intr financccccce

8/2/2019 intr financccccce

http://slidepdf.com/reader/full/intr-financccccce 1/32

1

GlobalizationOpening Case: The Globalization of Health Care• There is a shortage of radiologists in the United States and demand for their services is

growing twice as fast as the rate of graduation

• Solution to the problem: Send images over the Internet to be interpreted by radiologistsin India

Opening Case: The Globalization of Health Care• Outsourcing health care is not only limited to radiology; we are beginning

to see patients travel internationally for treatments as well as surgery• In 2004 some 170,000 foreigners visited India for medical treatments; the

number is expected to grow at 15% for the next several years• Question: Will demand for American health services soon collapse as

work moves offshore to places like India?

What is Globalization?

Globalization of Markets• The merging of distinctly separate national markets into a global

marketplace- Falling barriers to cross-border trade have made it easier to sell internationally- Tastes and preferences converge onto a global norm- Firms offer standardized products worldwide creating a world market

Globalization of Markets

• Difficulties that arise from the globalization of markets- Significant differences still exist among national markets- Country-specific marketing strategies- Varied product mix

Globalization of Markets• The most global markets are not consumer markets• The most global markets are for industrial goods and materials that serve a

universal need the world over

Globalization of Production

• Refers to sourcing of goods and services from locations around the worldto take advantage of - Differences in cost or quality of the factors of production

• Labor• Land• Capital



2

Globalization of Production• Historically this has been primarily confined to manufacturing enterprises• Increasingly companies are taking advantage of modern communications

technology, and particularly the Internet, to outsource service activities to

low-cost producers in other nations

Globalization of Production• Outsourcing of productive activities to different suppliers results in the

creation of products that are global in nature• Impediments to the globalization of production include

- Formal and informal barriers to trade- Barriers to foreign direct investment- Transportation costs- Issues associated with economic risk- Issues associated with political risk

The Emergence of Global Institutions• Globalization has created the need for institutions to help manage, regulate

and police the global marketplace- GATT- WTO- IMF- World bank - United Nations

Drivers of Globalization• Two macro factors seem to underlie the trend toward greater globalization

- Decline in barriers to the free flow of goods, services, and capital that has occurredsince the end of World War II

- Technological change

Declining Trade and Investment Barriers• During the 1920s and ‘30s, many of the nation-states of the world erected

formidable barriers to international trade and foreign direct investment• Advanced industrial nations of the West committed themselves after World

War II to removing barriers to the free flow of goods, services, and capital

between nations.

Average Tariff Rates on Manufactured Products

Growth Trends

Affects of Lowering Trade Barriers

The Role of Technology• Lowering of trade barriers made globalization possible; technology has made it a reality• Since the end of World War II the world has seen advances in



3

- Communication- Information processing- Transportation technology

Internet Usage GrowthThe Changing Demographics of the Global Economy

• World output and trade• Changing foreign direct investment• Changing nature of multinationals

The Globalization Debate• Pro Factors

- Lower prices for goods and services- Economic growth stimulation- Increase in consumer income- Creates jobs- Countries specialize in production of goods and services that are produced most efficiently

• Con Factors- Destroys manufacturing jobs in wealthy, advanced countries- Wage rates of unskilled workers in advanced countries declines- Companies move to countries with fewer labor and environment regulations- Loss of sovereignty

Managing in the Global Marketplace• Much of this book is concerned with the challenges of managing an international

business (any firm that engages in international trade or investment)• Managing an international business is different from managing a purely domestic

business in four areas:- Countries are different- Range of problems confronted by a manager in an international business is wider and the problems

themselves are more complex than those confronted by a manager in a domestic business- An international business must find ways to work within the limits imposed by government intervention

in the international trade and investment system- International transactions involve converting money into different currencies

Looking Ahead• Chapter 2: National Differences in Political Economy

- Political Systems- Economic Systems- Legal Systems- The Determinates of Economic Development- Development

- States in Transition- Managerial Implications

World Trade Organization• The successor of the General Agreement on Tariffs and Trade (GATT)• Primarily responsible for:

- Policing the world trading system- Promoting the lowering of barriers to trade

• As of May 2005 there were 148 member nations that collectively accounted for



4

97% of world trade

IMF and World Bank• Both the International Monetary Fund (IMF) and the World Bank were created

in 1944 by 44 nations that met at Bretton Woods, New Hampshire• The IMF was created to maintain order in the international monetary system• The World Bank was created to promote economic development through low-

interest loans

United Nations• The United Nations was established October 24, 1945 by 51 countries committed

to preserving peace through international cooperation and collective security• Membership is now at 191 countries• Four main purposes of the UN are:

- To maintain international peace and security- To develop friendly relations among nations

- To cooperate in solving international problems and in promoting respect for human rights- To be a center for harmonizing the actions of nations

International Trade• Occurs when a firm exports goods or services to consumers in another

country

Foreign Direct Investment• Occurs when a firm invests resources in business activities outside its

home country

World Output and TradeChanging Foreign Direct Investment Changing Nature of Multinationals

• Non-U.S. Multinationals- In the 1960’s global business activity was dominated by large U.S. multinational corporations- In 1973 48.5% of multinationals were U.S. firms- In 2002 28% of largest multinationals were U.S. firms- Globalization of the world economy has resulted in a relative decline in the dominance of U.S. firms in

the global marketplace

• Rise of Mini-Multinationals- Growth of medium-size and small multinationals has become a trend in international business

- Consider Lubricating Systems Inc. which employs 25 people and generates sales of $6.5 million, ofwhich $2 million are from global sales

- International business is conducted not just by large firms but also by medium-size and smallenterprises



5

Differences in CultureChapter Overview • What is culture?• Social Structure• Religious and Ethical Systems• Language• Education• Culture and the Workplace• Cultural Change

What is Culture?

