INTL BUSINESS FINAL

Wilson's Disease

- 2 young sisters, N and K, were diagnosed with rare inherited disease, wilson's disease - Can cause liver failure and be fatal - N and K began taking Cuprimine and Syprine, standard drugs to treat it, and the symptoms went away - Economically doing well with good jobs as they get older - One day, the insurance company denies it, saying that Syprine, which cost about $400 a month, is now $20,000 for a month's supply (similar cost increase in Cuprimine) - They found that the drugs are acquired by Valeant in 2010

more political arguments for government intervention in trade

Furthering foreign policy objectives - Governments sometimes use trade policy to support their foreign policy objectives - US has maintained long-running trade sanctions against Cuba in the hope that the resulting economic hardship will collapse the communist government and bring in a more democratic (and pro-US) government Protecting human rights - Sometimes governments have foreign policy to promote human rights in other countries - Ex. U.S. government long had trade sanctions against Myanmar, in no small part due to the poor human rights practices in that nation.

paper river game and incentives

- As seen in river paper game, if you tweak rules of game, you get more incentive structure and more efficient market - Created the incentive for the Math Company to use paper efficiently - So why do we still have underdeveloped countries? Maybe need to look at rules of the game and incentive structures - Good institution → positive change in the rule of the game → incentive structure → better economic output

Culture clash in boardroom

- At a board meeting, the vice Chairperson from the headquarter flew from Germany - Wang is close to making a huge sale but the customer's purchasing manager is insisting on a 1% commission - Wang insists to give the commission - He argues that too strict ethical practices will jeopardize the venture - "We need to be flexible in order to compete" - "If we cannot provide the commission, let's at least consider a visit to Munich headquarters" - Liu - Commission or trips, it's all the same thing: business bribery - Wang - Look at this financial statement Q2. we made only 60% of our target for this quarter - Our performance is sinking fast. This joint venture has done nothing but hurt us. we have yet to see any return at all." - "All you do is make us spend, spend, spend - on German goggles and unnecessary waste processing." - "We need tighter control on costs and more sales! - The vice chairperson, to Liu's dismay, says he's open to discussion about the commission or trip. - Chairperson: "We could be in trouble without Wang's sale. Besides, where do we draw the line? Is a golf game bribery? We do that in Germany all the time." - Liu is shocked. But he insists that the company should not concede.

Economic reforms toward a market-based economy

deregulation & privatization

levels of economic integration

free trade, customs union, common market, economic union, political union

EU

- Another regional integration you probably know is European Union - In 2016, there was much news about Brexit, Britain's decision to leave the EU - One country's fisherman now has to sell outside of tariff wall (after Brexit) and now have to go through tariff wall which will raise prices and make it hard for them to sell

Tariffs on steel and aluminum imports

- 25% on imported steel and 10% on imported aluminum in 2018 - Unprecedented level of tariffs - The claim was that it would protect American steel and aluminum industries and their workers and help them to expand their businesses - Who would be the winners and losers of this policy? What would be the pros and cons? - Winners are American companies because now international companies have higher prices with the tariffs - Foreign exporters are losers - American workers of steel and aluminum companies are winners bc job security and maybe higher wages - Tension between countries possibly - Losers in US → US consumers of steel and aluminum because no access to cheaper prices from foreign industries because no option to use cheap steel

Daraprim

- A 68 year old drug developed by GSK pharmaceutical - Treats a life-threatening parasite infection in people with HIV or cancer - Small niche market with no competition - $1 per pill in 2009; $13.50 in 2014; $750 in 2015 - 5000% price increase overnight - A lot of suffering - HIV patients panicked - Physicians panicked - Many physicians frantically hoarded pills to provide to their patients - Daraprim was acquired by Turing Pharmaceuticals - CEO was former hedge fund manager not someone in medical field - He wanted to find a drug with no competitors so they can jack up the price - Huge controversy - Politicians like Hilary Clinton, Bernie, Trump criticized - Shkreli (CEO) faced the congressional committee investigating drug price hikes - Was it illegal? No and he was trying to maximize shareholder value for his company, which is a widely accepted goal of a company. - Is this business strategy a problem? - Taking advantage of vulnerable population who have no choice but to buy the drug if they want to be treated - Devils advocate: maximizing profit and it is legal and it's a business - But some shareholders might not want to engage in business that is unethical - company looks bad when taking advantage - On Dec 17, 2015, Shkreli was arrested by FBI after a federal indictment in the US District Court for the Eastern District of NY was filed, charging him with securities fraud (unrelated to Daraprim) - Ultimately sentenced to seven years for fraud

the product life-cycle theory by Raymond Vernon

- A large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market - Examples: mass-produced cars, TVs, personal computers, and semiconductor chips - Phase 1 - Xerox was first developed in the U.S. in the 1960s and sold in the U.S. market - For innovative products, the demand is based on non price factors - Companies can charge high prices for new products, which obviates the need to look for low-cost production sites in other countries - High trade out of US because new product not anywhere else - Copy machine created so goes from USA to Japan because innovative - Phase 2 - Overtime, demand for the new product starts to grow in other advanced countries - U.S. firms set up production facilities in those advanced countries. - Reduction of U.S. exports of that product - Phase 3 - Product is popularized and standardized - Price becomes important factor for buyers - Production facilities again move from developed countries to developing countries - Buyers in U.S. and other developed countries buy from lower-production cost countries (in the Xerox case, Thailand). - The locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries - Imported from developing world to US because want cheaper products - US buys copy machine from other developed countries from lower-production cost countries - All parts of trade are dependent on product-life cycle

valeant case

- A new CEO, michael pearson, started a new and interesting strategy beginning in 2008 - Almost zero R&D (R&D is very uncertain because might not be successful) - Instead, acquire, slash costs, and raise prices - "Slash costs" - Typically 90% of the R&D budget - 50% of employees - When Valeant acquired a company, they cut costs and raised price

Assess this critically

- A pharmaceutical company that doesn't create any new drugs (R&D) but only focuses on acquiring existing drugs and short-term oriented financial restructuring - Does it increase shareholder value? - Definitely! - Why? Raising the price while slashing cost = profit and not wasting on long term investment like R&D

David Autor, an MIT economist

- A study on counties in the US for its manufacturers' exposure to competition from China - Regions most exposed to China not only lost more manufacturing jobs, but also had an overall employment decline. Those had more workers receiving unemployment insurance and food stamps. - Trade leads to loss of jobs and government has to pay for unemployment and food stamps - Cost of these government payments amounted two-thirds of the gains from trade with China - Don't get them wrong. They concede that free trade is better than protectionism - "Free trade may turn out pragmatically to be still best for eachr egion in comparison to lobbyist-induced tariffs and quotas which involve both a perversion of democracy and non-subtle deadweight distortion losses."

