D70 Semester Notes
Popular in Global Business Environment
Popular in International Business
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
This 77 page Bundle was uploaded by Echo Angelicchio on Thursday February 12, 2015. The Bundle belongs to BUS-D 270 at a university taught by Garcia in Fall. Since its upload, it has received 234 views.
Reviews for D70 Semester Notes
What an unbelievable resource! I probably needed course on how to decipher my own handwriting, but not anymore...
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/12/15
Chapter 1 D270 Notes Echo Angelicchio 02122015 Chapter 1 Globalization and International Business Opening Case The Globalized Business of Sports Sports is potentially the most globalized legitimate business in the world 0 How does this relate to business 0 Cities and countries compete to host the events in order to attract tourists and publicize to the world opportunities that might exist for business 0 Global companies pay for marketing rights as sponsors 0 Location of worldwide sporting events used to be less global but that is changing 0 International Job Market 0 More fans expect to see the world s best teams and players so the search for talent has become worldwide 0 However assembling talent is not nearly all it takes to make a sports business successful 0 How the ATP Association of Tennis Professionals Courts Worldwide Support 0 Members are required to play in a certain number of events and thus stop by in a number of countries to maintain their international rankings 0 This keeps tennis a global sport 0 International broadcast of the events attracts sponsorship from international companies 0 From National to International Sports Pastimes 0 Countries either have a legally designated national sport or at least an effective one 0 Increased exposure to international audiences broadens global fan base and has created more multilingual and cultural teams 0 World of Televised Sports 0 Top players effectively become global brands and are paid millions for endorsing products 0 Teams also promote products even nonsports ones by having their logos in stadiums and on team uniforms Introduction 0 Globalization widening set of interdependent relationships among people from different parts of a world that happens to be divided into nations 0 Sometimes refers to elimination of barriers to international movements of goods services capital technology and people that in uence integration of world economies How International Business Fits In International business all commercial transactions including sales investments and transportation that take place between two or more countries private companies do it for profit and government business may or may not do it for profit The Studv of International Business 0 Studying international business is important because 0 Most companies are either international or compete with international companies 0 Modes of operations may differ from those used domestically 0 The best way of conducting business may differ by country 0 An understanding helps you make better career decisions 0 An understanding helps you decide what governmental policies to support 0 Like in the opening case example managers must consider where to obtain best inputs at best price and where product or service can best be sold Understanding the EnvironmentOperations Relationship 0 Best way to do business abroad is not necessarily the same as the best way to do it at home 0 Modes of business like importing and exporting differ in other countries 0 Physical social and competitive conditions also differ among countries The Forces Driving Globalization Globalization has been growing is less pervasive than generally thought has economic and noneconomic dimensions and is stimulated by several factors Studies of the measure of globalization have revealed some common results 0 Size of countries small countries tend to be more globalized than larger ones 0 Income of the countries population countries with higherincome populations tend to be more globalized than those with lowerincome populations 0 Variance among globalization aspects even if a country ranks as highly globalized on one dimension like travel it may also be low on another 0 ie US is high on technological scales but low on economic ones Factors in Increased Globalization Increase inapplication of technoloav 0 most modern advances in production are from fairly recent technical advances 0 Much of what we trade today either did not exist or was unimportant in trade a decade or two ago 0 Population growth and rising productivity have freed up more people and time to develop new products because it takes fewer people to produce them 0 Many new products cannot easily take place in one country alone 0 Collaboration among and dependence on firms in different countries becomes necessary 0 Advances in communication and transportation allow us to discover and desire products and services developed in far parts of the world 0 In the beginning case involving globalized sports ability to broadcast globally and easy travel for athletes has allowed more quantity of sporting events and more advertisingmarketing through broadcast of them Liberalization of crossborder trade and resource movements 0 Ever country in some way restricts the movement across its borders to protect its own industries 0 Most governments over time have reduced these restrictions for 3 reasons 0 Citizens want greater variety of goodsservices at lower prices 0 Competition spurs domestic producers to become more efficient 0 They hope to induce other countries to lower their barriers in turn Development of services that support international business 0 Companies and governments have developed a variety of services that facilitate global commerce Growth of consumer pressures 0 Consumers know more about products and services available in other countries can afford to buy them and want a greater variety in quality price and characteristics 0 Consumers ability to take advantage of this variety differs greatly by wealth distribution Increase in global competition 0 Many companies have merged or acquired operations to gain the efficiencies to better compete 0 These are the socalled bornglobal companies that start out with a global focus because of their founders international experience and because advances give them a good idea of where global markets and supplies are 0 Clusteringagglomeration when many new companies locate in areas with numerous competitors and suppliers I Quickly observe how their competitors benefit from foreign opportunities and gain easier access to resources needed for international moves 0 Becoming more global is necessary regardless of industry Changes in political situations and government policies 0 Political changes sometimes open new frontiers for international business 0 However governments still prefer international business within certain countries and even deny such business with other countries for political reasons Expansion of crossnational cooperation 0 Governments have realized their own interests can be addressed through international cooperation by means of treaties agreements and consultation 0 This willingness to do so is due to three main needs 0 Gain reciprocal advantages I Companies petition governments to act on their behalf I Governments join international organizations and sign treaties and agreements for a variety of commercial activities 0 Attack problems jointly that one country acting alone can t solve I Governments coordinate on projects that serve the interest of all parties dams highways bridges U Many problems are inherently global and impossible for one country to deal with alone I To coordinate economic policies most economically important countries regularly meet to share information and ideas U Example the group of 20 G20 countries 0 Deal with areas of concern that lie outside the territory of any nation I 3 global areas belong to no single country noncoastal ocean areas outer space and Antarctica I We need agreements to specify the amounts and methods of fishing to be allowed for example or rules for commercial benefits reaped from outer space or to determine limitations on tourism in Antarctica The Costs of Globalization Despite benefits of rising globalization there are also consequences that remain controversial Antiglobalization forces regularly protest international conferences and policies sometimes with violence and revolve around three main focus issues Threats to National Sovereigntv 0 Question of local objectives and policies 0 Rules set re ect national priorities however critics argue that individual countries priorities are undermined by opening borders to trade 0 Question of small economies overdependence 0 Also claim that small economies depend so much on larger ones that they are vulnerable to foreign mandates 0 Question of cultural homogeneity 0 Critics also charge that globalization homogenizes products companies work methods social structures and even language 0 Makes it harder to maintain traditional way of life Environmental Stress 0 Critics argue that growth consumes more natural resources and increases environmental damage 0 Argument for global growth and cooperation 0 Some argue that globalization has positive results for sustaining natural resources and maintaining environment On practice test Brazil hasn t curtailed logging activity in the Amazon because it holds job creation in that industry as more important than climate protection outside brazil Growing Income Inequalitv and Personal Stress 0 Income Inequality 0 Has been growing among and within countries 0 Critics claim globalization has affected this disparity I Profits have gone disproportionately to the top executives rather than to the masses thus not actually raising standard of living 0 Must maximize gains and minimize costs borne by those who lose from globalization 0 Personal Stress 0 Some costs can t be measured economically this refers to stress of people whose status suffers or who fear loss of jobs 0 Evidence that growth of globalization goes hand in hand with costly social unrest in general PointCounterpoint Is Offshoring Good Strategy Point Yes because if offshoring succeeds in reducing costs it is good if you can cut your cost you can cut your prices or improve your product 0 Even though main complaint of offshoring is that too many domestic jobs end up abroad it actually lets companies create more highvalue jobs at home causing demand for qualified people to go up 0 This in turn results in more highincome people 0 Offshoring is a natural extension of outsourcing O Shifting of jobs is commonplace and shifting because of outsourcing is no different than a shift for any other reason 0 Offshoring isn t for everyone some companies even reshore which means they bring operations back home from abroad Counterpoint No some things are good for some of the people some of the time but for offshoring it is good for only a few people but not most 0 Goods are rarely cheaper than they used to be because of outsourcing the lower prices don t positively impact the consumers 0 Rather lower production costs merely result in higher compensation for already highpaid employees and for shareholders 0 When you replace jobs by offshoring you re exchanging good jobs for bad ones 0 Increase in highvalue jobs doesn t do anything for people who have only one skillset as a result of working the same menial off shored job their whole lives 0 People do have to change jobs in a dynamic economy more than in a stagnant one but not to the extent caused by offshoring Why Companies Engage in International Business Expanding Sales 0 pursuing international sales usually increases the potential market and potential profits 0 For example in the opening case televising sports competitions globally generates revenue in great excess of any increased transmission costs Acguiring Resources 0 Foreign sources may give companies lower costs new or better products and additional operating knowledge 0 This can allow firms to sometimes gain a competitive advantage by improving product quality or differentiating their products from those of competitors 0 Diversity of employees and operations bring companies new perspectives Reducing Risk 0 International operations may reduce operating risk by smoothing sales and profits and preventing competitors from gaining advantages 0 Swings in sales and profits can be minimized 0 Companies go international for defense reasons as well to counter a competitor s advantage Modes of Operations in International Business Merchandise Exports and Imports 0 Merchandise exports tangible goods that are sent out of a country 0 Merchandise imports goods brought into a country 0 Merchandise exports and imports are usually a country s most common international economic transactions Service Imports and Exports I service exports and imports international nonproduct sales and purchases 0 Very important for some companies and include many specialized international business operating modes 0 Tourism and Transportation I Economies of some countries depend heavily on revenue from these sectors 0 Service Performance I Services that net company earnings in terms of fees which also occurs on an international level I Example companies pay fees for services rendered as socalled turnkey operations construction projects performed under contract and transferred to owners where they are operational I Companies also pay fees for management contracts arrangements where one company provides personnel to perform general or specialized management functions for another 0 Asset Use I Licensing agreements when one country allows another to use its assets such as trademarks patents copyrights or expertise under contracts I Royalties earnings from licensing agreements I Franchising mode of business in which one party franchisor allows another franchisee to use a trademark as an essential asset of the franchisee s business Investments 0 Dividends and interest paid on foreign investments are considered service exports and imports because they represent the use of assetscapital 0 Direct investment 0 Foreign direct investment FDI investor takes a controlling interest in foreign company I When 2 companies share investment of an FDI it is called a joint venture 0 Portfolio Investment 0 Portfolio investment noncontrolling financial interest of a foreign operation 0 Takes one of two forms stock in a company or loans to a companycountry in the form of bonds bills or notes purchased by the investor Types of International Organizations 0 MNE multinational enterprise terms also used include multinational corporation or company 0 This is any company with foreign direct investments Why International Business Differs From Domestic Business Conditions in a company s external environment that may affect its internal operations explain differences between international vs domestic business Although foreign external environmental differences are problematic 0 some reports of failure are myths 0 they must be weighted against domestic opportunities and risks 0 understanding social science disciplines and how they affect all business functions help assure success abroad thsical and Social Factors 0 Geographic In uences 0 Natural conditions affect where different goods and services can be best produced 0 Geographic barriers affect communications and distribution channels 0 Population distribution and impact of human activity on environment may also exert strong future in uences on international business 0 Political Policies 0 Politics often determine where and how international business can take place 0 Political disputes can disrupt trade and investment 0 Legal Policies 0 Each country has its own laws regulating business 0 Agreements among countries set international law I Determines how earnings are taxed by all jurisdictions I International law can also determine how or when or whether a company can operate in certain places 0 Ways in which laws are enforced also affect a firm s foreign operations 0 Behavioral Factors 0 Countries behavioral norms in uence how companies should operate there 0 Economic Forces 0 Economics explains country differences in costs currency values and market size The Competitive Environment A companies competitive situations may differ by their rankings among countries competitors they face globally and resources they can commit internationally 0 Competitive strategy for products 0 Products compete by means of cost or di erentiation strategies I Developing favorable brand image I Developing unique characteristics 0 Company Resources and Experience 0 Company s size and resources compared to those of its competitors 0 In large markets companies have to invest much more to secure national distribution than in small markets 0 Will face more competition in large markets than in small ones 0 Being a leader in one country however doesn t guarantee being a leader anywhere else I Competitors Faced in Each Market 0 Success in a market often depends on whether the competition is also international or local 0 For example the 2 large commercial aircraft companies compete almost only with each other I What they learn about one another in one country is useful in predicting the other s strategies elsewhere Looking to The Future 3 Ways of Looking at Globalization 1 Globalization is Inevitable this view re ects premise that advances in human connectivity are so pervasive that consumers everywhere will know about and demand best products regardless of origins Must figure out how to spread benefits of globalization equally 2 International Growth will be More Regional Than Global 03 Second view is based on studies showing that almost all of the companies we think of as global conduct most of their business at hoe and in neighboring countries Most world trade is regional Transport costs favor regional over local business However regional growth may also only be a transitional phase before international growth Globalization and International Business Will Slow Third view argues that pace of globalization will slow or has already begun collapsing Some critics are adamant about voicing their antiglobalization sentiments 0 Pressure governments to promote nationalism by raising trade barriers and rejecting international organizations and treaties Economic recession and lingering unemployment have led countries to enact measures to protect their work forces Safety concerns may also inhibit companies from venturing abroad as much There is concern that neither the institutions nor the people working in them can handle the complexities of an interconnected world adequately Closing Case Carnival Cruise Lines Historically recreational sea voyage was reserved for the elite in recent years however the cruise industry has undergone a change and the demographic groups it now targets include the working middle class as well What s a Cruise and What Happened to the Cruise Industry 0 Cruise is a sea voyage taken for pleasure 0 Shipping companies that once were the only mode of transcontinental travel lost business to air travel meaning they needed