International Business Exam 1 (Chapters 1-5)

What is globalization?

The shift toward a more integrated and interdependent global economy

Globalization of markets

The merging of historically separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment and increasingly global consumer tastes helped lead to the rise of this

Globalization of production

Sourcing goods and services from locations around the globe to take advantage of differences in the cost and quality of factors of production.

• factors of production include labor, energy, land and capital

Global institutions

• WTO-polices world trading system and facilitates multinational trade agreements

• IMF-maintains order in the international monetary system and often acts as a lender of last resort

• World Bank-focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments

• UN-promotes peace through international cooperation and collective security

• General Agreement on Tariffs and Trade (GATT)-designed to reduce barriers to the free flow of goods across borders

• G20-represents the world’s 19 largest economies plus representatives from the EU and European Central Bank

Drivers of globalization-declining trade and investment barriers

• In the 1920s and 1930s there were many barriers to international trade and FDI but GATT lowered the barriers.

• Because of this between 1960 and 2023, the value of the world economy and international trade increased tremendously

• Trade in goods and services and the value of foreign direct investment have all been growing faster than world output.

Drivers of globalization: role of technological change

• Communications-microprocessor is most important innovation since WWII

• The internet-allows buyers and sellers to connect globally and businesses to coordinate globally dispersed production

• Transportation technology-have all “shrunk” the globe

Implications for the globalization of

• Production: Locating production in geographically separate locations has become more economical

• Markets: Cultural distance has been reduced and has brought some convergence of consumer tastes and preferences

The Changing Foreign Direct Investment Picture

As barriers to the free flow of goods and services fell, non- U.S. firms increasingly invested across national borders.

• Desire to disperse production activities to optimal locations and to build a direct presence in major foreign markets.

• Outward stock of foreign direct investment (FDI): the total cumulative value of foreign investments by firms domiciled in nations outside of that nation’s borders.

The Changing Nature of the Multinational Enterprise.

Multinational enterprise (MNE) is any business that has productive activities in two or more countries.

• In 2003, 38.8 percent of the world’s 2,000 largest multinationals were U.S. firms.

• By 2023, the U.S. share had fallen to 31 percent, a drop of 611 firms

The Changing World Order

Former communist countries of Europe and Asia present export and investment opportunities.

• Signs of growing unrest and commitment to market-based economic systems cannot be assumed.

• Risks of doing business in these countries are high.

• China moving to industrial superpower.

• Latin America, debt and inflation are down, more private investors, and expanding economies.

Why is globalization not inevitable?

Countries can pull back from globalization because of economic, political, security, or supply-chain concerns and risks are high.

Critics of globalization argue

• Falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower —> destroys manufacturing jobs in wealthy advanced economies.

• Services also being outsourced which leads to higher unemployment and lower living standards in their home nations

Supporters of globalization argue that

• Benefits outweigh the costs.

• Free trade will result in countries specializing in the production of goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently.

• As a result, the whole economy is better off.

• Companies can reduce their cost structure, and consumers benefit.

What do critics argue about globalization and environmental/labor standards?

Companies may move production to countries with weaker regulations to reduce costs

What do supporters about globalization and environmental/labor standards argue?

Economic progress and free trade can lead to stronger labor and environmental standards

What do critics argue globalization does to national sovereignty?

It shifts some power away from national governments toward supranational organizations such as the WTO, EU, and UN.

What factors does the chapter identify as contributing to poverty?

• Totalitarian governments

• Poor economic policies

• Corruption

• Lack of property rights

• Rapid population growth

• Debt burdens

What do globalization supporters argue can help poor nations?

Lowering barriers to trade and investment and promoting free-market policies

What makes managing an international business different from managing a domestic business?

• Countries are different

• The range of problems is wider and more complex

• Managers must deal with government restrictions on trade and investment

• International transactions involve different currencies

Critics vs supporters of globalization

Critics emphasize job loss, inequality, environmental/labor concerns, and sovereignty.

Supporters emphasize specialization, lower costs, economic growth, and consumer benefits

Globalization three key words

1. Increasingly

2. Interdependent

3. Integrated

Drivers of globalization

• decline in barriers to free flow of goods, services and capital

• technological change

Global institutions and their years founded

• United Nations – 1945 (San Francisco)

• International Monetary Fund and World Bank – 1944 (Bretton Woods)

• General Agreement on Tariffs and Trade (GATT)

– First round: Geneva Round – 1947

– Last round: Uruguay Round – 1986-94 – led to creation of the WTO

Two dimensions political systems are assessed

• degree that they emphasize collectivism as opposed to individualism

• degree to which they are democratic or totalitarian

Collectivism and socialism

Collectivism:

• Emphasizes collective goals over individual goals.

Socialism:

• Public ownership of the means of production for the common good.

