IB 409 Final

Pros of free trade

• lower prices for consumers

• variety of goods

• economic growth

• job creation

• encourages efficiency & innovation

Cons of free trade

• job loss in some industries

• wage pressure

• dependence on other countries

• unequal benefits

• environmental concerns

International Monetary Fund (IMF)

• to stabilize

• provides a forum for cooperation on international monetary problems

• facilitates International trade, promotes exchange rate stability, lends countries foreign exchange

World Bank

• to advise

• initial role aid reconstruction of EU after WWII

• free trade = open markets, analysis & national trade policy advice, agreements supporting international standards in financial systems

• info & knowledge transfer to develop countries to support sustainable development

World Trade Organization (WTO)

• to broker

• liberalized trade by lowering and/or removing trade barriers such as tariffs, quotas, and subsidies

• s-principles: trade without discrimination, freer trade, predictability, promote fair competition, encourage economic reforms in developing countries

globalization

the socioeconomic reform process of eliminating trade, investments, cultural, information technology, and political barriers across countries

absolute advantage

The ability of one country to produce a good or service more efficiently than another (one thing)

comparative advantage

The ability of one country that has an absolute advantage in the production of two or more goods (or services) to produce one of them relatively more efficiently than the other (multiple)

Heckscher-Ohlin (H-O) theory

• Attributes the comparative advantage of a nation to its factor endowments

• if you have an abundance of an input (labor, resource, $$, etc.) You are going to export these above other things

Porter’s Diamond Model

• factor conditions

  • Looks at comparative advantage of the country (advances resources like infrastructure, skilled labor, capital are more important)

• demand conditions

  • looks at domestic demand for goods and services (high local demand increases firm’s chance of replicating success in foreign market)

• related/supporting industries

  • looks at the other industries nearby (concentrations of them create competition, large knowledge base)

• firm strategy, structure, rivalry

  • looks at leadership strategy of a firm (will firm culture work in another country?, are there monopolies?)

what are the 2 variables that are hard to control/ firms cannot predict?

• external shocks “chance”

• governments

trade policy

the regulations and agreements that govern how a country conducts international trade. It encompasses all measures taken by a government to influence trade, including taxes on imports and exports, import quotas, and subsidies, with the aim of promoting national economic interests

mercantilism

believed that for a nation to be wealthy, it must export as much as possible and import as little as possible so that the country would have a trade surplus

countertrade: socioeconomic managed trade

International trade where goods or services are exchanged for other goods or services, rather than for hard currency

export cartels: socioeconomic managed trade

Resource rich countries agree to work together and control commodity prices. Less fluctuations, but nobody can cheat.

protection of infant industries: socioeconomic managed trade

Comparative advantage for developing countries need 'training wheels.'

questionable labor practices: socioeconomic managed trade

Developed countries use this to wean developing countries off unethical practices (child labor)

environmental considerations: socioeconomic managed trade

Extra duties on Brazilian ethanol because of the damage done to rainforests in the Amazon

health and safety: socioeconomic managed trade

Mad cow disease in the US and UK caused Japan to ban imports for 2 years

national security: geopolitical managede trade

• Export control of some goods that could be used against us

• Firms that are prevented from selling these to non-allies are rewarded with special consideration in US contracts

strategic industries: geopolitical managed trade

Governments will jump in and help “national bedrock” industries (France and its wine industry)

embargoes: geopolitical manages trade

Used to punish countries that operate outside of ethical norms (N. Korea and Iran for nuclear programs)

economic integration

an arrangement among nations that typically includes the reduction or elimination of trade barrier and the coordination of monetary and fiscal policies

benefits of regional integration

• Creating a larger pool of consumers with growing incomes and similar culture, tastes, and social values

• Encouraging economies of scale in production, increasing the region’s level of global competitiveness, and enhancing economic growth through investment flows

• Freeing the flow of capital, labor, and technology to the most productive areas in the region

• Increasing cooperation, peace, and security among countries in the region

• Encouraging member states to enhance their social welfare to match that of the most progressive states

costs of regional integration

• Undermining the most-favored-nation status rule, an essential principle of the WTO

• Imposing uniform laws and regulations that at times do not take into account national economic, cultural, and social differences

