestic business can be seen as a simplified version,
 The most basic form of economic cooperation.
international environments are often uncertain, with varying
 A free trade area isn't necessarily a physical location.
rules and rapid changes. To succeed, managers need to adapt,
Rather, it is an agreement between a group of
understand changing foreign priorities, and develop a global
countries that put up few or no barriers to trade in the
perspective for their products, capabilities, and goals.
form of tariffs or quotas among them.
Integrating this international outlook into the company's core
 Free trade areas tend to increase the volume of
international trade among member countries and
 allow them to increase their specialization in their but it also requires a common currency,
respective comparative advantages. harmonization of members tax rates and a common
 The provisions of the agreement and the resulting monetary and fiscal policy.
scope of free trade are subject to politics and
international relations. Example of Economic Union:

Example of Free Trade Area: CARICOM Single Market and Economy (CSME) aims to
create an economic space for competitive goods and
One of the best-known and largest free trade areas was services to establish a foundation for growth and
created by the signing of the North American Free Trade development of the Caribbean community. It is an
Agreement (NAFTA) on Jan. 1, 1994. This agreement, enlarged market that provides better opportunities to sell
signed by Canada, the United States, and Mexico, products and services, increased competitiveness, and
encouraged trade among these North American countries. improvement of the lives of people.

2. Customs union 5. Political union

 This type provides for economic cooperation as in a  Represents the potentially most advanced form of
free- trade zone. Barriers to trade are removed integration with a common government and where the
between member countries. The primary difference sovereignty of a member country is significantly
from the free trade area is that members agree to treat reduced.
trade with non-member countries in a similar manner.  A political union in which a central political apparatus
 A customs union eliminates trade barriers between coordinates the economic, social and foreign policies
member countries and adopts a common external of the member states.
trade policy. The establishment of a common external
trade policy necessitates significant administrative Example of Political Union:
machinery to oversee trade relations with non- Eurasian Economic Union (EEU) also called the
members. Eurasian Union, EAEU or EEU, the Eurasian Economic
Example of Customs Union: Union is a political and economic union of states in central
and northern Eurasia. The treaty that established the union
The European Union is the largest customs union in the was signed in 2014 by the leaders of Russia, Belarus, and
world in terms of the economic output of its members. The Kazakhstan. The accession treaty of both Armenia and
EU Customs Union, established in 1968, makes it easier Kyrgyzstan came into force in the following year.
for EU companies to trade, harmonizes customs duties on
goods from outside the EU and helps to protect Europe’s
citizens, animals and the environment.

3. Common market

 A common market is a formal agreement where a

group is formed amongst several countries that adopt
a common external tariff.
 To be defined as a common market, all the following
conditions must be satisfied:
 Tariffs, quotas, and all barriers regarding importing
and exporting goods and services among members of
the common market are eliminated.
 Common trade restrictions such as tariffs on countries
outside the group are adopted by all members.
 Production factors such as labor and capital are able to
move freely without restriction among member
countries.

Example of Common Market:

In July 2010, Kenyan President Mwai Kibaki formed the

East African Common Market to accelerate economic
growth and development in the region. The establishment
of a common market in East Africa was an expansion of an
existing customs union, which was created in 2005 and
was made up of six countries in eastern Africa: Burundi,
Kenya, Rwanda, South Sudan, Tanzania, and Uganda.

4. Economic union

 Economic union involves the free flow of products

and factors of production between member countries
and the adoption of a common external trade policy,
LESSON 3: UNVEILING THE FABRIC OF GLOBAL COMPARATIVE ADVANTAGE (ADAM SMITH, DAVID
EXCHANGE: THEORIES OF INTERNATIONAL RICARDO):
TRADE & INVESTMENT
 Focus on relative efficiency, not absolute cost.
Imagine a world without international trade. Coffee would not  Specialization for mutual benefit, maximizing global
grace our mornings, smartphones might be a distant dream, and welfare.
cultural exchange would be severely limited. This
interconnectedness is fueled by powerful economic forces, Example - Atlantica and Pacifica:
explained by various theories. Let's begin with the historical
foundation.  Atlantica has absolute advantage in butter, Pacifica in
bacon.
Why do Nations Trade?  Specialization and trade lead to both countries being
better off.
CLASSICAL THEORIES
HECKSCHER-OHLIN MODEL (FACTOR
MERCANTILISM (16TH-18TH CENTURIES) PROPORTIONS THEORY)
Introduction: Introduction:
 Emerged in England in the mid-16th century.  Proposed by Swedish economists Heckscher and
 Systematically developed by Italian Economist Ohlin.
Antonio Serra.  Based on comparative advantage arising from factor
Example - England and France: endowments.

