Exam 1 Flashcards
Globalization
Integration of national economies through trade, investment, capital flow, labor migration, and technology.
Globalization of markets
Ongoing economic integration and growing interdependence of countries worldwide.
The merging of historically distinct and separate national markets into one huge global marketplace
In many markets today, the tastes and preferences of consumers in different nations are converging
International Business
Cross-border transactions of goods and services between two or more countries.
i. Consists of trade and transactions at a global level
ii. Part of globalization
iii. Elements
1) Globalization of markets
2) International trade
3) International investment
4) International business risks
5) Participants: firms, intermediaries, facilitators, governments
6) Foreign market entry strategies (exporting, foreign direct investment)
International Trade
Exchange of products and services across national borders; typically through exporting and importing
(Can involve products, services, capital, technology, know-how, and labor)
International Investment (FDI)
Transfer of assets to another country or acquisition of assets in that country. Also known as ‘foreign direct investment’
International Portfolio Investment
Passive ownership of foreign securities such as stocks and bonds, in order to generate financial returns
Two Key Facets of Globalization
- Globalization of Markets
2. Globalization of Production
Globalization of Production
Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor energy, land, capital)
Lower overall cost structure to improve the quality or functionality of the product to compete more effectively
Outcomes of Globalization
i. Declining barriers to cross-border trade and investment
ii. Advances in transportation and telecommunications
iii. Material culture similar all over the world
iv. National economies merging into integrated global economic system
v. Unprecedented growth and international trade
vi. Development of sophisticated global financial systems and mechanisms
vii. Greater collaboration among nations
viii. Low cost communication networks help create electronic marketplace
ix. Low cost transportation make it economical to ship products around the world
x. A reduction in cultural distance
xi. A convergence of consumer taste and preferences
Risks Associated with International Business
Cross Cultural Risks
Country Risks
Currency Risks
Financial Risks
Cross Cultural Risks (Examples)
i. Cultural differences
ii. Negotiation Patterns
iii. Decision-Making Styles
iv. Ethical Practices
Country Risks (Examples)
i. Government intervention, protectionism and barriers to trade and investment
ii. Bureaucracy, red tape, admin delays, corruption
iii. Lack of legal safeguards for property rights
iv. Unfavorable legislation
v. Economic failures
vi. Unrest and instability
Currency Risks (Examples)
i. Currency exposure - exchange rate fluctuations
ii. Asset Valuation - risk that exchange rate fluctuations will adversely affect value of firms assets and liabilities
iii. Taxation
iv. Inflation
Financial Risks
i. Weak Partners
ii. Operational problems
iii. Timing of entry
iv. Competitive intensity
v. Poor execution of strategy
Participants in International Business
Multinational Enterprise
Small and Medium Sized Enterprise
Born Global Firm
Non-governmental Organizations
Multinational Enterprise
Large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.
Small and Medium Sized Enterprise
Smaller than 500 employees, comprising over 90% of all firms in most countries. SMEs increasingly engage in international business.
Born Global Firm
A young, entrepreneurial SME that undertakes substantial international business at or near its founding
Non-governmental Organizations
Many of these NPO’s conduct cross border activities. They pursue special causes and serve as advocates for social issues, education, politics and research
Why do firms participate in International Business?
a. Seek opportunities for growth through market diversification
b. Earn higher margins and profits
c. Gain new ideas about products, services and business methods
d. Serve key customers that have relocated abroad
e. Be closer to supply sources, benefit from global sourcing advantages or gain flexibility in sourcing of products
f. Gain access to lower-cost or better-value factors of production
g. Develop economies of scale in sourcing, production, marketing and R&D
h. Confront international competitors more effectively or thwart growth of competition in the home market
i. Invest in potentially rewarding relationship with foreign partner
GDP Calculation
GDP= Consumption + Gross Domestic Private Investment + Government Spending + Net Exports
Collectivism
System that stresses the primacy of collective goals over individual goals
Traces back to Pluto
Socialism (Karl Marx) - State ownership of basic means of production. Split into Communist and Social Democrats
Many fail to succeed
Communists
socialism could only be achieved through revolution and totalitarian dictatorship
Social Democrats
worked to achieve the same goals by democratic means
Individualism
Suggest individuals should have freedom over their economic and political pursuits.