Quality of Institutions

- Acemoglue, Johnson, and Robinson (2004) "Institutions as the FundamentalCause of Long-Run Growth" - Many economists think that the market and its potential growth are shaped by institutions. - Blue circle is the market, and the pink circle is the institution. - If you look at the blue circle (=market) independent from institutions, you will struggle to fully understand it no matter how much attention you pay to it. - If you take a step back and look at the institutions surrounding the market, you will have an easier time understanding it

Free trade area

- All barriers to the trade of goods and services among member countries are removed - Remove all barriers so all free trade - No tariffs, quotas, subsidies, or administrative impediments - But each country is allowed to determine its own trade policies with regard to non members

Case 1. "Almond Chemical" in China (pseudonym)

- Almond chemical is headquartered in Munich, Germany - Its subsidiary in China, Almond China, set up joint ventures with local partners. - One of them is based in Chongqing. Partnered with Chongqing No. 2 Chemical Company. Almond has 51% stake Almond Chemical in China - Liu Peijin, president of Almond China - Liu on CSR and conflict with Chinese partners - Production facilities in Chongqing by German standards - Safety equipment from Europe (helmets, shoes, protective clothing) - Chinese partners call them "wasteful", frivolous, and luxurious expenditures - Treating the factory's chemical waste by German standards - Chinese law didn't mandate it - His partners had been dismayed at the costs - Didn't have to treat chemical waste in china and so the Chinese didn't think it was necessary

Exchange Rate

- An exchange rate measures one currency's value relative to another - You are traveling from the U.S. to France and want to bring $3,000 to pay your travel expenses. - You have to decide how much euro is worth $3,000. - It is determined by the exchange rate between USD and the euro of that day

Investors were excited about Pearson and his strategy

- Because no uncertainty and no money spent in R&D - Pearson was different from other CEOs in style from the typical polished, well-dressed pharmaceutical CEO. "He was his own person; fat, pants riding low, fleece jackets" - Many investors didn't like traditional pharmaceutical companies due to the inherent unpredictability of drug development - But Pearson came and said "the rest of the industry is stupid and we are smarter than everyone" which is appealing to people who think they are smart - For investors, he spoke their language and said "all i care about is our shareholders" - Floods of funds into Valeant under Pearson including renowned investment companies like Paulson, Akerman, and Sequoia

Paul Samuelson's criticism of the comparative advantage models

- Being able to purchase groceries 20% cheaper from Walmart (due to international trade) does not necessarily make up for the wage losses (in America) - The lower prices that US consumers pay for goods imported from China based on free trade, may not be enough to produce a net gain if the free trade is to lower real wages in the U.S.

Brazil's information industry in the 1980s

- Brazil wanted to protect their small computer firms from giants like IBM and Apple - Only the computers produced locally by Brazilian companies were allowed to be sold in Brazil - "Brazilian companies" mean 100% owned by Brazilian nationals. In other industries, 51% would suffice to be considered a Brazilian company - Blocks Apple or big companies from establishing a base in other country to sell - Pros and cons of the Brazilian government's protection of their baby industry? - Pros = domestic companies can have a chance to do well, protecting small businesses, giving time for these companies to grow, protecting jobs in the Brazilian industry - Cons = more expensive, not good for consumer industry - schools, hospitals, office jobs - who have to use computers and these computers might not be on par with computers from Apple or IBM so this would bump down these industries as well, Brazil faced the danger of excluding itself from the computer revolution, less motivation because protected anyway

what do we learn from this case?

- CSR challenges for international business - Standards of corporate responsibility between countries - Keep your ethical standard? - Market competition - Hard to compete against other companies that are bribing or dumping waste - Laxer ethical standards; bribes kickbacks, commissions, dumping waste - Another challenge: unrealistic expectations from parent companies based on financial metrics like revenues and profit - Financial metrics are visible from financial reports, but local business practices are not much visible to the parent company - Ex. bribery, kickbacks, bad labor/environmental standards are oftentimes not visible in official reports - Later they find out that those "numbers" were based on ethically questionable practices - To keep up with the benchmark numbers, should a subsidiary also be involved in bad practices? POTENTIALLY - Not only business but also surveillance on business has also been globalized - Examples of companies observed and reported by international surveillance - Unilever in vietnam with the undesirable treatment of workers - Nike sweatshop scandal - Fast fashion brands in Bangladesh (Rana plaza) - Overseas production facilities and contractors are closely observed by diverse - Organizations face contradictory demands: - Demand for economic efficiency vs demand for legitimacy - When financial performance suffers, the internal power dynamics changes - In the Almond Chemical case, people in the efficiency camp became more vocal than the ethics camp

Democracy correlation

- Causal claim: "you need democracy for economic prosperity" - Democracy causes economic prosperity

Dilemmas in CSR

- Commendable, but dilemmas - Fairy tale vs messy reality

Corruption

- Corruption hinders economic development - The government is generally powerful in most countries - If they are corrupt, -- Inefficient companies might win the competition by bribery or connection to the government -- Loss of predictability; less motivation for large-scale investments - It shows that many institutions are not designed for economic efficiency. They are the products of power struggle, history, and culture - When there is corruption, you are incentivized to spend money in nonproductive ways (bribing, etc) - When lack of corruption, you spend money on productive things

Shareholder capitalism

- Currently we are living in shareholder capitalism - Ask managers: what is the goal of your company? - Many managers would answer maximizing shareholder value - These days, the answer might not be straight. They might say some things like social responsibility, environment, sustainability, etc.) - Maximizing shareholder value has been the holy grail of management for decades - The famous Milton Friedman, the University of Chicago economist, wrote in the NYT in 1970 that "the social responsibility of business is to increase its profits" - People do things nowadays to maximize shareholder value

Property rights

- Defining property line incentivizes people to make investment because more stable and you know what is your property - Unclear and unstable property rights: -- It'll be hard to make a big and long-term investment -- Ex. when you are not sure which part of the backyard is yours or the neighbor's, it's hard to put a big investment in gardening

What do you need for economic development?

