Business and Government Relations Study Guide II: Chapters 15-20 & Questions
Business and Government Relations Study Guide II: Chapters 15-20 & Questions BADM 3102
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Business and Government Relations Study Guide II: Chapters 1520 & Questions Chapter 15: The Political Economy of the European Union The European Union ● The European Union (EU) has taken landmark steps toward economic and political integration ● Post World War II, Europeans recognized the need to increase trade and encourage political cooperation ○ Treaty of Paris ■ In 1951, six nations—Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany— signed the Treaty of Paris, which established the European Coal and Steel Community (ECSC). ■ The ECSC’s goal was to improve the efficiency of its member states’ coal and steel industries through the reduction of trade barriers. ○ Treaty of Rome ■ In 1957, the same nations signed the Treaty of Rome, which provided the basic framework for the European Union of today. ■ The Treaty of Rome established the European Economic Community (EEC), or the common market, with the objectives of opening domestic markets to the members and rationalizing their industries. ○ Treaty of Brussels ■ The 1965 Treaty of Brussels represented an important step toward European integration by unifying the administration of the EEC, ECSC, and European Atomic Energy Community (EURATOM). ■ This provided an administrative structure upon which further steps toward economic and political integration could be built. ○ Treaty of Nice ■ The 2000 Treaty of Nice provided a road map for enlargement of the Union, and in 2004 the European Union admitted 10 new members: Cyprus, Latvia, Lithuania, the Czech Republic, Estonia, Hungary, Malta, Slovakia, Poland, and Slovenia, with Bulgaria and Romania joining in 2007. The Single European Act ● Took effect in 1987 ● Addressed several impediments to trade ● Provided measures to facilitate access to national markets ● Increased the power of the EU government relative to the governments of the member states: ○ By limiting the use of the unanimity rule for decision making ○ Harmonization/mutual recognition ● The Maastricht Treaty established a timetable for: ○ A common European currency ○ An independent European Central Bank ● The Treaty of LisboN ○ Formally recognized the Charter for Fundamental Rights ○ Made human and civil rights enforceable by the European Union ● The SEA mandated the realization of a single market by the beginning of 1993. ● The program to realize market integration involved the removal of three types of barriers: physical, technical, and fiscal. ● The European Union took two approaches to the removal of internal barriers to trade. ● Harmonization ● Mutual recognition ● In 1992, the member states agreed to the Maastricht Treaty on European Union. ● The Treaty ran into immediate problems as the United Kingdom opted out of part of it, Denmark first rejected and then narrowly accepted it, and French voters only narrowly approved it. ● The Treaty of Lisbon made the institutions more transparent and democratic, although the EP remained the only popularly elected body. European Union Enlargement ● Conditions for membership ● The EU operates comprehensive approval procedures that ensure new members are admitted only when they can demonstrate they will be able to play their part fully as members, namely by: ○ complying with all the EU's standards and rules ○ having the consent of the EU institutions and EU member states ○ having the consent of their citizens – as expressed through approval in their national parliament or by referendum. What is negotiated? The conditions and timing of the candidate's adoption, implementation and enforcement of all current EU rules (the "acquis"). These rules are divided into 35 different policy fields (chapters), such as transport, energy, environment, etc., each of which is negotiated separately. ● candidates essentially agree on how and when to adopt and implement them. ● the EU obtains guarantees on the date and effectiveness of each candidate's measures to do this. Other issues discussed: ● financial arrangements (such as how much the new member is likely to pay into and receive from the EU budget (in the form of transfers) ● transitional arrangements – sometimes certain rules are phased in gradually, to give the new member or existing members time to adapt. EU Legislative and Administrative Institutions The Court of Justice ● Supreme judicial body of the Union ● Has the authority to overturn decisions that conflict with the EU treaties ● The Court of Justice is located in Luxembourg. ● The Court of Justice hears appeals of Commission decisions. The European Economic and Social Committee (EESC) ● An advisory body whose 344 members represent employees, employers, farmers, trades, and other interests ○ Based in Brussels ● Has six sections ○ Provide forums to express opinions on Commission proposals and suggest changes in them The European Central Bank and Monetary Union ● Council of Ministers endorsed a series of steps to realize an Economic and Monetary Union (EMU) ○ Commenced in 1998 with the formation of the European System of Central Banks and the European Central Bank (ECB) ■ To conduct a single monetary policy for its members ● ECB is an independent central bank patterned after Germany’s central bank ○ Stated