• Karl Marx: the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted.

Individualism

• An individual should have freedom in economic and political pursuits.

• The interests of the individual should take precedence over the interests of the state.

Two tenets of individualism:

• Guarantee of individual freedom and self-expression.

• Welfare of society is best served by letting people pursue their own economic self-interest.

Democracy

Government is by the people, exercised either directly or through elected representatives. Democracy and individualism go hand in hand.

Totalitarianism

One person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties.

Market economy

• All productive activities are privately owned.

• Production is determined by the interaction of supply and demand.

• To work, supply must not be restricted.

• Role of government is to encourage vigorous free and fair competition.

Command economy

• Government plans the goods and services, quantity and price, then allocates them for “the good of society.”

• All businesses are state-owned.

• Historically found in communist countries.

• No incentive for individuals to look for better ways to serve consumer needs

Mixed economy

• Some sectors are privately owned, and some are government-owned.

• Once common in developed world, they have become less so.

• Government may aid troubled firms whose operations are vital to national interests.

  • U.S. helped Citigroup, General Motors in 2008 recession.

Different legal systems

• Common law-based on tradition, precedent and custom. More flexible than other systems

• Civil law-based on detailed laws organized into codes. Less adversarial than a common law system

• Theocratic law-based on religious teaching. Ex. islamic law

Differences in contract law

Under common law:

• Contracts are very detailed with all contingencies spelled out.

• More expensive and can be adversarial.

Under civil law:

• Contracts tend to be much shorter and less specific

United Nations Convention on Contracts for the International Sale of Goods (CISG)

• Establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers 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.

Property Rights and Corruption

Private action: theft, piracy, and blackmail by private individuals or groups.

Public action and corruption: public officials extort income, resources, or property.

• Can be done legally by levying excessive taxation, requiring licenses or permits from property holders, taking assets into state ownership without compensating owners, and redistributing assets without compensating prior owners.

• Can be done illegally through corruption, demanding bribes.

Foreign Corrupt Practices Act (FCPA)

• Illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority.

• Requires all publicly traded companies keep detailed records that would reveal whether a violation of the act has occurred

What did the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions do?

• Make the bribery of foreign public officials a criminal offense.

• Allows for facilitating or expediting payments.

Protection of intellectual property

• patents

• copyrights

• trademarks

What organization protects intellectual property?

World Intellectual Property Organization

What kind of country is more attractive to do business in?

A country with democratic political institutions, a market-based economic system, and a strong legal system

Three systems

• political

• economic

• legal

Ireland case study

Ireland shifted from protectionism and government intervention → toward openness, FDI, trade, and market-oriented reforms → contributing to much faster economic growth.

Trends that foster greater economic development

• Democratic forms of government.

• Market-based economic reforms.

• Legal systems that better enforce property rights.

GDP

Measures the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. However, it does not consider differences in the cost of living.

Purchasing power parity is an adjustment in gdp per capita to direct comparison of living standards in different countries

• high gdp per capita-Japan, Sweden, Switzerland, Australia, the U.S

• lower gdp per capita-China, India

GDP and PPP data are static and do not consider economic growth rates

Although China and India are currently relatively poor, but their economies are growing more rapidly than many advanced nations

Development requires removing impediments to freedom such as:

• Poverty, tyranny, poor economic opportunities, systematic social deprivation, neglect of public facilities, and intolerance of repressive states

• Economic progress requires the democratization of political communities to give citizens a voice.

• Good health and education are essential for both personal development and higher-income levels.

Human development index (HDI)

• Life expectancy at birth.

• Educational attainment.

• Whether average incomes are sufficient to meet the basic

needs of life.

HDI Scale

The HDI is scaled from 0 to 1.

• Low: <0.55

• Medium: 0.55–0.699

• High: 0.7–0.799

• Very high: >0.8

Market vs planned economies innovation and entrepreneurship incentives

• In a market economy, any individual is free to try out an innovative idea by starting a business, and existing businesses are free to improve their operations through innovation.

• In planned economies, there is little incentive to develop new innovations because the state owns all means of production and captures the gains.

Why are totalitarian states detrimental to progress?

They limit freedom and suppress human development

Examples of how economic growth led to establishment of democratic regimes

South Korea, Taiwan, and Indonesia

Geography and Economic Development

Economist Jeffrey Sachs argues that countries with favorable geography are more likely to engage in trade and are open to market-based systems.

• Promotes faster economic growth.

• Adverse geographic conditions, like disease, poor soils, and harsh climates in tropical regions, hinder development

Education and economic development

Nations that invest more in education will have higher growth rates.

• Education investments helped Southeast Asian countries surpass tropical challenges, driving growth unmatched in Africa and Latin America

Demographics and economic development

A growing population increases the supply of labor.

