Autumn Semester
1. Economics and Ecology
2. European Union
3. Getting a job – Internet sources, see http://samba.fsv.cuni.cz/~stankova or
http://samba.fsv.cuni.cz/~poslusna
4. Globalization
5. Demography
6. Immigration
7. Cultural diversity
8. Business ethics
9. Takeovers and mergers
10. Taxation
1. Economics and Ecology
Source: English for Business Studies, Ian MacKenzie (Cambridge University Press)
Turning filthy air into a highly tradable asset
Marc Tran
The day is not far off when investors can trade in smog bonds or smog futures in
addition to pork bellies as the notion gains ground that financial markets have a positive
role to play in reducing pollution. The Chicago Board of Trade is already working
on plans to set up a market for sulphur dioxide, and the exchange is also interested in
running a market in international carbon dioxide.
Pollution rights or emission rights, long advocated by economists, were endorsed in
the 1990 Clean Air Act, which allowed polluters the right to meet government limits by
buying and selling sulphur dioxide allowances or credits. Southern California last week
became the first region to adopt this market approach on a large scale. The plan would set
levels by which polluters would have to reduce their emissions each year, but would not
tell them how to do it.
Businesses that developed techniques or technologies to reduce their emissions below
the required levels would accumulate credits they could sell on the open market to other
companies that were unable to meet the requirements or found it uneconomical to do
so. Rather than being all stick, the approach dangles carrots as pollution control becomes
a profit opportunity instead of simply a regulatory burden. A radical departure from the
present regulatory methods, southern California's success or failure will have an important
bearing on future anti-pollution efforts.
The market approach has even been adopted by the United Nations
Conference on Trade and Development (UNCTAD) to combat global warming.
Growing numbers of scientists believe that, within 50 years, the Earth's temperature will
climb to dangerous levels, eventually leading to coastal flooding, severe storms and
drought. Carbon dioxide pollution from factories, power generators and cars is the biggest
single contributor to global warming.
UNCTAD's proposal would work like this: each polluting company is issued with a
certain number of carbon dioxide credits a year. Each credit entitles a company to emit
one tonne of carbon dioxide a year; and the credits are traded in bundles of 100.
Companies would be able to buy additional credits as needed.
The number of credits would be tightly controlled by a global Environmental
Protection Agency, and reduced over a number of years. Inefficient companies that
release huge quantities of carbon dioxide would face increasingly steep payments
for the credits they need, while cleaner companies could make a profit by selling their
credits on the open market. The UN also recommends the creation of exchangebased and over-the-counter futures and options markets in the pollution rights.
In the case of southern California, a green group, the Natural Resources Defence
Council, generally in favour of market incentives such as a lax on carbon dioxide
emissions, urges caution. Veronica Kun, a staff scientist with NRDC in Los Angeles,
suggests that the southern Californian programme be limited at first to sources of
nitrogen oxide, such as oil refineries and utilities, which have the advantage of being easier
to monitor. Limiting pollution rights to less damaging gases would also avoid the danger
of building up pollution 'hot spots'. At a location where a company is buying pollution
rights, it is possible in the short term for air quality to worsen. The EPA would have
to monitor trading to avoid concentrating too much pollution in one place.
Monitoring poses a complicated problem. The number of credits owned by a company
depends on how much it has reduced its emissions, which has to be certified by the EPA. In
the late 1970s, when the EPA first experimented with trading in emission rights, much
cheating occurred, such as selling rights based on a plant that closed years ago. That could
happen again as companies that shut down plants claim credits without actually improving the
environment. Even alter pollution credits are assigned and sold, the EPA must keep track of
emissions from both buyers and sellers, a task that could increase the EPA's annual budget
of about $5 billion.
Other environmental groups, such as Environmental Action and Greenpeace strongly oppose
the notion of pollution as a property right or an asset rather than a social evil to be vanquished.
and argue that the market-based approach becomes a way of legitimizing pollution rather than
restricting it. Environmental groups in developing countries are particularly suspicious of
the UNCTAD plan. They assert that industrialized countries have a responsibility to reduce their
own carbon dioxide emissions and that responsibility should not be transferred abroad.
By investing cheaply in industries in developing countries, a company from an
industrialized country reduces pollution at home, gains credibility but has found somewhere
else to pollute. Developing countries could become international pollution 'hot spots'. This
distributional problem comes on top of the organizational nightmare posed by trying to
combine in a single system nations at varying stages of economic development with vastly
different environmental laws.
2. European Union
Money-go-round
Jul 26th 2007
From The Economist print edition
Why the European Union is spending billions in rich countries
David Simonds
These days can be a trying time for hardline Eurosceptics). When they motor to picturesque
corners of the continent after months of fretting about the powers of the European Union, they
find themselves baited and enraged by countless billboards bearing the blue-and-gold
European flag, announcing the EU's generosity in building some bridge, highway or
waterworks.
These are the spoor of the EU's “cohesion policy”, a gigantic redistribution scheme that will
eat up more than a third of the EU budget, about €350 billion ($480 billion) over seven years.