another selling point to maintain business I cruises became a selling point Contemporary Cruise IndustrV 0 Dominated by Carnival and Royal Caribbean with Carnival by far the largest 0 Carnival began with the idea of a Fun Ship Vacation which was designed to be less formal and luxurious than a traditional ocean liner 0 Began by buying a retired liner and refurbishing it Doing Business in International Waters O O The whole cruise industry is international in scope given the nature of its business Only a few cruiseline offerings can be characterized as purely domestic I What it Takes to Operate a Cruise Line 0 O O O 0 Ship Stopping Where to find crew members Casinos and other amenities Oversees environment use whole world as source of both customers and supplies Safety Issues strict security checks for boarding passengers Economic Issues lengthfrequency of cruises for customers depends on economic conditions I However cruise lines have faired well during economic downturns because of their allinclusive prices being bargains compared to cost of travel to major cities or popular resorts I Fixed prices also spare passengers added risk of encountering unforeseen unfavorable exchange rates Weather uncertainty whenever there is extreme weather Carnival may have to cancel trips and fully refund passengers The future overall the outlook for Carnival and the cruise industry as a whole is mixed I Relatively untapped cruise destinations still remain I More people in places like China will have more discretionary income to spend on leisure travel I However percentage of firsttime customers is declining and industry observes worry that experienced cruisers will tire of it Chapter 2 The Cultural Environments Facing Business Case Study Saudi Arabia Background Loyalty is tribal rather than national Share common language of Arabic and common religion of Islam Oil very important to economy Con ict of traditionalism vs modernization Religious Factor Religion and state very strongly tied Regional differences within same religion in Saudi Arabia Rules of behavior very foreign to westernized cultures Traditional Factors Familycentered society Most Saudi Arabian business have historically been family owned Traditionally building a friendshiprelationship comes before any business dealings This clashes greatly when british salesmen attempt to work at their accustomed pace in Saudi Arabia finding the Saudi Arabians to take too much time to make a deal Gender Roles Very different from ours women are very subservient Culture learned norms based on the values attitudes and beliefs of a group of people The People Factor business always must involve people Cultural Diversity As dif nationalities come together through projects and teams their diverse backgrounds perspectives and experiences often enable businesses Cultural Collision When divergent cultures come in contact Occurs under 2 conditions Company implements practices that are less effective than intended Company s employees encounter distress because of difficulty in accepting or adjusting to foreign behaviors Sensitivity and Adjustment Must determine which practices of a foreign business differ from your own Cultural Awareness Lack of cultural awareness can cause failed business dealings in foreign culture Two types of business cultures Dealfocus DF culture business people are primarily taskoriented and don t like to waste time in business dealings Relationshipfocus RF culture need to build a relationshipfriendshiptrust before doing any business dealings may view DF s as offensive Idea of a Nation Delineating Cultures Nation as a point of reference similarity among people is both a cause and effect of national boundaries and is intrinsically connected to culture Nation as a cultural mediator existence of shared attributes doesn t mean whole country follows same values and attitudes Many people are bicultural or multicultural meaning they have internalized more than one national culture Sources of Cultural Change Change by choice Change by imposition Cultural imperialism When an alien culture imposes certain elements on an existing culture Language Diffuser and Stabilizer of Culture Languages like English French and Spanish have such widespread acceptance that the native speakers don t feel the same need to learn other languages as do speakers of rarer languages Why English travels so well English is the world s most important second language There are sometimes backlashes about accepting English as an operating language Religion as a Cultural Stabilizer Buddhism Christianity Hindu Islam and Judaism in uence specific beliefs that affect business Inhibiting sale of certain products or the performance of work at certain times Why does Geography matter Some groups of people are more isolated from the rest of the world than others Sometimes natural barriers or other factors contribute to this isolation Mutual isolation of tribal groups results in 800 different languagesis papua New Guinea Some in a country may have more external contact than others and therefore have a more liberal attitude towards business Behavioral Practices Affecting Business Issues in social stratification every culture ranks some people higher than others Ranking can be by achievements and qualifications or by affiliationmembership to certain groups or by age Ascribed group membership gender family age caste ethnic racial or national origin determined by birth Acquired group membership based on religion political affiliation educational place and achievement profession not something you are born with Ethnic and racial groups Genderbased groups Familybased groups Work Motivation Materialism and motivation There are arguments on both sides for strong religious beliefs having positive correlation to production and also for more secular economies to be more successful ProductivityLeisure tradeoff some cultures place more value on leisure time than others shorter hours more holidays spend more time and money on leisure activities France and US contrast france much more leisurely Expectation of Success and Reward Motivation toward work is in uenced by the perceived likelihood of success and its rewards vs failure People have little enthusiasm for effort when the likelihood of success seems too easy or too difficult Enthusiasm to work towards something peaks when uncertainty of success is high and the rewards are high Performance and Achievement Masculinityfemininity index High or low masculinity or femininity in a country can be very revealing when making international business decisions Highmasculinity admire successful workers little sympathy for less fortunate prefer to be better than others rather than on par with them Money and things oriented live to work don t work to live Highfemininity prefer smooth social relationships and amiable ongoing dealings with suppliers instead of immediate results Place organizational goals like employee and social welfare ahead of goals like minimizing workers compensation Relationship Preferences Power distance superior subordinate interaction preferences Companies are well advised to align their management styles with power distance preferences of foreign cultures High power distance People prefer little consultation between the two tiers and one of two management styles Autocratic ruling with unlimited authority Patemalistic regulating conduct by supplying needs Low power distance People prefer consultative styles Workerparticipation methods may need to be adjusted to fit different countries Individualism vs Collectivism High individualism employer s preference to fulfill leisure time and improve skills outside the organization receive direct monetary compensation as opposed to fringe benefits engage in personal decisionmaking and onthejob challenges selfactualization opportunity is a prime motivator employees want challenges High Collectivism Typifies an employer s penchant for dependence on the organization through training Also through satisfactory work conditions and good benefits Fulfilling security needs is a high motivator Socialismcommunism Risktaking Behavior Uncertaintv avoidance Where this is high employees in these countries prefer to follow a set of rules even if they believe that breaking them may be in the company s best interests Fewer consumers are prepared to risk being early product adopters Companies who depend heavily on introducing new products are unlikely to try to sell to a market of this nature M Countries differ greatly on opinion on such statements as most people can be trusted and you can t be too careful when dealing with people For example many more Norwegians vs Brazilians regard most people as inherently trustworthy When trust is high business costs tend to be lower because they spend less time on every possible contingency and monitoring every action to ensure compliance and more time actually producing selling and innovating Degree of trust may differ between what people consider their ingroup and their out group ie high trust of family members but low trust of people unknown Future orientation Living for the future easier to motivate workers through delayed compensation like retirement because it is something they can wait for Cultures differ in their perceptions of the risks from delaying gratification US needs more instant gratification than most European nations for employee motivation Fatalism Fatalism believe every event in life is inevitable If people believe strongly in selfdetermination they may be willing to work hard to achieve goals and take responsibility for performance HOWEVER if they are fatalistic they re less likely to accept the basic causeandeffect relationship between work and reward Country with a high rate of fatalism people plan less for contingencies Religious differences also play a significant role in this factor Conservativefundamentalist groups are more likely to view occurrences as the will of God and so managers are less apt to sway them with causeandeffect logic Would be more successful with personal appeals or offering of rewards for complying with requests Information and Task Processing Perception of Cues Cues features that inform us about the nature of something Cultural differences especially language re ect differences in perception of cues Some languages are much more descriptive about things that are culturally relevant to them but not perhaps culturally relevant to foreigners Obtaining Information LowContext vs HighContext Cultures Lowcontext United states most of Northern Europe People generally regard as relevant only firsthand information that bears directly on the subject at hand Businesspeople will spend little time on small talk and tend to get to the point Highcontext Japan Arabic nations People tend to regard seemingly peripheral information as pertinent and infer meanings from things said either indirectly or casually Tend to follow these patterns also in written communications even in emails and take them into account in international litigation Can result in miscommunication because lowcontext people expect explicit explanations of requirements rather than roundabout explanations Information Processing As all cultures categorize plan and quantify information processing is a universal activity However every culture has its unique systems for ordering and classifying information Must understand processing systems to perform efficiently and work amicably in foreign environments Different processing systems create challenges in sharing global data Monochronic vs Polvchronic Cultures Cultural differences also affect people s comfort with different degrees of multitasking Monochronic cultures People prefer to work sequentially finishing transactions with one customer before dealing with another Polychronic cultures More comfortable when working simultaneously on a variety of tasks such as dealing immediately with multiple customers who need service Idealism vs Pragmatism Some cultures tend to focus first on the whole and then on the parts others do the opposite Idealism Cultures in which people prefer to establish the overall principles before they try to resolve small issues Example Japan Pragmatism Cultures in which people focus more on details than on abstract principles Example United States Communications Spoken and Written Language Translating languages from one directly to another is not as straightforward as it would seem because different expressions literal and idiomatic can mean different things depending on whowhat language is speaking them Grammar is very complex a seemingly slight misuse of a word can substantially change the meaning Silent Language we constantly exchange messages through a host of nonverbal cues in the opening case researches used nonverbal cues to deduce who was or was not af uent Colors For the success of a product its colors must be consistent with the consumer s frame of reference Different colors invoke distinct connotations in different countries Example different colors for mourning Distance The accustomed distance people maintain during conversation or when conducting business varies culturally Example US maintains high distance but in Mexico the distance is customarily much lower Differences can cause uneasiness for both sides Time and Punctualitv Different perceptions of time and punctuality can create confusion as well In the US customary to arrive early for business appointments late for dinner and late for social gatherings In Latin America would find it discourteous to be even a few minutes late to a dinner social gathering but wouldn t even notice being late to a business meeting Body Language Also called kinesics This is the way people walk touch and move their bodies Also differs greatly across cultures very few gestures have universal meaning Prestige Factor of silent language that relates to a person s status particularly in an organizational setting In the US we denote status with larger offices on higher oors so we may underestimate the prestige of equally powerful counterparts who don t indicate their status in the same material manner Dealing With Cultural Differences After identifying key cultural differences abroad managers must figure out how to succeed there by determining degrees of successful adjustment 1 Extent to which a culture is willing to accept the introduction of anything foreign 2 Whether key cultural differences are small or great 3 The ability of individuals to adjust to what they find in foreign cultures 4 The general management of orientation of the company involved 1 Host Society Acceptance How willing the foreign culture is to accepting the introduction of anything foreign Sometimes if host society is willing little adjustment is required for managers to be successful abroad Sometimes however citizens may take offensebe opposed to foreigners making adjustments that are extreme such as dressing in local garb because they are not natives 2 Degree of Cultural Differences Cultural Distance Number of countries apart measures cultural dimensions by cultural proximity Moving to a culturally similar country should mean encountering fewer differences and needing to make fewer adjustments However even in similar countries significant cultural differences could still affect business dealings Hidden Cultural Attitudes Even if cultures are similar people in the host country may reject the in ux of foreign practices because they see them as additional steps that threaten their selfidentities With many minute cultural dimensions it is not easy to discern what may impede operations by comparing countries on broad dimensions that are obvious and already studied 3 Ability to Adjust Culture Shock Culture shock the frustration that results from having to absorb a vast array of new cultural cues and expectations Ending case shows that help from fellow citizens who already have learned the different tasks can speed up your understanding of them in a different culture 4 Company and Management Orientations Polycentrism Polycentric organization believes that its business units abroad should act like local companies Polycentrism management may be so overwhelmed by national differences that it won t introduce workable changes The overly polycentric firm may rely too heavily on imitating proven hostcountry practices and in the process use its own innovative edge Ethnocentrism Re ects the belief that one s own culture is superior to that of other countries Usually applied in IB to a company or individual so strongly committed to the principle of what works at home will work abroad that its foreign practices ignore differences in cultures and markets Ethnocentric management overlooks national differences and Ignores important factors Believes homecountry objectives should prevail Thinks acceptance by other cultures is easy W Integrates company and hostcountry practices as well as some entirely new ones In the opening case salesmen have adjusted to Saudi customs but at the same time have introduced homecountry merchandising practices along with new practices Geocentric management often uses business practices that are hybrids of home and foreign norms Requires companies to balance informed knowledge of their own organizational cultures with home and host country needs capabilities and constraints Geocentrism is the preferred approach for companies to succeed in foreign cultures and markets Strategies for Instituting Change Focus on strategies in nine different areas Value systems costbenefit analysis of change resistance to too much change participation reward sharing opinion leadership cultural bridges timing learning abroad Ending Case Tesco PLC Leveraging Global Knowledge Case set up David Potts CEO of Tesco Asia goes to visit China and this visit has posed many questions need to figure out how to develop his venture across such a huge continent Companv Background Based out of the UK Recession in 1980 I new young talented executives with Tesco background made Tesco into a sort of Walmart beat out walmart Strategy to become market leader was to improve in every aspect of operations Change in corporate culture to emphasize attention to people Potts compiled J argonbuster to simplify language which was vital as employees became more multicultural Internationalization Entered Hungarian market first then to Thailand and South Korea Initially entered with an ethnocentric approach that tried to replicate home success abroad Created issues because parading the British aspect of Tesco in front of a store not in Britain was terrible marketing strategy Resolved to move to a locally responsive marketing stance Grew internationally in a bottomup locally inclusive fashion Main challenges were to identify global advantages of its foreign subsidiaries and to learn from them in a way that would reignite their hoe country competitive advantage The Essence of Tesco Proiect Solution brought together a team of Asian managers who would visit Tesco UK to examine home operations and give insight into what they do differently at their Tesco s that makes them more profitable Project had twopronged strategic purpose