International Business 2000 – Final Exam
International Business 2000 – Final Exam
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Date Created: 02/09/15
International Business 2000 Final Exam Chapter 5 Ethics in International Business Business Ethics accepted principles of right or wrong governing the conduct of businesspeople Ethical Strategy a strategycourse of action that does not violate a company s business ethics Most common ethical issues involve empoyment practices human rights environmental regulations corruptions moral obligation of multinational corporations Employment practices Use of sweatshops in other nations with low ethical guidelines is unethical Estabish minimal acceptable standards that safeguard the basic rights amp dignity Audit foreign subsidiaries to make sure standards are met Take corrective action if not up to standards to guard against ethical abuse Human Rights Companies can passively resist inhumane government regimes by ignoring guidelines and supporting democratization Coud go as far as divesting businesses Environmental Pollution Goba warming Goba tragedy of the commons Corruption Internationa businesses gain economic advantages by making payments to corrupt government officials Foreign Corrupt Practice Act 1977 l outlawed the paying of bribe to foreign government officials Convention on Combating Bribery of Foreign Public Officials in International Business Transactions An OECD convention that establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective Moral obligations With power comes the social responsibility for multinationals to give something back to societies that enable them to prosper and grow Social responsibility the idea that business people should consider the social consequences of economic actions when making business decisions Corporate Governance Ethical Dilemmas Situations where there is no ethically accepted solutions Mora compass ethical algorithm needed to guide employees to ethical solutions Roots of Unethical Behavior Persona Ethics Decisionmaking process Organization culture the values and norms shared among an organization Unreaistic Performance Expectations Leadership behavior Societal Culture Individualism and Uncertainty avoidance l more ethical Masculinity and Power Distance Less ethical Philosophical Approaches to Ethics Straw Men used to demonstrate that business ethics offer inappropriate guidelines for ethical decision making in a multinational enterprise Friedman doctrine Cultura relativism Righteous moralist Nai39ve immoralist Friedman doctrine Business ethics scholars outline only to then tear down Only social responsibility of business is to increase pro ts so long as the company stays within the rule of law lmproving working conditions beyond required by law and necessary to maximize worker productivity l will lead to decreased pro ts Pro ts go into stockholders and it is up to stockholders to socially invest l l engage in open and free competition without deception or fraud Downfall Rules vary from country to country Hard to de ne Cultural Relativism Ethics are culturally determined and rms should adopt the ethics of the culture in which they operate Righteous Moralist Multinational s homecountry standards of ethics are the appropriate ones for companies to follow in foreign countries Downfall big penalty for not following cultural norm Na39I39ve Immoralism okay if everyone s doing it Belief that if a manager of a multinational sees that rm from other nations are not following ethical norms in a host nation that manager should not either Solution not to invest in a country where rule of law is so weak however unfair to citizens of the country who could bene t from the inward investment Utilitarian and Kantian Ethics Utilitarian approach to Ethics the moral worth of actions or practices is determined by their consequences An action is judged desirable if it leads to the best possible balance of good consequences over bad consequences committed to maximization of good and minimization of harm greatest good for the greatest number of people Downfall some risks are hard to quantify some good actions are unjust Kantian ethics people should be treated as ends and never purely as means to the ends of others Focus on People Rights Theories Human beings have fundamental rights and privileges that transcend national boundaries and cultures fundamental human rights form the moral compass the underlying motivation for the United Nations Universal Declaration of Human Rights Obligation from the rights have to be enforced by a moral agent or more than one Justice Theories just distribution of economic goods or services just distribution a distribution of goods and services that is considered fair and equitable Design a system under the veil of ignorance with 2 principles 1 each person permitted maximum amount of basic liberty freedom of xxxxx 2 Once equal basic liberty is assured inequality in basic social goods is to be allowed only if such inequalities bene t everyone l can be moral compass for dif cult moral dilemma Managers decision guidelines 1 favor hiring and promoting people with a wellgrounded sense of personal ethics 2 build an organizational culture that places a high value on ethical behavior 3 make sure leaders not only articulate the rhetoric of ethical behavior but also act in a manner that is consistent with that rhetoric 4 put decisionmaking processes in place that require people to consider the ethical dimension of business decisions 5 develop moral courage Code of ethics a business s formal statement of ethical priorities 5step process to think through ethical problems 1 identify which stakeholders a decision would affect and in what ways moral imagination 2 judging the ethics of the proposed strategic decision violate fundamental human rights of stakeholders 3 establish moral intent 4 company engages in ethical behavior 5 business should audit the decisions review to make sure they are consistent with ethical principles in code of ethics Chapter 6 International Trade Theory Free trade the absence of barriers to the free ow of goods and services between countries no in uence through quota and duties Bene