BSc16 IB PPT Slides

International Business An Asian Perspective

By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 1

Globalization

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

1-3

What Is Globalization?

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system

Globalization refers to the shift toward a more integrated and interdependent world economy

1-4

What Is The Globalization of Markets?

Historically distinct and separate national markets are merging

It no longer makes sense to talk about the German market or the American market

Instead, there is the global market falling trade barriers make it easier to sell globally

consumers tastes and preferences are converging on some global norm

firms promote the trend by offering the same basic products worldwide

1-5

What Is The Globalization of Production?

Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, and capital

Companies can lower their overall cost structure

improve the quality or functionality of their product offering

1-6

Why Do We Need

Global Institutions?

Institutions help manage, regulate, and police the global

marketplace

promote the establishment of multinational treaties to govern the global business system

Examples include the General Agreement on Tariffs and Trade (GATT)

the World Trade Organization (WTO)

the International Monetary Fund (IMF)

the World Bank

the United Nations (UN)

1-7

What Do Global

Institutions Do? The World Trade Organization (like its predecessor GATT)

polices the world trading system makes sure that nation-states adhere to the rules laid down in trade

treaties promotes lower barriers to trade and investment

The International Monetary Fund (1944) maintains order in the international monetary system

The World Bank (1944) promotes economic development The United Nations (1945)

maintains international peace and security develops friendly relations among nations cooperates in solving international problems and in promoting respect for

human rights is a center for harmonizing the actions of nations

1-8

What Is Driving

Globalization?

The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II

since 1950, average tariffs have fallen significantly and are now at 4 percent

countries have opened their markets to FDI

Technological change microprocessors and telecommunications

the Internet and World Wide Web

transportation technology

1-9

Declining Trade And

Investment Barriers Average Tariff Rates on Manufactured Products as Percent of Value

1-10

What Does Globalization

Mean For Firms?

Lower barriers to trade and investment mean firms can view the world, rather than a single country, as their market

base production in the optimal location for that activity

Technological change means lower transportation costs - firms can disperse production to

economical, geographically separate locations

lower information processing and communication costs - firms can create and manage globally dispersed production systems

low cost global communications networks - help create an electronic global marketplace

low-cost transportation - help create global markets

global communication networks and global media - create a worldwide culture, and a global market for consumer products

1-11

The Changing Demographics

Of The Global Economy

There has been a drastic change in the demographics of the world economy in the last 30 years

Four trends are important:

1. the Changing World Output and World Trade Picture

2. the Changing Foreign Direct Investment Picture

3. the Changing Nature of the Multinational Enterprise

4. the Changing World Order

1-12

How Has World Output And

World Trade Changed? In 1960, the United States accounted for over 40%

of world economic activity

By 2008, the United States accounted for just over 20% of world economic activity

A similar trend occurred in other developed countries

The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020

1-13

How Has World Output And

World Trade Changed? The Changing Demographics of World GDP and Trade

1-14

How Has Foreign Direct

Investment Changed Over Time?

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

Other developed countries have followed a similar pattern

In contrast, the share of FDI accounted for by developing countries has risen

Developing countries, especially China, have also become popular destinations for FDI

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Investment Changed Over Time? Percentage Share of Total FDI Stock 1980-2007

1-16


Investment Changed Over Time? FDI Inflows 1988-2008

1-17

What Is A

Multinational Enterprise?

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

Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-multinationals

1-18

The Changing World Order

Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies so, there are new opportunities for international

businesses but, there are signs of growing unrest and totalitarian

tendencies in some countries like Russia

China and Latin America are also moving toward greater free market reforms between 1983 and 2008, FDI in China increased from

less than $2 billion to $90 billion annually but, China also has many new strong companies that

could threaten Western firms

1-19

How Will The Global Economy

Of The 21st Century Look? The world is moving toward a more global

economic system

But globalization is not inevitable there are signs of a retreat from liberal economic

ideology in Russia

Globalization brings risks the financial crisis that swept through South East Asia

in the late 1990s

the recent financial crisis that started in the U.S. in 2008, and moved around the world

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Is An Interdependent Global

Economy A Good Thing? Supporters believe that increased trade and cross-

border investment mean lower prices for goods and services greater economic growth higher consumer income, and more jobs

Critics worry that globalization will cause job losses environmental degradation the cultural imperialism of global media and MNEs

Anti-globalization protesters now regularly show up at most major meetings of global institutions

1-21

How Does Globalization Affect

Jobs And Income?

Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries

Supporters contend that the benefits of this trend outweigh the costs

countries will specialize in what they do most efficiently and trade for other goodsand all countries will benefit

1-22

How Does Globalization Affect Labor

Policies And The Environment?

Critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced

Supporters claim that tougher environmental and labor standards are associated with economic progress

as countries get richer from free trade, they implement tougher environmental and labor regulations

1-23

How Does Globalization

Affect National Sovereignty? Is todays interdependent global economy shifting

economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN?

Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states

Supporters claim that the power of these organizations is limited to what nation-states agree to grant the power of the organizations lies in their ability to get

countries to agree to follow certain actions

1-24

How Is Globalization

Affecting The Worlds Poor? Is the gap between rich nations and poor nations

is getting wider? Critics believe that if globalization was beneficial

there should not be a divergence between rich and poor nations

Supporters claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment implement economic policies based on free market

economies receive debt forgiveness for debts incurred under

totalitarian regimes

1-25

How Does The Global

Marketplace Affect Managers?

Managing an international business differs from managing a domestic business because

countries are different

the range of problems confronted in an international business is wider and the problems more complex than those in a domestic business

firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system

international transactions involve converting money into different currencies

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Review Question

The shift toward a more integrated and

interdependent world economy is referred to

as

a) economic integration

b) economic interdependency

c) globalization

d) internationalization

1-27

Review Question

The merging of historically distinct and

separate national markets into one huge

global marketplace is known as

a) global market facilitation

b) cross-border trade

c) supranational market integration

d) the globalization of markets

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Review Question

Firms that are involved in international

business tend to be

a) large

b) small

c) medium-sized

d) large, small, and medium-sized

1-29

Review Question

Which is not a factor of production?

a) trade

b) land

c) capital

d) energy

1-30

Review Question

The sourcing of good and services from

around the world to take advantage of national

differences in the cost and quality of factors of

production is called

a) economies of scale

b) the globalization of production

c) global integration

d) global sourcing

1-31

Review Question

Which organization is responsible for policing

the world trading system?

a) the International Monetary Fund

b) the United Nations

c) the World Trade Organization

d) the World Bank

1-32

Review Question

What is the single most important innovation

to the globalization of markets and

production?

a) advances in transportation technology

b) the development of the microprocessor

c) advances in communication

d) the Internet

1-33

Review Question

Which of the following trends is true? a) the United States is accounting for a greater

percentage of world trade than ever before b) the United States is accounting for a greater

percentage of foreign direct investment than ever before

c) the share of world trade accounted for by developing countries is rising

d) the share of foreign direct investment by developing countries is declining

1-34

Review Question

Which of these is not a concern of anti-globalization

protesters?

a) globalization raises consumer income

b) globalization contributes to environmental degradation

c) globalization is causing a loss of manufacturing jobs in developing countries

d) globalization implies a loss of national sovereignty


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 2

National Differences in Political Economy


2-37

What Is A Political Economy?

The political economy of a nation refers to 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

2-38

What Is A Political System?

Political system refers to the system of government in a nation

Assessed according to

the degree to which the country emphasizes collectivism as opposed to individualism

the degree to which the country is democratic or totalitarian

2-39

What Is Collectivism?

Collectivism stresses the primacy of collective goals over individual goals can be traced to the Greek philosopher, Plato

(427-347 BC)

Today, collectivism is 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

2-40

How Does Modern-Day Socialism Look?

In the early 20th century, socialism split into

1. Communism socialism can only be achieved through violent revolution and totalitarian dictatorship in retreat worldwide by mid-1990s

2. Social democrats socialism is achieved through democratic means retreating as many countries move toward free

market economies

state-owned enterprises have been privatized

2-41

What Is Individualism?

Individualism refers to philosophy that an individual should have freedom in his own economic and political pursuits

can be traced to Greek philosopher, Aristotle (384-322 BC), who argued that individual diversity and private ownership are desirable

individual economic and political freedoms are the ground rules on which a society should be based

implies democratic political systems and free market economies

2-42

What Is Democracy?

Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives

usually associated with individualism

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

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What Is Totalitarianism?

Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties 1. Communist totalitarianism found in states where the

communist party monopolizes power

2. Theocratic totalitarianism - found in states where political power is monopolized by a party, group, or individual that governs according to religious principles

3. Tribal totalitarianism - found in states where a political party that represents the interests of a particular tribe monopolizes power

4. Right-wing totalitarianism - permits some individual economic freedom, but restricts individual political freedom

2-44

What Is An Economic System?

There are three types of economic systems 1. Market economies - all productive activities are privately owned and

production is determined by the interaction of supply and demand government encourages free and fair competition between private

producers 2. Command economies - government plans the goods and services that a

country produces, the quantity that is produced, and the prices as which they are sold all businesses are state-owned, and governments allocate resources for

the good of society because there is little incentive to control costs and be efficient,

command economies tend to stagnate 3. Mixed economies - certain sectors of the economy are left to private

ownership and free market mechanisms while other sectors have significant state ownership and government planning governments tend to own firms that are considered important to

national security

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What Is A Legal System?

The legal system of a country refers to the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained

There are three types of legal systems 1. Common law - based on tradition, precedent,

and custom 2. Civic law - based on detailed set of laws

organized into codes 3. Theocratic law - law is based on religious

teachings

2-46

How Are Contracts Enforced In Different Legal Systems?

A contract is a 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 Many countries have ratified the United Nations Convention on

Contracts for the International Sale of Goods (CIGS) which 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

2-47

How Are Property Rights And Corruption Related?

