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ethics

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accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization

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business ethics

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accepted principles of right or wrong governing the conduct of businesspeople

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ethical strategy

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: a course of action that does not violate a co. business ethics

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human rights

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Freedom of association, speech, assembly, movement, political repression, etc. are not universally accepted

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Sullivan Principles

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GM adopted, Leon Sullivan (black Baptist minister & member of GM's board of directors) said it was ethically justified for GM to operate in S. Africa as long as 2 conditions were met: oCo. shouldn't obey the apartheid laws in its own S. African operations (a form of passive resistance to the racist against blacks) oCo. should do everything w/in its power to promote the abolition of apartheid laws Widely adopted by U.S. firms operating in S. Africa & ignored by apartheid, but continued and said we weren't stopping them so no longer accepted so divested...inward investments can be a force to improve the rights of people

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ethical issues

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arise when environmental regulations in host nations are inferior to those in the home nation

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tragedy of the commons

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when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation (atmosphere & ocean) o livestock on pasture

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global tragedy of commons

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moving production to locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons o global warming?

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o foreign corrupt practices act: 1977

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U.S. law regulating behavior regarding the conduct of IB in the taking of bribes & other unethical actions o act outlawed paying of bribes to foreign govt. officials to gain business o Put U.S. firms at a competitive disadvantage?

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o Amended to allow for "facilitating payments"

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Aka speed money or grease payments Not payments to secure contracts that would not otherwise be secured nor are they payments to obtain exclusive preferential treatment Rather, they are payments to ensure receiving the standard treatment that a business ought to receive from a foreign govt., but might not due to the obstruction of a foreign official

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unclear

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o Ethical implications of making facilitating payments is

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growth rate

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o Corruption had a significant negative impact on a country's

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feeds

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o But lead to jobs so good? o But corruption __ on itself and can't turn back, so never engage in corruption no matter how compelling the benefits might seem (many multinationals like BP) o Or strongly discouraged facilitating payments as in Dow Corning

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Social responsibility (moral obligation)

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idea that businesspeople should consider the social consequences of economic actions when making business decisions o is there a __ for multinationals to give something back to the societies that enable them to prosper & grow?

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Noblesse oblige:

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o __: French term that refers to honorable & benevolent behavior considered the responsibility of people of high (noble) birth (aka successful business) o Has been long recognized by co; make social investments designed to enhance the welfare of the communities in which they operate o But some co. abuse their power for private gain

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ethical dilemmas determinants of ethical behavior

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: personal ethics, societal culture, decision-making processes, leadership, unrealistic performance goals, & organization culture

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ethical dilemma

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: a situation in which there is no ethically acceptable solution; not always clear cut

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personal ethics

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• Individual code that guides our behavior comes from a number of sources: parents, schools, religion, & media • 1st step to est. a strong sense of business ethics is for a society to emphasize strong personal ethics

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violate

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• Home-country managers working abroad in multinational firms (expatriate managers) may experience more than the usual degree of pressure to __ their personal ethics

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decision making processes

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•"is this decision or action ethical?" is not Part of most business decision making processes, but it should be

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organizational culture

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the values and norms shared among an organization's employers •__ that deemphasizes business ethics, reducing all decisions to the purely economic

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Unrealistic Performance Expectations

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• Pressure from the parent co. to meet unrealistic performance goals that can be attained only by cutting corners or acting in an unethical manner

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leaders/leadership

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help to est. the culture of an organization, and they set the ex. That others follow • Not just what they say, but what they do or don't do

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societal culture

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• Enterprises headquartered in cultures where individualism & uncertainty avoidance are strong were more likely to emphasize the importance of behaving ethically than firms headquartered in cultures where masculinity and power distance are important cultural attributes

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Philosophical Approaches to Ethics -Straw Men:

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:offer inappropriate guidelines for ethical decision making in a multinational enterprise; • Deny the value of business ethics or apply the concept in a very unsatisfactory way

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o Friedman Doctrine, cultural relativism, the righteous moralist, and the naïve immoralist

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• 4 approaches are commonly discussed in literature: o All have some inherent value but all are unsatisfactory in important ways, but sometimes co. adopt these approaches

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Friedman Doctrine

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o Only social responsibility of business is to increase profits, so long as the co. stays w/in the rules of law o Rejects the idea that businesses should undertake social expenditures beyond those mandated by the law & required for the efficient running of a business o If stockholders then wish to use the proceeds to make social investments, that is their right, but managers of the firm shouldn't make that decision for them o But says should behave in an ethical manner & not engage in deception & fraud

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cultural relativism

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the belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate o "when in Rome, do as the Romans"

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• The righteous moralism:

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the belief that a multinational's home country standards of ethics are the appropriate ones for co. to follow in foreign countries o Typically associated w/ managers from developed nations

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• The naïve immoralist:

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the belief that if a manager of a multinational sees that firm from other nations are not following ethical norms in a host nation, the manger should not either drug lord problem

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• Utilitarian approaches to ethics:

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these hold that 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 and minimization of harm

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o How to measure benefits, costs, and risks? o The philosophy omits the consideration of justice o Greatest good for greatest number of people may result in unjustified treatment of a minority

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• Best decisions are those that produce the greatest good for the greatest # of people • Cost-benefit analysis & risk assessments • Problems:

