International Business Collier Evans

8/19/2019 International Business Collier Evans

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International Business 9e

By Charles W.L. Hill

McGraw-H il l/I rwin Copyri ght © 2013 by The McGraw-H il l Companies, I nc. Al l ri ghts reserved.


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Chapter 1

Globalization


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What Is Globalization?

Globalization - the shift toward a moreintegrated and interdependent worldeconomy

The world is moving away from self-contained national economies toward aninterdependent, integrated global

economic system


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What Is The

Globalization of Markets?Historically distinct and separate national

markets are merging

It no longer makes sense to talk about the

“German market” or the “American market” Instead, there is the “global market”

falling trade barriers make it easier to sell globally

consumers’ tastes and preferences are converging onsome global norm

firms promote the trend by offering the same basicproducts worldwide


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What Is The

Globalization of Markets?

Firms of all sizes benefit and contribute tothe globalization of markets

97% of all U.S. exporters have less than 500

employees

98% of all small and mid-sized Germancompanies participate in international markets


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What Is The

Globalization of Production?Firms source goods and services from

locations around the globe to capitalize onnational differences in the cost and quality

of factors of production like land, labor,energy, and capital

Companies can

lower their overall cost structureimprove the quality or functionality of their

product offering


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Why Do We NeedGlobal Institutions?

Global institutionshelp manage, regulate, and police the global

marketplace

promote the establishment of multinationaltreaties to govern the global business system


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Why Do We NeedGlobal Institutions?

Examples include

the General Agreement on Tariffs and Trade(GATT)

the World Trade Organization (WTO)the International Monetary Fund (IMF)

the World Bank

the United Nations (UN)

the G20


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What Do GlobalInstitutions Do?

The World Trade Organization (like itspredecessor GATT)

polices the world trading system

makes sure that nation-states adhere to therules laid down in trade treaties

promotes lower barriers to trade and

investment154 members in 2011


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The International Monetary Fund (1944)

maintains order in the international monetarysystem

lender of last resort for countries in crisis

Argentina, Indonesia, Mexico, Russia, SouthKorea, Thailand, Turkey, Ireland, and Greece

The World Bank (1944)promotes economic development via low

interest loans for infrastructure projects


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The United Nations (1945)maintains international peace and securitydevelops friendly relations among nations

cooperates in solving international problemsand in promoting respect for human rightsis a center for harmonizing the actions of

nations

The G20forum through which major nations tried to

launch a coordinated policy response to the2008-2009 global financial crisis


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What Is DrivingGlobalization?

Declining barriers to the free flow of goods,services, and capital

average tariffs are now at just 4%

more favorable environment for FDIglobal stock of FDI was $15.5 trillion in 2009

facilitates global production

Technological change

microprocessors and telecommunications

the Internet and World Wide Web

transportation technology


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What Does GlobalizationMean For Firms?

Lower barriers to trade and investmentmean firms can

view the world, rather than a single country,

as their market

base production in the optimal location for thatactivity

But, firms may also find their homemarkets under attack by foreign firms


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Declining Trade AndInvestment Barriers

Average Tariff Rates on Manufactured Products as Percent of Value


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What Does GlobalizationMean For Firms?

Technological change means lower transportation costshelp create global markets and allow firms to

disperse production to economical, geographically

separate locations low cost information processing and communicationfirms can create and manage globally dispersed

production low cost global communications networks

help create an electronic global marketplaceglobal communication networks and global mediacreate a worldwide culture and a global consumer

product market


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The Changing DemographicsOf The Global Economy

Four trends are important:

1. The changing world output and worldtrade picture

2. The changing foreign direct investmentpicture

3. The changing nature of the multinationalenterprise

4. The changing world order


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How Has World Output AndWorld Trade Changed?

In 1960, the U.S. accounted for over 40%of world economic activity, but by 2009,the U.S. accounted for just 24%

a similar trend occurred in other developedcountries

In contrast, the share of world outputaccounted for by developing nations isrisingexpected to account for more than 60% of

world economic activity by 2020


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How Has World Output AndWorld Trade Changed?

The Changing Demographics of World GDP and Trade


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How Has Foreign DirectInvestment Changed Over Time?

In the 1960s, U.S. firms accounted forabout two-thirds of worldwide FDI flowsToday, the United States accounts for less

than one-fifth of worldwide FDI flowsOther developed countries have followed a

similar pattern

In contrast, the share of FDI accounted forby developing countries has risenDeveloping countries, especially China, have

also become popular destinations for FDI


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Percentage Share of Total FDI Stock 1980-2007


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FDI Inflows 1988-2008

Wh t I A


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What Is AMultinational Enterprise?

Multinational enterprise (MNE) - anybusiness that has productive activities intwo or more countries

Since the 1960s

the number of non-U.S. multinationals hasrisen

the number of mini-multinationals has risen


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The Changing World Order

Many former Communist nations in Europe and Asia are now committed to democratic politicsand free market economiescreates new opportunities for international businesses

but, there are signs of growing unrest and totalitariantendencies in some countries

China and Latin America are also moving towardgreater free market reformsbetween 1983 and 2010, FDI in China increased from

less than $2 billion to $100 billion annuallybut, China also has many new strong companies that

could threaten Western firms


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How Will The Global EconomyOf The 21st Century Look?

The world is moving toward a more globaleconomic system…

But globalization is not inevitable

there are signs of a retreat from liberal economicideology in Russia

Globalization brings risks

the financial crisis that swept through South East Asia

in the late 1990s

the recent financial crisis that started in the U.S. in2007-2008, and moved around the world

I A I t d d t Gl b l


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Is An Interdependent GlobalEconomy A Good Thing?

Supporters believe that increased trade andcross-border investment mean lower prices for goods and servicesgreater economic growth

higher consumer income, and more jobsCritics worry that globalization will cause job lossesenvironmental degradation

the cultural imperialism of global media and MNEs Anti-globalization protesters now regularly show

up at most major meetings of global institutions

H D Gl b li ti


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How Does Globalization Affect Jobs And Income?

Critics argue that falling barriers to tradeare destroying manufacturing jobs inadvanced countries

Supporters contend that the benefits ofthis trend outweigh the costs

countries will specialize in what they do most

efficiently and trade for other goods—and allcountries will benefit


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How Does Globalization Affect LaborPolicies And The Environment?

