International Business Midterm
Be able to explain how the principle of diminishing returns weakens the Ricardian model
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.
What happened to GATT during the 1980s and early 1990s?
During the 1980s and early 1990s, the world trading system established by GATT came under significant strain as pressures for greater protectionism mounted around the world. Three issues in particular were important. First, the economic success of Japan strained the world trading system. Second, the world's trading system was further strained by the persistent trade deficit in the world's largest economy, the United States. Finally, many countries found ways to get around GATT regulations.
Be able to describe the disadvantages of economic integration for international businesses and how firms can protect themselves from these threats.
Economic integration presents a number of difficulties for companies. Certainly, the more competitive business environment that will result from integration would be considered a disadvantage. To survive, firms will have to capitalize on the opportunities presented by the creation of an integrated marketplace and rationalize their production and reduce their costs. Companies that are outside of trading areas such as the EU may find themselves facing a trade fortress with high barriers to imports and investment. Consequently, firms may find that to protect themselves, they will need to establish operations "on the inside." Finally, firms may find their strategic choice limited by restrictions on proposed acquisitions and mergers. Firms may find that they must make significant concessions in order for their proposed plans to move ahead
Be able to explain the Friedman doctrine - who developed it and how it holds up ethically
In 1970, Milton Friedman suggested that the only 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 business should undertake social expenditures beyond those mandated by the law and required for the efficient running of a business. Friedman does state that businesses should behave in an ethical manner and not engage in deception and fraud, however, most economists believe that his approach to ethics does not hold up well. For example, even though child labor may not be against the law in a particular country, it is still unethical to use child labor
Be able to explain why there is inefficiency in a monopoly situation and what the role of the government is in such a situation.
In a monopoly situation, a firm has no competitors, and therefore it has no incentive to search for ways to lower production costs. Rather, cost increases are simply passed on to consumers in the form of higher prices. The net result is that the monopolist is likely to become increasingly inefficient, producing high-priced, low-quality goods. Given the dangers inherent in monopoly, the role of government in a market economy is to encourage vigorous free and fair competition between private producers. Governments do this by outlawing restrictive business practices designed to monopolize a market (antitrust laws serve this function in the United States).
Be able to explain the Paul Samuelson's critique
Paul Samuelson's critique looks at what happens when a rich country enters into a free trade agreement with a poor country that rapidly improves its productivity after the introduction of a free trade regime. Samuelson's model suggests that in such cases, the lower prices that the rich country's consumers pay for goods imported from the poor country following the introduction of a free trade regime may not be enough to produce a net gain for the rich country's economy if the dynamic effect of free trade is to lower real wage rates in the rich country.
Discuss the economic reasons for government intervention in markets
The economic reasons for government intervention have undergone a renaissance in recent times as more economists support economic reasons for intervention. The oldest argument for intervention is the infant industry argument. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. Strategic trade policy is the other main reason given for economic government intervention in markets.
Be able to identify a major disadvantage of the product life-cycle theory.
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. This is a major disadvantage of the product life-cycle theory.
Know the assumptions that we make when we discuss a simple Ricardian model to support free trade.
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. 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.
Know what collectivism is and what ideals the philosophy supports. Know where the philosophy started and where it now exists in the modern world.
A collectivist political system is one that stresses the primacy of collective goals over individual goals. In that sense, the needs of the society as a whole are viewed as being more important than individual freedoms. Collectivism can trace its roots to the ancient Greek philosopher Plato who suggested that individual rights be sacrificed for the good of the majority. Today, collectivism is reflected in the socialist movement started by Karl Marx who argued that the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted. Marx advocated state ownership of the basic means of production, distribution, and exchange. Supporters of Marx's ideals were divided into two camps in the early 20th century: communists, who believed that socialism could only be achieved through violent revolution and totalitarian dictatorship; and social democrats, who committed themselves to achieving socialism by democratic means. Today, both versions of socialism are losing followers.
Know the factors that determine the costs of doing business in a country.
A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, a company may have to pay off politically powerful entities in a country before the government allows it to do business there. With regard to economic factors, one of the most important variables is the sophistication of a country's economy. As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly).
Be able to compare and contrast import quotas and voluntary export restraints
An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is normally enforced by issuing import licenses to a group of individuals or firms. In contrast, a voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Both import quotas and VERs benefit domestic producers, but hurt consumers through higher prices.
Be able to explain if privatization by itself is enough to guarantee economic growth and be able to give an example to support your answer (either way).
As privatization has proceeded around the world, it has become clear that simply selling state-owned assets to private investors is not enough to guarantee economic growth. If the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition by barriers to international trade and foreign direct investment, they will have little incentive to restructure their operations to become more efficient. For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. For example, when Brazil decided to privatize the state-owned telephone monopoly, Telebras Brazil, the government also split the company into four independent units that were to compete with each other and removed barriers to foreign direct investment in telecommunications services. This action ensured that the newly privatized entities would face significant competition and thus would have to improve their operating efficiency to survive.