“Culture is that complex whole which includes knowledge, belief, art,

morals, law, custom, and other capabilities acquired by man as a memberof society.”

- Edward Tylor

What is Culture?“A system of values and norms that are shared among a group of people and

that when taken together constitute a design for living.”- Hofstede, Namenwirth, and Weber

Components of Culture• Values• Norms• Society

Folkways and Mores• Folkways: Routine conventions of everyday life.

- Little moral significance - Generally, social conventions such as dress codes, social manners, and neighborly

behavior

• Mores: Norms central to the functioning of society and its social life- Greater significance than folkways

- Violation can bring serious retribution• Theft, adultery, incest and cannibalism

Culture, Society, and the

Nation State• A society is a group of people bound together by a common culture• There is not a strict one-to-one correspondence between a society and a



6

nation state• Nation State:

- Is a political creation- May contain a single culture or several cultures

The Determinants of Culture

Social Structure• Social structure refers to its basic social organization• Two dimensions that are particularly important include:

- The extent to which society is group or individually oriented- Degree of stratification into castes or classes

Religious and Ethical Systems• Religion: a system of shared beliefs and rituals that are concerned with the realm of the

sacred• Ethical systems: a set of moral principles, or values, that are used to guide and shape

behavior - Most of the world’s ethical systems are the product of religions

• Among the thousands of religions in the world today, four dominate in terms of numbers of adherents:

- Christianity with 1.7 billion adherents- Islam with 1 billion adherents- Hinduism with 750 million adherents- Buddhism with 350 million adherents

Religious and Ethical Systems

Language• Spoken

- Verbal cues- Language structures perception of world

• Unspoken- Body language- Personal space

Education• Formal education plays a key role in a society

- Formal education: the medium through which individuals learn many of the language,conceptual, and mathematical skills that are indispensable in a modern society

- Also supplements the family’s role in socializing the young into the values and norms of asociety

- Schools teach basic facts about the social and political nature of a society, as well asfocusing on the fundamental obligations of citizenship

- Cultural norms are also taught indirectly at school• Examples include: respect for others, obedience to authority, honesty, neatness, being on time• Part of the “hidden curriculum”

- The use of a grading system also teaches children the value of personal achievement andcompetition

Culture in the Workplace



7

• Four dimensions of culture- Power distance - cultures are ranked high or low on this dimension based on the particular

society’s ability to deal with inequalities- Individualism versus collectivism - this dimension focuses on the relationship between

the individual and his/her fellows within a culture- Uncertainty avoidance - this dimension measures the extent to which a culture socializes

its members into accepting ambiguous situations and tolerating uncertainty- Masculinity versus femininity - this dimension looks at the relationship between gender

and work roles

Work-Related Values for20 Selected Countries

Problems with Hofstede• Assumes one-to-one relationship between culture and the nation state• Research may have been culturally bound• Survey respondents were from a single industry (computer) and a single

company (IBM)

Cultural Change• Culture is not a constant; it evolves over time

- Since 1960s American values toward the role of women have changed- Japan moved toward greater individualism in the workplace

• Globalization will continue to have impacts on cultures around the world

Cultural Change

Managerial Implications• Cross-cultural literacy

• Culture and competitive advantage• Culture and business ethics

Looking Ahead to Chapter 4• Ethics in International Business

- Ethical Issues in International Business- Ethical Dilemmas- The Roots of Unethical Behavior- Philosophical Approaches to Ethics- Ethical Decision Making

Values• Values for the bedrock of a culture• They provide the context within which a society’s norms are established

and justified• They include attitudes toward

- Individual freedom- Democracy



8

- Truth- Justice- Honesty- Loyalty- Social obligations

• Values are also reflected in the political and economic systems

Norms• Norms are the social rules that govern people’s actions toward one another

Society• Society refers to a group of people who share a common set of values and

norms

Individual vs. Group Orientation• Individual societies tend to view individual attributes and achievements as being more

important than group membership

• Emphasis on individual performance can be both beneficial and harmful- Encourages entrepreneurship- Can lead to high degree of managerial mobility

• Group societies see groups as the primary unit of social organization• Group members

- Often form deep emotional attachments- See group membership as all important

• Emphasis on the group can be both beneficial and harmful- Strong group identification creates pressure for mutual self-help and collective action- Discourages managers and workers from moving from company to company- Discourages entrepreneurship

Social Stratification• Social stratification refers to the fact that all societies are stratified on a hierarchical

basis of social categories• Strata are typically defined on the basis of characteristics such as family background,

occupation, and income• Societies are all stratified to come degree but they differ in two related ways

- Social mobility refers to the extent to which individuals can move out of the strata into whichthey are born

- The extent to which the stratification of a society affects the operation of businessorganizations, this is known as significance

Christianity• This is the most widely practiced religion in the world, approximately 20% of the

world’s people identify themselves as Christians

• Christianity grew out of Judaism and has monotheistic beliefs• Christianity can be subdivided into three separate organizations- The Orthodox church- The Roman Catholic church- Protestants which is an umbrella for several denominations

Economic Implications of

Christianity• Several sociologists have argued that protestants have made a significant economic impact



9

• Max Weber commented- That business leaders and owners of capital, as well as the higher grades of skilled labor, and even

more the higher technically and commercially trained personnel of modern enterprises, areoverwhelmingly Protestant.

- That Protestant ethics emphasize the importance of hard work and wealth creation (for the glory ofGod) and frugality (abstinence from worldly pleasures).

- That the combination of hard work and the accumulation of capital, which could be used to finance

investment and expansion, paved the way for the development of capitalism in Western Europe andsubsequently in the United States.