To conduct healthcheck of Tesco UK s current corporate state and figure out what isn t working Compare and contrast that state with processes and practices used in Asian subsidiaries and leverage this globally for Tesco Win locally by applying skills globally Chapter 3 The Political and Legal Environments Facing Business Opening Case China Complicated Risks Big Opportunities Background over the past three decades China has prospered more from globalization than any other country The Siren Call of China Market potential With 134 billion citizens market is huge and steadily expanding Domestic markets are in early highgrowth stages Market Performance Rapid economic development Growing income has in turn spurred spending Infrastructure Investing trillions on housing offices highways airports seaports waterways dams power grids Resources Immense pool of productive labor because of welleducated population Strategic Positioning China represents biggest growth opportunity in the history of capitalism The Complication of Reality Political and legal systems of china make business operations there nebulous and frustrating China s State Capitalism has the government manipulating market activities to achieve political goals MNE s doing business in China are at a disadvantage Rapid emergence aggravates longrunning idiosyncrasies creating many gray areas Precise laws vs ambiguous guidelines Chinese court is very harsh Legalization is full of ambiguities Legislative gaps and hazy interpretations The Political Environment Opening case shows that evolving political and legal systems create a thriving business environment Tens of thousands of foreign investors have entered its market opened operations managed activities and earned profits Political System The structural dimensions and power dynamics of the government that Specify institutions organizations and interest groups Goal of the political system is integrating the diverse elements of a society The test of a political system is uniting society in the face of divisive viewpoints Individualism vs Collectivism Individualism champions the primacy of the rights and role of the individual while collectivism refers to the primacy of the rights and role of the group Individualism Business implications of individualism are direct Every person has the right to make economic decisions largely free of rules and regulations Countries with an individualistic orientation like the US shape their market place around the idea of laissez faire literally means leave it alone Laissezfaire approach holds that government should not interfere in business affairs rather the market should operate according to the neoliberal principles of free market fundamentalism Gaps between philosophical ideals and opportunistic behaviors create an adversarial relationship con ict between governments and businesses in individualistic societies Opportunistic behavior as a result of individualism can destabilize the marketplace and jeopardize system sustainability Collectivism Collectivism stresses that the needs of society take precedence over the needs of the individual In the business world collectivism holds that the ownership of assets allocation of resources structure of industries conduct of companies and actions of managers share common goah Improve the welfare of all members of society Business decisions are made by the group Political Ideology A political ideology encapsulates the doctrine of political behavior and change it outlines the procedures for converting ideas into actions In the US liberal principles of Democratic party and conservative doctrine of Republican party define their respective political ideologies Pluralism Holds that there are multiple opinions about an issue each of which contains part of the truth but none that contain the entire truth Progress with pluralism depends on compromise Can also arise when two are more groups in a country different in terms of language class structure ethnic background tribal legacy or religion Spectrum Analysis Political spectrum Spectrum analysis guides the assessment of a complex issue in this case political ideology The starting point is to specify credible ideas to ideologies This is complicated because the world has a huge diversity of potential ideologies Spectrums are bounded by endpoints like secular vs theocratic Common denominator that integrates the diversity of political ideologies is its vision of political freedom Political freedom Measures the degree to which fair and competitive elections occur the extent to which individual and group freedoms are guaranteed legitimacy ascribed to the rule of law and existence of freedom of the press Democratic Government Democracy Radical Liberal Conservative Reactionary Autocratic Government Totalitarianism Dictatorship Communist Fascist Authoritarian Democracy calls for participation by citizens in a fair and just decisionmaking process all citizens are politically and legally equal entitled to freedom of thought opinion belief speech and association and command sovereign power over public officials Business implications MNE s invest and operate based on economic not political standards Business environments promote commerce expand trade and streamline exchange both Within and across countries Bureaucratic regulation does not make decisions for the productive business environment Totalitarianism subordinates the individual to the interests of the collective A single agent in Whatever form monopolizes political power and uses it to regulate many if not all aspects of public and private life Eliminates dissent through indoctrination persecution surveillance propaganda censorship and violence 25 billion people live under such rule Leaders of such harshly governed countries increasingly display subtle finesse in their techniques of modern propaganda to exert and maintain control of a population Business Implications Managers in totalitarian systems face markets that are radically different from those in democracies Private enterprise supports state control of economic activities if it is even permitted Managers adjust decision making to the intricacies of political activities Their imperative is sustaining state power and economics and markets are convenient tools to do this with Situation affects all companies but typically hits foreign investors the hardest State favors local companies at the expense of foreign competitors State s intent to manipulate market for political purposes creates complicated risks and rewards for doing business Thus MNE s strike deals that would be unthinkable elsewhere Standard of Freedom Free country exhibits open political competition respect for civil liberties independent civic life and independent media Freedom of expression assembly association education and religion Partly free country exhibits limited political rights and civil liberties corruption weak rule of law ethnic and religious strife unfair elections and censorship Democracy is sometimes used as a facade for a single party dominating Not free country has few to no political rights and civil liberties Government allows minimal to no exercise of personal choice Relies on rule of man as the basis of law Constrains religious and social freedoms and controls all business activity Trends in Political Ideologies The Third Wave of Democratization During this period more than 30 countries throughout Africa Asia Latin America South America Eastern Europe abandoned totalitarianism for democracy Occurred in the 1870s and 1980s Now nearly half the world s population lives in a democracy of some sort Engines of Democracy Regime Legitimacy Failure of totalitarian regimes to deliver economic progress undermined their legitimacy Citizens become weary of longdeclining standards of life and contest the right of officials to govern Formerly communist countries shifted from collectivism to individualism Communication Innovations Improved communications eroded totalitarian states control of information Technology integrated formerly isolated people into the global village of information and news Images of resistance and rebellion had snowball effects worldwide for the prodemocracy movement Freedom s Consequences Freedom yielded economic dividends which positively in uences property rights rule of law education opportunities gender equality media freedom and social tolerance Rising prosperity supported the political stability and faith in the future that anchors the democratic ideology Fueled belief in inevitability of democracy Stabilized business environments for MNEs Recession and Retreat of Democracy Momentum of democracy is in question over the past 7 years longrunning gains in political freedom have given way to widespread declines Several indicators show slowing adoption of democracy throughout the world State of Political Affairs Four types of political legal systems Full democracy awed democracy hybrid regime authoritarian regime Hybrid regime manifests many parts of democracy but still has evident authoritarian tendencies Surge of Authoritarianism by 2012 belief in democracy continued to deteriorate from 1991 because of global financial crisis as most countries in the region saw declining democracy scores Collectively trends throughout the world show growing confidence in the authoritarian alternative with countries showing increasing interest in building singleparty political systems Engines of Authoritarianism Strong States supporting strong performance Gaps in the principles and practices of democracy Economic insecurity following slowing growth Escalating debate of the meaning of democracy Political Economv of Growth Rising uncertainty questions the relationship between level of economic development and democracy More success has been seen in countries that aren t democratic people s democratic dictatorship model of china has steadily gained credit worldwide Rhetoric Versus Reality Democracy setbacks and accusations of hypocrisy against Western countries jumble democratic ideals Double standards in foreign policy decrease credibility of democracy promoters Economic Problems Global financial crisis complicates matters High unemployment slow growth rising debt threatens middle class and weakens belief in effectiveness of democracy Who defines democracv Legitimacy of democracy of western nations translates poorly to societies with different ideals and institutions Different interpretations of democracy complicate its stability Looking to the Future Political Ideology and MNE s Actions The Washington Consensus advocates democracy political freedom rule of law and human rights Called upon countries to reform in ways that re ected the political economy of the United States Believed this would build nations that championed prosperity and peace Ironically promoting it requires powerful military spending The Beiiing Consensus Alternative to the Washington Consensus Euphemism for China s selfproclaimed people s democratic dictatorship Calls for a singleparty system in which elected representatives preapproved by the ruling party oversee a nominal democratic system whose citizens cannot participate in decision making Stability trumps everything Ideologically agnostic Has gained credibility worldwide The Clash of Civilizations Spreading democracy in Arab world has been a longrunning goal of the West Regional instability explains difficulty of promoting democratic political cultures Productive economies stall democracy as well because it no longer appears that it is a necessary condition for prosperity Irreconcilable cultural and religious differences between Islam and the West highlight the quotclashofcivilizationsquot scenario What s Next for Managers Managers must study the direction that political ideologies might track because of the ongoing retreat of democracy If the Washington Consensus proves resilient managers must adjust operations to the growing pains of countries that champion freedom advocate human rights and adopt the rule of law If the Beijing Consensus predominates managers must rethink business in a world that uses state controls to generate economic growth at the price of freedom Political Risk refers to the threat that decisions or events in a country will negatively affect the profitability and sustainability of an investment Political risk is the potential loss arising from a change in government policy More precisely it is the risk that political decisions events or conditions will affect a country s business environment in ways that force investors to accept lower rates of return cost them some or all value of their investment or threaten the sustainability of their operations Trends that increase political risk worldwide Fastgrowing emerging markets are full of red ags Aftermath of financial crisis aggravates political risk in both developed and developing markets Classes and Characteristics of Political Risk Systemic In uence the macro business environment affecting the operation of all firms Financial anomalies competing perspectives unilateral breach of contract Procedural Institutes impediments that constrain the exibility of local operations Tax discrimination restrictions on profit regulation Distributive Gradual elimination of the local property rights of foreign companies Destructive government actions harmful action against people Catastrophic Devastates countries and companies Harmful action against people expropriationnationalization civil strive insurrection war Proactive Political Risk Management The Best Approach Point those who advocate active political risk management reason that the best defense is a good offense What to do two tactics Apply state of the art stat modeling to quantify political risk Stresstest their models consul experts This requires identifying valid indicators of risk that can be reliably measured To apply this approach add qualitative countryspecific indicators in addition to quantitative data Counterpoint proactive approach fails to explain why MNEs do the exact opposite and choose to manage political risk passively Reason that no model no matter how brilliant is capable of consistently predicting political risk What to hedge dimensions and dynamic of a political environment defy precise specification developing broad frameworks makes good business sense Objective is protection not prediction How to hedge How do I hedge my company s exposure I typically MNEs apply a passive approach to outsource political riskmanagement process Best shield is buying political risk insurance best offense is a good defense The Legal Environment Key aspect of IE environment is how a country develops interprets and enforces its laws legal system specifies the rules that regulate behavior the processes by which laws are enforced and the procedures used to resolve grievances mechanism for conceiving stipulating interpreting and enforcing the law in a formal jurisdiction Legal systems differ due to variations in tradition precedent usage custom or religious precepts All legal systems institute rules that support business formation regulate transactions and stabilize relationships Modern legal systems share 3 components Constitutional law translates country s constitution into an open and just legal system Criminal Law safeguards society by specifying what conduct is criminal and prescribing punishment to those who breach those standards Commercial Laws ensure fairness and efficiency in business transactions by stipulating private rights and specific remedies in order to regulate conduct between individuals andor organizations Types of Legal Systems Type of legal system in a country determines conduct of business transactions rights and obligations of those doing business and the legal redress open to those who believe they have been wronged Globalization of business drives the standardization of laws across countries Five types of legal systems Common Law Developed by judges through the decisions of courts Relies on tradition judgemade precedent and usage Civil Law Based on strict application of statutory laws Relies on systematic codification of accessible detailed laws Assigns political officials rather than judges the responsibility to translate legal principles into a compendium of regulatory statues Theocratic Law Based on the inspirations and instructions of religious teachings Customarv Law Based on norms of behavior that gain legitimacy through longterm practice Re ects wisdom of daily experienceenduring spiritual legacies and timehonored philosophical outlooks Mixed Emerges when a nation uses two or more of the preceding types Legal pluralism results when two or more legal systems apply cumulatively or interactively Most are found in Africa and Asia Trends in Legal Systems Basis of Rule Rule of man vs rule of law The Rule of Man Holds that ultimate authority resides in a person whose word and whim no matter how unfair or unjust is law Like a dictatorship In China for example topranked party members accused of wrongdoing answer to the CCP not the law of the land because the Party is outside and above the law Rule of man instrumental device of totalitarianism Sovereign leader makes the law officials follow the law and citizens are its subjects justice is absent The Rule of Law Holds that no individual is above laws that are clearly specified commonly understood and fairly enforced Justice is blind so that justice is impartial justice is omnipresent Government authority is legitimately exercised in accordance with written publicly disclosed laws Without rule of law democracy struggles Implications for Managers Uncertainty about the basis of law in a particular country complicates decision making in the MNE MNEs long accustomed to the rule of law increasingly operate in markets anchored in the rule of man Which rule when Some believe fastgrowing emerging economies like China will eventually accept legitimacy of rule of law However because of the retreat of Democracy progress has slowed because the rule of law is the antithesis to totalitarianism The growing confidence of emerging economies increasingly questions the longrunning presumption that the West knows best Legal Issues in International Business The globalization of markets progressively standardizes legal systems however enduring variability differentiates how countries regulate basic business operations Operational concerns that managers face worldwide Starting a business It can take two days to start a business in one country such as Australia but 150 days in another such as Brazil Must take into account requirements in foreign country for size of business Entering and enforcing contracts Sanctity of a contract is vital for business operations United Nations Convention on Contracts for the International Sale of Goods sets guidelines for negotiating and enforcing contracts However standards still vary across legal systems Hiring and firing workers Legal standards around the world are rarely straightforward Slowmoving bureaucracies also complicate business regulation Closing a business Different requirements in different countries whether you want to get out or are