CBA 300 Exam 2

Chinese Firms are setting up factories in the US

"greenfield" investments increased rapidly

Airbus and Boeing

"produce, do not produce" or "do not produce, produce"

Foreign Direct Investment (FDI)

a firm invests directly in facilities to produce or market a good in a foreign country -with FDI, a firm becomes a multinational enterprise

Free trade refers to a situation where

a government does not try to influence what its citizens can buy from global markets

Tariff Rate Quotas

a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota

Sustainability

does not exert a negative impact on the ability of future generations to meet their own economic needs

Specific tariffs

domestic: excise or specific tax a fixed charge for each unit ex) $3 per barrel of oil

Antidumping

dumping has been a loophole to pursue protectionism between 1995 and mid-2014, WTO members had reported 4,627 antidumping actions

Greenfield investments

established a wholly new operation

GM adopted Sullivan Principles

ethically justified for GM to operate in South Africa under two conditions: 1. should not obey the apartheid laws (passive resistance) 2. promote the abolition of apartheid laws Sullivan's principles were widely adopted by US firms -South Africa did not want to antagonize foreign investors and ignored the violation of the apartheid laws

Cultural Relativism

ethics are culturally determined and firms should adopt the ethics of the cultures in which they operate

Is a current account deficit bad?

even though capital is flowing out of the US as payments to foreigners, much of it flows back in as investments in assets current account deficit (surplus): country imports more (less) than it exports

Absolute Advantage and Gains from Trade

ex) Ghana & South Korea have 200 units of resources Ghana -10 units to produce one ton of cocoa -20 units to produce one ton of rice South Korea -40 units to produce one ton of cocoa -10 units to produce one ton of rice Ghana has an absolute advantage in producing cocoa, while South Korea has an absolute advantage in producing rice

game WITHOUT equilibrium

ex) penalty kick in soccer

Triple Bottom Line

financial, social, and environmental ex) Umicore NV is a Belgian multinational materials technology company -Financial objective: achieve double-digit revenue growth -Environmental: reduce carbon footprint -Social: reduce body concentrations of metals to which employees have exposure

Naive Immoralist

if firms from other nations are not following ethical norms in a host nation, we should not either

Ad valorem tariffs are

levied as a proportion of the value of the imported good

Tariff rate quota on sugar

limited the amount foreign producers can sell in the US the price of sugar in the US increased as much as 40% greater than the world price

The threat of antidumping action affects a firm by

limiting its ability to use aggressive pricing to gain market share in a country

Trade Barriers and Firm Strategy

locate productions facilities in their countries -when tariff barriers, quotas, and VER's limit the ability to serve a country from outside

Subsidies

may subsidies do not increase the international competitiveness of domestic producers, but tend to protect the inefficient

Acquisition

mergers with existing firms -quicker, easier, and less risky to acquire assets

Deontology (Categorical)

morality is in the certain categorical duties, rules, and rights "killing 1 person is not right, even if it can save 5 people"

Consequentialism

morality is in the consequences of an act "killing 1 person is better than 5 people"

Benevolence or Self-Interest?

not from the benevolence, but from their regard to their own interest - Adam Smith

Import Quotas

restrict the quantity of good that may be imported usually enforced by issuing import licenses

Ethical Dilemma: Imitation Game (2014)

the cracking of Germany's Engima code shortened the war by 2-4 years and saving an estimated 14-21 million lives

Quota rent

the extra profit to producers (equivalent to a collusive agreement)

Patterns of FDI

the flow and stock of FDI have increased over the last 35 years China has been a major investor in African countries to gain access to raw materials

Protectionism in Agriculture

the largest beneficiaries in most countries -59% in Japan the biggest defenders have been the advanced nations -non-agricultural products: 4% significant distortions: -reduce trade and raise prices -Overproduce subsidized products

As a philosophy for business ethics, utilitarianism focuses attention on the need to

weigh carefully all the social benefits and costs of a business action

To Make Ethical Decisions

-build and organizational culture that places a high value on ethics -build incentive and reward systems not criticize management for any loss of business resulting from adherence to the principles -hire ethics officers to ensure that: employees are trained in ethics, ethics is considered in decision-making process, the company's code of conduct is followed -hire independent auditors (Nike)