Islam• The central principle of Islam is that there is but the one true omnipotent God

- Islam requires unconditional acceptance of the uniqueness, power, and authority of God and theunderstanding that the objective of life is to fulfill the dictates of his will in the hope of admission toparadise

• According to Islam, worldly gain and temporal power are an illusion• Other major principles of Islam include:

- Honoring and respecting parents- Respecting the rights of others- Being generous but not a squanderer- Avoiding killing except for justifiable causes- Not committing adultery- Dealing justly and equitably with others- Being of pure heart and mind- Safeguarding the possessions of orphans- Being humble and unpretentious

Economic Implications of Islam• The Koran establishes some explicit economic principles, many of which are pro-free

enterprise- The Koran speaks approvingly of free enterprise and of earning legitimate profit through

trade and commerce (the prophet Mohammed was once a trader)- The protection of the right to private property is also embedded within Islam- Islam is critical of those who earn profit through the exploitation of others

• Given the Islamic proclivity to favor market-based systems, Muslim countries are likely

to be receptive to international businesses as long as those businesses behave in amanner that is consistent with Islamic ethics

Ethics in International BusinessIntroductionEthical Issues in

International Business• Many of the ethical issues and dilemmas in international business are rooted in the fact

that political systems, law, economic development, and culture vary significantly fromnation to nation

• In the international business setting, the most common ethical issues involve- Employment practices- Human rights- Environmental regulations- Corruption- Moral obligation of multinational corporations



10

Employment Practices• Ethical issues associated with employment practices abroad include

- When work conditions in a host nation are clearly inferior to those in a multinational’s homenation, what standards should be applied?

- While few would suggest that pay and work conditions should be the same across nations,

how much divergence is acceptable?

Human Rights• Questions of human rights can arise in international business because basic human

rights still are not respected in many nations- Rights that we take for granted in developed nations, such as freedom of association,

freedom of speech, freedom of assembly, freedom of movement, and freedom from politicalrepression are by no means universally accepted

• The question that must be asked of firms operating internationally is: ‘What is theresponsibility of a foreign multinational when operating in a country where basichuman rights are trampled on?’

Environmental Pollution• Ethical issues arise when environmental regulations in host nations are far inferior tothose in the home nation

- Developing nations often lack environmental regulations, and according to critics, the resultcan be higher levels of pollution from the operations of multinationals than would beallowed at home

• Environmental questions take on added importance because some parts of theenvironment are a public good that no one owns, but anyone can despoil

- The tragedy of the commons occurs when a resource held in common by all, but owned byno one, is overused by individuals, resulting in its degradation

Corruption• Corruption has been a problem in almost every society in history, and it continues to be one

today• International businesses can, and have, gained economic advantages by making payments to

government officials• The United States passed the Foreign Corrupt Practices Act to fight corruption

- Outlawed the paying of bribes to foreign government officials to gain business

• In 1997, the trade and finance ministers from the member states of the Organization forEconomic Cooperation and Development (OECD) followed the U.S. lead and adopted theConvention on Combating Bribery of Foreign Public Officials in International Business

Transactions- Obliges member states to make the bribery of foreign public officials a criminal offense

Moral Obligations

• Multinational corporations have power that comes from their control over resources andtheir ability to move production from country to country• Moral philosophers argue that with power comes the social responsibility for

corporations to give something back to the societies that enable them to prosper andgrow

- Social responsibility refers to the idea that businesspeople should consider the socialconsequences of economic actions when making business decisions

- Advocates of this approach argue that businesses need to recognize their noblesse oblige(benevolent behavior that is the responsibility of successful enterprises)



11

Ethical Dilemmas• Managers must confront very real ethical dilemmas

- The ethical obligations of a multinational corporation toward employmentconditions, human rights, corruption, environmental pollution, and the use of powerare not always clear cut

- Ethical dilemmas are situations in which none of the available alternatives seemsethically acceptable

The Roots of

Unethical Behavior• Why do managers behave in a manner that is unethical?

- Business ethics are not divorced from personal ethics- Businesspeople sometimes do not realize they are behaving unethical because they fail to

ask if the decision is ethical- The climate in some businesses does not encourage people to think through the ethical

consequences of business decisions- Pressure from the parent company to meet unrealistic performance goals that can be

attained only by cutting corners or acting in an unethical manner- Leaders help to establish the culture of an organization and they set the example that

others follow

The Roots of

Unethical Behavior

Philosophical

Approaches to Ethics: Straw Man• Straw man approaches to business ethics are raised by business ethics

scholars primarily to demonstrate that they offer inappropriate guidelinesfor ethical decision making in a multinational enterprise

- The Friedman Doctrine states that the only social responsibility of business is toincrease profits, so long as the company stays within the rules of law

Philosophical

Approaches to Ethics: Straw Man• Cultural Relativism believes that ethics are nothing more than the

reflection of a culture (‘When in Rome, do as the Romans’)• The Righteous Moralist claims that a multinational’s home-country

standards of ethics are the appropriate ones in all countries• The Naïve Immoralist asserts that if a manager sees that firms from other

nations are not following ethical norms in a host country then they should

not either

Philosophical Approaches to Ethics: Utilitarian and Kantian

Ethics• Utilitarian approaches to ethics hold that the moral worth of actions or

practices is determined by their consequences



12

- An action is judged to be desirable if it leads to the best possible balance of goodconsequences over bad consequences

- One problem with utilitarianism is in measuring the benefits, costs, and risks of anaction

- The second problem related to utilitarianism is that it does not consider justice, sothe minority will always be at a disadvantage

Philosophical Approaches to Ethics: Utilitarian and KantianEthics• Kantian ethics hold that people should be treated as ends and never purely

as means to the ends of others- People are not instruments like a machine- People have dignity and need to be respected- Kantian ethics are viewed as incomplete

Philosophical Approaches to Ethics:

Rights

• Rights theories recognize that human beings have fundamental rights andprivileges which transcend national boundaries and cultures• Rights establish a minimum level of morally acceptable behavior• Moral theorists argue that fundamental human rights form the basis for the

moral compass that managers should navigate by when making decisionswhich have an ethical component