Traced back to Aristotle, David Hume, Adam Smith, J.S. Mill, Milton Friedman, Friedrich von Hayek and James Buchanan
“Invisible Hand” -Adam Smith
Democracy
Political system in which government is by the people, exercised either directly through elected representatives
Most common form today
Totalitarian
Form of government in which one person or political party exercises absolute control and opposing parties are prohibited
Results:
- Political Oppression
- Censorship
- Denial of civil liberties
Market Economy
In economics, a pure free market is a system in which the prices for goods and services are determined by the open market and consumers, (the law and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority
Command Economy
System where the government, rather than the free market, determines what goods should be produced, how much should be produced and the price at which the goods are offered for sale. It also determines investments and income
Mixed Economy
1) Features characteristics of both capitalism and socialism
2) Has private property and allows level of economic freedom in the use of capital, but also allows governments to interfere with economic activities in order to achieve social aims.
3) Most modern economic feature a synthesis of two or more economic systems (mixed), with economies falling at some point along a continuum
4) Iceland, Sweden, France, UK, USA, Russia, China
Legal Systems
Refers to the rules, or laws, that regulate behavior, along with processes by which the laws of a country are enforced and through which redress for grievances is obtained
Importance of Legal Systems
i. Regulate business practice
ii. Define the manner in which business transactions are to be executed
iii. Set down the rights and obligations of those involved in the business transactions
Common Law
Based on tradition, precedent, and custom
Found in Great Britain former colonies
Civil Law
Based on detailed set of laws organized into codes
Found in more than 80 countries (Germany, France, Japan)
Theocratic Law
Based on religious teachings
Islamic law
Differences in Contract Law
i. In a common law state, contracts are very detailed with all contingencies spelled out
ii. In civil law, contracts are shorter and much less specific
United Nations Convention for the International Sale of Good
Treaty that is a uniform international sales law
Ratified in 89 states that account for a significant proportion of global trade, making it one of the most successful international uniform laws
CISG allows exporters to avoid choice of law issues, as the CISG offers “accepted substantive rules on which contracting parties, courts and arbitrators may rely”
Unless excluded, the CISG is deemed to be incorporated into any otherwise applicable laws with respect to a transaction in goods between parties from different states
Property Rights
Legal rights over the use to which a resources is put and over the use made of any income that may be derived from that resource
Corruption
Private or public dishonest actions by someone in authority, often to acquire personal benefit, (is present in all countries and may be more accepted in some).
Private action corruption examples
theft, piracy, blackmail, and the like by private individuals or groups
Public action corruption examples
officials force income or resources from property holders
Government or Political Corruption example
when an officeholder or other governmental employee acts in an official capacity for personal gain
Foreign Corrupt Practices
a) Limits corruption in U.S.
b) States that is illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority
c) States that all publicly traded companies must keep detailed record so that it is clear whether a violation of the act has occurred
d) Facilitating or expediting payments to secure the performance of routine government actions are prohibited
Intellectual Property
Property that is the product of intellectual activity
Paris Convention for the Protection of Industrial Property
Patents
gives the inventor exclusive rights to the manufacture, use or sale of that invention
Copyrights
exclusive legal rights to authors, composers, playwrights, artists, and publisher to publish and dispose of their work as they see fit
Trademark
designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products
Gross National Income (GNI)
the sum of a nation’s gross domestic product (GDP) and the net income (NI) it receivesfrom overseas.
purchasing power parity (PPP)
provides a more direct comparison of living standards in different countries
How much of the global economy is estimated to be apart of the ‘black market’?
10% however, varies by country
Amartya Sen conception of development
development should be assessed less by material output and more by the capabilities and opportunities that people enjoy.
Human Development Index (Developed by the UN)
based on life expectancy, education attainment, and whether average incomes are sufficient to meet the basic needs of life in a country.
Engines of Economic Growth and their needs
Innovation and Entrepreneurship require a Market Economy, Strong Property Rights, Favorable Geography and High Education Levels
Hernando de Soto
developing world will not benefit from capitalism until property rights are better defined and protected
1) The “Commanding Heights” of the global economy
2) Unlocking the “Mystery of Capital”
Transition of Economies (From what to what with examples)
Mixed –> Free
China, India, Latin America
What is causing the transition of economies?