Critics argue that firms avoid the cost ofadhering to labor and environmental regulationsby moving production to countries where such

regulations do not exist, or are not enforcedSupporters claim that tougher environmental

and labor standards are associated witheconomic progress

as countries get richer from free trade, theyimplement tougher environmental and laborregulations

H D Gl b li ti


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How Does Globalization Affect National Sovereignty? Is today’s global economy shifting economic power away

from national governments toward supranationalorganizations like the WTO, the EU, and the UN?

Critics argue that unelected bureaucrats have the power

to impose policies on the democratically electedgovernments of nation-states

Supporters claim that the power of these organizations islimited to what nation-states agree to grant

the power of the organizations lies in their ability toget countries to agree to follow certain actions

H I Gl b li ti


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How Is Globalization Affecting The World’s Poor? Is the gap between rich nations and poor nations

getting wider?Critics believe that if globalization was beneficial

there should not be a divergence between rich

and poor nationsSupporters claim that the best way for the poor

nations to improve their situation is to reduce barriers to trade and investment

implement economic policies based on free marketeconomies receive debt forgiveness for debts incurred under

totalitarian regimes

H D Th Gl b l


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How Does The GlobalMarketplace Affect Managers?

Managing an international business differs frommanaging a domestic business because

countries are different

the range of problems confronted in an internationalbusiness is wider and the problems more complexthan those in a domestic business

firms have to find ways to work within the limits

imposed by government intervention in theinternational trade and investment system

international transactions involve converting moneyinto different currencies


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International Business 9e




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Chapter 2

National Differences

in Political Economy


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What Is A Political Economy?

Political economy of a nation - how the

political, economic, and legal systems of a

country are interdependent

they interact and influence each other

they affect the level of economic well-being in

the nation


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What Is A Political System?

Political system - the system of

government in a nation

Assessed according to

the degree to which the country emphasizes

collectivism as opposed to individualism

the degree to which the country is democratic

or totalitarian


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What Is Collectivism?

Collectivism stresses the primacy ofcollective goals over individual goals

can be traced to the Greek philosopher, Plato

(427-347 BC)Today, collectivism is equated with

socialists (Karl Marx 1818-1883)

advocate state ownership of the basic meansof production, distribution, and exchange

manage to benefit society as a whole, ratherthan individual capitalists

H D M d D


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How Does Modern-Day

Socialism Look? In the early 20th century, socialism split into

1. Communism – socialism can only be achievedthrough violent revolution and totalitariandictatorship in retreat worldwide by mid-1990s

2. Social democrats – socialism is achievedthrough democratic means

retreating as many countries move toward freemarket economies

state-owned enterprises have been privatized


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What Is Individualism?

Individualism refers to philosophy that anindividual should have freedom in his owneconomic and political pursuitscan be traced to Greek philosopher, Aristotle (384-

322 BC)

individual diversity and private ownership aredesirable

individual economic and political freedoms are the

ground rules on which a society should be based implies democratic political systems and free market

economies


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What Is Democracy?

Democracy - a political system in which

government is by the people, exercised either

directly or through elected representatives

usually associated with individualismpure democracy is based on the belief that citizens

should be directly involved in decision making

most modern democratic states practice

representative democracy where citizens periodicallyelect individuals to represent them


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What Is Totalitarianism?

Totalitarianism - form of government in

which one person or political party

exercises absolute control over all

spheres of human life and prohibitsopposing political parties


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What Is Totalitarianism?

Four major forms of totalitarianism exist today1. Communist totalitarianism – found in states where

the communist party monopolizes power

2. Theocratic totalitarianism - found in states where

political power is monopolized by a party, group, orindividual that governs according to religiousprinciples

3. Tribal totalitarianism - found in states where apolitical party that represents the interests of aparticular tribe monopolizes power

4. Right-wing totalitarianism - permits some individualeconomic freedom, but restricts individual politicalfreedom

Wh t I Th Li k B t P liti l


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What Is The Link Between Political

Ideology and Economic Systems?

Political ideology and economic systems

are connected

countries that stress individual goals are

likely to have market based economies

in countries where state-ownership is

common, collective goals are dominant


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What Is An Economic System?

There are three types of economic

systems

1. Market economies - all productive

activities are privately owned and

production is determined by the

interaction of supply and demand

government encourages free and faircompetition between private producers


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2. Command economies - government plans thegoods and services that a country produces,the quantity that is produced, and the prices aswhich they are sold

all businesses are state-owned, andgovernments allocate resources for “thegood of society”

because there is little incentive to controlcosts and be efficient, command economiestend to stagnate


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3. Mixed economies - certain sectors of the

economy are left to private ownership

and free market mechanisms while other

sectors have significant state ownershipand government planning

governments tend to own firms that are

considered important to national security


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What Are The


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What Are The

Different Legal Systems? There are three types of legal systems1. Common law - based on tradition, precedent,

and custom

2. Civic law - based on detailed set of laws

organized into codes3. Theocratic law - law is based on religious

teachings

How Are Contracts Enforced


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How Are Contracts Enforced

In Different Legal Systems?Contract - document that specifies the conditions

under which an exchange is to occur and details

the rights and obligations of the parties involved

Contract law is the body of law that governscontract enforcement

under a common law system, contracts tend to be

very detailed with all contingencies spelled out

under a civil law system, contracts tend to be muchshorter and less specific because many issues are

already covered in the civil code

Which Country’s Laws Should


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Which Country s Laws Should

Apply In A Contract Dispute?

The United Nations Convention on Contracts for

the International Sale of Goods (CIGS)

establishes a uniform set of rules governing certain

aspects of the making and performance of everyday

commercial contracts between buyers and sellers

who have their places of business in different nations

Ratified by the U.S. and about 70 countries

but, many larger trading nations including Japan andthe U.K. have not agreed to the provisions of CIGS

and opt for arbitration instead

How Are Property Rights


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And Corruption Related?