Rights• The notion that there are fundamental rights that transcend national borders and

cultures was the underlying motivation for the United Nations Universal

Declaration of Human Rights- All human beings are born free and equal in dignity and rights- They are endowed with reason and conscience and should act toward one another

in a spirit of brotherhood- Everyone has the right to work, to free choice of employment, to just and favorable

conditions of work, and to protection against unemployment


Rights• United Nations Universal Declaration of Human Rights

- Everyone, without any discrimination, has the right to equal pay for equal work

- Everyone who works has the right to just and favorable remuneration ensuring forhimself and his family an existence worthy of human dignity, and supplemented, ifnecessary, by other means of social protection

- Everyone has the right to form and to join trade unions for the protection of hisinterests


Justice• Justice theories focus on the attainment of a just distribution of economic goods and



13

services- A just distribution is one that is considered fair and equitable- There is no one theory of justice- Several theories of justice conflict with each other in important ways

• Valid principles of justice are those with which all persons would agree if they couldfreely and impartially consider the situation

- Impartiality is guaranteed by a conceptual device called the veil of ignorance - Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her particularcharacteristics

• race, sex, intelligence, nationality, family background, and special talents


Justice• Rawls argues that under the veil of ignorance people would unanimously agree on two

fundamental principles of justice- Each person be permitted the maximum amount of basic liberty compatible with a similar

liberty for others- Once equal basic liberty is assured, inequality in basic social goods is to be allowed only if

such inequalities benefit everyone • Difference principle states that inequalities are justified if they benefit the position of the least-

advantaged person

• Moral philosophers have a problem with Rawls’ concept of the veil of ignorancebecause decisions generally include some of the factors

Ethical Decision Making• Five things that an international business and its managers can do to make sure ethical

issues are considered- Favor hiring and promoting people with a well-grounded sense of personal ethics- Build an organizational culture that places a high value on ethical behavior- Make sure that leaders within the business not only articulate the rhetoric of ethical

behavior, but also act in a manner that is consistent with that rhetoric

- Implement decision-making processes that require people to consider the ethical dimensionof business decisions- Develop moral courage

Hiring Practices:

A Job Seeker’s Audit

Organization Culture and

Leadership• To foster ethical behavior, businesses need to build an organization culture that values

ethical behavior• Three things that are need to build an ethical culture

- Businesses must explicitly articulate values that emphasize ethical behavior in a code ofethics

- Leaders in the business must give life and meaning to those words by repeatedlyemphasizing their importance and then acting on them

- Incentive and benefit systems, including promotions, must reward people who engage inethical behavior and sanction those who do not

Decision-Making Process• According to experts, a decision is acceptable on ethical grounds if a



14

businessperson can answer yes to each of these questions:- Does my decision fall within the accepted values or standards that typically apply in the

organizational environment (as articulated in a code of ethics or some other corporatestatement)?

- Am I willing to see the decision communicated to all stakeholders affected by it — forexample, by having it reported in newspapers or on television?

- Would the people with whom I have a significant personal relationship, such as familymembers, friends, or even managers in other businesses, approve of the decision?

Decision-Making ProcessFive-step process to think through ethical problems

- Businesspeople should identify which stakeholders a decision would affect and in whatways

• Stakeholders are individuals or groups that have an interest, claim, or stake in the company - Judge the ethics of the proposed strategic decision, given the information gained in Step 1- Managers must establish moral intent- Implement the ethical behavior- Review the decision to make sure it was consistent with ethical principles

Moral Courage• Moral courage enables managers to walk away from a decision that is profitable,

but unethical• Moral courage gives an employee the strength to say no to a superior who

instructs her to pursue actions that are unethical• Moral courage gives employees the integrity to go public to the media and blow

the whistle on persistent unethical behavior in a company• Moral courage does not come easy and employees have lost their jobs when

acting on this courage

Looking Ahead• International Trade Theory

- Overview of Trade Theory- Mercantilism- Absolute Advantage- Comparative Advantage- Heckscher-Ohlin Theory- The Product Life-Cycle Theory- New Trade Theory- National Competitive Advantage: Porter’s Diamond

Ethics in International BusinessIntroductionEthical Issues in

International Business• Many of the ethical issues and dilemmas in international business are rooted in the fact

that political systems, law, economic development, and culture vary significantly from



15

nation to nation• In the international business setting, the most common ethical issues involve

- Employment practices- Human rights- Environmental regulations- Corruption

- Moral obligation of multinational corporations

Employment Practices• Ethical issues associated with employment practices abroad include

- When work conditions in a host nation are clearly inferior to those in a multinational’s homenation, what standards should be applied?

- While few would suggest that pay and work conditions should be the same across nations,how much divergence is acceptable?

Human Rights• Questions of human rights can arise in international business because basic human

rights still are not respected in many nations- Rights that we take for granted in developed nations, such as freedom of association,

freedom of speech, freedom of assembly, freedom of movement, and freedom from politicalrepression are by no means universally accepted

• The question that must be asked of firms operating internationally is: ‘What is theresponsibility of a foreign multinational when operating in a country where basichuman rights are trampled on?’