Example - United States and China:

 England imposes tariffs on French cloth, subsidizes
the textile industry.  U.S. exports capital-intensive goods, imports labor-
 France implements quotas on English cloth, invests in intensive.
domestic industry.  China exports labor-intensive manufacturing goods.
 Both aim for a favorable balance of trade for wealth  Reflects differences in factor endowments.
accumulation.
Key Principles:
Key Principles:
 Countries export goods using abundant factors of
 Accumulating wealth through exports and a positive production.
trade balance.  Explains trade patterns based on relative factor
 Government intervention: Export subsidies, import endowments.
tariffs.  Predicts convergence in wages and factor prices with
 Fixed-pie mentality: One nation's gain is another's trade.
loss.
 Gold and silver as the foundation of national wealth Conclusion:
and commerce.
 The Heckscher-Ohlin model refines understanding of
Criticisms: specialization.
 Links trade patterns to a nation's relative abundance of
 Zero-sum game mentality leading to trade wars. factors.
 Stifling innovation and efficiency.  Predicts convergence in wages and factor prices with
 Higher consumer prices due to limited choices. trade openness.
Modern Relevance: PRODUCT LIFE-CYCLE THEORY
 Some aspects persist in policies like tariffs, subsidies,  The product life-cycle theory was put forward by
and currency devaluation. Raymond Vernon in the mid 1960s. & According to
the PLC theory of trade, the production location for
ABSOLUTE ADVANTAGE AND COMPARATIVE
many products moves from one country to another
ADVANTAGE (18TH-19TH CENTURIES)
depending on the nastage in the product's life cycle.
ABSOLUTE ADVANTAGE (ADAM SMITH, 1776):  It was based on the observation that for most of the
twentieth century a large proportion of the world's
 Producing goods more efficiently. new products developed by US firms are sold in US
 Specialization in most efficient goods leads to trade markets first (e.g. mass-produced automobiles,
benefits. televisions,instant cameras, photocopiers, PCs and
semiconductor chips).
Example - Atlantica and Pacifica:
 Vernon argued that wealth and size of U.S Market
 Atlantica has absolute advantage in butter, Pacifica in gave U.S firms a strong incentive to develop new
bacon. products
 Specialization and trade lead to both countries being
better off.
  The Porter Diamond Model suggests that countries
can create advantages for themselves, such as a strong
technology industry or a skilled labor force. Another
application of the Porter Diamond Model is used in
corporate strategy as a framework to analyze the
relative merits of investing and operating in national
markets.

 The Porter Diamond Model is visually represented by

a diagram that resembles the points of a diamond and
PRODUCT LIFE-CYCLE THEORY includes the interrelated determinants that Porter
theorizes as the deciding factors of national
1. Introduction: comparative economic advantage:

 Innovation in response to observed need 1. Factor Conditions

 Exporting by the innovative country 2. Demand Conditions
 Evolving product characteristics 3. Related and Supportive Industries
4. Firm Strategy
2. Growth:
Why Is Porter’s Diamond Model Important?
 Increase in exports by the innovating country
 More competition Porter’s Diamond Model is important because it helps
 Increased capital intensity businesses and countries understand the sources of competitive
advantage. It helps them identify the most critical factors to
 Some foreign production (outsourcing)
their success.
3. Maturity:

 Decline in exports from the innovating country

 More product standardization
 More capital intensity
 Production start-ups in emerging economies

