MKT 3400 Notes
Chapter 1 – Globalization and International Business
Factors in IB Operations
Why Study About Globalization, IB, and Their Relationship?

Globalization is the widening and deepening of interdependent relationships among
people from different nations

How Does IB Fit In?
o The Relation to Globalization


IB consist of all commercial transactions between two or more countries

The IB goal of private businesses is to make profits

Government IB may or may not be motivated by profit
The Study of IB
o Studying IB is important because

Most companies are either international or compete with international
companies

Modes of operations may differ from those used domestically

It helps managers to decide where to find resources and to sell

The best way of conducting business may differ by country

An understanding helps you make better career decisions

An understanding helps you decide what governmental policies to
support
The Forces Driving Globalization and IB

Although hard to measure, globalization
o Has been growing
o Is less pervasive than generally thought
o Has economic and noneconomic dimensions
o Is stimulated by several factors

Factors in Increased Globalization
o Rise in and Application of Technology

Much new technical innovation takes so many financial and intellectual
resources that companies from different countries must cooperate to
take on portions of development

Advances in Communication and Transportation

Strides in communication and transportation now allow us to
discover, desire, and demand goods and services from abroad.
o Liberalization of Cross-Boarder Trade and Resource Movements

Most governments have reduced trade restrictions primarily for three
reasons:

Their citizens want a greater variety of goods and services at
lower prices

Competition spurs domestic producers to become more efficient

They hope to induce other countries to lower their barriers in turn
o Services that Support IB

Companies and governments have developed services that facilitate
global commerce
o Growth in Consumer Pressures
2

More consumers know more today about products and services available
in other countries, can afford to buy them, and want the greater variety,
better quality, and lower prices offered by access to them

Consumer pressure has also spurred companies to spend more on
research and development and to search worldwide for innovations and
products they can sell to evermore demanding consumers
o Increase in Global Competition

Increased competitive pressures can persuade companies to buy or sell
abroad
o Changes in Political Situations and Government Policies
o Expansion of Cross-National Cooperation

To gain reciprocal advantages

To attack problems jointly that one country alone cannot solves

To deal with areas of concern that lie outside the territory of any nation
The Criticisms of Globalization

Critics of globalization claim
o Countries’ sovereignty is diminished

The question of local objectives and policies

The question of small economies’ overdependence

The question of cultural homogeneity

Critics argue that countries have difficulty maintaining the
traditional ways of life that unify and differentiate them.
o The resultant growth hurts the environment

The argument for global growth and global cooperation
o Some people lose both relatively and absolutely

Income inequality


Personal stress

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Critics claim globalization has affected this disparity by helping to
develop a global superstar system, creating access to a greater
supply of low-cost labor, and developing competition that leads
to winners and losers.
From real and potential loss of relative economic and social
positions
Why Companies Engage In IB

Sales Expansion
o Pursuing international sales usually increases the potential sales and potential
profits

Resource Acquisition
o Foreign locations may give companies


Lower costs

New or better products

Additional operating knowledge
Risk Reduction
o International operations may reduce operating risk by

Smoothing sales and profits

Preventing competitors from gaining advantages
IB Operating Modes

Merchandise Exports and Imports
o The most popular IB modes

Service Exports and Imports (international nonproduct sales and purchases)
o Tourism and Transportation
o Service Performance

Including banking, insurance, rental, engineering, and management
services
o Asset Use


Royalties from licensing agreements and franchising
Investments
o Direct Investment

The investor takes a controlling interest in a foreign company
o Portfolio Investment

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
Noncontrolling interest of a foreign operation

Extension of loans
Types of International Organizations
o Multinational Enterprise

A multinational enterprise or MNE (sometimes called MNC or TNC) is a
company with foreign direct investments

Does Size Matter?

No. A small company can have foreign direct investments and
adopt any of the operating modes we’ve discussed.
Why Do Companies’ External Environments Affect How They May Best
Operate Abroad?

Physical Factors
o These affect

Where different good and services can be best produced

Operating risks
o Geographic Influences

Geographic barriers—mountains, deserts, jungles, and land-locked
areas—often affect communications and distribution channels.
o Demographic Influences


Countries populations differ in many ways, such as density, education,
age distribution, and life expectancy. These differences impact IB
operations, such as market demand and workforce availability.
Institutional Factors
o Political Policies

Politics can often determine where and how IB can take place
o Legal Policies

Each country has its own laws regulating business. Agreements among
countries set international law.
o Behavioral Factors

Countries’ behavioral norms influence how companies should operate
there
o Economic Forces


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Economics explains country differences in costs, currency, values, and
market size
The Competitive Environment
o Competitive Product Strategy

Products compete by means of cost or differentiation strategies. The
latter used by

Developing a favorable brand image

Developing unique characteristics
o Company Resources and Experience

Compared to those of its competitors.
o Competitors Faced in Each Market

Market success whether domestic or foreign, often depends on the
strength of competition and whether it is international or local.
Chapter 2 – The Cultural Environments Facing Business
Culture’s Importance in IB and Trickiness to Assess

National Cultures as a Point of Reference
o Values are learned, and all individuals have them. They are reflected in their
attitudes, beliefs, and actions. Their core values are so strong that they are not
negotiable, whereas their peripheral values are less dominant and more pliable.
The shared values, attitudes, and beliefs of a group of individuals constitutes a
culture
o The nation provides a workable definition of culture because similarity among
people is both a cause and effect of national boundaries.