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• Kantian Ethics:

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the belief that people should be treated as ends and never as means to the ends of others o People should be respected and treated with dignity (no sweat shops) -this philosophy is considered by modern philosophers as incomplete: -has no place for emotions or sentiments such as sympathy or caring -but the notion of treating people w/ dignity resonates the modern world

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rights theories

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a twentieth century theory that recognizes that human beings have fundamental rights and privileges that transcend national boundaries and cultures

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fundamental right

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= something that takes precedence over or "trumps" a collective good

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moral theorist

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•__ argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component o Shouldn't pursue actions that violate these rights

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• U.N Universal Declaration of human rights:

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a U.N. document that lays down the basic principles of human rights that should be adhered to o Fundamental rights that transcend national borders & cultures o Ratified by almost every country o Illegal for child labor & more... see pg. 139 o Rights come with obligations

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just distribution

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: a distribution of goods and services that is considered fair & adequate

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justice theories

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• focus on the attainment of a just distribution of economic goods and services -valid principles of justice are those with which all persons would agree if they could freely and impartially consider the situation No one theory; several conflict w/ each other in important ways

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•One ex. John Rawls

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argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone's advantage

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veil of ignorance

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(everyone is imagined to be ignorant of all of his or her particular characteristics (race, sex, intelligence, nationality, family background, special talents)

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1. Each person be permitted the max amount of basic liberty compatible w/ a similar liberty for others 2. Once equal basic liberty is assured, inequality in basic social goods (income & wealth distributions ) is to be allowed only if such inequalities benefit everyone

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o Under this people unanimously agree on 2 fundamental principles of justice:

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difference principle

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: inequalities are justified if they benefit the position of the least advantaged person o Market systems are thus just

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1. Favor hiring and promoting people w/ a well-grounded sense of personal ethics

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5 things an IB and its managers can do to make sure ethical issues are considered in business decisions: 1. psychological tests

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2. Build an organizational culture that places a high value on ethical behavior

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• Code of ethics: a business's formal statement of ethical priorities a) Must explicitly articulate values that emphasize ethical behavior b) Must give life and meaning to those words by repeatedly emphasizing their importance and then acting on them c) Requires incentive & reward systems (promotions vs. sanction)

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3. Make sure that leaders w/in the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent w/ that rhetoric

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3. ethics officers

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4. Put decision making processes in place that require people to consider the ethical dimension of business decisions

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4. • Ethical algorithm, moral compass...if answer yes to each of these ?s, the decision is acceptable on ethical grounds... o Does my decision fall w/in the accepted values or standards that typically apply in the organizational environment? o Am I willing to see the decision communicated to all stakeholders affected by it—newspaper? o Would the people w/ whom I have a significant personal relationship approve of the decision?

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• Others 5 step...see bottom of page 143...moral imagination (standing in shoes) 1.

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2. Judging the ethics of the proposed strategic decision, given the info gained in step 1 3. Requires managers to establish moral intent 4. Requires the co. to engage in ethical behavior 5. Requires the business to audit its decisions, reviewing them to make sure they were consistent w/ ethical principles, such as those stated in the co. code of ethics a. Critical & often overlooked o Stakeholders: individuals or groups that have an interest, stake, or claim in the actions and overall performance of a co. o Internal stakeholders: people who work for or own the business such as employees, directors, and stockholders o External stakeholders: individuals or groups that have some claim on a firm such as customers, suppliers, and unions

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5. Develop moral courage

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• Walk away from a decision that is profitable but unethical

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Employment practices Human rights Environmental regulations Corruption The moral obligation of multinational companies

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The most common ethical issues in business involve:

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Straw men (The Friedman doctrine, Cultural relativism, The righteous moralist, The naïve immoralist) Utilitarian and Kantian Rights theories Justice Theories

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several approaches to business ethics including:

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ethics, corporate social responsibility, sustainability

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corporate governance is made up? of:

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legal & cultural reasons

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why worry about ethics in business?

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develop competitive advantage avoid being perceived as irresponsible

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achieve 2 objects: demanded by customers, govt, & other stakeholders

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shareholders, employees, customers, society

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goals of 4 groups of stakeholders might be in conflict:

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corruption

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the misuse of entrusted power for private gain

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bribes

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payments or promises to pay cash or anything of value

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corporate social responsbility

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the practice of going beyond the legal obligations to actively balance commitments to shareholders, customers, employees, and society at large -consists of 3 layers of activity: traditional philanthropy transparency in global operations as part of code of conduct strategic CSR

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bottom: complying with laws and regulations middle: ethical behavior top: CSR

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pyramid

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sustainability

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meeting humanity's needs without harming future generations __ business simultaneously pursues 3 types of interest...

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1. economic interests

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the firm's economic impact on the localities where it does business

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2. social interests

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how the firm performs relative to societies and social justice, often termed social impact

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3. environmental interests

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the extent of the firm's contribution to preserving environmental quality, commonly known as environmental impact

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corporate governance

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the system of procedures and processes by which: corporations are managed, direct, and controlled -provides the means through which firms undertake ethical behaviors, CSR, and sustainability

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-legal problems (financial management, bribery, & product safety) -consumer actions such as boycotts -unethical behavior can impact employee morale -uncertainty about sales due to bad publicity

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motivations for corporate responsibility

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1. identify problem

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ethical framework 5 steps: is there something wrong? ethical dilemma? situation that could cause harm?