Property rights refer to 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

Can be violated through 1. Private action theft, piracy, blackmail

2. Public action - legally - ex. excessive taxation or 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

The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority

2-48

Which Countries Are Most Corrupt?

Rankings of Corruption by Country 2008

2-49

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

2-50

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

2-51

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

When product safety laws are stricter in a firms home country than in a foreign country, or when liability laws are more lax, the firm has to decide whether to adhere to home country or host country standards

2-52

What Determines A Countrys Level Of Economic Development?

Two ways to measure levels of economic development are

1. Gross national income (GNI) per person 2. Purchasing power parity (PPP) involves

adjusting GNI by purchasing power Nobel-prize winner Amartya Sen argues

economic development should be seen as a process of expanding the real freedoms that people experience the removal of major impediments to freedom like

poverty, tyranny, and neglect of public facilities the presence of basic health care and basic education

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What Determines A Countrys Level Of Economic Development?

The United Nations used Sens ideas to develop the Human Development Index (HDI) which is based on

life expectancy at birth

educational attainment

whether average incomes are sufficient to meet the basic needs of life in a country

2-54

How Do Countries Compare on Economic Development?

Economic Data for Select Countries

2-55

How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship are the engines of long-run economic growth

Innovation and entrepreneurship require a market economy and strong property rights

Democratic regimes are probably more conducive to long-term economic growth than dictatorships, even the benevolent kind

Subsequent economic growth leads to the establishment of democratic regimes

2-56

How Do Geography And Education Influence Economic Development?

Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote

Countries that invest in education have higher growth rates because the workforce is more productive

2-57

How Is The Political Economy Changing?

Since the late 1980s, two trends have emerged

1. Democratic revolution (late 1980s and early 1990s) many totalitarian regimes failed to deliver economic progress to

the vast bulk of their populations

new information and communication technologies have broken down the ability of the state to control access to uncensored information

economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms

2. A move away from centrally planned and mixed economies more countries have shifted toward the market-based model

2-58

How Free Are Countries Politically?

Political Freedom in 2008

2-59

How Free Are Countries Economically?

Distribution of Economic Freedom in 2008

2-60

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

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What Does The Changing Economy Mean For Managers?

Markets that were formerly off-limits to Western business are now open

By identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country ex. China -1.2 billion people and India 1.1 billion people

However, the potential risks are large

It can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

2-62

What Does The Changing Economy Mean For Managers?

Managers must consider

1. Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

2. Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise

3. Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

2-63

How Can Managers Determine A Markets 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

2-64

Review Question

A political system that stresses the primacy of

collective goals over individual goals is called

a) individualism

b) collectivism

c) a democracy

d) a market economy

2-65

Review Question

_____ believe(s) that socialism can only be

achieved through violent revolution and

totalitarian dictatorship.

a) communists

b) social democrats

c) social republicans

d) Plato

2-66

Review Question

A form of government in which one person or

political party exercises complete control over all

spheres of human life and prohibits opposing

political parties is

a) a democracy

b) a representative democracy

c) totalitarianism

d) socialism

2-67

Review Question

______ is found in states where political power

is monopolized by a party according to

religious principles.

a) tribal totalitarianism

b) right-wing totalitarianism

c) theocratic totalitarianism

d) communist totalitarianism

2-68

Review Question

In which type of economic system are all

productive activities privately owned?

a) a mixed economy

b) a command economy

c) a representative economy

d) a market economy

2-69

Review Question

Which type of law is based on tradition,

precedent, and custom?

a) civil law

b) common law

c) theocratic law

d) contract law

2-70

Review Question

Which country is not among the most corrupt

countries in the world?

a) Haiti

b) Indonesia

c) Malaysia

d) Nigeria

2-71

Review Question

Design and names by which merchants or

manufacturers designate and differentiate

their products are called

a) trademarks

b) copyrights

c) patents

d) name brands

2-72

Review Question

Which is not a primary determinant of a

nations rate of economic development?

a) its political system

b) its economic system

c) its geography

d) its currency


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 3

Differences

in Culture

Copyright 2011 McGraw-Hill/Irwin

3-75

What Is Cross-Cultural Literacy?

Cross-cultural literacy is an understanding of how cultural differences across and within nations can affect the way in which business is practiced

A relationship may exist between culture and the costs of doing business in a country or region


3-76

What Is Culture?

Culture is 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

norms are the social rules and guidelines that prescribe appropriate behavior in particular situations

Society refers to a group of people who share a common set of values and norms


3-77

What Are Values And Norms?

Values provide the context within which a societys norms are established and justified and form the bedrock of a culture

Norms include

folkways - the routine conventions of everyday life

mores - norms that are seen as central to the functioning of a society and to its social life


3-78

How Are Culture, Society, And The Nation-State Related? The relationship between a society and a

nation state is not strictly one-to-one

Nation-states are political creations

can contain one or more cultures

A culture can embrace several nations


3-79

What Are The Determinants Of Culture?

The values and norms of a culture evolve over time

Determinants include

religion

political and economic philosophies

education

language

social structure


3-80

What Is A Social Structure?