• Aging population strains government finances as fewer workers support more retirees.

• Larger populations drive more inventors, fostering greater technological innovation and faster economic growth.

Reasons for the spread of democracy

• Many totalitarian regimes failed to deliver economic progress to the bulk of their populations.

• New information and communication technologies.

  • Reduced state’s ability to control access to uncensored information.

  • Created new conduits for the spread of democratic ideals.

• Economic advances have led to a prosperous middle class that has pushed for democratic reforms.

Growing authoritarianism

Since 2005, there has been a drift back toward more authoritarian modes of government in many nations.

• Elections have been compromised; civil liberties restricted; independent press has been attacked or suppressed; opposition parties have been restricted.

• Examples: Turkey, Russia, Indonesia, Ecuador, and Venezuela.

The New World Order and the Evolution of a Multipolar World

Francis Fukuyama argues the new world order will be

characterized by democratic regimes and free market

capitalism.

Political scientist Samuel Huntington argues that while many

societies are modernizing, they are not becoming more

Western.

Political position is more likely to be somewhere between

Fukuyama and Huntington.

The shift towards 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 ownership of state property to private individuals

• A legal system to safeguard property rights

Countries are more likely to have higher sustained rates of economic growth with:

• Democratic regimes.

• Market-based economic policies.

• Strong property rights protection.

• Favorable demographic trends

Rule of 72

• Easier calculation than CAGR of

–(Ending Value / Beginning Value)^(1 / n) - 1

• Works best for rates of 5-10%

• At 2% growth, US GDP should double in 36 years

• At 3% growth, China GDP should double in just

under 25 years

Values

• Provide the context within which a society’s norms are established and justified

• They are invested with emotional significance

• Reflected in the economic systems of a society

Norms

Social rules that govern people’s actions toward one another.

• Mores are norms seen as central to functioning of society

• Folkways are routine conventions of everyday life such as appropriate dress code, good social manners

Mores

Norms seen as central to functioning of society.

Determinants of culture

• Religion.

• Political philosophy.

• Economic philosophy.

• Education.

• Language.

• Social structure.

Two dimensions help explain differences among cultures:

1. The degree to which the basic unit of social organization is the individual as opposed to the group.

2. The degree to which a society is stratified into classes or castes.

The individual

In many Western societies, the individual is the basic

building block of social organization.

• Western societies emphasize on individual achievement.

• Both beneficial and harmful aspects

The group

• A group is an association of two or more individuals who

have a shared sense of identity and interact in structured

ways based on common expectations.

• The primary unit of social organization in many non-Western

societies.

• Importance of group membership/identification.

Social stratification

Social strata are hierarchical social categories often based on family background, occupation, and income.

• Individuals born into a particular stratum, which affects life chances.

Four basic principles of social strata

• Is a trait of society, not a reflection of individual

differences.

• Carries over into next generation.

• Is generally universal but variable.

• Involves not just inequality but also beliefs.

Social mobility

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

• Caste system is a closed system where social position is determined by family and change is usually not possible

• Class system is less rigid form and the position can be changed through achievement and luck

What is the most widely practiced religion?

Christianity

Economic implications of islam

• Many pro-free enterprise principles, protection of private property, concern with social justice.

• Prohibits the payment or receipt of interest.

• Islam stresses the importance of living up to contractual obligations, keeping one’s word, and abstaining from deception—all good business practices.

• Islamic banks experimented with two different banking methods—the mudarabah and the murabaha

Economic implications of Hinduism:

• Max Weber: Hindus are valued by their spiritual rather

than material achievements.

• Caste system abolished in India but still has an effect

Economic implications of buddhism

• Does not emphasize wealth creation.

• Does not support the caste system—individuals have some

mobility and can work with individuals from different classes.

• Recent trends bring the “Zen” orientation from Buddhism into

business in the Western world.

• Zen is a meditation-based form of Buddhism

Confucianism

Teaches the importance of attaining personal salvation through right action.

High morals, ethical conduct, and loyalty to others.

Economic implications of Confucianism:

• Three values of Confucianism—loyalty, reciprocal obligations, and honesty—may all lead to lowering the cost of doing business in Confucian societies

Significance of formal education

• socializes the young into values and norms of a society

• provides a national competitive advantage

Hofstedes dimensions of culture

Framework that shows how culture affects different values and aspects of society

• Power distance-how a society deals with the fact that people are unequal in physical and intellectual capabilities.

• Individualism versus collectivism

• Uncertainty avoidance measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating uncertainty.

• Masculinity versus femininity looks at the relationship between gender and work roles.

• Long-term versus short-term orientation refers to the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs.

Hofstedes index score (0-100)

• Western nations tend to score high on individualism and low on power distance.