New information and communication technologies have allowed demanders and suppliers to find each other easier
Economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes
What nature changes are occurring in these economies that are transitioning?
Deregulation - Removing legal restrictions to the free play of markets, Establishment of private enterprises, Removing price controls
Privatization - Transfers ownership of state property into the hands of private individuals
Laws protecting private property rights and providing mechanisms for contract enforcement
Without a legal system in place, little incentive to engage in economic activity
Managerial Implications to Internationalize
Balance between the likely benefits of doing business in that country against the likely costs and risks B(x) > C(x)
May be able to gain first mover advantages, late entrants face late-mover disadvantages
Generally, the costs and risks are lower in economically developed and politically stable markets
However, the potential for growth may be higher in less developed nations
With greater risk, a potential higher return (or potential loss)
Economic Costs
relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses
Economic Risks
the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affects the profit and other goals of a business enterprise
Political Costs
include the cost of paying bribes or lobbying for favorable or fair treatment, also political change in a country can have an impact
Political Risks
the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affects the profit and other goals of a business enterprise
Legal Costs
can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
Legal Risks
the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
Culture
Evolving set of collective beliefs, values, norms, mores, attitudes and behavior characteristic of a particular social group.
Much of what definesculturesas DIFFERENT is unseen and includes world views, beliefs, ethics, and morals.
Can be interpreted as an iceberg
Values
Important and lasting beliefs or ideals shared by the members of a culture about what is good or bad and desirable or undesirable
provide the context within which a society’s norms are established and justified
Norms
the social rules that govern the actions of people toward one another
Mores
norms that are seen as central to the functioning of a society and to its social life
Cross Cultural Literacy
involves an understanding of how cultural differences across and within nations can affect the way in which business is practiced.
Acculturation
process of adjusting and adapting to a culture other than one’s own; commonly experienced by expatriate workers
Socialization
process of learning the rules and behavioral patterns appropriate to one’s society
Examples of Culture
Symbols
Material Productions
Manners
ways of behaving and conducting oneself in public and business situations.
Customs
describes a regular, patterned way of behaving that is considered characteristic of life in a social system (e.g., handshaking, bowing, drinking and toasting, gift-giving).
Conversational Perception
reflects each culture’s orientation about personal space and conversational distance.
Monochronic Perception
A rigid orientation to time in which the individual is focused on schedules, punctuality, time as a resource, time is linear, “time is money”. For example, people in the US can be hurried and impatient.
Polychronic Perception
A flexible, non-linear orientation to time in which the individual takes a long-term perspective; time is elastic, long delays are tolerated before taking action. Punctuality is relatively unimportant. Relationships are valued. Examples: Africa, Latin America, Asia.
Social Stratification
defined by characteristics such as family background, occupation, and income
Societies differ in terms of the degree of mobility between social strata
Ethical System
a set of moral principles, or values, that are used to guide and shape behavior
Language
Key dimension of culture
Contains non-verbal cues
Conceptual Skills
basis for acquiring the ability to control certain aspects of life, such as understanding abstract ideas, problem solving, understanding relations and the ways in which organized systems function
Communication Skills
receptive and expressivelanguage, and non-verbal communication.
Technical Skills
knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as well as other specific tasks relating to technology
Geert Hofstede 5 Dimesions of Different Cultures
i. Power distance
ii. Individualism versus collectivism
iii. Uncertainty avoidance
iv. Masculinity versus femininity
v. Long-term versus short-term orientation
A move to add a sixth dimension: indulgence versus restraint
Power Distance (Geert Hofstede)
High power distance societies exhibit big gaps between the weak and powerful; in firms, top management tends to be autocratic, giving little autonomy to lower-level employees. Examples: Guatemala, Malaysia, Philippines, and several Middle East countries.
Low-power distance societies have small gaps between the weak and powerful. Firms tend toward flat organizational structures, with relatively equal relations between managers and workers. For example, Scandinavian countries instituted various systems to ensure socioeconomic equality.
Uncertainty Avoidance (Geert Hofstede)
extent to which people can tolerate risk and uncertainty in their lives
High uncertainty avoidance societies create institutions to minimize risk and ensure security. Firms emphasize stable careers and regulate worker actions. Decisions are made slowly.