Common Ethical Issues

-employment practices and human rights -environmental pollution -moral obligations of multinational companies -corruption and bribe in foreign countries

Smooth-Hawley Act (1930) in the US

-erected an enormous wall of tariff barriers -a damaging effect on employment abroad -other countries reacted by raising their own tariff barriers -US exports tumbled and the world slid into the Great Depression

How Businesses Contribute to Society

-iPads for autism -Virtual care for seniors using iPad -Deforestation in Haiti -new technology helps blind people -the parable of horseshit -meat and leather without killing animals

Criticism on Factory Farming

-massive amount of manure and synthetic fertilizer -inappropriate feed -antibiotics, steroid, and growth hormone 70% of antibiotics go into animal feed

Ethical dilemmas

-none of the available alternatives seems ethically acceptable -real world decisions are complex, difficult to frame

Nike and International Labor Practices

-young women worked with toxic materials 6 days a week in poor conditions for 20 cents an hour at Vietnamese subcontractor -Nike and its subcontractors were not breaking any laws -Nike established a "code of conduct" for subcontractors and annual monitoring by independent auditors

Voluntary Export Quotas on Japanese Automobile

1986-1990: cost to US consumers was $13 billion after accounting for the higher profits of US firms, the US economy suffered $3 billion loss

Trade in Hormone-Treated Beef

1999: WTO allowed the US to impose punitive tariffs of $125 million on EU exports to the US 2012: the EU struck a deal with the US -the EU keeps the ban, but increases its import quota of high-quality non-hormone-treated beef from the US

Wal-Mart Expansion Strategy

30 local monopolies "wait for the growth to come to us" Sam Walton *Preemption game*

Starbucks: Ethical Sourcing

93% of coffee beans were ethically sourced

Ethical Dilemmas: Child Labor

A foreign subsidiary in a poor nation has hired a 12 year old girl to work on a factory floor. An American executive instructs the local manager to replace the child with an adult -the orphan who is the only breadwinner for herself and 6 year old brother is unable to find another job, and turns to prostitution. Two years later she dies of AIDS What managers need is a moral compass to guide them through such an ethical dilemma to find an acceptable solution

Truths about the US Trade Deficit

Accounting identity: (Saving - Investment) = (Exports - Imports) -foreign governments' policies affect only how that deficit is divided among trading partners

Which of the following theories proposes that a country should specialize in producing those goods for which it has an absolute advantage?

Adam Smith's theory

World Trading System, 1947-1979

After the Great Depression, the US Congress had swung in favor of free trade Japan's economic success created strains -despite low tariff rates and subsidies, Japan was closed to imports and foreign investment by administrative trade barriers --today, China relies on currency value after joining WTO

Nash Equilibrium: w/ subsidy

Airbus moves first: "produce, do not produce" or "do not produce, produce" Boeing moves first: "produce, produce" or "do not produce, produce"

Remote Area Medical

American relief organization that airdrops doctors and medicine into the jungles of the Amazon

Trade Issues with China

China was using the People's Liberation Army's (PLA) cyber skills to infiltrate American companies and steal technology -China agreed to end government cyber theft of industrial technology

The _______ benefits inefficient farmers and the politicians who rely on the farm vote, but not consumers in the European Union, who end up paying more for their foodstuffs

Common Agricultural Policy (CAP)

Role of Business in Society

Creating Shared Value: business model at a profit (Michael Porter)

Which account keeps track of the export and imports of goods and services in a country?

Current account

UK and Free Trade System

DAVID RICARDO free trade was first officially embraced by UK in 1846 when the UK repealed the Corn Laws: a high tariff on corn imports

DP World and US Ports (2006)

DP World would not own the US ports, just manage them

Theory of Comparative Advantage

David Ricardo proposed countries should produce and export those products for which have the greatest comparative advantage. buying goods from other countries that they could not produce more efficiently Q: If one country has an absolute advantage in all goods? Absolute advantage suggests no benefits from trade

Doha Round (2001)

Doha, Qatar -have gone on for 12 years and are currently stalled -cutting tariffs on industrial goods and services -phasing out subsidies to agriculture -limiting the use of anti-dumping laws the EU, the US, and India were not willing to reduce tariffs and subsidies to their politically important farmers

What are first-mover advantages?