primary objective of the ECB is “to maintain price stability” Competition Policy ● Includes EU policies involving: ○ Structure, conduct, and support of industries, including state aid ● Enforcement ● Mergers ● State aids Subsidies paid by member state governments to their industries or governmentowned companies ● Common Agriculture Policy (CAP) Provided subsidies to farmers totaling €41 billion in 2009 Nonmarket Strategies in the EU ● Much of the nonmarket action in the EU takes place behind the scenes ○ Most businesses avoid taking public action that might be subjected to criticism ● Because of the pervasive influence of government in most EU countries: ○ Firms seldom engage in open confrontation with government ● Lobbying is the principal political activity for implementing: ○ Representation ○ Informational strategies in the EU EU Institutions, Constituencies, and Access Chapter 16: China: History, Culture, and Political Economy ● Asian Infrastructure Investment Bank (AIIB) (launched in October 2014) "The US may have lost its role as the world's economic leader” (Larry Summers, T he Washington Post , April 6, 2015) Introduction ● Since 1978, China has embarked on a remarkable economic path in which: ○ Markets and foreign direct investment have been encouraged ○ Economic reforms have been frequent and often successful ● Economic reforms were headlined by the “Four Modernizations” ○ Agriculture ○ Industry ○ Defense ○ Science and technology Confucianism and Social Explanations ● China’s rich cultural heritage: ○ Important factor in understanding Chinese social and economic organization ● Confucianism emphasizes hierarchy, deference, moral rectitude, and behavioral norms Structural Pluralism and Culture and History Institutions and Government ● Party organization ● National party congress ● Central Committee ● Politburo ● Standing committee of the politburo ● The Chinese Communist Party (CCP) and policymaking State Institutions ● The Legislative Branch ● The Executive Branch ● The Judicial Branch ● Provincial and Local Governments StateOwned Enterprises (SOEs) ● Unique entity that has represented the single most important type of company in China in terms of employment, as well as in problems for the country ● Not the future of the country nor responsible for China’s growth in the reform era Alibaba targets China’s financial and healthcare sectors as ripe for reform (Financial Times, Nov 12, 2014) “…Alibaba’s moves into statedominated industries have not been as smooth as it hoped. The group’s plans for rolling into financial services such as online money market fund had been dealt with a setback by the central bank’s decision to block plans for a virtual credit card last spring. Internet competition would have hurt Union Pay, the state credit card monopoly…” International Trade Policy and WTO Membership ● Trade policy became one of the primary concerns of China’s international relations in the 1990s. ● The PRC’s application for membership in the WTO was a protracted and contentious issue. ● Concerns over Chinese domestic policies and human rights abuses blocked WTO membership. ● After nearly 15 years of negotiations China was admitted to the WTO at the end of 2001. ● During that period China made many domestic reforms to qualify for membership. Foreign Direct Investment ● Joint venture policy ○ Equity joint venture ○ Contractual joint ventures ○ Wholly foreignowned enterprise Continuing Issues ● Human rights Foreign governments as well as human rights groups targeted China as a major abuser of human rights ○ Piracy of intellectual property ○ Product safety ○ Corruption ○ Workers’ right ● Energy and the environment ○ China has surpassed the United States to become the largest emitter of CO 2 Chapter 17: Emerging Markets CNN to ban Russian Broadcasts ● Company blames changes in laws, says it hopes to return (USA Today, November 11, 2014): “CNN will not be seen on channels in Russia beginning next year…We hope to reenter the Russian market in due course…” ● The move comes at a time of strain between the United States and Russia over the Russian military involvement in Ukraine. ● In 2009 the Federal Service for Supervision of Communications, Information Technology and Mass Media, began more tightly scrutinizing foreign stations operating in Russia and requiring them to get a local broadcasting license within six months. And Russian media law was amended in 2010 to cap foreign participation in a broadcasting operation to 50%. In 2014, it dropped to 20%. Introduction ● Eighty percent of the world’s population lives in emerging markets countries ● Opportunities in many emerging market countries are very attractive to firms ● Foreign direct investment has flowed to the relatively stable and lowerrisk countries Factors in Country Assessment ● Individual freedom ● Economic freedom ● Corruption ● Ease of doing business ● Competitiveness ● Political risk ● Sovereign default risk ● Use of the measures ● Culture *Rankings of BRIC Countries Types of Opportunities in Emerging Markets ● Opportunities in emerging markets are of two basic types: ○ Use a country to export goods to better developed countries and markets ○ Use the opportunity that stems from the domestic economy Underdeveloped Markets and Business Groups ● Domestic capital markets may be inadequate for the financing needed in emerging market economies ○ Has led to the formation