9.29 MKT 310- Exam 2 (Homework Questions)

What concept negates the idea that a country can specialize to the degree suggested by the Ricardian model?

Diminishing returns

Which of the following statements regarding openness of an economy and growth is TRUE?

Economies that are open to trade grow at a faster rate economically than those that are closed.

True or false: Most economists prefer the Ricardian model when discussing trade even though it is a relatively poor predictor of real--world international trade.

False

What is the likely result for the gains from specialization according to the concept of diminishing returns?

Gains are likely to be exhausted before specialization is complete.

The Middle East has an abundance of oil reserves; therefore, exporting oil supports the ______ theory which is based on creating an advantage based on factor endowments.

Heckscher-Ohlin

What is the theory that states that countries will export goods that make intensive use of the factors that are abundant in the economy?

Heckscher-Ohlin

What theory argues that free trade is beneficial, but that differences in factor endowments, not productivity, determine the pattern of international trade?

Heckscher-Ohlin

What assumption does the Ricardian model of comparative advantage make in terms of converting resources?

It assumes that all resources can easily shift from one thing to another.

______ raised questions about the Heckscher-Ohlin theory.

Leonteif

According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the

Leontief paradox.

According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the`

Leontief paradox.

______ is the first theory of trade that advocated that a country should export more than it imports and should accumulate gold and silver to make up the difference and maintain a trade surplus.

Mercantilism

______ theory states that, because of economies of scale, trade can increase the variety of goods available and decrease the average cost of these goods.

New trade

Which theory was based on the observation that early in the development of a commodity, all the parts and labor come from the area in which it was invented?

Product life-cycle

Which theory is said to predict trade patterns more accurately?

Ricardo

The Leontief paradox would be used to explain which of these situations?

The US exports goods that require skilled labor and imports heavy manufacturing products that require large amounts of capital.

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibilities frontier?

Constant

Raymond Vernon's product life-cycle theory was based on the observation that for most of the 1900s the majority of the world's new products were developed in

United States

Economist David Hume argued that an inherent inconsistency with mercantilism is that in the long run no country could sustain

a surplus on the balance of trade.

The theory of ______ advantage was the first to attack the tenet of mercantilism which implied that trade is a zero-sum game.

absolute

When a country is more efficient at producing a product than any other country, the country has a(n) ______ advantage in the production of that product. political

absolute

According to Adam Smith's theory of absolute advantage, who benefits from engaging in trade?

both countries engaging in a trade process

Economic studies have suggested that according to the theory of ______ advantage, countries will experience higher growth rates if they follow a more open stance toward international growth.

comparative

Ricardo's theory of _____ advantage states that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and then purchase the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

comparative

Heckscher and Ohlin identified differences in national factor endowments as the root of ______

comparative advantage

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibilities frontier?

constant

According to product life-cycle theory, as products mature, ______ considerations become far more important in the competitive process.

cost

What was the basic premise of mercantilism?

countries should encourage exports and discourage imports

A production possibilities frontier shows returns to specialization when more units of resources are required to produce each additional unit. (Choose diminishing or increasing.)

diminishing

Country A wants to produce more rice. Unfortunately, it will have to farm less productive land to produce this rice. This fact represents the idea of ______ returns to specialization

diminishing

It takes 12 units of resources to produce 100 pounds of silk. It takes 13 units to produce 115 pounds of silk and 15 units to produce120 pounds of silk. This is an example of ______ returns to specialization.

diminishing

Which type of returns to specialization happen when additional units of resources are required to produce each additional unit?

diminishing

Based on the theories of Smith, Ricardo, and Heckscher-Ohlin, in a country with access to cheap labor, productive land, and diverse plant life, it makes sense to _____ agricultural goods.

export

Portugal can produce wine and cloth with less labor than England. But, given all factors of production, England can produce cloth relatively better than Portugal. According to Ricardo's theory of comparative advantage, it make sense for England to

export cloth and import wine from Portugal.

According to Heckscher and Ohlin, each country has certain ______, such as land, labor, and capital.

factor endowments

The Heckscher-Ohlin theory of international trade focuses on ______ when explaining what a country chooses to export.

factors of production

True or False: According to Adam Smith, a country should produce all goods at home that it can, even if it could buy those goods at a lower cost from other countries.

false

Manatee Mfg. is able to source parts for its refrigeration products from anywhere in the world because the United States does not place any quotas or limitations on the imports they need. This is a reflection of a _____ policy.

free trade

Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game where all participating countries realize economic gains.

free trade

______ is reflected in a nation in which the government does not attempt to influence what its citizens can buy from another country by applying import duties or what citizens can produce and sell to another country.

free trade

If a country has an open economy and embraces free trade, citizens, on average, will benefit from ______ income levels and living standards.

higher

New trade theory states that some countries specialize in the production and export of a particular product because

in certain industries the world can only support a limited number of firms.

Generally, an open economy can ____ increase, Correct Unavailable a country's stock of resources

increase

Generally, an open economy can increase/decrease a country's stock of

increase

If a country decides to focus production on wheat because it has an absolute advantage in this crop and it trades with another country that has an absolute advantage in its corn crop, then the level of production of these crops for both countries is likely to

increase

When a country decides to specialize in the production of one item, it is most likely to ___ the level of production of that item. (Choose increase or decrease.)

increase

One explanation for the Leontief paradox is that the US has an advantage and exports goods produced with

innovative technologies.

A country is said to have an absolute advantage in the production of an item when the country

is more efficient than any other country at producing the item.

When applying reasoning for why Japan exports automobiles or why Switzerland exports watches, David Ricardo's theory of comparative advantage bases the explanation in terms of differences in

labor productivity.

The final conclusion of the product life-cycle theory is that ultimately a product

may be exported back to the country where it was originally invented.

It has been argued that Donald Trump favors _____ views because he wants the country to export products but does not favor importing products.

mercantilism

When a government intervenes to achieve a surplus in the nation's balance of trade, this action is consistent with the main tenet of ______.

mercantilism

Which theory does NOT support unrestricted free trade between countries?

mercantilism

Free trade _____ the efficient use of resources within a country.

might increase

Because of economies of scale, some countries specialize in manufacturing a particular product (such as cars) for which the global market can only support a limited number of firms. This is a reflection of _____.

new trade theory

In the real world, it costs money to move products from one country to another, but Ricardo's model does not address these ______ costs.

transportation

True or false: The US has an abundance of arable land and has long been an exporter of agricultural products. This is a good application of the Heckscher-Ohlin theory.

true

true or false: The benefits from free trade are not evenly distributed throughout an economy.

true

A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many

unrealistic assumptions.

The trade theories associated with Smith and Ricardo advocate for _____ free trade.

unrestricted

The proponents of mercantilism see trade as a ______ -sum game.

zero

According to the product life cycle theory, when a product is in the early stages of its life cycle, it is most likely to be produced and exported from

the country where it was developed.

Comparative Advantage (just the general concept of comparative advantage, difference between Absolute Advantage and Comparative Advantage, gains from trade, positive-sum game, assumptions, constant returns vs. diminishing return)