Property rights - the legal rights over the

use to which a resource is put and over

the use made of any income that may be

derived from that resource



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Property rights can be violated through

1. Private action – theft, piracy, blackmail

2. Public action - legally - ex. excessive

taxation or illegally - ex. bribes orblackmailing

high levels of corruption reduce foreign direct

investment, the level of international trade, and

the economic growth rate in a country



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The Foreign Corrupt Practices Act makes itillegal for U.S. companies to bribe foreigngovernment officials to obtain or maintainbusiness over which that foreign official has

authority facilitating or expediting payments to secure or

expedite routine government action are permitted

Which Countries Are


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Which Countries Are

Most Corrupt?Rankings of Corruption by Country 2010

How Can Intellectual


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Property Be Protected? Intellectual property - property that is the product of

intellectual activity

Can be protected using

1. Patents – exclusive rights for a defined period to the

manufacture, use, or sale of that invention2. Copyrights – the exclusive legal rights of authors,

composers, playwrights, artists, and publishers topublish and disperse their work as they see fit

3. Trademarks – design and names by which merchantsor manufacturers designate and differentiate theirproducts



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Property Be Protected?

Protection of intellectual property rights differsfrom country to countryWorld Intellectual Property Organization

Paris Convention for the Protection of Industrial

Property

To avoid piracy, firms canstay away from countries where intellectual property

laws are lax

file lawsuits lobby governments for international property rights

agreements and enforcement

What Is Product Safety


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What Is Product Safety

And Liability?

Product safety laws set certain standards to

which a product must adhere

Product liability involves holding a firm and its

officers responsible when a product causesinjury, death, or damage

liability laws tend to be less extensive in less

developed nations


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How Can Managers Determine A


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How Can Managers Determine A

Market’s Overall Attractiveness?

The overall attractiveness of a country as a

potential market and/or investment site for an

international business depends on balancing the

benefits, costs, and risks associated with doingbusiness in that country

Other things being equal, more attractive countries

have democratic political institutions, market based

economies, and strong legal systems that protectproperty rights and limit corruption


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International Business

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Chapter 4

Differences

in Culture

How Do Cultural Differences


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How Do Cultural Differences

Affect International Business?

Understanding and adapting to the local culturalis important international companies cross-cultural literacy - an understanding of how

cultural differences across and within nations can

affect the way in which business is practicedcross-cultural literacy is important for business

success

A relationship may exist between culture and the

costs of doing business in a country or regionMNEs can be agents of cultural changeMcDonald’s


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What Is Culture?

Culture - a system of values and norms that are

shared among a group of people and that when

taken together constitute a design for living

wherevalues are abstract ideas about what a group believes

to be good, right, and desirable

norms are the social rules and guidelines that

prescribe appropriate behavior in particular situationsSociety - a group of people who share a

common set of values and norms


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What Are Values And Norms?

Values provide the context within which a

society’s norms are established and

justified and form the bedrock of a culture

Norms include

folkways - the routine conventions of

everyday life

mores - norms that are seen as central to thefunctioning of a society and to its social life

How Are Culture Society


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How Are Culture, Society,

And The Nation-State Related?The relationship between a society and a

nation state is not strictly one-to-one

Nation-states are political creations

can contain one or more cultures

A culture can embrace several nations


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What Determines Culture?

Determinants of Culture


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What Is A Social Structure?

Social structure - a society’s basic social

organization

Consider

the degree to which the basic unit of social

organization is the individual, as opposed to

the group

the degree to which a society is stratified intoclasses or castes

How Are Individuals


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How Are IndividualsAnd Groups Different?

A group is an association of two or morepeople who have a shared sense ofidentity and who interact with each other in

structured ways on the basis of a commonset of expectations about each other’sbehavior

individuals are involved in families, work

groups, social groups, recreational groups,etc.

Societies place different values on groups

How Are Individuals


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And Groups Different?

In Western societies, there is a focus on theindividual individual achievement is common

dynamism of the U.S. economy

high level of entrepreneurship

But, creates a lack of company loyalty andfailure to gain company specific knowledgecompetition between individuals in a company instead

of than team building

less ability to develop a strong network of contactswithin a firm


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What Is Social Stratification?

All societies are stratified on a

hierarchical basis into social categories,

or social strata

individuals are born into a particular stratum

Must consider

1. mobility between strata

2. the significance placed on social strata inbusiness contexts


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What Is Social Stratification?

2. The significance attached to social strata

in business contacts class consciousness - a condition where people

tend to perceive themselves in terms of theirclass background, and this shapes their

relationships with others

an antagonistic relationship between

management and labor raises the cost ofproduction in countries with significant class

differences


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How Do Religious And


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gEthical Systems Differ?

World Religions

How Do Religious And


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gEthical Systems Differ?

Ethical systems - a set of moral

principles, or values, that are used to

guide and shape behavior

Religion and ethics are often closelyintertwined

ex. Christian or Islamic ethics


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What Is Christianity?

Christianity

the world’s largest religion

found throughout Europe, the Americas, and

other countries settled by Europeansthe Protestant work ethic (Max Weber, 1804)

hard work, wealth creation, and frugality is the

driving force of capitalism


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h d


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What Is Hinduism?

Hinduismpracticed primarily on the Indian sub-continent

focuses on the importance of achieving

spiritual growth and development, which mayrequire material and physical self-denial

Hindus are valued by their spiritual rather thanmaterial achievements

promotion and adding new responsibilitiesmay not be important, or may be infeasibledue to the employee's caste

h ddh


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What Is Buddhism?

Buddhism

has about 350 millions followers

stresses spiritual growth and the afterlife,

rather than achievement while in this worlddoes not emphasize wealth creation

entrepreneurial behavior is not stressed

does not support the caste system, individualsdo have some mobility and can work with

individuals from different classes


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What Is The Role


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Of Language In Culture?

Language - the spoken and unspoken (nonverbal communication such as facial

expressions, personal space, and hand

gestures ) means of communicationcountries with more than one language often

have more than one culture

Canada, Belgium, Spain


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What Is The Role


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Of Education In Culture?

Formal education is the medium through whichindividuals learn many of the language,conceptual, and mathematical skills that areindispensable in a modern society

important in determining a nation’s competitiveadvantage

Japan’s postwar success can be linked to itsexcellent education system

general education levels can be a good index for thekinds of products that might sell in a country

ex. impact of literacy rates

How Does Culture


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Impact The Workplace?