Economic and strategic advantages that accrue to early entrants into an industry

What is the term for unit cost reductions associated with a large amount of output?

Economies of scale

To make sure that a business behaves in an ethical manner, many companies have hired __________, who are responsible for making sure the company's code of ethics if followed in every business decision

Ethics Officers

An import quota is a specific tax levied on imports

False

Kantian ethics hold that the moral worth of actions or practices is determined by their consequences

False

Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance

False

New trade theorists argue that getting a first-mover advantage is not a significant determinant of international trade

False

The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions obliges member states to make facilitating payments made to expedite routine government action a criminal offense

False

The naive immoralist claims that a multinational's home-country standards of ethics are the appropriate ones for companies to follow in foreign countries

False

strategic trade policy

Governments can help firms attain first-mover advantages and overcome barriers to entry into industries where foreign firms have an initial advantage PAUL KRUGMAN

Host-country costs

National sovereignty and economic autonomy -decisions that can affect the host country's economy will be made by a foreign parent

Comparative Advantage and Gains from Trade

Ghana -10 units to produce one ton of cocoa -13.33 units to produce one ton of rice South Korea -40 units to product one ton of cocoa -20 units to produce one ton of rice Ghana is more efficient in both -Ghana has an absolute advantage in both -Ghana has a comparative advantage in cocoa

Righteous Moralist

Home country standards of ethics should be followed in foreign countries

Game Theory

John Nash the study of rational behavior among interdependent agents -provides a toolkit for strategic thinking -agents have competing interest to maximize their own share -an agent's rational decisions require anticipating rivals' responses

Apartheid in South Africa- 10 years

Leon Sullivan concluded following the principles was not sufficient to break down the apartheid regime -American companies could not justify their presence in South Africa Companies divested their South African operations -Exxon, GM, Kodak, IBM, and Xerox US and other governments imposed economic sanctions South African abandoned white minority rule and apartheid and introduced democratic elections in 1994

_______ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold

Licensing

The Purpose of Business

Milton Friedman: undermine the foundations-- increase profits John Francis "Jack" Welch, Jr.: GE's value rose 4,000% "social responsibility is to win"

Kantian Ethics: Deontology (Categorical)

Morality is in the certain categorical duties, rules, and rights (regardless of consequences) People should be always treated as ends and never as means to the ends Immanuel Kant (1724-1804)

The Panama Papers

Mossack Fonseca is a Panamanian law firm -founded in 1977 -sells anonymous offshore companies which enable the owners to cover up their business dealings

__________ refers to the values and norms that are shared among employees of an organization

Organizational Culture

Ethical Dilemmas: Charity-Based Aid

Over the past 60 years, at least $1 trillion of development-related aid has been transferred to Africa -real per-capita income today is lower than it was in the 1970's A stream of "free" money is a perfect way to keep an inefficient or bad government in power -more than 90% in Ethiopia No country has ever achieved economic success by depending on aid, to the degree that many African countries do

_______ argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries

Paul Krugman

Which of the following argues that it is in a country's best interests to maintain a trade surplus?

Principle of Mercantilism

Which of the following theories explains global trade in terms of the international differences in labor productivity?

Ricardo's theory of comparative advantage

Determinants of Ethical Behavior

Societal Culture, Decision-Making Processes, Leadership, Unrealistic Performance Goals, Organization Culture, Personal Ethics

_______ suggests that a government should us subsidies to support promising firms that are active in newly emerging industries

Strategic trade policy

Utilitarian Approach: Consequentialism

The moral worth of actions is determined by their consequences -desirable if they lead to the best possible consequences -maximize good, minimize harm -the best decisions produce the greatest good for the greatest number of people Omits the consideration of justice -the greatest good for the greatest number of people may result in the unjustified treatment of a minority Cost-benefit analysis and risk assessment are often rooted in a utilitarian philosophy ex) an oil company drilling in the Alaskan wildlife preserve benefits: increased oil production and creation of jobs costs: environmental degradation ex) an agriculture biotechnology company (Monsanto) benefits of genetically modified crops that produce natural pesticides vs. risks David Hume, Jermey Bentham, John Stuart Mill