- David Ricardo took Adam Smith's theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. Smith's theory of absolute advantage suggests that such a country might derive no benefits from international trade. In his 1817 book Principles of Political Economy, Ricardo showed that this was not the case. According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. While this may seem counterintuitive, the logic can be explained with a simple example. Assume that Ghana is more efficient in the production of both cocoa and rice; that is, Ghana has an absolute advantage in the production of both products. In Ghana it takes 10 resources to produce 1 ton of cocoa and 13½ resources to produce 1 ton of rice. Thus, given its 200 units of resources, Ghana can produce 20 tons of cocoa and no rice, 15 tons of rice and no cocoa, or any combination in between on its PPF (the line GG' in Figure 6.2). In South Korea it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Thus, South Korea can produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or any combination on its PPF (the line KK' in Figure 6.2). Again assume that without trade, each country uses half its resources to produce rice and half to produce cocoa. Thus, without trade, Ghana will produce 10 tons of cocoa and 7.5 tons of rice (point A in Figure 6.2), while South Korea will produce 2.5 tons of cocoa and 5 tons of rice (point B in Figure 6.2). In light of Ghana's absolute advantage in the production of both goods, why should it trade with South Korea? Although Ghana has an absolute advantage in the production of both cocoa and rice, it has a comparative advantage only in the production of cocoa: Ghana can produce 4 times as much cocoa as South Korea, but only 1.5 times as much rice. Ghana is comparatively more efficient at producing cocoa than it is at producing rice. Without trade the combined production of cocoa will be 12.5 tons (10 tons in Ghana and 2.5 in South Korea), and the combined production of rice will also be 12.5 tons (7.5 tons in Ghana and 5 tons in South Korea). Without trade each country must consume what it produces. By engaging in trade, the two countries can increase their combined production of rice and cocoa, and consumers in both nations can consume more of both goods. - Imagine that Ghana exploits its comparative advantage in the production of cocoa to increase its output from 10 tons to 15 tons. This uses up 150 units of resources, leaving the remaining 50 units of resources to use in producing 3.75 tons of rice (point C in Figure 6.2). Meanwhile, South Korea specializes in the production of rice, producing 10 tons. The combined output of both cocoa and rice has now increased. Before specialization, the combined output was 12.5 tons of cocoa and 12.5 tons of rice. Now it is 15 tons of cocoa and 13.75 tons of rice (3.75 tons in Ghana and 10 tons in South Korea). The source of the increase in production is summarized. Not only is output higher, but both countries also can now benefit from trade. If Ghana and South Korea swap cocoa and rice on a one-to-one basis, with both countries choosing to exchange 4 tons of their export for 4 tons of the import, both countries are able to consume more cocoa and rice than they could before specialization and trade. Thus, consumption of cocoa and rice can increase in both countries as a result of specialization and trade. The basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade. Ricardo's theory suggests that consumers in all nations can consume more if there are no restrictions on trade. This occurs even in countries that lack an absolute advantage in the production of any good. In other words, to an even greater degree than the theory of absolute advantage, the theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains. - Qualifications and Assumptions - 1. We have assumed a simple world in which there are only two countries and two goods. 2. We have assumed away transportation costs between countries. 3. We have assumed away differences in the prices of resources in different countries. 4. We have assumed that resources can move freely from the production of one good to another within a country. 5. We have assumed constant returns to scale; that is, that specialization by Ghana or South Korea has no effect on the amount of resources required to produce one ton of cocoa or rice. In reality, both diminishing and increasing returns to specialization exist. The amount of resources required to produce a good might decrease or increase as a nation specializes in production of that good. 6. We have assumed that each country has a fixed stock of resources and that free trade does not change the efficiency with which a country uses its resources. 7. We have assumed away the effects of trade on income distribution within a country. ? Although a detailed extension of the theory of comparative advantage is beyond the scope of this book, economists have shown that the basic result derived from our simple model can be generalized to a world composed of many countries producing many different goods. However, once all the assumptions are dropped, the case for unrestricted free trade, while still positive, has been argued by some economists associated with the "new trade theory" to lose some of its strength, - Extensions of the Ricardian Model - - Immobile Resources - In our simple comparative model of Ghana and South Korea, we assumed that producers (farmers) could easily convert land from the production of cocoa to rice and vice versa. While this assumption may hold for some agricultural products, resources do not always shift quite so easily from producing one good to another. A certain amount of friction is involved. While the theory predicts that the benefits of free trade outweigh the costs by a significant margin, this is of cold comfort to those who bear the costs. Accordingly, political opposition to the adoption of a free trade regime typically comes from those whose jobs are most at risk. - Diminishing Returns - The simple comparative advantage model developed above assumes constant returns to specialization. By constant returns to specialization we mean the units of resources required to produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF). Thus, we assumed that it always took Ghana 10 units of resources to produce 1 ton of cocoa. However, it is more realistic to assume diminishing returns to specialization. Diminishing returns to specialization occur when more units of resources are required to produce each additional unit. While 10 units of resources may be sufficient to increase Ghana's output of cocoa from 12 tons to 13 tons, 11 units of resources may be needed to increase output from 13 to 14 tons. It is more realistic to assume diminishing returns for two reasons. First, not all resources are of the same quality. As a country tries to increase its output of a certain good, it is increasingly likely to draw on more marginal resources whose productivity is not as great as those initially employed. The result is that it requires ever more resources to produce an equal increase in output. A second reason for diminishing returns is that different goods use resources in different proportions. For example, imagine that growing cocoa uses more land and less labor than growing rice and that Ghana tries to transfer resources from rice production to cocoa production. The rice industry will release proportionately too much labor and too little land for efficient cocoa production. To absorb the additional resources of labor and land, the cocoa industry will have to shift toward more labor-intensive methods of production. The effect is that the efficiency with which the cocoa industry uses labor will decline, and returns will diminish. Diminishing returns show that it is not feasible for a country to specialize to the degree suggested by the simple Ricardian model outlined earlier. Diminishing returns to specialization suggest that the gains from specialization are likely to be exhausted before specialization is complete. In reality, most countries do not specialize, but instead produce a range of goods. However, the theory predicts that it is worthwhile to specialize until that point where the resulting gains from trade are outweighed by diminishing returns. - Dynamic Effects and Economic Growth - The simple comparative advantage model assumed that trade does not change a country's stock of resources or the efficiency with which it utilizes those resources. This static assumption makes no allowances for the dynamic changes that might result from trade. If we relax this assumption, it becomes apparent that opening an economy to trade is likely to generate dynamic gains of two sorts.9 First, free trade might increase a country's stock of resources as increased supplies of labor and capital from abroad become available for use within the country. Second, free trade might also increase the efficiency with which a country uses its resources. Gains in the efficiency of resource utilization could arise from a number of factors. For example, economies of large-scale production might become available as trade expands the size of the total market available to domestic firms. Trade might make better technology from abroad available to domestic firms; better technology can increase labor productivity or the productivity of land. e. The theory suggests that opening an economy to free trade not only results in static gains of the type discussed earlier but also results in dynamic gains that stimulate economic growth. - The Samuelson Critique - Paul Samuelson's critique looks at what happens when a rich country—the United States—enters into a free trade agreement with a poor country—China— that rapidly improves its productivity after the introduction of a free trade regime (i.e., there is a dynamic gain in the efficiency with which resources are used in the poor country). Samuelson's model suggests that in such cases, the lower prices that U.S. consumers pay for goods imported from China following the introduction of a free trade regime may not be enough to produce a net gain for the U.S. economy if the dynamic effect of free trade is to lower real wage rates in the United States. It will lower the market clearing wage rate, perhaps by enough to outweigh the positive benefits of international trade. Having said this, it should be noted that Samuelson concedes that free trade has historically benefited rich counties (as data discussed later seem to confirm). Moreover, he notes that introducing protectionist measures (e.g., trade barriers) to guard against the theoretical possibility that free trade may harm the United States in the future may produce a situation that is worse than the disease they are trying to prevent. The researchers found that regions most exposed to China tended not only to lose more manufacturing jobs but also to see overall employment decline. - Evidence for the Link between Trade and Growth - countries that adopt a more open stance toward international trade enjoy higher growth rates than those that close their economies to trade. . Higher growth will raise income levels and living standards - Constant Returns to Specialization - The units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier

Economic Implications of Christianity, Islam, Hinduism, Buddhism, Confucianism

- Christianity - Protestants has the most important economic implication. There is a connection between Protestant ethics and "the spirit of capitalism". Weber theorized that the relationship between Protestantism and the emergence of modern capitalism. Protestant ethics emphasizes the importance of hard work and wealth creation and frugality. This facilitated the development of capitalism. Their beliefs suggested that rather than consuming the wealth by indulging in worldly pleasures, they should invest it in the expansion of capitalist enterprises. In contrast, the Catholic promise of salvation in the next world, rather than this world, did not foster the same type of work ethic. The Protestants also encourage capitalism by breaking away from the Catholic Church and giving individuals significantly more freedom to develop their own relationship with God. The emphasis on individual religious freedom may have paved the way for the subsequent emphasis on individual economic and political freedoms. Based on this, some say there is a connection between individualism inspired by Protestantism and the extent of entrepreneurship in a nation. - Islam - Pro-free enterprise. Koran speaks approvingly of free enterprise and of earning legitimate profit through trade and commerce. Protection of the right to property is also embedded within Islam, although Islam asserts that all property is a favor from Allah. Those who hold property are regarded as trustees rather than owners. Entitled to receive profits from property but are admonished to use it in a righteous, socially beneficial, and prudent manner. Critical of those that earn profit through exploitation of others. Islam favors market-based systems, but will only work with businesses that have similar ethics. While fundamentalism rises, general hostility toward Western-owned businesses is likely to rise. One economic principle of Islam prohibits the payment or receipt of interest. Instead mudarabah is similar to a profit-sharing scheme. Under this when an Islamic bank lends money to a business, rather than charging business interest on the loan, it takes a share of the profits that are derived from the investment. Or Murabaha contracts are used, which when a firm wishes the purchase something using a loan, the firm tells the bank after having negotiated the price with the manufacturer. The bank then buys the equipment and the firm has to buy it back at a later date. - Hinduism - Ascetic principles embedded in Hinduism do not encourage the kind of entrepreneurial activity seen in Protestantism. Material well-being mad Nirvana harder to achieve. this causes a negative impact on the economic development of India. Hinduism also supported the caste system and saw mobility as something that is achieved through spiritual progression and reincarnation. - Buddhism - wealth creation is not embedded in Buddhism. No cultural stress for entrepreneurship. But unlike Hinduism, the lack of support for caste systems and extreme ascetic behavior suggest that a Buddhist society may represent a more fertile ground for entrepreneurship. Economies were localized and relationships were unmediated. - Confucianism - Economic implications as profound as Protestantism. Basic thesis is that the influence of Confucian ethics on the culture of China, South Korea, and Taiwan, by lowering costs in doing businesses in those countries, may help explain their economic success. Three central values to Confucian systems of ethics: loyalty, reciprocal obligation, and honesty when dealing with others. Loyalty that binds employees to managers reduces conflict. Reciprocal obligations stresses that superiors are obligated to reward loyalty by bestowing blessings on them. Dishonest behavior yields only short-term benefits but doesn't pay off in the long run. The cost of contracts are lowered and lawyers are not needed.

What is Culture (Values, Norms - Folkways, Mores)

- Culture actually affects how different people define culture itself. Values orientation theory of culture states that all definitions of culture must answer a limited number of universal problems, that the value-based solutions are limited in number and universally known, and that different cultures have different preferences among them - Hofstede Definition of Culture - the collective programming of the mind which distinguishes the members of one human group from another. Culture includes systems of values and values are among the building blocks of culture, - Culture - A system of values and norms that are shared among a group of people and that when taken together constitute a design for living. - Values - Abstract ideas about what a society believes to be good, right, and desirable. (Shared assumptions about how things ought to be) - Norms - Social rules and guidelines that prescribe appropriate behavior in particular situations - Society - Group of people who share a common set of values and norms (While a society might be equivalent to a country, some countries have several societies or subcultures, and some societies embrace more than one country.) - Values form the bedrock of a culture. Values provide the context within which a society's norms are established and justified. They may include a society's attitudes towards such concepts as individual freedom, democracy, truth, justice, sex, marriage. Values are not just abstract concepts, they are invested with considerable emotional significance.Also often reflected in the economic systems of society. - Norms are the social rules that govern people's actions towards one another. These norms can be subdivided into two major categories: folkways and mores. - Folkways - Routine conventions of everyday life. Actions of little moral significance. Rather, they are social conventions that deal with things like appropriate dress code in a particular situation, good social manners, eating with correct utensils. Violation of them are not a serious matter. Ex. is people's attitude toward time. Folkways also include rituals and symbolic behavior for example bowing. - Mores - Norms seen as central to the functioning of a society and to its social life. They are more widely observed and have greater moral significance. Violating mores can bring serious retribution, ill will, and the collapse of a business deal. Important enough to be enacted in law. Include laws against theft, adultery, incest, and cannibalism. - Nation-states are political creations. While nation-states are often studied for their "national identity", national character, and even competitive advantage of nations, in reality they may contain a single culture or several subcultures. - To complicate things further, it is also possible to talk about culture at different levels. It is reasonable to talk about "American society' and "American culture" but there are several societies within America, each with its own culture. Ex. African American Culture, Chinese American Culture. Even if a country can be characterized as having a single homogeneous culture, often the national culture is a mosaic of subcultures. - Values and norms of a culture evolve over time in response to a number of factors. These include prevailing political and economic philosophies, the social structure of a society, and the dominant religion, language, and education.