Environmental Pollution• Ethical issues arise when environmental regulations in host nations are far inferior to

those in the home nation- Developing nations often lack environmental regulations, and according to critics, the result

can be higher levels of pollution from the operations of multinationals than would beallowed at home

• Environmental questions take on added importance because some parts of theenvironment are a public good that no one owns, but anyone can despoil

- The tragedy of the commons occurs when a resource held in common by all, but owned byno one, is overused by individuals, resulting in its degradation

Corruption• Corruption has been a problem in almost every society in history, and it continues to be one

today• International businesses can, and have, gained economic advantages by making payments to

government officials• The United States passed the Foreign Corrupt Practices Act to fight corruption

- Outlawed the paying of bribes to foreign government officials to gain business• In 1997, the trade and finance ministers from the member states of the Organization for

Economic Cooperation and Development (OECD) followed the U.S. lead and adopted theConvention on Combating Bribery of Foreign Public Officials in International Business

Transactions- Obliges member states to make the bribery of foreign public officials a criminal offense

Moral Obligations• Multinational corporations have power that comes from their control over resources and



16

their ability to move production from country to country• Moral philosophers argue that with power comes the social responsibility for

corporations to give something back to the societies that enable them to prosper andgrow

- Social responsibility refers to the idea that businesspeople should consider the socialconsequences of economic actions when making business decisions

- Advocates of this approach argue that businesses need to recognize their noblesse oblige(benevolent behavior that is the responsibility of successful enterprises)

Ethical Dilemmas• Managers must confront very real ethical dilemmas

- The ethical obligations of a multinational corporation toward employmentconditions, human rights, corruption, environmental pollution, and the use of powerare not always clear cut

- Ethical dilemmas are situations in which none of the available alternatives seemsethically acceptable

The Roots of

Unethical Behavior• Why do managers behave in a manner that is unethical?- Business ethics are not divorced from personal ethics- Businesspeople sometimes do not realize they are behaving unethical because they fail to

ask if the decision is ethical- The climate in some businesses does not encourage people to think through the ethical

consequences of business decisions- Pressure from the parent company to meet unrealistic performance goals that can be

attained only by cutting corners or acting in an unethical manner- Leaders help to establish the culture of an organization and they set the example that

others follow

The Roots of

Unethical BehaviorPhilosophical

Approaches to Ethics: Straw Man• Straw man approaches to business ethics are raised by business ethics

scholars primarily to demonstrate that they offer inappropriate guidelinesfor ethical decision making in a multinational enterprise

- The Friedman Doctrine states that the only social responsibility of business is toincrease profits, so long as the company stays within the rules of law

Philosophical

Approaches to Ethics: Straw Man• Cultural Relativism believes that ethics are nothing more than the

reflection of a culture (‘When in Rome, do as the Romans’)• The Righteous Moralist claims that a multinational’s home-country

standards of ethics are the appropriate ones in all countries• The Naïve Immoralist asserts that if a manager sees that firms from other

nations are not following ethical norms in a host country then they should



17

not either


Ethics

• Utilitarian approaches to ethics hold that the moral worth of actions orpractices is determined by their consequences

- An action is judged to be desirable if it leads to the best possible balance of goodconsequences over bad consequences

- One problem with utilitarianism is in measuring the benefits, costs, and risks of anaction

- The second problem related to utilitarianism is that it does not consider justice, sothe minority will always be at a disadvantage


Ethics• Kantian ethics hold that people should be treated as ends and never purely

as means to the ends of others- People are not instruments like a machine- People have dignity and need to be respected- Kantian ethics are viewed as incomplete


Rights• Rights theories recognize that human beings have fundamental rights and

privileges which transcend national boundaries and cultures• Rights establish a minimum level of morally acceptable behavior• Moral theorists argue that fundamental human rights form the basis for the

moral compass that managers should navigate by when making decisionswhich have an ethical component


Rights• The notion that there are fundamental rights that transcend national borders and

cultures was the underlying motivation for the United Nations UniversalDeclaration of Human Rights

- All human beings are born free and equal in dignity and rights- They are endowed with reason and conscience and should act toward one another

in a spirit of brotherhood- Everyone has the right to work, to free choice of employment, to just and favorable

conditions of work, and to protection against unemployment


Rights• United Nations Universal Declaration of Human Rights

- Everyone, without any discrimination, has the right to equal pay for equal work- Everyone who works has the right to just and favorable remuneration ensuring for



18

himself and his family an existence worthy of human dignity, and supplemented, ifnecessary, by other means of social protection

- Everyone has the right to form and to join trade unions for the protection of hisinterests


Justice• Justice theories focus on the attainment of a just distribution of economic goods and

services- A just distribution is one that is considered fair and equitable- There is no one theory of justice- Several theories of justice conflict with each other in important ways

• Valid principles of justice are those with which all persons would agree if they couldfreely and impartially consider the situation

- Impartiality is guaranteed by a conceptual device called the veil of ignorance - Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her particular

characteristics• race, sex, intelligence, nationality, family background, and special talents

Philosophical Approaches to Ethics:Justice• Rawls argues that under the veil of ignorance people would unanimously agree on two

fundamental principles of justice- Each person be permitted the maximum amount of basic liberty compatible with a similar

liberty for others- Once equal basic liberty is assured, inequality in basic social goods is to be allowed only if

such inequalities benefit everyone • Difference principle states that inequalities are justified if they benefit the position of the least-

advantaged person

• Moral philosophers have a problem with Rawls’ concept of the veil of ignorancebecause decisions generally include some of the factors

Ethical Decision Making• Five things that an international business and its managers can do to make sure ethical

issues are considered- Favor hiring and promoting people with a well-grounded sense of personal ethics- Build an organizational culture that places a high value on ethical behavior- Make sure that leaders within the business not only articulate the rhetoric of ethical

behavior, but also act in a manner that is consistent with that rhetoric- Implement decision-making processes that require people to consider the ethical dimension

of business decisions- Develop moral courage

Hiring Practices:A Job Seeker’s Audit

Organization Culture and

Leadership• To foster ethical behavior, businesses need to build an organization culture that values

ethical behavior• Three things that are need to build an ethical culture



19

- Businesses must explicitly articulate values that emphasize ethical behavior in a code ofethics

- Leaders in the business must give life and meaning to those words by repeatedlyemphasizing their importance and then acting on them

- Incentive and benefit systems, including promotions, must reward people who engage inethical behavior and sanction those who do not

Decision-Making Process• According to experts, a decision is acceptable on ethical grounds if a

businessperson can answer yes to each of these questions:- Does my decision fall within the accepted values or standards that typically apply in the

organizational environment (as articulated in a code of ethics or some other corporatestatement)?