Social structure refers to a societys 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


3-81

How Are Individuals And Groups Different?

A group is an association of two or more people who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each others behavior

In Western societies, there is a focus on the individual individual achievement is common

dynamism of the U.S. economy

high level of entrepreneurship

But, creates a lack of company loyalty and failure to gain company specific knowledge competition between individuals in a company instead of than

team building

less ability to develop a strong network of contacts within a firm


3-82

How Are Individuals And Groups Different?

In many Asian societies, the group is the primary unit of social organization

discourages job switching between firms

encourages lifetime employment systems

leads to cooperation in solving business problems

But, might also suppress individual creativity and initiative


3-83

What Is Social Stratification?

All societies are stratified on a hierarchical basis into social categories, or social strata

Must consider 1. The degree of 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 is a condition where people tend to perceive

themselves in terms of their class background, and this shapes their relationships with others


3-84

How Do Religious And Ethical Systems Differ?

Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred

Religion and ethics are often closely intertwined

Four religions dominate society 1. Christianity

2. Islam

3. Hinduism

4. Buddhism

Confucianism is also important in influencing behavior and culture in many parts of Asia

Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior


3-85

How Do Religious And Ethical Systems Differ?

World Religions


3-86

What Is Christianity?

Christianity

the worlds largest religion

found throughout Europe, the Americas, and other countries settled by Europeans

the Protestant work ethic (Max Weber, 1804) hard work, wealth creation, and frugality is the

driving force of capitalism


3-87

What Is Islam?

Islam the worlds second largest religion

extends the underlying roots of Christianity to an all-embracing way of life that governs one's being

Islamic fundamentalism is associated in the Western media with militants, terrorists, and violent upheavals, but in fact Islam teaches peace, justice, and tolerance

fundamentalists, who demand rigid commitment to religious beliefs and rituals, have gained political power in many Muslim countries, and blame the West for many social problems

people do not own property, but only act as stewards for God people must take care of that which they have been entrusted with

supportive of business, but the way business is practiced is prescribed


3-88

What Is Hinduism?

Hinduism practiced primarily on the Indian sub-continent

focuses on the importance of achieving spiritual growth and development, which may require material and physical self-denial

Hindus are valued by their spiritual rather than material achievements

promotion and adding new responsibilities may not be important, or may be infeasible due to the employee's caste


3-89

What Is Buddhism?

Buddhism

has about 350 millions followers

stresses spiritual growth and the afterlife, rather than achievement while in this world

does not emphasize wealth creation

entrepreneurial behavior is not stressed

does not support the caste system, individuals do have some mobility and can work with individuals from different classes


3-90

What Is Confucianism?

Confucianism ideology practiced mainly in China

teaches the importance of attaining personal salvation through right action

high morals, ethical conduct, and loyalty to others are stressed

three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty - may all lead to a lowering of the cost of doing business in Confucian societies


3-91

What Is The Role Of Language In Culture?

Language - the spoken and unspoken (nonverbal communication such as facial expressions, personal space, and hand gestures ) means of communication

One of the defining characteristics of culture countries with more than one language often have more than one

culture

English is the most widely spoken language in the world

Chinese is the mother tongue of the largest number of people

English is also becoming the language of international business

knowledge of the local language is still beneficial, and in some cases, critical for business success

failing to understand the nonverbal cues of another culture can lead to communication failure


3-92

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 important in determining a nations

competitive advantage

general education levels can be a good index for the kinds of products that might sell in a country


3-93

How Does Culture Impact The Workplace?

Management processes and practices must be adapted to culturally-determined work-related values

Geert Hofstede identified four dimensions of culture 1. Power distance - how a society deals with the fact that

people are unequal in physical and intellectual capabilities

2. Uncertainty avoidance - the relationship between the individual and his fellows

3. Individualism versus collectivism - the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity

4. Masculinity versus femininity -the relationship between gender and work roles


3-94

How Does Culture Impact The Workplace?

Work-Related Values for 20 Countries


3-95

Was Hofstede Right?

Hofstede later expanded added a fifth dimension called Confucian dynamism captures attitudes toward time, persistence, ordering by status,

protection of face, respect for tradition, and reciprocation of gifts and favors

Hofstedes work has been criticized because 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


3-96

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


3-97

What Do Cultural Differences Mean For Managers?

1. It is important to develop cross-cultural literacy companies that are ill informed about the practices of

another culture are unlikely to succeed in that culture managers must beware of ethnocentric behavior, or a

belief in the superiority of one's own culture

2. There is a connection between culture and national competitive advantage suggests which countries are likely to produce the

most viable competitors has implications for the choice of countries in which

to locate production facilities and do business


3-98

Review Question

Abstract ideas about what a group believes to be good, right, and desirable are called

a) norms

b) values

c) folkways

d) mores


3-99

Review Question

The basic social organization of a society is its

a) culture

b) social strata

c) social structure

d) caste system


3-100

Review Question

The group is the primary unit of social organization in

a) Japan

b) the United States

c) Switzerland

d) Mexico


3-101

Review Question

Which of the following is not characteristic of

individualism?

a) individual achievement

b) low managerial mobility

c) low company loyalty

d) entrepreneurial behavior


3-102

Review Question

Which religion promotes the notion that a

moral force in society requires the acceptance

of certain responsibilities called dharma?

a) Islam

b) Buddhism

c) Hinduism

d) Confucianism


3-103

Review Question

_______ focuses on how society deals with the

fact that people are unequal in physical and

intellectual capabilities.

a) power distance

b) individualism versus collectivism

c) uncertainty avoidance

d) masculinity versus femininity


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 4

Ethics in International Business


4-106

What Is Ethics?

