Midterm Review Document
Chapters A (LO6), 3 (LO1, LO2, LO4), 4 (LO6)
I. International Institutions from a Business Perspective Economic Integration Agreements
1. Types of Economic Integration Agreements
& a) Free trade area (FTA) – tariffs abolished among members, but each member nation maintains its own external tariffs, those to countries in the rest of the world.
o Members have free trade among themselves but have their own trade restrictions with nonmember nations. If you want to learn more check out What are the two reasons why meta analysis are better than primary studies?
o Within FTA, restrictions remain on: the movement of services (accounting, insurance, legal services), people (labor), and capital. o Economic cooperation begins with an agreement to have a free trade area.
Ex: North American Free Trade Agreement (NAFTA) among
Canada, Mexico, U.S.
& No tariffs imposed on nations that are members of agreement, but each individual nation in the agreement has the ability to tariff other countries & b) Customs union – an agreement/collaboration that adds common external tariffs to the FTA. If you want to learn more check out What are issues that developmentalists argue?
o FTA adds common external tariffs to become a customs union – clicker Don't forget about the age old question of Temperature increased because of what?
o Ex: Southern African Customs Union, Common Market of the South, Andean Community
& In order for there to be an external tariff to members apart of the union, each member-nation has to have the same external tariff
& c) Common Market – created when a customs union lifts restrictions on the mobility of services, people, and capital among the member nations o Essentially a single market so barriers to trade (such as standards, borders, taxes) become common
o To achieve this level of economic integration, common market members establish common economic policies, which require a great deal of political will.
& d) Complete Economic Integration – integration on economic and political levels.
o Involves a high degree of political integration, which requires member nations to surrender important elements of their
o Ex: the EU
A central bureaucracy is responsible for coordinating tax
rates, labor, education, social and legal systems for all EU
members – while the European Central Bank develops
A single currency (Euro) established to replace member
nations’ currencies. Is used in 16 of the member states.
2. NAFTA (North American Free Trade Agreement) – created a free trade area among Canada, Mexico & the US (short answer: name & discuss positive/negative consequences of NAFTA – actual test question was to discuss 1 pos/neg consequence of NAFTA on Mexico) If you want to learn more check out What is the french wars of religion?
a Main goals – promoting economic growth by easing the movement of goods and services between US, Mexico & Canada. If you want to learn more check out What is the conclusion in the prisoners dilemma?
We also discuss several other topics like What if the target market is unfamiliar with the product category?
o The 3 countries have created one of the world’s largest free trade zones
o Trade in North America is now virtually tariff-free.
b Precursor – Canada-US Free Trade Agreement (since 1989) c Stipulations:
o Removal of most tariffs and restrictions on trade between the US, Canada & Mexico.
o Wide range of agreements on agricultural, textile, and automotive trade
o Agreements on telecommunications and intellectual property o Mobility of workers
o Environmental policies
o Losing manufacturing jobs to Mexico
o US migration policies
o High corn subsidies for US farmers
o Energy trade policies – clicker question – test question
o Positive Effects of NAFTA:
o Intra- North American Trade has more than tripled since
o Increased foreign direct investment (FDI) between the 3
o Mexico protected from financial instability in S. America
o Increased export manufacturing in Mexico
o Agricultural trade between Mexico & US increased from 1994- 2006
o Negative Effects:
o Reduction in manufacturing jobs in the US – Direct losses vs. changing pattern of employment – short answer
o Environmental concerns in Mexico’s industrial areas
o Mexico productivity vs. real wages
o Mexico affected by 2001 US recession
o Mexican agriculture
3. The European Union (EU) – a body of 28 European countries committed to economic and political integration. Mainly made for security, post WW2 – Complete Economic Integration
a) EU Development
∙ EU began as a common market for the coal and steel industries. ∙ 6 countries/core members created the European Community (EC) – know 6 original members – Germany, France, Italy, Belgium,
Netherlands, Luxembourg – test question
∙ 1993, EC members signed a treaty that established the EU with 3 areas of integration: economic community, foreign policy, domestic affairs.