- Am I willing to see the decision communicated to all stakeholders affected by it — forexample, by having it reported in newspapers or on television?

- Would the people with whom I have a significant personal relationship, such as familymembers, friends, or even managers in other businesses, approve of the decision?

Decision-Making Process

Five-step process to think through ethical problems- Businesspeople should identify which stakeholders a decision would affect and in whatways

• Stakeholders are individuals or groups that have an interest, claim, or stake in the company - Judge the ethics of the proposed strategic decision, given the information gained in Step 1- Managers must establish moral intent- Implement the ethical behavior- Review the decision to make sure it was consistent with ethical principles

Moral Courage• Moral courage enables managers to walk away from a decision that is profitable,

but unethical• Moral courage gives an employee the strength to say no to a superior who

instructs her to pursue actions that are unethical• Moral courage gives employees the integrity to go public to the media and blow

the whistle on persistent unethical behavior in a company• Moral courage does not come easy and employees have lost their jobs when

acting on this courage

Looking Ahead• International Trade Theory

- Overview of Trade Theory- Mercantilism- Absolute Advantage

- Comparative Advantage- Heckscher-Ohlin Theory- The Product Life-Cycle Theory- New Trade Theory

National Competitive Advantage: Porter’s Diamond



20

International Trade TheoryOverview of Trade Theory• Free Trade occurs when a government does not attempt to influence,

through quotas or duties, what its citizens can buy from another country orwhat they can produce and sell to another country

• The Benefits of Trade allow a country to specialize in the manufacture andexport of products that can be produced most efficiently in that country

Trade Theory-Overview• The Pattern of International Trade displays patterns that are easy to

understand (Saudi Arabia/oil or China/crawfish).- Others are not so easy to understand (Japan and cars)

• The history of Trade Theory and government involvement presents amixed case for the role of government in promoting exports and limiting

imports• Later theories appear to make a case for limited involvement

Mercantilism: Mid-16th Century• A nation’s wealth depends on accumulated treasure

- Gold and silver are the currency of trade

• Theory says you should have a trade surplus- Maximize export through subsidies- Minimize imports through tariffs and quotas

• Flaw: “zero-sum game”

Mercantilism-Zero-Sum Game

• In 1752, David Hume pointed out that:- Increased exports lead to inflation and higher prices- Increased imports lead to lower prices

• Result: Country A sells less because of high prices and Country B sellsmore because of lower prices

• In the long run, no one can keep a trade surplus

Theory of Absolute Advantage• Adam Smith argued (Wealth of Nations, 1776): Capability of one country to

produce more of a product with the same amount of input than another

country can vary- A country should produce only goods where it is most efficient, and trade for those goods

where it is not efficient

• Trade between countries is, therefore, beneficial• Assumes there is an absolute balance among nations

- Example: Ghana/cocoa

Theory of Absolute Advantage



21

Absolute Advantage and the

Gains From Trade

Theory of

Comparative Advantage

• David Ricardo (Principles of Political Economy, 1817):- Extends free trade argument- Efficiency of resource utilization leads to more productivity- Should import even if country is more efficient in the product’s production than

country from which it is buying- Look to see how much more efficient

• If only comparatively efficient, than import

• Makes better use of resources• Trade is a positive-sum game

Comparative Advantage and theGains From Trade

Simple Extensions of the

Ricardian Model• Immobile resources:

- Resources do not always move easily from one economic activity to another

• Diminishing returns:- Diminishing returns to specialization suggests that after some point, the

more units of a good the country produces, the greater the additional

resources required to produce an additional item- Different goods use resources in different proportions


Ricardian Model• Free trade (open economies):

- Free trade might increase a country’s stock of resources (as labor andcapital arrives from abroad)

- Increase the efficiency of resource utilization

PPF Under Diminishing Returns

Influence of Free Trade on PPF

Heckscher (1919)-Olin (1933) Theory

• Export goods that intensively use factor endowments which are locallyabundant



22

- Corollary: import goods made from locally scarce factors

• Note: Factor endowments can be impacted by government policy - minimum wage

• Patterns of trade are determined by differences in factor endowments - notproductivity

• Remember, focus on relative advantage, not absolute advantage

Product Life-Cycle

Theory - R. Vernon (1966)

• As products mature, both location of sales and optimal production changes• Affects the direction and flow of imports and exports• Globalization and integration of the economy makes this theory less valid

Product life cycle theory

New Trade Theory

In industries with high fixed costs:- Specialization increases output, and the ability to enhance economies of scaleincreases

- Learning effects are high.• These are cost savings that come from “learning by doing”

New Trade Theory-Applications• Typically, requires industries with high, fixed costs

- World demand will support few competitors

• Competitors may emerge because of “ First-mover advantage”- Economies of scale may preclude new entrants

- Role of the government becomes significant• Some argue that it generates government intervention and strategic tradepolicy

Theory of National

Competitive Advantage • The theory attempts to analyze the reasons for a nation’s success in a

particular industry• Porter studied 100 industries in 10 nations

- Postulated determinants of competitive advantage of a nation were based on fourmajor attributes

• Factor endowments• Demand conditions• Related and supporting industries• Firm strategy, structure and rivalry

Porter’s Diamond

• Success occurs where these attributes exist



23

• More/greater the attribute, the higher chance of success• The diamond is mutually reinforcing

Porter’s Diamond

Factor Endowments• Factor endowments: A nation’s position in factors of production such as

skilled labor or infrastructure necessary to compete in a given industry- Basic factor endowments- Advanced factor endowments