• Latin American and Asian countries emphasize collectivism and score high on power distance scale.

• Japan demonstrates strong uncertainty avoidance and high masculinity

Components of culture

–Values – ideas about what is good, right and desirable

–Norms – social rules and guidelines for behavior in particular situation

• Folkways – routine conventions for everyday life

• Mores – norms that are essential, with moral significance

A brief history on usury

• Hebrew Bible forbade lending money at interest

• Greek philosophers like Plato and Aristotle condemned interest

• The Quran strictly prohibits usury (riba)

• The Catholic Church classified any interest-taking as usury

• With rise of trade and demand for commercial credit, absolute bans on interest became impractical

• US states have usury laws and interest rate caps -- ~30%

Islamic Finance - Murabaha

• Murabaha is an Islamic loan structure that constitutes about 80% of Islamic finance products

• In murabaha, the bank buys and then sells an asset to the customer with a markup.

• Two components are the cost amount and fixed administrative fee

• Two parties are the investor (rab al maal) and investment manager (mudareb)

Things worth knowing about a culture

• Basic phrases

• Recent history

• Holidays and festivals

• Workdays and weekends

• Working hours and lunch breaks

Social issues that arise in international business

Ethics, corporate social responsibility, and sustainability

To guard against ethical abuses, firms should:

• Establish minimal acceptable standards that safeguard the basic rights and dignity of employees.

• Audit foreign subsidies and contractors regularly to ensure standards are being met.

• Take corrective action as necessary

General Motors and the Sullivan principles.

• Company should not obey the apartheid rules in its

operation in South Africa.

• Company should promote abolition of apartheid laws.

• Was not sufficient to break down the apartheid regime

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.

• corporations that move production locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons.

Ethical dilemmas

Ethical obligations of multinational corporations are not

always clear-cut.

How should corporations handle ethical dilemmas regarding

employment, human rights, corruption, and environmental

pollution?

• Pressure from customers and stakeholders to be

transparent in ethical decision-making.

• No universal worldwide agreement about what constitutes

accepted ethical principles.

Ethical dilemmas are situations in which no alternatives

seem ethically acceptable

Six determinants of ethical behavior

• Personal ethics.

• Decision-making processes.

• Organizational culture.

• Unrealistic performance goals.

• Leadership.

• Societal culture-those that emphasize individualism and uncertainty avoidance are more likely to stress ethical behavior than cultures where masculinity and power distance are emphasized

Utilitarian ethics

• Actions are desirable if they lead to the best possible balance of good consequences over bad consequences.

• Best decisions are those that produce the greatest good for the greatest number of people.

Drawbacks:

• Difficult to measure benefits, costs, and risks of the action.

• Fails to consider justice.

Kanthian ethics

• People should be treated as ends and never purely as means to the ends of others.

• People have dignity and need to be respected.

• Contemporary moral philosophers view Kant’s ethical philosophy as incomplete.

Rights theories

Human beings have fundamental rights and privileges that transcend national borders and cultures.

• Moral theorists argue that fundamental human rights form the basis for a moral compass that managers should use in ethical decision-making.

Justice theory

Focus on the attainment of a just distribution of economic goods and services.

• A just distribution is a distribution of goods and services that is considered fair and equitable.

Five step process to think through ethical problems

1. Identify which stakeholders a decision would affect and in what ways

2. Determine whether a proposed decision would violate the fundamental rights of stakeholders

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

4. Engage in ethical behavior

5. Audit decisions to make sure they are consistent with ethical principles

Corporate social responsibility

• With power comes the social responsibility to give something back to the societies that enable multinationals to grow and prosper.

• Advocates argue that businesses need to recognize their noblesse oblige.

• Power can be used in a positive way to increase social welfare, which is ethical, or used in a manner that is ethically and morally suspect

Sustainability

• Sustainable strategies help the firm make good profits without harming the environment while acting in a socially responsible manner to stakeholders.

• Core idea: organization’s actions do not exert a negative impact on the ability of future generations to meet their own economic needs and actions impart long-run economic and social benefits to stakeholders

Business ethics

• Business ethics are the accepted principles of right and wrong that govern the conduct of businesspeople

–“accepted”

–“right and wrong”

–“businesspeople”

Common ethical topics

• Employment practices – hours, working conditions

• Human rights – South Africa and anti-apartheid movement

• Environmental regulations –

–Local

–“Global tragedy of the commons”

• Corruption – US Foreign Corrupt Practices Act – 1977

• Moral obligations of multinational companies

Roots of unethical behavior

• Personal ethics

• Decision-making process

• Organizational culture

• Unrealistic performance goals

• Leadership

• Societal culture

Stakeholders

• Internal

– Employees

– Management

– Board of directors

– Investors/Owners

• External

– Customers

– Suppliers

– Governments

– Local communities