going under Some countries even have no standards to govern dissolution of a company Key Relationship Wealth and Regulation There is an inverse relationship between a nation s general wealth and its regulation of business activities Richer countries typically regulate business activities less Poorer countries typically regulate more Most top ranked countries in terms of supportive business environment have a democratic political system and a commoncivil law legal system anchored in rule of law Most bottom ranked countries have authoritarian politics and a mixed legal system anchored in the rule of man Strategic Concerns Countrv Characteristics National laws affect ow of products across borders host government must devise laws that consider the product s country of origin country where it was grown produced or manufactured Politicians also enact regulations to protect jobs voters and placate special interestspreserve tax revenue Host governments prefer that MNEs make the greatest possible portion of their products locally Governments enforce local content regulations Product Safety and LiabilitV Product safety regulations set by the European Union shape standards worldwide Legal Jurisdiction Addition of a choiceof law clause to contracts between different parties in different countries is an effective legal safeguard Clause stipulates whose laws will govern a dispute resolution Intellectual ProDertv Intellectual property IP is the general term for creative ideas expertise or intangible insights that grant its owner a competitive advantage Intellectual property rights IPR is a primary safeguard for intellectual property the right to control and derive the benefits from writing inventions processes and identifiers Very difficult to enforce IPRs because of counterfeiting Predominant share of counterfeit products is made in countries in which rule of man prevails Basis of Political and Legal Differences making sense of the differences in attitudes and outlooks comes from making sense of the effects of historical legacies economic conditions and cultural orientations Historical Legacies Foreignmade laws are inconsistently enforced in the local marketplace in countries with markets in which the rule of man is the de facto legal system This is why more counterfeit is found in these countries like China Conversely countries that observe the rule of law more aggressively protect intellectual property rights Economic Circumstances generally poorer countries protect intellectual property less vigilantly than do wealthier countries Developing countries popularly perceive IP rights as predatory monopoly privileges that impose costs by impoverishing the majority to concentrate wealth and power among the privileged Cultural Orientation Individualist countries like the US and Australia regard personal property rights as intrinsically legitimate In contrast collectivist countries like South Korea Thailand and China put the virtue of sharing over individual ownership If you create something it should improve the welfare of society Cultural attitudes in uence the protection of intellectual property rights Individualist societies are more vigilant than collectivist societies Potential for CrossNational Convergence Countries that generate intellectual property are strong advocates of ownership rights Calls for stronger protection hinge on the future success of companies in currently lax countries Trends in China actually do signal the start of this process Closing Case It s a Knockoff World Issue companies are plagued by piracy the illegal imitating copying or counterfeiting of their registered products IP in the form of books music product designs brand names etc is difficult to conceive but very very easy to copy and knockoffs sell for a fraction of the price Big monev Big risks IP theft is a big business that generates astounding profit On the other hand the costs to original companies is staggering International AntiCounterfeiting Coalition IACC estimates more than 600 billion a year in losses Nothing is OffLimits Counterfeits don t just target highend brands 96 of counterfeiting is for everyday products Counterfeiting threatens global health and safety Counterfeit medicines annually kill tens of thousands of people Waging a Multifront War Companies industry associations and governments use many weapons to fight back against counterfeiters Seek and destroy method and hightech assault method to find and close down counterfeiting operations The Bandits are Everywhere Piracy is rapidly growing in fastemerging markets like China and India As more enter global market many are eager to consume western brands and because are more expensive it creates a large market for knockoffs Skilled pirates can overcome IP defenses easily internet also increases the problem Is Piracv Inevitable Pervasiveness poses profound question to protection of IPRs Some believe the war against piracy has already been lost because a large number of consumers of counterfeit products clearly have no ethical qualms about buying knockoffs Global financial crisis has also pushed people to seek counterfeits because of how much cheaper they are Ch 4 The Economic Environments Facing Businesses Opening Case The Comeback Accelerates Issue Rhetoric vs Reality Some see attening of the world where advances in institutions technology and communication fundamentally change the economics of globalization These Flatliners believe that anyone anywhere can trade anything anytime if powered by hardware and software innovations Others emphasize effect of entry of billions of people into global market that drives a twopart transformation Supply shock of billions of lowwage workers radically resets how we interpret capital and labor in the production of goods and services Sees a world where everyone from everywhere competes for everything Fallout of the global financial melt down raises opinion that growing debt burdens de ationary dynamics riskaverse companies and nationalistic consumers slow the cross national movement of information people products capital and jobs Governments constrain spirit of capitalism and regulate free markets The Emergence By 2050 4 of the 6 largest economies in the world Japan China India and Russia will be in greater Asia In 2009 emerging economies accounted for more than half of total world GDP Budding economics in emerging markets suggests revolution has only begun Precedents and Predictions Annual growth since 2001 in emerging markets has averaged 64 percent While these markets expand the global financial crisis slows and shrinks many developed economies which have shown 16 percent annual growth Diminishing role of today s rich economies along with accelerating scope of emerging ones changes investment trade consumption wealth poverty fiscal and monetary patterns Here and Now Megatrends like The Comeback are millennial events At this point odds are that policymakers executives workers and investors will wrestle with the consequences of the Comeback New M ets New Persnectivi Managers study a country s economic environment to assess its development explain its performance and estimate its potential Studying an economic environment helps managers make better investment choices and operating decisions Key Viewpoints include Countries Differ in Various Wavs Different levels of economic development performance and potential Dissimilar economic processes require anticipating new situations Economic and Political Changes Alter Market Circumstances Economic environments continually change Changing economic policies reveal government ambitions and spotlight implications for economic freedom Connections Change and Consequences Companies monitor changes in countries where improving macro trends or revised policies open markets or strengthen competitors Center of economic gravity in our world has shifted from the west to the east since the 1980s Challenges of the Comeback Rise of emerging economies distorts traditional economic indicators Greater competition for scarce resources raises prices of commodities but lowers costs of manufactured goods More people are working worldwide but poverty is increasing More than 70 of world s growth over the next few years will be in emerging markets Choices of Citizens Policymakers and Institutions After 2000 promarket reforms increased investment consumption employment and wealth Then global financial crisis contested the legitimacy and sustainability of marketled change Crisis showed that free markets can misallocate capital and fan opportunism Governments increasingly in the west constrain capitalist spirits with stricter regulations International Economic Analysis Managers must ask themselves which countries in the world warrant investment and which ones they must avoid given the everpresent resource constraints The assessments of economic environments is often more conditional than universal because System complexity Determining indicators that definitively represent a country s economic performance and potential is difficult The challenge is to identify among many indicators which matter and then to monitor their performance Market Dynamism Constantly changing markets make today s valid measures invalid the next day Analysis of market fundamentalism of the west doesn t work the same in analyzing state sponsored capitalism in the east Market Interdependence No one country is isolated Consequence of connections make it so that actions in one market in uence outcomes in another Data Overload Increasing data streams don t improve market analysis but rather just complicate interpretation Causes analysis paralysis Chapter Extra Does Geography Matter Consequence of Change in Arctic Sea Ice Economic geography is the study of the location distribution and spatial organization of economic activities across the earth Logistic Options Canals and Passages Just as these canals have changed the ow of trade so too might global warming Opens shipping routes in once impassable waters at the top of the world Ice melts Consequences and Choices Accelerating ice loss may largely free the arctic ocean of summer ice before 2050 Shrinking arctic ice cap is at best a mixed blessing Improves traveling conditions but an increasingly hotter world posses threats with side effects that may trump benefits of shorter trade routes Economic Freedom economic freedom holds that one has the right to work produce consume save and invest in the way that one prefers greater degree of economic freedom means greater freedom individuals have to decide how they wish to do above activities Does not exist independent of the state because economic freedom is both protected and regulated by the state Economic freedom index Estimates extent to which a government constrains free choice and free enterprise for reasons that go beyond the need to protect property Analyzes 50 indicators that comprise 10 components organized into four categories SEE TABLE 41 PAGE 148 Economic Freedom Today Economic freedom has decreased due to the great financial crisis and ensuing global recession Freest countries Hong Kong Singapore Australia New Zealand Least economically free country North Korea Uzbekistan Turkmenistan TimorLeste 5 countries has free economies 30 are mostly free 50 are moderately free 59 mostly un free and 33 repressed The Value of Economic Freedom Helps explain a country s development performance and potential In ation and unemployment rate better in economically free countries as does life expectancy literacy poverty reduction and environmental sustainability Trends in Economic Freedom Track record of free markets around the world indicates that economic freedom is positively related to financial prosperity economic stability and standards of living By spurring a resurgence of state intervention the global financial crisis has interrupted the decadeslong expansion of economic freedom Crisis highlighted the limits of a market economy and made people reconsider he role government can have in an economy Neoliberal policies tightened controls Fear of Freer Markets State control of economic affairs has escalated in countries hit hardest by crisis Only in US and Pakistan did 20 of people believe capitalism works well the way it is Now emerging economies support of free markets exceeds that of the US The Market Test Managers watch key events to gauge the contest between economic freedom and state control including how the government Regulates the economy Protects property rights Sets fiscal and monetary policies Enforces antitrust regulation Low in ation high employment prudent public finances and openness to trade and FDI are telltale signs of a market with good potential TVDeS of Economic Systems see visual on page 152 Economic system organizes the production distribution and consumption of goods and services The three types of economic systems endorse different philosophies advocate different principles and apply different approaches Market economy is anchored in capitalism command economy is anchored in communism and a mixed economy is anchored in socialism Market Economv an economic system where individuals rather than the government make most decisions Methods privatization deregulation property rights antitrust legislation Anchored in capitalism Private ownership gives inalienable property rights that legitimize profits earned by one s initiative Seen in Hong Kong Singapore Australia Switzerland Canada and the United States Grants economic freedom to decide where to work what to do and for how long how to spend or save money and whether to consume now or later Champions laissezfaire economics less is more I enduring bias toward minimal government Command Economy Communism champions state ownership of resources and control of all economic activity Usually calls for egalitarian classless and stateless society based on the government s command of the economy Implementing this socioeconomic structure imposes a command economy Government decides what products to make in what quantity At what price and in what way visible hand of the government Soviet Union China Afghanistan have historically displayed command economy at points Purest example we have today is North Korea and to a lesser degree Cuba and Myanmar These fall into mostly unfreerepressed category of Economic Freedom Index Mixed Economv Most economies fall in this category between market and command types Economic decisions are principally marketdriven and ownership is largely private However government intervenes ranging from a little to a lot in allocating resources Interaction of supply and demand freely optimize production through efficient pricing while the state intermingles ownership of some resources and centralizes certain planning functions of the market Socialism specifically advocates for regulating economic activity while maintaining social equality and fair distribution of wealth Socialism holds that a fair a just economy besides just optimizing market efficiencies defends the weak by supporting low unemployment prevents consolidation of wealth and privilege helps impoverished by fairly redistributing income stabilizes systems by intervening in market failures protects society by limiting abuses of market power Aftermath of global financial crisis has supported many of these socialist views Extent and nature of government intervention differs depending on local circumstances country to country Countries commonly classified as mixed South Africa Japan South Korea Sweden Austria France Brazil Germany India Generally fall into mostly free and moderately free on Economic Freedom Index Chapter Extra Looking to the Future State Capitalism Detour or Destination State capitalism system where political officials decide how assets are valued and when and where they are used Government explicitly manipulates market outcomes for political purposes Uses markets to promote stability and growth which legitimizes the state s rule It is NOT controlling the market to enforce an abstract idealreligion or cult of personality but rather for longterm political survival and power projection Invisible hand only becomes visible when things go bad that s when state steps in State typically owns its biggest national companies like in China Telltale signs of State Capitalism Public investment public wealth public enterprise prevailing Favors local companies at expense of foreign rivals Economic nationalism Assessing Economic Develonment Performance and Potentiil Broad classes of countries include developing countries emerging economiesmarkets and developed countries There are currently about 70 emerging economies in the world The use of the term emerging economies is usually referring mainly to Brazil Russia India China BRICS See Table 43 graphic Alphabet of Emerging Economies pg 157 Developed countries include Japan Australia New Zealand Canada and the United States Measures of Economic Performance Managers must streamline market evaluation to singleitem measures that indicate whether an economy is Expanding or contracting Needs a boost or should be constrained Is threatened by recession or in ation Gross National Income GNI The broadest measure of economic activity for a country Measures the value of all production in the domestic economy together with the income that country receives from other countries interest and dividends minus payments it has made to other countries Portion of the value of a Sony TV building South Korea using Sony s resources counts for the GNI of Japan as Sony is a Japanese company Gross National Product GNP Total value of all final goods and services produced within a nation in a particular year Conceptually equal to GNI but their slightly different calculation can result in discrepancy at the country level Gross Domestic Product GDP Total market value of goods and services produced by workers and capital within a nation s borders Provides the truest measure of national economic activity Total market value of all output produced within the nation s borders no matter whether generated by a domestic or foreignowned company Estimates ow of economic activity within a country not just its stock of productive assets Technically GDP income from exports imports and international operations of a nation s companies GNI Application both Samsung and Sony TVs made in South Korea contribute to South Korea s GDP even though they only own Samsung but TV s made in Japan by Samsung only go into Japan s GDP not South Korea s Adjusting Analytics Despite the strengths of using GNI etc to measure economic strength these statistics can be misleading to managers when comparing countries higher GNI doesn t necessarily mean faster growth Managers improve the usefulness of GNI by adjusting it for growth rate of the economy number of people in a country and local cost of living Rate of Economic Growth Growth rate of GNI indicates a country s economic potential If it grows faster or slower than its population the country s standards of living are risingfalling Growth rate of GNI also indicated business opportunities China has been one of the fastest expanding economies