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2. examine the facts

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determine the nature of the situation interview all relevant persons determine who has stakes in the outcome anyone have a greater stake than another

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create alternatives

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develop alternative courses of action confirm legal compliance with host and home country laws confirm compliance with co. code of conduct determine strengths and weaknesses of each evaluate each option using the 5 ethical standards

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4. implement course of action

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initiate the best options

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5. evaluate results

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1. how effective was the chosen option? any additional actions or changes needed?

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• Mercantilism

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Ch. 6: international trade theory = encourage exports and discourage imports wealth =gold and silver exports = increases wealth import= decreases wealth

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free trade

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: the absence of barriers to the free flow of goods and services between countries; situation in which a govt. doesn't attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country

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benefits to trade

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•Common sense (Iceland shouldn't try to produce oranges) •Countries should engage in international trade even for products it is able to produce for itself •Country's economy may gain if its citizens buy certain products from other nations that could be produced at home •Allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country,, while importing products that can be produced more efficiently in other countries o Limits on imports are often in the interests of domestic producers, but not domestic consumers

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patterns of international trade

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• Climate and natural resources • Labor productivity • Interplay between the proportions in which the factors of production (land, labor, and capital) are available in different countries and the proportions in which they are needed for producing particular goods? But failure

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product life cycle theory

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early in life cycle, new products are produced in and export from the country in which they were developed o As it becomes widely accepted internationally, production starts in other countries & the product may ultimately be exported back to the country of its original innovation

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new trade theory

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observed pattern of trade in the world economy may be due in part to the ability of firms in a given market to capture first-mover advantages o Paul Krugman o U.S. commercial jet aircraft (Boeing) o Theory of national competitive advantage

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resources

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• All theories agree IT is beneficial, but lack agreement in their recommendations for govt. policy o Unrestricted free trade? Import controls & export incentives are self defeating and result in wasted __

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mercantilism

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an economic philosophy advocating that countries should simultaneously encourage exports and discourage imports • Maintain a trade surplus... export more than you import -Advocated govt. intervention (imports were limited by tariffs and quotas while exports were subsidized

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Zero-sum game

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• Inconsistency (David Hume) no country could sustain a surplus on the balance of trade and so accumulate gold and silver as the mercantilists had envisaged o __: a situation in which an economic gain by one country results in an economic loss by another o Smith & Ricardo had to show it as a positive sum game...where all countries benefit o Is China a Neo-Mercantilist Nation?

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absolute advantage

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: a country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it...

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the wealth of nations

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by Adam Smith • Countries differ in their ability to produce goods efficiently • A country should never produce goods at home that it can buy at a lower cost from other countries

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• Production possibility frontier (PPF):

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different combos that a country can produce are represented by this line (graph pg. 157)

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comparative advantage

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• It makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying the goods from other countries that it could produce more efficiently itself (graph pg. 159) • Potential world production is greater with unrestricted free trade than it is with restricted trade • To an even greater degree than the theory of absolute advantage, this theory suggests that trade is a positive sum game

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qualifications and assumptions

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1. 2 countries, 2 goods 2. no transportation costs 3. no exchange rates 4. look at other restrictions pg. 161 *but theory still works for the most part in the real world -Extensions of the Ricardian Model --Immobile resources= cause friction and human suffering --Diminishing Returns

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constant returns to specialization

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units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier o Convex line (not straight) o Not all resources are of the same quality (land...use best then average) o Different gods use resources in different proportions (land vs. labor) o Not feasible for a country to specialize to a degree (gains will be exhausted before specialization is complete (most countries don't specialize but instead produce a range of goods o Theory predicts that it is worthwhile to specialize until that point where the resulting gains from trade are outweighed by diminishing returns

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dynamic effects and economic growth

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• Free trade might increase a country's stock of resources as increased supplies of labor and capital from abroad become available for use w/in the country • Free trade might also increase the efficiency w/ which a country uses its resources

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The Samuelson Critique

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• Looks at what happen when a rich country enters into a free trade agreement w/ a poor country that rapidly improves its productivity after the introduction of a free trade regime. • U.S. vs. China • Is free trade enough to outweigh lower real wage rates in U.S.?

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Evidence for the link between trade & growth

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• Adopt an open economy & embrace free trade & your nation will be rewarded w/ higher economic growth rates which will raise income levels and living standards

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Heckscher-Ohlin Theory

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• Argue that comparative advantage arises from differences in national factor endowments (rather than differences in productivity like Ricardo) • Factor endowments: a country's endowment w/ resources such as land, labor, and capital • The more abundant a factor, the lower its cost • Predicts that 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 • Relative (not absolute) endowments are important • Preferred by economists b/c fewer simplifying assumptions • But assume technologies are the same across countries • Theory subject to tests...