Ethics refers to 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 are the accepted principles of right or wrong governing the conduct of business people

Ethical strategy is a strategy, or course of action, that does not violate these accepted principles

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Which Ethical Issues Are Most Relevant To International Firms?

The most common ethical issues in business

involve 1. employment practices

2. human rights

3. environmental regulations

4. corruption

5. the moral obligation of multinational companies

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How Are Ethics Relevant To Employment Practices?

Suppose work conditions in a host nation are clearly inferior to those in the multinationals home nation

Which standards should apply?

home country standards

host country standards

something in between

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How Are Ethics Relevant To Human Rights?

Basic human rights are taken for granted in developed countries freedom of association

freedom of speech

freedom of assembly

freedom of movement

What are the responsibilities of firms in countries where basic human rights are not respected?

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How Are Ethics Relevant To Environmental Regulations?

Some parts of the environment are a public good that no one owns, but anyone can despoil

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

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?

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How Are Ethics Relevant To Corruption?

The U.S. Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business

The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD), obliges member states to make the bribery of foreign public officials a criminal offense

But, is it permissible for multinationals to pay government officials facilitating payments if doing so creates local income and jobs?

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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, and that 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

Advocates argue that businesses need to recognize their noblesse oblige - honorable and benevolent behavior that is the responsibility of successful companies give something back to the societies that have made their success

possible

But, are multinationals morally required to use their power to enhance local welfare?

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What Are Ethical Dilemmas?

Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable

The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut

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Why Do Managers Behave Unethically?

Several factors contribute to unethical behavior including

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 analysis when making decisions

2. Decision-making processes - the values and norms that are shared among employees of an organization organization culture that does not emphasize business culture

encourages unethical behavior

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3. Organizational culture - organizational culture can legitimize unethical behavior or reinforce the need for ethical behavior

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

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Determinants of Ethical Behavior

4-117

What Are The Philosophical Approaches To Ethics?

There are several different approaches to business ethics

Straw men approaches deny the value of business ethics or apply the concept in an unsatisfactory way

Others approaches are favored by moral philosophers and are the basis for current models of ethical behavior

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What Are The Straw Men Approaches To Business Ethics?

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

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 do

3. Righteous moralist - a multinationals home country standards of ethics should be followed in foreign countries

4. Nave 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

All approaches offer inappropriate guidelines for ethical decision making

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What Are Utilitarian And Kantian Approaches To Ethics? Utilitarian ethics - 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

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What Are Rights Theories?

Rights theories - human beings have fundamental rights and privileges which transcend national boundaries and cultures establish a minimum level of morally acceptable

behavior the Universal Declaration of Human Rights specifies

the basic principles that should always be adhered to irrespective of the culture in which one is doing business

Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions which have an ethical component

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What Are Justice Theories?

Justice theories focus on the attainment of a just distribution of economic goods and services a just distribution is one that is considered fair and

equitable

John Rawls argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyones advantage impartiality is guaranteed by the veil of ignorance -

everyone is imagined to be ignorant of all his or her particular characteristics

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How Can Managers Make Ethical Decisions?

To encourage ethical decision making, firms should 1. Hire and promote people with a well grounded sense of

personal ethics refrain from promoting individuals who have acted unethically 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 importance of 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

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3. Make sure that leaders within the business articulate the rhetoric of ethical behavior and act in a manner that is consistent with that rhetoric

4. 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

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5. Put decision making processes in place that require people to consider the ethical dimension 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

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Managers can also use a five step process to think through ethical problems:

Step1: Identify which stakeholders (the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company) a decision would affect and in what ways internal stakeholders are people who work for or who own the

business such as employees, the board of directors, and stockholders

external stakeholders are the individuals or groups who have some claim on a firm such as customers, suppliers, and unions

Step 2: Determine whether a proposed decision would violate the fundamental rights of any stakeholders

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Step 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

Step 4: Engage in ethical behavior

Step 5: Audit decisions and review them to make sure that they are consistent with ethical principles

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What Is An Ethics Officer?