- Democracy - Strong and clear property rights - Market economy - Education - Geography

Democracy

- Democracy is definitely "correlated" with economic prosperity - But we know that correlation is not always causation - Many successful emerging markets were undemocratic when they were developing fast. Examples are China, South Korea, Taiwan, Singapore, and Hong Kong - Sometimes, economic progress begets democracy - Economic property mean you have strong middle class. If you have strong middle class, they like freedom and civil rights, so then you have democracy

- Economies of scale create first-mover advantages in some industries

- Ex aerospace industry - Exorbitant levels of fixed costs → it is essential to spread the high fixed costs over a large number of sales - This makes first-mover advantages - Airbus spent $15 billion to develop a superjumbo jet, the 550-seat A380 - To break even, Airbus has to sell at least 250 of them - The total demand for the next 20 years for this class of aircraft is between 400 and 600 - Boeing is competitor, but they should not join market because small demand for next 20 years and cannot sell more than 400 of these and the operating company (Airbus) is already there trying to sell - The global market can support only one producer of jet aircraft in the superjumbo category - Airbus is the first-mover in this category and its competitors including Boeing cannot enter the market (because market can only support one product) - first mover advantage based on economies of scale

Deregulation

- Deregulation and privatization: expanding the boundaries of the market - Market gets larger because expanding boundaries Deregulation case 1: airlines deregulation of 1978 in US - Private companies were operating airlines - But federal government's heavy regulations --Routes --Fares --Schedules --Market entry barrier - Public utility vs business - The Airline Deregulation Act of 1978 lifted restrictions on market entry, fares, and routes - In a nutshell, airlines started to operate through the market mechanism, not through the state - Market competition introduced - New airlines formed: PeopleExpress, Presidential, New York Air, etc. - They competed against established ones - Any positive outcomes can you imagine? - Price competition: established airlines had to drop prices - Routes competition: better routes were developed through market research - Quality of service competition - Overall efficiency; accessibility to airlines; more routes - The airline deregulation of 1978: a successful case - Overall efficiency (lower price better WHAT - Affordability - Varieties of choice - Deregulation Case 2: electricity deregulation in California - Electricity bill higher after deregulation in CA - Why failed? - Manipulation of supplies and prices - Prices should drop if successful but went other way - Sellers have been withholding power from this market in order to drive up prices in other parallel markets - Demand was increasing, but companies hoarded the electricity - Released electricity when the price was jacked up - Poor government oversight

Five example cases of wealth creation vs transfer

- Develops new diabetes drugs that works differently but is expensive→ wealth creation - New option - Value coming from creation of new drug and benefiting consumers - Net positive because society has a new thing - Even if super expensive, no one is forcing to buy it and new option for those who can afford it - Wealth creation - Microsoft killing netscape (had higher market share than internet explorer and was liked); microsoft updated computers so netscape no longer worked which forced customers to use internet explorer → wealth transfer - Not helping consumers - Value moving into microsoft but not benefiting consumers - Nothing new, just killing existing one - net negative - Wealth transfer - Ford developing mass produced automobile for first time → wealth creation - Creating new option - Value coming from new cars and helping consumers - Net positive because even though horse farms are losing, it is still benefitting large amount - Wealth creation - Dolan outsourcing cleaning function to local cleaning firm → wealth creation - Net value is positive because value created so fairfield cleaning company is paid - Dolan has existing cleaning team and were fired and give to Fairfield cleaning company - Net positive because giving jobs to cleaning company but also benefits Dolan because cuts cost and they get good cleaning service - Wealth creation - Turing pharmaceutical and Valeant not using R&D and taking profit → wealth transfer - Net negative because no new development of drugs/no new options - Wealth transfer

Currency appreciation (USD gets more valuable)

- Disadvantages - Generally exports decrease - Advantages - Imports get cheaper - Foreign debt repayments get cheaper

Currency Depreciation (USD gets less valuable)

- Disadvantages - Imports get more expensive.Possible inflation. - Increases in foreign debt repayment. - Rapid devaluation may scare off international investors (reduction of the real value of their assets) - Advantages - Generally, exports increase(cheaper prices of domestic products) - Higher exports and aggregate demand (AD) can lead to higher rates of economic growth

comparative advantage (by David Ricardo)

- Due to a crazy level of climate change, england got so efficient in wine production, even more than France - Now, england is more efficient in both textiles and wine than France - But still within England, textile production is more efficient than wine because of accumulated know-hows - England better than France in everything - would it make sense for England to specialize in textiles and buy wine from France? - Yes - England loses efficiency whenever they use resources for wine (opportunity cost) - Because they could have produced a slightly larger amount of textiles with those resources - Has to give up amount of output by spending resources on wine so can have greater amount of output if they produce just textiles - It is better for a country to specialize and trade even when the country is more efficient in all industries than other countries - Because within the county, some industries are comparatively more advantageous than other industries and spending resources in less efficient industries is not optimal - Trade is a positive-sum game in which all countries that participate realize economic gains - Keep in mind that these conclusions are based upon radical assumptions to simplify the reality - Assumptions of comparative advantage theory: - Only 2 countries, same prices for all products and resources, no exchange rates, free movement of products, free re-allocation of resources, fixed stock of resources within countries, etc. - Be realistic. Be open. Don't be a mindless parrot that only remembers the simplified version - This is an example where there are not other variables so assuming it works

Why exactly is the UK leaving the EU of concern to the UK automotive industry?