Management processes and practicesmust be adapted to culturally-determinedwork-related values

Geert Hofstede studied culture usingdata collected from 1967 to 1973 for100,000 employees of IBM Hofstede identified four dimensions that

summarized different cultures

How Does Culture


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Hofstede’s dimensions of culture: 1. Power distance - how a society deals with the

fact that people are unequal in physical andintellectual capabilities

2. Uncertainty avoidance - the relationshipbetween the individual and his fellows

3. Individualism versus collectivism - the extent towhich different cultures socialize theirmembers into accepting ambiguous situationsand tolerating ambiguity

4. Masculinity versus femininity -the relationshipbetween gender and work roles

How Does Culture


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Impact The Workplace?Work-Related Values for 20 Countries

How Does Culture


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Hofstede later expanded added a fifthdimension called Confucian dynamism orlong-term orientation

captures attitudes toward time, persistence,ordering by status, protection of face, respectfor tradition, and reciprocation of gifts andfavorsJapan, Hong Kong, and Thailand scored high on

this dimension

the U.S. and Canada scored low

W H f t d Ri ht?


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Was Hofstede Right?

Hofstede’s work has been criticized for severalreasons

made the assumption there is a one-to-one

relationship between culture and the nation-state

study may have been culturally bound

used IBM as sole source of information

culture is not static – it evolves

But, it is a starting point for understanding howcultures differ, and the implications of those

differences for managers

D C lt Ch ?


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Does Culture Change?

Culture evolves over timechanges in value systems can be slow and

painful for a society

Social turmoil - an inevitable outcome ofcultural change

as countries become economically stronger,cultural change is particularly common

economic progress encourages a shift fromcollectivism to individualism

globalization also brings cultural change

What Do Cultural Differences


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Mean For Managers?

1. It is important to develop cross-cultural literacy companies that are ill informed about the practices

of another culture are unlikely to succeed in thatculture

To avoid being ill-informed consider hiring local citizens

transfer executives to foreign locations on a regularbasis

Managers must also guard againstethnocentrism a belief in the superiority of one's own culture

What Do Cultural Differences


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Mean For Managers?

2. There is a connection between cultureand national competitive advantage

suggests which countries are likely to

produce the most viable competitors has implications for the choice of countries

in which to locate production facilities and do

business


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Chapter 5

Ethics in


What Is Ethics?


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What Is Ethics?

Ethics - accepted principles of right or wrong thatgovern

the conduct of a person

the members of a profession

the actions of an organization

Business ethics - accepted principles of right or

wrong governing the conduct of business people

Ethical strategy - a strategy, or course of action,that does not violate these accepted principles

Which Ethical Issues Are Most


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Relevant To International Firms?

The most common ethical issues inbusiness involve

1. employment practices

2. human rights

3. environmental regulations

4. corruption

5. the moral obligation of multinationalcompanies

How Are Ethics Relevant


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To Employment Practices?

Suppose work conditions in a host nationare clearly inferior to those in the

multinational’s home nation

Which standards should apply?home country standards

host country standards

something in between

How Are Ethics Relevantl


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To Employment Practices?

Firms shouldestablish minimal acceptable standards that

safeguard the basic rights and dignity of

employeesaudit foreign subsidiaries and subcontractors

regularly to ensure they are meeting the

standards

take corrective action as necessary

How Are Ethics Relevanth


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To Human Rights?

Basic human rights are taken for grantedin developed countries

freedom of association

freedom of speech

freedom of assembly

freedom of movement

Question: What are the responsibilities offirms in countries where basic humanrights are not respected?

How Are Ethics RelevantT H R h ?


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To Human Rights?

Question: Is it ethical for companies to dobusiness with countries with repressive

regimes?

Myanmar

Nigeria

Question: Does multinational investment actually

help bring change to these countries and

ultimately improve the rights of citizens?China

How Are Ethics RelevantT E i l R l i ?


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To Environmental Regulations?

Some parts of the environment are a public good that noone owns, but anyone can despoil

What happens when environmental regulations in hostnations are far inferior to those in the home nation?

Is it permissible for multinationals to pollute indeveloping countries simply because there are noregulations against it?

legal versus ethical behavior

The tragedy of the commons occurs when a resource

held in common by all, but owned by no one, is overusedby individuals, resulting in its degradation

How Are Ethics Relevant T C i ?


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To Corruption?

The U.S. Foreign Corrupt Practices Act outlawedthe practice of paying bribes to foreigngovernment officials in order to gain business

amended to allow for facilitating payments

The Convention on Combating Bribery ofForeign Public Officials in International BusinessTransactions was adopted by the Organizationfor Economic Cooperation and Development(OECD)

obliges member states to make the bribery offoreign public officials a criminal offense

How Are Ethics Relevant T C i ?


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To Corruption?

But, is it permissible for multinationals topay government officials facilitating

payments if doing so creates local income

and jobs?is it ok to do a little evil in order to do a greater

good?

does grease money actually improveefficiency and help growth?

How Are Ethics RelevantT M l Obli i ?


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To Moral Obligations?

Social responsibility refers to the idea thatmanagers should consider the social

consequences of economic actions when

making business decisionsthere should be a presumption in favor of

decisions that have both good economic and

good social consequences

it is the right way for a business to behave

How Are Ethics RelevantT M l Obli i ?


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To Moral Obligations?

Advocates argue that businesses need torecognize their noblesse oblige -

honorable and benevolent behavior that is

the responsibility of successful companiesgive something back to the societies that have

made their success possible

But, are multinationals morally required touse their power to enhance local welfare?

What Are Ethical Dilemmas?


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What Are Ethical Dilemmas?

Ethical dilemmas - situations in which none ofthe available alternatives seems ethically

acceptable

real-world decisions are complex, difficult to frame,

and involve consequences that are difficult to quantify

the ethical obligations of an MNE toward employment

conditions, human rights, corruption, environmental

pollution, and the use of power are not always clear

cut

the right course of action is not always clear

Why Do ManagersB h U thi ll ?


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Behave Unethically?

Several factors contribute to unethical behaviorincluding

1. Personal ethics - the generally acceptedprinciples of right and wrong governing the

conduct of individuals expatriates may face pressure to violate their

personal ethics because they are away from theirordinary social context and supporting culture

managers fail to question whether a decision oraction is ethical, and instead rely on economicanalysis when making decisions



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Behave Unethically?