Since its beginnings, the EU has sent money to far-flung, rural and poor parts, to help them
catch up with the rest. The money goes mostly to regions rather than national governments,
and there are rewards for cross-border schemes involving more than one country. All this has
long bred suspicions among sceptics that regional funding is a Euro-wheeze to minimise (or
erase) ancient national frontiers, in preparation for a federal Europe.
Those who inhabit the illiberal fringes of Euroscepticism are currently very cross about the
tens of billions of euros being transferred annually from rich “old Europe” to the newest
members. To quote Nigel Farage, a member of the European Parliament and leader of the
(self-explanatory) United Kingdom Independence Party: “Why should our money go to new
sewers in Budapest and a new underground in Warsaw when public services in London are
crumbling?”
Not for the first time, however, the angry brigade is aiming at the wrong target. True, the
European Commission has created a “client base of regional actors who swarm around
Brussels, and don't trust national treasuries,” in the words of one EU diplomat. But nation
states rule the roost. The EU always requires nations or regions to put up some (often quite
hefty) matching funds. Any regional scheme too extravagant, or daft, to attract national
matching funds usually withers and dies.
Rich countries have much to gain from an EU single market that strives for free movement of
people, goods and capital. And there are sound economic and political arguments for
investing in backward parts of such an open economic zone. EU projects in poor
neighbourhoods are notoriously prone to corruption and waste, but the risks are matched by
high rates of return. Invest the right funds in new members, and you can create new
consumers and new markets, stabilise fragile democracies and limit the risk of massive,
uncontrolled migration within the EU.
The scandal is not that the EU shifts money from rich countries to poorer newcomers, but that
it recycles large sums straight back to wealthy countries. Some of the least needy countries in
the EU recoup tens of billions of euros. This is usually because they have some relatively poor
regions (eg, Germany's eastern states, or Italy's south).
In the prolonged negotiations over the current budget, the Netherlands, Sweden and Britain
(all countries that get measly returns from the cohesion policy) took a cue from the influential
2003 Sapir report on EU finances and proposed that rich countries should pay for their own
regional projects, with less meddling from Brussels. But they were defeated. More than that,
the EU budget for 2007-13 includes a new scheme dreamt up by the European Commission to
spread money (often small sums) to all EU regions, even the richest. Under the twin rubrics of
“competitiveness and employment” and “transnational co-operation”, the commission will
spend more than €50 billion over seven years in prosperous countries.
Ask commission officials to defend such spending policies, and they offer a variety of
reasons. They say, for instance, that their funds are the only reason some nice things (like art
galleries in England) have been built, arguing that national authorities were not that interested
until Brussels got involved. Perhaps so. But is curing British philistinism a job for Brussels?
Eurocrats talk of the efficiency of spending money through regions. This is debatable:
Brussels is a fearsome generator of paperwork and meetings, even when very modest funds
are on offer. And the point is irrelevant, anyway. Britain, for example, promised that if
allowed to fund its own projects, the money would still flow through regional and local
institutions.
Most revealingly, Euro-officials talk of the need visibly to spread largesse to every corner of
the EU. People in rich regions must also see the fruits of cohesion spending, the argument
goes, or they may resent sending money to poorer neighbours and come to see the EU as
nothing but a machine for emitting annoying rules and regulations. Danuta Hübner, the EU
commissioner for regional policy, says her funds shore up a sense of European “solidarity”
across the EU. “Frankly speaking, this is a policy that is sometimes the only proof that
Brussels exists, if you go to the regions that are quite far from national capitals.”
Flying the flag
Brussels takes “visibility” seriously. The rules for regional funds include instructions on the
design of those European billboards that so irritate Eurosceptic motorists: at least one-quarter
of the sign must be taken up with the EU flag and the name of the EU fund involved, and
preferably the slogan: “Investing in your future”. In addition, every regional or central
government body that manages EU-funded projects must mark Europe Day (May 9th) by
flying the European flag outside its premises for a week.
Such policies are worse than silly; they are defeatist. They assume voters in rich EU nations
must be bribed with their own money before accepting the benefits of free trade and open
borders. Cohesion funds have been greatly expanded as part of a grand bargain two decades
ago to help poorer states adapt to the rigours of the single market. Such rational investment
was the right way to create a large and liberal open market. Bribery of the rich is wrong—and
no number of smart EU billboards advertising such bribery can change that.
3. Getting a job – Internet sources, see http://samba.fsv.cuni.cz/
4. Globalization
From The Economist print edition
Investment banks are scouring the globe for new business
MAKE the mistake of describing Goldman Sachs as “sort of a global bank” to Lloyd
Blankfein, its boss, and you get a thundering response: “Sort of! What do you mean, sort of?”
Empire-building is as important to investment banks today as it was to their forebears more
than a century ago, when Citibank had offices from Mexico City to Manila and Deutsche
Bank financed railways from the Wild West to Baghdad. As in that earlier era, capital now
moves effortlessly across time-zones, political systems and asset classes. Within the past
decade Europe's single currency has taken root and China and India have grown flush with
capital, as have oil exporters such as Russia and the Gulf states. Japan, too, has begun to
emerge from a decade of stagnation. America, meanwhile, has wrapped up its own financial
markets in red tape and may be losing its hegemony.