- EU - No tariffs among member countries - Common external tariffs - Regulatory alignment (goods and services that are legal in one country are also legal in other countries) - Unified visa regime - Things to consider - Tariffs - Regulatory differences - Delays at the border - Workforce mobility - Relationship with non-EU countries

- The benefits and cons of successful deregulation

- Efficiency -- Market competition is introduced so companies need to cut costs for better quality - Customers face better prices, better quality, and more choices - New business opportunities: more profits Potential cons of deregulation - Corporate malfeasance if the government does not oversee the industry carefully (californian electricity companies' cases) - If monopolized by private companies, the price might be higher than in regulated markets

Roots of unethical behavior according to textbook

- Ethical behavior - Societal culture - Decision making process - Leadership - Unrealistic performance goals - Organizational culture - Personal ethics - Many of you will work while belonging to certain organizations - Working embedded in the system of positions, reporting, and hierarchy - A question to ask is "can an ethical individual behave unethically in organizations" - Can you do bad things when work for an organization - Ethical individual vs unethical organization

Political motivations behind regional economic integration

- European Community (the forerunner of the EU) - Rise of the U.S. as the world superpower after World War II. - Europeans needed to unite to deal with the U.S. - Also, they needed to politically isolate the Soviet Union to win the Cold War. - NAFTA - U.S. had motivations to promote democracy and economic growth in Mexico to reduce the flow of illegal immigration

Correlation or causation Examples

- Fans in room reduces infant risk of crib death - Cooler rooms are better for the baby and they sleep better because don't wake up and move as much - Room temp is not third factor because it still relates to the fan (the fan is still buying into causal claim) - Parent carefulness (adding fan and paying attention to the baby) is third factor - These parents know not to put pillows and blankets in cribs Diet of fish can prevent teen violence - Living in places where they can eat healthier foods like fish; fish is more expensive so people who eat it are educated and middle class, financially stable families which are groups who are less likely to engage in violence - Parent socioeconomic status is third factor

- Other examples of first-mover advantage based on economies of scale?

- Fixed cost is really high and world's demand does not support lots of companies so you dominate market - SpaceX (rocket services, reusable rockets) - Cargo, astronauts, and satellites to orbit — the demand is limited to a handful of governments and NASA - Have first-mover advantage because not huge demand

concerns about deregulation

- For deregulation --We rely on competitive markets to arrange delivery of most things. Clothing, cars, gasoline,phones, etc. --If the rules are right, electricity, like any other commodity, can be arranged by the market. It can be priced more efficiently by competitive market forces than it can be by regulators and monopolists. --If profit is there, the industry will get more investments, which means more electricity will be supplied, and its price will decrease further Concerns about deregulation --Electricity is not Q-tips and bubble gum. It's an essential commodity that everyone needs every day -Infrastructural industries like electricity: --Demand not elastic ---Demand does not change a lot depending on the price --No substitution for electricity ---Will you light a candle if you don't have the power? --High capital entry cost ---The reason why the market drives down costs is when incumbent companies are enjoying high margins, new companies are motivated to join the market too. And that means more competition and eventually lowered prices. ---But when the entry cost is high like electricity, you cannot expect many newcomers. And even when a newcomer is coming, it takes a long time to begin its operation. - These features prevent the proper work of the market mechanism. Thus, governmental regulations and operations in these industries are justified. - The market mainly cares about profits, which is its strong point. Society does not have to care if bubble gums are affordable to the general public, but it should care about electricity.

Formal and informal institutions

- Formal institutions: property rights, intellectual property protection, investor protection, etc. - Informal institutions: lack of corruption, social network, religion, etc. - These both construct the rules of game leading to incentive structure leading to efficient market

Interesting Implication of the new trade theory

- Government intervention might be an important factor to create a first-mover - Boeing's research and development was largely paid for by the US government - The 707 was a spin-off from a government funded military program - According to the theory, a government can increase the chance of its domestic firms becoming first movers in newly emerging industries, as the US government apparently did with Boeing - Oddly enough, this theory can be used to defend both free-trade orientation and proactive governmental trade policies

"The Banality of Evil" by Hannah Arendt

- Hannah Arendt, a german philosopher and holocaust survivor - Adolf Eichmann, a Nazi officer and one of major organizers of - German nazi organized gas chambers - People said he is mad and psychopath, evil - Eichmann fled after war and he was caught in Argentina - He looked like ordinary guy - Had a family and got along with neighbors - War crime trial - I just followed the orders. I just obeyed the law. - I was just doing my job - In some crazy sense, it looked as if he was just maintained a professional life, not an outlandish satanism. Like performing ordinary tasks for a job. - Desk job. Paperwork - So detached from the holocaust sites - The killing was not felt on his skin - Person who did terrible things is just normal person walking around - No guarantee that we all would not do same thing - Perhaps most evil things are being done not by some crazy villains but by organizations filled with ethical individuals

Think about "alignment" between corporate profit and society's wealth

- If corporate profit is aligned with society's wealth - Maximizing shareholder value - Not for the sake of social good - If so, Milton Friedman's statement will be correct: "the social responsibility of business is to increase its profits" But so many cases of "misalignment" - The pursuit of shareholder value has been pushed to the extreme, distorting the alignment - Many firms were just focused on transferring values from society to them to maximize their shareholder value, without any consideration of the societal impact of their businesses - Impact on environment, labor, patients, consumers, suppliers, farmers, etc. - Critical reflections on these behaviors were the driving force behind the movement toward CSR

Valeant Case Consequences

- In 2015, Shkreli's case draw a lot of public attention to pharma companies - Valeant was investigated by both the House and the Senate - Many dubious practices and accounting were found - The share price plummeted, investors quickly ditched their shares, and Pearson stepped down from CEO position - Top CEOs disagreed with - shareholder value is no longer everything

Why integrate?

