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CHAPTER 3
International Institutions from an International Business
Perspective
Learning Objectives
LO3-1 Explain the importance of international institutions to business decision makers and their
firms.
LO3-2 Describe the various types of institutions, drawing on institutional theory.
LO3-3 Outline the United Nations as an institution and its relevance to international business.
LO3-4 Describe the purposes of the two global monetary institutions, the IMF and the World
Bank.
LO3-5 Discuss the purpose of the World Trade Organization and its impact on international busi-
ness.
LO3-6 Discuss the resources of the Organisation for Economic Cooperation and Development.
LO3-7 Identify the levels of economic integration and the effectiveness of the major trading
blocs.
LO3-8 Discuss the EU, its impact and its challenges going forward.
NOTE:
International business statistics, data, and facts about countries, regions, governments, and companies can
change rapidly and dramatically. We recommend that you update this information regularly.
As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the
International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,
videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to
the ever-changing topic of international business.
iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video
service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop
to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and
discussion questions. Key concepts for each video are identified to save you time! Visit
www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about
iGlobe or the IB Newsletter.
Overview
Institutional theory is briefly explained to provide a conceptual framework for our discussion on
international institutions, including monetary institutions. This theory is referred to in subsequent
chapters, so becoming familiar with it now is helpful.
International institutions are numerous and of great and growing importance to international business.
They operate in many fields of importance to international managers, including labor conditions,
agriculture, international company behavior, transportation, patent and trademark protection and postal
system operations, to mention only a few.
Our purpose in this chapter is to introduce students to a way of thinking about institutions (institutional
theory) and then to many of the international organizations with which businesses must interact or whose
influence businesses feel, and from which businesses can gain substantially, especially in the areas of
information and financing.
Suggestions and Comments
Students should have had civics or government courses in high school, political science courses as college
freshmen or sophomores or business law courses, all of which deal with government control of business.
This parallel may be used to bridge to the international institutions.
One way to build interest in this area is to go to the career development opportunities these institutions
offer our students. They are the source of rich careers, and all of the international organizations have
employment links of their websites.
Students and many business people, actually, think of institutions such as the UN or the WTO as
tangential to their practice of international business (IB), although perhaps important to IB in a more
general way. This is a mistake, and throughout the chapter, you might emphasize ways in which
international institutions can be helpful to the business managers who know how to use them. Companies
can get financing, beneficial information and sometimes contracts from the various organizations or from
their partners.
The growth of developing countries, especially the BRICs (Brazil, Russia, India, China) is affecting most
international organizations. Many of our students, when they take jobs with business or government, will
confront the problems and opportunities posed by dealing with developing countries or by the influence
of the developing countries on international institutions.
Student Involvement Exercises
All the organizations described issue several publications. You may wish to have students read some of
the publications on-line in order to sample their contents and quality.
All of these institutions have substantial websites. You might assign individual students or groups specific
organizations to research, including their history, purposes, activities, successes and short-comings.
Despite much opposition from protectionists, organized labor and environmentalists, the North American
Free Trade Agreement (NAFTA) came into effect in 1994. Since then, trade between Mexico and the U.
S. has grown as exports from both countries increased substantially. The feared exodus of jobs from the
U.S. to low-wage Mexico did not occur. Congress approved NAFTA at the request of President Clinton
under the so-called fast-track authority that Congress had granted him and the recent presidents preceding
him. Fast- track permits the president to negotiate trade agreements with other countries and submit them
for congressional approval or disapproval by an up or down vote with no amendments permitted. Other
countries are reluctant to negotiate agreements with the U.S. if the agreements are subject to
congressional amendments. Fast track expired in July, 2007. To date, it has not been renewed.
Since many of the institutions discussed in this chapter have governments as their membership, it is
important to understand how and when these institutions speak for their members’ governments and the
impact their power has. Recent meetings of some international institutions have made the news not
necessarily because of the discussions going on in the meeting, but often because of the protestors outside
the meetings. A discussion about these protests should engender lively classroom debate.
The European Union (EU) has progressed from an economic-purposed institution to include political
purposes. There is an EU passport. The EMU has grown, and it now faces serious challenges with EU
member debt issues. These issues can be understood in part as indicative of the need for EU
institution-building. (The EU does have a central bank, but the EMU does not have a trasury.)