Huw van Steenis at Morgan Stanley in London estimates that securities markets outside
America are expanding three times faster than those within, which they overtook in size in the
first half of 2006. The pace of debt and share issuance in Europe since 2002 has easily
outstripped that in America. Since 2005 volumes of mergers and acquisitions outside America
have been larger than inside. And revenues of the biggest Wall Street banks' subsidiaries
generated from trading in Europe have doubled since 2000 (see chart 8).
Yet there is room for further growth. McKinsey calculates that in 1995 the outstanding stock
of debt and equity securities in the future euro-zone countries was 1.3 times the size of their
collective GDP. By 2004 it had grown to 2.4 times. But it still fell short of America's, where
the capital markets were more than triple the size of the economy. Investment banks' sales and
trading revenues in Europe still represent only 50-60% of those in America.
Gregory Fleming, the ebullient head of markets and investment banking at Merrill Lynch in
New York, predicts that in perhaps only seven years' time up to 75% of his firm's global
markets and investment-banking revenues may come from outside America, compared with
50% now. “This is not because of a lack of growth in this country. It is more because of
growth of economies around the world,” he says. “For the first time there is a broad-based
global financial system.”
Next stop the N11
Having already occupied Europe, the top ten investment banks have set their sights on the rest
of the world, too. Almost all of them are now increasingly involved in the so-called BRIC
economies, Brazil, Russia, India and China. Next in line may be some of those Goldman has
dubbed the N11 (for next 11); in alphabetical order, Bangladesh, Egypt, Indonesia, Iran,
South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.
Banks have travelled these trade routes before in moments of global bullishness, probably
once a decade, only to retreat hastily after some emerging-market crisis. But this time they
believe it will be different. They are not just seeking to sell cheap emerging-markets assets to
investors from the rich world. The developing world, with big, commodity-rich companies
and surplus savings looking for safe returns, is itself shopping in the West for everything from
Treasury bonds to wax museums and steel plants.
The abundance of petrodollars and hard-currency reserves is one reason why the world is
awash with liquidity and long-term interest rates are low. But many emerging markets have
lower domestic borrowing costs too, thanks to investment-grade debt ratings and nascent
domestic capital markets. Mr Klein of Citigroup notes that it now costs the same to borrow
overnight from a bank in China as from one in Germany. “The last remaining wall separating
emerging markets from developed markets, the cost of capital, has been almost eliminated in
the past four years,” he says.
As a result, large developing-country companies with global ambitions, such as China's
CNOOC, Russia's Gazprom or India's Tata Steel, can get access to international finance as
readily as their counterparts from the rich world. That means investment banks have to deploy
more staff on the ground to find out what these firms are up to. “These are large, highly
complex companies with increasingly complicated needs. To really understand a company
like Gazprom requires more than just an occasional visit from head office,” explains Jonathan
Chenevix-Trench, chairman of Morgan Stanley International.
Putting down roots
But what is the best way to tackle global expansion? Citigroup, for example, has offices in
106 countries and can afford to deploy lots of staff. For the first time this year it has put large
emerging-market companies under the leadership of a single global corporate bank. It is also
betting heavily on stronger domestic markets in countries such as Russia and China. Its
philosophy, says Mr Klein, is “when you enter a country, you don't leave.”
The philosophy of pure investment banks, such as Morgan Stanley, is changing too. “Banks
used to take a cyclical approach to emerging markets, investing when assets were cheap.
When there was trouble, they would sell,” says Mr Chenevix-Trench. “Now it's not a matter
of trading assets in these countries, it's a matter of building businesses.”
To underline these new priorities, the lifts in Morgan Stanley's headquarters in London's
Canary Wharf display posters about the firm's growing involvement in the Middle East. The
firm has moved 40 bankers to Dubai, and has recently signed a joint venture with the Capital
Group in Saudi Arabia, where it acts mainly as an intermediary for the region's vast wealth. In
Russia, where it has a bigger presence, dating back to before the dark days of 1998, it is
targeting not just initial public offerings and acquisitions but also a growing domestic market.
Last year securities trading in Russia rose by over 60%, it estimates.
Morgan Stanley is also one of many banks excited by talk of a resource-rich “great crescent”
stretching from Russia through Central Asia to North Africa. The optimists—of whom there
are many in investment banking—believe this region could eventually provide the equivalent
of another Germany to capital-markets revenues. McKinsey expects the share of petrodollarrelated revenues in the industry to grow between 9% and 15% in a decade. The potential
pitfalls, however, are huge, especially in Russia, where the rulebooks are new and untested
and talent is so hard to come by that the best people shuttle between global and local banks.
Caution is indeed warranted. Credit Suisse lost $1.3 billion after Russia defaulted on its
domestic debt in 1998, and Merrill Lynch sacked staff just after the default (only to re-hire
them months later when the markets proved more resilient than it had expected). Earlier this
year Merrill secured a broking licence in Moscow, but has moved cautiously.