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it

True

Building an organizational culture that places a high value on ethical behavior requires incentive and reward systems that reward people who engage in ethical behavior

True

In general, FDI in the form of greenfield investments should increase competition

True

Offshore production refers to FDI undertaken to serve the home market

True

The GATT was a multilateral agreement whose objective was to liberalize trade

True

The amount of FDI undertaken over a given time period is known as the flow of FDI

True

The infant industry argument states that an industry should be protected until it can develop and be viable and competitive internationally

True

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

True

Underlying most trade theories is the notion that different countries have particular advantages in different productive activities

True

Walmart and the FCPA

Walmart wanted to build a new store in San Juan Teotihuacan, Mexico, a mile from ancient pyramids. zoning laws prohibited commercial development in the historic area Walmart paid a $52,000 bribe to redraw the zoning area In 2012, Walmart paid $24 million to Mexican officials to win zoning charges

In which of the following situations would FDI deteriorate the current account of the host country's balance of payments?

When a foreign subsidiary imports a substantial number of its inputs from abroad

Home vs. Host Country

Which standards should apply when work conditions in a host nation are inferior?

As valorem tariffs

a proportion of the value of the imported good

Tragedy of the Commons

a resource is held in common and owned by no one -overused by individuals, resulting in degradation ex) in 16th-century England, large open areas, called commons, were free to use as pasture -each person put out more and more livestock -far more livestock than the commons could handle -overgrazing and degradation of the commons

(Nash) Equilibrium

a set of strategies (actions) such that each player is doing the best given the actions of its opponents

Cisco Networking Academy

a shortage of qualified network administrators the program operated 9,900 academies in all 50 states and in 147 countries

WTO (1995)

accounted for 98% of world trade China joined in 2001 Russia in 2012 an agreement to open telecommunication markets (1997) an agreement to liberalize cross-boarder trade in financial services

Capital Account

activities resulting in transfers of wealth (debt forgiveness, copyrights, trademarks) ex) the government forgives $1 billion in debt owed to it by the government of Pakistan -debit in the US capital account -US wealth declines by $1 billion

The Foreign Corrupt Practices Act was amended to

allow for "facilitating payments"

NAFTA Renegotiation

an agreement on the amount of North American content a vehicle must have to pass duty-free across borders

The Infant Industry

an industry should be protected until it can be competitive internationally

Retaliation

as a bargaining tool to help open foreign markets and force trading partners to "play by the rules" the US threatened to impose tariffs on some Chinese imports to get China to enforce its intellectual property laws

Tax Cuts and Jobs Act (Dec 20, 2017)

cuts corporate income tax rate permanently to 21%, as of Jan 1, 2018

Corporate Social Responsibility (CSR)

consider the social consequences of business decisions

A subsidy is a

government payment to a domestic producer

Licensing

granting the right to produce and sell a product with a royalty fee -does not give control over manufacturing, marketing, and strategy in the foreign country ex) RCA in 1960s

Foreign Corrupt Practices Act (FCPA)

high levels of corruption reduce foreign direct investment, international trade, and economic growth The Lockheed case was the impetus for the 1977 FCPA in the US -illegal for US companies to bribe foreign government officials to obtain or maintain business -allowed facilitating or expediting payments (speed money or grease payments) to secure or expedite routine government action

Protecting US Magnesium

high prices would force automobile manufacturing elsewhere

Exports

high transportation costs, trade barriers FDI can circumvent trade barriers

The Prisoner's Dilemma

if you both confess, both of you will be sentenced 5 years in prison if you confess and the other person does not, we will let you go, but the other will get 10 years if you don't confess and the other does, that person is free and you get 10 years if you both don't confess, both will be held for 1 year

Current Account

imports and exports: transactions of goods, services, and income ex) French company imports American blue jeans -credit on US Current Account

OECD: Convention on Combating Bribery

in 1977, the Organization for Economic Co-operation and Development (OECD) followed the US and adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions -makes the bribery of foreign public officials a criminal offense -excludes facilitating payments

BMW Factory Runs on Trash

in 2001, BMW and VW built a 9.5 mile pipeline to deliver the landfill gas to the plant to power turbines and cogenerate

