International Business Test 2

Study Guide for Test 2

Definition of Ethics

accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization

Roots of Unethical Behavior

Societal Culture, Personal Ethics, Organizational Culture, Unrealistic performance goals, leadership, decision- making processes

Personal Ethics (Root of Unethical Behavior)

• Business ethics reflect personal ethics

• Expatriates may face pressure to violate their personal ethics

Decision-making processes (Roots of unethical behavior)

• Fail to task the relevant questions

• Decisions made based on economic logic

Organizational culture that (roots of unethical behavior)

• Does not emphasize business ethics

Unrealistic performance goals (roots of unethical behavior)

• Pressure from parent company to meet goals that are unrealistic and can only be attained by acting in a unethical manner

Leadership (roots of unethical behavior)

• Employees often take cues from business leaders

Societal culture (roots of unethical behavior)

• Ethical policies differ by country

Corporate social Responsibility

Decisions that have both good economic and good social consequences

Ethical dilemmas

situations in which none of the available alternatives seems ethically acceptable

Four philosophies of ethics and social responsibility

• Friedman View

• Cultural Relativism

• Righteous Moralism

• Utilitarianism

Friedman’s View

• A company’s sole responsibility is to maximize profits for its

owners (or shareholders) while operating within the law.

• Companies do NOT have “social” obligations

The cultural relativist view

• A company should adopt local ethics wherever it operates

because right and wrong are determined within a cultural

context.

• “When in Rome, do as the Romans do” captures the essence of this view

Righteous Moralist View

• A company should maintain its home-country ethics wherever

it operates because its ethics are superior.

• If headquarters instructs a subsidiary manager to refrain from

bribing local officials, it imposes its righteous moralist view on the local manager.

Utilitarian View

• A company should behave in a way that maximizes “good”

outcomes and minimizes “bad” outcomes wherever it operates.

• A utilitarian manager will take the action that produces the best

outcome for all affected parties.

Government impose restrictions on free trade for

political, economic, and cultural reasons

Political motives

Protect jobs

 Preserve national security

• Imports (e.g., agricultural sector)

• Exports (e.g., defense-related goods)

 Respond to “unfair” trade

 Gain influence

Economic Motives I

Protect infant industries - protect emerging industries during development from global competition

Potential results

+National income increases

-Wrong industries protected

-Firms grow complacent

-Consumer prices rise

-Public funds poorly spent

Economic Motives II

Pursue strategic trade policy - Help companies to achieve economies of scale and gain a first-mover advantage

Potential Results

+Global Industry Created

-Firms efficiency reduced

-Domestic costs increase

-Special interests benefit

Cultural Motives

• Nations block imports deemed harmful

• Usual suspects are U.S media and consumer goods

• Result of increased globalization

• Protect national identity

Trade promotion methods

• Subsidies

• Export financing

• Foreign trade zones

• Special government agencies

Trade restriction methods

• Tariffs - government tax levied as a product enters or leaves a nation

• Quotas - Restriction on amount of a good that can enter or leave a country during a period of time.

• Embargoes - Complete ban on trade in one or more products in a country.

• Local content requirements - laws stipulating that producers in the domestic market must supply a specified amount of goods.

• Administrative delays - Regulatory controls to slow imports into a country. It hurts consumers by denying access to possibly foreign products

Word Trade organization main goals

• Help free trade

• Negotiate opening of markets

• Settle trade disputes

Tariffs

government tax levied as a product enters or leaves a nation

Quotas

Restriction on amount of a good that can enter or leave a country during a period of time.

Embargoes

Complete ban on trade in one or more products in a country.

Local content requirements

laws stipulating that producers in the domestic market must supply a specified amount of goods.

Administrative delays

Regulatory controls to slow imports into a country. It hurts consumers by denying access to possibly foreign products

Export Financing

Financing such as low-interest loans and loan guarantees

Two agencies help obtain export financing:

• Export-Import Bank of the United States

• The Overseas Private Insurance Corporation (OPIC)

  • Insured against losses due to expropriation, currency inconvertibility, war, revolution

Subsidy

financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or some other form intended to help domestic companies fend off international competitors

Brings increased competitiveness and it increasing consumer prices

Foreign Trade Zones (FTZ)

FTZ is a designated region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer custom procedures

• Purpose: increase employment and trade within the nation

• FTZ reduce customs duties that typically increase production costs and lengthen the time needed to get a product to market

• Companies often use FTZ for final product assembly

Foreign Direct Investment (FDI)

is the purchase of physical assets or a significant amount of ownership (stock) of a company in another country in order to gain some measure of management control

Internalization theory

Flaws in the efficient operation of an industry are market imperfections

Examples of market imperfection:

• Trade barriers (e.g., tariffs)

• Company’s unique competitive advantage (specialized knowledge, technical expertise, or special abilities embodied in employees)

Reasons for Home Intervention (Outward FDI)

-Remove national resources

-Eliminate export markets

-Eliminate domestic jobs

+Improve competitiveness

+Eliminate low-wage jobs

Reasons for Host Intervention I

Balance of payments

• Initial FDI boosts economy

• FDI may decrease imports

• FDI may generate exports

Reasons for Host intervention II

Obtain resources and benefits

• Access technology

• Access management skills

• Create employment

Balance of Payments

The balance-of-payments account records a country’s payments to and receipts from other countries