Many investment banks expanding in emerging markets have trouble finding local people
whom they can trust to maintain the firm's risk-management culture. This has become all the
more important because investment banks are increasingly devolving risk-taking
responsibility to regional hubs and even local offices. Risk management is following.
“As recently as five years ago, Merrill Lynch had a New York-centric operating model with a
lot of global products managed from here,” says Mr Fleming. This is changing. Banks now
tend to believe that the closer they are to their markets, the better they are able to assess the
risks.
Lehman Brothers is also actively considering decentralisation, says Jeremy Isaacs, its chief
executive in London. Until now the people running its main global divisions have been based
in New York. But in early May the firm announced that the new head of its global fixedincome business would be working from London.
The region that probably has a greater variety of local peculiarities than anywhere else—and
where investment-banking revenues have grown fastest recently—is Asia.
5. Demography
How to deal with a falling population
Jul 26th 2007
From The Economist print edition
Worries about a population explosion have been replaced by fears of decline
Getty Images
THE population of bugs in a Petri dish typically increases in an S-shaped curve. To start with,
the line is flat because the colony is barely growing. Then the slope rises ever more steeply as
bacteria proliferate until it reaches an inflection point. After that, the curve flattens out as the
colony stops growing.
Overcrowding and a shortage of resources constrain bug populations. The reasons for the
growth of the human population may be different, but the pattern may be surprisingly similar.
For thousands of years, the number of people in the world inched up. Then there was a sudden
spurt during the industrial revolution which produced, between 1900 and 2000, a nearquadrupling of the world's population.
Numbers are still growing; but recently—it is impossible to know exactly when—an
inflection point seems to have been reached. The rate of population increase began to slow. In
more and more countries, women started having fewer children than the number required to
keep populations stable. Four out of nine people already live in countries in which the fertility
rate has dipped below the replacement rate. Last year the United Nations said it thought the
world's average fertility would fall below replacement by 2025. Demographers expect the
global population to peak at around 10 billion (it is now 6.5 billion) by mid-century.
As population predictions have changed in the past few years, so have attitudes. The panic
about resource constraints that prevailed during the 1970s and 1980s, when the population
was rising through the steep part of the S-curve, has given way to a new concern: that the
number of people in the world is likely to start falling.
The shrinking bits
Some regard this as a cause for celebration, on the ground that there are obviously too many
people on the planet. But too many for what? There doesn't seem to be much danger of a
Malthusian catastrophe. Mankind appropriates about a quarter of what is known as the net
primary production of the Earth (this is the plant tissue created by photosynthesis)—a lot, but
hardly near the point of exhaustion. The price of raw materials reflects their scarcity and,
despite recent rises, commodity prices have fallen sharply in real terms during the past
century. By that measure, raw materials have become more abundant, not scarcer. Certainly,
the impact that people have on the climate is a problem; but the solution lies in consuming
less fossil fuel, not in manipulating population levels.
Nor does the opposite problem—that the population will fall so fast or so far that civilisation
is threatened—seem a real danger. The projections suggest a flattening off and then a slight
decline in the foreseeable future.
If the world's population does not look like rising or shrinking to unmanageable levels, surely
governments can watch its progress with equanimity? Not quite. Adjusting to decline poses
problems, which three areas of the world—central and eastern Europe, from Germany to
Russia; the northern Mediterranean; and parts of East Asia, including Japan and South
Korea—are already facing.
Think of twentysomethings as a single workforce, the best educated there is. In Japan, that
workforce will shrink by a fifth in the next decade—a considerable loss of knowledge and
skills. At the other end of the age spectrum, state pensions systems face difficulties now,
when there are four people of working age to each retired person. By 2030, Japan and Italy
will have only two per retiree; by 2050, the ratio will be three to two. An ageing, shrinking
population poses problems in other, surprising ways. The Russian army has had to tighten up
conscription because there are not enough young men around. In Japan, rural areas have borne
the brunt of population decline, which is so bad that one village wants to give up and turn
itself into an industrial-waste dump.
A fertile side-effect
States should not be in the business of pushing people to have babies. If women decide to
spend their 20s clubbing rather than child-rearing, and their cash on handbags rather than
nappies, that's up to them. But the transition to a lower population can be a difficult one, and
it is up to governments to ease it. Fortunately, there are a number of ways of going about it—
most of which involve social changes that are desirable in themselves.
The best way to ease the transition towards a smaller population would be to encourage
people to work for longer, and remove the barriers that prevent them from doing so. State
pension ages need raising. Mandatory retirement ages need to go. They're bad not just for
society, which has to pay the pensions of perfectly capable people who have been put out to
grass, but also for companies, which would do better to use performance, rather than age, as a
criterion for employing people. Rigid salary structures in which pay rises with seniority (as in
Japan) should also be replaced with more flexible ones. More immigration would ease labour
shortages, though it would not stop the ageing of societies because the numbers required
would be too vast. Policies to encourage women into the workplace, through better provisions
for child care and parental leave, can also help redress the balance between workers and
retirees.