2. Decision-making processes - the values andnorms that are shared among employees of anorganization

organization culture that does not

emphasize business culture encouragesunethical behavior

3. Organizational culture - organizational culturecan legitimize unethical behavior or reinforcethe need for ethical behavior

4. Unrealistic performance expectations -encourage managers to cut corners or act inan unethical manner



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Behave Unethically?

5. Leadership - helps establish the culture of anorganization, and set the examples that othersfollow when leaders act unethically, subordinates may act

unethically, too6. Societal culture – firms headquartered in

cultures where individualism and uncertaintyavoidance are strong are more likely to stress

ethical behavior than firms headquartered incultures where masculinity and power distancerank high


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What Are The PhilosophicalA h T Ethi ?


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Approaches To Ethics?

There are several different approaches tobusiness ethics

Straw men approaches deny the value of

business ethics or apply the concept in anunsatisfactory way

Others approaches are favored by moral

philosophers and are the basis for currentmodels of ethical behavior


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What Are The Straw MenApproaches To Business Ethics?


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Approaches To Business Ethics?

3. Righteous moralist - a multinational’s homecountry standards of ethics should be followed

in foreign countries

4. Naïve immoralist - if a manager of a

multinational sees that firms from other nations

are not following ethical norms in a host nation,

that manager should not either

All approaches offer inappropriate guidelinesfor ethical decision making

What Are Utilitarian AndKantian Approaches To Ethics?


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Kantian Approaches To Ethics?

Utilitarian ethics - (David Hume, JeremyBentham, John Stuart Mills) - the moral worth of

actions or practices is determined by their

consequences

actions are desirable if they lead to the best possible

balance of good consequences over bad

consequences

but, it is difficult to measure the benefits, costs, and

risks of an action

the approach fails to consider justice


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How Can ManagersMake Ethical Decisions?


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Make Ethical Decisions?

1. Hire and promote people with a wellgrounded sense of personal ethics

refrain from promoting individuals who haveacted unethically

try to hire only people with strong ethics

prospective employees should find out asmuch as they can about the ethical climate in

an organization prior to taking a position



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2. Build an organizational culture that places ahigh value on ethical behavior

articulate values that place a strongemphasis on ethical behavior

emphasize the importance of a code ofethics - formal statement of the ethicalpriorities a business adheres to

implement a system of incentives andrewards that recognize people who engagein ethical behavior and sanction those whodo not



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3. Make sure that leaders within thebusiness articulate the rhetoric of ethical

behavior and act in a manner that is

consistent with that rhetoric give life and meaning to words

make sure that leaders emphasize the

importance of ethics verbally and through

their actions


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Step 2: Determine whether a proposed decisionwould violate the fundamental rights of any

stakeholders

Step 3: Establish moral intent - place moral

concerns ahead of other concerns in

cases where either the fundamental rights

of stakeholders or key moral principles

have been violated

How Can Managers

M k E hi l D i i ?


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Step 4: Engage in ethical behavior

Step 5: Audit decisions and review them to

make sure that they are consistent

with ethical principlesthis step is often overlooked even

though it is critical to finding out

whether a decision process is working

What Is An Ethics Officer?


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What Is An Ethics Officer?

Many firms now have ethics officers toensure

all employees are trained in ethics

ethics is considered in the decision-makingprocess

the company’s code of conduct is followed

How Can Managers

M k E hi l D i i ?


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Make Ethical Decisions?5. Develop moral courage enables managers to walk away from a decision

that is profitable, but unethical

gives an employee the strength to say no to a

superior who instructs her to pursue actions that areunethical

gives employees the integrity to go public to themedia and blow the whistle on persistent unethicalbehavior in a company

How Can Managers

M k E hi l D i i ?


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In the end, there are clearly things that aninternational business should do, and

there are things that an international

business should not doBut, it is important to remember that not all

ethical dilemmas have a clean and

obvious solutionin these situations, firms must rely on the

decision making ability of its managers


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9e




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Chapter 6

International

Trade Theory

Why Is Free Trade Beneficial?


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y

Free trade - a situation where agovernment does not attempt to influencethrough quotas or duties what its citizenscan buy from another country or what they

can produce and sell to another countryTrade theory shows why it is beneficial for

a country to engage in international tradeeven for products it is able to produce for

itself

Why Is Free Trade Beneficial?


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y

International trade allows a countryto specialize in the manufacture and export of

products and services that it can produceefficiently

import products and services that can beproduced more efficiently in other countries

limits on imports may be beneficial toproducers, but not beneficial for consumers

Why Do CertainPatterns Of Trade Exist?


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Patterns Of Trade Exist?

Some patterns of trade are fairly easy toexplain

it is obvious why Saudi Arabia exports oil,Ghana exports cocoa, and Brazil exports

coffee

But, why does Switzerland exportchemicals, pharmaceuticals, watches, and

jewelry?Why does Japan export automobiles,

consumer electronics, and machine tools?

What Role DoesGovernment Have In Trade?


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Government Have In Trade?

The mercantilist philosophy makes a crude casefor government involvement in promoting

exports and limiting imports

Smith, Ricardo, and Heckscher-Ohlin promote

unrestricted free trade

New trade theory and Porter’s theory of national

competitive advantage justify limited and

selective government intervention to support thedevelopment of certain export-oriented

industries

What Is Mercantilism?


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Mercantilism (mid-16th century) suggeststhat it is in a country’s best interest tomaintain a trade surplus -to export morethan it imports

advocates government intervention to achievea surplus in the balance of trade

Mercantilism views trade as a zero-sum

game - one in which a gain by one countryresults in a loss by another

What Is Smith’s TheoryOf Absolute Advantage?


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Of Absolute Advantage?

Adam Smith (1776) argued that a countryhas an absolute advantage in the

production of a product when it is more

efficient than any other country inproducing it

countries should specialize in the production

of goods for which they have an absolute

advantage and then trade these goods for

goods produced by other countries


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How Does The TheoryOf Absolute Advantage Work?


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Of Absolute Advantage Work?