Culture and Business (Hofstede dimensions and their business implications)

- Dimensions - power distance, uncertainty avoidance, individualism vs collectivism, and masculinity vs femininity, long-term vs short-term orientation. - power distance - Theory of how a society deals with the fact that people are unequal in physical and intellectual capabilities. High power distance cultures are found in countries that let inequalities grow over time into inequalities of power and wealth; low power distance cultures are found in societies that try to play down such inequalities as much as possible. - individualism vs collectivism - Theory focusing on the relationship between the individual and his fellows; in individualistic societies the ties between individuals are loose and individual achievement is highly valued. In societies where collectivism is emphasized, ties between individuals are tight, people are born into collectives, such as extended families, and everyone is supposed to look after the interests of his collective. - Uncertainty Avoidance - Extent to which culture socialize members to accept ambiguous situations and to tolerate uncertainty. Members of high uncertainty avoidance cultures placed a premium on job security, career patterns, retirement benefits. Strong need for rules and regulations. Low uncertainty avoidance cultures are characterized by greater readiness to take risks and less emotional resistance to change. - Masculinity vs Femininity - Theory of the relationship between gender and work roles. In masculine cultures, sex roles are sharply differentiated and traditional "masculine values" such as achievement and the effective exercise of power determine cultural ideals; in feminine cultures, sex roles are less sharply distinguishes, and little differentiation is made between men and women in the same job. - Long-term vs Short-term Orientation - The theory of the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs. It captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors. - Indulgence vs Restraint - Indulgence refers to a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun. Restraint refers to a society that suppresses gratification of needs and regulates it by means of strict social norms - Criticisms of dimensions - Assumes there is a one-to-one correspondence between culture and the nation-state, but many countries have more than one culture. The research has been culturally bound to Europeans and Americans. Informants worked not only within a single industry, but also within one company. - GLOBE - designed to address the notion that a leader's effectiveness is contextual. - World Values Survey - explores people's vales and norms, how they change over time, and what impact they have in society and business.

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability

- Ethics - Accepted Principles of right and wrong that govern the conduct of a person, the members of a profession, or the actions of an organization - Business ethics - the accepted principles of right and wrong governing the conduct of business people. - Ethical Strategy - A course of action that does not violate a company's business ethics.

Appendix A - International Trade and Balance of Payments (concepts of balance of payment, current account, current account deficit, current account surplus, capital account, financial account, how each of these concepts relate to each other)

- International trade involves the sale of goods and services to residents in other countries (exports) and the purchase of goods and services from residents in other countries (imports) - Balance-of-payments accounts - National accounts that track both payments to and receipts from foreigners. These include payments to foreigners for imports of goods and services, and receipts from foreigners for goods and services exported to them. - Balance-of-payments accounts are divided into three main sections: the current account, the capital account, and the financial account - Current Account - records transactions involving the export or import of goods and services - Current Account Deficit -occurs when a country imports more goods, services, and income than it exports. - Current Account Surplus -occurs when a country exports more goods, services, and income than it imports. - In recent years, the U.S. current account deficit has been fairly significant, primarily because America imports far more physical goods than it exports. - Capital Account - t records one-time changes in the stock of assets. Ex. The capital account includes capital transfers, such as debt forgiveness and migrants' transfers - Financial Account - records transactions that involve the purchase or sale of assets. Ex. Thus, when a German firm purchases stock in a U.S. company or buys a U.S. bond, the transaction enters the U.S. balance of payments as a credit on the financial account. - The financial account is comprised of a number of elements. The net U.S. acquisition of financial assets includes the change in foreign assets owned by the U.S. government (e.g., U.S. official reserve assets) and the change in foreign assets owned by private individuals and corporations - A basic principle of balance-of-payments accounting is double-entry bookkeeping. Every international transaction automatically enters the balance of payments twice—once as a credit and once as a debit. Thus, any international transaction automatically gives rise to two offsetting entries in the balance of payments. Because of this, the sum of the current account balance, the capital account, and the financial account balance should always add up to zero. - Does the Current Account Deficit Matter - As discussed earlier, there is some concern when a country is running a deficit on the current account of its balance of payments.39 In recent years, a number of rich countries, including most notably the United States, have run persistent current account deficits. When a country runs a current account deficit, the money that flows to other countries can then be used by those countries to purchase assets in the deficit country. For example, as a result of financing its current account deficit through asset sales, the United States must deliver a stream of interest payments to foreign bondholders, rents to foreign landowners, and dividends to foreign stockholders. One might argue that such payments to foreigners drain resources from a country and limit the funds available for investment within the country. Since investment within a country is necessary to stimulate economic growth, a persistent current account deficit can choke off a country's future economic growth. However, things are not this simple. For one thing, in an era of global capital markets, money is efficiently directed toward its highest value uses, and over the past quarter of a century, many of the highest value uses of capital have been in the United States. So even though capital is flowing out of the United States in the form of payments to foreigners, much of that capital finds its way right back into the country to fund productive investments in the United States. This revisionist view, which has gained in popularity in recent years, suggests that a persistent current account deficit might not be the drag on economic growth it was once thought to be. Having said this, there is still a nagging fear that at some point, the appetite that foreigners have for U.S. assets might decline. ? In short, instead of reinvesting the dollars that they earn from exports and investment in the United States back into the country, they would sell those dollars for another currency. This would lead to a fall in the value of the dollar on foreign exchange markets, and that in turn would increase the price of imports and lower the price of U.S. exports, making them more competitive, which should reduce the overall level of the current account deficit. Thus, in the long run, the persistent U.S. current account deficit could be corrected via a reduction in the value of the U.S. dollar. The concern is that such adjustments may not be smooth. Rather than a controlled decline in the value of the dollar, the dollar might suddenly lose a significant amount of its value in a very short time, precipitating a "dollar crisis." Because the U.S. dollar is the world's major reserve currency and is held by many foreign governments and banks, any dollar crisis could deliver a body blow to the world economy and at the very least trigger a global economic slowdown. That would not be a good thing

Focus on Managerial Implications (location, first-mover advantage, and government policy -- general implications for companies)

- Location - Underlying most of the theories we have discussed is the notion that different countries have particular advantages in different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. The result is a global web of productive activities, with different activities being performed in different locations around the globe depending on considerations of comparative advantage, factor endowments, and the like. If the firm does not do this, it may find itself at a competitive disadvantage relative to firms that do. - First-Mover Advantages - According to the new trade theory, firms that establish a first-mover advantage with regard to the production of a particular new product may subsequently dominate global trade in that product. This is particularly true in industries where the global market can profitably support only a limited number of firms. For the individual firm, the clear message is that it pays to invest substantial financial resources in trying to build a first-mover, or early-mover, advantage, even if that means several years of losses before a new venture becomes profitable. The idea is to preempt the available demand, gain cost advantages related to volume, build an enduring brand ahead of later competitors, and, consequently, establish a long-term sustainable competitive advantage. - Government Policy - The theories of international trade also matter to international businesses because firms are major players on the international trade scene. Business firms produce exports, and business firms import the products of other countries. Because of their pivotal role in international trade, businesses can exert a strong influence on government trade policy, lobbying to promote free trade or trade restrictions. The theories of international trade claim that promoting free trade is generally in the best interests of a country, although it may not always be in the best interest of an individual firm. Businesses do not always lobby for free trade. In the United States, for example, restrictions on imports of steel have periodically been put into place in response to direct pressure by U.S. firms on the government. In some cases, the government has responded to pressure by getting foreign companies to agree to "voluntary" restrictions on their imports, using the implicit threat of more comprehensive formal trade barriers to get them to adhere to these agreements. Finally, Porter's theory of national competitive advantage also contains policy implications. Porter's theory suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production (for example, to invest in better training for its employees) and to increase its commitment to research and development. It is also in the best interests of business to lobby the government to adopt policies that have a favorable impact on each component of the national diamond. Thus, according to Porter, businesses should urge government to increase investment in education, infrastructure, and basic research (since all these enhance advanced factors) and to adopt policies that promote strong competition within domestic markets.

Ethics and International Business (how ethics relates to the various topics, tragedy of the commons, FCPA, OECD Convention)