ts of trade a country s economy may gain if its citizens buy certain products from other nations that could be produced at home international trade allows countries to specialize in the manufacture and export of products that can be produced most efficiently in that country importing products that can be produced more efficiently in other countries lmport controls bene t some groups but hurt the whole economy as a whole Limits on imports are often in the interest of domestic producers not the consumers The Pattern of International Trade Countries have varying endowment of factors of production theory of comparative advantage Product lifecycle theory early in the life cycle most products are produced in and exported from the country in which they were developed As a new product becomes widely accepted internationally production starts in other countries l the product may ultimately be exported back to the country of its original innovation New Trade Theory Countries specialize in the production and export of particular products not because of underlying differences in factor endowments but because certain industries the world market can support only a limited number of rms Firms that enter the market rst are able to build a competitive advantage Theory of National Competitive AdvantageMichael Porter explains why particular nations achieve international success in particular industries Both justify limited government intervention to support the development of exportoriented industries Mercantilism an economic philosophy advocating that countries should simultaneously encourage exports and discourage imports best interest to maintain a trade surplus imports are limited by tariffs and quotas exports are subsidized DOWNFALL it viewed trade as a zerosum game situation in which an economic gain by one country results in a economic loss by another Neomercantiists still believe in economic powerpoitica powerbaanceof trade surplus China is keeping money value low so other countries will import from it exporting a lot more than it imports and increasing federal reserve Swell in domestic money supply would cause in ation De ation in corresponding trade country ln ated country would want to import from the de ated country cheaper Defeated original purpose Absolute Advantage a country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it Smith advocates absolute advantage demonstrates trade as a positivesumgame As a result of specialization and trade output of products would increase and consumers in both nations would be able to consume more Comparative Advantage country should specialize in the production of those goods that it produces most ef ciently and to buy the goods that it produces less ef ciently from other countries If a country has absolute advantage for all products trade will not bene t him SMITH Divide country s ability to produce to see who s comparatively more advantageous Eg Ghana can produce 4 times as much cocoa as South Korea but only 15 times as much rice l Comparatively more ef cient at producing cocoa than rice Despite absolute advantage for both Paul Samuelson argued that in certain circumstances the theory of comparative advantage predicts that a rich country might actually b worse off by switching to a free trade regime with a poor nation Extensions of the Ricardian Model lmmobile resources Unions have the most to lose from free trade Governments need to ease the transition toward free trade by helping to retrain those who lose their jobs Diminishing Returns Comparative advantage model developed by Ricardo assumes constant returns to specialization The unit of resources required to produce a good are assumed to remain constant no matter where one is on a country s production possibility frontier More realistic to assume diminishing returns to specialization occurs when more units of resources are required to produce each additional unit Convex PPF rather than straight line 1 not all resources are of the same quality 2 different goods use resources in different proportions worthwhile to specialize until that point where the resulting gains from the trade are outweighed by diminishing returns Dynamic gains and economic growth Opening an economy to trade is likely to generate dynamic gains of two types 1 free trade increases a country s stock of resources as increased supplies of labor and capital from abroad became available 2 free trade increases a country s ef ciency with using its resources Paul Samuelson Critique Lower prices US consumers pay for goods from China following free trade is not enough to produce a net gain for the US economy if the dynamic effect was to lower the real wage rate in the US Evidence for the Link between Trade and Growth Higher growth raises income levels and living standards Heckscher Ohlin Theory countries will export those goods that make intensive use of factors that are locally abundant while importing goods that make intensive use of factors that are locally scarce the pattern of international trade is determined by differences in factor endowments rather than differences in productivity The Leontief Paradox Leontief postulated that because US was relatively abundant in capital compared to other nations the US would be an exporter of capital intensive goods an an importer of laborintensive goods in fact US exports were less capital intensive than US imports Once the impact of differences of technology on productivity is controlled for the HeckscherOhlin theory seems to gain predictive power New Trade Theory ability of rms to attain economies of scale might have important implications for international trade Economies of scale unit cost reductions associated with large scale of output 1 trade can increase the variety of goods available to consumers and decrease the average cost of those goods 2 in those industries when the output required to attain economies of scale represents a signi cant proportion of total world demand the global market may be able to support only a small number of enterprises world trade dominated by countries with rst mover advantages First mover advantage economic and strategic advantages that accrue to early entrants into