Basic Factor Endowments• Basic factors: Factors present in a country

- Natural resources- Climate- Geographic location- Demographics

• While basic factors can provide an initial advantage they must besupported by advanced factors to maintain success

Advanced Factor Endowments• Advanced factors: The result of investment by people, companies, and

government are more likely to lead to competitive advantage - If a country has no basic factors, it must invest in advanced factors

Advanced Factor Endowments

• Communications• Skilled labor• Research• Technology• Education

Demand Conditions• Demand:

- creates capabilities- creates sophisticated and demanding consumers

• Demand impacts quality and innovation

Related and Supporting Industries

• Creates clusters of supporting industries that are internationallycompetitive



24

• Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure

and Rivalry

• Long term corporate vision is a determinant of success• Management ‘ideology’ and structure of the firm can either help or hurt

you• Presence of domestic rivalry improves a company’s competitiveness

Porter’s Theory-Predictions

• Porter’s theory should predict the pattern of international trade that weobserve in the real world

• Countries should be exporting products from those industries where allfour components of the diamond are favorable, while importing in thoseareas where the components are not favorable

Implications for Business• Location implications:

- Disperse production activities to countries where they can be performed mostefficiently

• First-mover implications:- Invest substantial financial resources in building a first-mover, or early-mover

advantage

• Policy implications:- Promoting free trade is in the best interests of the home country, not always in the

best interests of the firm, even though many firms promote open markets

Looking Ahead to Chapter 6

• The Political Economy of International Trade- Instruments of Trade Policy- The Case for Government Intervention- The Revised Case for Free Trade- Development of the World Trading System



25

International Trade TheoryOverview of Trade Theory• Free Trade occurs when a government does not attempt to influence,

through quotas or duties, what its citizens can buy from another country orwhat they can produce and sell to another country

• The Benefits of Trade allow a country to specialize in the manufacture andexport of products that can be produced most efficiently in that country

Trade Theory-Overview• The Pattern of International Trade displays patterns that are easy to

understand (Saudi Arabia/oil or China/crawfish).- Others are not so easy to understand (Japan and cars)

• The history of Trade Theory and government involvement presents amixed case for the role of government in promoting exports and limiting

imports• Later theories appear to make a case for limited involvement

Mercantilism: Mid-16th Century• A nation’s wealth depends on accumulated treasure

- Gold and silver are the currency of trade

• Theory says you should have a trade surplus- Maximize export through subsidies- Minimize imports through tariffs and quotas

• Flaw: “zero-sum game”

Mercantilism-Zero-Sum Game

• In 1752, David Hume pointed out that:- Increased exports lead to inflation and higher prices- Increased imports lead to lower prices

• Result: Country A sells less because of high prices and Country B sellsmore because of lower prices

• In the long run, no one can keep a trade surplus

Theory of Absolute Advantage• Adam Smith argued (Wealth of Nations, 1776): Capability of one country to

produce more of a product with the same amount of input than another

country can vary- A country should produce only goods where it is most efficient, and trade for those goods

where it is not efficient

• Trade between countries is, therefore, beneficial• Assumes there is an absolute balance among nations

- Example: Ghana/cocoa

Theory of Absolute Advantage



26

Absolute Advantage and the

Gains From Trade

Theory of

Comparative Advantage

• David Ricardo (Principles of Political Economy, 1817):- Extends free trade argument- Efficiency of resource utilization leads to more productivity- Should import even if country is more efficient in the product’s production than

country from which it is buying- Look to see how much more efficient

• If only comparatively efficient, than import

• Makes better use of resources• Trade is a positive-sum game

Comparative Advantage and theGains From Trade


Ricardian Model• Immobile resources:

- Resources do not always move easily from one economic activity to another

• Diminishing returns:- Diminishing returns to specialization suggests that after some point, the

more units of a good the country produces, the greater the additional

resources required to produce an additional item- Different goods use resources in different proportions


Ricardian Model• Free trade (open economies):

- Free trade might increase a country’s stock of resources (as labor andcapital arrives from abroad)

- Increase the efficiency of resource utilization

PPF Under Diminishing Returns

Influence of Free Trade on PPF

Heckscher (1919)-Olin (1933) Theory

• Export goods that intensively use factor endowments which are locallyabundant



27

- Corollary: import goods made from locally scarce factors

• Note: Factor endowments can be impacted by government policy - minimum wage

• Patterns of trade are determined by differences in factor endowments - notproductivity

• Remember, focus on relative advantage, not absolute advantage

Product Life-Cycle

Theory - R. Vernon (1966)

• As products mature, both location of sales and optimal production changes• Affects the direction and flow of imports and exports• Globalization and integration of the economy makes this theory less valid

Product life cycle theory

New Trade Theory

In industries with high fixed costs:- Specialization increases output, and the ability to enhance economies of scaleincreases

- Learning effects are high.• These are cost savings that come from “learning by doing”

New Trade Theory-Applications• Typically, requires industries with high, fixed costs

- World demand will support few competitors

• Competitors may emerge because of “ First-mover advantage”- Economies of scale may preclude new entrants

- Role of the government becomes significant• Some argue that it generates government intervention and strategic tradepolicy

Theory of National

Competitive Advantage • The theory attempts to analyze the reasons for a nation’s success in a

particular industry• Porter studied 100 industries in 10 nations

- Postulated determinants of competitive advantage of a nation were based on fourmajor attributes

• Factor endowments• Demand conditions• Related and supporting industries• Firm strategy, structure and rivalry

Porter’s Diamond

• Success occurs where these attributes exist



28

• More/greater the attribute, the higher chance of success• The diamond is mutually reinforcing

Porter’s Diamond

Factor Endowments• Factor endowments: A nation’s position in factors of production such as

skilled labor or infrastructure necessary to compete in a given industry- Basic factor endowments- Advanced factor endowments