- In economic theory, free trade stimulates economic growth. - Countries can utilize absolute, comparative advantages, and economies of scale. - Why regional integration, not global integration? - Theoretically and ideally, global integration will be more efficient than regional integration. - It is very difficult to get all countries to agree to a common set of rules. Different countries have different interests and think differently. - Regional integration can be seen as an attempt to achieve attainable gains from free trade within small groups of countries that can agree on certain terms

A is correlated with B could mean

- Yes, A might have caused B - But, B might have caused A (reverse causation) - Or C caused A and B (A and B are correlated but A doesn't cause B) - Not all correlations are causation

Absolute advantage (by Adam Smith)

- In his time, the English were the most efficient textile manufacturers - Superior manufacturing processes - The french had the most efficient wine industry (favorable climate, good soils, accumulated expertise) - A country has an absolute advantage in the production of a product when it is more efficient than others. - The English had an absolute advantage in the production of textiles over the French. - The French had an absolute advantage in the production of wine over the English - Each country spending same amount of resources in each industry but one industry (wine for english and textiles for french) is suffering - Is the current arrangement optimal for each country to maximize the amount of things to consume? - No trade so have to produce everything - Not optimal, french should be trading wine for textiles and vice versa - When specialize in one thing (what you are good at), you put all resources into one thing and trade - More output and have absolute advantage - If the English specialize in the production of textiles rather than producing both textilesand wines, and if the French specialize in the production of wine rather than producing both, and they trade with each other, the two nations have more textiles and wine - England's total output will increase because of specialization and same for France; both now have more to consume compared to non-trade

Back to the Paper River Game

- In our Paper River game, the institution was "designed" to maximize efficiency - "Designed" vs "result" - Ex. corruption - nobody designs societal corruption

Islamic Banking

- In the Western approach, interest guarantees the banker a return. The banker avoids much of the commercial risk that is inherent in business - In contrast, Islam requires that the banker share this commercial risk. If the business venture is successful, the banker shares the profit. If the venture doesn't do well, neither does the banker - The value of community in Islam is stronger than the value of individual profit

Incentive structure

- Incentive structure desirable - If yes → economic development - If no → hindered economic development

Copyright

- Incentivizes people to make art because confident that if invest time and energy into the song, they will get the benefit

"Individual morality" vs "organizational authority"

- Individual morality says do not push button - Organization authority says push button - Prediction (what people think): individual morality wins - Result (what actually happens): organizational authority wins

Why is the business world so much into CSR?

- Individual-level ethics are not enough to promote responsible business - Need to have organization level ethics and societal-level initiatives

Economic arguments for governmental intervention

- Infant industry → promising industry (Ex. computer industry) - Want to protect domestic industry before competing against big international firms - Governments should temporarily support new industries (with tariffs,import quotas, and subsidies) until they have grown strong enough to meet international competition - Strategic trade policy (like new trade theory) - By appropriate actions, a government can help raise national income if itcan somehow ensure that the firm or firms that gain first-mover advantagesin an industry are domestic rather than foreign firms

institutions

- Institutions are rules of the game - Douglas North, a Nobel Prize winner in economics, offers the following definition: -- Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction -- In consequence they structure incentives in human exchange, whether political, social, or economic

How does a typical pharmaceutical company make a profit?

- Invest heavily in R&D in order to discover new drugs - When they successfully develop a drug, they sell it on the market - Ex. Covid vaccines by Pfizer and Moderna

CSR Dilemma in a domestic setting

- Kids' toys - Lead in plastics - Kids, heavy metal, and brain - Cost vs consumer protection - Using lead cuts cost but risk for babies

How About white-collar jobs?

- Many blue-collar jobs were offshored when trade with China and other countries - Can white-collar jobs be offshored? - A few years ago Bank of America cut nearly 5,000 jobs from its 25,000 US based IT workforce - Infosys, an Indian IT firm, is doing the job for $20/hour which would cost $100/hour in the US - Other infosys employees are busy processing home loan applications for US mortgage companies - Another Indian firm, Wipro, radiologists are interpreting 30 CT scans a day for Massachusetts General Hospital - In the next region, Indian engineers earn $10,000 a year designing leading-edge semiconductor chips for Texas Instruments - Conditions for white-collar offshoring - Pandemic made companies adapt to remote work - Transition to a cloud-based, remote-friendly operation is not longer in question - Companies facing shortages of workers. - The wage difference is immense. - A $300,000 engineering job in the U.S. can be done at $80,000 by an Indian engineer. - Conditions against white-collar offshoring - Language barrier - Educated workers are not replaceable in many domains - Cybersecurity (sensitive company data)

Reputation in network

- Marculay (1963), "Non-contractual relations in business: Apreliminary study" --The portion of disputes among firms that actually amount to legal actions is tiny. --Most disputes are settled long before reaching out to legal sanctions. --Parties find solutions based on relationships, trust, and common membership in a community. --One interviewee from business: "You can settle any dispute if you keep the lawyers out of it. They just do not understand the give-and-take needed in business." - Most business disputes are solved very smoothly because people care about reputations --If sue someone, it might tarnish their reputation --Only 1% of disputes solved by court - Cheap and fast and smooth solutions which is good for economic prosperity --With no trust, there would be lawyers and court which is slow and expensive

How many people went to 10?

- Milgram explained the experimental design to students in his class and asked their guesses on percentage of people who would go to the extreme to inflict level 10 shock on the learner - The average expectation/guess: 1.5% - Result: 65% (26 out of 40) - People who pushed the button to max voltage. Try to understand the behavior. Why did they do it? - How can we understand such a huge gap between the prediction and the actual result? Why was the prediction so inaccurate? - In society, we are trained to obey orders from superiors (parents, teachers, bosses) - Also a stranger and do not know the person - When someone has authority, you feel like they can do bad things to you - Done in university so some trust that university is not doing crazy thing and you are contributing to science - I am pushing the button but not doing the thing, the university is - Difference between prediction and result: - In classroom you think who would do that but in the moment when there is authority figure ordering you, then you feel pressure

similar examples of milgram experiment

- Military violence - Volkswagen pollution scandal - people doing their job but under organizational pressure - Pressure by top management - A culture of fear and intimidation that discouraged dissent and whistleblowing - A rationalization that cheating was necessary to compete with other carmakers

Wealth Creation

- Most businesses, in the pursuit of their own profit and without any intention to do good for the whole society, create wealth for the whole economy - Ex. Baker - new bakery opens in Fairfield; before this had to drive to westport or bridgeport; fairfield residents get benefit from this (net positive) because have new option even though price is higher; baker pursuing own profit but as a side effect, community gets positives - "The invisible hand" by Adam Smith - Don't have to rely on mercy of marketers, they are providing us those products for their own profit yet also contributing to society - Steve Jobs iPhone → he did this because he wanted to make money but iPhone contributed to overall welfare of consumers - Shoprite Fairfield → net positive because increasing market competition and giving another option - By pursuing own profit, inevitably create a positive in consumer welfare

CSR dilemma in international settings

- Multinationals: different business practices (home vs foreign countries) - Nike's sweatshop in Vietnam - Let's discuss a real-life case: a manager in MNE facing CSR dilemmas