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The Leontief Paradox

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• B/c U.S. was relatively abundant in capital, U.S. would be an exporter of capital-intensive goods and an importer of labor-intensive goods • But he found that U.S. exports were less capital intensive than U.S. imports • Reasons? Maybe b/c U.S. has a special advantage in producing new products or goods made with innovative technologies • Theory gains predictive power once impact of differences of technology is controlled • But until then, it is good on theoretical grounds, but a relatively poor predictor of real world IT patterns • Ricardo's theory of comparative advantage actually predicts trade patterns w/ greater accuracy

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the product life cycle theory

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• Wealth & size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products • High cost of U.S. labor gave firms an incentive to develop cost-saving process innovations • Produced first in U.S. (given uncertainty and risks inherent in introducing new products) • Demand for most new products tends to be based on nonprice factors, firms can charge relatively high prices for new products, obviates need to look for low cost production sites in other countries

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price

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• Overtime, demand grows in other advanced countries, so foreign produce begin producing for their home markets, limiting potential for exports from U.S. • Then product becomes more standardized & __ becomes the main competitive weapon • Costs play greater role, produced where labor costs are lower, might be able to export to the U.S. • Locus of global production initially switches from the U.S. to other advanced nations and then from those nations to developing countries • U.S. switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations (graphs pg. 169)

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dominance

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-Evaluating the product life cycle theory • Works for most (Xerox photocopies) • Weaknesses: o Asian/EU perspective: argument that most new products are developed and introduced in the U.S. seems ethnocentric and increasingly dated o Vernon's theory may be useful for explaining the pattern of IT during the period of American global __, its relevance in the modern world seems limited

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new trade theory

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• Economies of scale: cost advantages associated with large scale production; unit cost reductions associated w a large scale of output o With a number of sources: o Ability to spread fixed costs over a large volume (automobiles) o Ability of large volume producers to utilize specialized employees and equipment o Major source of cost reductions in many industries

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o Through its impact on economies of scale, Trade can increase the variety of goods available to consumers and decrease the average cost of those goods o In those industries when the output required to attain economies of scales represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises Thus world trade in certain products may be dominated by countries whose firms were first movers in their production

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new trade theory makes 2 important points:

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Increasing product variety and reducing costs

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• Each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods—thus trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology • Trade is thus mutually beneficial b/c it allows for the specialization of production, the realization of scale economies, the production of a greater variety of products, and lower prices

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economies of scale, first-mover advantages, and the pattern of trade

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• First-mover advantages: advantages accruing to the first to enter a market o Ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure • New Trade theory argues that for those products where economies of scale are significant and represent a substantial proportion of world demand, the first movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match

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implications of new trade theory

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• Variety of products available to consumers in each nation is increased, while the average costs of those products should fall, as should their price, freeing resources to produce other goods and services • New trade theory is at variance w/ the Heckscher-Ohlin theory • Theory is quite useful in explaining trade patterns • The number of firms is very limited in many global industries • Perhaps the most contentious implication of the new trade theory is the argument that it generates for govt. intervention and strategic trade policy • Stress the role of luck, entrepreneurship, and innovation in giving a firm first-mover advantages

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National Competitive Advantage: Porter's Diamond

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• Why some nations succeed and others fail in international competition • 100 industries, 10 nations • 4 broad attributes of a nation shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage 1. Factor endowments: a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry

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2. Demand conditions 3. Related & supporting industries 4. Firm strategy, structure, and rivalry

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o__: the nature of home demand for the industry's product or service o __: the presence or absence of supplier industries and related industries that are internationally competitive o __: the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry All 4 constitute a diamond; argues that firms are most likely to succeed in industries segments where the diamond is most favorable; says it is a mutually reinforcing system Effect of one attribute is contingent on the state of others 2 additional variables can influence the national diamond in important ways: • Chance (events)= can reshape industry structure and provide the opportunity for one nation's firms to supplant another's... ex. Major innovation • Govt.= by its choice of policies, can detract from or improve national advantage (regulation, antitrust policies, & govt. investments) o Diamond on pg. 174

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factor endowments

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• Lie at the center of the Heckscher-Ohlin theory • Porter recognizes hierarchies among factors o Basic factors: natural resources, climate, location, and demographics) o Advanced factors: communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how o Argues that advanced factors are the most significant for competitive advantage (product of investment by individuals, companies, and govt.) (not naturally endowed basic factors) • Relationship between advanced & basic factors is complex • Basic factors can provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors • Disadvantages in basic factors can create pressures to invest in advanced factors

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demand conditions

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• Emphasizes the role home demand plays in upgrading competitive advantage • Firms are typically most sensitive to the needs of their closest customers • Characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality • A nation's firm gains competitive advantage if their domestic consumers are sophisticated and demanding • Such consumers pressure local firms to meet high standards of product quality and to produce innovative products

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-Related and supporting industries

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• 3rd broad attribute of national advantage in an industry is the presence of suppliers or related industries that are internationally competitive • The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally • One result of this process is that successful industries w/in a country tend to be grouped into clusters of related industries • Such clusters are important b/c valuable knowledge can flow between the firms w/in a geographic cluster, benefiting all within that cluster • Knowledge flows occur when employees move between firms w/in a region and when national industry associations bring employees from different co. together for regular conferences or workshops • Finland's Nokia wireless phone

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-firm strategy, structure, and rivalry...2 points

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• Different nations are characterized by different management ideologies, which either help them or do not help them to build national competitive advantage • There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry o Improve efficiency, quality, reduce costs, invest in upgrading advanced factors