has grown by 98 percent over the last three decades Population Size managers also adjust GNI by the number of people who live in a country which lets managers remove the affects of demography in assessing a country s relative performance Gives GNI per capita Purchasing Power ParitV Provides a method of measuring the relative purchasing power of different countries currencies for the same array of goods and services Accounts for cost of living where GNI per capita does not because costs of goods and services vary country to country A dollar in the US may not get you the same amount of goods as a dollar of income in Mumbai PPP how many goods and services one can by with a unit of income in one country relative to how much one can by with that unit of income in another Adjusting GNI for PPP essentially creates an international dollar that has the same purchasing power as a dollar in the United States Expensive standards of living fall on the GNI scale vice versa for cheaper standards of living Performance and Potential Alternative Interpretations Green measures gauge economic performance in terms of the effect of current choices of longterm stability Sustainability Green economics holds that each country is a component of and dependent on the natural world Sustainable development interprets economic activity in terms of its capacity to meet the needs of the present without compromising the ability of future generations to meet their own needs Endorses a broader accounting of the gains and costs of growth to better gauge an economy Net National Product NNP Measures depletion of natural resources and degradation of the environment that result from generating GNI Genuine Progress Indicator GPI Starts with GDP but then adjusts for values assigned to environmental quality population health livelihood security equity free time and educational attainment GPI values voluntary and unpaid household work as paid labor and subtracts the costs of crime pollution and family breakdown GDP vs GPI is like the difference between the gross profits versus net profits GPI is like the net because it is the gross less costs incurred GPI will equal zero if the costs of pollution crime and family breakdown equal the monetary gains from the production of goods and services Human Development Index HDI Holds that improving the human condition improves economic performance Estimating the standards that shape a country s overall quality of life helps managers to measure market potential StabilitV There is an ongoing paradox that people in rich countries are not significantly happier than people in poor countries Happynomics is the idea that we should move from aiming for financial prosperity to aiming for emotional prosperity This questions the validity of monetary aggregates as performance measures Qualifies performance in terms of life expectancy leisure time and income equality Your Better Life Index YBLI Measures wellbeing and perceptions of living conditions Advocates evaluating economic performance in terms of matters that people worldwide would believe important Gross National Happiness GNH Progressive societies presume that material and spiritual development occur side by side Measures a country s ability to promote equitable and sustainable socioeconomic development preserving and promoting cultural values conserving the natural environment and establishing good governance Happy Planet Index HPI This utilitarian view holds that people aspire to live long healthy happy lives So a country s economic performance and potential is represented by how well it helps its citizens do so while not infringing on the opportunity of future generations Chapter Extra PointCounterpoint Growth Positive and Productive Point yes growth is not only good it is a fundamental necessity Moral stability growth affects social attitudes and political institutions Poverty reduction growth is the only means to alleviate poverty for the billions struggling to sustain life Business Dividend growth stimulates higher employment capital investment and profits Fiscal Dividend government finances are at the mercy of economic growth Peace Dividend growth creates more opportunities for more people in more places people who see the potential for prosperity behave peacefully Environmental Benefits growth encourages innovations drives the efficient allocation of resources Quest to Excel growth incents people to bring to bear their ingenuity their imagination and their industriousness to find a better way every day to make a difference Life growth supports longer lives people now need to work only half the time they once had to and find rising qualityoflife standards Progress or Decline unquestionably growth imposes costs however no matter the costs of growth they are nothing compared to benefits Counterpoint accepts premise that growth supports life but ignoring or denying the costs of benefits imperils civil society and the survival of humanity and the planet Growth Privileges Few benefits of growth are unevenly distributed creating extreme inequalities of income wealth and power Growth is Misleading growth does not deliver the benefits it promises Growth Threatens Life polluted air poisoned water and toxic land are the byproducts of growth Growth Destroys Individuality growth requires mass production mass consumption mass distribution mass markets mass media etc Current Growth is Unsustainable presently human consumption is 30 percent larger than nature s capacity to regenerate Change the Game epic poverty for billions slowmotion death spiral of ecosystem false hope of actualization by consumption puts the world at a fork in the road Economic Analysis Narrow estimators GNI GDP GNP Broad estimators HDI HPI NNP In ation In ation measures the increase in the cost of living sustained rise in prices measured against standard level of purchasing power Compares two sets of products at two points in time and compute increase in price not due to increase in quality In ation and the Cost of Living a country experiencing rising prices for a prolonged period suffers chronic in ation Chronic in ation erodes confidence in a country s currency and spurs people to seek other ways to store value In ation compels government response Measuring In ation Price indices are different country to country CPI in US HICP in EU If Not In ation Then De ation De ation is a decrease in the general price level of goods and services often caused by a reduction in the supply of money or credit Opposite of in ation occurs when annual in ation rate is less than 0 Causes contraction in personal spending and investment spending Declining demand and growing supply trigger increasing quantity and lower prices De ation and unemployment are linked lower demand slows activity of a company Re ation is when money supply is increased and taxes are decreased to accelerate economic activity to combat de ation relied on by banks and government Federal Reserve of US has been pushed to print money to stimulate demand in order to preempt de ation Unemployment Unemployment rate is the share of outofwork citizens seeking employment for pay relative to the total civilian labor force Number of workers who want to work but do not have paid jobs Misery index is the sum of a country s in ation and unemployment rates higher sum means greater economic misery Measuring Unemployment Underemployment occurs when individuals work fewer hours a day than they would prefer or when individuals work below the level for which they have been trained This skews unemployment because even thought these people are employed they are often parttime or underpaid Debt Debt total of a government s financial obligations measures what the state borrows from its citizens foreign organizations foreign governments and international institutions Internal debt portion of the government debt that is denominated in the country s own currency and held by domestic residents External debt debt owed to foreign creditors and denominated in foreign currency Growing public debt is a leading indicator of Tax increases Reduced growth Rising in ation Increasing austerity Income Distribution Income distribution defines a market s performance and potential Estimates the proportion of the population that earns various levels of income GNI can misestimate the relative wealth of a nation s citizens even when adjusted for population size and PPP Presently the richest 1 of Americans own 37 of all privately held stock and receive more income than the bottom 40 this is the widest gap in 70 years Inequality grows across the world as well Benefits and Costs There is a growing gap between the rich and poor in virtually every country in the world Countries that are more unequal perform poorly on social indicators have lower human development records and higher economic insecurity Widening inequality eventually triggers destructive outcomes Gini Coefficient Gini Coef cient is the most commonly used measure of inequality Indicates the extent to which income shares deviate from a perfectly equal distribution Presumes that there is a reasonable degree of income within a country Poverty Poverty is the state of having little or no money few or no material possessions and limited access to education health and community Extreme poverty is rated as living on less than 125 per day PPP 13 billion people Moderate poverty is les than 2 per day 25 billion people Prevalence of PovertV Worldwide growth of business activity and economic progress ultimately depends on alleviating poverty Markets experiencing extreme poverty may have nonexistent market systems unworkable infrastructure pervasive crime and struggling government regulation Potential of the Poor In India number of mobile phone subscribers has gone up from 2002 form 15 million to 136 million by 2006 even though more than 80 of Indians live on less than 2 dollars a day Today Indian companies offer the cheapest mobile services in the world while still earning profits This perspective alerts managers to the Base of the Pyramid phenomenon constitutes the nearly four billion people that earn less than US4 per day who live primarily in Asia Africa and South America Though long seen as inaccessible and unprofitable the poor for some represent the next market frontier of the global economy They are the largest but poorest socioeconomic group in the world Success Standards As world moves from being mostly poor to mostly middle class contours of the pyramid will change Frugal engineering takes the need of poor consumers as a starting point in developing functional costconscious products Task at hand is to develop affordable ecosensitive products that work in harsh environments For example Nokia Samsung and Motorola offer phones with sealed faceplates to keep out the elements and 400 hour of standby batter time on one charge These changes also increasingly benefit the rich as well Standards of the Base of the Pyramid innovations increasing appeal to priceconscious consumer in the west because of declining af uence Lowcost Highperformance Resourceminimizing Lifestylesensitive Balance of Payments BOP BOP is officially known as the Statement of International Transactions Reports its trade and financial transactions with the rest of the world System of recording all of a country s economic transactions with the rest of the world Two different kinds of transactions Current account surplus Current account deficit Elaborating Economic Analysis with Global Indices Managers consider metamodels to improve their understanding of the absolute and relative potential of an economic environment using indices such as GCI GII WTBBI WCI Global Competitiveness Index GCI World economic forum assesses the basis of competitiveness in 144 countries Assumes that providing prosperity to citizens hinges on how effectively a country develops institutions applies policies and employs resources to improve productivity Today s top 10 competitive economies are dominated by European countries World Competitiveness Index WCI world competitiveness project assess a nation s ability to create and maintain an environment in which enterprises private or stateowned can compete prosper and create wealth Four primary factors Economic performance Government efficiency Business efficiency Infrastructure Hong Kong topped WCI in 2012 Global Innovation Index GII Countries increasingly look to their brainpower to create innovations that confer competitive advantage GII measures a country s success by assessing its competency in promoting technologies expanding human capacities streamlining organizational capabilities and improving institutional responsiveness that best leverages knowledge into marketchanging innovation 5 input pillars Institutions and policies Human Capacity Infrastructure Technological Sophistication Business Markets and Capital 3 output pillars Knowledge Competitiveness Wealth WheretobeBorn Index WTBBI In general smaller economies score higher in the lottery of life Holds that how well a country provides opportunities for a healthy safe and prosperous life helps explain both its current and future economic environment Evaluates 11 indicators like geography democracy quality of life per capita income and life expectancy Topped by Switzerland Australia Norway Sweden and Denmark Large wealthy countries like the US do not rank very well on this index Closing Case The BRICs Vanguard of the Revolution Improving performance shows the accelerating success of emerging economies Together BRICs countries are home to nearly 28 billion people and cover a quarter of the world s area Presently account for about 18 of global GDP Changing of the Guard 30 years ago Brazil s economy was in shambles but today conditions have radically changed This could mean an astonishing or worrisome depending on how you look at it Besides Russia all the BRICs countries have growing middle classes as income grows so does demand for what once were unreachable luxuries Big Plans but Big Problems History shows great mistakes made by many who extrapolated the present into the future Economic growth rates will invariably slow as base of activity expands Advantages such as cheap labor or lowcost capital wane as growing demand increases marginal price pressures National Challenges Russia is particularly vulnerable and considered riskier because of longsimmering tensions with the West and legal and political infrastructure governed by rule of man Brazil s economic potential has been anticipated for decades but it has struggled to achieve expectation defeat Difficulties in income inequality productivity and education have often resulted in Green Constraints There are only so many resources to go around Emergence of BRICs challenges sustainability of global environment Adding Mortar Indications show strengthening ties between Russia and China Russia is now more politically aligned with the oneparty state of China than the multiparty democracies in the west Dethroning the Dollar BRICs increasingly try to erode the dominance of the US dollar Stronger Ties BRIC leaders have begun to hold BRIConly summits to discuss ways to reset the global trade structure and champion a new supranational currency Chapter 6 Governmental In uence on Trade Chapter Extra Opening Case The US Vietnamese Cat sh Dispute The Rise of Aquaculture Last half century has seen such an increase in marine catch overfishing that the numbers of many species are not being replenished due to a higher world population coupled with technology that enables fishing vessels to locate and land fish better than ever before To counter the overfishing has been fish farming Catfish industry in both Vietnam and the US has been part of aquaculture revolution Catfish are grown in ponds and harvested at a certain size The Vietnamese Advantages Vietnam climate is winterless so the fish grow faster One Vietnamese catfish species tra can go to the surface to breathe air thus they can be grown in greater density US governmental regulations limit discharge of fishpond waters into rivers whereas Vietnam has no restrictions Labor rates are lower in Vietnam an important factor in cost of filleting and freezing the fish US Industry Fights Back Changed name and disallowed Vietnamese imports to be called catfish deterring buyers However menus at restaurants didn t have to adhere to this US was also facing diminished profits because of increased costs Due to a combination of harvest shortfalls increased grain demands in Asia and use of corn and soybeans to produce ethanol Catfish Institute changed name catfish because it had a negative connotation and called it delacata Unfair competition dumping US petitioned for increased taxes on imported Vietnamese fish so antidumping taxes of 64 were placed on importing fish from Vietnam Health arguments An incident occurred where contaminated Chinese pet food killed thousands of US cats and dogs which US catfish farmers capitalized on to make imported fish seem unsafe Opposition and the Future No evidence that present FDA fish inspections were inadequately protecting health Cost to develop catfish inspection program was too high Vietnam is a fast growing economy with a large population with exports rising steeply meaning import restrictions could jeopardize US export sales to Vietnam Economic con icts between US and Vietnam could deteriorate political relations between the two US voted in 2012 to repeal inspection requirements Introduction All countries seek to in uence trade and each has economic social and political objectives Problems arise with con icting objectives and interest groups Protectionism governmental restrictions and support to in uence international trade competitiveness trade protectionism Con icting Results of Trade Policies Despite freetrade benefits governments intervene in trade to attain economic social or political objectives In general governments want to help their struggling companies and industries without penalizing those that are doing well an often impossible goal especially if other countries retaliate by limiting their own imports The Role of Stakeholders Stakeholders people and groups that believe they will be affected by something ie proposals on trade regulations Stakeholders who feel threatened by changes tend to object often and loudly Role of Consumers Consumers also stakeholders typically but the best product they can find for the price often without knowing or caring about its origin Don t realize how much retail prices rise in aggregate because of import restrictions Consumer costs are typically spread out among many people over time and entail a small price increase for individual purchases Economic RMles for Governmental Interventi Governmental trade intervention may be classified as either economic or noneconomic Fighting Unemployment Most effective pressure group is the unemployed have the most time and incentive to protest publicly and contact government representatives What s wrong with full employment as an economic obiective Prospect of retaliation import restrictions to create domestic employment May lead to retaliation by other countries