It is a reference people make to “we” vs. “they
o The Nation as Cultural Mediator

Despite using the nation as a cultural reference point,

Not everyone therein shares the same values and attitudes

Subcultures exist within nations
o Ex. Rural vs. Urban


Some people have internalized more than one culture (bicultural
or multicultural)

Cultural similarities link groups from different countries
The People Factor
o Cultural Diversity
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
Cultural diversity can be a competitive advantage, but managing it can
be difficult
o Cultural Collision


When contact among divergent cultures create problems, the situation is
known as cultural collision

Cultural collision may cause

Ineffective business practices

Personal distress
Building Cultural Awareness
o Almost everyone agrees that national cultures differ, but they disagree on what
the differences are and the importance of them
o Cultural research can improve a person’s awareness and sensitivity

Shortcomings in Cultural Assessments
o Sometimes differences are attributed only to culture, although other factors
may be influential
o Shortcomings in cultural research include

Erroneous responses to questions

Relying on averages when they are variations

Overlooking changes
Influences on Cultural Formation and Change

Sources of Change
o Cultural value systems, especially core values, are set early in life but may
change through

Change by Choice

Contact with other cultures

Change by Imposition
o Sometimes called cultural imperialism and involves
imposing certain elements from an alien culture, such as a
forced change in laws by a dominant country that, over
time, becomes part of the subject culture

Language as Both a Diffuser and Stabilizer of Culture
o A common language is a unifying force, but many countries
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
Have multiple language groups,

Depend on a regional lingua franca
o Why English Travels So Well

English has become the “international language of business” because

Native English language countries account for so much of world
production

It is the world’s most important second language
o The Evolvement of Languages

The use of English in IB may overvalue people simply because of
language competence.


Soon other countries’ economies may grow so big that their
language(s) may become more important than English.
Religion as a Cultural Stabilizer
o Many strong values are the result of a dominant religion
Major Behavioral Practices Affecting Business

Issues in Social Stratification
o Every culture ranks people. Social Stratification creates hierarchies and
influences a person’s class, status, and financial rewards within that culture
o Individual Qualifications and Their Limitations

Business reward meritocracy more highly in some societies

Group affiliations can be



Ascribed or acquired

A reflection of class and status
Country-by country attitudes vary toward

Social connections

Race and ethnicity

Male and female roles

Rules and expectations based on age

Family ties
Work Motivation
o Materialism and Motivation
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

The desire for material wealth is

A prime motivation to work

Positive for economic development
The Productivity/Leisure Trade-Off
o Expectation of Success and Reward


People are more eager to work if

Rewards for success are high relative to failure

There is some uncertainty of success
Success and Reward Across Borders

Performed in different countries, the same tasks come with
different probabilities of success and different rewards for
success vs. failure.
o Performance and Achievement

The Masculinity-Femininity Index

A high-masculinity culture prefers to “live to work,” and a highfemininity culture prefers to “work to live.”
o Hierarchies of Needs


According to this theory, people try to fulfill lower-level needs before
moving on to higher-level ones. (physiological, security, affiliation, then
self-actualization).

The hierarchy of needs

May differ among countries

Is useful in deciding how to motivate differently among countries
Relationship Preferences
o Power Distance

There are national variations in the preference for autocratic (high power
distance) vs. consultative (low power distance) management
o Individualism Vs. Collectivism


“Safe” work environments motivate collectivists. Challenges motivate
individualists
Risk-Taking Behavior
o Risk-taking behavior differs among nationalities because of their
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

Ease of handling uncertainties

Degree of trust among people

Future orientation

Attitudes of self-determination and fatalism
Information and Task Processing
o Perception of Cues

Differences in perception of cues may result from genetics and language
o Managers are helped by knowing whether cultures favor

Focused (low-context) or broad (high-context) information,

A particular way of classifying information

Sequential (monochronic) or simultaneous (polychronic) handling of
situations

Handling principles (idealism) vs. small issues (pragmatism) first
Problems in Communicating Across Cultures

Translation of Spoken and Written Language
o Cross-border communications do not always translate as intended

Silent Language
o We constantly exchange messages through a host of nonspoken and nonwritten
cues that form a silent language.
o Colors
o Distance

Ex. Distance and touchiness during conversations
o Time and Punctuality
o Body Language
o Prestige
Guidelines for Cultural Adjustment

Host Society Acceptance
o Host cultures do not always expect foreigners to adjust to them

Degree of Cultural Differences
o Cultural Distance

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When doing business in a similar culture, companies


Usually have to make fewer adjustments (smaller cultural
distance = less changes needed)

May overlook subtle differences (hidden cultural attitudes)
Ability to Adjust: Culture Shock
o Culture Shock—the frustration that results from having to absorb a vast array of
new cultural cues and expectations
o Reverse culture shock—having become partial to aspects of life abroad that are
not options back home

Company and Management Orientations
o Polycentrism

Polycentric management may be so overwhelmed by national
differences that it won’t introduce workable changes
o Ethnocentrism

Ethnocentric management overlooks national differences and

Ignores important factors,

Believes home-country objectives should prevail

Thinks acceptance by other cultures is easy
o Geocentrism


Geocentric management often uses business practices that are hybrids
of home and foreign norms
Strategies for Instituting Change
o Because people do not necessarily accept change readily, the management of
change is important

Value Systems


Resistance to Too Much Change


Change is better gradually
Participation

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If something contradicts core values, it will likely not be accepted.
But even contradictions to peripheral (not strongly embedded)
face obstacles.
One way to avoid problems is to discuss proposed changes with
stakeholders (employees, suppliers, customers, and the like) in
advance.

Reward Sharing


Opinion Leadership


Companies may rely on bicultural or multicultural individuals,
especially those within their own ranks, to present and explain
changes to stakeholders.
Timing


By making use of channels of influence, or opinion leaders, a firm
may be able to facilitate the acceptance of change.
Biculturals as Mediators


Develop means of sharing gains of changes with stakeholders
Many well-conceived changes fail simply because they’re illtimed.
Learning Abroad

Companies’ experience in foreign operations enables them to
learn as well as impart valuable knowledge—knowledge that
proves just as useful at home as in the host country.
Chapter 3 – The Political and Legal Environments Facing Business
Politics, Laws, and Operating Internationally

Managers study political and legal environment in order to fit activities to local
circumstances.
The Political Environment

The goal of the political system is integrating the diverse elements of a society. Its test
is uniting society in the face of divisive viewpoints.

Individualism
o Individualism champions the primacy of the rights and role of the individual over
the group.

Collectivism
o Collectivism advocates the primacy of the rights and role of the group over the
individual.