What has been the experience of the WTO to date? What does the future look like for the organization?
By 2013, the WTO had 159 members with more in the application process. The WTO has remained at the forefront of efforts to promote free trade. So far, it appears that its policing and enforcement mechanisms are having a positive effect. Countries are using the WTO to settle trade disputes, which represents an important vote of confidence in the organization's dispute resolution procedures. So far, the users of the system have included both developed and developing countries, which is also a promising development. In addition, some powerful developed countries, including the United States, have been willing to accept WTO rulings that have gone against them, which attest to the organization's legitimacy.
Know the connection between religion and ethical systems and the implications for business
Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior. Most of the world's ethical systems are the product of religions. Therefore, there are Christian ethics and Islamic ethics. There are four dominant religions in the world: Christianity, Islam, Hinduism, and Buddhism. The relationship among religion, ethics, and society is subtle and complex. Some scholars have argued 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.
Know the impediments to countries integrating.
Even with strong economic and political support for integration, there are two impediments that make integration difficult in many cases. First, although economic integration typically benefits the majority of the people in a country, certain groups may lose. These groups are likely to be at the forefront of efforts to stop economic integration. Second, the issue of national sovereignty becomes important. In many cases, these impediments to integration are very difficult to overcome.
Know the difference between a greenfield investment and an acquisition. Be able to explain which form of FDI a firm is more likely to choose and be able to explain your answer.
FDI can take the form of a greenfield investment in a new facility or an acquisition of or a merger with an existing local firm. Research shows that most FDI takes the form of mergers and acquisitions rather than greenfield investments. Mergers and acquisitions are more popular for three reasons. First, mergers and acquisitions are quicker to execute than greenfield investments. Second, foreign firms are acquired because those firms have valuable strategic assets. Third, firms make acquisitions because they believe they can increase the efficiency of the acquired firm by transferring capital, technology, or management skills
Be able to discuss the reasons for the growth in FDI over the last 30 years.
FDI has grown more rapidly than world trade and world output for several reasons. First, many companies see FDI as a means of circumventing potential trade barriers. Second, political and economic changes in many of the world developing nations has been encouraging FDI. Finally, the globalization of the world economy is having a positive impact on the volume of FDI as firms now see the whole world as their market.
Be able to describe the four dimensions of culture as identified by Geert Hofstede.
Geert Hofstede identified four dimensions that he claimed summarized the differences between different cultures. According to Hofstede, the power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities. The second dimension identified by Hofstede, individualism versus collectivism, focused on the relationship between the individual and his/her fellows. Hofstede's third dimension, uncertainty avoidance, measured the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating uncertainty. Finally, Hofstede's fourth dimension, masculinity versus femininity, examined the relationship between gender and work roles.
Be able to discuss the characteristics of globalization and be able to give examples.
Globalization refers to a fundamental shift in the world economy in which national economies are no longer relatively self-contained entities. Instead, nations are moving toward an interdependent global economic system. Within this new global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by DaimlerChrysler from components made in the United States and Japan that were fabricated from Korean steel and Malaysian rubber. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets
Know the limitations of Hofstede's research.
Hofstede's research has been criticized on a number of points. First, Hofstede assumes there is a one-to-one correspondence between culture and the nation-state. Second, the research may have been culturally bound. Third, Hofstede's informants worked not only within a single industry, but within one company. Finally, because cultures evolve, Hofstede's research, which was conducted in the 1960s and 1970s, may not be as relevant today
Know the ways in which host governments restrict inward FDI.
Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements. Ownership restraints can take several forms. In some countries, foreign companies are excluded from specific fields. In other industries, foreign ownership may be permitted although a significant proportion of the equity of the subsidiary must be owned by local investors. Performance requirements can also take several forms. Performance requirements are controls over the behavior of the MNE's local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.
Be able to identify the three types of economic systems and be able to explain how they differ from each other and how they are the same.
In a pure market economy, all productive activities are privately owned. Production is determined by supply and demand, and signaled to producers through the price system. The role of the government in a pure market economy is to encourage vigorous free and fair competition between private producers. In a command economy, the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. The government's role is to allocate resources for the good of the society. In addition, all businesses are state owned. A mixed economy is a combination of the other economic systems in which certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant state ownership and government planning.
Be able to compare and contrast the four forms of totalitarianism.