Are less likely retaliated against effectively by small economies Are less likely to be met with retaliation if implemented by small economies May decrease export jobs because of price increase for components May decrease export jobs because of lower incomes abroad Analyzing trade017 Possible costs of import restrictions include higher prices and higher taxes Such costs should be compared with those of unemployment Protecting Infant Industries Infant industry argument says that production becomes more competitive over time because of Increased economies of scale Greater worker efficiency Argument holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own Many developing countries use this argument to justify their protectionist policies Underlying Assumptions Presumes that initial operating costs for an industry in a given country may be so high as to make its output noncompetitive in the world markets Risks in Designating Industries Determining probability of success If infant industry protection fails to reduce costs enough to compete against imports chances are its owners workers and suppliers will constitute a formidable pressure group that may prevent the importation of competing lowerpriced products Security of government protection against import competition may deter managers from adopting the innovations needed to compete globally and to provide consumers with highquality products at a low price Who should bear the cost Even if success can be determined it doesn t necessarily follow that those companies should receive government assistance as some part of the economy will have to incur the higher cost when local production is still inefficient Like paying higher prices for protected products or taxpayers paying for subsidiaries When this happens governments have to spend less elsewhere Developing an Industrial Base Countries seek protection to promote industrialization because that type of production 1 Brings faster growth than agriculture 2 Brings investment funds 3 Diversifies the economy 4 Brings more income than primary products do 5 Reduces imports and promotes exports 6 Helps the nationbuilding process Surplus Workers Industrialization argument presumes that the unregulated importation of lowerpriced manufactures prevents the development of a domestic industry When a country shifts from agriculture to industry Demands on social and political services in cities may increase Output increases if the marginal productivity of agricultural workers is very low Development possibilities in the agricultural sector may be overlooked Investment In ows Import restrictions applied to spur industrialization also may increase FDI which provides capital technology and jobs If import restrictions keep out foreignmade goods foreign companies may invest to produce in the restricted area Diversification Price variations due to uncontrollable factors such as weather affect supply or business cycles abroad affecting demand can wreak havoc on economies that depend on the export of primary products Especially true for many developing countries that must rely on only one or a few commodities A greater dependence on manufacturing does not guarantee diversification of export earnings Growth in Manufactured Goods Terms of trade for emerging economies may deteriorate because Demand for primary products grows more slowly Production cost savings for primary products will be passed onto consumers Terms of trade the quantity of imports that a given country s exports can buy Prices of raw materials and agricultural commodities have not risen as fast as those of finished products over time Quantity of primary products demanded does not rise as rapidly as manufactured products and services due partly to people spending a lower percentage of income on food as their incomes rise and partly to rawmaterialsaving technologies Prices of manufactured products can stay high because competition is based more on differentiation Import Substitution and ExportLed Development Industrialization emphasizes either products to sell domestically or products to export Developing countries have traditionally promoted industrialization by restricting imports in order to boost local production and consumption of products they would otherwise import However if protected industries don t become efficient local consumers have to support them by paying higher prices or taxes than they would with importing Exportled development an approach that achieves rapid economic growth by promoting the development of industries with export potential Used successfully by Taiwan and South Korea Nation Building May be a strong relationship between industrialization and aspects of the nationbuilding process Industrialization helps countries build infrastructure advance rural development and boost workforce skills Economic Relationships with Other Countries Four practices aimed at improving a countries position relative to performance of other countries economically Making balanceoftrade adjustments Gaining comparable access to foreign markets Using restrictions as a bargaining tool Controlling prices Balanceof Trade Adjustments Trade deficit creates problems for nations with low foreign exchange reserves which are the funds that help finance the purchase of priority foreign goods If balanceof trade difficulties arise government may act to reduce imports or encourage exports to balance trade account with two options 1 Depreciating or devaluing its currency which makes all products cheaper in relation to foreign products 2 Relying on fiscal and monetary policy to bring lower price increases in general than those in other countries Both options make all products more expensive both essential and luxury items Thus protection may be used to more effectively be selective of certain products to affect with price increase Comparable Access Fairness Domestic producers may be disadvantaged if their access to foreign markets is less than foreign producers access to their market Comparable access argument holds that companies and industries are entitled to the same access to foreign markets as foreign industries and companies have to their markets Also presented as an argument of fairness This can also lead to restrictions that may deny lower prices to one s own consumers Governments would find it impractical to negotiate and monitor separate agreements for each of the thousands of different products services that may be traded Restrictions as a Bargaining Tool Countries levy trade restrictions to coerce other countries to change their policies Retaliatory measure for persuading other countries to lower import barriers Danger is that each country then escalates its restrictions creating a trade war that has negative impact on all economies involved To be successful in using restrictions as a bargaining tool must consider two criteria Believability either have access to alternative sources for the product or consumers are willing to do without it Example EU successfully retaliated against US import restrictions be threatening to impose its own restrictions on USgrown soybeans knowing they could get them from Brazil Importance exports of the product being restricted are significant to certain parties in the producer country who are in uential enough to prompt changes in their own country s trade policy Example US placed restrictions on importation of steel and EU threatened to restrict the importation of apples from Washington and oranges from Florida Since these states were so important in a close presidential election US removed steel import restrictions In all export restrictions may Keep up world prices Require more controls to prevent smuggling Lead to substitution Keep domestic prices down by increasing domestic supply Give producers less incentive to increase output Shift foreign production and sales PriceControl Obiectives Countries sometimes withhold goods from international markets in an effort to raise prices abroad This works the best when a few countries hold a nearmonopoly control of certain resources and can limit supply so consumers must pay a higher price This however often encourages smuggling Especially ineffective for digital products because they re so easily copied abroad Country may also limit exports of a product that is in short supply worldwide to favor domestic consumers which usually drops local prices beneath those in the internationally undersupplied world market India has limited cotton exports to increase supplies for textile industry Also fear that foreign producers will price exports so artificially low that they will drive producers out of business in importing country with two potential adverse consequences for the importing economy 1 Foreign producers may be shifting their countries unemployment abroad but their own taxpayers are subsidizing the purchases by consumers abroad 2 If there are high entry barriers foreign producers can change exorbitant prices once their competitors go out of business However competition among producers form different countries usually limits anyone s ability to charge exorbitant prices Low import prices for example have eliminated most US production of consumer electronics but US still has some of the lowest prices in the world for consumer electronics because so many companies make them in so many countries Dumping when companies export below cost or below their homecountry price Most countries restrict imports of dumped products but enforcement usually only occurs if imported product disrupts domestic production Companies may dump products to introduce them and build a market abroad after which they can charge a high enough price to make a profit Import restrictions may prevent dumping from being used to put domestic producers out of business May also get foreign producers to lower their prices Companies can only afford to dump products if they can charge high prices in their home market or if homecountry government subsidizes them OptimumTariff Theory states that a foreign producer will lower its prices if the importing country places a tax on its products Benefits shift to the importing country because the producer lowers its profits on the export sales As long as foreign producer lowers its price by any amount some shift in revenue goes to the importing county and the tariff is deemed an optimum one Noneconomic Rationales for Government Intervention Maintaining essential industries especially defense Promoting acceptable practices abroad Maintaining or extending spheres of in uences Preserving national culture Maintaining Essential Industries Essentialindustry argument holds that governments apply trade restrictions to protect essential domestic industries during peacetime so the country is not dependent on foreign supplies during war Example US subsidizing the domestic production of silicon so domestic computerchip makers won t need to depend on foreign suppliers Argument has much appeal in rallying support for import barriers because of nationalism This argument should not be accepted without a careful evaluation of costs real needs and alternatives In protecting essential industries countries must Determine which ones are essential Consider costs and alternatives Consider political and economic consequences Promoting Acceptable Practices Abroad Governments use national defense arguments to prevent the export even to friendly countries of strategic goods that might fall into the hands of potential enemies Rationale is to weaken the foreign country s economy by decreasing its earnings from foreign sales or limiting its access to needed products so that it amends the externally unpopular policies Trade controls are used to pressure foreign governments to alter their stances on a variety of other issues ranging from human rights to environmental protection to production of goods the importing country finds dangerous or immoral In the case of sanctions on Iran the US not only penalized US companies that do business with Iran but it also bars nonUS companies from the US marketplace if they do business inwith Iran Maintaining or Extending Spheres of In uence Governments also use trade to support their spheres of in uence Giving aid and credits to and encouraging imports from countries that join a political alliance or vote a preferred way within international bodies For example Venezuela has exported oil at low cost and with longterm financing to targeted Latin American countries to gain in uence in the region Preserving National Culture Countries are held together partly through a unifying sense of identity that sets their citizens apart from those in other nations To sustain collective identity they prohibit exports of art and historical items that they deem to be part of their national heritage Additionally limit imports of certain foreign products and services that may either con ict with their dominant values or replace domestic sources of production that uphold these traditional values Chapter Extra Point Counterpoint Should Governments Impose Trade Sanctions Point Yes living in a global society necessitates government intervention For example development of a nuclear arsenal in one nation can escalate the damage that terrorists can do elsewhere Can t sit back and let what happens elsewhere come back to haunt us We have a moral responsibility not to participate economically with countries who practice things like human trafficking forced prostitution slavery etc Many trade sanctions have at least been in uential in achieving their objectives Counterpoint No government doesn t need to continue imposing new sanctions Sanctions can cause lawabiding companies to lose revenue that took years to develop Question as to whether sanctions even work Even if trade sanctions do succeed in weakening targeted countries economies those who really suffer are innocent citizens of those countries Governments sometimes seem to impose trade sanctions based on one issue rather than a country s overall record Instruments of Trade Control Two types of trade control that differ in their effects 1 Those that indirectly affect the amount traded by directly in uencing export or import prices 2 Those that directly limit the amount of a good that can be traded Tariffs Price Controls Tariff also called a duty is a tax levied on a good shipped internationally Most common type of trade control Tari barriers affect prices Nontari barriers may affect either price or quantity Governments charge a tariff on a good when it crosses an official boundary Export tariffs tariffs collected by exporting country Transit tariffs collected by a country through which the goods pass Import tariffs collected by importing countries Import tariffs are by far the most common Criteria for assessing tari s Perunit basis called a specific duty Percentage of the item s value called an ad valorem duty Based on local value of a product Combination of perunit and percentage of value called a compound duty Raw materials frequently enter developed countries free of duty but if they are processed developed countries then assign an import tariff Developing countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariff rate Thus a tariff rate of 10 is effectively 20 on the manufactured portion Nontariff Barriers Direct Price In uences Subsidies Subsidies are a form of direct assistance to companies to boost competitiveness Government subsidies may help companies be competitive Especially to overcome market imperfections because they are least controversial However there is little agreement on what a subsidy is but agricultural subsidies are difficult to dismantle Not everyone agrees that companies are being subsidized just because they lose money or that all types of government loans or grants are subsidies Longrunning controversy with commercial aircraft Boeing Example Airbus Industrie and the EU claim that US national and state governments subsidize Boeing through RampD contracts for military aircraft that also have commercial applications and tax breaks to secure employment from Boeing s facilities Boeing and US facilities however claim that the EU subsidizes Airbus Industrie through lowinterest government loans Developing countries are disadvantaged in serving the developed markets with competitive agricultural products Much of surplus production from developed countries is exported at very low prices Overcoming Market Imperfections Most countries offer potential exporters many business development services such as market information trade expositions and foreign contracts These sorts of subsidies are more justifiable than tariffs because they seek to overcome rather than create market imperfections Aid and Loans Governments also give aid and loans to other countries If the recipient is required to spend the funds in the donor country it is known as a tied aid or tied loan Some products in this type of aid can compete abroad that might otherwise be noncompetitive Tied aid helps win large contracts for infrastructure There is growing skepticism about the value of tied aid because it requires the recipient to use donor country suppliers that are shielded from competition and may not be the best Can also slow the development of local suppliers in developing countries Customs Valuation Because it is difficult for customs officials to determine the honesty of import invoices They may arbitrarily increase value Valuation procedures have been developed They may question the origin of and productclassification of imports Generally most countries have agreed to use the invoice information unless customs officers doubt its authenticity time Agents then must assess on basis of value of identical goods or goods arriving at the same There is no sales invoice when imported goods enter for lease rather than purchase Sometimes discretionary power is used to assess the value too high Valuation Problems The fact that so many different products are traded creates valuation problems New products coming off the market all the time must be classified within existing tariff categories It s easy to misclassify a product and its corresponding tariff In opening case there was controversy of whether the Vietnamese fish are catfish or whether they are basa tra or pangasius Disparities in duties may cost companies millions of dollars Other DirectPrice In uence Special fees such as consular and customs clearance and documentation Requirements that customs deposits be placed in advance of shipment Minimum price levels at which goods can be sold after they have customs clearance Nontariff Barriers Quantity Controls Quotas A quota is the most common type of quantitative import or export restriction Quotas limit the quantity of a product that can be imported or exported in a given time frame typically per year Quota may set the total amount to be traded or allocate amounts by country Import quotas normally raise prices for two reasons To limit supply To provide little incentive to use price competition to increase sales Big difference between tariffs and quotas is their effect on revenues Tariffs generate revenue for the government Quotas