4. Decline:

 Concentration of production in emerging economies

(The term of "Rising South")
 Innovating country becoming net importer
National Industrial Policy
CONTEMPORARY THEORIES
 A proactive economic development plan initiated by
The Competitive Advantage of Nations
the government, often in collaboration with the
 According to Porter, the competitive advantage of a private sector that aims to develop or support
nation depends on the collective competitive particular industries within the nation.
advantages of the nation’s firms.  Tax incentives to encourage citizens to save and
 The competitive advantages held by the nation tend to invest.
drive the development of new firms and industries  Monetary and fiscal policies, such as low-interest
with these same competitive advantages. loans, that provide a stable supply of capital for
 At both the firm and national levels, competitive company investment needs.
advantage and technological advances grow out of  Rigorous educational systems at the pre college and
innovation. university levels that ensure a steady stream of
 The more innovative firms in a nation, the stronger competence.
the nation’s competitive advantage.
NEW TRADE THEORY
Michael Porter's Diamond Model
 New trade theory (NTT) suggests that a critical factor
 The Porter Diamond Theory of National Advantage, in determining international patterns of trade are the
or the Porter Diamond Model, is a model that very substantial economies of scale and network
describes the competitive advantage that nations or effects that can occur in key industries.
groups possess based on factors available to them.  Another element of new trade theory is that firms who
The theory explains how governments can act to have the advantage of being an early entrant can
improve a country's position in a globally competitive become a dominant firm in the market. This is
economic environment. because the first firms gain substantial economies of
scale meaning that new firms can’t compete against
 Created by Michael Porter, founder of the Institute for the incumbent firms. This means that in these global
Strategy and Competitiveness at the Harvard Business industries with very large economies of scale, there is
School, the Porter Diamond Model is considered a likely to be limited competition, with the market
proactive economic theory.
 dominated by early firms who entered, leading to a Common examples of FDI:
form of monopolistic competition.
 Monopolistic competition is an important element of  A US company building a factory in China.
New Trade Theory, it suggests that firms are often  A Chinese company acquiring a majority stake in a
competing on branding, quality and not just simple European tech startup.
price. It explains why countries can both export and  A Japanese investment firm developing a real estate
import designer clothes. project in Dubai.
 This means that the most lucrative industries are often
FDI-BASED EXPLANATIONS
dominated in capital-intensive countries, who were
the first to develop these industries. Therefore, being 1. Monopolistic Advantage Theory
the first firm to reach industrial maturity gives a very
strong competitive advantage. (some may say unfair The Monopolistic Advantage Theory, proposed by S.H. Hymer
advantage) explains why multinational corporations (MNCs) are able to
 New trade theory also becomes a factor in explaining compete successfully against local firms. It argues that MNCs
the growth of globalisation. have a monopolistic advantage, which gives them a competitive
 It means that poorer, developing economies may edge over local competitors. This advantage can come from a
struggle to ever develop certain industries because variety of sources, including proprietary knowledge, patents,
they lag too far behind the economies of scale enjoyed unique know-how, and sole ownership of other assets.
in the developed world. This is not due to any intrinsic 2. Internalization Theory
comparative advantage, but more the economies of
scale the developed firms already have. The Internalization Theory, suggests that firms choose foreign
direct investment (FDI) when the benefits of internalizing
Example: transactions or activities outweigh the costs of doing so through
TESLA is a popular brand in the electric vehicle segment. the market. In simpler terms, firms invest abroad to directly
TESLA had been the early entrant or the first mover into manage activities themselves instead of relying on external
manufacturing electric vehicles (EVs) for the public on a large markets when managing those activities internally offers
scale. With time, it transformed from an American EV to a greater benefits.
global EV manufacturer. TESLA gained a monopoly in the Reasons for internalization:
market by doing the following:
 Transaction costs
 Being the first mover into EV;
 Protecting proprietary knowledge
 Getting subsidies from the American government;
 Coordination and efficiency
 Having economies of scale due to huge funding
available; and 3. Dunning's Eclectic Paradigm
 Rising value of its cars, creating network effects, led
to monopolistic tendencies in the EV manufacturing The Eclectic Paradigm, developed by John H. Dunning, builds
sector. upon the Monopolistic Advantage and Internalization theories
to explain why and when firms engage in Foreign Direct
How can internationalizing firms gain and sustain Investment (FDI). It suggests that FDI occurs when three
competitive advantage? critical elements are present:

FDI Definition and Examples: 1. Ownership Advantages (O):

FDI stands for FOREIGN DIRECT INVESTMENT. It's Example: Nike leverages its iconic brand (O) to enter
essentially an investment made by a company or individual emerging markets with lower labor costs.
from one country into a business or project in another country,
with the intention of gaining control or significant influence 2. Location Advantages (L):.
over the investment. This means they're not just putting in Example: Apple invests in factories in China (L) for
money passively, but they're actively involved in managing the lower production costs while maintaining control (I)
business. through internalization.
Key characteristics of FDI: 3. Internalization Advantages (I):
Control or influence: The investor aims to have a say in how Example: A pharmaceutical company invests in
the business is run, not just receive financial returns. This can factories abroad (I) to protect proprietary drug
be achieved through owning a majority stake in the company, formulas (O) and ensure quality control (I) instead of
having representation on the board of directors, or other means. relying on external manufacturers.
Long-term commitment: FDI is typically a long-term When all three elements are present, FDI becomes a
investment, as the investor is looking to establish a lasting more attractive option for firms to gain and sustain
presence in the foreign market. competitive advantage in foreign markets.
Direct involvement: The investor is directly involved in the
operations of the business, unlike portfolio investments where
they simply buy shares and hold them passively.
NON-FDI-BASED EXPLANATIONS GOLD STANDARD (1879-1914)