∙ The EU has moved forward from economic to political integration – clicker – test question
∙ In EU, there is more institutionalization, which is different from other regional organizations (NAFTA) that only focus on economic matters.
∙ 2004/2007 Enlargement – 12 countries – test question: which part of Europe did most of the countries come from (North, East, South, West?)
∙ 2013 – Croatia joined – should know most recent member – Test question
b) European Parliament - EU legislative body whose members are popularly elected from member nations. - Clicker - Legislative ∙ Represents the people of Europe & is elected from member states. ∙ Degressive proportionality
c) Council of the European Union – represents the member states and is the primary policy-setting institution of the EU. Legislative
∙ When the council meets, the minister who represents the specific area being discussed serves as the representative of the member nation.
d) European Commission – responsible for/administers the EU’s day-to-day operations. – test question (was it legistative, executive, judicial) ∙ Consists of 27 commissioners, 1 from each member-nation. e) European Central Bank (ECB) – sets & implements EU monetary policy. ∙ Manages the euro to ensure the price stability of European markets, largely by managing interest rates.
∙ Makes decisions independent of member governments.
f) European Court of Justice (ECJ) – court that rules on issues related to EU policies.
∙ Decides cases arising under the Treaty of Rome and subsequent agreements.
∙ On EU matters, its authority supersedes that of the member nations’ national courts.
g) The European Union’s impact on international business ∙ Significant # of EU regulations have major impact in the US, Japan, China & elsewhere, because of the EU’s size and importance as a trading partner.
∙ EU standards tend to be advanced, especially in ecology and sustainability requirements.
∙ EU is the world’s largest trading economy, a large source of FDI outflows, & the source for 26% of the world’s total output.
II. Sociocultural Forces
1. What is culture – Consists of the individual worldviews, social rules, and interpersonal dynamics characterizing a group of people set in a particular time and place. – clicker
∙ Culture is learned; we are not born with culture.
∙ Aspects of culture are interrelated.
∙ Culture is shared, patterned, and mutually constructed through social interaction.
∙ Culture defines the boundaries of different groups.
Ethnocentricity – The belief that your culture is superior to other cultures 2. How does culture affect business functions – culture affects all business functions: marketing, HR, production, accounting & finance, and leadership – Test question (just had to what business functions culture affected) ∙ Marketing: what motivates people to buy and what do they prefer to buy? o To develop effective marketing campaigns, the marketer has to understand the foreign market the firm is selling to
∙ Human Resources: What are the local Sociocultural motivators of employees?
o Rewards: In some cultures, individual effort is rewarded, while in others, group effort is more highly valued
o Attitude towards status (social status): It is earned through achievements, or result of family’s social position
∙ Production: How do people work in groups? How do you groups acquire resources?
o Production managers have found that attitudes toward change can seriously influence the acceptance of new production methods o The assembly line is the product of minds socialized in a culture, in which the task receives primary focus
o In procurement, socioculture norms & rules structure the way the firm acquires resources.
∙ Accounting & Finance: Controls are based on the perception of trust in people
o Accounting controls directly relate to the culture’s assumptions about the basic nature of people
o Formal Controls – compliance through rules and sanctions
o Informal Controls – compliance through social norms
∙ Preferred Leadership Styles: Relationship between leader and followers o Leadership function: does leadership integrate a group of people or is it to provide direction for a collection of individuals?