In a Globalized World

in a globalized world, China can't punish foreign companies without sacrificing Chinese workers and business partners, too

General Agreement on Tariffs and Trade (GATT) 1947

in its early years, the GATT was very successful -the average US tariff declined by 92% between 1947 and 1973

The Lockheed Case

in the 1970s, Lockheed made a $12.6 million payment to Japanese agents and government officials to secure an order for TriStar jet from Nippon Air US officials charged Lockheed with falsification of its records and tax violations Such payments were an accepted business practice in Japan, but the revelations created a scandal there too -the government ministers in question were criminally charged; one committed suicide; the government fell in disgrace

Preemptive Investment Strategy

it depends on who moves first (to preempt) "enter-do not enter" or "do not enter-enter"

Mercantilism

it is a country's best interest to maintain a trade surplus -views trade as a zero-sum game

Free Trade

it is beneficial for a country to engage in international trade even for products it can product for itself -limits on imports may be beneficial to producers, not consumers

Which of the following is true about the righteous moralist approach to ethics?

it is typically associated with managers from developed nations

beggar-thy-neighbor

policies that boost national income at the expense of other countries

Bottom Line

profit or loss which is recorded at the bottom line on an Income Statement

Protecting jobs

protecting the interests of certain producers at the expense of consumers

Voluntary Export Restraints (VER)

quotas on trade imposed by the exporting country, typically at the request of the importing country's government

Dumping

selling goods below their costs of "fair" market value

Offshore production

serves the home market from a low-cost production location

Repatriation

sets a one-time mandatory tax of 8% on illiquid assets and 15.5% on cash and cash equivalents for about $2.6 trillion in US business profits now held overseas

Healthcare

some 47 million Americans have no health insurance millions more are underinsured, unable to pay their deductibles or get access to dental care

local content requirement

some specific fraction of a good should be produced domestically "a product is American if 51% of the materials by value are produced domestically"

Trade is a positive sum game

specialization increases efficiency even further consumers in all nations can consumer more with free trade

Tariffs

taxes levied on imports -generally pro-producer and anti-consumer -reduce the overall efficiency of the world economy

Apartheid in South Africa

the Apartheid system denied basic political rights to the majority nonwhite population -mandated segregation between whites and nonwhites -reserved certain occupations exclusively for whites -prohibited blacks from being places in positions where they would manage whites

General Motors stand against apartheid in South Africa was based upon what came to be known as __________

the Sullivan principles

Quotas make a comeback

the Trump administration's efforts to block imports are bringing back the quota

Flow

the amount of FDI over a given time period -outflows and inflows

Friedman Doctrine

the only social responsibility is to increase profits, so long as the company stays within the rules of the law (without deception and fraud) Milton Friedman (1912-2006)

Purpose of Business

the purpose of business is to create economic value while creating shared value for society businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many social issues -drive innovation, productivity, and economic growth Shared value -integrating CSR practice with business strategy -the link between a company's philanthropic strategy in its core business and competitive context

What is the purpose of greenfield investment?

to establish a new operation in a foreign country

Export tariffs (less common)

to reduce exports from a sector, often for political reasons

Stock

total accumulated value of foreign-owned (owned by foreigners) assets at a given time

The stock of FDI is the

total accumulated value of foreign-owned assets at a given time

Theory of Absolute Advantage

trade is a positive-sum game -all countries can benefit Adam Smith

Uruguay Round of GATT in 1986

trade issues related to services, intellectual property, agriculture going beyond manufactures goods Established the World Trade Organization (WTO) to police the international trading system

Financial Account

transactions that involve the purchase of assets ex) American company buys a German factory -debit in the US financial account (outflow) -transactions requires payment from US to Germany ex) an Italian firm buys a US company stock -credit on US financial account (inflow)

Economies of scale

unit cost reductions associated with a large scale of output First movers can gain a scale-based cost advantage that later entrants find difficult to match

predatory behavior

use profits from home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices

Nestle's Milk District

value chain depended on establishing local sources of milk 180 (1962) vs. 75,000 (2006) farmers supplied milk -death rate of calves has dropped by 75% -milk production has increased 50-fold