• Eliminating jobs and increasing unemployment in protected industries

• Losing sovereignty, national independence, and identity

• Reducing the powers of the national government

• Increasing the problems of illegal drugs and terrorism due to the ease of cross-border labor movement

elements of culture

• religion’s impact

• cultural values

• attitudes & trust

Hofstede’s cultural dimensions

• individualism vs. collectivism

• power distance

• masculine vs. feminine

• uncertainty avoidance

• time orientation

• indulgence vs. restraint

Trompenaar’s cultural dimensions

• universalism vs particularism

• individualism vs collectivism

• neutral vs emotional

• specific vs diffuse

• sequential vs synchronous

• outer vs internal direction

• achievement vs ascription

GLOBE

• global

• leadership

• organizational

• behavior

• effectiveness

  • Analyzes organizational norms, values, and beliefs of leaders of different societies

  • Differences from Hofstede

    • More dimensions (9 vs 6)

    • More Recent (1994 vs 60’s & 70’s)

    • More Organizations (170 vs just IBM)

    • More segments within groupings

Examples of business conduct in Japan

• Upon meeting a Japanese executive, a slight bow and handshake are appropriate.

• Business card etiquette is important.

• It is not appropriate to look directly into the eyes of your Japanese hosts.

• It is important for your Japanese hosts to know your title and rank.

• Japanese business has a group orientation, rather than an individualistic one.

• Japanese executives expect foreign business representatives to arrive prepared and to have decision-making authority.

• New potential business partners should be referred to Japanese business representatives through a third party.

Examples of business conduct in South Korea

• Elders are respected for their knowledge and wisdom

• “Inwa” involves harmony among unequals: loyalty is

  owed to parents and authority figures, yet superiors

  are responsible for the well-being of their

  subordinates

Examples of business conduct in China

• Guanxi

• Utilitarian in nature, not based on emotions or sentiment.

• Exchanges are often uneven, an advantage for weaker member in the guanxi relationship.

• Persons of low rank may be powerful and influential due to guanxi relationships with superiors.

• Foreigners who want to conduct business in China may need to seek out lower-level persons and obtain their favor in order to gain access to more powerful superiors who are decision makers.

Guanxi

A philosophy denoting friendships among unequals (as between subordinates and superiors) and the unlimited exchanges of favors

Examples of business conduct in Arab countries

• Avoid sitting so that the sole of one’s shoe is shown.

• The left hand is viewed as “unclean.”

• Good posture is imperative.

• Foreign business representatives should not inquire

about the wives of Arab business representatives.

• Do not overly praise the possessions of Arab hosts, as

this could create a perception that you expect your

hosts to give them to you.

• Arab business representatives will probably be reluctant

to do business with women.

• If a woman is accepted, modest dress is appropriate.

• Arab business representatives may frequently divert

from the topic initially discussed, then return to it.

Examples of business conduct in India

• Adhere to formal business traditions, such as wearing a suit and using formal greetings.

• Even in a casual meeting, Indians maintain a high standard of civility

• Diplomacy is valued, while being blunt or direct is viewed as foolhardy and uncivilized

• Be tactful in all your comments, especially with ideas that are in opposition to your Indian counterpart

• Sharing personal information is not only acceptable, but also a means for building a good relationship

democracy

Greek for “rule by the people”; form of government in which all citizens have the right to vote

Athenian democracy

A pure form of democracy, in which all adult citizens vote directly on matters affecting the community

Representative democracy

Citizens vote to elect given individuals to serve as their representatives for a certain period of time

Totalitarian government

Individuals govern without the support or consent of the citizenry

communism

The government or state owns and controls all major factors of production and is philosophically an economically classless society

Socialism

The government plays a strong role in the economy and may own

stakes in certain businesses

Capitalism

Businesses are privately owned, strong individual incentives exist,

and the government plays very little role in the economy

economic risks

Risks that economic problems or mismanagement in a given country will have a meaningful negative impact on the conduct of business in that country

examples of economic risks

• Restrictions on transfer or exchange of a country’s currency, or devaluation of the currency

• Questionable ability to repay loans

• Human resource and labor relations problems

• Inflation and corruption

political risks

Risks that political forces or problems in a given country will have a significant negative impact on the conduct of business in that country

examples of political risk

• Micropolitical risk – only affect a certain industry or set of firms.

  • A government intervenes a specific industry

  • Our railroad network (East Palestine OH) also the UAW strike

  • France port and customs workers

• Macropolitical risk – essentially affects all businesses in a given country.