Political Ideology
o A political ideology encapsulates the doctrine of political behavior and change.
It outlines the procedures for converting ideas into actions.
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o Political freedom measures the degree to which fair and competitive elections
occur, the extent to which individual and group freedoms are guaranteed, the
legitimacy ascribed to the rule of law, and the existence of freedom of the press.

Democracy
o Democracy calls for participation by citizens in a fair and just decision-making
process.
o Democracy and individualism are intrinsically related and mutually reinforcing;
individualism legitimates principles of democracy and democracy supports
standards of individualism.
o Business Implications


In a democracy, MNE’s have the freedom to invest and operate based on
economic, not political standards. Managers and consumers are free to
do as they see fit in a business environment that promotes commerce
and encourages trade.
Totalitarianism
o A totalitarian system consolidates power in a single agent who then controls
political, economic, and social activities.
o Totalitarianism and collectivism are intrinsically related and mutually
reinforcing; collectivism legitimates principles of totalitarianism and
totalitarianism supports standards of collectivism.
o Business Implications

Authoritarian parties often rely on shadowy politics, skewed elections,
and nefarious security agencies.
The State of Political Freedom

Freedom House identifies three types of political systems:
o Free

A “free” country exhibits open political competition, respect for civil
liberties, independent civic life, and independent media. There are
inalienable freedoms of expression, assembly, association, education
and religion.

Australia, Brazil, India, and the United States
o Partly free

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A “partly free” country exhibits limited political rights and civil liberties,
corruption, weak rule of law, ethnic and religious strife, unfair elections,
and censorship.

Guatemala, Pakistan, and Tanzania
o Not free

A “not free” country has few to no political rights and civil liberties. The
government allows minimal to no exercise of personal choice, relies on
the rule of man as the basis of law, constrains religious and social
freedoms and controls a large share, if not all, of business activity


China, Russia, Saudi Arabia, and Iran
The Prevalence of Political Freedom
o The Third Wave of Democratization refers to the third surge of democratically
governed states in the twentieth century. Ultimately, as this wave crested, the
number of countries led by a democratic government doubled.
o Various forces powered past the Third Wave of Democratization


Failure of totalitarian regimes to deliver prosperity.

Improving communication technology

Economic dividends of political freedom
The Struggles of Political Freedom
o Several indicators show slowing adoption of democracy throughout the world.
o Gauging the Scale of Struggle: The Texture of Democracy

The Economist Intelligence Unit (EIU) identifies four types of political
systems:

Full democracy

Flawed democracy

Hybrid regime

Authoritarian Regime
o Qualifying Democracy by Demography


Worldwide, few people live in fully functional democracies; many more
live in authoritarian states.
The Allure of Authoritarianism
o Powering the resurgence of totalitarianism, but more specifically
authoritarianism, is
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
Strong states support strong performance, economies of growth.

Gaps in the principles and practices of democracy

Economic insecurity following slowing growth.

Escalating debate of the meaning of democracy
Political Risk

Political risk refers to the threat that decisions or events in a country will negatively
affect the profitability and sustainability of an investment

Classifying Political Risk
o Systemic Political Risk

Systemic political risks, by influencing the macro business environment,
affect the operation of all firms.

Financial anomalies, competing perspectives, unilateral breach of
contract
o Procedural Political Risk

Procedural political risk institutes impediments that constrain the
flexibility of local operations

Tax discrimination
o Distributive Political Risk

Distributive political risks gradually eliminate the local property rights of
foreign companies.

Destructive government actions (ex. Trade barriers)
o Catastrophic Political Risk

Catastrophic political risk devastates the business environment for all
companies.

War
The Legal Environment

The legal system is the mechanism for conceiving, stipulating, interpreting, and
enforcing the laws in a formal jurisdiction.

Modern legal systems evidence three components:
o Constitutional Law

This translates the country’s constitution into an open and just legal
system, setting the framework for government and defining the
authority and procedure of political bodies to establish laws.
o Criminal Law
15

This safeguards society by specifying what conduct is criminal, and
prescribing punishment to those who breach those standards.
o Civil and commercial law


This ensures fairness and efficiency in business transactions by
stipulating private rights and specific remedies in order to regulate
conduct between individuals and/or organizations.
Types of Legal Systems
o Common Law System

Common law is developed by judges through the decisions of courts.
o Civil Law System

Civil law is based on strict application of statutory laws.
o Theocratic Law System

Theocratic law is based on the inspirations and instructions of religious
teachings.
o Customary Law System

Customary law is based on norms of behavior that gain legitimacy
through ongoing practice.
o Mixed System


A mixed system results when a nation uses two or more of the preceding
types.
The Foundation of Legality
o The Basis of Rule

The rule of man holds that the ruler, in whatever form, commands
authority that is above the law.



The rule of man anchors the legal system in totalitarian states.
The rule of law holds that no individual is above laws that are clearly
specified, commonly understood, and fairly enforced.
Mapping the Basis of Law
o The rule of man anchors the legal systems of many of today’s emerging
countries.

Which Rule When?
o The growing confidence of emerging economies increasingly calls into question
the long-running presumption that “the West knows best.”
16

Implications to Managers
o Uncertainty about the basis of law in a particular country complicates decisionmaking in the MNE
Legal Issues Facing International Companies

Operational Concerns
o Operational concerns that managers face worldwide include

Starting a business

Entering and enforcing contracts


The type of legal system in the country directly influences the
standards of acceptable contracts.

Hiring and firing workers

Closing a business
Strategic Concerns
o Strategic concerns that managers face worldwide include

Product origin and local content

Marketplace behavior


Legal jurisdiction


The addition of a choice-of-law clause to contracts between
different parties in different countries is an effective legal
safeguard.
Product safety and liability


Richer countries typically regulate business activities less. Poorer
countries typically regulate more.
Product safety regulations by the European Union shape
standards worldwide
Intellectual property protection

Intellectual property is the general term for creative ideas,
expertise, or intangible insights that grant its owner a
competitive advantage.