Basic Factor Endowments• Basic factors: Factors present in a country

- Natural resources- Climate- Geographic location- Demographics

• While basic factors can provide an initial advantage they must besupported by advanced factors to maintain success

Advanced Factor Endowments• Advanced factors: The result of investment by people, companies, and

government are more likely to lead to competitive advantage - If a country has no basic factors, it must invest in advanced factors

Advanced Factor Endowments

• Communications• Skilled labor• Research• Technology• Education

Demand Conditions• Demand:

- creates capabilities- creates sophisticated and demanding consumers

• Demand impacts quality and innovation

Related and Supporting Industries

• Creates clusters of supporting industries that are internationallycompetitive



29

• Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure

and Rivalry

• Long term corporate vision is a determinant of success• Management ‘ideology’ and structure of the firm can either help or hurt

you• Presence of domestic rivalry improves a company’s competitiveness

Porter’s Theory-Predictions

• Porter’s theory should predict the pattern of international trade that weobserve in the real world

• Countries should be exporting products from those industries where allfour components of the diamond are favorable, while importing in thoseareas where the components are not favorable

Implications for Business• Location implications:

- Disperse production activities to countries where they can be performed mostefficiently

• First-mover implications:- Invest substantial financial resources in building a first-mover, or early-mover

advantage

• Policy implications:- Promoting free trade is in the best interests of the home country, not always in the

best interests of the firm, even though many firms promote open markets

Looking Ahead to Chapter 6

• The Political Economy of International Trade- Instruments of Trade Policy- The Case for Government Intervention- The Revised Case for Free Trade- Development of the World Trading System



30

Foreign Direct InvestmentForeign Direct Investment in the

World Economy

Trends in FDI• Flow and stock increased in the last 20 years• In spite of decline of trade barriers, FDI has grown more rapidly than world trade

because- Businesses fear protectionist pressures- FDI is seen a a way of circumventing trade barriers- Dramatic political and economic changes in many parts of the world- Globalization of the world economy has raised the vision of firms who now see the

entire world as their market

Slumping FDI• Between 200 and 2004 the value of FDI slumped almost 50% from $1.2 trillion

to about $620 billion• The slowdown in FDI flows has been most pronounced in developed nations• The slowdown is probably temporary and reflects three developments

- General slowdown in the growth rate of the world economy- Heightened geopolitical uncertainty following the September 11, 2001 attack- Bursting of the stock market bubble in the US

FDI Outflows

The Direction of FDI• Historically, most FDI has been directed at the developed nations of the world as firms

based in advanced countries invested in other markets

- The US has been the favorite target for FDI inflows• While developed nations still account for the largest share of FDI inflows, FDI into

developing nations has increased- Most recent inflows into developing nations have been targeted at the emerging economies

of South, East, and Southeast Asia

• Gross fixed capital formation summarizes the total amount of capital invested infactories, stores, office buildings, etc.

- This makes FDI an important source of capital investment and a determinant of the futuregrowth rate of an economy

FDI Flow by Region

Gross Capital Fixed Formation

The Source of FDIThe Form of FDI• Greenfield operation:

- Mostly in developing nations

• Mergers and acquisitions:- Quicker to execute- Foreign firms have valuable strategic assets



31

- Believe they can increase the efficiency of the acquired firm

• More prevalent in developed nations

The Shift to Services• The shift to services is being driven by four factors

- Reflects the general move in many developed economies away from

manufacturing and toward service industries- Many services cannot be traded internationally- Many countries have liberalized their regimes governing FDI in services- The rise of Internet-based global telecommunications networks has allowed some

service enterprises to relocate some of their value creation activities to differentnations to take advantage of favorable factor costs

Horizontal FDI• Horizontal Direct Investment

- FDI in the same industry abroad as company operates at home

• FDI is expensive because a firm must bear the costs of establishing

production facilities in a foreign country or of acquiring a foreignenterprise• FDI is risky because of the problems associated with doing business in

another culture where the rules of the game may be different

Market Imperfections• Market imperfections are factors that inhibit markets from working perfectly

- In the international business literature, the marketing imperfection approach to FDI istypically referred to as internalization theory

• With regard to horizontal FDI, market imperfections arise in two circumstances:- When there are impediments to the free flow of products between nations which decrease

the profitability of exporting relative to FDI and licensing

- When there are impediments to the sale of know-how which increase the profitability of FDIrelative to licensing

Horizontal FDI – When• Transportation costs for a product are high• Market Imperfections (Internalization Theory)

- Impediments to the free flow of products between nations- Impediments to the sale of know-how

• Follow the lead of a competitor - strategic rivalry• Product Life Cycle - however, does not explain when it is profitable to

invest abroad

• Location specific advantages (natural resources)Vertical FDI• Vertical FDI takes two forms

- Backward vertical FDI is an investment in an industry abroad that providesinputs for a firm’s domestic production processes

- Forward vertical FDI occurs when an industry abroad sells the outputs of afirm’s domestic production processes, this is less common than backward



vertical FDI

Strategic Behavior• One explanation for firm’s choice of vertical FDI is that by using vertical

backward integration, a firm can gain control over the source of raw

materials- This would allow the firm to raise entry barriers and shut new competitors out of anindustry

• Another explanation of vertical FDI is that firms use this strategy tocircumvent the barriers established by firms already doing business in acountry

Market Imperfections• The market imperfections approach offers two explanations for vertical

FDI- There are impediments to the sale of know-how through the market mechanism

- Investments in specialized assets expose the investing firm to hazards that can bereduced only through vertical FDI

Decision Making Grid For FDI

Looking Ahead to Chapter 8• The Political Economy of Foreign Direct Investment

- Political ideology and Foreign Direct Investment- The benefits of FDI to host countries- The costs of FDI to host countries- The benefits and costs of FDI to home countries- Government policy instruments and FDI

Documents

intr financccccce