INBU 3301 F 2024 Midterm Review PDF

Midterm Review INBU 3301 F 2024 Dr. Abdulrahman Chikhouni Here are some important details about the midterm: 1.Duration: The exam will take 80 minutes, which is the regular class time. 2.Question Format: You will encounter 50 multiple choice questions, each worth 1 mark. 3.Materials Needed:...

Midterm Review INBU 3301 F 2024 Dr. Abdulrahman Chikhouni Here are some important details about the midterm: 1.Duration: The exam will take 80 minutes, which is the regular class time. 2.Question Format: You will encounter 50 multiple choice questions, each worth 1 mark. 3.Materials Needed: This is a paper-based exam, so please remember to bring a pencil and an eraser. 4.Study Resources: To prepare, focus on the slides provided in this document. If you wish to delve deeper, consult the corresponding pages in the textbook, as indicated on the next slide. 5.Excluded Questions: Please note that questions involving specific numbers, such as statistics or rankings (e.g., "What is the growth in world FDI in 2022?" or "Which country has the highest corruption rate?"), will not be included. 6.Pacing: Remember to pace yourself during the exam. Take the time you need to consider and answer each question; there's no need to rush. What to study from the book Explanations of slides are in the Book Chapter 1 1-18 Chapter 2 32-57 Chapter 3 66 - 75 & 80 - 86 Chapter 4 95 – 115 Chapter 5 122 - 142 Chapter 6 150-170 Globalization of Markets The merging of separate national markets into one huge global marketplace Low-cost transportation Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces  Globalization of production Refers to the sourcing of goods and services from locations around the world to take advantage of national differences, costs, and quality of factors of production. Companies can lower their overall cost structure improve the quality or functionality of their product offering Chapter 1: Globalization The emergence of global institutions General Agreement on Tariffs and Trade (GATT) signed in 1947, to reduce tariffs and other trade barriers and to eliminate preferences, on a reciprocal and mutually advantageous basis, succeeded by WTO in 1994 World Trade Organization A formal structure for continued negotiations to reduce trade barriers and a mechanism for settling trade disputes Polices the world trading system Ensures nation-states adhere to the rules Facilitates multinational agreements among members (164 nations account for 98% of world trade) International Monterey Fund established 1944 and headquartered in Washington DC. IMF maintains order in the international monetary system. lender of last resort for countries in crisis: Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece Chapter 1: Globalization The emergence of global institutions The World Bank Established 1944 and the headquarter is in Washington DC. Promotes economic development Focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments The UN Sustainable Development Goals G20 since 2008, it has been the forum through which major nations attempted to launch a coordinated policy responses to the global financial crises Includes the Finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank Represents 90 percent of global GDP and 80 percent of international global trade Why Do We Need Global Institutions? Global institutions: help manage, regulate, and police the global marketplace promote the establishment of multinational treaties to govern the global business system Chapter 1: Globalization Forces Driving Globalization 1) Declining trade and investment barriers Trade across country borders is 2.6 times higher than world production. Knowledge society has produced more informed consumers, driving demand. Removal of restrictions to FDI More trade agreements 2) The Role of Technological Change microprocessors and telecommunications Internet of things transportation technology Chapter 1: Globalization The Changing Demographics Of The Global Economy 1. The changing world output and world trade picture A bigger share of world output is produced by emerging countries 2. The changing foreign direct investment picture In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows. Today, the United States accounts for less than one-fifth of worldwide FDI flows 3. The changing nature of the MNEs Multinational enterprise (MNE) - any business that has productive activities in two or more countries. Since the 1960sthe number of non-U.S. multinationals has risen and the number of mini-multinationals has risen 4. The changing world order Former communist countries present export and investment opportunities Signs of growing unrest and totalitarianism China has become an industrial superpower Latin America debt and inflation are down, more private investors, expanding economies Chapter 1: Globalization Again For st the cultural lower prices for imperialism of goods and global media and services MNEs is globalizatio job losses greater economic growth n good or higher consumer bad? environmental degradation income, and more jobs  Chapter 2 National Differences in Political, Economic, and Legal Systems 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  What Is A Political System? Political system - the system of government in a nation, and assessed according to Collectivism Individualism A political system that stresses the An individual should have primacy of collective goals over freedom in his own economic and individual goals. political pursuits Totalitarian Democratic Form of government in which one person or A political system in which political party exercises absolute control government is by the people, over all spheres of human life and prohibits exercised either directly or opposing political parties through elected representatives  Plato (427-347 BC) - Aristotle (384 – 322 BC) – Private Individual rights should be property is more highly productive sacrificed for the good of than communal property and will society. thus stimulate progress Karl Marx Leon Trotsky Adam Smith John Stuart Mill What Is Collectivism? Collectivism is usually equated with socialists (Karl Marx 1818- 1883) – advocate state ownership of the basic means of production, distribution, and exchange – manage to benefit society as a whole, rather than individual capitalists  In the early 20th century, socialism Communism split into Social Socialism Democrats is achieved through democratic means  retreating as many countries move toward Socialism can only be free market economies achieved through violent revolution and totalitarian dictatorship What Is Individualism? Individualism is built on two central tenets – individual economic and political freedoms are the ground rules on which a society should be based – The welfare of society is best served by letting people pursue their own economic self-interest, as oppose to some collective body dictating what is in society’s best interest