of business groups in a number of countries as a means of providing financing and diversifying risks Opportunity at the Bottom of the Pyramid ● C.K. Prahalad (2004) argued that: ○ Companies had overlooked as customers the 4 billion people in the world who lived on less than $2 a day ○ Private companies could make a “fortune” serving these consumers, helping to bring them out of poverty ● Karnani criticized Prahalad’s thesis ○ Argued that: ■ It was “logically flawed and inconsistent with the evidence” ■ The market at the bottom of the pyramid was not that large and was costly to serve Microfinance ● Modern version due to Muhammad Yunus ○ Grameen Bank Loaned to groups or circles of women, who were responsible for: ■ Allocating the borrowings among themselves ■ Ensuring that the borrowings were repaid Fairtrade & the Fairtrade System ● Fair trade movement was begun to improve the lives of: ○ Poor farmers ○ Workers trapped by market conditions ● Can be understood as an approach to improving the wellbeing of poor farmers in developing countries by: ○ Circumventing markets ○ Coordinating market behavior ● Challenges ○ A large price premium that may suppress the demand ○ Quality concerns Risk Assessment ● Risks in emerging markets can differ in magnitude and nature from those in developed countries ○ Risks are greater in magnitude in emerging markets ○ Foreign risks arise from a broader range of factors than do domestic risks ○ Risks can depend on the country of origin Sources and Types of Risks ● Coups ● Democratic revolution ● Policy risk ● Regulatory risk ● Price controls ● Financial restrictions ● Nationalization and seizures ● Political megalomania ● Political corruption ● Ethnic and religious conflict ● Media restrictions ● Environmental risks ● Market risk hedging Management in the Nonmarket Environment ● Managing policy risk: ○ Understand the preferences of the actors in the market and nonmarket environments ○ Have a structure analogous to that of the intelligence community that can provide information and assessments ○ Influence the risk through collective action and coalitions Chapter 19: The Political Economy Introduction ● International trade policy is the result of economic and political forces ○ The principal economic force is the gains from trade ■ Provides the economic rationale for free trade ○ The principal political force ■ Benefits that firms, consumers, employees, and suppliers can obtain through favorable trade policies The Economics of International Trade ● Competitive theory Based on the gains from trade ○ Evident in the case of a country that cannot produce a product that its citizens wish to consume ● Absolute Advantage vs. Comparative Advantage Production and Consumption Possibilities Autarky Production and Consumption Possibilities with Trade The Economics of International Trade ● Strategic trade theory Economists have considered whether a nation can gain from a strategic trade policy ○ Intervention to: ■ Protect domestic industries ■ Subsidize exports ■ Stimulate demand for domestic goods International Trade Policy Process The Politics of International Trade Policy The World Trade Organization (WTO) ● The WTO has 160 member countries ● Three principal roles ○ Provides a system of agreements that helps trade move more freely ○ Provides a forum for trade negotiations ○ Provides a dispute settlement mechanism to resolve trade disputes Most Favored Nation (MFN) requirement ● The WTO agreements ○ GATT ○ GATS ○ TRIPS ○ Dispute settlement ○ The Agricultural Agreement ○ Agreement on government procurement Antidumping, Countervailing Duties, and Safeguards ● Sales at less than fair value that materially injure domestic industries ● Countervailing duties are allowed by the WTO agreements to offset the effects of subsidies provided by another country ● Temporary safeguards against a surge in imports can be taken to avoid “serious injury” to a country Other Trade Agreements ● NAFTA ● Common Market of the European Union ● A large number of bilateral and multilateral agreements The Structure of US Trade Policy ● The politics of international trade takes place in four institutional arenas ○ Cabinet departments ○ Regulatory agencies ○ Congress ○ The Office of the President ● The administration of trade policy has been placed with executive branch agencies ○ Primarily the Departments of the Treasury, State, and Commerce Major Components of US Trade Law Section 201 (temporary Provides for temporary relief for domestic industries seriously safeguards) injured by increased imports; no unfair trade practice is required Section 301 (presidential Provides for action against countries that restrict imports of U.S. retaliation) goods or subsidize exports to the United States Section 731 Provides authority for the imposition of duties on goods imported (antidumping) to the U.S. at a price that is less than fair value (LTFV) Section 303 Provides authority for the imposition of duties against those (countervailing duties) countries that subsidize their domestic industries Section 337 (intellectual Allows retaliation against countries that violate U.S. patents, property) copyrights, or protected trade secrets Trade Adjustment Provides assistance for those injured by imports Assistance The Political Economy of Protectionism ● Protection applies to two kinds of conditions ○ Predatory trade practice Where a foreign firm