Guest Lecturers and Film
Some businesspeople who could contribute to the material in this chapter would be:
1. Local consulate members or representatives from local branches of international organizations
could speak to the class on institutional issues their country or organization faces.
2. Another source of speakers could be international banks or businesses.
3. Sometimes other members of your school’s faculty may have had experiences with the
institutions about which they would talk with your classes.
4. A film, Europe United, can be obtained for the EU office in Washington. It gives the history of
the EU formation and can be quite helpful. Similar material is on the EU website designed for
U.S. viewers.
Worldview: IMF Sees a Growing Africa and So Does China
The focus of this Worldview is China's growing influence in Africa. The IMF has voiced concern over
China's African involvement, and this short description of that involvement encourages students to think
through the future implications of China's growing involvement in many parts of Africa. The institutional
basis for China's involvement (aid) is also an area for discussion.
Global Debate
Do International Institutions Weaken the Nation-State?
The focus of this Global gauntlet explores, “Do International Institutions Weaken the Nation-State?”
and serves as a starting point for a stimulating class discussion on such topics as:
Do 3rd party institutions with oversight and regulatory powers weaken national
sovereignty?
What advantages can nation-states gain from international institutions?
Do treaties and conventions negotiated by the UN weaken national decision
making?
The Kyoto Protocol is an example of cross-border agreements. What is the status
on its ratification?
What would provoke nation-states to be non-compliant to 3rd party international
institutions?
Lecture Outline
I. Opening Discussion
These institutions are of tremendous importance because, by limiting choices, they mediate
among nations with different values, goals and cultures. One might argue that when they are
successful, international institutions stand between us and chaos, helping to provide an
environment conducive to international trade. People involved in international business need to
understand the impact international institutions may have.
II. What are institutions?
New institutional theory sees institutions as a collection of norms that “regulate the relations of
individuals to each other.”i That is, institutions are socially constructed--a group, society or
culture constructs them--and they limit behavior.
A. Types of institutions
1. Formal institutions influence behavior through laws and regulations ( government,
police force)
2. Informal institutions use customs and ideologies to influence behavior (social groups,
many international organizations)
B. Institutional Theory and International Business
Formal institutions, such as national governments, are major players in their geographical
areas. Through their rules and regulations, they constrain the possible actions the firm
may take. Informal institutions range from professional organizations to the growing
number of non-governmental organizations (NGOs) that establish standards, “propagate
principles, and broadly represent ‘humanity.’”
III. Global Level Institutions
A. United Nations (UN)
1. Background: The UN was formed at the end of World War II (WWII)
2. Organization: Decentralized with five main bodies: General Assembly, Security Council,
Economic and Social Council, International Court of Justice, and Secretariat.
3. Going forward: As we recognize that many of our problems require a global or regional
solution (global warming, AIDS/HIV) the UN’s function is becoming critical. It has
grown tremendously since its establishment in 1945 and new nations continue to join.
Developing countries now constitute a majority of the UN membership, and increasingly
UN effort is directed to aid them.
B. International Monetary Institutions
1. IMF
The premise of the International Monetary Fund (IMF), which operates
as a collaboration of nations, is that the common interest of all nations in a
workable international monetary system far transcends conflicting national interests. The
IMF coordinates multilateral monetary rules and their enforcement.
2, World Bank
The World Bank (IBRD) was formed to address development issues. Organized into two
major and three smaller institutions, it functions as a nonprofit cooperative for its 185
member nations to support development.
C. World Trade Organization (WTO)
1. WTO Principles
2. Doha Round
3. WTO Challenges
D. Organisation for Economic Cooperation and Development (OECD)
1. Brief history
2. Significant contributions
IV. Economic Integrations Agreements and levels of economic integration
A. Types of Integration: free trade area, customs union, common market
B. Examples
1. North American Free Trade Agreement (NAFTA)
2. European Free Trade Agreement (EFTA)
3. ASEAN
4. African Free Trade Agreements
5. MERCOSUR/MERCOSUL
6. Central American Free Trade Area
7. European Union (EU): further expanded below
V. European Union (EU)
A. EU Background and growth
B. EU Institutions
1. European Parliament
2. Council of the EU
3. European Commission
4. European Court of Justice
5. Other EU Institutions
C. EU impact
i Talcott Parsons, “Prolegomena to a Theory of Social Institutions,” American Sociological Review, 1934/1990,
55:319-339, as referenced by Scott (2008), p 14.