Intellectual property rights refer to the right to control and derive
benefits from writing (copyright), inventions (patents), processes
(trade secrets), and identifiers (trademarks).
Politics, Law, and the Business Environment
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
Countries that observe the rule of law, as opposed to the rule of man, more
aggressively protect intellectual property rights. Hence the predominant share of
counterfeit products is made in countries in which the rule of man prevails.
Chapter 4 – The Economic Environments Facing Businesses
International Economic Analysis
o Studying an economic environment helps managers make better investment
choices and operating decisions.
o Resource constraints require managers to identify which countries in the world
warrant investment as well as those they must avoid.
o Managers study a country’s economic environment to assess its development,
explain its performance, and estimate its potential.
o A principle of globalization is the broadening network of relationships among
people, companies, countries, and institutions. Philosophically, the same
principle applies to the emergence and evolution of economies.
o Various principles help managers better assess economic environments,
including:


System Complexity

Market dynamism

Market interdependence
Navigating Challenges
o Chapter 1 notes changing environmental conditions that promote and constrain
globalization, Chapter 2 notes changing cultural identities, and Chapter 3 notes
changing political philosophies and legal outlooks. The same perspective applies
here as well—namely, the changing economic environments of international
business create opportunities and impose constraints.
Who’s Who in the Global Business Environment

Developed Economies
o Developed economies generally have high income levels, extensive
industrialization, advanced technological infrastructure, and high standard of
living.
o Developed economies are also referred to as
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
High-income economies,

Advanced markets,

Advanced industrial economies,


Postindustrial economies
Developing economies
o Developing economies generally have low-income levels, slight
industrialization, incomplete infrastructure, and lower standards of living.
o Significant gaps exist in economic and social characteristics between developed
and developing economies.
o Poverty is the state of having little or no money, few or no material possessions,
and limited access to education, health, and community.
o The worldwide growth of business activity and economic progress ultimately
depends on alleviating poverty.

Economies in Transition
o The term emerging economies is often used in place of economies in transition.
One also sees terms such as frontier markets and newly industrializing
countries.
o Emerging economies exhibit improving productivity, rising income, and growing
prosperity, particularly relative to slower growing developing economies.
o Although developing countries are attractive in terms of economic potential,
managers need the discussions of chapters 2 and 3 concerning the different
cultural, political, and legal environments found in developing countries. Still,
Chapter 1 notes the drivers of globalization steadily narrow the gap between
developed and developing countries.

The issue of different degrees of development
o The base of the pyramid is the largest, but poorest, socioeconomic group in the
world.
Economic Freedom

Economic freedom holds that one has the right to work, produce, consume, save, and
invest in the way that one prefers.

Economic freedom measures the absence of government coercion or constraint on the
production, distribution, or consumption of goods and services beyond the extent
necessary for citizens to protect and maintain liberty.

The value of economic freedom
o Chapter 1 suggests that income inequality and poverty should diminish as
international business improves the efficiency of resource allocation. Chapter 3
highlighted the importance of people’s freedom to do so. Here we add to the
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mix ideas of economic freedom and its thesis that productive use of liberated
capital creates progress and prosperity.
o The track record of free markets around the world indicates that economic
freedom is positively related to financial prosperity, economic stability, and
standards of living.
o Economic freedom, by expanding international trade across open borders,
promotes globalization.

The prevalence of economic freedom
o Worldwide, economic freedom dropped in the aftermath of global financial
crisis. It has steadily regained ground.

Economic freedom and type of economic environment

The paradox of promise versus prevalence
o Paradoxically, despite the documented benefits of economic freedom, just 5
countries, out of 178, have policies that maximize it.
o Managers watch key events to gauge the contest between economic freedom
and state control. These include how the government:

Regulates the economy.

Protects property rights.

Sets fiscal and monetary policies.

Promote transparent policies.
o The surge in state capitalism helps explain why many emerging and developing
economies deemphasize economic freedom.
Types of Economic Systems

An economic system organizes the production, distribution, and consumption of goods
and services.

The market economy
o Capitalism and its advocacy of the private ownership of factors of production
anchors a market economy.
o Chapter 3 notes that the individual voter is the cornerstone of a democracy.
Here we add that the individual, as a consumer, is the key factor in a free
market. Whereas democracy recognizes the supremacy of voter sovereignty,
the market economy recognizes the supremacy of consumer sovereignty.
o A market economy endorses the doctrine of capitalism, its principles of the
invisible hand and laissez-fare, and the goal of maximizing economic freedom.
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o The need for government to provide public goods and protect society makes
visible the otherwise invisible hand in a market economy.

The command economy
o In a command economy, the visible hand of the state supersedes the invisible
hand of the market.
o Totalitarianism subordinates people’s day-to-day lives—including their market
behavior and economic outlook—to the state. Government command of the
economy supports this policy, enabling it to determine asset valuation, direct
resource allocation, and regulate productivity.
o Despite points of overlap, state capitalism is not a form of a command
economy; the former promotes state wealth whereas the latter promotes state
ideology.

Mixed economy
o A mixed economic system combines elements of the market and command
economic systems; both government and private enterprise influence
production, consumption, investment, and savings.
o A market economy is anchored in capitalism, a command economy is anchored
in communism, and a mixed economy is anchored in socialism.
Assessing economic development, performance, and potential

Monetary measures
o Gross National Income (GNI) is the broadest measure of a country’s economic
performance. It has four components: personal consumption, business
investments, government spending, and net exports of goods and services.
o Gross Domestic Product (GDP) is the total market value of all output produced
within a nation’s border, no matter whether it is generated by a domestic or
foreign owned enterprise, over a fixed period. It provides the truest measure of
national economic activity.
o Gross National Product (GNP) is the total value of all final goods and services
produced within a nation in a particular year.

Improving economic analytics
o Managers improve the economic indicators by adjusting for the

Growth rate of the economy

Number of people in the country,

Local cost of living.
o Rate of economic growth
21
o Population size
o Purchasing power parity


Purchasing power parity (PPP) provides a method of measuring the
relative purchasing power of different countries’ currencies for the same
basket of goods and services.

Adjusting for PPP controls for differences in the relative cost of living
between countries.
The wildcard: The shadow economy
o All countries experience the effects of the shadow economy (undocumented
activities). They are particularly influential in developing economies.