the industry especialy signi cant in those products where economies of scale are signi cant and represent a substantial proportion of world demand National Competitive Advantage Porter s Diamond Factor endowmentsa nation s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry Demand endowmentsthe nature of home demand for the industry s product or service Related and supporting industries the presence or absence of supplier industries and related industries that are internationally competitive Firm strategy structure and rivalrythe conditions governing how companies are created organized and managed and the nature of domestic rivalry l rms are most likely to succeed in industries or industry segments where the diamond is most favorable 2 additional variables can in uence the national diamond in important ways 1 Chance eg major innovations can reshape industry structure and provide opportunity for one nation s rms to supplant another s 2 Government choice of policies can detract from or improve national advantage Implications for international businesses 1 Location 2 Firstmover implications 3 Policy implications Location choose where there is a large pool of your talent needed somewhere you can produce ef ciently cost structure or cost of labor Firstmover advantages important in less concentrated industries in market that can support only a limited number of rms Government policies Businesses can exert a strong in uence on government trade policy lobby to promote free trade or trade restrictions Chapter 7 The Political Economy of International Trade Seven main instruments of trade policy Tariffs subsidies import quotas voluntary export restraints local content requirements administrative policies and antidumping duties Tarifftax levied on imports Speci c tariffslevied as xed charge for each unit of a good imported Ad valorem tariffs levied as a proportion of the value of the imported good Tariffs produce revenue for the US and protect domestic producers from foreign competition by raising the price of imported goods 1 Consumers lose 2 Reduce overall ef ciency of the world economy produce inhome instead of produce more ef ciently abroad Subsidies government payment to a domestic producer which is intended to lower their costs Cash grants lowinterest loans tax breaks government equity participation in domestic rms 1 compete against foreign imports 2 gain export markets l increased international competitiveness lmport Quotas and Voluntary Export Restraints lmport quotadirect restriction of a good that can be imported into a country Tariffrate quota a lower tariff rate is applied to imports within the quota than those over the quota Voluntary export restraint VERquota on trade imposed by the exporting country imposed at the request of the importing country s government an import quota always raises the domestic price of an imported good Quota rent extra pro t that producers make when supply is arti cially limited by an import quota Local content requirements a requirement that some speci c fraction of a good be produced domestically widely used n developing countries to shift their manufacturing base from simple assembly of products into local manufacture of component parts protect local jobs from foreign competition Administrative Trade Policiesbureaucratic rules designed to restrict imports or boost exports Antidumping Rules designed to punish foreign rms that engage in dumping lprotect domestic producers from un ar foreign competition Countervailing Duties Dumping selling goods in a foreign market for less than their cost of production or below their fair market value drive indigenous competitors out of the market unoad excess production Government Intervention in International Trade Political argument for intervention Preserving jobs Protecting industries deemed important for national security Retaliating against unfair foreign competition Protecting consumers from dangerous products Furthering the goals of foreign policy Advancing the human rights of individuals in exporting countries HelmsBurton Act passed in 1996 to allow Americans to sue foreign rms that use Cuban property con scated from them after the 1959 revolution D Amato Act similar law aimed at Libya and Iran Economic arguments for Intervention The Infant Industry Argument governments should temporarily support new industries until they have grown strong enough to meet international competition Recognized by GATI39 as a legitimate reason for protectionism Criticism 1 protection of manufacturing from foreign competition does no good unless the protection makes the industry efficient 2 the only industries that would require gov protection would be those that are not worthwhile for nancing Strategic Trade policy government policy aimed at improving competitive position of a domestic industrydomestic rm in the world market support promising rms that are active in newly emerging industries to gain rst mover advantage to help raise national income pay a government to intervene in an industry by helping domestic rms overcome the barriers to entry created by foreign rms that have already reaped rstmover advantage Development of World trading system SmootHawley Act enacted in 1930 by US congress to erect a wall of tariff barriers against imports into the US GA39IT multilateral agreement whose objective was to liberalize trade by eliminating tariffs subsidies import quotas etc reguations enforced by mutual monitoring system after Uruguay round of GA39IT WTO result of demand for renewed demand for protection against imports umbrela organization that emcompasses the GA39IT with two new functions to protect intellectual property and services arbitrate trade disputes and monitor trade polocies now antidumping protectionism in agriculture lack of strong intellectual property protection continued high tariffs in other goods and services To combat trade barriers that increases cost of exporting and quotas companies can place production facilities in that country so that it can compete on an even footing To conform local content regulations ocate more production activities in a given market raise costs as if the production activity was dispersed