What Is Democracy? Democracy pure democracy is based on the belief that citizens should be directly involved in decision making – most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them Democracy demands: 1. Freedom of expression 2. Free media 3. Regular elections 4. Limited terms for representatives 5. Fair court system 6. Non political – police and army What Is Totalitarianism? A form of government in which one person or political party has absolute control over all human life and opposing political parties are prohibited Four major forms of totalitarianism exist today Theocratic totalitarianism found in states where political power is monopolized by a party, group, or individual that governs according to religious principles Secular totalitarianism (military and bureaucratic leadership) Communiste totalitarianism Tribal totalitarianism Kikuyu Tribe in Kenya Right-wing totalitarianism  What Is An Economic System? Laos India Alberta Centrally Planned Mixed Market Government plans the goods and all productive activities services that a country produces, are privately owned and Certain sectors of the the quantity that is produced, and production is determined economy are left to private the prices as which they are sold by the interaction of ownership and free market all businesses are state-owned, supply and demand. mechanisms while other and governments allocate Government encourages sectors have significant resources for “the good of free and fair competition state ownership and society” between private government planning. because there is little incentive producers governments tend to own to control costs and be efficient, firms that are considered command economies tend to Within-countries political orientation Differences in political ideologies within a country can significantly impact business operations and the overall market environment. While the political system of a country sets the broad framework, the policies and regulations enacted by left-leaning or right-leaning governments can lead to substantial variations in business conditions. Left-Leaning Political systems Right-Leaning Political Economic Policy: Advocate for income systems equality, progressive taxation, and Economic Policy: Emphasize free- significant government spending on social market capitalism, and lower taxes. They programs and infrastructure. They support advocate for deregulation and stronger regulations on businesses to privatization to stimulate business protect workers, consumers, and the growth and innovation. environment. Social Policy: Tend to support Social Policy: Promote progressive traditional values and norms, often values, including gender equality, and emphasizing law and order, national reproductive rights. They often push for security, and individual responsibility. comprehensive healthcare and education They may oppose progressive social systems accessible to all. changes such as same-sex marriage and Government Role: Support a more active abortion rights. government role in addressing social Government Role: Favor a smaller inequalities and providing public services. What Is A Legal System? Legal system - the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained – the system in a country is influenced by the prevailing political system Legal systems are important for business because they – define how business transactions are executed – identify the rights and obligations of parties involved in business transactions What Are The Different Legal Systems? Common based on tradition, precedent, and custom Law More flexible than other systems based on detailed set of laws Civic Law organized into codes Less adversarial Theocrati law is based on religious teachings c Law Legal Systems around the world Common Law Civil Law Theocratic Law UK France Iran USA Spain Saudi Arabia Canada (except Quebec Sudan Quebec) All Latin America Vatican City Australia Germany New Zealand Japan Jamaica China Ghana All Scandinavian Pakistan countries India Singapore Bangladesh 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 governs contract 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 much shorter and less specific because many issues are already covered in the civil code 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 – Applies automatically to all contracts for the sale of goods between different firms based in countries that have ratified the convention, unless the parties opt out – As of Dec 2017, it has been ratified by 89 states but, many larger trading nations including the U.K., India and South Africa have not agreed to the provisions of CIGS and opt for arbitration instead How Are Property Rights 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 – Resources include land, buildings, equipment, capital, mineral rights, businesses, and intellectual property (such as patents, copyrights and trademarks). Property rights can be violated through 1. Private action Private Action is an action by private individuals or groups against property holders including actions such as: Theft, Piracy, Blackmail, and Any criminal activity against property rights 2. Public action legally - ex. excessive taxation, requiring expensive licenses or permits from property holders, taking assets into state ownership without compensating the owners, redistributing assets without compensating the prior owners illegally - ex. bribes or blackmailing High levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country How Are Property Rights And Corruption Related? The Foreign Corrupt Practices Act  Illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority  Requires all publicly traded companies to keep detailed records that would reveal whether a violation of the act has occurred On 1997, The Organization for Economic Co-operation and Development (OECD) adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – Allows for facilitating or expediting payments In Canada, Bill S-21 was passed and The Corruption of Foreign Public Officials Act received the Royal Assent on Dec 10th, 1998 To understand the level of corruption in countries, multinational companies can rely on the Corruption Perception Index (CPI). CPI, developed by Transparency International, gives an idea of the perceived levels of corruption within countries. How Can Intellectual 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 invention 2. Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit 3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products How Can Intellectual Property Be Protected? Protection of intellectual property rights differs from country to country – World Intellectual Property Organization – Paris Convention for the Protection of Industrial Property To avoid piracy, firms can – stay away from countries where intellectual property laws are lax – file lawsuits – lobby governments for international property rights agreements and enforcement 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 causes injury, death, or damage – liability laws tend to be less extensive in less developed nations Why understanding the level of economic development How political, economic, and legal systems influence the level of economic development of a nation How attractive is a place for doing business  WHAT DETERMINES A COUNTRY’S LEVEL OF ECONOMIC DEVELOPMENT? Purchasing Human Development Index (HDI) Gross national Power Parity life expectancy at birth income (GNI): per (PPP): to account educational attainment person measures the for the differences Growth rate of whether average total annual income in the cost of GDP incomes are sufficient received by residents living we can to meet the basic of a nation adjust GNI by needs of life in a purchasing power country GNI can be misleading because it does not consider differences in the cost of living Static, and do not consider economic growth rates Development is not just an economic process WHAT DETERMINES A COUNTRY’S LEVEL OF ECONOMIC DEVELOPMENT? – Nobel-prize winner Amartya Sen argues Economic development should be assessed by the capabilities and opportunities people enjoy Development requires the removal of major impediments to freedom: poverty, tyranny, poor economic opportunities – Amartya Sen also claims that economic progress requires the democratization of political communities to give citizens a voice DIFFERENCES IN ECONOMIC DEVELOPMENT The “official” figures can be misleading Do not account for black economy transactions GNI and PPP data are static and do not consider economic growth rates China and India are currently relatively poor, but their economies are growing more rapidly than many advanced nations China may become the world’s largest economy during the next decade India will become among the largest economies in the world HOW DOES POLITICAL ECONOMY INFLUENCE ECONOMIC PROGRESS? Market economy Strong property rights More Incentives Innovation Economic Democracy Entrepreneur Growth ship Favorable geography Creating new markets and High investment in products More productive labor and education capital HOW IS THE POLITICAL ECONOMY CHANGING?  Since the late 1980s, two trends have emerged 1. Democratic revolution (late 1980s and early 1990s)  democratically elected governments replaced totalitarian regimes  more committed to free market capitalism 2. A move away from centrally planned and mixed economies  more countries have shifted toward the market-based model What Is The Nature Of Economic Transformation? The shift toward a market-based system involves deregulation – removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state property into the hands of private investors the creation of a legal system to safeguard property rights WHAT ARE THE IMPLICATIONS OF POLITICAL ECONOMY DIFFERENCES FOR MANAGERS? Countries with democratic regimes, market based economic policies, and strong property rights protection are more likely to have higher sustained rates of economic growth – these markets are more attractive to international businesses – the benefits, costs, and risks of doing business in a country are a function of the country’s political, economic, and legal systems PESTEL ANALYSIS FOR INTERNATIONAL EXPANSION We use the PESTEL analysis to evaluate how suitable a country is as a target for international expansions. A PESTEL analysis could identify the benefits, costs, and risks of global operations. Political Economic Social Government policy Economic growth Demographics including differences in Inflation and interest rates Consumer attitudes & political views between Fluctuation in exchange buying patterns home and host countries rate Socio-cultural changes Political stability Job growth and including cultural Corruption unemployment differences between home Foreign trade policy disposable income of and host countries including free trade consumers Lifestyle trends agreement (country- specific trade incentives) Tax policy including tax arrangements between home and host countries PESTEL ANALYSIS FOR INTERNATIONAL EXPANSION Technological Environmental Legal Technology incentives Sustainability measures Health and safety The level of innovation, and carbon footprint Product labeling automation, and (R&D) targets Antitrust laws activities Geographic distance Employment laws Technology infrastructure between home and host Consumer protection Cyber security countries (affects laws What is the level of traveling and shipping Copyright and patent interest and focus on costs) Are there environmental- laws technology (government General investment and businesses)? protection laws? What are the regulations incentives regarding waste disposal and energy consumption? Does the host country regularly experience significant climate events (can add cost to HOW CAN MANAGERS DETERMINE A MARKET’S OVERALL ATTRACTIVENESS? Country Attractivenes s  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 doing business in that country Other things being equal, the benefit-cost-risk trade- off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector debt MANAGERIAL IMPLICATIONS – The costs of doing business in a country based on Political system: is it necessary to pay bribes to get market access? Economic level: are the necessary supporting business and infrastructure in place? Legal system: how do local laws and regulations affect business decisions? Property right protection? Chapter 4: The Cultural Environmnet 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 where Values are abstract ideas about what a group believes to be good, right, and desirable. Values provide the context within which a society’s norms are established and justified and form the bedrock of a culture (e.g. freedom and loyalty) Norms are the social rules and guidelines that prescribe appropriate behavior in particular situations Society - a group of people who share a common set of values and norms.  A culture can spans many countries (e.g. Countries of the Gulf Cooperation Council)  Some countries have many subcultures (e.g. Switzerland) Managers must guard against ethnocentrism (a belief in the superiority of one's own culture)  Chapter 4: Differences in Culture Examples of Folkways Punctuality, waiting in line  Chapter 4: Differences in Culture Determinants of Culture Chapter 4: Differences in Culture 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 into classes or castes Chapter 4: Differences in Culture How Are Individuals And Groups Different? Chapter 4: Differences in Culture 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 Social mobility - the extent to which individuals can move out of the strata into which they are born caste system - closed system of stratification in which social position is determined by the family into which a person is born (change is usually not possible during an individual's lifetime) class system - form of open social stratification (position a person has by birth can be changed through achievement or luck) 2. The significance attached to social strata in business contacts class consciousness - a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with Chapter 4: Differences in Culture Religion - a system of shared beliefs and rituals that are concerned with the realm of the sacred Main religions of the world 1. Christianity 2. Islam 3. Hinduism 4. Buddhism 5. Confucianism is also important in influencing behavior and culture in many parts of Asia Chapter 4: Differences in Culture The influence of Language on Culture Language - the spoken and unspoken means of communication (nonverbal communication such as facial expressions, personal space, and hand gestures ) Chinese is the mother tongue of the largest number of people, followed by: Spanish and English. English is the most widely spoken language in the world, followed by Spanish, Russian and Arabic English is also becoming the language of international business. However, knowledge of the local language is still beneficial, and in some cases, critical for business success Lingua franca is a third or “link” language that is understood by two parties who speak different languages. Interestingly, although only 5 percent of the world’s population speaks English as a first language, it is the most common lingua franca in international business. Chapter 4: Differences in Culture The influence of Language on Culture The language of a society allows it to communicate and also directs the attention of people towards certain features of the world and human interactions Language helps describe how different people see the world differently Countries with more than one language often have more than one culture (e.g. Canada, Belgium, Switzerland) failing to understand the nonverbal cues of another culture can lead to communication failure Chapter 4: Differences in Culture What Is The Role Of Education In Culture? Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society Values and norms of the society are taught in the education system directly and indirectly Direct influence: schools generally teach basic facts about the social and political nature of the society Indirect influence: e.g. obedience of the authority, being on time, Important in determining a nation’s competitive advantage  Japan’s postwar success can be linked to its excellent education system General education levels can be a good index for the kinds of products that might sell in a country Example: impact of literacy rates Chapter 4: Differences in Culture How Does Culture Impact The Workplace? Management processes and practices must be adapted to culturally determined work-related values Geert Hofstede studied culture using data collected from 1967 to 1973 for 100,000 employees of IBM Hofstede identified four dimensions that summarized different cultures Hofstede’s work has been criticized for several reasons 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 how cultures differ, and the implications of those differences for managers Chapter 4: Differences in Culture Does Culture Change? Culture evolves over time changes in value systems can be slow and painful for a society Social turmoil - an inevitable outcome of cultural change as countries become economically stronger, cultural change is particularly common Economic progress encourages a shift from collectivism to individualism Globalization also brings cultural change  CHAPTER 4 Ethics in International Business What Is Ethics? Ethics - accepted principles of right or wrong that govern 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 Where is it happening? The most corrupt industry sectors Extraction (mining, oil & gas, logging, etc.) Construction (building) Transportation (highways, bridges, railroads, airports, etc.) IT (Information and Telecommunications)  The range for business decisions Wheelen and Hunger (2004) 60  Ethical Issues Many of the ethical issues and dilemmas in international business are rooted in the fact that political systems, law, economic development, and culture vary significantly from culture to culture and nation to nation. What is considered normal practice in one culture may be considered unethical in others. Managers in a multinational firm need to be particularly sensitive to these differences and able to choose the ethical action. Ethics as affected by Different Environments Social- Technologic Political cultural al environmen environmen environmen t t t Competitiv Economic e environmen environmen t t 1. Ethics in the Changing Political Environment Why would students of international business be worried about perceptions of corrupt politicians in Canada? Canada is an exporting nation. Ourability to be competitive exporters depends on the perceptions of international customers Political scandals based on unethical dealings that are played out daily in the international news raise concerns of international business people dealing with Canada  How Are Ethics Relevant To Corruption? TheU.S. Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business  amended to allow for facilitating payments The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions was adopted by the Organization for Economic Cooperation and Development (OECD)  obliges member states to make the bribery of foreign public officials a criminal offense 2. Ethics in the Changing Socio-Cultural Environment What is considered normal practice in one culture maybe considered unethical in others (e.g. gift giving and child labor) Does grease money actually improve efficiency and help How Are Ethics Relevant To Human Rights? growth? Basic human rights are taken for granted in developed countries freedom of association freedom of speech freedom of assembly freedom of movement Question: Does multinational investment actually help bring change to these countries and ultimately improve the rights of citizens? China 3. Ethics in the Changing Technological Environment The effect of advances in communication technology and the competitiveness of global news media Developments and applications of sophisticated technology can create ethical nightmares (WikiLeaks) reaching far across the globe and touching many governments and organizations. Facilitated by the fact that millions of people are using handheld devices with web access to communicate Whistleblowing Collecting data for political influence 4. Ethics in the Changing Economic Environment Tax havens Tax inversion 5. Ethics in the Changing Competitive Environment The intense competitiveness of the international business environment puts pressure on companies to squeeze out every advantage they have and to cut costs in the most extreme way Employment Practice Employees’ data collection Outsourcing Firing local employees Environmental Pollution How Are Ethics Relevant To Employment Practices? Suppose work conditions in a host nation are clearly inferior to those in the multinational’s home nation Which standards should apply? home country standards host country standards something in between To guard against ethical abuses, firms should establish minimal acceptable standards that safeguard the basic rights and dignity of employees audit foreign subsidiaries and subcontractors regularly to ensure they are meeting the standards take corrective action as necessary How Are Ethics Relevant To Environmental Pollution? Some parts of the environment are a public good that no one owns, but anyone can despoil What happens when environmental regulations in host nations are far inferior to those in the home nation?  Is it permissible for multinationals to pollute in developing countries simply because there are no regulations against it? o legal versus ethical behavior The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation How Are Ethics Relevant To Moral Obligations? Social responsibility refers to the idea that managers should consider the social consequences of economic actions when making business decisions There 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  What Are Ethical Dilemmas? Ethical dilemmas - situations in which none of the 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) Determinants of Ethical Behavior Why Do Managers Behave Unethically? 1. Personal ethics - the generally accepted principles of right and wrong governing the conduct of individuals  expatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture  managers fail to question whether a decision or action is ethical, and instead rely on economic 2. Decision-making analysis when making processes decisions- the values and norms that are shared among employees of an organization  organization culture that does not emphasize business culture 3. Organization culturebehavior encourages unethical - organization culture can legitimize unethical behavior or reinforce the need for ethical behavior Why Do Managers Behave Unethically? 4. Unrealistic performance expectations - encourage managers to cut corners or act in an unethical manner 5. Leadership - helps establish the culture of an organization, and set the examples that others follow when leaders act unethically, subordinates may act unethically, too What Are The Philosophical Approaches To Ethics? Thereare several different approaches to business ethics Strawmen approaches deny the value of business ethics or apply the concept in an unsatisfactory way Otherapproaches are favored by moral philosophers and are the basis for current models of ethical behavior  Philosophies of Business Ethics Straw Men Approaches Friedman Utilitarian Doctrine Approach Maximize profits maximizing “good” outcomes Rule-based Cultural and minimizing Approach Relativist “harm” Upholding rights Adopt local Kantian are more ethics Righteous important than Approach Moralist people should be consequences home-country treated as ends ethics and never purely Naïve as means to the Immoralist ends of others Everyone else is doing it 4 - 77 The Straw Men Approaches To Business Ethics The straw man analogy comes from the straw that was put inside scarecrows—the point being that it is not a serious effort to really fake people into thinking it is real man—anybody can see it is just straw stuffed into some worn out clothes. Inarguments, this straw man phrase is used when people want to make a point, but it is a weak point and not likely to be convincing or stand up to scrutiny. Straw man approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a multinational enterprise There are four common straw men approaches 1. Friedman doctrine - the only social responsibility of business is to increase profits, so long as the company stays within the rules of law Friedman View There are four common straw men approaches 2. Cultural relativism - ethics are culturally determined and firms should adopt the ethics of the cultures in which they operate  “when in Rome, do as the Romans”  Grease payment is a form of acknowledgment for the differences in moral standards among countries 3. Righteous moralist - a multinational’s home country 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 What Are Utilitarian And Kantian Approaches To Ethics? Utilitarian ethics - (David Hume, Jeremy Bentham, John Stuart Mill) - 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 Kantian ethics - (Immanuel Kant) - people should be treated as ends and never purely as means to the ends of others people have dignity and need to be respected  people are not machines  Actions are good or bad in and of themselves Deontologic Human beings have certain al or Rule- fundamental rights based Upholding rights more important Models than consequences Hard to get consensus on which rules and values to base fundamental rights on  How Can Managers Make Ethical Decisions? 1. Hire and promote people with a well- grounded sense of personal ethics refrain from promoting individuals who have acted unethically try to hire only people with strong ethics prospective employees should find out as much as they can about the ethical climate in an organization prior to taking a position 2. Build an organizational culture that places a high value on ethical behavior articulate values that place a strong emphasis on ethical behavior emphasize the importance of a code of ethics - formal statement of the ethical priorities a business adheres to implement a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not  How Can Managers Make Ethical Decisions? 3. Put decision-making processes in place that require people to consider the ethical dimensions of business decisions  Ask whether  decisions fall within the accepted values of standards that typically apply in the organizational environment  decisions can be communicated to all stakeholders affected by it  if colleagues would approve of decisions 4. Institute ethics officers to ensure all employees are trained in ethics ethics is considered in the decision-making process the company’s code of conduct is followed Managerial Implications 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 are unethical gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company 6. Make corporate social responsibility a cornerstone enterprise policy Advocates argue that businesses need to recognize their noblesse oblige and give something back to the societies that have made their success possible. Power can be used in a positive way to increase social welfare,  r5 International Trade Theory The Expected Benefits of Free Trade Free Trade - a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country  Trade theory shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself  International trade allows a country  to specialize in the manufacture and export of products and services that it can produce efficiently  to import products and services that can be produced more efficiently in other countries Government Have In Trade?  