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evaluating porter's theory

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• Theory has not been subjected to detailed empirical testing • May be that each of these theories, which complement each other, explains something about the pattern of international trade

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3 main implications for international business

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Location • Wherever most efficient...global web of productive activities -First-Mover Advantages -Govt. Policy • Free trade is generally in the best interests of a country, although it may not always be in the best interest of an individual firm

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international trade theory

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Explains why it is beneficial for countries to engage in international trade Helps countries formulate their economic policy Explains the pattern of international trade in the world economy

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mercantilism liberalization

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it is in a country's best interest to maintain a trade surplus - to export more than it imports Advocated government intervention to achieve a surplus in the balance of trade Viewed trade as a zero-sum game - one in which a gain by one country results in a loss by another Mercantilism is problematic and not economically valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective __ of trade

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absolute advantage

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Smith (1776) - countries differ in their ability to produce goods efficiently A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it According to Smith: Trade is not a zero-sum game Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries

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comparative advantage

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Ricardo (1817) - theory of comparative advantage - a country should specialize in the production of those goods it produces most efficiently and import goods it produces less efficiently, even if this means buying goods from other countries that it could produce more efficiently itself Trade is a positive sum game in which all gain Provides a strong rationale for encouraging free trade Potential world production is greater with unrestricted free trade than it is with restricted trade

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porter Countries should export products from industries where the diamond is favorable Countries should import products from areas where the diamond is not favorable

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Porter (1990) identified four attributes he calls the diamond that promote or impede the creation of competitive advantage Factor endowments Demand conditions Related and supporting industries Firm strategy, structure, and rivalry In addition, Porter identified two additional variables (chance and government) that can influence the diamond in important ways

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international trade

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purchase sale or exchange of goods and services across national borders

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world trade grows faster than world output

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world output impacts trade... growing output = growing trade & reverse

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IB & trade theory

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what products should we import or export how much should we trade & with whom

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Classical theories: mercantilism absolute advantage principle comparative advantage principle factor proportions theory international product life cycle theory new trade theory

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why do nations trade?

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contemporary theories: competitive advantage of nations Michael porter's diamond model national industrial policy

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how can nations enhance their competitive advantage?

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firm internationalization: internationalization process of the firm born globals and international entrepreneurship

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why and how do firms internationalize?

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FDI based explanations: monopolistic advantage theory internationalization theory dunning's eclectic paradigm Non-FDI based explanations: international collaborative ventures networks and relational assets

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how can internationalizing firms gain and sustain competitive advantage

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country!

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comparative advantage: superior features of a __ that provide it with unique benefits in global competition; aka location specific advantage; typically derived from an abundance in a country of: valuable natural resources, arable or buildable land, favorable climate, low cost labor, skilled labor, inexpensive capital, one or mores strong organizational capabilities (innovative capacity or productivity) widely available in an industry or among numerous firms

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firm!

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competitive advantage: distinctive assets or competencies of a __ that are difficult for competitors to imitate; aka firm specific advantage or ownership specific advantage...typically is derived from an abundance in an individual firm of: specific knowledge & capabilities, certain types of skills, superior strategies, strong relationships with key members of the firm's value chain, other assets that allow the firm to compete effectively

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national competitive advantage

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when a nation has an abundance of comparative advantages in a given industry and the firms in that industry collectively have abundant competitive advantages, the nation has __ in that particular industry

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...

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review Carmen quizzes!

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politically

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

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Tariffs - specific and ad valorem Subsidies Import quotas Voluntary export restraints Local content requirements Antidumping policies Administrative policies trade promotion methods (subsidies, export financing, foreign trade zones, special govt. agencies) trade restriction methods (tariffs, quotas, embargoes, local content requirement, administrative delays, currency controls)

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There are seven main instruments of trade policy

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Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) Economic arguments - concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)

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Why do governments intervene in trade? 2 arguments

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Protecting jobs Protecting industries deemed important for national security Retaliating to unfair foreign competition Protecting consumers from "dangerous" products Furthering the goals of foreign policy Protecting the human rights of individuals in exporting countries

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Political arguments include:

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The infant industry argument Strategic trade policy

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Economic arguments include:

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The Revised Case for Free Trade

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New trade theorists believe government intervention in international trade is justified Classical trade theorists disagree Some new trade theorists believe that while strategic trade theory is appealing in theory, it may not be workable in practice - they suggest a revised case for free trade Two situations where restrictions on trade may be inappropriate Retaliation Domestic policies

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Up until the Great Depression of the 1930s, most countries had some degree of protectionism The U.S. enacted the Smoot-Hawley Act (1930) - created significant import tariffs on foreign goods Other nations took similar steps and as the depression deepened, world trade fell further

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How has the world trading system evolved?