Some of those measures might have an interesting side-effect. America and north-western
Europe once also faced demographic decline, but are growing again, and not just because of
immigration. All sorts of factors may be involved; but one obvious candidate is the efforts
those countries have made to ease the business of being a working parent. Most of the
changes had nothing to do with population policy: they were carried out to make labour
markets efficient or advance sexual equality. But they had the effect of increasing fertility. As
traditional societies modernise, fertility falls. In traditional societies with modern
economies—Japan and Italy, for instance—fertility falls the most. And in societies which
make breeding and working compatible, by contrast, women tend to do both.
6. Immigration
Nowhere to hide
Jul 5th 2007 | SAN DIEGO AND SCOTTSDALE
From The Economist print edition
The failure of immigration reform will have unfortunate consequences
DESPITE its name, Smugglers' Gulch is one of the toughest places to sneak into America.
The ravine near San Diego is bisected by a steel wall and watched day and night by agents of
the border patrol, who track would-be illegal immigrants with the help of floodlights,
helicopters and underground pressure sensors. Rafael, a cement worker, has already been
caught jumping over the fence five times. Yet he still loiters on the Mexican side of the fence,
waiting for nightfall and another chance to cross. How much longer will he keep trying?
“Until I get through,” he says.
Last week the Senate tried, and failed, to deal with the problem of illegal immigration. After
much debate it abandoned a bill that would have provided more money for border security but
also allowed many illegal immigrants to obtain visas. Liberals had argued that the sheer
number of people like Rafael—some 12m are thought to be living illegally in America—made
reform more urgent. For some Republicans, and the small but loud nativist posse who
hectored them, it made anything resembling an amnesty unpalatable.
Piecemeal legislation may follow, strengthening the border and, perhaps, making it easier for
farmers to employ foreign workers. But a bill that deals realistically with the huge number of
illegals in America will be stymied until at least 2009, when the next president is sworn in.
And it may take much longer. Any politician who is tempted to throw his weight behind
immigration reform may consider the fate of John McCain, the presidential candidate most
strongly associated with the Senate bill. His support among Republicans has eroded in the
past two months and he is struggling to raise money.
Yet the collapse of the Senate bill does not mean illegal immigration will go away, either as a
fact or as an urgent political issue. Indeed, one likely consequence will be an outbreak of ad
hoc law-making in cities and states. Liberal and Hispanic enclaves may follow the example of
National City, on the outskirts of San Diego, and declare themselves to be “sanctuary cities”
where police officers are told not to quiz people about their immigration status. Others—
probably a greater number—will tell the cops to do precisely that, or enact other laws against
illegal immigrants and the people who house and employ them.
One such place is Arizona, where Janet Napolitano, the governor, signed a bill this week
imposing stiff penalties on employers who hire illegal immigrants. Those who are caught
once will have their licences suspended; a second offence will put them out of business. Even
the governor admits the bill is too broadly drawn and will be hard to enforce. She signed it,
she explained, because the federal government has shown itself to be incapable of dealing
with illegal immigration.
One in ten workers in Arizona is illegal, according to the Pew Hispanic Centre. So the law, if
rigorously enforced, could disrupt the state's economy. Which suggests it will not be. One
landscape gardener in Scottsdale who worked illegally for three decades and now pays illicit
workers $7 an hour thinks the measure is ridiculous. “Who else is going to pick lettuces and
trim trees in this heat?” he asks, pointing to the sun on a 47°C (117°F) day. He has no plans to
change his ways, and says he will simply move if he is caught.
Laws such as Arizona's will make life more unpleasant and unpredictable for illegal workers.
But they will not curtail either illegal immigration or illicit working as much as supporters
claim. Subcontracting, which is common both in farming and in the construction business,
makes it difficult to punish companies for employing dodgy workers. In any case, the border
has been so porous for so long that people now have plenty of reasons to steal across it other
than work. Of five aspiring immigrants who spoke to your correspondent in Smugglers' Gulch
earlier this week, three were trying to join their families.
Those who defeated the Senate's immigration bill won a pyrrhic victory. Not only did they
sacrifice funding for border policing; they also lost a guest-worker programme that would
have allowed hundreds of thousands of legal grunts into the country each year. At present,
importing temporary workers is so difficult and expensive that most bosses find it easier to
wink at illegality.
Americans have made it clear over the past year that they want the federal government to do
something about illegal immigration. It is hard to know whom they will now blame for its
failure. The nativist wing of the Republican party was fiercest in opposition to the Senate bill,
and crowed loudest over its defeat—something it may come to regret. On the other hand, the
Democrats run both chambers of Congress. Voters may decide to hold them responsible for
failing to solve the problem. That would be unfair: because of Senate rules, the Democrats can
pass nothing without Republican co-operation.
In the long term, though, anti-immigrant hardliners are likely to suffer most. Latino voters are
growing quickly in number and history suggests they will punish intolerant talk on
immigration. Mark DiCamillo, a pollster, points out that California's Hispanics used to lean
only slightly leftwards. In 1990, for example, they favoured Dianne Feinstein, the Democratic
candidate for governor, over Pete Wilson, a Republican, by 53% to 47%. Then in 1994 came
a ballot initiative, supported by Mr Wilson, which sought to make life much more difficult for
illegal immigrants. Since then California's Latinos have favoured Democrats by a margin of
between two-to-one and four-to-one.