Ethics officers ensure all employees are trained in ethics

ethics is considered in the decision-making process

the companys code of conduct is followed

In the end, there are clearly things that an international business should do, and there are things that an international business should not do

But, not all ethical dilemmas have a clean and obvious solution

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Review Question

All of the following except ____ contribute to

unethical behavior by international managers.

a) Decision-making processes

b) Leadership

c) Personal ethics

d) National culture

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Review Question

According to ________, a companys home

country standards of ethics are the appropriate ones

to follow in foreign countries.

a) the righteous moralist

b) the nave immoralist

c) the Friedman doctrine

d) cultural relativism

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Review Question

________ recognize that human beings have

fundamental rights and privileges which

transcend national boundaries and cultures.

a) Kantian ethics

b) Utilitarian approaches

c) Straw men

d) Rights theories

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Review Question

The _____ suggests that everyone is imagined

to be ignorant of all his or her particular

characteristics.

a) tragedy of the commons

b) veil of ignorance

c) code of ethics

d) the Universal Declaration of Human Rights

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Review Question

What is a companys formal statement of

ethical priorities called?

a) Mission statement

b) Code of ethics

c) Code of values

d) Organizational culture

4-133

Review Question

Which is not an area where multinational

firms are concerned about ethics?

a) Human rights

b) Trade regulations

c) Environmental regulations

d) Corruption


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 5

International Trade Theory


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Why Is Free Trade Beneficial?

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

that it can produce efficiently import products that can be produced more efficiently

in other countries

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Why Do Certain Patterns Of Trade Exist?

Some patterns of trade are fairly easy to explain it is obvious why Saudi Arabia exports oil,

Ghana exports cocoa, and Brazil exports coffee

But, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry?

Why does Japan export automobiles, consumer electronics, and machine tools?

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What Role Does 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 Porters theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries

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What Is Mercantilism?

Mercantilism suggests that it is in a countrys 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

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What Is Smiths Theory Of Absolute Advantage?

Adam Smith 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 the goods produced by other countries

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How Does The Theory Of Absolute Advantage Work? Assume that two countries, Ghana and South Korea, both

have 200 units of resources that could either be used to produce rice or cocoa

In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice

and no cocoa, or some combination of rice and cocoa between the two extremes

In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one ton of rice South Korea could produce 5 tons of cocoa and no rice, 20 tons of

rice and no cocoa, or some combination in between

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How Does The Theory Of Absolute Advantage Work? Without trade Ghana would produce 10 tons of cocoa and 5 tons of rice South Korea would produce 10 tons of rice and 2.5 tons of cocoa

With specialization and trade Ghana would produce 20 tons of cocoa South Korea would produce 20 tons of rice Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice

After trade Ghana would have 14 tons of cocoa left, and 6 tons of rice South Korea would have 14 tons of rice left and 6 tons of cocoa

If each country specializes in the production of the good in which it has an absolute advantage and trades for the other, both countries gain

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How Does The Theory Of Absolute Advantage Work?

Absolute Advantage and the Gains from Trade

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What Is Ricardos Theory Of Comparative Advantage?

David Ricardo asked what might happen when one country has an absolute advantage in the production of all goods

Ricardos theory of comparative advantage suggests that 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

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How Does The Theory Of Comparative Advantage Work? Assume Ghana is more efficient in the production of both cocoa

and rice in Ghana, it takes 10 resources to produce one ton of

cocoa, and 13 1/3 resources to produce one ton of rice So, Ghana could produce 20 tons of cocoa and no rice,

15 tons of rice and no cocoa, or some combination of the two in South Korea, it takes 40 resources to produce one ton

of cocoa and 20 resources to produce one ton of rice so, South Korea could produce 5 tons of cocoa and no

rice, 10 tons of rice and no cocoa, or some combination of the two

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How Does The Theory Of Comparative Advantage Work? With trade Ghana could export 4 tons of cocoa to South Korea in

exchange for 4 tons of rice

Ghana will still have 11 tons of cocoa, and 4 additional tons of rice

South Korea still has 6 tons of rice and 4 tons of cocoa

if each country specializes in the production of the good in which it has a comparative advantage and trades for the other, both countries gain

Comparative advantage theory provides a strong rationale for encouraging free trade

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How Does The Theory Of Comparative Advantage Work?

Comparative Advantage and the Gains from Trade

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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 diminishing returns 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

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Could A Rich Country Be Worse Off With Free Trade?

Paul Samuelson - 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

But, protectionist measures could create a more harmful situation than free trade

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What Is The Heckscher-Ohlin Theory?

Eli Heckscher and Bertil Ohlin - comparative advantage arises from differences in national factor endowments the extent to which a country is endowed with resources like land, labor, and capital

predict that countries will export goods that make intensive use of those factors that are locally abundant, and import goods that make intensive use of factors that are locally scarce

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Does The Heckscher-Ohlin Theory Hold?

Wassily Leontief 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

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What Is The Product Life Cycle Theory?

The product life-cycle theory - (Raymond Vernon) - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade the size and wealth of the U.S. market gave U.S. firms a strong

incentive to develop new products

initially, the product would be produced and sold in the U.S.

as demand grew in other developed countries, U.S. firms would begin to export

demand for the new product would grow in other advanced countries over time making it worthwhile for foreign producers to begin producing for their home markets

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U.S. firms might set up production facilities in advanced countries with growing demand, limiting exports from the U.S.