Examples: Belgium, France, Japan
In low uncertainty avoidance societies, managers are relatively entrepreneurial and comfortable with risk. Firms make decisions quickly. People are comfortable changing jobs.
Examples: Ireland, Jamaica, U.S.
Masculinity versus femininity (Geert Hofstede)
refers to a society’s orientation based on traditional male and female values.
Masculine cultures value competitiveness, ambition, assertiveness, and the accumulation of wealth. Both men and women are assertive, focused on career and earning money. Examples: Australia, Japan.
Feminine cultures emphasize nurturing roles, interdependence among people, and caring for less fortunate people – for both men and women.
Examples: Scandinavian countries, where welfare systems are highly developed, and education is subsidized.
Long-term vs. short-term orientation (Geert Hofstede)
Long-term orientation emphasizes the long view in planning and living, focusing on years and decades. Examples: Traditional Asian cultures, such as China, Japan, and Singapore
Short-term orientation is typical in the United States and most other Western countries.
Indulgence versus restraint (Geert Hofstede)
describes the degree to which people in a society attempt to control their impulses and desires
Members of indulgent societies allow relatively free gratification of their basic and natural human desires related to having fun and generally enjoying life.
Restrained societies believe that such gratification should be curbed and regulated by strict norms.
For example, Denmark, Mexico, and the U.S. score high on indulgence. China, Iraq, and South Korea score high on restraint
High and Low Context Cultures
Low-context cultures rely on explicit explanations, with emphasis on spoken words.
Such cultures emphasize clear, efficient, logical delivery of verbal messages. Communication is direct. Agreements are concluded with specific, legal contracts.
Examples: Chinese, Korean, Japanese
High-context cultures emphasize nonverbal or indirect language. Communication aims to promote smooth, harmonious relationships.
Such cultures prefer a polite, “face-saving” style that emphasizes a mutual sense of care and respect for others. Care is taken not to embarrass or offend others.
German, Swiss, North American
Ethnocentric Orientation
Using our own culture as the standard for judging other cultures.
Polycentric Orientation
A mindset in which the manager develops a greater affinity for the country in which he or she works than for the home country
Geocentric Orientation
A global mindset in which the manager is able to understand a business or market without regard to national boundaries.
Managers should strive for a geocentric orientation.
Corporate Governance
System of procedures and processes by which corporations are managed, directed, and controlled. Simply obeying the law is usually insufficient to ensure against violating standards of ethical behavior. This results because such standards vary around the world, which makes ethics a complex issue in international business.
Business Ethics
accepted principles of right or wrong governing the conduct of business people
Ethical Strategy
a course of action that does not violate a company’s business ethics
Tragedy of the Commons
occurs when a resource held in common by all but owned by no one is overused by individuals, resulting in its degradation.
Corporations can contribute to the global tragedy of the commons by 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.
Foreign Corrupt Practices Act (FCPA)
not just imposed on U.S. companies with operations globally. It also has jurisdiction over foreigners operating in the country.
Ethical Dilemmas
situations in which none of the available alternatives seems ethically acceptable
CSR Pyramid
(Top) Corporate Social Responsibility
(Middle) Ethical Behavior
(Bottom) Complying with Laws and Regulations
Roots of Unethical Behavior
i. Personal ethics
ii. Decision making processes
iii. Culture (at the organizational and societal levels)
iv. Unrealistic performance goals
v. Leadership
Framework for Making Ethical Decisions
a. Identify Problem
b. Examine the Facts
c. Create Alternatives
d. Implement Course of Action
e. Evaluate Results
Cultural Relativism
The belief that ethics are culturally determined and firms should adopt the ethics of the cultures in which they operate
“When in Rome, do as the Romans do”
Righteous Moralist
An MNE’s home country standards of ethics are the appropriate ones for companies to follow in foreign countries
Approach is common among managers from developed countries
The Naive Immoralist
If a manager of an MNE sees that firms from other nations are not following ethical norms in a host nation, that manager should not either
Actions are ethically justified if everyone else is doing the same thing
Utilitarian
Hold that the moral worth of actions or practices is determined by their consequences.
As a philosophy for business ethics, it focuses attention on the need to weigh carefully all the social benefits and costs of a business action and to pursue only those actions where the benefits outweigh the costs.