sells in the U.S. at a price below its cost ■ Export subsidization or predatory dumping ○ Relative efficiency When foreign firms have lower costs than U.S. firms and sell in the U.S. at prices above their costs yet below the prices of domestic goods ● The relative inefficiency of domestic industries is addressed in four ways ○ Those injured may be compensated under the Trade Adjustment Assistance Act ○ Safeguards relief can be granted under Section 201 in the form of temporary tariffs, etc. ○ Relief is granted under Section 731 when a petitioner’s dumping complaint is affirmed by the ITC and the ITA ○ Protection is provided by measures ranging from tariffs to voluntary agreements to limit imports The Cost of Protectionism ● Consumers bear the cost of protectionism ○ Consumers are costly to organize ○ Individual consumers are unlikely to act politically on trade protection issues ○ Organized consumer groups have largely been inactive in cases involving protection of domestic industries Channels of Protection ● Firms, labor unions, and industries can seek protection from imports through: ○ Political channels ○ Administrative channels e.g. International Trade Administration The North American Free Trade Agreement (NAFTA) ● A free trade agreement and not a market integration agreement ● Provided for the elimination of tariff and nontariff barriers over a 10year period ○ Some barriers were to be phased out over 15 years ● Measures were taken to reduce opposition ○ NAFTA included transition provisions for a gradual phaseout of trade barriers to give industries time to adjust ○ To obtain congressional votes, the Clinton administration made a number of side deals outside the trade area ○ Side agreements were included to reduce the opposition of environmental groups and organized labor Market Opening Under the Threat of Retaliation ● Most effective means of addressing foreign barriers to trade is through negotiations, but countries, particularly the United States, have used retaliation and its threat to provide leverage. Boeing vs. Airbus Chapter 20: Corporate Social Responsibility Insider Trading ● Insider trading occurs when an insider, such as the manager of a corporation, buys or sells its securities based on nonpublic information in anticipation of a firmspecific change in price. ● Also, the distribution of such information that leads to a profitable stock trade is a form of insider trading. The Effects of Insider Trading Insider Trading by Companies ● Criminal Charges Allege SAC Capital Did Insider Trading ● Martoma, SAC Capital ExTrader, Gets 9 Years in Prison Introduction ● Many firms go beyond what is required by their market and nonmarket environments ○ Some explicitly attempt to serve directly the needs of their stakeholders or, more broadly, of society Integrated Strategy Framework The Trust Gap ● In interacting with the public or with stakeholders, it is useful to begin with caution ● The lack of trust in global companies stands in stark contrast to the trust in NGOs Milton Friedman’s Profit Maximization ● “To conduct the business in accordance with [owners’] desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom” Friedman’s Conception of a Corporation Compliance with the Law ● A fundamental component of responsible management ○ In recent years the number and size of corporate scandals and incidents of wrongdoing have been alarming Market and Government Failures & Stakeholders ● The market perspective of Friedman leaves unresolved a number of issues about the role of business in society ○ Market imperfections can cause a divergence between private and social costs ○ The reliance on private ownership and markets to generate wellbeing is justified by utilitarianism ○ Just as markets can be imperfect, so too can government ○ The agency problem Market capitalism coexists with managerial capitalism Broader Conceptions of Social Responsibility ● The Business Roundtable was founded to: ○ Examine public issues that affect the economy and develop positions which seek to reflect sound economic and social principles The Business Roundtable View of a Corporation Corporate Social Responsibility and Corporate Social Performance ● CSR focuses on the responsibility of a firm for social performance ● Arises from a combination of: ○ An ethical failure that establishes a moral duty ○ The assignment of that duty to the firm Corporate Social Responsibility A Framework for Understanding Corporate Social Performance ● Corporate social performance (CSP) refers to social activities that satisfy two conditions ○ Social activities extend beyond the requirements of the law and regulations ○ Social activities involve the private provision of public goods or private redistribution Motivation for CSP ● Moral ● Managerial perquisites ● Social pressure ● Strategic (CSR) motivation Rewards ● Consumer rewards ● Employee rewards ● Investor rewards ● Government rewards Corporate Governance ● Social accountability ○ Continues to be an issue for firms that adopt social responsibilities The Duties of Boards of Director ● According to the Business Roundtable: ○ Select, regularly evaluate and, if necessary, replace the chief executive officer, determine management compensation, and review succession planning ○ Review and, where appropriate, approve the major strategies and financial and other objectives, and plans of the corporation ○ Advise management