As the market in the U.S. and other advanced nations matured, the product would become more standardized, and price the main competitive weapon

Producers based in advanced countries where labor costs were lower than the United States might now be able to export to the United States

If cost pressures were intense, developing countries would acquire a production advantage over advanced countries

Production became concentrated in lower-cost foreign locations, and the United States became an importer of the product

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The Product Life Cycle Theory

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Does The Product Life Cycle Theory Hold?

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

But, 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

5-156

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

1. Through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods without trade, nations might not be able to produce those

products where economies of scale are important with trade, markets are large enough to support the production

necessary to achieve economies of scale so, trade is mutually beneficial because it allows for the

specialization of production, the realization of scale economies, and the production of a greater variety of products at lower prices

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What Is New Trade Theory?

2. In those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises first mover advantages - the economic and strategic

advantages that accrue to early entrants into an industry

economies of scale

first movers can gain a scale based cost advantage that later entrants find difficult to match

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What Are The Implications Of New Trade Theory For Nations?

Nations may benefit from trade even when they do not differ in resource endowments or technology

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

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What Is Porters Diamond Of Competitive Advantage?

Michael Porter tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage

1. Factor endowments - a nations position in factors of production necessary to compete in a given industry can lead to competitive advantage can be either basic (natural resources, climate, location) or

advanced (skilled labor, infrastructure, technological know-how)

2. Demand conditions - the nature of home demand for the industrys product or service influences the development of capabilities sophisticated and demanding customers pressure firms to be

competitive

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3. Relating and supporting industries - the presence or absence of supplier industries and related industries that are internationally competitive can spill over and contribute to other industries

successful industries tend to be grouped in clusters in countries

4. Firm strategy, structure, and rivalry - the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry different management ideologies affect the development of

national competitive advantage

vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features

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Determinants of National Competitive Advantage: Porters Diamond

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Does Porters 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, Porters theory has not been sufficiently tested to know how well it holds up

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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 firms should lobby the government to adopt policies that have a

favorable impact on each component of the diamond

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What Is The Balance Of Payments?

A countrys balance of payments accounts keep track of the payments to and receipts from other countries for a particular time period

Balance of payments accounting uses double entry bookkeeping so, the sum of the current account balance, the capital account and the

financial account should always add up to zero

There are three main accounts 1. The current account records transactions that pertain to goods,

services, and income, receipts and payments current account deficit - a country imports more than it exports current account surplus a country exports more than it imports

2. The capital account records one time changes in the stock of assets 3. The financial account records transactions that involve the

purchase or sale of assets net change in U.S. assets owned abroad foreign owned assets in the United States

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What Is The Balance Of Payments?

United States Balance of Payments Accounts, 2007

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Is A Current Account Deficit Bad?

Does current account deficit matter? a current account deficit implies a net debtor so, a persistent deficit could limit future economic

growth

But, even though capital is flowing out of as payments to foreigners, much of it flows back in as investments in assets

Yet, suppose foreigners stop buying domestic assets and sell their dollars for another currency

A currency crisis could occur

5-167

Review Question

All of the following theories advocated free

trade except

a) Mercantilism

b) Comparative Advantage

c) Absolute Advantage

d) Heckscher-Ohlin

5-168

Review Question

Which theory suggested that comparative advantage

arises from differences in national factor

endowments?

a) mercantilism

b) absolute advantage

c) Heckscher-Ohlin

d) comparative advantage

5-169

Review Question

Which theory suggests that as products

mature the optimal production location will

change?

a) Mercantilism

b) Comparative Advantage

c) Absolute Advantage

d) Product life-cycle

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Review Question

Economies of scale and first mover

advantages are important to which trade

theory?

a) Mercantilism

b) Product life cycle

c) New trade theory

d) Comparative advantage

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Review Question

Porters diamond of competitive advantage

includes all of the following except

a) Factor endowments

b) Demand conditions

c) First-mover advantages

d) Firm strategy, structure, and rivalry

5-172

Review Question

_________ refer to the nature of home demand for the industrys product or service.

a) Demand conditions

b) Factor endowments

c) Firm strategy, structure, and rivalry

d) Related and supporting industries


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 6

The Political Economy of International Trade


6-175

What Is The Political Reality Of International Trade?

Free trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country

While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups

6-176

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 Tariffs

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

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2. Subsidies - government payments to domestic producers Subsidies help domestic producers compete against low-cost foreign imports gain export markets

Consumers typically absorb the costs of subsidies

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

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4. Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing countrys government Import quotas and voluntary export restraints benefit domestic producers raise the prices of imported goods

5. Local Content Requirements - demand that some specific fraction of a good be produced domestically benefit domestic producers consumers face higher prices

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6. Administrative Polices - bureaucratic rules designed to make it difficult for imports to enter a country polices hurt consumers by limiting choice

7. Antidumping Policies aka countervailing duties - designed to 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 later raise prices

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Why Do Governments Intervene In Markets?