Sustainability and stability
o Chapter 1 notes that some groups oppose globalization, Chapter 2 discussed
cultural objections, and Chapter 3 identifies political reasons that inspire
opposition. Here, we add that critics charge that overly emphasizing monetary
measures misrepresents the economic benefits of globalization.

Sustainability
o Green economics

Green economics hold that an economy is a component of, and
dependent on, the natural world. We must account for associated social
and ecological costs.
o Sustainability

Sustainability endorses a broader view and is about meeting the needs of
the present without compromising the ability of future generations to
meet their own needs.
o Estimators of economic progress toward improving happiness include

Net National Product

Genuine Progress Indicators

Human Development Index
o Sustainability and stability perspectives hold that the objective of economic
activity is to create an environment for people to enjoy long, healthy, and happy
lives.

Stability
o Fully understanding growth progress, and prosperity calls for assessing the
consequences of economic choice on sustainability and stability.
22
o Estimates of economic progress toward improving happiness include:


Your Better Life Index

Gross National Happiness

Happy Plant Index
As we saw in Chapter 1, critics of globalization often point to the inefficient use of
resources to promote economic activity. Hence, many advocate considering
sustainability in evaluating the benefits and costs of globalization.
Elements of Economic

Economics is rich with metrics to measure performance and potential.

Integrating Economic Analysis
o Managers often consider meta-models to improve the absolute and relative
potential of an economic environment. Popular indices include:

Global Competitiveness Index,

Global Innovation Index,

Where-To-Be-Born Index,


In general, smaller economies score higher in the lottery of life.
World Competitiveness Index

An economy’s productivity, namely its efficiency in converting
inputs into useful outputs, is a key determinant of its
competitiveness.
o Making sense of the different domains in a big world, as we saw in Chapters 1, 2,
and 3, encourages the integration of various indicators into a comprehensive,
coherent index. Indices of the sort we see here help managers develop a holistic
profile of particular markets in terms of productivity, competitiveness,
innovation, and the quality of life.

Economic Freedom, Innovation, and Competitiveness
o Economic freedom has a strong relationship with a country’s relative
competitiveness and innovation performance.
Chapter 5 – Globalization and Society
Stakeholder Trade-Offs

Companies must satisfy the demands of
o Shareholders,
23
o Employees,
o Customers,
o Suppliers,
o Society.
The Economic Impact of the MNE

It is hard to determine whether the actions of MNEs affect societal conditions.

The philosophy, goals, and action of each MNE are unique.

Balance-of-Payments Effects
o Effect of Individual FDI

The effect of an individual MNE may be positive or negative
o The formula to determine the balance-of-payments effect is simple but the date
used must be estimated and are subject to assumptions.
o Calculating Net Import Effect

On the import side the balance-of-payments is positive if the FDI results
in a substitution for imports and negative if results in an increase in
imports.
o Calculating Net Capital Flow


The balance-of-payments effects in terms of capital flows for FDI are
usually.

Positive for the host country initially and negative for the home
country,

Negative for host country and positive for the home country
later.
Growth and Employment Effects
o Growth and employment effects are not a zero-sum game because MNEs may
use resources that were unemployed or underemployed.
The Foundations of Ethical Behavior

Many actions elicit universal agreement on what is right or wrong, but other situations
are less clear.

There are three levels of moral development:
o Preconventional
o Conventional
24
o Postconventional, autonomous, or principled.

Teleological Approach: Decisions are based on the consequences of the action.

Utilitarianism: An action is right if it produces the greatest amount of good.

Deontological Approach: Moral Judgments are made and moral reasoning occurs
independent of consequences.

Why Do Companies Care About Ethical Behavior?
o To develop competitive advantage.
o To avoid being perceived as irresponsible.
o NGOs are active in prodding companies to comply with certain standards of
ethical behavior.
The Cultural Foundations of Ethical Behavior

Values differ from country to country and between employees and companies.

Relativism Versus Normativism
o Relativism

Relativism: Ethical truths depend on the groups holding them
o In discussing “guidelines for cultural adjustment” in Chapter 2, we demonstrate
that successful accommodation to a host country’s culture depends not only on
that culture’s willingness to accept anything foreign but also on the extent to
which foreign firms and their employees are able to adjust to the culture in
which they find themselves.
o Normativism

Normativism: There are universal standards of behavior that all cultures
should follow
o Walking the Fine Line Between Relative and Normative

Managers need to exhibit ordinary decency—principles of honesty and
fairness.

Social responsibility requires human judgment, which is subjective and
ambiguous.
The Legal Foundations of Ethical Behavior

25
Note that in Chapter 3 we define a country’s legal system as the fundamental
institution that creates a comprehensive legal network to regulate social interaction; its
purpose is to stabilize political and social environments as well as to ensure a fair, safe,
and efficient business environment.

Legal Justification: Pro and Con
o Legal justification for ethical behavior may not be sufficient because not
everything that is unethical is illegal.
o The law is a good basis for ethical behavior because it embodies local cultural
values.
Corruption and Bribery

Bribery of public officials takes place to obtain government contracts or to get officials
to do what they should be doing anyway.

Bribes are payments or promises to pay cash or anything of value.

What’s being Done about Corruption?
o National Initiative: The United States

The Foreign Corrupt Practices Act is U.S. Legislation that makes bribery
illegal. It applies to domestic or foreign operations and to company
employees as well as their agents overseas.

Sarbanes-Oxley legislation in the United States is helpful in combating
corruption through more effective governance, financial disclosure, and
public accounting oversight.
Ethics and the Environment

Companies that extract natural resources, generate air or water waste, or manufacture
products such as autos that generate pollution need to be concerned with their
environmental impact.

What is “Sustainability”?
o Sustainability involves meeting the needs of the present without compromising
the ability of future generations to meet their own needs while considering what
is best for the people and the environment.
o Sustainability is no longer just good business practice. New businesses are
emerging that are combining the idea of environmental responsibility and
profitability.