  • A government takes over or intervenes across all businesses (including and especially foreign controlled ones)

  • The COVID-19 event did this in many ways

corruption

A situation where businesses are able to illegally alter relevant private

and/or public decision making by way of bribes, kickbacks, blackmail,

extortion, and related activities

private corruption

Business corruption involving other private businesses, individuals, or groups (A supplier bribes a client for a favorable contract)

public corruption

The practice of making illegal payments to government officials or engaging in blackmail, extortion, or other related activities to obtain government contracts or governmental approval for business activities (bribing a police officer or “do you know who i am?”)

Foreign Corrupt Practices Act (FCPA)

• Enacted in 1977

• Replaced the Securities Exchange Act

• Applies to U.S. firms and to foreign firms that engage in business in the United States

• Consists of two parts:

  • An anti-bribery provision

  • A requirement to maintain an adequate internal control system over financial booksand records

• Consequences: Fines AND Imprisonment

civil law

• Based on a comprehensive listing of legal rules in sets of written codes of law

  • Clear cut and very straightforward. Leaves little room for interpretation

  • Only changed by legislation

  • Slower to adapt, but crystal clear

  • Examples: France, Germany, Spain, Mexico, China, South Korea, Brazil

common law

• Legislative bodies enact less specific legal rules giving judges/courts considerable authority in interpreting these rules based on precedent and other factors

  • Common in British influenced countries

  • Leaves interpretation to a judge and allows for new precedents

  • More agile when new events and phenomena occur (internet, twitter, etc)

  • Examples: UK, USA, Canada, Australia, India (somewhat)

theocratic law

• Based on a religious document and religious teachings

  • Based on religious teachings (Mohammed, Jesus Christ)

  • Unique codes and interpretations – some quite severe

  • Examples: Iran, Saudi Arabia, Yemen, Vatican City (Holy See)

criminal law

establishes which violations of a nation’s laws are crimes punishable by possible incarceration

contract law

the body of law governing legally enforceable agreements between parties to engage in economic exchange

tax law

The body of law dealing with governmental levying of taxes on individuals and corporations

antitrust laws

• designed to promote “fair competition” among businesses

• typically prohibit companies from engaging in collusion.

• are also known as “antimonopoly laws.”

product safety law

establishes the standards of product safety to which the manufacturers and sellers of products are held

• caveat emptor (buyer beware) & caveat venditor (seller beware)

dispute settlement law

governs how disputes that arise in the course of global business are settled

intellectual property

the product of intellectual rather than physical activity

intellectual property protections

The limited monopoly rights legally granted by a nation to the creator of intellectual property

patents

• The right granted to the inventor of a product or process that excludes others from selling, making, or using the invention for a certain period of time

  • Induces a reward for innovation

  • Almost all countries protect patents for 20 years

trademarks

• A distinctive phrase, name, word, picture, symbol, or design, or a combination of these, that identifies a given business’s service or product and is owned by said business.

copyrights

• The exclusive legal right that authors, playwrights, publishers, artists, and composers have to publish and disseminate their work as they see fit.

  • In the US it’s 70 years

ethics

The branch of philosophy that addresses the values pertaining to human behavior, with regard to the “rightness” and “wrongness” of actions and to the “goodness” and “badness” of the intent and results of such actions

integrity

Adherence to moral and ethical principles; soundness of moral character; honesty. As a practical matter, a person of integrity knows what is right and has the courage to do it

Imperative principle

do what is right, regardless of the situation

Utilitarian principle

Do what produces the greatest good, regardless of the individuals affected

Generalization argument

do what is right, but filter the action by consideration of the consequences

the ___ the CPI the ___ corrupt the country is perceived

higher, less

Corporate social responsibility (CSR)

A company’s obligations to society, including the welfare of people and places affected by company activities

example of financial scandal

Enron - Used innovative and misleading accounting in “cooking its books” to avoid disclosing unprofitable operations, including mark to market accounting practices

Teapot Dome

• President Harding transferred supervision of strategic oil reserve land to Albert Fall

• Resulted from the secret leasing of Teapot Dome oil reserves to a businessman who paid Secretary of the Interior Albert Fall hundreds of thousands of dollars in zero-interest loans

Ponzi scheme

A fraud in which money received from later investors is used to provide returns to earlier investors, thus giving an appearance of a profitable investment

internal controls

comprise a system of rules and procedures designed to ensure the accuracy and reliability of financial and accounting information (preventative controls & feedback controls)