There are two main arguments for government intervention in the market

1. Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)

2. Economic arguments - concerned with boosting the overall wealth of a nation benefits both producers and consumers

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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 like aerospace or electronics are often protected because they are deemed important for national security

3. Retaliating to 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

6-182

What Are The Political Arguments For Government Intervention?

4. Protecting consumers from dangerous products limit unsafe products

5. 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

the Helms-Burton Act and the DAmato Act, have been passed to protect American companies from such actions

6. Protecting the human rights of individuals in exporting countries through trade policy actions the decision to grant China MFN status in 1999 was based on this

philosophy

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What Are The Economic Arguments For Government Intervention?

1. The infant industry argument - an industry should be protected until it can develop and be viable and competitive internationally

accepted as a justification for temporary trade restrictions under the WTO

Question: 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

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What Are The Economic Arguments For Government Intervention?

2. Strategic trade policy - in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages

governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

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When Should Governments Avoid Using Trade Barriers?

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

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How Has The Current World Trading System Emerged?

Until the Great Depression of the 1930s, most countries had some degree of protectionism Smoot-Hawley tariff (1930)

After WWII, the U.S. and other nations realized the value of freer trade established the General Agreement on Tariffs and Trade (GATT) - a

multilateral agreement to liberalize trade

In the 1980s and early 1990s protectionist trends emerged Japans 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

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The Uruguay Round of GATT negotiations began in 1986 focusing on

1. Services and intellectual property

going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture

2. The World Trade Organization

it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules

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The WTO encompassed GATT along with two sisters organizations the General Agreement on Trade in Services (GATS) the Agreement on Trade Related Aspects of Intellectual

Property Rights (TRIPS)

The WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services

So far, the WTOs policing and enforcement mechanisms are having a positive effect

Most countries have adopted WTO recommendations for trade disputes

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What Is The Future Of The World Trade Organization?

The WTO has become a magnet for various groups protesting free trade

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

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What Is The Future Of The World Trade Organization?

The WTO launched a new round of talks at Doha, Qatar in 2001

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

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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 raise the cost of exporting products to a country

2. Voluntary export restraints (VERs) may limit a firms 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

Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies

6-192

Review Question

When tariffs are levied as a fixed charge for

each unit of a good imported, they are called

a) Specific tariffs

b) Ad valorem tariffs

c) Tariff rate quotas

d) Transit tariffs

6-193

Review Question

A ________ demands that some specific fraction of a good be produced domestically

a) subsidy

b) quota rent

c) voluntary export requirement

d) local content requirement

6-194

Review Question

Which of the following is not a political argument for

government intervention?

a) protecting jobs

b) protecting infant industries

c) protecting industries deemed important for national security

d) protecting consumers from dangerous products

6-195

Review Question

What is the most common political reason for trade barriers? a) To protect infant industries b) Strategic trade policy c) To protect jobs d) To protect industries that are important for

national security

6-196

Review Question

Which theory suggests that in cases where there may

be important first mover advantages, governments

can help firms from their countries attain these

advantages?

a) The infant industry argument

b) Strategic trade theory

c) Comparative advantage theory

d) The Leontief paradox

6-197

Review Question

All of the following except _____ are key issues

on the table at the Doha Round.

a) Anti-dumping policies

b) Protectionism in agriculture

c) Intellectual property rights

d) Infant industry protection


By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 7

Foreign Direct Investment


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What Is FDI?

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country the firm becomes a multinational enterprise

FDI can be in the form of greenfield investments - the establishment of a wholly new

operation in a foreign country acquisitions or mergers with existing firms in the foreign country

The flow of FDI refers to the amount of FDI undertaken over a given time period Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country

The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time

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What Are The Patterns Of FDI?

Both the flow and stock of FDI have increased over the last 30 years Most FDI is targeted towards developed nations - United States and EU

South, East, and South East Asia - China and Latin America are emerging

FDI has grown more rapidly than world trade and world output firms still fear the threat of protectionism democratic political institutions and free market economies have

encouraged FDI globalization is forcing firms to maintain a presence around the world

Gross fixed capital formation - the total amount of capital invested in factories, stores, office buildings, and the like the greater the capital investment in an economy, the more favorable its

future prospects are likely to be

So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy

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FDI Outflows 1982-2008 ($ billions)

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FDI Inflows by Region 1995-2008 ($ billion)

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Inward FDI as a % of Gross Fixed Capital Formation 1992-2007

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What Is The Source Of FDI?

Since World War II, the U.S. has been the largest source country for FDI

the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries

together, these countries account for 56% of all FDI outflows from 1998-2006, and 61% of the total global stock of FDI in 2007

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What Is The Source Of FDI?

Cumulative FDI Outflows 1998-2007 ($ billions)

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Why Do Firms Choose Acquisition Versus Greenfield Investments? Most cross-border investment is in the form of

mergers and acquisitions rather than greenfield investments

Firms prefer to acquire existing assets because mergers and acquisitions are quicker to execute than

greenfield investments

it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up

firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

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Why Does FDI In Services Occur?

FDI is shifting away from extractive industries and manufacturing, and towards services

The shift to services is being driven by the general move in many developed countries toward

services

the fact th

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