- Many of the ethical issues in international business are rooted in the fact that political systems, law, economic development, and culture vary significantly from nation to nation. What is considered normal practice in one nation may be considered unethical in another - In the international business setting, the most common ethical issues involve employment practices, human rights, environmental regulations, corruption, and the moral obligation of multinational corporations. - As the Nike case demonstrates, a strong argument can be made that it is not okay for a multinational firm to tolerate poor working conditions in its foreign operations or those of subcontractors. However, this still leaves unanswered the question of which standards should be applied. For now, note that establishing minimal acceptable standards that safeguard the basic rights and dignity of employees, auditing foreign subsidiaries and subcontractors on a regular basis to make sure those standards are met, and taking corrective action if they are not up to standards are a good way to guard against ethical abuses - Rights taken for granted in developed nations, such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, freedom from political repression, and so on, are by no means universally accepted. Ex. The apartheid system denied basic political rights to the majority nonwhite population of South Africa, mandated segregation between whites and nonwhites, reserved certain occupations exclusively for whites, and prohibited blacks from being placed in positions where they would manage whites. Despite the odious nature of this system, businesses from developed nations operated in South Africa. In the decade prior to apartheid's abolishment, however, many questioned the ethics of doing so. They argued that inward investment by foreign multinationals, by boosting the South African economy, supported the repressive apartheid regime. GM adopted what came to be called the Sullivan principles. Sullivan argued that it was ethically justified for GM to operate in South Africa so long as two conditions were fulfilled. First, the company should not obey the apartheid laws in its own South African operations (a form of passive resistance). Second, the company should do everything within its power to promote the abolition of apartheid laws -Although change has come in South Africa, many repressive regimes still exist in the world. Only about 45% of the world's population are living in democratic countries. People that are not free face severe consequences if they try to exercise basic rights. -It is often argued that inward investment by a multinational can be a force for economic, political, and social progress that ultimately improves the rights of people in repressive regimes. This position was first discussed in Chapter 2, when we noted that economic progress in a nation could create pressure for democratization. In general, this belief suggests it is ethical for a multinational to do business in nations that lack the democratic structures and human rights records of developed nations. Investment in China, for example, is frequently justified on the grounds that although China's human rights record is often questioned by human rights groups and although the country is not a democracy, continuing inward investment will help boost economic growth and raise living standards. There is a limit to this argument. As in the case of South Africa, some regimes are so repressive that investment cannot be justified on ethical grounds - Ethical issues arise when environmental regulations in host nations are inferior to those in the home nation. Many developed nations have substantial regulations governing the emission of pollutants, the dumping of toxic chemicals, the use of toxic materials in the workplace, and so on. Those regulations are often lacking in developing nations, and, according to critics, the result can be higher levels of pollution from the operations of multinationals than would be allowed at home. - The Tragedy of the Commons - occurs when a resource held in common by all but owned by no one is overused by individuals, resulting in its degradation. Ex. Large open areas, called commons, were free for all to use as pasture. The poor put out livestock on these commons and supplemented their meager incomes. It was advantageous for each to put out more and more livestock, but the social consequence was far more livestock than the commons could handle. The result was overgrazing, degradation of the commons, and the loss of this much-needed supplement. - Corporations can contribute to the global tragedy of the commons by moving production to locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons. While such action may be legal, is it ethical? Again, such actions seem to violate basic societal notions of ethics and corporate social responsibility. - International businesses can and have gained economic advantages by making payments to those officials. - Foreign Corrupt Practices Act (FCPA) - US regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions. The act outlawed the paying of bribes to foreign government officials to gain business. Some U.S. businesses immediately objected that the act would put U.S. firms at a competitive disadvantage (there is no evidence that has occurred). The act was subsequently amended to allow for "facilitating payments." Sometimes known as speed money or grease payments, facilitating payments are not payments to secure contracts that would not otherwise be secured, nor are they payments to obtain exclusive preferential treatment. Rather they are payments to ensure receiving the standard treatment that a business ought to receive from a foreign government but might not due to the obstruction of a foreign official -The trade and finance ministers from the member states of the Organisation for Economic Co-operation and Development (OECD) followed the U.S. lead and adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The convention, which went into force in 1999, obliges member states and other signatories to make the bribery of foreign public officials a criminal offense. The convention excludes facilitating payments made to expedite routine government action from the convention. - Convention on Combating Bribery of Foreign Public Officials in International Business Transactions - An OECD convention that established legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective. - From a pragmatic standpoint, giving bribes, although a little evil, might be the price that must be paid to do a greater good (assuming the investment creates jobs where none existed and assuming the practice is not illegal). Several economists advocate this reasoning, suggesting that in the context of pervasive and cumbersome regulations in developing countries, corruption may improve efficiency and help growth! These economists theorize that in a country where preexisting political structures distort or limit the workings of the market mechanism, corruption in the form of black-marketeering, smuggling, and side payments to government bureaucrats to "speed up" approval for business investments may enhance welfare. - In contrast, other economists have argued that corruption reduces the returns on business investment and leads to low economic growth. In a country where corruption is common, unproductive bureaucrats who demand side payments for granting the enterprise permission to operate may siphon off the profits from a business activity. This reduces businesses' incentive to invest and may retard a country's economic growth rate. Another study found that firms that paid more in bribes are likely to spend more, not less, management time with bureaucrats negotiating regulations and that this tended to raise the costs of the firm. Consequently, many multinationals have adopted a zero-tolerance policy.

National Competitive Advantage: Porter's Diamond (the different determinants)

- Porter theorizes that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage. These attributes are: Factor endowments—a nation's position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry.; Demand conditions—the nature of home demand for the industry's product or service.; Related and supporting industries—the presence or absence of supplier industries and related industries that are internationally competitive.;∙ Firm strategy, structure, and rivalry—the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry. -Porter speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where the diamond is most favorable. He also argues that the diamond is a mutually reinforcing system. The effect of one attribute is contingent on the state of others. Porter maintains that two additional variables can influence the national diamond in important ways: chance and government. - Factor Endowments - Factor endowments lie at the center of the HeckscherOhlin theory. While Porter does not propose anything radically new, he does analyze the characteristics of factors of production. He recognizes hierarchies among factors, distinguishing between basic factors (e.g., natural resources, climate, location, and demographics) and advanced factors (e.g., communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how). He argues that advanced factors are the most significant for competitive advantage. Unlike the naturally endowed basic factors, advanced factors are a product of investment by individuals, companies, and governments. The relationship between advanced and basic factors is complex. Basic factors can provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors. Conversely, disadvantages in basic factors can create pressures to invest in advanced factors. - Demand Conditions - Porter emphasizes the role home demand plays in upgrading competitive advantage. Firms are typically most sensitive to the needs of their closest. customers. Thus, the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality. Porter argues that a nation's firms gain competitive advantage if their domestic consumers are sophisticated and demanding. Such consumers pressure local firms to meet high standards of product quality and to produce innovative products. - Related and Supporting Industries - The third broad attribute of national advantage in an industry is the presence of suppliers or related industries that are internationally competitive. The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally. One consequence of this process is that successful industries within a country tend to be grouped into clusters of related industries. y. Such clusters are important because valuable knowledge can flow between the firms within a geographic cluster, benefiting all within that cluster. Knowledge flows occur when employees move between firms within a region and when national industry associations bring employees from different companies together for regular conferences or workshops. - Firm Strategy, Structure, and Rivalry - Porter makes two important points here. First, different nations are characterized by different management ideologies, which either help them or do not help them build national competitive advantage. Porter's second point is that there is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors. - Evaluating Porter's Theory - Porter contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and domestic rivalry. He argues that the presence of all four components is usually required for this diamond to boost competitive performance (although there are exceptions). Porter also contends that government can influence each of the four components of the diamond—either positively or negatively.If Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable.

Religious and Ethical Systems (ethical, behavioral, and economical differences between the cultures)

- Religion - A system of shared beliefs and rituals concerned with the realm of the sacred. - Ethical system - A set of moral principles, or values, that is used to guide and shape behavior. - Most of the world's ethical systems are the product of religions. Thus we can talk about Christian ethics and Islamic ethics. Confucianism, however, influence behavior and shape culture in parts of Asia, yet is incorrect to characterize Confucianism as a religion. - Four dominant religions: Christianity, Islam, Hinduism, and Buddhism. Some scholars have theorized that the most important business implications of religion center on the extent to which different religions shape attitudes toward work and entrepreneurship and the degree to which the religious ethics affect the costs of doing business in a country. It is hazardous to make sweeping generalizations so it is important to view such proposed relationships with a degree of skepticism. Some argue there is a relationship between religious and ethical systems and business practice in a society. Many religions show evidence of entrepreneurial activity and sustainable economic growth. The proposed relationship mughtexist but their impact may be small compared to the impact of economic policy. On the other hand research does show that strong religious beliefs in heaven and hell have a positive impact on economic growth rates. Higher religious beliefs stimulate economic growth because they help sustain aspects of individual behavior that lead to higher productivity. - Christianity - Vast majority live in Europe and the Americas, although numbers are growing in Africa. Grew out of Judaism. It is a monotheistic religion. a religious division in the eleventh century led to two major Christian organizations - Roman Catholic Church (more that half of Christians today) and the Orthodox Church. In the sixteenth century, the Reformation led to Protestantism. - Islam - Based on Prophet Muhammad. Adherents of Islam are referred to as Muslims. Has roots in Judaism and Christianity and is a monotheistic religion. Requires unconditional acceptance of the uniqueness, power, and authority of God, and understanding that the objective of life is to fulfill the dictates of His will in the hope of paradise. Worldly gain are an illusion and those who forgo worldly ambitions to seek the favor of Allah may gain paradise. Islam is an all-embracing way of life and a Muslim is not a totally free agent. Muslims live in a social structure that is shaped by Islamic values. Requires prayer five times a day, women must dress a certain way, and forbids consumption of pork and alcohol. - Islamic Fundamentalism - In the west, associated in the media with militants, terrorists, and violent upheavals. For most, this characterization is misleading. A small minority of radical "fundamentalists" who have hijacked the religion to further their own political and violent ends perpetrate the violence that the Western media associates with Islamic fundamentalism. Ex. ISIS. The rise of Islamic fundamentalism has no one cause. In part it is a response to the social pressures created in traditional Islamic societies by the move toward modernization and by the influence of Western ideas. Fundamentalists demand a commitment to traditional religious beliefs and rituals. The sentiments of some fundamentalist groups are often Anti-Western. In many Islamic countries, fundamentalists have gained political power and have used this to try to make Islamic law (koran) the law of the land. - Hinduism - Most of them on Indian subcontinents. Oldest religion. Founding not linked to a particular person or sacred book. Hindus believe that a moral force in society requires the acceptance of certain responsibilities, called dharma. Reincarnation. Also believe in karma, which is the spiritual progression of a person's soul. It is affected by the way a person lives. Nirvana is a state of complete spiritual perfection that renders reincarnation no longer necessary. Believe this can be achieved through a severe ascetic lifestyle of material and physical self denial, devoting life to spiritual rather than material quest. - Buddhism - Founded by Siddhartha. Renounced wealth to pursue an ascetic lifestyle and spiritual perfection. Achieved Nirvana but stayed on earth to teach his followers. Known as Buddha. Usually found in Asia, Korea, and Japan. Suffering originates in people's desire for pleasure. Noble Eightfold Path as a route for transformation. Buddhism does not support caste systems or extreme ascetic behavior. - Confucianism - founded by K-ung-Fu-tzu or Confucius. Official ethical system of China. Teaches importance of attaining personal salvation through right action. Although not a religion, Confucian ideology is embedded in cultures around the world. Built around an comprehensive ethical code that sets down guidelines for relationships with others. High moral and ethical conduct and loyalty to others are central.