generate revenue only for those companies that are able to obtain and sell a portion of the intentionally limited supply of the product Companies sometimes convert their product into one for Which there is no quota to get around the quotas on their products A country may establish export quotas to assure domestic consumers a sufficient supply of goods at a low price to prevent depletion of natural resources or to attempt to raise export prices by restricting supply in foreign markets goals Voluntary Export Restraint Voluntary export restraint VER is a variation of a quota Much easier to switch off than an import quota Embargoes Embargo is a specific type of quota that prohibits all trade Governments impose embargoes in an effort to use economic means to achieve political Buy Local Legislation Through these laws Government purchases give preference to domestically made goods Governments sometimes legislate a percentage of domestic content Sometimes government purchases specify a domestic content restriction Which is to say that a certain percentage of the product must be of local origin Sometimes governments favor domestic producers through price mechanisms For example permitting an agency to buy a foreignmade product only if the price is at some predetermined margin below that of a domestic competitor Standards and Labels Other types of trade barriers include Arbitrary standards Licensing arrangements Administrative delays Reciprocal requirements Service restrictions Countries can devise classification labeling and testing standards to allow the sale of domestic products but obstruct foreignmade ones Product labels indicating where something was made inform consumers who may prefer to buy products from certain nations Specific Permission Requirements Importexport license government permission required for importers or exporters before transacting trade Procedure can restrict imports or exports directly by denying permission or indirectly because of the cots time and uncertainty involved Foreign exchange control requires importer to apply to a government agency to secure the foreign currency to pay for the product Administrative Delays Create uncertainty and raise cost of carrying inventory Intentional delays may occur not only to protect domestic producers but also for political reasons Reciprocal Requirements Exporters sometimes must take merchandise or buy services in lieu of receiving cash payment This is common in the aerospace and defense industries Countertrade Countertrade or offsets are government requirements in the importing country whereby the exporter especially in military sales to a foreign government must provide additional economic benefits such as jobs or technology as part of the transaction Reciprocal requirements often mean that exporters must find markets for goods outside their lines of expertise engage in complicated organizational arrangement that require them to relinquish some operating control Undertake activities outside their expertise Restrictions on Services Four main reasons why trade in services is restricted are Essentiality Preference for notforprofit operations Standards Immigration Essentiality countries judge certain service industries to be essential because they serve strategic purposes or provide social assistance to citizens Essential services include media communications banking utilities and domestic transport NotforPro tServices Mail education and hospital health services are notforprofit sectors in which few foreign firms compete Government privatization of these industries usually prefers local ownership and control Standards governments limit entry into many service professions to ensure practice by qualified personnel There is presently little reciprocal recognition in licensing from one country to another because occupational standards and requirements differ substantially Immigration Governmental regulations often require an organization domestic or foreign to search extensively for qualified personnel locally before it can apply for work permits for personnel pulled in from abroad Dealing With Governmental Trade In uences When facing possible losses because of import competition four options stand out Move operations abroad Concentrate on market niches that attract less international competition Adopt internal innovations such as greater efficiency or superior products Try to get governmental protection Tactics for Dealing with Import Competition In situations where companies themselves can t identify solutions they often ask their governments to restrict imports or open export markets In opening case US catfish farmers successfully gained government support to limit import competition Convincing Decision Makers Burden falls on company to convince officials that situation warrants particular policies Preparing for Changes in the Competitive Environment Companies that depend on freer trade andor have integrated their production and supply chains among countries tend to oppose protectionism In contrast companies with single or multidomestic production facilities tend to support protectionism Chapter Extra Looking to The Future Dynamics and Complexity Gains to consumers from freer trade may be at the expense of some companies and workers International regulatory situation is becoming more complex which challenges companies to find the best locations in which to produce Chapter Extra Closing Case USCuban Trade When does a cold war strategy become a cold war relic US embargo of Cuba has been a resilient foreign policy Many US observers want normal commercial relations with Cuba and many do not Supporters of trade argue that long embargo has not workers and that US companies have been forced to lose business to competitors abroad Opposition to trade argue that demoralized Cuban population will overthrow regime if economic conditions deteriorate just a little more Moral obligation not to do business with a regime so economically and politically repressive Before and After the Revolution Before overthrow of Batista by Fidel Castro in 1959 over 23 of Cuba s foreign trade took place in US After Castro came to power US countered by cancelling its agreements to buy Cuban sugar and Cuba seized US oil refineries Cold War Sets In Con ict occurred at height of cold war tensions between US and Soviet Union Enacting the Embargo Trade embargo endured during this period as originally set US congress passed the Cuban Democracy Act in 1992 which banned American travel to Cuba and extended embargo to US foreign subsidies abroad Cuba had to hold democratic elections before US would repeal embargo Shifting Svaathies Many countries initially supported the US embargo Gradually countries began trading with Cuba anyway The Cold War Thaws In 2000 congressional legislation allowed certain exports of US agricultural food and medical products Argument for Policy Change Argue that policies caused adversity for over 11 million Cubans economically without weakening Castro rule Growing number of US leaders have publicly favored normalization of USCuban trade US Business Advantages in Cuba Repealing embargo may help US industries and companies because businesses from other countries have already found advantages in tapping Cuba s qualified work force and near perfect literacy rate Cuban demand for foreign products and services exists Market potential for US companies in tourism and transportation sectors Many also argue however that opportunities are highly limited Cuba needs to earn enough from abroad to pay for imports while Cuba depends heavily on commodity exports Is Embargo a Cold War Relic Some argue that the Cuban embargo looks like Cold War relic as it is the longest and harshest embargo by one state against another in modern history A move to normalize economic relations with Cuba without anything in return would make US look weak Cuban economic gains would only be used to increase political repression Change however in US commercial policy doesn t necessarily mean that Cuba would welcome or accept it Chapter 11 Globalization and Society Chapter Extra Opening Case Ecomagination and the Global Greening of GE Green is Green Ecomagination Initiative by General Electric Company is a major promotional campaign announced in 2005 by CEO Jeffrey Immelt Strategy designed to demonstrate that an ecologically conscious conglomerate can cultivate the bottom line while doing its duty toward the global environment Campaign motto is Green is Green GE is world s second largest corporation operating in more than 100 countries With announcement of plans to launch internal green revolution GE surprised investors and industrial customers who had long seen GE as an all struggling against environmental activists and lobbyists Commitments and Goals 5 basic commitments reduce greenhouse emissions and improve energy efficiency of operations double investment in RampD of clean technologies increase revenues from those technologies reduce global water use by 20 percent keep public informed Overall target was a 1 percent reduction from 2004 levels by 2012 Reduce intensity of GHG emissions 30 percent by 2008 To ensure goals were met Immelt put together crossbusiness crossfunctional team to oversee planning and monitor progress By 2011 had reduced GHG emissions by 29 improved energy intensity by 32 A Little Consensus Seeking Worked with Environmental and Natural Resources Defense Council and Pew Center on Global Climate Change to seek to help shape international political debate over global warming GE allied itself with companies internationally with similar goals GE is still pursuing its own best interests economically as ecologically proactive firms are gaining strategic advantage over other companies Technological Tactics and EcoFriendlv Products GE aims to double RampD investment in clean technologies like Renewable energy water purification processes fuel efficient products Increased number of products meeting Ecomagination criteria from 17 to 90 in four years Uses website to communicate information about green products and efforts to improve its own GHG reduction is an example of goal 5 keeping the public informed Solving Environmental Problems is a Good Business GE insists market for ecologically sound products and services is growing and profitable GE regards Ecomagination strategy as a necessary response to customer demand Mixed Reactions GE has been praised by its efforts to go green but has also generated skepticism What happens if the markets GE is betting on don t materialize fast enough Another risk is the participation of developing nations in the cleantechnology push Will they be willing to pay prices that developed countries pay for the technology that reaches the market Clients and shareholders are from the pool of the utility sector which is a leader in disregarding warnings of climatic change and opposing ecofriendly regulation Investors concerned over company s newfound activism and potential of newly instituted green initiatives alienating industrial customers Intl39oduc To review from chapter 1 3 major criticisms of globalization of business are threats to national sovereignty growth and environmental stress rising income inequality and personal stress This chapter examines globalization and society from ethical and social responsibility standpoint Ethics in a global context bribery corruption environment corporate codes of conduct Corporate social responsibility broader prospective on how individuals and companies are trying to improve human condition Stakeholder TradeOffs Stakeholders shareholders employees customers suppliers and society at large To prospersurvive companies must satisfy stakeholders Shareholderstockholder vs stakeholder dilemma pits demands of one stakeholder against all others In the short term different group aims tend to con ict Shareholders want additional sales and increased productivity for higher profits and returns employees goals could include safer workplaces and higher compensation Customers want higher quality at lower price Society wants to see more jobs increased corporate taxes more corporate support for social services and more trustworthy behavior by corporate executives In the long term all of these aims need to be met adequately Pressure groups additionally may lobby government to regulate MNE activities at home and abroad For example in opening GE case initiative generated pressure to please various groups like clients governments employees and environmental lobbyists each group powerfully in uencing how GE does business Foundations of Ethical Behavior Many actions elicit universal agreement on what is right or wrong but other situations are less clear 3 levels of moral development 1 Preconventional Level children learn what is right and wrong but don t understand why 2 Conventional Level learn role conformity first from peers then from societal laws can argue that company codes of conduct are part of this level of behavior in context of company 3 PostconventionalAutonomousPrincipled Level Individuals internalize moral behavior not because of fear of punishment but because they truly believe such behavior is right Methods of moral reasoning Teleological approach decisions are based on the consequences of the action Utilitarianism An action is right if it produces the greatest amount of good for the greatest number of people Deontological approach moral judgments are made and moral reasoning occurs independent of consequences Actions are right or wrong per 56 When an individual moves abroad moral reasoning becomes more complicated Consequences vary due to legal differences and what is perceived right or wrong may depend on local values Why Do Companies Care About Ethical Behavior Ethical behavior can be instrumental in achieving one or both of the two possible following objectives To develop competitive advantage To avoid being perceived as irresponsible GE s Ecomagination program re ects belief of top management that responding to social concerns can gain a strategic advantage over competitors Companies are aware more and more that NGOs are becoming active in monitoring and publicizing international corporate practices The Cultural Foundations of Ethical Behavior Values differ from country to country and between employees and companies When Enron was forced into bankruptcy because of illegal employee acts other US companies followed suit Relativism vs Normativism Managers often face situations in which the whys and how s of applying cultural values are less than crystal clear Even within a given country there are contrasting views on ethical matters Personal values may also differ from employer s policies social norms or both Relativism Relativism ethical truths depend on the groups holding them and may vary from one society or country to another It would not be appropriate to inject or enforce one s ethical values on another or that a foreigner must assimilate local values or morals when they are not consistent with their home beliefs There are significant differences from country to country that may affect our behavior One must adjust to what makes sense in different environments adapt to local customs etc But just because something like bribery is acceptable in one country does not mean that when you are in that country that you should feel ethically sound practicing bribery Normativism Normativism there are universal standards of behavior that all cultures should follow Key is to distinguish what is common to all and what is unique to the individual From this perspective nonintervention is unethical Walking the Fine Line Between Relative and Normative Company may be pressured to comply with local norms for competitive advantage Conversely company may be pressured from homecountry government not to comply with local norms abroad Many lay out minimum levels of business practices that they say a company must follow regardless of legal requirements or ethical norms prevalent where it operates This is called ordinary decency which is exhibiting principles of honesty and fairness Managers need to create competitive advantages through ethical behavior and avoid being perceived as irresponsible Negotiating Between Evils Both societies and companies must often choose between the lesser of two evils ie the use of pesticide DDT use is prohibited in the US but the World Health Organization gave its support to DDT in 2006 in African countries where it could tame spread of malaria deciding that benefits outweighed costs Legal Foundations of Ethical Behavior Social responsibility requires human judgment which is subjective and ambiguous Dealing with ethical dilemmas is often a balance between actions we take and the product of those actions Legal foundations can provide guidance here but legal justification is more rooted in the teleological approach of moral reasoning and moral behavior consequenceoriented instead of right vs wrong behavior Legal Justi cation Pro and Con 5 good reasons why legal justification for ethical behavior is not adequate for individuals or companies in business Some things that are unethical are not illegal Law is slow to develop in emerging areas and it takes time to pass and test laws in courts Can t always anticipate future dilemmas Law is often based on imprecisely defined moral concepts that can t be separated from legal concepts they underpin Law often needs to undergo court scrutiny Law isn t very efficient it would be impossible to solve every ethical behavioral problem with an applicable law 4 good reasons for using the law to justify ethical behavior Law embodies many of a country s moral principles Law provides clearly defined set of rules which established a good precedent for moral behavior Law contains enforceable rules that apply to everyone Law re ects careful and wideranging discussions because it represents a consensus derived from widely shared experience and deliberation Extraterritoriality The most basic problem is that laws vary from country to country For example GE has to deal with international variation in environmental laws Extraterritoriality imposing domestic legal and ethical practices on foreign subsidiaries of companies headquartered in their jurisdictions This is controversial and some argue that it is inconsistent with increased globalization and the need to collaborate across national boundaries Ethics and Corporate Bribery Despite all the problems that arise considering the law is still a good place to start when studying ethics As countries find themselves seeking common solutions to common problems they find themselves taking common legal steps Corruption and Briberv Bribery is only one facet of the much bigger issue corruption Bribes are payments or promises to pay cash or anything of value Corruption includes cultural legal and political forces Bribery of public officials takes place to obtain government contracts or to get officials to 0 what they should be doing anyway Bribery is at the heart of corrupt behavior 9 Examples of high profile corruption and bribery Ralph Lauren in Argentina paying off foreign government officials to skip