1. International Collaborative Ventures Gold standard is a monetary system in which the standard unit
of currency is a fixed quantity of gold or is kept at the value of
ICVs are partnerships between two or more firms from a fixed quantity of gold.
different countries to achieve a common business goal. These
ventures take various forms, including: In simple words, each country’s currency was set in value per
ounce of gold.
 Joint ventures: A separate legal entity is created,
owned by both partners. The gold standard was formally accepted as an IMS in the
 Strategic alliances: Firms collaborate on specific 1870s when major countries like United States, Germany and
projects or share resources without creating a new Japan adopted it.
entity.
 Consortia: Groups of firms come together to
undertake large-scale projects or research initiatives.

There are several reasons why firms choose to collaborate

internationally:

 Access resources and markets

 Share costs and risks Interwar Period (1918-1939)
 Complement strengths
The gold standard was abandoned in 1914 with the onset of I
 Overcome regulations and barriers
World War. During the war, the countries started printing
2. Networks and Relational Assets money to provide for the war activities.

Networks: The countries restricted the disengaged movement of gold

among nations and also put the convertibility of currency into
Networks are intricate structures of interconnected entities or gold on hold
nodes, often individuals or organizations, linked by
information, resource, or support flows. In international After the termination of the first world, the countries started
business, they represent a firm's relationships with stakeholders returning back to the gold standard. After the world war, the
like suppliers, customers, distributors, governments, and others $ became stronger and European countries became weak. As a
in foreign markets. result, US became the first nation to adopt the gold standard
back in 1919.
Examples:
Reasons for the Failure to Restore the Gold Standard
o Supply chain networks
o Distribution networks First, the 1920s and 1930s saw frequent recessions and
o Customer networks banking.
o Governmental networks
o Stakeholder networks Second, there was a leadership vacuum in the international
regime. The UK, the old leader was losing power and incapable
Relational Assets: of handling the situation.
Relational assets are intangible resources and capabilities a firm Third, as a result of this and in the absence of policy
gains from its relationships with other firms, organizations, and cooperation, each country become selfish.
individuals. These assets cannot be easily replicated and
include trust, goodwill, reputation, shared knowledge, and a BRETTON WOODS SYSTEM (1945-1971)
history of cooperation.
In July 1944, while the Second World War was still going on,
Examples: the representatives of 44 nation states met at Bretton Woods,
New Hampshire to design a new IMS.
 Preferential access
 Deep customer understanding An agreement was reached to establish two multinational
 Regulatory advantage institutions:
 Social license to operate IMF (International Monetary Fund) to monitor IMS, maintain
exchange rate stability and oversee national monetary policies
LESSON 4: INTERNATIONAL MONETARY SYSTEM
and also provide financial cooperation to member countries for
The group of rules, conventions and institutions that administer meeting short term BOP shortfall.
the international business, trade and investment are jointly
IBRD (International Bank for Reconstruction and Development)
called as international monetary system (IMS).
was established to primarily finance the post war reconstruction
The IMS provides the framework within which foreign of the member countries
exchange rates are ascertained.
BRETTON WOODS SYSTEM
Its main purpose is to facilitate the transactions between
During 1960s, US undertook welfare programs. The increase in
different countries.
government expenditure was financed by raising the domestic
money supply, which led to inflation. With increased money THE ROLE OF IMF
supply, people started spending more.
I. Introduction
Consequently, the demand for imports increased while exports
became uncompetitive (due to increased prices of US goods). International Monetary Fund

The member countries began to lose confidence in dollar and  Cooperative intergovernmental monetary and
started converting their dollar reserves into gold. The gold financial institution.
stock with US treasury began to fall drastically.  Near universal membership.
 Established in 1944 at Bretton Woods Conference.
In February 1973, the parity value of dollar was again revised
upward from 38$ per ounce to 42$ per ounce. By March 1973, Three Founding Purposes of IMF:
the eminent currencies were allowed to float and the Bretton
Woods System came to an end.  Promote International monetary cooperation
 Facilitate balanced growth of international trade
EXCHANGE RATE REGIME SINCE 1973  Promote exchange rate stability