If B(x) > C(x) do x
David Hume, Jeremy Bentham Stuart Mil
Kantian
Holds that people should be treated as ends and never purely asmeansto the ends of others. People are not instruments, like a machine. People have dignity and need to be respectedas such
Actions managers can take to ensure ethics are considered:
i. Favor hiring and promoting people with a well-grounded sense of personal ethics
ii. Build an organizational culture that places a high value on ethical behavior
iii. Put decision making processes in place that require people to consider the ethical dimension of business decisions
iv. Institute ethical officers in the organization
v. Develop moral courage
vi. Make corporate social responsibility a cornerstone of the enterprise policy
Pursue strategies that are sustainable
Moral Courage
allows managers to walk away from decisions that may be profitable but unethical
Corporate Social Responsibility (CSR)
idea that businesspeople should consider the social consequences of economic actions when making business decisions and that there should be a presumption in favor of decisions that have both good economic and social consequences. By sustainable strategies,we refer to strategies that not only help the multinational firm make good profits, but that also do so without harming the environment while simultaneously ensuring that the corporation acts in a socially responsible manner with regard to its stakeholders.
Free Trade
The absence of barriers to the free flow of goods and services between
Free tradeis a policy to eliminate discrimination against imports and exports.
Many theories explain why free trade is beneficial to countries that participate
Economists argue that free trade stimulates economic growth and raises the standard of living
Theories of trade can help IB managers in practice, in terms of competitive advantage
Benefits of free trade
More and better choices for consumers and firms.
Lower prices of goods for consumers and firms.
Higher profits and better worker wages (because imported input goods are usually cheaper).
Higher living standards for consumers (because their costs are lower).
Greater prosperity in poor countries.
Mercantilism
Mercantilism theorists believed that the amount of wealth in the world was static (viewed trade a zero-sum game).
The goal was to increase a nation’s wealth by imposing government regulation (achieve a trade surplus).
It was believed national strength could be maximized by limitingimportsviatariffs and maximizingexports.
OnMarch 9, 1776, Adam Smith, a Scottish philosopher by trade, wrote the book “An Inquiry into the Nature and Causes of theWealth of Nations” to upend the mercantilism system of the day.
Smith argued 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 in producing it.
Absolute Advantage
Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unitthananotherentity that produces thesame good or service.
Entities with absolute advantages can produce a product or service using a smaller number of inputs or a more efficient processthan another entityproducing the same product or service.
Comparitive Advantage
Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors.
David Ricardo
Heckscher-Ohlin Theory
Comparative advantage reflects differences in national factor endowments: the extent to which a country is endowed with resources (e.g., land, labor, and capital)
Unlike Ricardo’s theory, the argue that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity
It argues that each country should produce and export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production.
Leontief Paradox
Leontief pointed to empirical findings that seemed to contradict the H.O. theory.
H.O. theory suggests that as the U.S. has abundant capital, it should be an exporter of capital-intensive products.
However, Leontief’s analysis, revealed that the U.S. often exported labor-intensive goods and also imported more capital-intensive goods than the H.O. theory would ordinarily predict.
This implies that international trade is complex and cannot be fully explained by a single theory!
New Trade Theory
Argues economies of scale and network effects are an important factor in some industries for superior international performance.
National Competitive Advantage: Porter’s Diamond
Wanted to explain why a nation achieves international success in a particular industry
Four attributes of a nation that shape the environment in which local firms compete
Chance and government can influence the national diamond
Factor Endowments: quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production.
Basic: natural resources, climate, location, demographics (Basic factors can provide an initial advantage that is extended by investment in advanced factors)
Advanced: communication infrastructure, skilled labor, technological know-how, (Advanced factors more significant for competitive advantage)
Demand Conditions: Demand conditions at home – the strengths and sophistication of customer demand.
The nature of home demand for an industry’s product or service influences the development of capabilities
Sophisticated and demanding customers ensure firms are more competitive; produce high quality, innovative products
Related and Supporting Industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry.
Investing in these industries can spill over and contribute to success in other industries. Successful industries can be grouped in clusters in countries which then prompts knowledge flows between firms
Firm Strategy, Structure and Rivalry: Different nations are characterized by different management ideologies which either help them or do not help them build national competitive advantage
There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry
