IB exam 1

Multinational firm (MNE/MNC)

A firm that operates productive activities in more than one country.

Foreign direct investment (FDI)

Purchase of assets in a foreign country that gives control over the use of those assets.

Foreign subsidiary

Host-country extension of a firm’s operations to conduct business activities.

Globalization

Shift toward an integrated & interdependent world economy; includes globalization of markets and production.

Drivers of Globalization

1. Declining trade & investment barriers 2. Technological innovations: Communication (Internet, WWW, microprocessors), Transportation (jets, containerization)

Firm Impacts of Globalization

Firms can view the world as their market, base production in optimal locations, and benefit from lower costs of transport, trade, info-processing, communication.

Supporters of globalization

Believe it leads to lower prices, economic growth, higher incomes, and more jobs.

Critics of globalization

Worry about job losses, environment degradation, poor labor policies, cultural imperialism, sovereignty loss, and inequality.

Implications for managers

Managers must adapt to differences across countries and face a more complex range of problems (government limits, currency conversion).

Interdependent

system of political, economic, and legal factors; shaped by and shapes societal culture.

Collectivism

A political system stressing the primacy of collective (group) goals over individual goals.

Socialism

Form of collectivism; advocates nationalization for the common good. Includes: 1. Communists (violent revolution, totalitarian dictatorship). 2. Social democrats (democratic means—e.g., UK, France, Germany).

Individualism

Welfare of society best served by letting people pursue their own economic self interest

Market economy

Private ownership; production determined by supply & demand (price system); competition drives efficiency, innovation, entrepreneurship.

Command economy

government plans goods and services, quantity and price, then allocates them for "good of society"

Mixed economy

Blend of market and command elements.

Common law

Legal system based on tradition, precedent, and custom (e.g., Britain, U.S.).

Civil law

Legal system based on detailed set of laws organized into codes (e.g., Germany, Russia, Japan).

Theocratic law

Legal system based on religion (e.g., Saudi Arabia, Iran).

Country attractiveness

Business decisions weigh costs, benefits, and risks of operating in a given country.

Culture

Shared values and norms that form a design for living.

Values

Beliefs about what is good/right in society.

Norms

Social rules and guidelines prescribing appropriate behavior.

Society

A group of people who share common values and norms.

Social stratification

The extent to which society is divided into classes or castes. Includes: Caste system (fixed, rigid, family-based; e.g., India), Class system (open, mobility based on achievement or luck).

Social mobility

Extent to which individuals can move out of the strata into which they are born.

Class consciousness

Awareness of class differences (e.g., UK: management vs. labor; China: urban dwellers vs. rural peasants).

Business impact of stratification

Affects competition and operations; difficult to build advantage in stratified societies.

Christianity

World’s largest religion. Protestant ethic (hard work, wealth creation, frugality) linked to capitalism (Max Weber).

Buddhism

Mostly Asia. Stresses afterlife/spiritual growth rather than wealth; does not support caste; allows mobility.

Language (spoken & unspoken)

Impacts business through communication styles, cues, and context.

Education

Formal education transmits values, skills, and norms, providing national competitive advantage (e.g., Japan, India).

Cross-cultural literacy

Understanding cultural differences and their business impact; needed to avoid ethnocentrism.

Culture & competitive advantage

Culture connects to national competitive advantage and ethics in decision making.

Ethical issues in IB

Concerns employment practices, human rights, environmental regulations, corruption, and moral obligations.

Ethical dilemma

Situations where there is no universal agreement on ethical principles.

Roots of unethical behavior

Factors include personal ethics, decision-making process, organizational culture, unrealistic performance goals, leadership, and societal culture.

Human rights issues

Example: Apartheid in South Africa (segregation, corporate divestments, sanctions, Sullivan principles).

Tragedy of the commons

When a resource held in common is overused by individuals, leading to degradation.

Global tragedy of the commons

Firms moving production to lax-regulation countries → harm to global commons.

Corruption

Widespread issue. U.S. Foreign Corrupt Practices Act (FCPA) allows “facilitating payments.” OECD Anti-Bribery Convention combats bribery.

Friedman Doctrine

Company’s only responsibility is to increase profits within the law.

Cultural relativism

“When in Rome, do as the Romans” → ethics follow local culture.

Righteous moralist

Apply home-country standards of ethics abroad.

Naïve immoralist

“If others are breaking rules, so can we.”

Better approaches to ethics

Utilitarianism, Kantian ethics, rights theories, justice theories.

Managerial tools for ethics

Hire/promote ethical people, build ethical culture, decision-making with ethics, ethical officers, encourage moral courage (whistleblowing), CSR policies, pursue sustainability.

Mercantilism (16th c.)

National strength = trade surplus. Government intervention to export > import. Trade viewed as a zero-sum game.

Absolute advantage (Adam Smith)

Countries should specialize in goods they produce most efficiently; trade benefits all.

Comparative advantage (David Ricardo)

Countries should specialize in goods they produce relatively more efficiently, even if they have absolute advantage in others.

Heckscher-Ohlin theory

Trade reflects factor endowments. Countries export goods using abundant factors, import goods using scarce factors.

Leontief paradox

U.S. imports were more capital-intensive than its exports, rasied questions about Heckscher-Ohlin.

Product Life-Cycle Theory (Vernon)

Innovation often starts in U.S. (wealth, size, labor cost pressures). As products mature, production shifts abroad to low-cost locations.

New Trade Theory (Krugman)

Economies of scale → more variety, lower cost. First-mover advantages give lasting benefits.

Porter’s Diamond (National Competitive Advantage)

1. Factor conditions (skilled labor, infrastructure). 2. Demand conditions (sophisticated home demand). 3. Related/supporting industries (clusters, spillovers). 4. Firm strategy, structure, rivalry (vigorous domestic rivalry breeds global competitiveness).

Containerization

Shipping innovation using standardized containers; lowers costs and increases efficiency in global trade.

Nationalization

Transfer of private assets to government ownership for the common good.

Privatization

Transfer of state-owned enterprises to private ownership; increases efficiency and competition.

Ethnocentrism

Belief that one’s own culture is superior; can harm international business if firms don’t adapt

Sullivan Principles / GM Case

Code for U.S. firms in South Africa during apartheid; reject apartheid laws, promote workplace equality.

Ethical Dilemma

Situation with no universal agreement on what is ethical; common in global business.

Moral Courage (Whistleblowing)

Strength to resist unethical pressure, say no, or report misconduct.

CSR Policies

Corporate Social Responsibility; firms giving back to society through ethical and sustainable practices.

Factor Endowment

A country’s resource base (land, labor, capital) that shapes trade patterns.