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General Agreement on Tariffs and Trade (GATT)

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Since World War II, an international trading framework has evolved to govern world trade In its first fifty years, the framework was known as the __ Established in 1947 to gradually eliminate barriers to trade Since 1995, the framework has been known as the World Trade Organization (WTO)

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mainstream

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Since its establishment, the WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services So far, most countries have adopted WTO recommendations for trade disputes The WTO has brokered negotiations to reform the global telecommunications and financial services industries The 1999 meeting of the WTO in Seattle demonstrated that issues surrounding free trade have become __, and dependent on popular opinion

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1. Anti-dumping policies 2. Protectionism in agriculture 3. Protecting intellectual property

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The WTO is currently focusing on: 1.__ - encouraging members to strengthen the regulations governing the imposition of antidumping duties 2. __ - concerned with the high level of tariffs and subsidies in the agricultural sector of many economies 3.__ - members believe that the protection of intellectual property rights is essential to the international trading system TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years

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4. Market access for nonagricultural goods and services

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4. bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates

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5. A new round of talks: Doha -

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5. launched in 2001 to focus on: Cutting tariffs on industrial goods and services Phasing out subsidies to agricultural producers Reducing barriers to cross-border investment Limiting the use of anti-dumping laws

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Trade barriers impact firm strategy Firms can play a role in promoting free trade or trade barriers

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Why should international managers care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism?

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tariff

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a tax levied on imports (or exports).

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specific tariff

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are levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil).

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Ad valorem tariffs

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are levied as a proportion of the value of the imported good.

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importance

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o Whether the gains to the government and domestic producers exceed the loss to consumers depends on various factors such as the amount of the tariff, the __ of the imported good to domestic consumers, the number of jobs saved in the protected industry, and so on.

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resources

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• Second, import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. The consequence is an inefficient utilization of __.

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political

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o In general, export tariffs have two objectives: first, to raise revenue for the government, and second, to reduce exports from a sector, often for __ reasons. For example, in 2004 China imposed a tariff on textile exports. The primary objective was to moderate the growth in exports of textiles from China, thereby alleviating tensions with other trading partners.

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subsidy

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a government payment to a domestic producer. - take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.

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(1) competing against foreign imports and (2) gaining export markets

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• By lowering production costs, subsidies help domestic producers in two ways:

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few

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Advocates of strategic trade policy (whichis an outgrowth of the new trade theory) favor subsidies to help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a __ firms (aerospace and semiconductors are two such industries).

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taxing

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According to this argument, subsidies can help a firm achieve a first-mover advantage in an emerging industry. ). If this is achieved, further gains to the domestic economy arise from the employment and tax revenues that a major global company can generate. However, government subsidies must be paid for, typically by __ individuals and corporations.

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import quota

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is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms

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tariff rate quota

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a lower tariff rate is applied to imports within the quota than those over the quota.

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A voluntary export restraint (VER)

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quota on trade imposed by the exporting country, typically at the request of the importing country's government...• Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing protectionist pressures in a country.

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quota rent

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The extra profit that producers make when supply is artificially limited by an import quota is referred to as

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demand

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• If a domestic industry lacks the capacity to meet __, an import quota can raise prices for both the domestically produced and the imported good.

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local content requirement

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is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally).

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component

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• Local content regulations have been widely used by developing countries to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture of __ parts. They have also been used in developed countries to try to protect local jobs and industry from foreign competition

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Administrative trade policies

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bureaucratic rules designed to make it difficult for imports to enter a country (customs inspectors)

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dumping

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selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value

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dumping

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firms unload excess production in foreign markets. Some dumping may be the result of predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market. Once this has been achieved, so the argument goes, the predatory firm can raise prices and earn substantial profits.

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antidumping policies

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designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition.

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petition

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. If a domestic producer believes that a foreign firm is dumping production in the U.S. market, it can file a __ with two government agencies, the Commerce Department and the International Trade Commission.

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countervailing duties; anti dumping duties

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These duties, which represent a special tariff, can be fairly substantial and stay in place for up to five years.

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in 1996 the U.S. Congress passed the Helms-Burton Act.

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This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution. ...Burton elicited protests from America's trading partners, including the European Union, Canada, and Mexico, all of which claim the law violates their sovereignty and is illegal under World Trade Organization rules but unenforceable? Later in 1996, Congress passed a similar law, the D'Amato Act, aimed at Libya and Iran.

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infant industry argument

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by far the oldest economic argument for government intervention. Alexander Hamilton proposed it in 1792. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition.

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efficient

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the GATT has recognized the infant industry argument as a legitimate reason for protectionism. Nevertheless, many economists remain critical of this argument for two main reasons. First, protection of manufacturing from foreign competition does no good unless the protection helps make the industry __. In case after case, however, protection seems to have done little more than foster the development of inefficient industries that have little hope of ever competing in the world market.

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worthwhile.

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• Second, the infant industry argument relies on an assumption that firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market. Consequently, governments have been required to subsidize long-term investments. Today, if a developing country has a potential comparative advantage in a manufacturing industry, firms in that country should be able to borrow money from the capital markets to finance the required investments Thus, given efficient global capital markets, the only industries that would require government protection would be those that are not __

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The new trade theory argues

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that in industries in which the existence of substantial economies of scale implies that the world market will profitably support only a few firms, countries may predominate in the export of certain products simply because they have firms that were able to capture first-mover advantages. The long-term dominance of Boeing in the commercial aircraft industry has been attributed to such factors.

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strategic trade policy

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First, it is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries.

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pay

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• The second component of the strategic trade policy argument is that it might __ a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages. • Krugman may be right about the danger of a strategic trade policy leading to a trade war.

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CAP

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The __ benefits inefficient farmers and the politicians who rely on the farm vote, but not consumers in the EU, who end up paying more for their foodstuffs.