5 fundamentals of ethics education

• personal integrity

• responsibility of business in society

• ethical decision making

• ethical leadership

• corporate governance

strategies that minimize financial risk

• export-import

• licensing

• franchising

Export-Import

Penetrating foreign markets by exporting or importing merchandise at competitive prices for domestic consumption

• relatively low-risk operation given the fact that capital is not tied up and it is relatively easy to enter or exit the business

Licensing

Providing a foreign partner with the rights and/or technology to manufacture and sell products or services in a target country for an annual license fee

• Licensing involves slightly more risk to the licensor than those in pure international trade business

Franchising

A franchisor provides specialized equipment, service, and/or startup costs to a franchisee in return for an annual fee for rights to manufacture/sell its products

• the parent firm assumes relatively more risk than with licensing

• allows for penetration of international markets without significant capital investment abroad by the parent company

Strategic Alliances

An agreement between two or more firms that do NOT involve the creation of a separate entity with joint ownership in which the firms stand to gain revenues and maximize profits through cooperation for a given period of time

International Joint Ventures

A business jointly owned and operated by two or more firms (one local host country and one foreign) that pool their resources to penetrate the host country’s markets, share in profits, and share commercial risk

Foreign Acquisitions

the purchase of established firms abroad with the goal of using the existing production, marketing, and distribution networks and of having instant access to foreign markets that fit the purchasing firm’s global strategy

Wholly-owned Foreign Subsidiaries

are new facilities built and operated overseas that require large investment capital because these new establishments are tailored to the exact needs of the home country firm

Mergers

Management of both companies play an active role in business development and execution

Acquisition

the bigger company acquires the smaller one

cross border acquisition

the home country firm purchases the host country firm

Multinational Enterprises (MNE’s)

firms that are headquartered in one country, but own and control significant manufacturing, services, R&D (research and development) facilities, or other business entities in other countries

• have significant amount of resources

• willing to take larger risks to operate globally

What can a country do to boost its attractiveness for FDI?

Attractive Investment Climate Characteristics

• Proper economic reforms

• Transparent governance structure

• Rule of law

power distance

The degree of equality of authority distribution in a given society.

• Low power distance cultures (egalitarian) employees may address bosses by their first names

• High power distance cultures have more centralized and formal relationships.

Uncertainty Avoidance

The degree a culture values predictability or the lack of it in a workplace

• High uncertainty Avoidance (restrained) cultures will have clear and explicit rules and take a harsher view and stance on things like lateness

• Low Uncertainty Avoidance (indulgent) cultures have more relaxed and “spirit of the law” or “outside the box” approach to rules

Individualism vs Collectivism

The extent that people think of themselves as members of a group or collective as opposed to being individuals.

• High Individualism cultures will expect individuals to “make it on their own” and high value is placed on individual success.

• High Collectivist cultures are where people measure success as

a group.

Masculinity/Femininity

The degree a culture places a higher value on masculine/feminine TRAITS (not roles)

• Masculine: Achievement, Competition, assertiveness.

• Feminine: Care for weak, relationships, marginalized.

Long/Short Term Orientation

The degree a society values long-term planning and looking towards the future vs a more immediate short-term view.

• High Long-Term countries

  • China, Russia, Japan

  • HR policies focus on good retirement and strong succession planning

• Low (Short term) countries

  • US, Australia, Spain

  • HR Policies focus more on engagement and immediate benefits

Outsourcing

• the process of a firm subcontracting a

certain production function to a third party

• THESE ARE FARMED OUT TO ANOTHER COMPANY

• A company hires a “3rd party vendor” to manage IT infrastructure

• A business owner hires a bookkeeping/payroll services firm so they can focus on their core business

offshoring

• the process of transferring an organizational function to another country, regardless of whether this function is outsourced or stays within the same firm or corporation

• THESE ARE OWNED BY THE ORIGINAL COMPANY

• A software company moves its customer service call center to India to take advantage of lower labor costs and specialization of workforces.

• A car company shifts its factory production to Mexico to save on labor and operating costs

decoupling

• The process by which a country becomes less dependent on foreign trading partners

• Threat to globalization

multipolar world

World economy in which the engines of growth could compromise several industrialized and energic economies, such as the USA, EU, BRIC, rather than USA alone

Tariffs

Custom duties on imports that are collected by a designated government agency responsible for regulating imports

Specific Tariff

an import tax that assigns a fixed dollar amount per physical unit