7. Management and cultural diversity
Source: English for Business Studies, Ian MacKenzie (Cambridge University Press)
CROSS-CULTURAL MANAGEMENT
Managing a truly global multinational company would obviously be much simpler if it required
only one set of corporate objectives, goals, policies, practices, products and services. But local
differences often make this impossible. The conflict between globalization and localization has
led to the invention of the word 'glocalization'. Companies that want to be successful in foreign
markets have to be aware of the local cultural characteristics that affect the way business is done.
A fairly obvious cultural divide that has been much studied is the one between, on the one
hand, the countries of North America and north-west Europe, where management is largely based
on analysis, rationality, logic and systems, and, on the other, the Latin cultures of southern Europe
and South America, where personal relations, intuition, emotion and sensitivity are of much
greater importance.
The largely Protestant cultures on both sides of the North Atlantic (Canada, the USA, Britain, the
Netherlands, Germany, Scandinavia) are essentially individualist. In such cultures, status has to be
achieved. You don't automatically respect people just because they've been in a company for 30
years. A young, dynamic, aggressive manager with an MBA (a Master in Business Administration
degree) can quickly rise in the hierarchy. In most Latin and Asian cultures, on the contrary, status
is automatically accorded to the boss, who is more likely to be in his fifties or sixties than in his
thirties. This is
particularly true in Japan, where companies traditionally have a policy of promotion by seniority.
A 50-year-old Japanese manager, or a Greek or Italian or Chilean one, would quite simply be
offended by having to negotiate with an aggressive, well-educated, but inexperienced American or
German 20 years his junior. A Japanese would also want to take the time to get to know the
person with whom he was negotiating, and would not appreciate an assertive American who
wanted to sign a deal immediately and take the next plane home.
In northern cultures, the principle of pay-for-performance often successfully motivates sales
people. The more you sell, the more you get paid. But the principle might well be resisted in more
collectivist cultures, and in countries where rewards and promotion are expected to come with age
and experience. Trompenaars gives the example of a sales rep in an Italian subsidiary of a US
multinational company who was given a huge quarterly bonus under a new policy imposed by
head office. His sales -which had been high for years - declined dramatically during the
following three months. It was later discovered that he was deliberately trying not to sell more
than any of his colleagues, so as not to reveal their inadequacies. He was also desperate not to earn
more than his boss, which he thought would be an unthinkable humiliation that would force the
boss to resign immediately.
Trompenaars also reports that Singaporean and Indonesian managers objected that pay-forperformance caused salesmen to pressure customers into buying products they didn't really need,
which was not only bad for long term business relations, but quite simply unfair and ethically
wrong.
Another example of an American idea that doesn't work well in Latin countries is matrix
management. The task-oriented logic of matrix management conflicts with the principle of
loyalty to the all-important line superior, the functional boss. You can't have two bosses any
more than you can have two fathers. Andre Laurent, a French researcher, has said that in his
experience, French managers would rather see an organization die than tolerate a system in which a
few subordinates have to report to two bosses.
In discussing people's relationships with their boss and their colleagues and friends, Trompenaars
distinguishes between universalists and particularists. The former believe that rules are extremely
important; the latter believe that personal relationships and friendships should take precedence.
Consequently, each group thinks that the other is corrupt. Universalists say that particularists
'cannot be trusted because they will always help their friends', while the second group says of the
first 'you cannot trust them; they would not even help a friend'. According to Trompenaars' data,
there are many more particularists in Latin and Asian countries than in Australia, the USA,
Canada, or north-west Europe.
8. Business Ethics
Business Ethics
Analyst Fired for Personal Trading
FBR Says Kalla Failed To Disclose Stock Deals
By Terence O'Hara
Washington Post Staff Writer
Friday, April 22, 2005; Page E01
Susan Kalla, a well-known and widely quoted Wall Street stock analyst who accurately
predicted the collapse of the telecommunications equipment sector in 2000, was fired by
Friedman, Billings, Ramsey Group Inc. after an internal investigation into her personal stock
trading, according to sources inside and outside the company with knowledge of the matter.
"Ms. Kalla was discharged in connection with an internal review related to her obligations as
a research analyst, including her compliance with firm policies and procedures," said FBR
spokesman Bill Dixon.
"The firm's statements about me are inaccurate. . . . Beyond that I have no comment," said
Kalla, who was dismissed Friday.
FBR notified the NASD, the self-regulatory and enforcement arm of the securities industry,
that Kalla had been terminated after the firm discovered she had traded in stock for her own
account without disclosing it, according to a source who read portions of the NASD document
to a reporter.
To prevent any potential conflicts, NASD member brokerage firms such as FBR require
research analysts to disclose to the firm their personal stock trading, particularly in industries
they evaluate for investors.