The mercantilist philosophy makes a crude case for 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 the development of certain export-oriented industries What Is Mercantilism?  Mercantilism (mid-16th century) suggests that it is in a country’s best interest to maintain a trade surplus—to export more than it imports  Advocates government intervention to achieve a surplus in the balance of trade  Mercantilism views trade as a zero-sum game—one in which a gain by one country results in a loss by another  Of Absolute Advantage?  Adam Smith (1776) argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing 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  trade is a positive sum game  Absolute Advantage Ghana and South Korea have 200 units of resources that could either be used to produce rice or cocoa 10 units = 1 ton of cocoa 40 units = 1 ton of cocoa 20 units = 1 ton of rice 10 units = 1 ton of rice Cocoa Rice Cocoa = 20 tons Rice = 0 Cocoa = 0 ton Rice = 20 ton ton Cocoa = 5 ton Rice = 0 ton Cocoa = 0 ton Rice = 10 Total No Trade Cocoa tons = 10 tons Rice = 5 tons Cocoa = 2.5 tons Rice = 10 tons 12.5 Cocoa 15 Rice Produce 20 of cocoa Produce 20 of rice Trade 6 tons of cocoa for 6 Trade 6 tons of rice for 6 Total With Trade tons of rice tons of cocoa 20 Cocoa Consume 14 tons cocoa and Consume 14 tons of rice 20 Rice 6 tons rice and 6 tons cocoa Theory Of Comparative Advantage?  David Ricardo asked what happens when one country has an absolute advantage in the production of all goods  The theory of comparative advantage (1817)—countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries  even if this means buying goods from other countries that they could produce more efficiently at home  Comparative advantage theory provides a strong rationale for encouraging free trade  total output is higher  both countries benefit  Trade is a positive sum game  Comparative Advantage Ghana and South Korea have 200 units of resources that could either be used to produce rice or cocoa 10 units = 1 ton of cocoa 40 units = 1 ton of cocoa 13.5 units = 1 ton of rice 20 units = 1 ton of rice Cocoa Rice Cocoa = 20 tons Rice = 0 Cocoa = 0 ton Rice = 10 ton ton Cocoa = 5 ton Rice = 0 ton Cocoa = 0 ton Rice = 15 Total No Trade Cocoa tons = 10 tons Rice = 7.5 tons Cocoa = 2.5 tons Rice = 5 tons 12.5 Cocoa 12.5 Rice Produce 15 of cocoa and 3.75 rice Produce 10 of rice Trade 4 tons of cocoa for 4 tons of Trade 4 tons of rice for 4 tons Total With Trade rice of cocoa 15 Cocoa Consume 11 tons cocoa and 7.75 Consume 6 tons of rice and 4 13.75 Rice tons rice tons cocoa  Is Unrestricted Free Trade Always Beneficial? Unrestricted free trade is beneficial, but the gains may not be as great as the simple model of comparative advantage would suggest  Immobile resources: resources do not always move from one economic activity to another  Diminishing returns: more units of resources are required to produce each additional unit  Dynamic effects and economic growth: 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 for other uses  economic growth  The Samuelson critique: the dynamic gains from trade may not always be beneficial  Free trade may ultimately result in lower wages in the rich country  The ability to offshore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages would then fall   What Is The Heckscher-Ohlin Theory?  Eli Heckscher and Bertil Ohlin (Stockholm School of Economics) comparative advantage arises from differences in national factor endowments  The pattern of trade is determined by factor endowments (land, labor, and capital)  Heckscher and Ohlin predict that countries will  export goods that make intensive use of locally abundant factors  import goods that make intensive use of factors that are locally scarce  Does The Heckscher- Ohlin Theory Hold?  Wassily Leontief (1953) theorized that since the U.S. was relatively abundant in capital compared to other nations, the U.S. would be an exporter of 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 as the Leontief Paradox  What Is The Product Life-Cycle Theory?  The product life-cycle theory - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade  proposed by Raymond 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.  The product life-cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the United States in the 1960s and 1970s  Mature industries leave the U.S. for low cost assembly locations Does The Product Life Cycle Theory Hold? The globalization and integration of the world economy has made this theory less valid today the theory is ethnocentric production today is dispersed globally products today are introduced in multiple markets simultaneously  Product Life-Cycle New Product TheoryMaturing Product As demand grew in other Standardized The big U.S. market gave developed countries, U.S. product U.S. firms a strong firms would begin to Big markets in other incentive to develop new export advanced economies, and products Big markets in other price competition. the product would be advanced economies will Production in developing produced and sold in the give incentives to produce economies (lower costs) U.S. in these economies What Is New Trade Theory?  New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade  Countries may specialize in the production and export of particular products because in certain industries, the world market can only support a limited number of firms  new trade theory emerged in the 1980s  Paul Krugman won the Nobel prize for his work in 2008  What Is New Trade Theory? 1. Through its impact on economies of scale, 2. In those industries when output trade can increase the variety of goods required to attain economies of scale available to consumers and decrease the represents a significant proportion of average cost of those goods total world demand, the global market  without trade, nations might not be may only be able to support a small able to produce those products where number of enterprises economies of scale are important  first-mover advantages - the  with trade, markets are large enough economic and strategic advantages to support the production necessary to that accrue to early entrants into an achieve economies of scale industry  so, trade is mutually beneficial  economies of scale because it allows for the specialization  first movers can gain a scale based of production, the realization of scale cost advantage that later entrants economies, and the production of a find difficult to match greater variety of products at lower prices  Of New Trade Theory For Nations?  