Hall’s framework (low and high context cultures) – simple, but powerful
∙ Hall’s framework based on communication styles & the role of context ∙ Context – the relevant environment; beyond explicit communication High Context Cultures (HC)
- Implicit and indirect communication; Context is critical
- Polychronic (simultaneous activities; multi-tasking)
- Asia, Latin America, Middle East
- Less verbally explicit communication, less written/formal information - More internalized understandings of what is communicated
- Multiple cross cutting ties & intersections with others
- Long term relationships
- Strong boundaries- insider/outsider
- Knowledge is situational, relational
- Decisions/activities focus around personal face-to-face relationships often around a central authority person
Low Context Cultures (LC)
- Explicit communication, direct and to-the-point
- Monochronic – linear, tangible, tied to “time is money,” uses schedules – clicker – test question
- North America
- Rule oriented, people play by external rules – test question
- More knowledge is codified, public, external, accessible
- Sequencing, separation – of time, space, activities, relationships - More interpersonal connections of shorter duration
- Knowledge is more often transferable
- Task centered. Decisions/activities focus around what needs to be done, division of responsibilities.
Trompenaars’ framework (seven dimensions of culture) – short answer question
Universalism vs. Particularism / rules vs. relationships
- Universalist – rules apply to everyone (rule based)
- Particularist – context determines which rules apply to whom (relationship based) – Ex: China
Individualism vs. Communitarianism
- Communitarianism – the group benefits from actions – ex: China - Individualism – the individual benefits from actions
Neutral vs. Affective / unemotional vs. emotional
- Display of emotion in a culture
- Neutral – withhold emotional expression
- Affective – much more expressive
Specific vs. Diffuse – describes displace of emotion in a culture
- Private life: small in specific vs. large in diffuse – undifferentiated from public life
Achievement vs. Ascription
- Status based on what a person does vs. who a person is
- Achievement – reward what you do
- Ascription – consider who a person is by family lineage, age, other attributes – Ex: China
Attitudes towards Time – 2 aspects
- Focus on past, present or future
- Actions sequential (linear) or synchronous (polychromic)
Attitudes toward Environment
- In harmony with nature or in control of nature?
III. Natural Resources
1. Porter’s Diamond – A model that considers 4 aspects of a country’s economic environment that affect its competitive position. – test question
∙ Porter suggests that competitively successful countries are the ones that have the most favorable “diamonds”
∙ Porter’s Diamond Model – 4 variables affecting competitive advantage: o Factor conditions – geographic factors
o Related & supporting industries
o Demand conditions
o Firm strategy, structure, & rivalry
∙ Porter’s Factor conditions:
o Basic factors – those that a country inherits (Ex: mountains and natural resources)
o Advanced factors – those a country can readily mold (Ex: labor force & infrastructure)
2. Location – builds political and trade relationship – where a country is located, who its neighbors are, how its capital & major cities are situated ∙ Geographic Proximity – major reason for trade between nations & plays a role in the formation of trading groups
o With geographical proximity, knowledge of the country is likely, delivery faster, freight costs and service costs lower. – test
3. Topography – creates differences in economies, cultures, politics, social structures – includes surface features (mountains, plains, deserts, bodies of water) that can both hinder and aid physical distribution. – Not controllable – lead to difference in economies, language, politics, which effect international business – short answer
∙ An effect of topography on a country is it creates different language groups which require special marketing adjustments.
o Ex: In Spain, Catalonia and the Basque country have separate languages.
Although the Basques & Catalans can speak Spanish,
when they are among themselves they use their own
languages (Catalan & Euskara), which are unintelligible to
∙ Surface features, such as mountain ranges, divide the country into smaller regions with separate markets, each with its own culture and dialect.
o Ex: Afghanistan, Switzerland, Spain, China, Colombia
4. Climate – climate conditions explain differences in human and economic development – meteorological conditions including temperature, precipitation, and wind that prevail in a region.
∙ Climate sets the limits on what people can do, physically and economically.
∙ The North South Divide – also suggests that the greatest economic & intellectual development occurs in less temperate climates.
o Which causes limitations on human energy & mental powers. o Ex: occurs in northern Europe & US.
Test Question about what World Bank says is the reason some countries are underdelevoped