inspections Walmart in Mexico Microsoft in China Allegations often make it to the press but don t make it to prosecution Corruptioan Perceptions Index 2012 see figure 112 pg 409 Identifies perceived level of publicsector corruption for a small sample of countries Lower score means more corrupt 23 of those surveyed score below 50 Poverty definitely contributes to corruption level however there are still some high income countries like Italy and Greece that score poorly as well The Consequences of Corruption Problems with bribery Affects both company performance and country economies Higher levels of corruption correlate strongly with lower national growth rates and lower levels of per capita income Briberybased scandals have led to the downfall of numerous heads of state Disclosures of corruption not only damage reputations of companies and whole countries but also compromise the legitimacy of MNEs in the eyes of local and global communities Corruption is expensive in ating costs and increasing prices What s Being Done About Corruption Efforts to combat bribery at global level include Organization for Economic Cooperation and Development OECD International Chamber of Commerce ICC United Nations Convention against Corruption UNCAC OECD comprises 34 mostly highincome countries AntiBribery Convention establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions ICC issued code of rules against corrupt practices in 1999 and has since supported other multilateral approaches to combating bribery More interested in private sector than OECD UNCAC covers broad range of corruption issues not just bribery Enforcement is up to member governments Regional Initiative The European Union European Commission confirmed its support for strong anticorruption measures with the EU in a 2007 communication to the European Council Parliament and Economic and Social Committee Included adoption of UN s official definition of corruption and support for many of the policies contained within international agreements Starting in 2013 Commission will publish an anticorruption report every two years as a way to evaluate and monitor the enforcement efforts of member countries given uneven nature of implementation of existing laws National Initiative The US Foreign Corrupt Practices Act Foreign Corrupt Practices Act FCPA in US is an example of a national approach to combat corruption Outlaws bribery payments by US firms to foreign officials political parties party officials and political candidates Applies to domestic or foreign operations and to company employees as well as their agents overseas Although it is legal to make payments to officials to expedite otherwise legitimate transactions called facilitating payments payments cannot be made to officials who aren t directly responsible for the transactions in question For example payment to customs official to clear legitimate merchandise is legal whereas paying a government minister to in uence a customs official is not but what s the difference SarbanesOxley legislation in the US is helpful in combating corruption through more effective corporate governance financial disclosure and public accounting oversight Industrv Initiatives A zerotolerance pact against bribery was signed by companies at the 2005 World Economic Forum PACI partnering against corruption initiative calls for member firms to set up internal programs to monitor and prohibit bribery Relativism The Rule of Law and Responsibilitv International initiatives have made progress in introducing the rule of law into more and more international business activity Companies are now freer to establish policies and procedures that are consistent with high standards of ethical behavior Laws and practices that once varied radically from country to country have become more uniform and easier to implement Chapter Extra PointCounterpoint Are Top Managers Responsible When Corruption is Afoot Point Yes ultimate responsibility for companywide behavior rests in the executive suite In one incident in 2006 in German Siemens AG company several managers caught up in bribery scandal claimed that corruption was just a part of the company s culture and that they had acted without knowledge or approval of the CEO Like other German companies Siemens was hanging onto a corporate culture that was comfortable with bribery and other forms of corrupt behavior All of this transpired on the CEO s watch it is unrealistic to think they were unaware of the corruption Employees didn t have a choice in their operations with pressure put on them by CEO Counterpoint No ingrained corporate culture is not an excuse for the actions of the individuals directly involved in the corruption Actions of individuals shape company s culture more than official codes It s hardly reasonable to expect top executives overseeing a highly decentralized large business to know everything that is going on globally The fact that passing laws takes time doesn t justify breaking them Employees who participated in bribery fully understood unlawfulness of their practices The argument that employees had no choice if they wanted to keep their careers doesn t hold up because now they face criminal charges and jail time with no hope of pursuing any career Ethics and the Environment Companies that extract natural resources generate air or water waste or manufacture products such as autos that generate pollution need to be concerned with their environmental impact What is Sustainability Sustainability involves meeting the needs of the present without compromising the ability of future generations to meet their own needs while taking into account what is best for the people and the environment Supporters of sustainability argue that it considers both what s best for people and the environment Sustainability is no longer just good business practice New businesses are emerging that are combining idea of environmental responsibility and profitability One such company is called Floating Island International FII Global Warming and the Kyoto Protocol Global warming results from the release of greenhouse gases that trap heat in the atmosphere rather than allowing it to escape The Kvoto Protocol The Kyoto Protocol is the theory that global climate change results from an increase in carbon dioxide and other gases that act like the roof of a greenhouse trapping heat that would normally radiate into space thereby warming the planet Signed in 1997 to require countries to cut their green house gas emissions to 52 percent below 1990 levels between 2008 and 2012 Some countries such as the US China and India have not met these requirements because they have not ratified the Protocol US would rather develop lowcarbon technologies to solve the problem instead of attempt to meet mandatory reductions fearing reduced economic growth and domestic unemployment An approach highly favored is to invest more in alternative and renewable energy rather than simply cut back on existing nonrenewable energy National and Regional Initiatives Firms operating in countries that have adopted the Kyoto Protocol are under pressure to take one of two steps Reduce emissions Buy credits from companies that have reduced emissions below target levels MNEs such as GE are now forced to reconsider their global strategies Companvspecific Initiatives USbased MNEs must comply with the Kyoto Protocol in compliance countries where they may have operations MNEs must adapt to different standards in different countries Legal approach to responsible corporate behavior says an MNE can settle for operating in accord with local laws Ethical approach urges companies to go beyond the law to do whatever is necessary and economically feasible to reduce GHG emissions given that they have multiple stakeholders to satisfy Chapter Extra Does Geography Matter How to See the Trees in the Rain Forest The world is one big greenhouse when it comes to the emission of carbon dioxide and other gases Amazon rain forest accounts for a third of the world s remaining tropical forest and covers about 60 of brazil home to about a third of the world s animal and plant species Rain forests may provide key to solving the problem of global warming because trees absorb carbon dioxide Thus one of the approaches to reducing GHG emissions involves reforestation Amazon is currently under a twofold humanmade assault of logging and burning Burning alone accounts for 75 of Brazil s GHG emissions 538 of the world s total Brazilian government has tried to issue land titles in hopes of reducing illegal land trade and make it easier to police the rain forest w GlaxoSmithKline GSK is one of the largest researchbased pharmaceutical companies in the world Focuses on two lines of business pharmaceuticals prescription drugs and vaccines and consumer healthcare products In order to fund their RampD these types of companies sell their successful drugs at high prices as long as the drugs are covered by patents Tiered Pricing and Other PriceRelated Issues Tiered pricing for pharmaceuticals means that companies charge a market price for products sold in industrialized countries and a discount price for products sold in developing countries This is an example of subsidized pricing If government buyer is still unsatisfied with the high cost of patented drugs it may resort to substituting generics Recently GlaxoSmithKline was accused of bribery and tax evasion as it tried to increase sales in the rapidly growing Chinese pharmaceutical market GSK was basically bribing foreign government officials and therefore is in violation of the Foreign Corrupt Practices Act since GSK is listed on the NY Stock Exchange Example of problems when pharmaceuticals become controversial AIDS in Brazil where government distributes AIDS drugs to anyone who needs them In 2007 drug maker offered drugs at 30 discount Brazilian government declined and instead made it legal for Brazilian firms to manufacture or buy generic versions of the drug while paying the drug maker only small royalties Brazil has also resorted to tactic of reverse engineering certain drugs so they can be produced at lower prices Taking Trips for What It s Worth WTO Agreement on TradeRelated Aspects of Intellectual Property Rights TRIPS Allows poor countries to counter the high cost of patented drugs by doing either of two things Producing generic products for local consumption Importing generic products from other countries if they themselves don t have the capacity to produce them Although this compels developing nations to use patented drugs in Brazil and Thailand they HIVAIDS and heart disease epidemics are considered national emergencies Thus these governments have permitted local companies to make unlicensed generics and avoid paying royalties to original pharmaceutical companies Illegal generic products are fakes that may or may not be of high quality India is a major manufacture of generic drugs and is now moving to RampD of new drugs In this area of controversy the issue of social responsibility revolves around finding ways in which pharmaceutical companies can generate enough revenues to create new products while responding to needs of developing countries that are full of disease but lacking in funds Ethical Dilemmas of Labor Conditions Maj or issues MNEs get involved in through FDI or purchasing from manufacturers in developing countries Fair wages Child labor Working conditions Working hours Freedom of association Pressures for ethical behavior with respect to workers come from external stakeholders such as Consumers NGOs Corporate investors Governments Individual investors Media Trade unions Ethical Trading Initiative ETI is a Britishbased organization that focuses on MNE s employment practices members include companies trade union organizations NGOs and governments Objective of ETI is to get companies to adopt ethical employment policies and monitor compliance with overseas suppliers concerning the following issues Employment is freely chosen Freedom of associationright to collective bargaining Working conditions are safe and hygienic Child labor prohibited Living wages are paid Working hours are reasonablenot excessive Regular employment is provided No harshinhuman treatment allowed The Problem of Child Labor Some case examples India and Bangladesh Two arguments for use of children in Indian carpet industry They re better suited than adults for certain tasks If they weren t employed they d be even worse off Children are sometimes even indentured to creditors to pay off parents debt In 1990s Bangladesh was pressured to stop employing thousands of child workers or face US trade sanctions In this example the employment of the children did worsen their condition An estimated 250 million children between 5 and 17 years old are working but only about 5 of child labor is involved in export industries Some companies avoid operating in countries where child labor is employed whereas others try to establish responsible policies in those same countries MNEs may not be willing to hire local workers who want to work long hours due to the risk of being targeted as exploiting labor pools in the host country What MNEs Can and Can t Do MNEs are not powerless when it comes to laborrelated matters in facilities abroad For example when IKEA was in trouble for using local suppliers that relied heavily on child labor instead of trying to force suppliers to discontinue unethical practices it helped local workers to increase family earning power and set up schools for working children MNEs operating in countries with con icting labor policies to their home country frequently succumb to pressure to simply leave the market to avoid risks of being accused of exploitation Even though MNEs don have the power to revolutionize employment practices in host countries nationwide they can still improve conditions under their operations abroad and have in uence on guidelines in that way For example in India IKEA partnered with UNICEF to help children and families and moved into a more humanitarian aspect of working to combat child labor Corporate Codes of Ethics How Should a Companv Behgve United Nations Global Compact which identifies 10 broad principles in the areas of human rights labor environment and anticorruption is a good start Not legally binding but is helpful for companies in establishing a code of conduct Motivations for Corporate Responsibility 4 strong motivations for acting responsibly Unethical and irresponsible behavior can result in legal headaches Lack of responsibility could result in consumer action such as a boycott Unethical behavior can affect employee morale whereas responsible behavior can positively in uence work force You never know when bad publicity will cost you sales this is probably a big reason why apparel companies responded so quickly to criticism about employment practices overseas Developing a Code of Conduct Major component of ethical strategy is a company s code of conduct 4 criteria for internal code of conduct Sets global policies everyone working anywhere in the world for that company must comply with Communicates company policies to all employees suppliers and subcontractors Ensures that policies laid out in code are carried outenforced Reports results to external stakeholders Most public companies provide a lot of information about their codes of conduct Chapter Extra Looking to the Future Dealing with Ethical Dilemmas in the Global Economy In chapter 1 we identified 3 scenarios of future globalization Through studying ethical issues of globalization we can see that regardless of what happens in the future the more companies expand abroad the greater the likelihood they will encounter ethical dilemmas Social media will also have a greater impact on future global ethical behavior Provides so much more transparency than has been available in the past There is more to responsible behavior than simply avoiding doing bad things Responsible behavior includes taking active measures to try to solve the world s problems Chapter Extra Anglo American PLC in South Africa What do you do when costs reach epidemic proportions In 2002 UKbased company Anglo American made a landmark decision to provide free antiretroviral therapy to HIVinfected employees there This was met with mixed reactions from stakeholders and achieved only controversial results AIDS in South Africa SubSaharan Africa contains 10 of world s population but 60 of population of all those infected with HIV worldwide 55 million people live with HIV in a population of 49 million almost 1000 South Africans die every day from AIDs AIDS has devastated the economy GDP continually decreasing because of loss of workers Anglo American Operations in South Africa Anglo American PLC is a diversified mining conglomerate operating in 45 countries and employing 107000 permanent workers Company dominates South Africa s domestic economy through direct employment contractors and its supply chain Anglo American and ART One of the first companies to develop a comprehensive strategy to combat negative effects of the disease Policies of the program include initiatives aimed at education and awareness condom distribution financial and skills training and surveys to monitor prevalence of disease infection Eventually led to include counseling testing and careandwellness programs to cover employers their families and surrounding populations Because of its early involvement company became leader in the privatesector fight against AIDS in Africa with many other MNEs soon following suit The Costs of Operating in an Epidemic HIVAIDS was adding as much as 5 to the cost of producing one ounce of gold which equates to an additional 11 million yearly in company production costs along with 7 million spent annually to combat AIDSrelated illnesses Company also had to bear costs of constantly retraining new workers because of workers dying so frequently ART program itself is also becoming continually more costly However on the positive side cost per patient should decrease as number of workers in program increases Constituencies and Critics Another problem is pressure from stakeholders National Union of Mineworkers hesitant to show support because of company s limitations on health insurance benefits Accuses Anglo American of trying to contain problem rather than find solutions for underlying causes Anglo American counters criticisms insisting that it is beyond the resources and capacity of a single company to combat the overall problem and requires cooperation from South Africa itself However company has faced outright opposition on part of South African government Dealing with pharmaceutical companies poses another problem as they have been hesitant and unreliable in their support Some critics suggest company would actually be better off by pulling back on treatment program However there are still upsides Of workers who adhere to the drug regimen over 90 have responded well to treatment and are working productively South African government has recently launched a National Strategic plan for combating the epidemic
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'