to its optimal loca on Countries have a disadvantage if trade barriers are targeted at exports of a particular country Move into the country imposing trade barriers Move production to countries whose exports are not targeted by that speci c trade barrier Antidumping No competitive pricing to gain market share in a country Government intervention has 3 drawbacks 1 it protects the inefficient trader 2 intervention invites retaliation and trigger trade war 3 hard to be wellexecuted Should Promote free trade by strengthening WTO l lower price Bali Package Food security to poorest Trade facilitation trillions into world economy Hep least developed countries navigate multilateral differences Chapter 8 Foreign Direct Investment occurs whenever a us party takes an interest of gt10 in a foreign business entitiy 1 Green eld Investment establishment of a new operation in a foreign country 2 acquiring or merging with existing rm in foreign country Flow of FDI amount of FDI in a de ned period of time Stock of FDI cumulative value of direct investments that have been made by foreign entities at a given point Out ow of FDI Flow of FDI Out of a country In ow of FD same Growth of FDI because rms fear protectionist pressure l circumvent future trade barriers economic deregulation privatization programs that are open to foreign investors etc Gobaization of the world economy Firms believe it is important to have production facilities close to major customers Historic patterns of FDI United States and EU UK and France are popular destinations for FDI in ow l switching to Southeast Asia and developing countries like China Major sources of FDI come from US Japan France Germany Netherlands UK Now Chinese companies are investing in developed nations as well MampA are quicker to execute than Green eld Investments foreign rms are acquired for their valuable strategic assets rms make acquisitions because they believe they can increase the f ciency of the acquired unit by transferring capital tech management skills etc Theories of Foreign Direct Investment Eclectic Paradigm Argument that combining location speci c assets or resource endowments and the rm s own unique assets often require FDI it requires the rm to establish production facilities where those foreign assets or resource endowments are located Alternatives to FDI Green eld ExportingSale of products in one country to residents of another country LicensingGranting a foreign entity the right to produce and sell the rm s product brand name trademark production processes in return for a royalty fee Limitations of Exporting viabiity constrained by transportation costs and trade barriers l particular true to low valuetoweight ratio goods and goods that can be produced in any location High tariffs import quotas Limitations of Licensing lnternalization theory rms prefer FDI over licensing in order to retain control over knowhow and manufacturing and marketing strategy or because some rm s capabilities are not amenable to licensing Market imperfections Approach Imperfections in the operation of the market mechanism 1 when the rm has valuable knowhow that cannot be protected by licensing 2 when the rm needs tight control over foreign entity to maximize share and earnings 3 Skills and knowhow are not amenable to licensing Knickbocker s Oligopolistic Reaction Thoery OR lmitative FDI behavior in oligopolies expain the global FDI tire pattern Multipoint competition arises when two or more enterprises encounter each other in different regional markets national markets or industries ensure a rival does not gain commanding position in one market and use the pro ts generated there to subsidize competitive attacks in other markets Eclectic Paradigmbelieves locationspeci c advantages are also of considerable importance in explaining FDI Locationspeci c advantages advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a rm nds valuable to combine with its own unique assets Oil companies Externalities Knowledge spillovers Political Ideology and FDI The Radical View argues that MNE extract pro ts from the host country and take them to the home country giving nothing to host country in exchange 3 reasons for collapse of the radical view 1 the collapse of communism in eastern Europe 2 the generally abysmal economic performance of those countries that embraced the radical position and a growing belief by many of these countries that FDI can be an important source of technology and jobs to stimulate economic growth 3 the strong economic performance of those developing countries that embraced capitalism rather than radical ideology The Free Market View argues that international production should be distributed among countries according to comparative advantage MNE is an instrument for dispersing the production of goods and services to the most ef cient locations around the globe Pragmatic Nationalism FBI has both bene ts and costs l bene ts by bringing capital skills technology and jobs costs when a foreign company rather than a domestic company produces products the pro ts from the investment go abroad rms import raw materials from home country hurting balance of payments position maximize national bene ts and minimize national costs aggressivey court FDI in the form of tax breaks or grants Host Country Bene ts Resourcetransfer effects Empoyment effects Balanceof payments effects Effects on competition and economic growth Host Country Costs Adverse effects on competition within the host nation Adverse effects on the balance of payments perceived loss of national sovereignty and autonomy Home Country Bene ts baance of payment bene ts from the inward ow of foreign earnings improve balance of payments if the foreign subsidiary creates demands for homecountry exports of raw materials Outward FDI employment effects Learns valuable skills from exposure to foreign markets Home country costs Balance of payments and outward employment effects of FDI offset by foreign earnings Baanceof payment suffers if the purpose of the FDI is to serve the home market from a low cost production location Baanceof payment suffers if FDI is a substitute to exports Reduced home country employment due to substitution