The sources, who spoke on the condition of anonymity because the matter is under
investigation and in dispute between Kalla and the firm, said FBR discovered Kalla had made
at least one undisclosed trade in a telecom stock, resulting in her firing. According to FBR's
NASD filing, the firm continues to investigate the matter. A spokesman for the NASD would
not say whether it was also investigating.
The firing comes at a time of intense regulatory scrutiny of FBR. The Arlington investment
firm, which is a major underwriter of initial public stock offerings and private placements of
stock with large investors, is under investigation by the Securities and Exchange Commission
and the NASD for its 2001 role in marketing shares of Annapolis-based CompuDyne Corp. to
a group of hedge funds. A manager of one of the hedge funds has already been cited by the
NASD for allegedly profiting from inside information.
Emanuel J. Friedman abruptly retired this month as co-chairman and co-chief executive of the
firm he co-founded 16 years ago. Neither the firm nor Friedman provided a reason for his
departure. Friedman managed FBR's hedge fund business and was an active stock trader
within the firm, though none of FBR's hedge funds invested in the CompuDyne deal in 2001.
Kalla, according to her publicly available NASD file, has never been subject to any regulatory
or enforcement actions during 13 years in the securities business, nor have any clients ever
filed formal complaints against her.
Kalla, a "buy-side" analyst -- most of FBR's brokerage clients are large institutions and
wealthy investors, not small investors -- gained prominence as one of the few analysts to
predict a bubble of overcapacity at a time when most telecom equipment makers that she
followed closely were enjoying sky-high stock prices.
In the summer of 2000, for example, she was steadfastly critical of the stock price of
Linthicum-based Ciena Corp., which makes equipment for fiber-optic transmission. It hit
more than $120 a share in October 2000. It closed yesterday at $2.05, and as late as last week
-- before FBR dropped coverage of the stock -- she still had a tepid "market perform"
recommendation on Ciena.
She was favored by newspaper reporters for her crisp and often cutting comments. When
asked if banks would be unwilling to continue to lend money to local phone provider Qwest
Communications International Inc. after that company reported accounting irregularities in
2002, she expressed her doubt this way: "The banks know there is never just one cockroach in
the kitchen."
Recently, she had turned more positive on several major equipment makers, such as Cisco
Systems Inc., Lucent Technologies Inc. and Nortel Networks Corp., rating each "outperform."
In July, FBR reassigned most of her telecommunications carriers, such as Sprint Corp., Nextel
Communications Inc., Verizon Communications Inc. and SBC Communications Inc., to
fellow FBR analyst Michael G. Bowen. Kalla, however, continued to be widely quoted in
newspapers about those and other technology stocks.
© 2005 The Washington Post Company
Further reading
Business Ethics
http://ethics.georgesmay.com/
Every business owner knows that there are some aspects of work that are discretionary and
other aspects with procedures that must be followed exactly. Do your people know what these
discretionary and non-discretionary areas are?
Discretionary areas of business are those situations where you and your employees have room
to maneuver, compromise, bargain and make deals within established boundaries.
These boundaries are the non-discretionary aspects of a business.
Non-discretionary areas are topics or situations with very specific rules, regulations or other
guidance that requires one - and only one - way of acting. Compromise is unacceptable in
these areas.
Safety is one non-discretionary area that is immediately recognizable. There are certain safety
procedures that MUST be followed or there is danger to workers. However, there are other
areas where your employees may not have quite as clear an understanding of what is ethically
correct.
To act ethically, it is vitally important that you, as a business owner - and your employees understand what actions fall into which of these two areas - discretionary or nondiscretionary.
Often different organizations and businesses provide different guidelines on operational
latitude. These differences may be due to the responsibilities that employees have in
performing their jobs. Or, the job requirements permit only a certain procedure.
Universal Norms
However, there are several universal areas where zero tolerance for violations is appropriate
for all organizations. These universally accepted norms include:
 Laws and regulations.
 Public and employee safety.
 Truthfulness of records and statements.
Stop and think what would happen if you did not obey laws and regulations. Most public and
employee safety rules were created because injuries occurred or because there was obvious
danger. Business is based on trust and truthfulness. If records and statements are not accurate,
trust is lost.
Company Specific Standards
Businesses may add to this list with specific policies and procedures that they wish to enforce
for the performance of the company or to differentiate the company from competitors.
Both, the universal norms for ethical action and the specific policies and procedures that a
company adopts as standards, are areas where ethics cannot be compromised. As a business
owner, you must set the example and ensure your employees know these ethical boundaries.
This information is compiled and provided by George S. May International Company.
9. Takeovers and mergers
Down to earth with a bump
Jul 19th 2007 | ROME
From The Economist print edition
The Italian government's plan to sell its stake in Alitalia fails to take off
WHAT are your airline loyalty points worth? Alitalia's 3m MilleMiglia cardholders are
wondering how quickly they can use theirs, since their value could soon fall to zero given the
precarious and uncertain future of Alitalia, Italy's state-controlled flag-carrier. On July 17th
Air One, a privately owned Italian airline, announced that it would not bid for the shares in
Alitalia that the government offered for sale at the end of last year, initially attracting 11
expressions of interest. As potential bidders dropped out, Air One was seen as the last hope
for an Italian buyer. It said that it had decided not to make a binding offer because of the
contractual conditions, though difficulties in financing the deal probably did not help.