After the end of Bretton Woods System, IMF constituted a II. Core Functions of the IMF
committee to evolve a new monetary system.
Surveillance
The committee members came out with a new set of rules
which were formally accepted by all member countries in a  Collect and analyze economic data.
meeting at Jamaica in January 1976.  Provide economic forecasts (World Economic
Outlook).
With this came the system of flexible exchange rates where the  Offer policy advice and recommendations.
exchange rate is not fixed by government authorities rather it is
determined by the forces of market i.e. supply and demand of Capacity Building
the currencies in the international market
 Training and technical assistance to member
THE IMF AND THE PHILIPPINES countries.
 Improve data collection and analysis skills.
The Philippines has been a member of the IMF since 1945.  Enhance economic policymaking capabilities.
The IMF has provided financial assistance to the Philippines on Lending
several occasions, including during the Asian financial crisis in
the late 1990s and the global financial crisis in 2008.  Provide financial assistance to countries facing
balance of payments difficulties.
The IMF also provides technical assistance and policy advice to
 Conditional loans tied to economic reforms.
the Philippines on a range of issues, including fiscal policy,
 Critiques of structural adjustment programs.
monetary policy, and financial sector development.
Global Liquidity
IMF's Recent Observations on the Philippines
 Maintain and promote a smooth functioning
Inflation: While decelerating from earlier peaks, inflation
international monetary system.
remains a concern, prompting the Bangko Sentral ng Pilipinas
(BSP) to raise interest rates.  Manage global reserves (including Special Drawing
Rights- SDRs).
Growth Outlook: Despite short-term challenges, the IMF  Promote capital account convertibility.
projects real GDP growth to rebound in 2024, supported by
public investment and improved external demand. III. Key activities

Philippines' Approach to the International Monetary Fund Article IV Consultations:

(IMF)  Regular discussions between IMF and member
Generally cooperative: The Philippines usually welcomes countries on economic policies and performance.
IMF's assessments and recommendations, implementing some Financial Arrangements:
policy changes based on their advice.
 Providing financial support to countries experiencing
Selective implementation: Not all IMF recommendations are
temporary balance of payments problems.
automatically adopted, as the Philippines prioritizes its own
 Technical Assistance:
national development goals and considers local contexts.
 Training programs, policy advice, and capacity
The Current Economic Situation in the Philippines building initiatives.

The Philippines' economy grew by 6.5% in 2022, following a Surveillance Reports:

growth of 5.7% in 2021.
 Analyzing and commenting on global economic
Growth is expected to moderate to 6.0% in 2023 and 2024, due trends and individual country performances.
to external headwinds and fiscal underspending.  Research and Analysis:
 Publishing reports and conducting research on various
Inflation rose to 8.7% in January 2023, but has since moderated economic topics.
to 4.9% in October 2023.
IV. Challenges and Opportunities  other capital investment

 Managing financial crises and their spillover effect. FACTORS AFFECTING INTERNATIONAL TRADE
 Promoting financial stability and sustainable growth FLOWS
in a globalized world
1. Cost of Labor -Firm in countries where labor costs are low
 Adapting to evolving economic and technological
commonly have an advantage when competing globally,
landscapers.
especially, in labor in labor intensive industries.
 Addressing concerns about IMF conditionalities and
their impact on developing countries. 2. Inflation -Current account decrease if inflation increase
 Strengthening international cooperation and relative to trade partner.
collaboration on economic issues.
3. National Income -Current account decrease if national
INTERNATIONAL FLOW OF FUNDS AND EXCHANGE income increases relative to other countries.
RATES
4. Government Policies -Increase imports though:
International Business - is facilitated by markets that allow for
the flow of funds between countries. The transaction arising a. Restrictions on import can
from international business cause money flows from one b. Subsidies for exporters
country to another. c. Lack of Restriction on Piracy
d. Environmental restrictions
Exchange Rates e. Labor Laws
f. f. Tax breaks
 The value of one currency for the purpose of
g. g. Country security laws
conversion to another. It gives the relative value of
one currency against another currency. 5. Exchange Rates -Current account decrease if currency
 Movements in the exchange rate influence the appreciates relative to other currencies.
decisions of individuals, businesses and the
government. IMPACT OF GOVERNMENT POLICIES
 The exchange rate affects the real economy most Restrictions on Imports- taxes (tariffs) on imported goods
directly through changes in the demand for exports increase prices and limits consumptions. Quotas limits the
and imports. volume of imports.
Balance of Payments Subsidies for Exporters- government subsidies help firms
The balance of payments is a measurement of all transactions produce at a lower cost than their global competitors.
between domestic and foreign residents over a specified period Restrictions on Piracy- a government can affect international
of time. trade flows by its lack of restrictions on piracy.
KEY COMPONENTS OF BALANCE OF PAYMENT FACTORS AFFECTING DFI
Current Account 1. Change in restrictions - New opportunities may arise
Summary of flow of funds due to purchases of goods or from the removal of government barriers.
services or the provision of income of financial assets. 2. Privazation - DFI has also been stimulated by the
selling of government operations.
 Payments of Merchandise and Service 3. Potential Economic Growth - Countries with higher
 Factor Income Payment potential economic growth are more likely to attract
 Transfer Payment DFI.