In South Korea it takes 40 units ofresources to produce one ton of cocoa

and 10 resources to produce one ton of

riceSouth Korea could produce 5 tons of cocoa

and no rice, 20 tons of rice and no cocoa, or

some combination in between



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Without tradeGhana would produce 10 tons of cocoa and 5

tons of rice

South Korea would produce 10 tons of rice

and 2.5 tons of cocoaWith specialization and tradeGhana would produce 20 tons of cocoa

South Korea would produce 20 tons of rice

Ghana could trade 6 tons of cocoa to SouthKorea for 6 tons of rice



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After tradeGhana would have 14 tons of cocoa left, and

6 tons of rice

South Korea would have 14 tons of rice left

and 6 tons of cocoaIf each country specializes in the

production of the good in which it has anabsolute advantage and trades for the

other, both countries gaintrade is a positive sum game



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Absolute Advantage and the Gains from Trade

What Is Ricardo’s TheoryOf Comparative Advantage?


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Of Comparative Advantage?

David Ricardo asked what happens when onecountry has an absolute advantage in theproduction of all goods

The theory of comparative advantage (1817) -

countries should specialize in the production ofthose goods they produce most efficiently andbuy goods that they produce less efficiently fromother countries

even if this means buying goods from othercountries that they could produce moreefficiently at home

How Does The Theory OfComparative Advantage Work?


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p g

Assume Ghana is more efficient in theproduction of both cocoa and rice

In Ghana, it takes 10 resources to produceone ton of cocoa, and 13 1/3 resources to

produce one ton of riceSo, Ghana could produce 20 tons of cocoa

and no rice, 15 tons of rice and no cocoa,or some combination of the two



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p g

In South Korea, it takes 40 resources toproduce one ton of cocoa and 20

resources to produce one ton of rice

So, South Korea could produce 5 tons ofcocoa and no rice, 10 tons of rice and no

cocoa, or some combination of the two



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p g

With tradeGhana could export 4 tons of cocoa to South

Korea in exchange for 4 tons of rice

Ghana will still have 11 tons of cocoa, and 4

additional tons of riceSouth Korea still has 6 tons of rice and 4 tons

of cocoa

if each country specializes in the production ofthe good in which it has a comparativeadvantage and trades for the other, bothcountries gain


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p gComparative Advantage and the Gains from Trade

Is Unrestricted Free TradeAlways Beneficial?


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ays e e c a

Unrestricted free trade is beneficial, but the gains maynot be as great as the simple model of comparativeadvantage would suggest immobile resources

diminishing returns

dynamic effects and economic growth the Samuelson critique

But, opening a country to trade could increase a country's stock of resources as increased supplies become

available from abroad

the efficiency of resource utilization and so free up resources forother uses

economic growth

Could A Rich Country BeWorse Off With Free Trade?


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Paul Samuelson - the dynamic gains from trademay not always be beneficial

free trade may ultimately result in lowerwages in the rich country

The ability to offshore services jobs that weretraditionally not internationally mobile may havethe effect of a mass inward migration into theUnited States, where wages would then fall

but, protectionist measures could create amore harmful situation than free trade

What Is TheHeckscher-Ohlin Theory?


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Eli Heckscher (1919) and Bertil Ohlin(1933) - comparative advantage arises

from differences in national factor

endowments the extent to which a country is endowed with

resources like land, labor, and capital

The more abundant a factor, the lower itscost

What Is TheHeckscher-Ohlin Theory?


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y

The pattern of trade is determined byfactor endowments

Heckscher and Ohlin predict that countries

willexport goods that make intensive use of

locally abundant factors

import goods that make intensive use of

factors that are locally scarce

Does The Heckscher-OhlinTheory Hold?


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y

Wassily Leontief (1953) theorized that since theU.S. was relatively abundant in capital comparedto other nations, the U.S. would be an exporterof capital intensive goods and an importer of

labor-intensive goods.However, he found that U.S. exports were

less capital intensive than U.S. imports

Since this result was at variance with the

predictions of trade theory, it became known asthe Leontief Paradox

What Is TheProduct Life Cycle Theory?


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y y

The product life-cycle theory - as productsmature both the location of sales and the

optimal production location will change

affecting the flow and direction of tradeproposed by Ray Vernon in the mid-1960s

At this time most of the world’s new products were

developed by U.S. firms and sold first in the U.S.



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y y

According to the product life-cycle theory the size and wealth of the U.S. market gave U.S.

firms a strong incentive to develop new products

initially, the product would be produced and sold in

the U.S.as demand grew in other developed countries, U.S.

firms would begin to export

demand for the new product would grow in other

advanced countries over time making it worthwhile forforeign producers to begin producing for their home

markets



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y y

U.S. firms might set up production facilitiesin advanced countries with growingdemand, limiting exports from the U.S.

As the market in the U.S. and other

advanced nations matured, the productwould become more standardized, andprice would be the main competitiveweapon



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y y

Producers based in advanced countries wherelabor costs were lower than the United Statesmight now be able to export to the United States

If cost pressures were intense, developingcountries would acquire a production advantage

over advanced countriesProduction became concentrated in lower-cost

foreign locations, and the U.S. became animporter of the product



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The Product Life Cycle Theory

Does The Product LifeCycle Theory Hold?


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y y

The product life cycle theory accurately explainswhat has happened for products likephotocopiers and a number of other hightechnology products developed in the United

States in the 1960s and 1970smature industries leave the U.S. for low cost

assembly locations

Does The Product LifeCycle Theory Hold?


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y y

But, the globalization and integration of theworld economy has made this theory lessvalid today

the theory is ethnocentric

production today is dispersed globally

products today are introduced in multiplemarkets simultaneously

What Is New Trade Theory?


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New trade theory suggests that the ability offirms to gain economies of scale (unit costreductions associated with a large scale ofoutput) can have important implications forinternational trade

Countries may specialize in the production andexport of particular products because in certainindustries, the world market can only support alimited number of firms

new trade theory emerged in the 1980s Paul Krugman won the Nobel prize for his

work in 2008



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1. Through its impact on economies of scale, tradecan increase the variety of goods available toconsumers and decrease the average cost ofthose goods without trade, nations might not be able to produce

those products where economies of scale areimportant

with trade, markets are large enough to support theproduction necessary to achieve economies of scale

so, trade is mutually beneficial because it allows for

the specialization of production, the realization ofscale economies, and the production of a greatervariety of products at lower prices



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2. In those industries when output required toattain economies of scale represents asignificant proportion of total world demand,the global market may only be able to supporta small number of enterprises

first mover advantages - the economic andstrategic advantages that accrue to earlyentrants into an industry

economies of scale

first movers can gain a scale based costadvantage that later entrants find difficult tomatch

What Are The Implications OfNew Trade Theory For Nations?