Heckscher-Ohlin Theory (general concept, factor endowments, The Leontief Paradox)

- Ricardo's theory stresses that comparative advantage arises from differences in productivity. Thus, whether Ghana is more efficient than South Korea in the production of cocoa depends on how productively it uses its resources. Ricardo stressed labor productivity and argued that differences in labor productivity between nations underlie the notion of comparative advantage. e. Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933) put forward a different explanation of comparative advantage. They argued that comparative advantage arises from differences in national factor endowments. By factor endowments they meant the extent to which a country is endowed with such resources as land, labor, and capital. Nations have varying factor endowments, and different factor endowments explain differences in factor costs; specifically, the more abundant a factor, the lower its cost. The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. . Like Ricardo's theory, the Heckscher-Ohlin theory argues that free trade is beneficial. Unlike Ricardo's theory, however, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity. - The Leontief Paradox - Most economists prefer the HeckscherOhlin theory to Ricardo's theory because it makes fewer simplifying assumptions. Using the Heckscher-Ohlin theory, Leontief postulated that because the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital intensive goods and an importer of labor-intensive goods. To his surprise, however, he found that U.S. exports were less capital intensive than U.S. imports. Because this result was at variance with the predictions of the theory, it has become known as the Leontief paradox. No one is quite sure why we observe the Leontief paradox. One possible explanation is that the United States has a special advantage in producing new products or goods made with innovative technologies. Such products may be less capital intensive than products whose technology has had time to mature and become suitable for mass production. Thus, the United States may be exporting goods that heavily use skilled labor and innovative entrepreneurship, such as computer software, while importing heavy manufacturing products that use large amounts of capital. They prefer the Heckscher-Ohlin theory on theoretical grounds, but it is a relatively poor predictor of real-world international trade patterns. On the other hand, the theory they regard as being too limited, Ricardo's theory of comparative advantage, actually predicts trade patterns with greater accuracy. The best solution to this dilemma may be to return to the Ricardian idea that trade patterns are largely driven by international differences in productivity. A key assumption in the Heckscher-Ohlin theory is that technologies are the same across countries. This may not be the case. Differences in technology may lead to differences in productivity, which in turn, drives international trade patterns. The new research shows that once differences in technology across countries are controlled for, countries do indeed export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. In other words, once the impact of differences of technology on productivity is controlled for, the Heckscher-Ohlin theory seems to gain predictive power. - Factor Endowments - A country's endowment with resources such as land, labor, and capital.

Roots of Unethical Behavior (the various motivations and reasons for unethical behavior - essentially what the implication of each subsection is)

- Six Determinants of Ethical Behavior - personal ethics, decision-making processes, organizational culture, unrealistic performance goals, leadership, and societal culture - Personal Ethics - the generally accepted principles of right and wrong governing the conduct of individuals. The personal ethical code that guides our behavior comes from a number of sources, including our parents, our schools, our religion, and the media. Our personal ethical code exerts a profound influence on the way we behave as business people. An individual with a strong sense of personal ethics is less likely to behave in an unethical manner in a business setting. It follows that the first step to establishing a strong sense of business ethics is for a society to emphasize strong personal ethics. - Decision- Making Processes - Several studies of unethical behavior in a business setting have concluded that business people sometimes do not realize they are behaving unethically, primarily because they simply fail to ask, "Is this decision or action ethical?"22 Instead, they apply a straightforward business calculus to what they perceive to be a business decision, forgetting that the decision may also have an important ethical dimension. The fault lies in processes that do not incorporate ethical considerations into business decision making. To improve ethical decision making in a multinational firm, the best starting point is to better understand how individuals make decisions that can be considered ethical or unethical in an organizational environment. Two assumptions must be taken into account. First, too often it is assumed that individuals in the workplace make ethical decisions in the same way as they would if they were home. Second, too often it is assumed that people from different cultures make ethical decisions following a similar process. Both of these assumptions are problematic. First, within an organization, there are very few individuals who have the freedom to decide ethical issues independent of pressures that may exist in an organizational setting. Second, while the process for making an ethical decision may largely be the same in many countries, the relative emphasis on certain issues are unlikely to be the same. - Organizational Culture - the values and norms shared among an organization's employees. The culture in some businesses does not encourage people to think through the ethical consequences of business decisions. This brings us to the third cause of unethical behavior in businesses: an organizational culture that deemphasizes business ethics, reducing all decisions to the purely economic. - Unrealistic Performance Goals - pressure from the parent company to meet unrealistic performance goals that can be attained only by cutting corners or acting in an unethical manner. The combination of an organizational culture that legitimizes unethical behavior, or at least turns a blind eye to such behavior, and unrealistic performance goals may be particularly toxic. In such circumstances, there is a greater than average probability that managers will violate their own personal ethics and engage in unethical behavior. - Leadership - Leaders help establish the culture of an organization, and they set the example, rules, and guidelines that others follow as well as the structure and processes for operating both strategically and in daily operations. Employees often operate and work within a defined structure with a mindset very much similar to the overall culture of the organization that employs them. Additionally, employees in a business often take their cue from business leaders, and if those leaders do not behave in an ethical manner, the employees might not either. It is not just what leaders say that matters but what they do or do not do. - Societal Culture - Using Hofstede's dimensions of social culture, the study found that enterprises headquartered in cultures where individualism and uncertainty avoidance are strong were more likely to emphasize the importance of behaving ethically than firms headquartered in cultures where masculinity and power distance are important cultural attributes

Social Structure (Individuals and Groups, Social Stratification, Social mobility, caste and class systems)

- Social Structure - the basic social organization of a society. How a society is organized in terms of its values, norms, and the relationships that are part of the society's fabric. How society operates and how people, groups, and companies treat each other both emerge from and are determinants of the behaviors of individuals in a specific society - Two Important dimensions of social structure - The degree to which the basic unit of a social organization is the individual, as opposed to the group, or even company for which a person works. The second dimension is the degree to which a society is stratifies into classes or castes. - Group - An association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior. Individuals are involved in families, work groups and social groups. Social media have expanded the boundaries of what is included in group life and placed an emphasis on what we can call extended social groups. While groups are found in all societies, some societies differ according to the degree to which the group is viewed as the primary means of social organization. In some societies individual attributes and achievements are views as being more important and group membership is more important in others. - The Individual - In western societies, the individual is the basic building block of social organization. Reflected in the political and economic organization of society and in the way people perceive themselves and relate to each other in social and business settings. More and more, individuals are regarded as "independent contractors" even though they belong to and work for a company. These individuals, in essence, build their personal brands by the knowledge, skills, and experience that they have, which often translates to increase salaries and promotions at the current company or another company that believes that it can benefit from that person's capabilities. Benefit - entrepreneurship and innovation. Individualism also finds expression in a high degree of managerial mobility between companies, but this is not always a good thing. Although moving from company to company may be good for individual managers who are trying to build impressive resumes and increase their salaries, it is not necessarily a good thing for companies because of a lack of loyalty and commitment. This can also lead to managers who have good general skills but lack the knowledge, experience, and network of contacts that come from years of working for the same company. One positive aspect of high managerial mobility, however, is that executives are exposed to different ways of doing business. - The Group - The group is the primary unit of social organizations in many other societies that aren't westernized. Example, in Japan the social status of an individual has traditionally been determined as much by the standing of the group to which he belongs as by his individual performance. Traditionally the group was the family or the village but today the group is usually associated with the work team or business organization. Benefits for the business firms due to the importance attached to group membership includes the fact that strong identification with the group is is argues to create pressure for mutual self-help and collective action. If the worth of an individual is closely linked to the achievements of the groups, this creates a strong incentive for individual members of the group to work together for the common good. This has found expression in the widespread diffusion of self-managing work teams within Japanese organizations; the close cooperation among different functions within Japanese companies; and the cooperation between a company and its suppliers on issues such as design, quality control, and inventory reduction. The primacy o the value of group identification also discourages managers and other workers from moving from company to company. Over years, managers and workers build knowledge, experience, and a network of interpersonal business contacts which help managers perform more effectively. The group of primacy is not always beneficial. Japanese society is characterized by a lack of dynamism and entrepreneurship. Some argue that individualistic societies are great at creating innovative ideas while collectivist, or group-oriented, societies are better at the implementation of those ideas. - Social Strata - Hierarchical social categories often based on family background, occupation, and income. Individuals are born into a particular stratum and become a member of the social category to which their parents belong. Individuals born toward the top have better life chances (better education, health, standard of living, and work opportunities) than those born towards bottom. -Although all societies are stratified to some degree, they differ in two related ways: First, they differ from each other with regard to the degree of mobility between social strata. Second, they differ with regard to the significance attached to social strata in business contexts. - Social stratification is based on four basic principles: Social stratification is a trait of society, not a reflection of individual differences; It carries over a generation to the next generation; It is generally universal but variable; Social Stratification involves not just inequality but also beliefs. -Social Mobility - The extent to which individuals can move out of the social strata into which they are born. Varies significantly from society to society. Most rigid system of stratification is a caste system. - Caste System - A system of social stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime. Usually carries with it a specific occupation. Although the number of societies with the caste systems diminished rapidly in the twentieth century, India still has four main castes and several thousand sub-castes. - Class System - A system of social stratification in which social status is determined by the family into which a person is born and by subsequent socioeconomic achievements; Mobility between classes is possible. Individuals at bottom can work up and individuals at top can slip down. Social mobility within a class system varies from society to society. For example, the UK has a more rigid class structure than other western societies. Historically, British society was divided into three main classes: upper class (individuals whose families for generations had wealth and power); the middle class (members involved in professional, managerial, and clerical occupations); working class (members earning living from manual occupations). Middle class was further subdivided in upper-middle class (managerial occupations and prestigious professions) and lower-middle class (clerical work and less prestigious professions). the British class system exhibited significant divergence between the life chances of members of different classes. Example is schools student went to. British society is now rapidly leaving behind this class structure and moving toward a classless society but sociologists continue to dispute this finding and present evidence that this is not the case. Another society where class divisions have been of some importance historically is China, where there has been a long-standing difference between the life chances of the rural peasantry and urban dwellers. This system crumbled following the reforms of communist rule, but now a new class system is emerging based on urban occupation. The class system in the Us is less pronounced. It still has an upper, middle, and working class, but class membership is determined to a much greater degree by individual economic achievements as opposed to background and schooling. Thus, mobility is great. - Significance - Stratification of a society is significant if it affects the operation of business organizations. In American society, the high degree of social mobility and the extreme emphasis on individualism limit the impact of class background on business operations. The same is true in Japan, where most of the population perceives itself to middle class. In a country such as the UK or India, however, the relative lack of class mobility and the differences between classes has resulted in the emergence of class consciousness. - Class Consciousnesses - A tendency for individuals to perceive themselves in terms of their class background. This played out in British society in the traditional hostility between the upper and middle class managers and their working class employees. Lack of respect made it difficult to achieve cooperation and caused many disputes. There has been a dramatic reduction in disputes recently. Alternatively class consciousness may be reemerging in urban China. An antagonistic relationship between management and labor classes and the resulting lack of cooperation and high level of industrial disruption, tends to raise the costs of production in countries characterized by significant class divisions. This makes it harder to establish a competitive advantage in the global economy.