Global Warming and the Paris Agreement on Climate Change
o Global warming results from the release of greenhouse gases that trap heat in
the atmosphere rather than allowing it to escape.
o The Paris Climate Agreement involving 187 countries targeted policies to reduce
GHG emissions to keep the global average temperature to 2 degrees Celsius
above pre-industrial levels.
26
Ethical Dilemmas of Labor Conditions

Major labor issues that MNEs get involved through FDI or purchasing from independent
manufacturers in developing countries are fair wages, child labor, working conditions,
working hours, and freedom of association.

What MNE’s Can and Can’t Do
o Some companies avoid operating in countries where child labor is employed,
whereas others try to establish responsible policies in those same countries.
Corporate Codes of Ethics: How Should a Company Behave?

Motivations for Corporate Responsibility
o Companies need to act responsibly because unethical and irresponsible
behavior.


Could result in legal sanctions,

Could result in consumer boycotts,

Could lower employee morale,

Could cost sales because of bad publicity.
Developing a Code of Conduct
o A major component in a company’s strategy for ethical and socially responsible
behavior is a code of conduct.
o Codes of conduct involve four dimensions.

Setting a global policy that must be complied with wherever the
company operates.

Communicating the code to employees, suppliers, and subcontractors.

Ensuring that policies are carried out.

Reporting results to external shareholders.
Chapter 6 – International Trade and Factor Mobility Theory
Introduction: Why Do Policymakers Rely on International Trade and Factor
Mobility Theories?

Trade theory helps managers and government policymakers focus on these questions:
o What products should we import and export?
o How much should we trade?
o With whom should we trade?
27

Some trade theories prescribe that governments should influence trade patterns;
others propose a laissez-faire treatment of trade.
Inventionist and Free Trade Theories

Mercantilism
o According to mercantilism, countries should export more than they import.
o The concept of balance of trade


Running a favorable balance of trade is not always necessarily beneficial.
Neomercantilism
o A country that practices neomercantilism attempts to run an export surplus to
achieve a social or political objective.

Free Trade Theories
o In Chapter 1, we observe that nations have been reducing barriers to the
movement of trade and production factors because competition spurs efficiency
and consumers want a greater variety of goods and services at lower prices.

Theory of Absolute Advantage
o According to Adam Smith, a country’s wealth is based on available goods and
services for its residents rather than on gold.
o Specialization increases efficiency because:

Labor skills improve,

Less time is lost by not switching production,

It incentivizes better working methods.
o Natural Advantage

Natural advantage considers climate, natural resources, and labor force
availability.
o Acquired Advantage

Acquired advantage occurs through either product or process
technology.
o Free trade will bring:

28

Specialization,

Higher global output
Theory of Comparative Advantage
o Gains from trade will occur even in a country that has absolute advantage in all
products, because the country must give up less efficient output to produce
more efficient output.

Theories of Specialization: Some Assumptions and Limitations
o Full employment

Full employment is not necessarily a valid assumption of absolute and
comparative advantage.
o Economic Efficiency

Countries’ goals may not be limited to economic efficiency.
o Division of Gains

Recall from Chapter 1 that individuals evaluate their well-being on both
an absolute and a comparative basis. In Chapter 2 we noted national
differences in preference for “live to work” vs. “work to live.”
o Transport Costs
o Insufficient Demands
o Statics and Dynamics

Countries’ absolute and comparative advantage can change.
o Services

Free trade advantages apply to services as well as physical products.
o Production Networks

Chapter 1 explained that many products are partially made in different
countries. Nevertheless, the concepts of absolute and comparative
advantage hold in these instances.
o Mobility

Neither domestic labor mobility nor international labor immobility is as
great as implied by the free trade theories.
Theories to Explain National Trade Patterns

How Much Does a Country Trade?
o Theory of Country Size

Bigger countries (in terms of land mass) differ in several ways from
smaller countries. They

29
Tend to export a smaller portion of output and import a smaller
part of consumption (they rely on trade less)

Have higher average transport costs for foreign trade.
o Size of the Economy


Larger economies are the bigger traders because they produce and
consume more
What Types of Products Does a Country Trade
o Factor Proportions Theory

According to the factor proportions theory, countries have their best
trade advantage when depending on their relatively abundant
production factors.

A Closer Observation



Process Technology

Companies may substitute capital for labor, depending on the
cost of each.

Countries with bigger markets depend more on producing
products requiring larger production runs.
Product technology


Product factors, such as land and labor, are not homogeneous.
Most new products originate in developed countries.
With Whom do Countries Trade?
o Country-Similarity Theory


Developed countries trade primarily with each other because they:

Produce and consume more,

Emphasize technical breakthroughs in different industrial sectors
(specialization and acquired advantage).
Product Differentiation


Product differentiation causes countries to conduct two-way
trade in seemingly similar products.
Trading partners are affected by:

Cultural similarity
o In Chapter 2 we showed that a company should expect
fewer adjustments when moving to a country whose
culture is close to that of its home base.
30

Political relations between countries

Distance
The Dynamics of Export Capabilities

Product Life Cycle (PLC) Theory
o According to the PLC Theory of trade, the production location for many
products moves from one country to another depending on the stage in the
product’s life cycle.

Product Introduction

The introduction stage is marked by:
o Innovation in response to observed need,
o Exporting by the innovative country,
o Evolving product characteristics.

Growth

Growth is characterized by:
o Increase in exports by the innovating country,
o More competition,
o Increased capital intensity,
o Some foreign production.

Maturity

Maturity is characterized by:
o A decline in exports from the innovating country,
o More product standardization,
o More capital intensity,
o Increased competitiveness of price,
o Production start-ups in emerging economies

Decline

Decline is characterized by
o A concentration of production in developing countries,
o An innovating country becoming a net importer.
o Verification and Limitations of PLC Theory

31
Not all products conform to the dynamics of PLC.

The Diamond of National Competitiveness Advantage
o According to the diamond of national competitive advantage theory,
companies’ development and maintenance of internationally competitive
products depends on favorable:

Demand conditions,

Factor conditions,

Related and supporting industries,

Firm strategy, structure, and rivalry.
o Limitations of the Diamond of National Advantage Theory

Domestic existence of all conditions:

Does not guarantee an industry will develop,

Is not necessary with globalization.
The Theory and Major Effects of Factor Mobility

Factor mobility theory focuses on why production factors move, the effects of the
movement on transforming factor endowments, and the impact of international factor
mobility (especially people) on world trade.