The current account records a country’s export and import of goods and services

• A surplus is usually favored over a deficit

  • FDI can help achieve a current account surplus

    • If it is a substitute for imports of goods and services

    • If the MNE uses a foreign subsidiary to export goods and services to other countries

A Decision Framework

Reasons for Merger and Acquisition

• Get a foothold in a new geographic market

• Increase a firm’s global competitiveness (Facebook and Instagram)

• Fill gaps in companies’ product lines in a global industry (Amazon and Whole Foods)

• Reduce costs in R&D, production, or distribution (Lenovo

and IBM division, Lenovo and Motorola)

Home Promotion Methods ( to promote FDI outflows)

• Insurance on assets abroad

• Loans and loan guarantees

• Special tax treaties

• Tax breaks on profits earned abroad

• Persuade other nations to accept FDI

Host Promotion methods (to promote FDI inflows)

Financial incentives

• Low or waived taxes

• Low-interest loans

Infrastructure benefits

• Better seaports, roads, and telecom networks

Host country benefits of FDI

Effect on Competition and Economic Growth

• FDI in the form of greenfield investment

• Increases the level of competition in a market

• Drives down prices

• Improves the welfare of consumers

Increased competition leads to

• Increased productivity growth

• Product and process innovation

• Greater economic growth

Host Restriction Methods (to restrict FDI inflows)

Ownership restrictions

• Prohibit investment in industries or businesses (e.g., tobacco and mining in Sweden, U.S. Airlines)

Performance demands

• Local content requirements

• Export targets

• Technology transfers

Home restriction method (to restrict FDI outflows)

• Higher taxes on foreign income

• Sanctions that prohibit investing (U.S. on Cuba and Iran)

Which of the following is most likely to be considered unethical?

a) Galaxy Inc. ceased its operations in some developing nations on account of Low employment standards in those countries

b) Unicorn Inc. sells its medicines at a lower price in less developed nations

c) Capricorn Inc. a multinational company operating in developing nations, pays its labor 30% more than what the local competitors pay

d) Centaur Inc. had to close down a production plant as the local management there had employed child labor

e) Orion Inc. sends its waste products for disposal to a developing nation because the pollution control laws in its home country are more strict than those in the developing nation

e) Orion Inc. sends its waste products for disposal to a developing nation because the pollution control laws in its home country are more strict than those in the developing nation

Davis is the manager of a pharmaceutical manufacturing facility in a developing country. The manufacturing unit does not meet the acceptable standards of the manufacturing facility in the home nation. He knows that demanding a better manufacturing unit will raise the cost of drugs mainly exported to other less developed countries, and hence its price. But he also realizes that by not demanding a better unit, the employees are prone to serious health issues. David is facing

a) a role conflict

b) the tragedy of the commons

c) a positivity offset

d) an ethical dilemma

e) a negativity effect

d) an ethical dilemma

Neon Synergy Inc. operates in three different countries, and is headed by a CEO who believes that the best approach to ethics is cultural relativism. In this context, which of the following statements is most likely to be true regarding Neon Synergy?

a) All business units of Neon Synergy will adopt a common standard of ethics irrespective of their location

b) Business decisions made by managers of Neon Synergy will be solely based on the goal of maximization of societal good

c) The business units of Neon Synergy will be empowered to adopt the standards of ethics followed in their respective host nations

d) Neon Synergy will extensively advocate the idea that universal notions of morality transcend different cultures

e)Neon Synergy will follow its home country standards of ethics at all its foreign locations

c) The business units of Neon Synergy will be empowered to adopt the standards of ethics followed in their respective host nations

Rice imports to a nation under a quota limit of 8,500 tons are charged a tariff of 1.5%. Imports of rice above the quota limit are charged a tariff of 60%. This is an example of a

a) export quota

b) voluntary export restraint

c) ad valorem tariff

d) tariff quota

d) tariff quota

Freeland is a semi-closed economy whose government believes in protecting national identity and building a self-sustained economy. The government’s priority is to protect local jobs and provide opportunities for Freeland’s emerging industries to flourish without the threat of external competition

Freeland’s protection of its national identity is an example of an _

a) political motive

b) economic motive

c) cultural motive

d) social motive

c) cultural motive

Which of the following statement is true of foreign trade zone?

a) It is an area through which merchandise is allowed to pass with fewer procedures but higher taxes

b) These areas provide very limited employment opportunities

c) Goods imported into these zones require import licenses and are subject to import duties

d) International companies can store goods in these zones without incurring taxes, before shipping them to other countries

d) International companies can store goods in these zones without incurring taxes, before shipping them to other countries

Caliland is a country characterized by beautiful beaches, vast natural resources, and a highly skilled labor force. Caliland is now encouraging foreign direct investment flows. The country has been exporting textiles, computer hardware and software programs. The net result of the trade is that Falkland exports far more goods and services and receives more income from abroad than it imports and pays abroad.

Caliland international trade situation illustrates that the country is experiencing a

a) current account deficit

b) capital account deficit

c) current account surplus

d) capital account surplus

c) current account surplus

Sphericals Inc. approach to international markets is to grant a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold. Sphericals Inc. approach is called

a) outsourcing

b) licensing

c) franchising

d) exporting

e) diversifying

b) licensing

Ohio manufacturing prefers FDI over licensing to retain control over know-how, manufacturing, and marketing. Ohio manufacturing’s stance constitutes the

a) comparative advantage theory

b) distribution theory

c) new trade approach

d) market imperfections approach

e) licensing theory

d) market imperfections approach