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Nations may benefit from trade even when theydo not differ in resource endowments or

technology

a country may dominate in the export of a good

simply because it was lucky enough to have one ormore firms among the first to produce that good

Governments should consider strategic trade

policies that nurture and protect firms and

industries where first mover advantages andeconomies of scale are important

What Is Porter’s Diamond OfCompetitive Advantage?


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Michael Porter (1990) tried to explain why anation achieves international success in aparticular industry

identified four attributes that promote orimpede the creation of competitive

advantage1. Factor endowments - a nation’s position in

factors of production necessary to compete ina given industry

can lead to competitive advantage can be either basic (natural resources, climate,

location) or advanced (skilled labor, infrastructure,technological know-how)



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2. Demand conditions - the nature of homedemand for the industry’s product or service influences the development of capabilities

sophisticated and demanding customers pressurefirms to be competitive

3. Relating and supporting industries - thepresence or absence of supplier industries andrelated industries that are internationallycompetitive

can spill over and contribute to other industries successful industries tend to be grouped in clustersin countries



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4. Firm strategy, structure, and rivalry - theconditions governing how companies arecreated, organized, and managed, and thenature of domestic rivalry

different management ideologies affect thedevelopment of national competitive advantage

vigorous domestic rivalry creates pressures toinnovate, to improve quality, to reduce costs, and toinvest in upgrading advanced features



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Determinants of National Competitive Advantage: Porter’s Diamond

Does Porter’s Theory Hold?


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Government policy canaffect demand through product standards influence rivalry through regulation and antitrust laws

impact the availability of highly educated workers andadvanced transportation infrastructure.

The four attributes, government policy, andchance work as a reinforcing system,complementing each other and in combinationcreating the conditions appropriate for

competitive advantageSo far, Porter’s theory has not been sufficientlytested to know how well it holds up


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What Is TheBalance Of Payments?


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A country’s balance of payments accounts keep track of the payments to and receiptsfrom other countries for a particular time period

double entry bookkeeping

sum of the current account balance, thecapital account and the financial accountshould be zero



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There are three main accounts

1. The current account records transactions of goods,services, and income, receipts and payments

current account deficit - a country imports morethan it exports

current account surplus – a country exports morethan it imports

2. The capital account records one time changes in thestock of assets

3. The financial account records transactions that involve

the purchase or sale of assets net change in U.S. assets owned abroad

foreign owned assets in the U.S.



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United States Balance of Payments Accounts, 2010

Is A CurrentAccount Deficit Bad?


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Question: Does current account deficit in theUnited States matter?

A current account deficit implies a net debtor

so, a persistent deficit could limit futureeconomic growth

But, even though capital is flowing out of theU.S. as payments to foreigners, much of it flowsback in as investments in assets

Yet, suppose foreigners stop buying U.S. assets

and sell their dollars for another currencya dollar crisis could occur


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Chapter 8

Foreign Direct

Investment

What Is FDI?


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Foreign direct investment (FDI) occurswhen a firm invests directly in newfacilities to produce and/or market in aforeign country

the firm becomes a multinational enterpriseFDI can be in the form of greenfield investments - the establishment of

a wholly new operation in a foreign country

acquisitions or mergers with existing firms inthe foreign country

What Is FDI?


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The flow of FDI - the amount of FDIundertaken over a given time period

Outflows of FDI are the flows of FDI out of acountry

Inflows of FDI are the flows of FDI into acountry

The stock of FDI - the total accumulatedvalue of foreign-owned assets at a giventime

What Are The Patterns Of FDI?


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Both the flow and stock of FDI haveincreased over the last 30 years

Most FDI is still targeted towards developednations

United States, Japan, and the EU

but, other destinations are emerging

South, East, and South East Asiaespecially China

Latin America



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FDI Outflows 1982-2010 ($ billions)



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FDI Inflows by Region 1995-2010 ($ billion)



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The growth of FDI is a result of1. a fear of protectionism want to circumvent trade barriers

2. political and economic changes deregulation, privatization, fewer restrictions on

FDI3. new bilateral investment treaties designed to facilitate investment

4. the globalization of the world economy

many companies now view the world as theirmarket need to be closer to their customers



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8-9

Gross fixed capital formation - the totalamount of capital invested in factories,stores, office buildings, and the like

the greater the capital investment in aneconomy, the more favorable its futureprospects are likely to be

So, FDI is an important source of capital

investment and a determinant of the futuregrowth rate of an economy


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What Is The Source Of FDI?


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Since World War II, the U.S. has been thelargest source country for FDI

the United Kingdom, the Netherlands, France,Germany, and Japan are other importantsource countries

together, these countries account for 60% ofall FDI outflows from 1998-2010


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Why Do Firms Choose Acquisition

Versus Greenfield Investments?


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Most cross-border investment is in theform of mergers and acquisitions ratherthan greenfield investments

between 40-80% of all FDI inflows per annumfrom 1998 to 2009 were in the form ofmergers and acquisitions

but in developing countries two-thirds of

FDI is greenfield investmentfewer target companies


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Why Choose FDI?


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Question: Why does FDI occur instead ofexporting or licensing?

1. Exporting - producing goods at homeand then shipping them to the receivingcountry for sale exports can be limited by transportation

costs and trade barriers

FDI may be a response to actual orthreatened trade barriers such as importtariffs or quotas

Why Choose FDI?


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2. Licensing - granting a foreign entity the right toproduce and sell the firm’s product in return fora royalty fee on every unit that the foreignentity sells

Internalization theory (aka market imperfections

theory) - compared to FDI licensing is less attractive firm could give away valuable technological know-

how to a potential foreign competitor does not give a firm the control over manufacturing,

marketing, and strategy in the foreign country

the firm’s competitive advantage may be based onits management, marketing, and manufacturingcapabilities

What Is The Pattern Of FDI?


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Question: Why do firms in the same industryundertake FDI at about the same time and thesame locations?

Knickerbocker - FDI flows are a reflection of

strategic rivalry between firms in the globalmarketplacemultipoint competition -when two or more enterprises

encounter each other in different regional markets,national markets, or industries

Vernon - firms undertake FDI at particular stagesin the life cycle of a product

What Is The Pattern Of FDI?