The lack of interest in Alitalia is not surprising, given the conditions that the buyer was
required to meet. These included taking on Alitalia's debt and maintaining its current route
structure, territorial coverage and Italian identity—keeping things pretty much as they are, in
short.
Yet Alitalia clearly needs shock therapy. Last year it reported a consolidated net loss of
€626m ($785m), having lost about €2.6 billion between 1999 and 2005. The misery has
continued this year with a pre-tax loss of €147m in the first quarter. Alitalia's difficulties are
such that Consob, Italy's stockmarket regulator, requires the airline to report on its financial
position every month. At the end of May the group had net debt of €1.05 billion and €466m in
net available funds. Without new capital Alitalia is close to stalling, as cash reserves run low
and creditors start to worry more about getting paid.
Clearly a buyer will need deep pockets to keep Alitalia airborne. Air One had hoped that
Intesa Sanpaolo, Italy's second-largest bank, would provide them. But could such a tiny outfit
really turn Alitalia around? Air One had a fleet of 40 aircraft at the end of last year, against
Alitalia's 186. It made a profit of €7m, but its traffic revenues of €570m were one-eighth of
Alitalia's, at €4.4 billion. At the end of 2006 its net assets amounted to just €59m.
Air One's owner, Carlo Toto, can claim success in launching a scheduled airline, but he did
this before low-cost airlines landed in Italy, and in a market where travellers were glad of an
alternative to the incumbent. Sorting out the problems at Alitalia, where more than ten trade
unions defend long-established privileges—one of them flexed its muscles by striking on July
18th—is a different challenge altogether.
So what will happen next? After vast infusions of state aid, Alitalia should now be refused
more public money under European Union rules. No doubt Italy's politicians would find ways
to pump in more money if the airline were placed in administration. The best option would be
liquidation, opening the way for low-cost airlines to acquire Alitalia's routes and boost
competition. But the government, which owns 49.9% of Alitalia, may simply decide to open
direct negotiations with Air One, or with Air France, which has held a 2% stake in Alitalia
since November 2002 and was expected to express an interest, but did not. If the French
airline were to buy Alitalia, it would at least put an end to the worries of all those MilleMiglia
cardholders, since both airlines are members of the SkyTeam alliance.
10. Taxation
Source: English for Business Studies, Ian MacKenzie (Cambridge University Press)
TAXATION (AND HOW TO AVOID IT!)
A The primary function of taxation is, of course, to raise revenue to finance government
expenditure, but taxes can also have other purposes. Indirect excise duties, for example, can
be designed to dissuade people from smoking, drinking alcohol, and so on. Governments can
also encourage capital investment by permitting various methods of accelerated
depreciation accounting that allow companies to deduct more of the cost of investments
from their profits, and consequently reduce their tax bills.
B There is always a lot of debate as to the fairness of tax systems. Business profits, for example,
are generally taxed twice: companies pay tax on their profits (corporation tax in Britain, income
tax in the USA), and shareholders pay income tax on dividends. Income taxes in most countries
are progressive, and are one of the ways in which governments can redistribute wealth. The
problem with progressive taxes is that the marginal rate - the tax people pay on any additional
income - is always high, which is generally a disincentive to both working and investing. On
the other hand, most sales taxes are slightly regressive, because poorer people need to spend a
larger proportion of their income on consumption than the rich.
C The higher the tax rates, the more people are tempted to cheat, but there is a substantial
'black' or 'underground' economy nearly everywhere. In Italy, for example, self-employed
people - whose income is more difficult to control than that of company employees - account
for more than half of national income. Lots of people also have undeclared, part-time evening
jobs (some people call this 'moonlighting') with small and medium-sized family firms, on which
no one pays any tax or national insurance. At the end of 1986, the Director of the Italian
National Institute of Statistics calculated the size of the underground economy, and added
16.7% to Italy's gross national product (GNP) figure, and then claimed that Italy had overtaken
Britain to become the world's fifth largest economy.
D To reduce income tax liability, some employers give highly-paid employees lots of 'perks'
(short for perquisites) instead of taxable money, such as company cars, free health insurance, and
subsidized lunches. Legal ways of avoiding tax, such as these, are known as loopholes in tax
laws. Life insurance policies, pension plans and other investments by which individuals can
postpone the payment of tax, are known as tax shelters. Donations to charities that can be
subtracted from the income on which tax is calculated are described as tax-deductible.
E Companies have a variety of ways of avoiding tax on profits. They can bring forward capital
expenditure (on new factories, machines, and so on) so that at the end of the year all the profits
have been used up; this is known as making a tax loss. Multinational companies often set up
their head offices in countries such as Liechtenstein, Monaco, the Cayman Islands, and the
Bahamas, where taxes are low; such countries are known as tax havens. Criminal organizations,
meanwhile, tend to pass money through a series of companies in very complicated transactions in
order to disguise its origin from tax inspectors - and the police; this is known as laundering
money.