of domestic production Government policy instruments and FDI Outward FDI encouragement by home country Foreign risk insurance Capita Assistance Jaxincen ves Poitica pressure Outward FDI Restriction by home country imit capital out ow due to concern for country s balance of payments manipuate tax rules to encourage rms to invest at home prohibit investment for political reasons Inward FDI Encouragement by host country tax concessions low interest loans grants or subsidies lgain from the resource transfer and employment effects of FDI Capture FDI away from other host countries Inward FDI Restriction by host country Ownership restraints excluded from several elds Performance requirements to maximize bene ts and minimize cost of FDI I National security or competition oca owners can help to maximize resource transfer and employment bene ts of FDI for the host country Chapter 9 Regional Economic Integration Regional Economic Integration agreements among countries in a geographic area to reduce and ultimately remove tariff and nontariff barriers to the free ow of goods services and factors of production between each other aim to lower the price of good and services across the bloc l however challenges producers who have to adapt to a more competitive environment Levels of economic integration free trade area customs union common market economic union full political union Free trade area are barriers o the trade of goods and services among member countries are removed but each country pursues independent external trade policies European Free Trade Association EFTAmost enduring free trade area in the world free trade association including Norway Iceland Liechtenstein and Switzerland free trade in industrial good Agriculture left out Customs Union 1 eliminates trade barriers between member countries and 2 Adopts a common external trade policy Common market 1 no barriers to trade among member countries 2 Common external trade policy 3 Factors of production can move freely among members no restrictions on immigration emigration crossborder ows of capital Economic Union even closer economic integration and cooperation 1 Free ow of products and factors of production 2 Common external trade policy 3 Common currency 4 Harmonization of members tax rates 5 Common monetary and scal policy Political Union a central political apparatus that coordinates economic social and foreign policy eg European parliament Council of Ministers The Economic Case For Integration attempts at regional economic integration are motivated by the desire to exploit the gains from free trade and investment The Political Case for Integration Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation and reduces violent con ict Countries can enhance their political weight in the world lmpediments to Regional Integration Not all groups can bene t from the same policy Concerns over national sovereignty Bene ts of Regional Integration are determined by the extent of trade creation Trade creation trade created due to regional integration occurs when highcost domestic producers are replaced by lowcost producers within the free trade area Trade diversion occurs when lowcost foreign suppliers outside a free trade area are replaced by highercost foreign suppliers in a free trade area Integration is only bene cial when the amount of trade it creates gt amount of trade it diverts Regional Economic Integration in Europe European Union EU an economic group of 27 European nations established as a customs union moving toward economic union formerly the European community Forerunner of EU Euroepan Coal and Steel Community Treaty of Rome in 1957 European Community Union Creation of a common market 4 Main Institutions in the EU European Commission The Council of the European Union the European Parliament and the Court ofJustice European Commission Body responsible for proposing EU legislation implementing it and monitoring compliance European Council The ultimate controlling authority in the EU represents the interests of member states European Parliament Elected EU body that consults on issues proposed by European Commission has the right to appoint commissioners as well as veto some laws The Treaty of Lisbon the power of the European Parliament is increased European Parliament became coequal legislator for almost all European laws and also created the position of the president of the European Council The Court ofJustice comprised of one judge from each country Supreme appeals court for EU law The Single European Act objective to have one market in place by December 1992 remove trade barriers among members mutual recognition to product standards signi cant restructuring national to panEuropean production and distribution sytems l scale economies Establishment of the Euro Maastricht Treaty committed the 12 memberstates of the European Community to adopt a common currency now used by 17 of 27 memberstates adopt the euro when they ful lled high degree of price stability sound scal situation stable exchange rates converged long term interest rates Caled for establishment of the independent European Central Bank ECB Euro second most widely traded currency exchange rates are locked to each other 1 businesses and individuals realize signi cant savings from having to handle one currency lower foreign exchange and hedging costs 2 Easier to compare prices across Europe lower prices for consumers 3 Longrun gains in efficiency of European companies 4 Development of a highly liquid panEuropean capital market 5 incease the range of investment options open to individuals and institutions Optimal Currency Area one where similarities among the economic structures of the countries make it feasible to adopt a single currency Andean Pact 1969 agreement among Bolivia Chile Ecuador Colombia and Peru to establish a customs union interna tariff reduction program common external tariff transportation policy common industrial policy specia concessions fo the smallest members Bolivia and Ecuador Mercosur pact among argentina brazil Paraguay and Uruguay to establish free trade area Central American Common Market CAFTA CARICOM
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