on significant issues facing the corporation ○ Oversee processes for evaluating the adequacy of internal controls, risk management, financial reporting and compliance, and satisfy itself as to the adequacy of such processes ○ Nominate directors and ensure that the structure and practices of the board provide for sound corporate governance SarbanesOxley ● The act is called the Public Company Accounting Reform and Investor Protection Act ● Requires: ○ Companies to identify an independent “financial expert” on its board audit committee ○ The CEO and CFO to certify the firm’s financial statements Say On Pay ‘ ● A provision in the Dodd–Frank financial reform act of 2010 ● Required corporations to conduct a nonbinding shareholder vote on executive compensation at least once every 3 years Practice Questions Ch. 1519 True/False 1. The Single European Act increased the political power of the governments of the member states relative to the power of the EU institutions. TRUE/FALSE 2. Late joiners to the EU follow the same timeline in terms of adopting and implementing the EU rules/standards. TRUE/FALSE 3. Lobbying is the principal nonmarket strategy for influencing the EU institutions. TRUE/FALSE 4. The ________ is the executive and administrative body of the European Union and is a primary target for corporate lobbying. TRUE/FALSE 5. The institutions in China are dominated by the Chinese Communist Party (CCP). TRUE/FALSE 6.Interest groups (collective action) are active in China. TRUE/FALSE 7. The principles of nonmarket strategy for operating in democracies cannot simply be transported to emerging markets, particularly for countries that are not democratic and where the rule of law is weak. TRUE/FALSE 8. Culture can be important, not only shaping the opportunities and risks in a country but also for the likelihood that a company can implement its market or nonmarket strategy. TRUE/FALSE 9. Rule of law overrides politics and political ties when doing business in emerging market countries. 10. Media restrictions, ethnic and religious conflicts, political corruption, and political megalomania are some of the risks faced in emerging market countries. 11. Trade policy does not depend on the nonmarket strategies of private interests. TRUE/FALSE 12. The law of comparative advantage provides the basic rationale for free trade—all countries, even those with an absolute disadvantage, can gain from trade. TRUE/FALSE 13. The central principle of the WTO agreements is manifested in the most favored nation (MFN) requirement that each signatory accord all other signatories the most favorable terms for trade provided to any country. TRUE/FALSE 14. Dumping in international trade refers to sales at less than fair value that materially injure domestic industries. TRUE/FALSE Multiple Choice 1.The ________ is the executive and administrative body of the European Union and is a primary target for corporate lobbying. A. European Commission B. European Parliament C. EU Court of Justice D. Council of Ministers 2.Which of the following is true with regard to the StateOwned Enterprises (SOEs) in China? A. The SOEs are more efficient than private enterprises. B. The Chinese government has provided significant subsidies to the SOEs. C. The SOEs did not serve as China’s social welfare system. D. China did not privatize any of the SOEs. 3. ________ is an example of an opportunity to use an emerging market country to export goods to better developed countries and markets. A. The extractive industries B. Wholesale and retail sales C. Domestic transportation and telecommunication D. Domestic consumption economy 4. The economic rationale for international trade is based on the ________. A. Budget deficits accumulated over a period of time B. Trade deficits accumulated over a period of time C. Gains from trade D. Rate of investments Answer Key True/False 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. False 10. True 11. False 12. True 13. True 14. True Multiple Choice 1. A 2. B 3. A 4. C EXTRA: Short Answers ● Discuss how the EU’s recent expansion might pose a challenge for firms from the perspective of nonmarket strategy. ● Discuss how the nonmarket environment of China might be different from the nonmarket environment of the US. ● Discuss different types of risks in emerging market countries. ● Discuss the nature of political competition for trade liberalization. Practice Questions Ch. 20 True/False 1. Milton Friedman argues that the social responsibility of business is solely to maximize public welfare. TRUE/FALSE 2. Compliance with the law is at the core of corporate social responsibility. TRUE/FALSE 3. Firms can undertake socially responsible actions because of social norms or audience effects. TRUE/FALSE 4. Corporate social responsibility (CSR) activities can strengthen local community relations and improve employee morale. TRUE/FALSE 5. High corporate social performance does not necessarily lead to high corporate financial performance. TRUE/FALSE 6. Greater scrutiny by NGOs and social activists strengthen the audience effects, giving firms incentives to be more socially responsible. TRUE/FALSE Answer Key 1. False 2. False 3. True 4. True 5. True 6. True EXTRA: Short Answer •Discuss the effects of insider trading on stock price. •What are some positive and negative aspects of insider trading?
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