Capital Account FACTORS AFFECTING INTERNATIONAL

PORTFOLIO INVESTMENT
Summary of flow of funds resulting from the sale assets
between one specified country and all other countries over a  Tax Rates on Interest or Dividends - Investors will
specified period of time. normally prefer countries where the tax rates are
relatively low.
 originally included the financial account  Interest Rate -Money tends to flows to countries with
 portfolio investment transactions involving long term high interest rates.
financial assets  Exchange Rates -Foreign investors may be attracted
 includes patents and trademarks if the local currency is expected to strengthen.
Financial Account INTERNATIONAL TRADE ISSUES
Refers to special types of investment, including DFI and 1. Events that increase international trade
portfolio investment. 2. Removal of Berlin wall. 1986
3. Single European Act. 1980 Act 1987 negotiated still
 direct foreign investments in fixed assets in foreign
1992
countries
4. North America Free Trade Agreement (NAFTA) 1993
 portfolio investment transactions involving long term
5. Inception of the Euro. 1999 other transaction 2001
financial assets
completely replaced 2002
2 TRADE FRICTION Weak Peso: Advantage

1. International trade and government strategies Exports become cheaper in dollar terms, making them more
competitive in the global market. This can lead to increased
 Tariff and quotas export volumes and revenues for Philippine businesses.
 Environmental restrictions
 Child labor laws Impact of Strong Peso in IBT
 Subsidies to exporters
Foreign Debt
 Tax Break
The Philippines has a significant amount of foreign debt
2. Outsourcing - -Process of subcontracting to a third party in
denominated in USD. A stronger PHP makes it easier to service
another country to provide supplies or services that were
this debt and reduces the risk of default.
previously produced internally.
Foreign Investment
 Impacts of outsourcing on value of MNCs
 Criticism on outsourcing A stable and appreciating PHP can make the Philippines a more
 Managerial decisions attractive destination for foreign investment, leading to
increased economic growth and job creation.
AGENCIES THAT FACILITATE INTERNATIONAL
TRADE FLOWS Remittance inflows

 International monetary fund Overseas Filipino workers (OFWs) send a significant amount
 World bank of money back to the Philippines in USD. A stronger PHP
 World trade organization reduces the value of these remittances in peso terms, potentially
 International financial corporation impacting the spending power of recipient families.
 International development association Tourism
 Bank for international settlements
 Organization of economic corporation and A stronger PHP can make the Philippines a more expensive
development destination for foreign tourists, potentially leading to a decrease
 Regional development agencies in tourism revenue.

IMPACT OF USD TO PESO Examples:

Average Rate  2008 Financial Crisis

 2013 US Taper Tantrum
Weak USD Strong Peso  2020 Covid 19 Pandemic
1 DOLLAR 48.1 PHP

Strong USD Weak Peso

1 DOLLAR 56 PHP

Impacts on Major Areas of IBT

Importation

Strong Peso: Advantage

Lower prices for imported goods and services as they become

cheaper in peso terms. This can benefit consumers and
businesses that rely on imported materials.

Weak Peso: Disadvantage

Higher prices for imported goods and services as they become

more expensive in peso terms. This can lead to increased
inflation and higher costs for consumers and businesses.

Exportation

Strong Peso: Disadvantage

Exports become more expensive in dollar terms, making them

less competitive in the global market. This can lead to
decreased export volumes and revenues for Philippine
businesses.