Common market

- No barriers to trade among member countries and common external trade policy - allows factors of production (people, labor, capital) to move freely among members - Ex. EU functioned as a common market for years (not anymore); Mercosur hopes to be a common market (argentina, brazil, paraguay, and uruguay)

Economic union

- No barriers to trade among member countries, common external trade policy, free movement of factors of production - Plus, a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy - Sacrifice of significant amounts of national sovereignty - Example: The EU is an economic union, although an imperfect one because not all members have adopted the euro; differences in tax rates and regulations still remain

Customs union

- No trade barriers between member countries - Plus, a common external trade policy - Free trade area plus external trade policy - Example: The EU began as a customs union (it has moved beyond this stage now). Andean Community of Bolivia, Columbia, Ecuador, and Peru. - Most countries that enter into a customs union desire even greater economic integration down the road

Wealth transfer

- On the other hand, some businesses do not add any value to the economy but simply transfer wealth from others to themselves (benefit to themselves) - Ex. California electricity prices → increases shareholder value because larger profits but net negative because suffering among consumers with such high prices; transferring money from customer pocket to their pocket but didn't create anything new; net negative or net zero - AIG sold risky financial products to banks; value transfer because transferring from customer pocket to their pocket and nothing new created

Dangers of Shareholder Value Maximization Ideology

- Over the years, it [shareholder value] has been used to justify bamboozling customers, squeezing workers and suppliers, avoiding taxes and lavishing stock options on executives. Most of what people find so distasteful aboutAmerican capitalism — the ruthlessness, the greed, the inequality — has its roots in this misguided notion about what business is all about." (Steven Pearlstein, "Top CEOs are reclaiming legitimacy by advancing a vision of what's good for America" - In its more corrosive application — the one that is inculcated in business schools, enforced by corporate lawyers and demanded by activist investors and Wall Street analysts — maximizing shareholder value has meant doing whatever is necessary to boost the share price this quarter and the next." (Steven Pearlstein, "Top CEOs are reclaiming legitimacy by advancing a vision of what's good for America - "The result? By 2019, maximizing shareholder value has come to be seen as leading to a toxic mix of soaring short-term corporate profits, astronomic executive pay, along with stagnant median incomes, growing inequality, periodic massive financial crashes, declining corporate life expectancy, slowing productivity, declining rates of return on assets and overall, a widening distrust in business.

what would you do

- Pay under the table to other buying departments - Chinese competitors paying cash to bribe buyers - OR Not paying cash but at least invite to germany and provide nice resort and food - This is another way but not paying explicitly in cash - OR just focus on improving quality of the product

AIDS and flouride

- People drinking water with fluoride tend to have higher rates of AIDS - Claim to stop drinking water with fluoride - High population density = more people so more fluoride in water and more AIDS because more people - Low population density = less fluoride in water and less people so less AIDS - Population density is third factor

Some infant industries were successful

- Potential benefits: - Now the Korean companies that were protected as infant industries are now making up a large portion of GDP to this day (ex. Samsung, LG, Hyundai, etc.) - Could have a world-leading company - Pitfalls - Governmental protections took away the motivations of Brazilian companies for innovation and efficiency. - Brazil faced the danger of excluding itself from the computer revolution

Privatization

- Privatization commonly involves the transfer of the ownership of state property, commonly state-owned companies, into the hands of private individuals - The privatization of Tokyo Metro, Japan - Japanese National Railways was privatized in 1987 and broken into six regional rail companies and one freight company - Used to be owned by government and now owned privately - Successful case - Market competition - Increased efficiency: reduced costs and better serviced - They discontinued unprofitable routes and developed new profitable routes - Other areas of possible privatization in many countries: Transportation, electricity, roadways,water, airports, waste disposal, maildelivery, communication infrastructure,etc. - Prison could be privatized/deregulated --It is a public service --Prisons have been high cost in US (maybe can be done for less and more efficiently by private companies) --Looks like promising market

pros and cons of steel tariffs

- Pros - It might be good for steel and aluminum producers in US - They could win the price war - They could raise price and remain competitive; more profits and jobs - Cons - US has larger sectors that are consumers of steel and aluminum - Automakers, aerospace companies, containers companies, construction companies, appliance makers, etc. - Prices suddenly soared for them - Two of america's largest exporters, boeing and caterpillar tractor, are directly hit - The steel and aluminum industries were hiring 140,00 workers, whereas their consumer industries were hiring 6.5 million workers - Retaliatory tariffs - Other countries responded with tariffs on some American products - Then overall the volume of trade diminishes globally and it is not good for all countries - Ex. This isn't just bad for farmers and ranchers in Nebraska who need to buy a new tractor, it's also bad for the moms and dads who will lose their manufacturing jobs because fewer people can buy a more expensive product Results of tariffs - Prices raised - People canceled orders and bought Chinese nails (tariff not on nails but on the steel)

pros and cons of prison privatization

- Pros: lower cost, more efficiency - Cons: motivated by profit not care of inmates, cut costs in essential part of living conditions, separation between law enforcement and prison should be maintained, less transparency - Private prison companies → bidding → governments (local, state, or federal) --Bidding competition among private prison services --For a fee --For contractors, the government pays per inmate day basis fees --Companies assume full responsibility for managing the day-to-day operations of a prison facility - There has been a rise of private prisons during the last 2 decades with mixed results --Reduced costs in many states --But one paper reported private prisons have greater recidivism among inmates --Some reported better working conditions and rewards for employees --But, more inmate misconduct, escapes, and grievances reported --Lots of debate on whether it is right to outsource moral functions like punishment and rehabilitation to the private sector --judges may receive money from private prisons and put as many people as possible in prison and private prisons have incentive to keep inmates as long as possible

Intellectual property protection

- Protection of ownership over intellectual property patents, copyrights, and trademarks. - Pharmaceutical industry - A patent grants an inventor of a new drug a 20-year monopoly in production of that drug. - Without a well-designed patent system, companies will have less incentive to undertake the expensive and time-consuming research to generate new drugs