Focus on Managerial Implications (cross-cultural literacy, ethnocentrism)

- Societies differ because their culture vary. Their cultures vary because of differences in social structure, religion, language, education, economic philosophy, and political philosophy. -There is a need to develop cross-cultural literacy; connection between culture and national competitive advantage; connection between culture and ethics in decision making - Cross-Cultural Literacy - International businesses that are ill-informed about another culture are likely to fail. Doing business in different cultures requires adaptation to conform to the value systems and norms o that culture. To combat being ill-informed, businesses should consider employing local citizens to help them do business in a particular culture. Ethnocentrism - Behavior that is based on the belief in the superiority of one's own ethnic group or culture; often shows disregard or contempt for the culture of other countries. Companies need to prevent this. -Culture and Competitive Advantage - the value systems and norms of a country influence the costs of doing business in that country. Costs of doing business in a country influence ability of firms to establish a competitive advantage. Ex. class-based conflict raises the costs of doing business. Islamic laws against interest payments may raise costs of doing business. Culture of Japan lowers cost of doing business because of an emphasis on group affiliation. Japanese culture, though, is less supportive of entrepreneurial activity than American culture. - Connection between cultural and competitive advantage is important because it suggests which cultures are likely to produce the most viable competitors and it has important implications for the choice of countries in which to locate production facilities and do business. - Choose a company that has a well developed education system, no social stratification, group identification is valued by the culture, and has only one linguistic group. - Cultural differences are significant but we should not overemphasize their importance in the economic sphere because economic, political, and legal systems have a bigger impact on economic growth.

New Trade Theory (economies of scale, product variety and reducing costs, first-mover advantages, implications)

- The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade.29 Economies of scale are unit cost reductions associated with a large scale of output. Economies of scale have a number of sources, including the ability to spread fixed costs over a large volume and the ability of large-volume producers to utilize specialized employees and equipment that are more productive than less specialized employees and equipment. Economies of scale are a major source of cost reductions in many industries. New trade theory makes two important points: First, through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods. Second, in those industries in which the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises. Thus, world trade in certain products may be dominated by countries whose firms were first movers in their production. - Increasing Product Variety and Reducing Costs - Imagine first a world without trade. In industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the size of the market. Now consider what happens when nations trade with each other. Individual national markets are combined into a larger world market. As the size of the market expands due to trade, individual firms may be able to better attain economies of scale. The implication, according to new trade theory, is that each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods; thus, trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology. -Economies of Scale, First-Mover Advantage, and Pattern of Trade - A second theme in new trade theory is that the pattern of trade we observe in the world economy may be the result of economies of scale and firstmover advantages. First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry.30 The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first-mover advantage. New trade theory argues that for those products where economies of scale are significant and represent a substantial proportion of world demand, the first movers in an industry can gain a scale based cost advantage that later entrants find almost impossible to match. Thus, the pattern of trade that we observe for such products may reflect first-mover advantages. Ex. By pioneering this market category, Airbus may have captured a firstmover advantage based on scale economies that will be difficult for rivals to match, and that will result in the European Union becoming the leading exporter of very large jet aircraft. - Implications of New Trade Theory - The theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. Trade allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of producing those products, while buying products that it does not produce from other nations that specialize in the production of other products. By this mechanism, the variety of products available to consumers in each nation is increased, while the average costs of those products should fall, as should their price, freeing resources to produce other goods and services. The theory also suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good. Because they are able to gain economies of scale, the first movers in an industry may get a lock on the world market that discourages subsequent entry. First-movers' ability to benefit from increasing returns creates a barrier to entry. New trade theory is at variance with the Heckscher-Ohlin theory, which suggests a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture. New trade theorists argue that the United States is a major exporter of commercial jet aircraft not because it is better endowed with the factors of production required to manufacture aircraft but because one of the first movers in the industry. The new trade theory is not at variance with the theory of comparative advantage. Economies of scale increase productivity. Thus, the new trade theory identifies an important source of comparative advantage. This theory is quite useful in explaining trade patterns. Empirical studies seem to support the predictions of the theory that trade increases the specialization of production within an industry, increases the variety of products available to consumers, and results in lower average prices. Perhaps the most contentious implication of the new trade theory is the argument that it generates for government intervention and strategic trade policy. New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm first-mover advantages. Herein is a rationale for government intervention; by the sophisticated and judicious use of subsidies, could a government increase the chances of its domestic firms becoming first movers in newly emerging industries, as the U.S. government apparently did with Boeing (and the European Union did with Airbus)? If this is possible, and the new trade theory suggests it might be, we have an economic rationale for a proactive trade policy that is at variance with the free trade prescriptions of the trade theories we have reviewed so far. - Economies of Scale - Cost advantages associated with large-scale production - First-mover Advantages - Advantages accruing to the first to enter a market. In this combined market, due to the ability to better realize economies of scale, more varieties (models) of cars can be produced, and cars can be produced at a lower average cost, than in either market alone.

Product Life-Cycle Theory (general concept)

- Vernon's theory was based on the observation that for most of the twentieth century, a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market. ). To explain this, Vernon argued that the wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products. In addition, the high cost of U.S. labor gave U.S. firms an incentive to develop cost-saving process innovations. Just because a new product is developed by a U.S. firm and first sold in the U.S. market, it does not follow that the product must be produced in the United States. It could be produced abroad at some low-cost location and then exported back into the United States. However, Vernon argued that most new products were initially produced in America. Also, the demand for most new products tends to be based on nonprice factors. Consequently, firms can charge relatively high prices for new products, which obviates the need to look for lowcost production sites in other countries. Vernon went on to argue that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries is limited to high-income groups. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. Over time, demand for the new product starts to grow in other advanced countries (e.g., Great Britain, France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers to begin producing for their home markets. As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. As this occurs, cost considerations start to play a greater role in the competitive process. Producers based in advanced countries where labor costs are lower than in the United States (e.g., Italy and Spain) might now be able to export to the United States. Thus, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. The consequence of these trends for the pattern of world trade is that over time, the United States switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations. - Product Life-Cycle Theory in the Twenty-First Century - Historically, the product life-cycle theory seems to be an accurate explanation of international trade patterns. Thus, initially the United States and now other advanced countries (e.g., Japan and Great Britain) have switched from being exporters of photocopiers to importers. This evolution in the pattern of international trade in photocopiers is consistent with the predictions of the product life-cycle theory that mature industries tend to go out of the United States and into low-cost assembly locations. However, the product life-cycle theory is not without weaknesses. Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric and increasingly dated. . Many new products are now first introduced in Japan (e.g., video-game consoles) or South Korea (e.g., Samsung smartphones).). In sum, although Vernon's theory may be useful for explaining the pattern of international trade during the period of American global dominance, its relevance in the modern world seems more limited.

Cultural Change (economic and business implications)

- economic progress is accompanied by a shift in values away from collectivism toward individualism. One reason might be that richer societies exhibit less need for social and material support built on collectives - The culture of societies may also change as the become richer. For example, increased urbanization and improvements in the quality of education are both a function of economic progress, and can lead to declining emphasis on the traditional values associated with poor rural societies. A shift occurs away from traditional values linked to religion, family, and country, and toward "secular-rational values". Globalization and economic progress created conditions for less cultural variation. There may be a steady convergence occurring across different cultures. Counter-trends include shifts toward Islamic Fundamentalism, nationalist movements in UK. Reaction to the pressures from cultural convergence. Deep structure of culture changes slowly.

Absolute Advantage (general concept)

-Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. Smith argued that countries differ in their ability to produce goods efficiently. In his time, the English, by virtue of their superior manufacturing processes, were the world's most efficient textile manufacturers. Due to the combination of favorable climate, good soils, and accumulated expertise, the French had the world's most efficient wine industry. The English had an absolute advantage in the production of textiles, while the French had an absolute advantage in the production of wine. Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it - According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries. Smith's basic argument, therefore, is that a country should never produce goods at home that it can buy at a lower cost from other countries. Smith demonstrates that by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade. - Thus, as a result of specialization and trade, output of both cocoa and rice would be increased, and consumers in both nations would be able to consume more. Thus, we can see that trade is a positive-sum game; it produces net gains for all involved - Absolute Advantage - A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it. - production possibility frontier (PPF) - Imagine that in Ghana it takes 10 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Thus, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between these two extremes. The different combinations that Ghana could produce are represented by the line GG′ in Figure 6.1. This is referred to as Ghana's production possibility frontier (PPF). By engaging in trade and swapping 1 ton of cocoa for 1 ton of rice, producers in both countries could consume more of both cocoa and rice.