Why Production Factors Move
o Capital and labor move internationally to:


Gain more income,

Flee adverse political situations.
Effects of Factor Movements
o Factor movements alter factor endowments.

Brain drain.
The Relationship Between Trade and Factor Mobility

Substitution
o There are pressures for the most abundant factors to move to areas of scarcity.

Complementarity
o Factor mobility through foreign investment often stimulates trade because of:
32

The need for components,

The parent company’s ability to sell complementary products,

The need for equipment for subsidiaries.

In Chapter 2, we emphasized societal differences in trust along with strength in family
ties, especially as it affects trust. We also discussed that higher trust reduces the cost of
business transactions.
Chapter 7 – Governmental Influence on Trade
Conflicting Outcomes of Trade Protectionism

All countries seek to influence trade and respond to their economic, social, and political
objectives.

Chapter 6 demonstrates how specialization and free trade can increase output, but
here we point out that protectionist policies, although sometimes warranted, can lead
to conflicting outcomes.

The Role of Stakeholders
o Those stakeholders affected by trade regulations push hardest for trade rules
favorable to them.
Economic Rationales for Governmental Trade Intervention and Outcome
Uncertainties

Fighting Unemployment
o The unemployed can form an effective pressure group form import restrictions.
o Import restrictions to create domestic employment:


May lead to retaliation by other countries,

Affect large and small economies differently,

Reduce import handling jobs,

May decrease jobs in another industry,

May decrease export jobs because of lower incomes abroad.
Protecting “Infant Industries”
o The infant-industry argument says that production becomes more competitive
over time because of

Increased economies of scale,

Greater worker efficiency
o In Chapter 6, we discuss governmental problems to determine what industries
to support in a strategic trade policy and the difficulty of removing the support if
the industries do not become globally competitive.
o Who Should Bear the Cost?
33


Possible costs of import restrictions include higher prices and higher
taxes. Such costs should be compared with those of unemployment.
Developing an Industrial Base
o Countries seek protection to promote industrialization because that type of
production:

Can use surplus agricultural worker more easily,

Brings in investment funds,

Diversifies the economy,

Brings faster growth than primary products do.
o Surplus workers

When a country shifts from agriculture to industry

Output may increase if the agricultural workers produced little
before,

Demands on social and political services may increase,

Development possibilities in the agricultural sector may be
overlooked,

Industrial jobs may not be forthcoming.
o Investment Inflows

If import restrictions keep out foreign-made goods, foreign companies
may invest to produce in the restricted area.
o Diversification

Although demand and prices for commodities fluctuate markedly, a shift
to production of manufactures creates competitive risk.
o Growth in Manufactured Goods

Terms of trade may deteriorate because

Demand for primary products grows more slowly than
manufactured ones.

Production cost savings for primary products will be passed on to
consumers.
o Import Substitution and Export-Led Development

Industrialization emphasizes either:

34
Products to sell domestically,


Or products to export.
Economic Relationship With Other Countries
o Balance-of-Trade Adjustments
o If domestic producers have less access to foreign markets than foreign
producers’ have to their market,

They may be disadvantaged,

Restricting foreign entry may disadvantage domestic consumers,

Negotiation equal market access for each product is impractical.
o Import Restrictions as a Bargaining Tool

Successful countries’ threats to levy trade restrictions to coerce other
countries to change their policies:

Must be believable.

Involve products important to the other countries.
o Export Restrictions

Export Restrictions may:

Raise world prices,

Require more control to prevent smuggling,

Be ineffective for digital products,

Lead to product substitution or new ways to produce the product,

Keep domestic prices down by increasing domestic supply,

Give producers less incentive to increase output.
o Discussion of neomercantilism in Chapter 6 explained that countries may
attempt to shift their economic and social problems abroad.
o Dumping:

May be used to introduce a new product,

May cause higher prices or subsidies in the exporting country,

Is hard to prove.
o An optimum-tariff theory is one by which a foreign product lowers its export
prices when an importing country places a tax on its products.
o An optimum tariff’s success:

35
Shifts revenue to an importing country.

Is difficult to predict,

May cause lower worker income in developing countries.
Governments’ Noneconomic Rationales and Outcome for Trade Intervention

Maintaining Essential Industries
o In protecting essential industries, countries must:


Determine which ones are essential,

Consider costs and alternatives,

Consider political and economic consequences.
Promoting Acceptable Practices Abroad
o Trade limitations may be used to compel a foreign country to amend an
objectionable practice.

Maintaining or Extending Spheres of Influence

Preserving National Culture
o We observe in Chapter 2 that a primary function of culture is that it supports a
nation’s sense of uniqueness and integrity.
Major Instruments of Trade Control

Tariffs may be levied:
o On goods entering, leaving, or passing through a country,
o For protection or revenue,
o On a per-unit bases, a value basis, or both.

Developing countries argue that their processed portion of commodities have higher
than the published rate.
Nontariff Barriers: Direct Price Influences

Subsidies
o Government subsidies may help companies be competitive:


But there is little agreement on what a subsidy is,

But agricultural subsidies are difficult to dismantle,

Especially to overcome market imperfections because they are least
controversial.
Because it is difficult for customs officials to determine the honesty of import invoices,
o Valuation procedures have been developed,
36
o They may restate the value,
o They may question the origin of and product-classification of imports.
Nontariff Barriers: Quantity Control

Quotas
o A quota may:


Be on imports or exports,

Set the total amount to be traded,

Allocate amounts by country,

Be negotiated as a voluntary export restraint.

Prohibit all trade when it is an embargo.
“Buy Local” Legislation
o Through “buy local” rules”


Government purchases give preference to domestically made goods,

Governments sometimes legislate a percentage of domestic content.
Standards and Labels
o Other types of trade barriers include:

Arbitrary standards,

Importing, exporting, and currency licensing,

Administrative delays,

Reciprocal requirements,

Service restrictions.