Impediments to integration

- Regional integration creates winners and losers within each country - For example, US - Korea Free Trade Agreement (2007) - Korean automakers and consumer electronic companies were huge winners - Hyundai, Samsung, LG, etc. - But Korean agricultural industries were hit hard by US agricultural products - US agriculture has a competitive edge based on large-scale production - Of course, the losing industries do not want integration - Countries are reluctant to relinquish national sovereignty. - Close economic integration demands that countries give up some degree of control over such key issues as monetary policy, fiscal policy (e.g., tax policy), and trade policy. - Example: The EU introduced a common currency, the euro, controlled by a central EU bank. Great Britain remained an important holdout. - Also, sovereignty over immigration policy was an important motivation that Great Britain left EU - EU is most advanced form of regional economic integration

Heckshcer-Ohlin theory

- Ricardo stresses that productivity determines comparative advantages - Higher productivity means higher outputs with lower inputs - Heckscher and Ohlin have a different take - comparative advantage is determined by factor endowments (resources vs productivity) - The extent to which a country is endowed with such resources as land, labor, and capital - The more abundant a factor in a country, the lower its cost - If well endowed with resources, then become an exporter of those goods - Ex. The US has long been a large exporter of agricultural goods. It reflects its unusual abundance of arable land. - China exports labor-intensive goods. It reflects its abundance of low-cost labor - They predict that countries will export those goods that utilize factors that are locally abundant while importing goods that utilize factors that are locally scarce - In theory, countries will export products that use locally abundant factors, regardless of their production efficiency. - They argue that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity

Example of Exchange Rates

- Russia's ruble crashed 20% - Russia ruble got dirt cheap - Advantages: easy to export, everything Russian is cheap so international markets want to import these cheap goods - Disadvantages: not many imports, when need to import specific goods it gets really expensive

Ex 2 Smoking and Depression

- Smoking is positively correlated with depression - If you smoke, you will get depression - This is actually reverse causality - People who are depressed and stressed out are more likely to smoke

brexit

- UK leaving EU - Different scenarios possible, but, likely, 10% tariff on cars and 2 - 4.5% on car components. - The car industry was important for UK economy, producing 1.82 million vehicles and employing 814,000 people. 78% of the produced cars were exported. - The car industry was highly dependent on free trade with the EU. - 56% of car components were imported - 79% of them were from the EU and 21% from other countries. - Carmakers had an average operating margin of just 6%. Costs of tariffs and other trade barriers could be a huge problem. - Another problem than tariff is border controls. - E.g. Honda Motor Company estimated that a 15-minute delay to each truck at the border would add 580,000 pounds to its operating costs. - BMW was preparing for future in electric vehicles. - But, facing Brexit, would it make sense to invest in Cowley, UK? It can certainly maintain the "British" image of the Mini.

milgram experiment

- Study on obedience - Research question - How obedient are people to organizational authority? - Are they obedient to a degree where they do not mind physically harming other people? - People obedient to a degree where they do not want to harm others Design of experiment - Two participants - Given $100 for participation in the experiment - Random assignment to teacher and learner Memorization test - Electric shock - Voltage goes up every time when learner gives wrong answer - From level 1 to level 10 voltage - Learner shows serious signs of pain from level 3 to 4 - At level 8, loud screaming, crying, and chair rattling from struggle - Level 10 they are unconscious - Experiment to see how many people push level 10 to stranger - People usually want to quit in middle of experiment because stranger is so hurting When a participant says he wants to stop - The leader of the experiment says the following statements in order: - 1. Please continue - 2. The experiment requires that you continue - 3. It is absolutely essential that you continue - 4. You have no other choice, you must go on - Last time they say they wanna stop, leader say ok experiment is done - Go up to level 10 because experimenter says they have to

Why does it matter to UK car manufacturers

- Tariffs - Regulatory differences - Delays at border - Workforce mobility (temporary movement of skilled employees between plants) - Third country access

Governments have tools to intervene in trade

- Tariffs: --Tax for imports - Subsidy: -- A government payment to a domestic producer -- It works 1) against foreign imports and 2) gaining export markets - Quota: --A direct restriction on the quantity of some imports. - Local content requirements: --A requirement that some specific fraction of a good be produced domestically (ex. In the USA) - Antidumping policies: --Dumping is selling goods in a foreign market below their "fair" market price --It can drive out indigenous competitors -- A government places "dumping duty (=anti dumping duty)" is a special tariff that can stay up to five years - Administrative policies: --Bureaucratic rules designed to make it difficult for imports to enter a country --Ex. Japan puts regulatory hurdles against foreign cars, such as vehicle parts standards that don't exist anywhere else in the world

Training: critical thinking skills

- The ability to critically assess causal claims - Important in business analyses - EX. as ice cream consumption goes up, drowning deaths increase --Positively correlated --Goes up in hotter months because more ice cream eaten in summer and more people swimming ---Season is the real cause Correlation is not causation - Ice cream doesn't cause drowning it is just correlated with drowning - Correlation: just a fancy way to say that two things are associated or related - Not all correlations are causation. In many cases, there might be a third factor, a real cause

Investor Protection

- The degree to which investors are protected from the power of insiders like managers or majority shareholders - Ex. transparency of financial information - Countries with better investor protection have more developed financial markets - Common law countries such as US and UK had more investor protection than civil law countries like France, Germany, and Scandinavian countries

The North American Free Trade Agreement

- The free trade agreement among the USA, Canada, Mexico - NAFTA's contents: Abolition of tariffs among members, Removal of most restrictions on foreign direct investment

the new trade theory

- The new trade theory: "why is nobody talking about economies of scale?" - Economies of scale are a crucial reason why trade is good for everyone - Economies of scale = per-unit production cost is reduced as the production volume increases - Toyota spent $10 billion to build factory - If produce 1 car, per-car production cost is $10 billion - Produce 2 cars, cost is $5 billion - As produce more cars, spread out large fixed production cost over many products - For example, manufacturing automobiles costs high fixed costs (ex. factories,assembly lines, research & development, etc.). - By producing a lot, a company can "spread" the fixed costs to the many products. - Per-unit cost is reduced by producing more - But the problem is this: A competent entrepreneur considering to building a large production facility but her country's domestic market is too small to realize the economies of scale - So, what if nations trade with each other? - The producer can have a large demand that combines individual national markets. - Then individual producers may be able to better attain economies of scale. - Even if companies in a country specialize in a narrow scope of products, because nations trade, they can import the things that they don't make in that country at cheaper prices (because those imports are also made efficiently by foreign firms utilizing economies of scale).