Philosophical Approaches to Ethics (differences between the various approaches and how they would impact decisions a company or an individual would make)

-Basically, all individuals adopt a process for making ethical (or unethical) decisions. This process is based on their personal philosophical approach to ethics—that is, the underlying moral fabric of the individual. - Straw men - either deny the value of business ethics or apply the concept in a very unsatisfactory way. Straw men approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a multinational enterprise. Four such approaches to business ethics are commonly discussed in the literature. These approaches can be characterized as the Friedman doctrine, cultural relativism, the righteous moralist, and the naive immoralist. All these approaches have some inherent value, but all are unsatisfactory in important ways. - The Friedman Doctrine - 5 Friedman's basic position is that "the social responsibility of business is to increase profits," so long as the company stays within the rules of law. He explicitly rejects the idea that businesses should undertake social expenditures beyond those mandated by the law and required for the efficient running of a business. For example, his arguments suggest that improving working conditions beyond the level required by the law and necessary to maximize employee productivity will reduce profits and are therefore not appropriate. His belief is that a firm should maximize its profits because that is the way to maximize the returns that accrue to the owners of the firm, its shareholders. If the shareholders then wish to use the proceeds to make social investments, that is their right, according to Friedman, but managers of the firm should not make that decision for them. Friedman argues that businesses should behave in a socially responsible manner, according to ethical custom and without deception and fraud. Critics charge that Friedman's arguments break down under examination. This is particularly true in international business, where the "rules of the game" are not well established and differ from country to county. Consider again the case of sweatshop labor. Child labor may not be against the law in a developing nation, and maximizing productivity may not require that a multinational firm stop using child labor in that country, but it is still immoral to use child labor because the practice conflicts with widely held views about what is the right and proper thing to do. - Cultural Relativism - The belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate. As with Friedman's approach, cultural relativism does not stand up to a closer look. At its extreme, cultural relativism suggests that if a culture supports slavery, it is okay to use slave labor in a country. Clearly, it is not! Cultural relativism implicitly rejects the idea that universal notions of morality transcend different cultures, but, as we argue later in the chapter, some universal notions of morality are found across cultures. As we noted in Chapter 3, societal values and norms do vary from culture to culture, and customs do differ, so it might follow that certain business practices are ethical in one country but not another. - Righteous Moralist - One who claims that a multinational's home-country standards of ethics re the appropriate ones for companies to follow in foreign countries. This approach is typically associated with managers from developed nations. The main criticism of the righteous moralist approach is that its proponents go too far. While there are some universal moral principles that should not be violated, it does not always follow that the appropriate thing to do is adopt home-country standards. For example, U.S. laws set down strict guidelines with regard to minimum wage and working conditions. Does this mean it is ethical to apply the same guidelines in a foreign country, paying people the same as they are paid in the United States, providing the same benefits and working conditions? Probably not, because doing so might nullify the reason for investing in that country and therefore deny locals the benefits of inward investment by the multinational. - Naive Immoralist - One who asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, the manager should not either. The objection is twofold. First, to say that an action is ethically justified if everyone is doing it is not sufficient. Second, the multinational must recognize that it does have the ability to change the prevailing practice in a country. It can use its power for a positive moral purpose. - In contrast to the straw men just discussed, most moral philosophers see value in utilitarian and Kantian approaches to business ethics. - Utilitarian approaches to Ethics - These hold that the moral worth of actions or practices is determined by their consequences. An action is judged desirable if it leads to the best possible balance of good consequences over bad consequences. Utilitarianism is committed to the maximization of good and the minimization of harm. Utilitarianism recognizes that actions have multiple consequences, some of which are good in a social sense and some of which are harmful. As a philosophy for business ethics, it focuses attention on the need to weigh carefully all the social benefits and costs of a business action and to pursue only those actions where the benefits outweigh the costs. The best decisions, from a utilitarian perspective, are those that produce the greatest good for the greatest number of people. Many businesses have adopted specific tools such as cost-benefit analysis and risk assessment that are firmly rooted in a utilitarian philosophy. The utilitarian philosophy does have some serious drawbacks as an approach to business ethics. One problem is measuring the benefits, costs, and risks of a course of action. The second problem with utilitarianism is that the philosophy omits the consideration of justice. The action that produces the greatest good for the greatest number of people may result in the unjustified treatment of a minority. Such action cannot be ethical, precisely because it is unjust. - Kantian Ethics - The belief that people should be treated as ends and never as means to the end of others. People are not instruments, like a machine. People have dignity and need to be respected as such. Employing people in sweatshops, making them work long hours for low pay in poor working conditions, is a violation of ethics, according to Kantian philosophy, because it treats people as mere cogs in a machine and not as conscious moral beings that have dignity. Although contemporary moral philosophers tend to view Kant's ethical philosophy as incomplete—for example, his system has no place for moral emotions or sentiments such as sympathy or caring—the notion that people should be respected and treated with dignity resonates in the modern world - Rights Theories - Twentieth-century theories that recognize that human beings have fundamentals rights and privileges that transcend national boundaries and cultures. Rights establish a minimum level of morally acceptable behavior. One well-known definition of a fundamental right construes it as something that takes precedence over or "trumps" a collective good. - Universal Declaration of Human Rights - A United Nations document that lays down the basic principles of human rights that should be adhered to. The notion that there are fundamental rights that transcend national borders and cultures was the underlying motivation for the United Nations Universal Declaration of Human Rights. 1. Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment. 2. Everyone, without any discrimination, has the right to equal pay for equal work. 3. Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. 4. Everyone has the right to form and to join trade unions for the protection of his interests. It is important to note that along with rights come obligations. Because we have the right to free speech, we are also obligated to make sure that we respect the free speech of others. The notion that people have obligations is stated in Article 29 of the Universal Declaration of Human Rights: 1. Everyone has duties to the community in which alone the free and full development of his personality is possible. - Just Distribution - A distribution of goods and services that is considered fair and equitable. Rawls argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone's advantage. , valid principles of justice are those with which all persons would agree if they could freely and impartially consider the situation. Impartiality is guaranteed by a conceptual device that Rawls calls the veil of ignorance. Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her particular characteristics, for example, race, sex, intelligence, nationality, family background, and special talents. Rawls then asks what system people would design under a veil of ignorance. Under these conditions, people would unanimously agree on two fundamental principles of justice. The first principle is that each person be permitted the maximum amount of basic liberty compatible with a similar liberty for others. Rawls takes these to be political liberty (e.g., the right to vote), freedom of speech and assembly, liberty of conscience and freedom of thought, the freedom and right to hold personal property, and freedom from arbitrary arrest and seizure. The second principle is that once equal basic liberty is ensured, inequality in basic social goods—such as income and wealth distribution, and opportunities—is to be allowed only if such inequalities benefit everyone. More precisely, he formulates what he calls the difference principle, which is that inequalities are justified if they benefit the position of the least-advantaged person. In the context of international business ethics, Rawls's theory creates an interesting perspective. Managers could ask themselves whether the policies they adopt in foreign operations would be considered just under Rawls's veil of ignorance. Is it just, for example, to pay foreign workers less than workers in the firm's home country? Rawls's theory would suggest it is, so long as the inequality benefits the least-advantaged members of the global society (which is what economic theory suggests). Alternatively, it is difficult to imagine that managers operating under a veil of ignorance would design a system where foreign employees were paid subsistence wages to work long hours in sweatshop conditions and where they were exposed to toxic materials. Such working conditions are clearly unjust in Rawls's framework, and therefore, it is unethical to adopt them.

Chapter 4: Differences in Culture Introduction (cross-cultural literacy)

-Differences in cultures across and within countries have an effect on the development and implementation of a company's international business strategies. This includes a focus on the operations of all types of multinational companies - from small to medium to large companies. - Business success in many, if not most, countries requires cross-cultural literacy, - Cross-cultural literacy - understanding how the culture of a country affects the way business is practiced. - It is important for foreign businesses to gain an understanding of the culture that prevails in countries where they do business and indeed that success requires a foreign enterprise to adapt, at least to some degree for most products and services, to the macro (overall) culture of its host country as well as to dominant subcultures within the country. - A relationship may also exist between culture and the cost of doing business in a country. Different countries will either be more or less supportive of the market-based mode of production and sales to customers (where supply and demand set the prices for products and services). - Culture is not static. Culture is rooted in the values and norms that we have as people, and those re generally tied to doing something over a period of time. Culture can and does evolve, although the rate at which culture can change is subject to dispute. Generally, culture evolves as behaviors of people become ingrained and coded in their values and norms. But things happen sometimes to cause people's behaviors to change, and so culture evolves.

Focus on Managerial Implications (the most important part, how all of these impact you, as a manager or employee in a company - code of ethics, stakeholders, moral courage, corporate social responsibility, noblesse oblige, sustainability)