In a totalitarian country, an individual's right to freedom of expression and organization, a free media, and regular elections are denied to the citizens. There are four forms of totalitarianism. Communist totalitarianism was until recently the most widespread form of totalitarianism. This form of totalitarianism advocates that socialism can only be achieved through totalitarian dictatorship. Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. Tribal totalitarianism occurs when a political party that represents the interests of a particular tribe monopolizes power. Right-wing totalitarianism permits some individual economic freedoms but restricts individual political freedom
Know the implications of cultural differences for international businesses
International business is different from national business because countries and societies are different. Societies differ because their cultures vary. Three important implications for international business flow from these differences. The first is the need to develop cross-cultural literacy. There is a need not only to appreciate that cultural differences exist but also to appreciate what such differences mean for international business. A second implication centers on the connection between culture and national competitive advantage. A third implication looks at the connection between culture and ethics in decision making.
Should a multinational feel free to pollute in a developing nation?
Issues that might emerge include whether there is any danger that a moral management might move production to a developing nation precisely because costly pollution controls are not required, the notion that the environment is public good that no one owns, but that anyone can despoil, human-induced global warming, and legality of various actions
Know what the political case for integration is and how political arguments influenced the establishment of the European Union.
Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring stages, and reduces the potential for violet conflict. Furthermore, by linking countries together, countries have greater clout and are politically much stronger in dealing with other nations. These considerations were instrumental in the establishment of the EU. Europe had suffered through two world wars in the first half of the century, and the desire for unity was high. In addition, many Europeans felt that after World War II the European nation-states were no longer large enough to hold their own in world markets and world politics. The need for a united Europe to deal with the U.S. on one side and the former Soviet Union on the other loomed large in the minds of the EC's founders.
Be able to explain why managing an international business is different from managing a purely domestic business.
Managing an international business is different from managing a purely domestic business for at least four reasons: (1) countries are different, (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business, (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system, and (4) international transactions involve converting money into different currencies.
Be able to describe some of the home country policies that encourage outward FDI.
Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. The types of risks insurable through these programs include the risks of expropriation, war losses, and the inability to transfer profits back home. In addition, several advanced countries also have special funds or banks that make government loans to firms wishing to invest in developing countries. As a further incentive to encourage domestic firms to undertake FDI, many countries have eliminated double taxation of foreign income. Last, and perhaps most significant, a number of investor countries (including the United States) have used their political influence to persuade host countries to relax their restrictions on inbound FDI
Be able to know, explain, examine, and possible critique the North American Free Trade Agreement. You may debate its ratification if you feel necessary.
NAFTA is a free trade agreement between the United States, Canada, and Mexico. When the agreement was initially proposed in 1988, there was much debate as to whether the agreement should be ratified. Proponents of NAFTA argued that NAFTA should be seen as an opportunity to create an enlarged and more efficient productive base for the entire North American region. They argued that while some lower-income jobs would move from the United States and Canada to Mexico, new jobs would be created in the U.S. and Canada as economic growth occurred in Mexico as a result of the job transfers. In addition, the international competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of lower labor costs will be enhanced, enabling them to better compete against Asian and European rivals. Those that opposed NAFTA claimed that U.S. and Canadian citizens would lose their jobs in alarming numbers as low-income positions were moved to Mexico to take advantage of lower wage rates. Environmentalists also voiced concerns about NAFTA. Because Mexico has more lenient environmental protection laws than either the U.S. or Canada, there was concern that U.S. and Canadian firms would relocate to Mexico to avoid the cost of protecting the environment. Finally, there was opposition in Mexico to NAFTA from those who feared a loss of national sovereignty. Mexican critics feared that NAFTA would allow their country to be dominated by U.S. and Canadian multinationals, and Mexico would be used as a low-cost assembly site, while keeping their higher-paying jobs in their own countries.
Know why education leads to economic development.
Nations that invest more in education will have higher growth rates because an educated population is a more productive population. A survey of 14 statistical studies that looked at the relationship between a country's investment in education and its subsequent growth rates concluded investment in education did have a positive and statistically significant impact on a country's rate of economic growth.
Be able to explain the trends in world trade and foreign direct investment since 1950
Since 1950, the volume of world merchandise trade has grown faster than the world economy. In particular, there has been acceleration in world trade since 1980. This trade and investment pattern implies that firms are dispersing parts of their production to different locations around the world to drive down production costs and increase product quality, that the economies of the world's nation states are becoming more intertwined, that foreign direct investment is playing an increasing role in the global economy as firms increase their cross-border investments, and that the world has become significantly wealthier since 1990. The implication is that rising trade is the engine that has helped pull the global economy along. Evidence also suggests that foreign direct investment is playing an increasing role in the global economy as firms increase their cross-border investments.
In your opinion, are bribes ever acceptable? Why or why not?
Some economists have suggested that corruption might in fact improve efficiency and help growth. Others however, argue that corruption simply reduces the returns on business investment and leads to low economic growth. What do you think?
Be able to describe the five-step process that businesses can use to think through ethical problems.
Some experts on ethics have recommended a five-step process to think through ethical problems. In step 1, businesspeople should identify which stakeholders a decision would affect and in what ways. Stakeholder analysis involves a certain amount of moral imagination. 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
Discuss the establishment of GATT. What was GATT's objective?
The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and other trade barriers. GATT was established in 1947 with 19 members. Membership increased to more than 120 nations by the time it was superseded by the WTO. Under GATT, tariff reduction was spread over eight rounds. The last round, the Uruguay Round, resulted in the establishment of the WTO, which, among other things, took over the role of GATT in the global economy
Know what the International Monetary Fund and World Bank are and what their relationship is with each other.
The International Monetary Fund (IMF) was created to maintain order in the international monetary system. The World Bank was established to promote economic development. Both organizations were launched as part of the 1944 Bretton Woods Agreement and have emerged as significant players in the global economy. The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations.
Know what the World Trade Organization is and its role in the world economy
The World Trade Organization (WTO) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO members. As of 2015, 160 nations that collectively accounted for 98 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO has been instrumental in lowering barriers to cross-border trade and investment. In addition to these responsibilities, the WTO also facilitates the establishment of additional agreements between member states.
Be able to discuss the notion of social responsibility and what it means for corporations.
The concept of social responsibility refers to the idea that businesspeople should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and social consequences. In a business setting, social responsibility means that benevolent behavior is the responsibility of successful enterprises.
Know the four attributes that are discussed in Porter's diamond
The four factors are: (1) Factor endowments — a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry. (2) Demand conditions — the nature of home demand for the industry's product or service. (3) Relating and supporting industries — the presence or absence of supplier industries and related industries that are internationally competitive. (4) Firm strategy, structure, and rivalry — the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry.
Know the factors that determine the long-run monetary benefits of doing business in a country
The long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. While some markets are very large when measured by number of consumers (e.g., China and India), low living standards may imply limited purchasing power and therefore a relatively small market when measured in economic terms.
Be able to discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.
The main benefits of inward FDI for a host country arise from resource-transfer effects, employment effects, balance-of-payments effects, and effects on competition and economic growth. Three costs of FDI concern host countries. They arise from possible adverse effects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy. The benefits of FDI to the home (source) country arise from three sources. First, the home country's balance of payments benefits from the inward flow of foreign earnings. Second, benefits to the home country from outward FDI arise from employment effects. Third, benefits arise when the home-country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. The most important cost/concern of FDI for the home country centers on the balance-of-payments and employment effects of outward FDI.
Be able to explain the key factors that companies must be aware of before deciding to do business in other countries.
The political, economic, and legal systems of a country raise important issues that have implications for the practice of international business. For example, what ethical implications are associated with doing business in totalitarian countries where citizens are denied basic human rights, corruption is rampant, and bribes are necessary to gain permission to do business? The other important factor is that the benefits, costs, and risks associated with doing business in another country are a function of that country's political economic, and legal systems. Companies must balance the likely long-term benefits of doing business in that country against likely costs and risks
Since the 1980s, there has been a transformation from centrally planned command economies to market-based economies. Know the rationale for this transformation
The rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan. As a consequence, even more states have gravitated toward the market-based model.
Be able to discuss the relationship between culture and national competitive advantage
The value systems and norms of a country influence the costs of doing business in that country. The costs of doing business in a country influence the ability of firms to establish a competitive advantage in the global marketplace. It can be argued that the class-based conflict between workers and management in class-conscious societies, when it leads to industrial disruption, raises the costs of doing business in that society. Some sociologists have argued that the ascetic "otherworldly" ethics of Hinduism may not be as supportive of capitalism as the ethics embedded in Protestantism and Confucianism. Japan's emphasis on group affiliation, loyalty, reciprocal obligations, honesty, and education, all boost the competitiveness of Japanese companies. But as important as culture is, it is probably less important than economic, political, and legal systems in explaining differential economic growth between nations.
Be able to explain how EU countries benefit from the establishment of a single currency and what the costs are (if any) of a single currency.
There were several reasons that promoted the establishment of the euro. First is the belief that businesses and individuals will realize significant savings from having to handle one currency rather than many. Second, the adoption of a common currency will make it easier to compare prices across Europe. Third, faced with lower prices, European producers will be forced to look for ways to reduce their production costs to maintain their profit margins. Fourth, the euro should give a strong boost to the development of a highly liquid pan-European capital market. Finally, the range of investment options open to both individuals and institutions will increase. However, in establishing a common currency, nations have had to give up control over monetary policy. Another drawback of the euro is that the EU is not what economists would call an optimal currency area, or an area in which similarities in the underlying structure of economic activity make it feasible to adopt a single currency.