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Question: But, why is it profitable for firms toundertake FDI rather than continuing to exportfrom home base, or licensing a foreign firm?

Dunning’s eclectic paradigm - it is important toconsider

location-specific advantages - that arise from usingresource endowments or assets that are tied to aparticular location and that a firm finds valuable tocombine with its own unique assets

externalities - knowledge spillovers that occur when

companies in the same industry locate in the samearea

What Are The TheoreticalApproaches To FDI?


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The radical view - the MNE is an instrument ofimperialist domination and a tool for exploitinghost countries to the exclusive benefit of theircapitalist-imperialist home countries in retreat almost everywhere

The free market view - international productionshould be distributed among countries accordingto the theory of comparative advantage

embraced by advanced and developing nationsincluding the United States and Britain, but no countryhas adopted it in its purest form

What Are The TheoreticalApproaches To FDI?


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Pragmatic nationalism - FDI has both benefits(inflows of capital, technology, skills and jobs)and costs (repatriation of profits to the homecountry and a negative balance of paymentseffect)

FDI should be allowed only if the benefits outweighthe costs

Recently, there has been a strong shift towardthe free market stance creatinga surge in FDI worldwidean increase in the volume of FDI in countries with

newly liberalized regimes

How Does FDI BenefitThe Host Country?


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There are four main benefits of inwardFDI for a host country

1. Resource transfer effects - FDI brings

capital, technology, and managementresources

2. Employment effects - FDI can bring jobs

How Does FDI BenefitThe Host Country?


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3. Balance of payments effects - FDI can help acountry to achieve a current account surplus

4. Effects on competition and economic growth -greenfield investments increase the level of

competition in a market, driving down pricesand improving the welfare of consumers

can lead to increased productivity growth, productand process innovation, and greater economic

growth

What Are The Costs OfFDI To The Host Country?


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Inward FDI has three main costs:1. Adverse effects of FDI on competition

within the host nation

subsidiaries of foreign MNEs may havegreater economic power than indigenouscompetitors because they may be part of alarger international organization

What Are The Costs OfFDI To The Host Country?


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2. Adverse effects on the balance of payments when a foreign subsidiary imports a substantial

number of its inputs from abroad, there is a debit onthe current account of the host country’s balance of

payments3. Perceived loss of national sovereignty and

autonomy

decisions that affect the host country will be made

by a foreign parent that has no real commitment tothe host country, and over which the host country’s

government has no real control


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What Are The Costs OfFDI To The Home Country?


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1. The home country’s balance of paymentscan suffer

from the initial capital outflow required tofinance the FDI

if the purpose of the FDI is to serve the homemarket from a low cost labor location

if the FDI is a substitute for direct exports

What Are The Costs OfFDI To The Home Country?


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2. Employment may also be negatively affected ifthe FDI is a substitute for domestic production

But, international trade theory suggests thathome country concerns about the negative

economic effects of offshore production (FDIundertaken to serve the home market) may notbe valid may stimulate economic growth and employment in

the home country by freeing resources to specializein activities where the home country has acomparative advantage

How Does GovernmentInfluence FDI?


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Governments can encourage outward FDIgovernment-backed insurance programs to

cover major types of foreign investment risk

Governments can restrict outward FDIlimit capital outflows, manipulate tax rules, or

outright prohibit FDI


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How Do InternationalInstitutions Influence FDI?


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Until the 1990s, there was no consistentinvolvement by multinational institutions inthe governing of FDI

Today, the World Trade Organization ischanging this by trying to establish auniversal set of rules designed to promotethe liberalization of FDI

What Does FDIMean For Managers?


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Managers need to consider what tradetheory implies about FDI, and the linkbetween government policy and FDI

The direction of FDI can be explainedthrough the location-specific advantagesargument associated with John Dunning

however, it does not explain why FDI ispreferable to exporting or licensing, mustconsider internalization theory


A Decision Framework


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A Decision Framework



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A host government’s attitude toward FDI isimportant in decisions about where tolocate foreign production facilities andwhere to make a foreign direct investment

firms have the most bargaining power whenthe host government values what the firm hasto offer, when the firm has multiple

comparable alternatives, and when the firmhas a long time to complete negotiations


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9e




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Chapter 9

Regional Economic

Integration

What Is RegionalEconomic Integration?


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Regional economic integration - agreementsbetween countries in a geographic region toreduce tariff and non-tariff barriers to the freeflow of goods, services, and factors of

production between each otherQuestion: Do regional trade agreements

promote free trade?

In theory, yes, but the world may be moving toward a

situation in which a number of regional trade blockscompete against each other

What Are The Levels OfRegional Economic Integration?


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1. A free trade area eliminates all barriers tothe trade of goods and services amongmember countries

European Free Trade Association (EFTA) -Norway, Iceland, Liechtenstein, andSwitzerland

North American Free Trade Agreement

(NAFTA) - U.S., Canada, and Mexico


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4 An economic union has the free flow of


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4. An economic union has the free flow ofproducts and factors of production betweenmembers, a common external trade policy, acommon currency, a harmonized tax rate, anda common monetary and fiscal policy

European Union (EU)5. A political union involves a central political

apparatus that coordinates the economic,social, and foreign policy of member states the EU is headed toward at least partial political

union, and the U.S. is an example of even closerpolitical union


Levels of Economic Integration


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Levels of Economic Integration

Why Should CountriesIntegrate Their Economies?


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All countries gain from free trade and investment regional economic integration is an attempt to exploit

the gains from free trade and investment

Linking countries together, making them more

dependent on each othercreates incentives for political cooperation and

reduces the likelihood of violent conflict

gives countries greater political clout when dealing

with other nations

What Limits EffortsAt Integration?

Economic integration can be difficult because


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Economic integration can be difficult becausewhile a nation as a whole may benefit from a regional

free trade agreement, certain groups may lose it implies a loss of national sovereignty

Regional economic integration is only beneficial

if the amount of trade it creates exceeds theamount it diverts trade creation occurs when low cost producers within

the free trade area replace high cost domesticproducers

trade diversion occurs when higher cost supplierswithin the free trade area replace lower cost externalsuppliers


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8/19/2019 International Busine

International Business Collier Evans

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