What is the point of Milgram experiment?

- The point of the Milgram Experiment is to see how individual ethics are compromised in organizational settings when there is organizational pressure that contradicts individual morality. It shows how authority and organizations can impact individual behavior and make people do things they normally would not do.

Is Brexit a concern to the UK automotive industry? If so, why exactly?

- Trade barriers between EU and UK which could affect UK automotive industry - Trade barriers because UK is no longer part of EU - Increase cost if there are barriers or tariffs - Tax can cause them to lose market share - Have to decide where to produce - this is an investment they need to account for

Trump and NAFTA

- Trump is threatening that, if American automakers move their factories toMexico and want to sell the cars in the U.S. market, they will have to pay taxes - Reporter says its illegal because of NAFTA

Correlation

- Two things are associated or related - Not all correlations are causations. In many cases, there is a third factor

Trade is not only an economic subject but also a political subject

- Why? Because trade is connected to jobs and people's lives depend heavily upon jobs - Some cities were devastated and became hollow because they lost factories and jobs in international competition - Rust Belt - US region that experienced industrial declines due to the elimination or outsourcing of manufacturing jobs beginning in late 20th century especially in sectors including steelmaking, automobile, manufacturing and coal mining

Major drivers of the success of vietnam's footwear manufacturing sector are its weakly enforced labor and environmental standards and its generous subsidies to state-owned enterprises. Does this give Vietnamese firms an unfair competitive advantage over US firms?

- Yes, unfair advantage because pay lower wages - Government subsidizes factories which lowers production costs which is unfair advantage - US pollutes/bad sustainability and then when they get so developed and successful, they say other countries and companies cannot do these practices (hypocritical) and kicking away ladder for other developing countries to become successful - Usually, there is a societal push on trade negotiators to link trade liberalization to compliance with internationally recognized labor and environmental standards - Many stakeholders in Vietnam see labor and environmental standards as a thinly veiled pretext for domestic protectionism

Theories on Trade

- absolute advantage - comparative advantage - heckscher-ohlin theory - product life-cycle

brexit bmw case

BMW mini - Mini first hit market in 1956 by British Motor Corporation (one of the plants in Cowley) which was acquired by BMW in 1994 - Like many other automotive companies, the Mini was heavily reliant on cross-border supply chains and the specialization of plants across Europe - Significant investment → Technological disruption toward electric vehicle forces BMW to make decision wherenew electric Minis would be manufactured - Even after the acquisition, the Mini continued to be known as a quintessential British brand - Brexit: the decision of UK to leave EU - Decided in 2017 and to be implemented in 2019 - This type of disruption of international commerce can posit huge uncertainty to businesses Supply chain for Mini - Where to produce the first electric version of BMW's iconic Mini - The UK team wanted to produce it at its historical home base in the UK, but they were facing "Brexit" - The main assembly line for the Mini was in Cowley, England - Gasoline engines for the Mini were made in Hams Hall in the UK - But many parts came from Germany or other parts of Europe - Mini Electric was strategically important for BMW because it represented a key element in the company's plans to introduce electric vehicles - Major investment to create place in UK - 30 production and assembly sights in 14 countries - The aim of the integrated global production was to achieve greater efficiency in the manufacturing process, specialization in each plant,reducing cost, and shortening the time to market for cars

almond chemical case

Culture Clash in Joint Venture - The growing conflict between Liu vs Chinese partners - Center of a conflict - Wang Zhibao, the vice president in charge of sales for the venture in Chongqing was not so much into CSR - He has closed several key deals that had kept the business afloat during its early years Culture clash in the HR training - Chinese executives were increasingly vocal - Gifts and commission - Incentives commonly accepted in china and routinely employed by Almond's competitors - "This is china, not europe" - Vague legality - Almond was listed on NYSE - Foreign Corruption Practices Act → it forbade the bribing by US listed companies - Liu did not back down against the arguments for commission - At Almond, ethics are non-negotiable - "We need to remember these laws as we go about our business. We are not just a Chinese company, we're a global one" - Bribing by inviting board of directors and giving very nice treatment - common in china - Liu is against this idea of bribery

nike v new balance

Michael Froman, the US Trade Representative - Need to complete negotiations on the Trans-Pacific Partnerships (TPP) - The TPP was the most promising trade liberalization initiative in a long time - Participating countries: US, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam Dilemma - Whether to eliminate the tariffs on Vietnamese footwear - Pros: shoe prices will go down - Cons: many Americans will lose jobs Nike - Has lots of operations in Vietnam - Wants to remove tariffs - Consumer welfare - High-skilled jobs in the US New Balance - Few manufacturers that still do in US; hire lots of US workers and have shoewear lines that are only made in US - Want to keep tariffs because if it is gone, competitor price goes down - Protecting low-skilled manufacturing jobs in US - Labor and environmental standards issues in Vietnam Consider value-added vs employment - Nike can create high-skilled jobs. - Higher value added - The economic importance of Nike is significantly larger when value added is considered rather than employment - Employment vs shareholders - Nike shares are disproportionately held by American shareholders - In this regard, Nike's interest is aligned with America's interest.

Political arguments for government intervention in trade

Protect jobs: - 1) Protecting jobs and industries against "unfair competition." - Ex. Obama's accusation of the Chinese government's subsidy for their exporters - n 2002, then-president GeorgeW. Bush placed tariffs on imports of foreign steel as a response to"unfair competition." - Critics point out that the U.S. steel producers were located in states thatBush need to win reelection in 2004 Protecting national security - Governments sometimes argue that it is necessary to protect certain industries because they are important for national security - Defense-related industries (aerospace, advanced electronics, and semiconductors) - Ex. TikTok Retaliation - A bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game." - E.g., The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese government to enforce its intellectual property laws.• Widespread copyright infringements in China had been costing U.S. companies such as Microsoft hundreds of millions of dollars per year in lost sales revenues Protecting consumers - Many governments implement regulations to protect consumers from unsafe products - Japan and South Korea banned imports of American beef due to concerns about mad cow disease