For:
o Essentiality,
o Preference for not-for-profit operations,
o Different professional standards,
o Immigration.

37
In discussing Factor mobility in Chapter 6, we
explain the increasing reliance on people as an
internationally mobile production factor and that
countries hand out immigration papers only
sparingly.
How Companies Deal With Governmental Trade Influences

When facing import competition, companies can:
o Move abroad or find foreign supplies,
o Seek other market niches,
o Make domestic output competitive,
o Try to get protection.
Chapter 9 – Global Foreign Exchange Markets
What is Foreign Exchange and Who are the Major Players in the Market?

When introduced the idea on Multinational Enterprise (MNE) in Chapter 1, we
emphasized that MNEs are firms that take a global approach to production and
markets. Here we add that the need to deal with foreign exchange is one of the
important factors in the environment in which MNEs must conduct business.

Foreign exchange—money denominated in the currency of another nation or group of
nations; an exchange rate is the price of a currency.

The Bank for International Settlements divides the foreign-exchange market into
reporting dealers (also known as dealer banks or money center banks), other financial
institutions, and nonfinancial institutions.
Some Aspects of the Foreign-Exchange Market

How To Trade Foreign Exchange
o Dealers can trade foreign exchange:

Directly with customers,

Through voice brokers,

Through electronic brokerage systems,

Directly through interbanks.
o Foreign-Exchange market:


Over-the-counter (OTC) commercial and investment banks

Securities exchange,
Global OTC Foreign Exchange Instruments
o The spot rate is the exchange rate quoted for transactions that require delivery
within two days.
o Outright forwards involve the exchange of currency beyond three days at a fixed
exchange rate, known as the forward rate.
38
o An FX swap is a simultaneous spot and forward transaction.
o Currency swaps, options, and future contacts are other forms of transactions in
foreign exchange.

Size, Composition, and Location of the Foreign-Exchange Government
o The most widely traded currencies in the world are those issued by countries
that enjoy high levels of political freedom and economic freedom.
o The dollar, the most traded currency in the world, is part of four of the top seven
currency pairs: the dollar/euro and the dollar/yen are the top two.
o The biggest market for foreign exchange is London, followed by New York,
Tokyo, and Singapore.
Major Foreign-Exchange Markets

The Spot Market
o Key foreign exchange terms:


Bid—the rate at which traders buy foreign exchange.

Offer—the rate at which traders sell foreign exchange.

Spread—the difference between bid and offer rates.

American terms, or direct quote—the number of dollars per unit of
foreign currency.

European terms, or indirect quote—the number of units of foreign
currency per dollar.
The Forward Market
o The forward rate is the rate quoted for transactions that call for delivery after
two business days.
o A forward discount exists when the forward rate is weaker than the spot rate.
o A premium exists when the forward rate is stronger than the spot rate.

Options
o An option is the right, but not the obligation, to trade a foreign currency at a
specific exchange rate.

Futures
o A futures contract specifies an exchange rate in advance of the actual exchange
of currency, but it is not as flexible as a forward contract.
The Foreign-Exchange Trading Process
39

Banks and Exchanges
o The top banks in the interbank market are chosen because of their location,
expertise in major and specific currencies, and ability to deal in different
financial instruments
o In chapter 12, we explain why companies establish and maintain effective value
chains—frameworks for dividing value-creating activities into separate
processes. A reliable value chain permits a firm to focus on its core
competencies—the unique skills or knowledge that make it better at something
than its competitors. Because managing currencies and cross-trades is typically
not among a firm’s core competencies, its bankers are key components of its
value chain.

Top Exchanges for Trading Foreign Exchange
o Major exchanges that deal in foreign currency derivatives are the CME Group,
NASDAQ, and NYSE:ICE.
How Companies Use Foreign Exchange

Cash Flow Aspects of Imports and Exports
o Commercial Bill of Exchange

With a draft or commercial bill of exchange, one party directs another
party to make payment.

A sight draft requires payment to be made when it is presented. A time
draft permits payment to be made after the date when it is presented.
o Letters of Credit


A letter of credit obligates the buyer’s bank to honor a draft presented to
it and assume payment; a credit relationship exists between the importer
and the importer’s bank.
Other Financial Flows
o Speculation

Speculators take positions in foreign-exchange markets and other
capital markets to earn a profit.
o Arbitrage
40

Arbitrage is the buying and selling of foreign currencies at a profit due to
price discrepancies.

Interest arbitrage involves investing in interest-bearing instruments in
foreign exchange to earn a profit due to interest rate differentials.
Chapter 10 – The Determination of Exchange Rates

Recall that we devote Chapter 9 to discussions of the foreign-exchange market, the
ways in which currencies are quoted and traded, and the various instruments through
which foreign exchange may be traded. In this chapter, we shift our focus to the ways in
which currency values are determined, considering especially the roles of governments
and the vagaries of the market.
The International Monetary Fund

Origin and Objectives
o In Chapter 8, we report on the establishment of the United Nations and the
subsequent creation of a number of UN satellite organizations, including the
IMD. Today, the IMF is in a position to influence economic policy among UN
member nations.
o Bretton Woods and the Principle of Par Value


The Bretton Woods Agreement established a par value, or benchmark
value, for each currency initially quoted in terms of gold and the U.S.
dollar.
The IMF today
o The IMF quota—the sum of the total assessment to each country—becomes a
pool of money that the IMF can draw on to lend to other countries. It forms the
basis for the voting power of each country—the higher its individual quota, the
more votes a country has.
o Special Drawing Rights (SDR)


The SDR is

An international reserve asset given to each country to help
increase its reserves,

The unit of account in which the IMF keeps its financial records.
Currencies making up the SDR basket are the U.S. dollar, the euro, the
Chinese renminbi, the Japanese yen, and the British pound. The Chinese
renminbi (yuan) was added in 2016.
o The Smithsonian Agreement

Exchange-rate flexibility was widened in 1971 from 1% to 2.25% from par
value.
o The Jamaica Agreement

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The Jamaica Agreement of 1976 resulted in greater exchange-rate
flexibility and eliminated the use of par values.
Exchange Rate Agreements

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