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GATT

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19 to 120 nations tariff reduction was spread over eight rounds. The last, the Uruguay Round, was launched in 1986 and completed in December 1993. In these rounds, mutual tariff reductions were negotiated among all members, who then committed themselves not to raise import tariffs above negotiated rates. GATT regulations were enforced by a mutual monitoring mechanism. If a country believed that one of its

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protection trends

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1980-1993: First, the economic success of Japan during that time strained the world trading system Second, the world trading system was strained by the persistent trade deficit in the world's largest economy, the United States. A third reason for the trend toward greater protectionism was that many countries found ways to get around GATT regulations. Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither the importing country nor the exporting country complains to the GATT bureaucracy in Geneva—and without a complaint, the GATT bureaucracy can do nothing.

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THE URUGUAY ROUND AND THE WORLD TRADE ORGANIZATION

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most difficult round of negotiations yet, primarily because it was also the most ambitious. Until then, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services. They also sought to write rules governing the protection of intellectual property, to reduce agricultural subsidies, and to strengthen the GATT's monitoring and enforcement mechanisms.

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1. Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to be scrapped on more than 40 percent of manufactured goods. 2. Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history. 3. Agricultural subsidies were to be substantially reduced. 4. GATT fair trade and market access rules were to be extended to cover a wide range of services. 5. GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks (intellectual property). 6. Barriers on trade in textiles were to be significantly reduced over 10 years. 7. The World Trade Organization was to be created to implement the GATT agreement.

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The Uruguay Round dragged on for seven years before an agreement was reached December 15, 1993. It went into effect July 1, 1995. The Uruguay Round contained the following provisions:

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WTO

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153 members, more effective policing and enforcement of GATT rules. The WTO acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on services and the other on intellectual property.

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Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules

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General Agreement on Trade in Services (GATS) has taken the lead to extending free trade agreements to services

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• The agenda includes cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of antidumping laws. • Clearly, it is one thing to agree to an agenda and quite another to reach a consensus on a new treaty.

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• A New Round of Talks: Doha In 2001, the WTO launched a new round of talks between member-states aimed at further liberalizing the global trade and investment framework. For this meeting, it picked the remote location of Doha in the Persian Gulf state of Qatar. The talks were originally scheduled to last three years, although they have already gone on for more than a decade and may not be concluded for some time.

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possible.

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A September 2003 meeting in Cancun, Mexico, broke down, primarily because there was no agreement on how to proceed with reducing agricultural subsidies and tariffs; the EU, United States, and India, among others, proved less than willing to reduce tariffs and subsidies to their politically important farmers, while countries such as Brazil and certain West African nations wanted free trade as quickly as __

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working capital loan guarantees credit info on nation or firm abroad export credit insurance against loss loan guarantees to buyers of U.S. goods and much more

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export/import bank of U.S.

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special govt. agencies

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organize trade missions for officials and businesses operate export promotion offices at locations abroad help import products the home nation does not produce

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increased competitiveness encourage inefficient firms increased consumer prices

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subsidies potential results:

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foreign trade zone

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designated region in which merchandise is allowed to pass through with lower custom duties (taxes) and/or few customer procedures purpose is to increase employment and trade within the nation

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export, transit, import

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tariffs

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WTO Ministerial Conference

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WTO negotiations-bargaining rounds: -the highest level of WTO decision making est. an agenda detailing the issues set a target date for the conclusion of the round...

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Final Ministerial Conference

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lower level national officials based at WTO headquarters in Geneva conduct detailed negotiations on the topics embodied in the agenda negotiations produce the outlines of a complete agreement __ is held to conclude the round the resulting agreement is ratified by wTO members and implemented according to an agreed timetable

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bali

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the morning of the world new light to trading globally indonesia 175 delegations 103 ministers 5 days

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the bali package

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development trade facilitation agriculture WTO

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foreign direct investment (FDI)

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occurs when a firm invests directly in facilities to produce or market a product in a foreign country.

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multinational enterprise

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Once a firm undertakes FDI it becomes a

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1. greenfield investment 2. Acquisition or merging with an existing firm in the foreign country

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2 forms of FDI: 1. - the establishment of a wholly new operation in a foreign country 2.

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flow stock

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There are two ways to look at FDI: The __ of FDI refers to the amount of FDI undertaken over a given time period The __ of FDI refers to the total accumulated value of foreign-owned assets at a given time

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outflows of FDI

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are the flows of FDI out of a country

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inflows of FDI

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are the flows of FDI into a country

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increased

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Both the flow and stock of FDI in the world economy has __ over the last 20 years

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developed

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Historically, most FDI has been directed at the __ nations of the world, with the U.S. being a favorite target

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emerging

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FDI inflows have remained high during the early 2000s for the United States, and also for the European Union South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows Latin America is also __ as an important region for FDI

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the U.S., the UK, the Netherlands, France, Germany, and Japan

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Important source countries -

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mergers and acquisitions

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The majority of cross-border investment involves __ rather than greenfield investments

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They are quicker to execute than greenfield investments It is easier and less risky for a firm to acquire desired assets than build them from the ground up Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

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Acquisitions are attractive because:

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To answer this question, we need to look at the limitations of exporting and licensing, and the advantages of FDI

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Why do firms prefer FDI to either exporting (producing goods at home and then shipping them to the receiving country for sale) or licensing (granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells)?