Nations may benefit from trade even when they do not differ in resource endowments or technology (at variance with Heckscher-Ohlin theory)  a country may dominate in the export of a good simply because it was lucky enough to have one or more 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 and economies of scale are important National Competitive Advantage Michael Porter (1990) identified four attributes that promote or impede the creation of competitive advantage (international success in particular industries) a nation’s position in factors of production necessary to compete in a given industry. can be either basic (natural resources, climate, Factor endowments location) or advanced (skilled labor, infrastructure, technological know-how) the nature of home demand for the industry’s product or service. influences the development of capabilities Demand conditions sophisticated and demanding customers pressure firms to be competitive Related and the presence or absence of supplier industries and related industries that are internationally competitive supporting industries successful industries tend to be grouped in clusters in countries the conditions governing how companies are created, organized, and Firm strategy, managed, and the nature of domestic rivalry. vigorous domestic structure, rivalry creates pressures to innovate, to improve quality, to reduce and rivalry costs, and to invest in upgrading advanced features Does Porter’s Theory Hold?  Government policy can  affect demand through product standards  influence rivalry through regulation and antitrust laws  impact the availability of highly educated workers and advanced transportation infrastructure.  The four attributes, government policy, and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage  So far, Porter’s theory has not been sufficiently tested to know how well it holds up  What Are The Implications Of Trade Theory For Managers? 1. Location implications - a firm should disperse its various productive activities to those countries where they can be performed most efficiently  firms that do not may be at a competitive disadvantage 2. First-mover implications - a first-mover advantage can help a firm dominate global trade in that product 3. Policy implications - firms should work to encourage governmental policies that support free trade  want policies that have a favorable impact on each component of the diamond Theory Developed by Why trade? Mercantilis To accumulate wealth (Gold) by encouraging export and m discouraging imports Absolute Adam Smith Countries can focus on producing products that they can produce advantage the best and export these products, and import products that they cannot produce efficiently Comparativ David Ricardo countries should specialize in the production of those goods they e advantage produce most efficiently and buy goods that they produce less efficiently from other countries Heckscher- Eli Heckscher Countries produce and export goods that require resources Ohlin Bertil Ohlin (factors) in abundance, and import goods that require resources in Theory short supply Product Life Raymond To take advantage of products in the middle and late stages of Cycle Vernon their life cycle New Trade Paul Krugman To take advantage of specialization, economies of scale, Theory government support, and first mover advantage National Michael Porter To benefit from the nation’s competitiveness in an industry competitive advantage  G OV E R N M E N T POLICY AND I N T E R N AT I O N A L TRADE Chapter 6 WHAT IS THE POLITICAL REALITY OF INTERNATIONAL TRADE? Free Trade refers to a situation where a government does not:  attempt to restrict what its citizens can buy from another country,  or what they can sell to another country. many nations are nominally committed to free trade, but intervene to protect the interests of politically important groups The Case for Government Intervention When governments intervene, they often do so by restricting imports of goods and services into their nation, while adopting policies that promote exports. Normally their motives are to protect domestic producers and jobs from foreign competition while increasing the foreign market for products of domestic producers.  HOW DO GOVERNMENTS INTERVENE IN MARKETS?  Governments use various methods to intervene in markets including 1. Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products  Specific tariffs - levied as a fixed charge for each unit of a good imported  Ad valorem tariffs - levied as a proportion of the value of the imported good – increase government revenues – force consumers to pay more for certain imports – are pro-producer and anti-consumer – reduce the overall efficiency of the world economy TARIFFS $3 Value X 15% Ad valorem tariffs are levied Specific tariffs are levied as as a proportion of the value of a fixed charge for each unit the imported good  HOW DO GOVERNMENTS INTERVENE IN MARKETS? 2. Subsidies - government payments to domestic producers – Subsidies help domestic producers  compete against low-cost foreign imports  gain export markets – They can be in the form of: Cash grants Low-interest loans Tax breaks Government equity participation in the company Alberta government announced a $500-million incentives program (royalty credits) for new petrochemical plants to serve plastic, fertilizer, HOW DO GOVERNMENTS INTERVENE IN MARKETS? 3. Import Quotas - restrict the quantity of some good that may be imported into a country – Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota – A quota rent - the extra profit that producers make when supply is artificially limited by an import quota Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government Import quotas and voluntary export restraints – benefit domestic producers – raise the prices of imported goods  HOW DO GOVERNMENTS INTERVENE IN MARKETS? 4. Local Content Requirements - demand that some specific fraction of a good be produced Under the USMCA, for a car domestically to remain duty-free, the – benefit domestic producers minimum content – consumers face higher prices requirement is 75% (was 62.5%) The requirement can be expressed either in physical terms, – (e.g., 75 percent of component parts for this product must be produced locally) or in value terms – (e.g., 75 percent of the value of this HOW DO GOVERNMENTS INTERVENE IN MARKETS? 5. Administrative Policies – Bureaucratic rules designed to make it difficult for imports to enter a country. Federal Express has had a tough time expanding its global express shipping services into Japan because Japanese customs inspectors insist on opening a large proportion of express packages to check for pornography, a process that can delay an “express” package for days. It also gives the Japanese competitor to Federal Express an advantage  HOW DO GOVERNMENTS INTERVENE IN MARKETS? 6. Antidumping Policies–also called countervailing duties–punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition  dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value  enables firms to unload excess production in foreign markets  may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices In Canada, companies can complain to the Canada Border Services Agency (CBSA) – The CBSA may investigate and, if appropriate, initiate a tax on the imported item WHY DO GOVERNMENTS INTERVENE IN MARKETS?  