-Here, we focus on seven actions that an international business and its managers can take to make sure ethical issues are considered in business decisions: (1) favor hiring and promoting people with a well-grounded sense of personal ethics; (2) build an organizational culture and exemplify leadership behaviors that place a high value on ethical behavior; (3) put decisionmaking processes in place that require people to consider the ethical dimension of business decisions; (4) institute ethical officers in the organization; (5) develop moral courage; (6) make corporate social responsibility a cornerstone of enterprise policy; and (7) pursue strategies that are sustainable. - Hiring and Promotion - It seems obvious that businesses should strive to hire people who have a strong sense of personal ethics and would not engage in unethical or illegal behavior. Similarly, you would expect a business to not promote people, and perhaps to fire people, whose behavior does not match generally accepted ethical standards. Businesses can give potential employees psychological tests to try to discern their ethical predispositions, and they can check with prior employees regarding someone's reputation. - Organizational Culture and Leadership - To foster ethical behavior, businesses need to build an organizational culture that values ethical behavior. Three things are particularly important in building an organizational culture that emphasizes ethical behavior. First, the businesses must explicitly articulate values that emphasize ethical behavior. Many companies now do this by drafting a Code of Ethics, which is a business's formal statement of ethical priorities. Having articulated values in a code of ethics or some other document, leaders in the business must give life and meaning to those words by repeatedly emphasizing their importance and then acting on them. This means using every relevant opportunity to stress the importance of business ethics and making sure that key business decisions not only make good economic sense but also are ethical. Finally, building an organizational culture that places a high value on ethical behavior requires incentive and reward systems, including promotions that reward people who engage in ethical behavior and sanction those who do not. - Decision-Making Processes - In addition to establishing the right kind of ethical culture in an organization, business people must be able to think through the ethical implications of decisions in a systematic way. Others have recommended a five-step process to think through ethical problems (this is another example of an ethical algorithm). In step 1, business people should identify which stakeholders a decision would affect and in what ways. Step 2 involves judging the ethics of the proposed strategic decision, given the information gained in step 1. Managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders. Step 3 requires managers to establish moral intent. This means the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated. Step 4 requires the company to engage in ethical behavior. Step 5 requires the business to audit its decisions, reviewing them to make sure they were consistent with ethical principles, such as those stated in the company's code of ethics. - Stakeholders - The individuals or groups that have an interest, stake, or claim in the actions and overall performance of a company - Internal Stakeholders - People who work for or own the business such as employees, directors, and stockholders. - External Stakeholders - Individuals or groups that have some claim on a firms such as customers, suppliers and unions. - Ethics Officers - To make sure that a business behaves in an ethical manner, firms now must have oversight by a high-ranking person or people known to respect legal and ethical standards. These individuals— often referred to as ethics officers—are responsible for managing their organizations ethics and legal compliance programs. They are typically responsible for (1) assessing the needs and risks that an ethics program must address; (2) developing and distributing a code of ethics; (3) conducting training programs for employees; (4) establishing and maintaining a confidential service to address employees' questions about issues that may be ethical or unethical; (5) making sure that the organization is in compliance with government laws and regulations; (6) monitoring and auditing ethical conduct; (7) taking action, as appropriate, on possible violations; and (8) reviewing and updating the code of ethics periodically. - Moral Courage - Enables managers to walk away from a decision that is profitable, but unethical. Moral courage gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical. Moral courage gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company. However, companies can strengthen the moral courage of employees by committing themselves to not retaliate against employees who exercise moral courage, say no to superiors, or otherwise complain about unethical actions. - Corporate Social Responsibility - Refers to the idea that business people should consider the social consequences of economic actions when making business decision and that there should be a presumption in favor of decisions that have both good economic and social consequences. In its purest form, corporate social responsibility can be supported for its own sake simply because it is the right way for a business to behave. Advocates of this approach argue that businesses, particularly large successful businesses, need to recognize their noblesse oblige and give something back to the societies that have made their success possible. Noblesse oblige is a French term that refers to honorable and benevolent behavior considered the responsibility of people of high (noble) birth. In a business setting, it is taken to mean benevolent behavior that is the responsibility of successful enterprises. Power itself is morally neutral; how power is used is what matters. It can be used in a positive way to increase social welfare, which is ethical, or it can be used in a manner that is ethically and morally suspect. Managers at some multinationals have acknowledged a moral obligation to use their power to enhance social welfare in the communities where they do business. - Sustainable Strategies - Strategies that not only help the multinational firm make good profits, but that do so without harming the environment, while simultaneously ensuring that the corporation acts in a socially responsible manner with regard to its multiple stakeholders. The core idea of sustainability is that the organization—through its actions—does not exert a negative impact on the ability of future generations to meet their own economic needs and that its actions impart long-run economic and social benefits on stakeholders.

What are two reasons diminishing returns to specialization occur?

-Not all resources are of the same quality. -Different goods use resources in different proportions.

Ethical Dilemmas (what an ethical dilemma is)

-The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, and environmental pollution are not always clear-cut. However, what is becoming clear-cut is the businesses are feeling more and more of the marketplace pressures from customers and other stakeholders to be transparent in their ethical decision making and operations. At the same time, there are no universal worldwide agreement about what constitutes accepted ethical principles. From an international business perspective, some argue that what is ethical depends on one's cultural perspective. - Ethical Dilemmas - A situation in which there is no ethically acceptable solution. Ex. In this case, employing child labor was not acceptable, but given that she was employed, neither was denying the child her only source of income.

Merchantilism (general concept, zero-sum game, Neo-merchantilist strategy)

-The principle assertion of mercantilism was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time, gold and silver were the currency of trade between countries; a country could earn gold and silver by exporting goods. Conversely, importing goods from other countries would result in an outflow of gold and silver to those countries. The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. The mercantilists saw no virtue in a large volume of trade. Rather, they recommended policies to maximize exports and minimize imports. To achieve this, imports were limited by tariffs and quotas, while exports were subsidized. ). The result would be a deterioration in the English balance of trade and an improvement in France's trade balance, until the English surplus was eliminated. Hence, according to Hume, in the long run no country could sustain a surplus on the balance of trade and so accumulate gold and silver as the mercantilists had envisaged. - The flaw with mercantilism was that it viewed trade as a zero-sum game. (A zero-sum game is one in which a gain by one country results in a loss by another.) It was left to Adam Smith and David Ricardo to show the shortsightedness of this approach and to demonstrate that trade is a positive-sum game, or a situation in which all countries can benefit. Unfortunately, the mercantilist doctrine is by no means dead. Neo-mercantilists equate political power with economic power and economic power with a balance-of-trade surplus. - Mercantilism - An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. - Zero-Sum Game - A situation in which an economic gain by one country results in an economic loss by another.

A basic message of Ricardo's theory of comparative advantage is that: (Check the two that apply.)

-even if countries lack an absolute advantage in the production of any good, consumers can still consume more if there are no restrictions on trade. -potential world production is greater with unrestricted free trade than it is with restricted trade.

To shift a country's production possibility frontier outward, it is necessary to

-increase the efficiency with which resources are used. -increase the stock of the country's resources.

An Overview of Trade Theory (benefits of trade, new trade theory)

-mercantilism advocated that countries should simultaneously encourage exports and discourage imports. Although mercantilism is an old and largely discredited doctrine, its echoes remain in modern political debate and in the trade policies of many countries. Next, we will look at Adam Smith's theory of absolute advantage. Proposed in 1776, Smith's theory was the first to explain why unrestricted free trade is beneficial to a country. Free trade refers to a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. Smith argued that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and what it exports. His arguments imply that such a laissez-faire stance toward trade was in the best interests of a country. Building on Smith's work are two additional theories that we review. One is the theory of comparative advantage, advanced by the nineteenth-century English economist David Ricardo. This theory is the intellectual basis of the modern argument for unrestricted free trade. In the twentieth century, Ricardo's work was refined by two Swedish economists, Eli Heckscher and Bertil Ohlin, whose theory is known as the Heckscher-Ohlin theory. - The Benefits of Trade - the theories of Smith, Ricardo, and Heckscher-Ohlin tell us that a country's economy may gain if its citizens buy certain products from other nations that could be produced at home. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries. One of the key insights of international trade theory is that limits on imports are often in the interests of domestic producers but not domestic consumers. - The Pattern of International Trade - The theories of Smith, Ricardo, and Heckscher-Ohlin help explain the pattern of international trade that we observe in the world economy. Some aspects of the pattern are easy to understand. Climate and natural resource endowments explain why Ghana exports cocoa, Brazil exports coffee, Saudi Arabia exports oil, and China exports crawfish. However, much of the observed pattern of international trade is more difficult to explain. For example, why does Japan export automobiles, consumer electronics, and machine tools? David Ricardo's theory of comparative advantage offers an explanation in terms of international differences in labor productivity. The more sophisticated Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the factors of production (such as land, labor, and capital) are available in different countries and the proportions in which they are needed for producing particular goods. This explanation rests on the assumption that countries have varying endowments of the various factors of production. Tests of this theory, however, suggest that it is a less powerful explanation of real-world trade patterns than once thought. y. New trade theory (for which Krugman won the Nobel Prize in economics in 2008) stresses that in some cases, countries specialize in the production and export of particular products not because of underlying differences in factor endowments but because in certain industries the world market can support only a limited number of firms. (This is argued to be the case for the commercial aircraft industry.) In such industries, firms that enter the market first are able to build a competitive advantage that is subsequently difficult to challenge. Thus, the observed pattern of trade between nations may be due in part to the ability of firms within a given nation to capture first-mover advantages. , Michael Porter developed a theory referred to as the theory of national competitive advantage. This attempts to explain why particular nations achieve international success in particular industries. - Trade Theory and Government Policy - Although all these theories agree that international trade is beneficial to a country, they lack agreement in their recommendations for government policy. Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. The theories of Smith, Ricardo, and HeckscherOhlin form part of the case for unrestricted free trade. Both the new trade theory and Porter's theory of national competitive advantage can be interpreted as justifying some limited government intervention to support the development of certain export-oriented industries. - Free trade - The absence of barriers to the free flow of goods and services between countries. - New Trade Theory - The observed pattern of trade in the world economy may be due in part to the ability of firms in a given market to capture first-mover advantages.

What are three sources of economies of scale?

-the ability of large-volume producers to use more specialized equipment -the ability of large-volume producers to use more effective, specialized employees -spreading fixed costs over a larger volume

Chapter 6: International Trade Theory

Be able to distinguish between the different trade theories, what they describe, what behaviors they predict, where they differ from each other

The main criticism of mercantilism was that

the goal of a constant positive balance of trade is impossible.

Sachs and Warner found a strong correlation between a(n) ______ response to trade and economic growth.

open

The ______ theory predicts that mature industries tend to shift production out of advanced nations and into low-cost assembly locations.

product life-cycle

While not as relevant today, the trade theory that was useful in explaining the pattern of trade when the US dominated the global market is the ______ theory.

product life-cycle

The ______ shows the combination of goods and/or services that can be produced by a country based on available resources.

production possibilities frontier

When discussing constant returns to specialization, it is realistic to assume that the units of resources required to produce one unit will _____ no matter where a country is on the production possibilities frontier.

remain the same

The primary problem with mercantilism is that its supporters claimed that trade should

show a gain by one country that results in a loss by another.

Reflecting the theories of Smith, Ricardo, and Heckscher-Ohlin, free trade permits ______, which allows a country to manufacture and export in those areas where they have a comparative advantage.

specialization

Free trade can result in dynamic gains that ______ economic growth.

stimulate