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It is common for firms in the same industry to: Have similar strategic behavior and undertake foreign direct investment around the same time Direct their investment activities towards certain locations at certain stages in the product life cycle

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What is the pattern of FDI?

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location-specific advantages and externalities

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Dunning's eclectic paradigm - in addition to the various factors discussed earlier, two additional factors -__- must be considered when explaining both the rationale for and the direction of foreign direct investment

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radical view

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There are several perspectives toward FDI: The __ - the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries

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free market view

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- international production should be distributed among countries according to the theory of comparative advantage

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pragmatic nationalism

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Between these two extremes is __ - FDI has benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)

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free market stance

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In recent years, there has been a strong shift toward the __

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The resource transfer effect The employment effect The balance of payments effect Effects on competition and economic growth

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The main benefits of inward FDI for a host country are:

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The possible adverse effects of FDI on competition within the host nation Adverse effects on the balance of payments The perceived loss of national sovereignty and autonomy

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There are three main costs of inward FDI:

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The effect on the capital account of the home country's balance of payments from the inward flow of foreign earnings The employment effects that arise from outward FDI The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

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The benefits of FDI to the home country include:

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The balance-of-payments Employment effects of outward FDI

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The most important concerns for the home country center around:

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both home and host countries

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FDI can be regulated by

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Encourage FDI Discourage FDI

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Governments can implement policies to:

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consistent

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Until recently there has been no__ involvement by multinational institutions in the governing of FDI The formation of the World Trade Organization in 1995 is changing this

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Exporting is preferable to licensing and FDI as long as transportation costs and trade barriers are low

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The theory of FDI has implications for strategic behavior of firms

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Impacts decisions about where to locate foreign production facilities and where to make a foreign direct investment

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Government policy on FDI can also be important for international businesses

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internationalization theory: • It follows that a firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. • Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm's capabilities are simply not amenable to licensing, as may often be the case.

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theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets (this approach is also known as the market imperfections approach). • According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities. • First, licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability the firm's competitive advantage is based not as much on its products as on the management, marketing, and manufacturing capabilities that produce those products

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multipoint competition

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arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

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imitative theory

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• Observation suggests that firms in the same industry often undertake foreign direct investment at about the same time. • Also, firms tend to direct their investment activities toward the same target markets.

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location specific advantages

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Dunning means the advantages that arise from utilizing resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management capabilities).

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offshore production

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to FDI undertaken to serve the home market

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foreign subsidiaries

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overseas units or entities

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externalities

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knowledge spillovers that occur when co. of the same industry locate in the same area

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regional economic integration

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refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other in theory benefits all members

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rise

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Over the last two decades, the number of regional trade agreements has been on the

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free trade area

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There are five levels of economic integration: __ - all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers

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customs union common market

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- eliminates trade barriers between member countries and adopts a common external trade policy - no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production

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Economic union - Political union

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- involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries' tax rates, and a common monetary and fiscal policy - independent states are combined into a single union

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It can be costly - while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose It can result in a loss of national sovereignty

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There are both economic and political arguments supporting regional economic integration Generally, many groups within a country oppose the notion of economic integration There are two main impediments to integration:

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diverts

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Regional economic integration only makes sense when the amount of trade it creates exceeds the amount it __

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trade creation

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occurs when low cost producers within the free trade area replace high cost domestic producers

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trade diversion

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occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

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The European Union with 27 members The European Free Trade Association with 4 members The European Union is expected to become a superpower of the same order as the United States

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Europe has two trade blocs:

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European Union (EU)

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is the result of: The devastation of two world wars on Western Europe and the desire for a lasting peace The desire by the European nations to hold their own on the world's political and economic stage

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The European Commission The European Council The European Parliament The Court Of Justice

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EU has 4 main institutions:

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The Single European Act (1987) The Maastricht Treaty (1991)

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-committed EC countries to work toward establishment of a single market by 1992 - committed EU members to adopt a single currency, the euro The euro is used by 17 of the 27 member states

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Many countries, particularly from Eastern Europe, have applied for membership in the EU In 2012, 27 countries belonged to the EU

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should the EU expand?

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North American Free Trade Agreement

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Regional economic integration is on the rise in the Americas The most significant attempt is the __ Other significant agreements include: The Andean Community Mercosur

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Free Trade Area of the Americas

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A __ is in discussions Two smaller trade pacts in the Americas are: The Central American Trade Market CARICOM

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The Association of Southeast Asian Nations The Asia-Pacific Economic Cooperation

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There have been various attempts at regional economic integration throughout Asia and Africa The success of these attempts have been limited The most significant efforts are:

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Thanks to regional economic integration, markets that had been protected from foreign competition are increasingly open These developments are particularly significant in the European Union and NAFTA However, regional economic integration is likely to increase competition

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Why is regional economic integration important to international companies?

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bilateral integration

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2 countries cooperate closely, usually in the form of tariff reductions

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regional integration

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a group of countries located in the same geographic proximity decide to cooperate, (EU) member nations get: increased product choices, productivity, living standards, lower prices, & more efficient resource use

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global integration

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countries worldwide cooperate through the WTO or other international institutions

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