There are two main arguments for government intervention in the market Political Economic arguments arguments Concerned with Concerned with boosting protecting the interests the overall wealth of a of certain groups within nation - benefits both a nation (normally producers and producers), often at the consumers expense of other groups (normally consumers) WHAT ARE THE POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION? 1. Protecting jobs - the most common political reason for trade restrictions results from political pressures by unions or industries that are "threatened" by more efficient foreign producers and have more political clout than consumers 2. Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security such as aerospace or semiconductors 3. Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers – if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted – risky strategy WHAT ARE THE POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION? 5. Protecting consumers from “dangerous” products - limit “unsafe” products such as the N95 masks that the Canadian government rejected because they did not meet the specifications 6. Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with – trade policy can also be used to punish rogue states 6. Protecting the human rights of individuals in exporting countries - through trade policy actions WHAT ARE THE ECONOMIC ARGUMENTS FOR GOVERNMENT INTERVENTION? 1. The infant industry argument –  New manufacturing industries cannot initially compete with well- established industries in developed countries.  To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries with tariffs, import quotas, and subsidies until they have grown strong enough to meet international competition.  It is accepted as a justification for temporary trade restrictions under the WTO When is an industry “grown up”?  Critics argue that if a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds without additional support from the government WHAT ARE THE ECONOMIC ARGUMENTS FOR GOVERNMENT INTERVENTION? 2. Strategic trade policy  The government can help raise national income when a domestic firm gains first-mover advantages; therefore, governments should use subsidies to support promising firms active in newly emerging industries. Governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage  THE REVISED CASE FOR FREE TRADE Retaliation and Trade War Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries – countries that attempt to use such policies will probably provoke retaliation Krugman argues that since special interest groups can influence governments, strategic trade policy is almost certain to be captured by such groups who will distort it to their own ends Domestic Policies – Governments don’t always act in the national interest – Interest groups may influence policy – Krugman concludes that strategic trade policy is almost DEVELOPMENT OF THE WORLD TRADE SYSTEM From Smith to the Great Depression (1930s) Before the great depression, Great Britain was the world dominant trading power Until the great depression most countries had some degree of protectionism – Smoot-Hawley Act (1930): The act raised U.S. tariffs on over 20,000 imported goods to record level. After WWII – The purpose of the act was to reduce imports and support the job creation in USA USA emerged from the war economically dominant the U.S. and other nations realized the value of freer trade; therefore, they established the GATT agreement in 1947 The General Agreement on Tariffs and Trade (GATT) - a multilateral agreement to liberalize trade by eliminating tariffs Tariff reduction was spread over eight rounds with great success DEVELOPMENT OF THE WORLD TRADE SYSTEM In the 1980s and early 1990s protectionist trends emerged – Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries – persistent trade deficits by the U.S – use of non-tariff barriers increased The Uruguay Round of GATT negotiations began in 1986 focusing on Extend GATT rules to cover trade in services Develop rules on intellectual property Reduce agricultural subsidies Strengthen GATT’s monitoring and enforcement DEVELOPMENT OF THE WORLD TRADE SYSTEM The WTO deals with regulation of trade between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. The WTO encompassed GATT along with two sister organizations  The GATT  The General Agreement on Trade in Services (GATS) working to extend free trade agreements to services  The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) working to develop common international rules for intellectual property rights  2012 1995 2016 2001 2005 1995 1995 WTO membership (2015  WHAT IS THE FUTURE OF THE WORLD TRADE ORGANIZATION? The current agenda of the WTO focuses on – the rise of anti-dumping policies – the high level of protectionism in agriculture – the lack of strong protection for intellectual property rights in many nations – continued high tariffs on nonagricultural goods and services in many nations  WHAT IS THE FUTURE OF THE WORLD TRADE ORGANIZATION? The WTO launched a new round of talks at Doha, Qatar in 2001 that have already gone on for 12 years and are currently stalled. The agenda includes – cutting tariffs on industrial goods and services – phasing out subsidies to agricultural producers – reducing barriers to cross-border investment – limiting the use of anti-dumping laws – Market access for nonagricultural goods and services Most developed nations have average tariff rates of 3.8 percent of value Certain imports still have high tariffs, which limits market access and economic growth; Tariffs higher on services than industrial goods WTO goal is to reduce tariff rates to zero HOW HAS THE CURRENT WORLD TRADING SYSTEM EMERGED? Despite its shortcomings, the World Trade Organization (WTO) remains a crucial advocate and facilitator of future trade deals, especially in the services sector. The WTO, with its 164 members and 20 observer governments, has positively impacted global trade through its policing and enforcement mechanisms. However, after a strong start, the WTO has struggled since the late 1990s to secure agreements that further reduce trade barriers. The Doha Round, in particular, has seen minimal progress. The global financial crisis of 2008- 2009 led to a resurgence of limited protectionism, a trend further suggested by the Brexit vote and the election of Donald Trump. Current geopolitical tensions, including the wars in Ukraine and the Middle East, pose additional threats to global trade, highlighting the ongoing challenges the WTO faces in promoting free trade.  WHAT DO TRADE BARRIERS MEAN FOR MANAGERS?  Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm 1. Trade barriers constrain a firm’s ability to disperse its productive activities to most efficient location 2. Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country 3. To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise