MGMT 330G Lesson 11-15

7. Define expatriate.

A person living outside of his or her country of citizenship.

9. Define value-added tax (VAT).

Indirect tax collected from the parties as they add value to the product

8. Define culture shock.

The anxiety people often experience when they move from a culture that they are familiar with to one that is entirely different.

currency arrangements Conventional Fixed peg

A fixed-peg or fixed-rate relationship allows a currency's exchange rates with one or a basket of currencies to fluctuate around a fixed rate within a narrow band of less than 1 percent. Saudi Arabia, Jordan, Oman, Turkmenistan, the United Arab Emirates, and the Bahamas are among the countries pegged to the U.S. dollar. Denmark, Latvia, Benin, Burkina Faso, Côte d'Ivoire, and the Republic of Congo are among the countries pegged to the euro.

Value Added Tax: (VAT)

A value-added tax (VAT) is a tax charged on the value added to a good as it moves through production from raw materials to final purchaser. It is really a sales tax whose payment documentation from one stage to another becomes important for tax credits, because the seller collects the tax for the goods sold and then receives credits for VAT paid earlier in the production process. Countries that levy value-added taxes are permitted by World Trade Organization (WTO) rules to rebate the value-added taxes to exporters, an incentive that makes the exports less expensive and thus more competitive.

10. List 3 allowances commonly given to expatriates.

Allowances are employee compensation payments added to the base salaries of expatriates because of higher expenses encountered when living abroad. The most common allowances are for housing, cost of living, tax differentials, education, and moving. The 3 allowances are Housing: designed to permit executives to live in housing comparable to the level of quality they had at home. In major urban areas, it is not financially viable or logistically practical to provide the same size housing as an expatriate may have enjoyed in their home country. Cost of living allowance: based on differences in the .in the prices paid for food, utilities, transportation, entertainment, clothing, personal services, and medical expenses oversease compared with the prices paid for these items in the headquarters' city. Allowances for Tax Differentials Education Allowances Moving and Orientation Allowances Bonuses Overseas Premiums Contract Termination Payments: made as inducements for employees to stay on their jobs and work out the periods of their overseas contracts. Home Leave: pay for periodic trips back to home country.

8. Explain the difference between renewable and non renewable energy sources.

Among renewable energy sources, those that are naturally replenished, are wind power, biomass fuels, solar photovoltaic power, concentrating solar thermal power, geothermal power, ocean energy, and hydropower. Figure 4.8 illustrates the evolution of the world's energy consumption by fuel from 1990 to 2035. Nonrenewable energy sources have dominated the market. We look at these first. NONRENEWABLE ENERGY SOURCES Nonrenewable energy is energy that comes from sources that cannot be replenished, the fossil fuels, including petroleum, coal, and natural gas. Nuclear energy is also nonrenewable, but on a quite different scale than the fossil fuels.

7. Historically, how have waterways been important to business?

Bodies of Water Unlike mountains, deserts, and tropical forests, bodies of water attract people and facilitate transportation. The world population map clearly shows that bodies of water have attracted more people than have areas remote from water. The world population map clearly shows that densely populated regions coincide with rivers, lakes, and seacoasts. Water is necessary for life and critical for industry, yet it is invisible to most consumers when used in agriculture and manufacturing. Did you know that as many as 2,400 liters of water are used to produce one hamburger, while 11,000 liters can be consumed in the production of a pair of jeans?19 Although water is an abundant natural resource, its distribution around the world is uneven. In general, the world's poor lack access to clean water. For example, in the slums of Dar es Salaam, Tanzania's largest city, 1,000 liters of water cost $8. The same amount of water in the wealthy areas of the same city costs $0.34, and in the United States $0.68, according to the London-based not-for-profit group WaterAid, whose mission is to help poor communities establish clean water supplies.20 Inland waterways provide inexpensive access to interior markets. Before the construction of railways, water transport was the only economically practical carrier for bulk goods over long distances. Its use increased even after the building of railroads, and today, on every continent except Australia, which has no inland waterways, water transportation is significant, although diminished due to competition from air and road transport everywhere except in Europe. The Rhine waterway, mapped in Figure 4.7, has become the world's most important inland waterway system. It carries one-half of Switzerland's exports and nearly three-fourths of its imports. The Rhine-Main-Danube Canal, completed in 1992, creates access from the Netherlands and the North Sea through 15 countries to the Black Sea. From there, shipments can continue to Moscow over the interconnected system of the Volga and Don Rivers. Increasingly, firms have been turning to the Rhine waterway as an environmentally friendly and more economical alternative to road or rail transportation.

7. Define antitrust laws.

Competition laws are intended to prevent inappropriately large concentrations of economic power, such as monopolies. Actions to enforce competition laws or antitrust laws usually are brought by government against business, but one business may also sue another. As suggested earlier, the EU and U.S. approaches to competition stem from different historic concerns, but the actual differences in their enforcement are narrowing. In both areas, competition laws are strictly enforced, in order to prevent price fixing, market sharing, and business monopolies. The U.S. Department of Justice is charged with enforcing U.S. antitrust laws, while in the EU, the EU Commission is responsible for enforcing competition policy. The Commission also has the power to force EU member-governments to dismantle state monopolies that block progress toward an open, communitywide market. More than 120 countries now have antitrust laws. A number of important differences in antitrust laws, regulations, and practices still do exist between the United States and the EU. One difference is the per se concept of U.S. law, under which certain activities, such as price fixing, are said to be illegal "per se." This means that they are illegal in and of themselves, even though no injury or damage results from them. The EU Treaty of Rome articles dealing with restrictive trade practices do not contain this per se illegality concept of U.S. antitrust law. The result is that a cartel that allows consumers a fair share of the benefits is legally acceptable in the EU, but not in the United States. Also, the EU allows market dominance, unless it is misused to damage competitors or harm consumers. The per se concept illustrates the U.S. focus is on the potential impact of the business deal on the consumer, while the EU's focus is more on the industry's competitive structure and how businesses compete. So the United States looks to consumers first, while the EU pays attention to rivals' objections. Both approaches result in benefit to the consumer.

2. Describe the international accounting standards' convergence process and its importance to international firms.

Convergence of accounting standards will create a standard for a global market, increase comparability, and allow ICs to list stock in foreign markets, so they could tap into their potential as a source of shareholders. The U.S. approach is a collection of rules and regulations, while the European approach tends to work from principles. It is helpful to remember that accounting is influenced by culture, since it exists in a context that is influenced by a country's legal, political, and economic systems, as well as the country's history, and its assumptions rest fundamentally on understandings about human behavior and the need to control.

Define convertible currencies

Convertible currencies can be exchanged for other currencies without restrictions. Also known as hard currencies, these include the Japanese yen, the U.S. dollar, the British pound, and the euro. When a currency is nonconvertible, its value is arbitrarily fixed, typically at a rate higher than its value in the free market, and the government imposes exchange controls to limit or prohibit the legal use of its currency in international transactions. The government also requires that all purchases or sales of other currencies be made through a government agency. Limitations might also restrict the amount of domestic currency transferred into foreign currency. Such restrictions may influence a firm's ability to repatriate profits, that is, return profits to the home country. A black market inevitably springs up alongside such currency restrictions, but it is of little use to the international manager, who needs to abide by the laws. Countries put limitations on the convertibility of their currency when they are concerned that their foreign reserves could be depleted. Foreign reserves are a source of currency for foreign debt service, import purchases, and other demands for foreign currency domestic banks might encounter. Ukraine, Argentina, Pakistan, and China are among the many countries that impose some sort of exchange controls. The Chinese renminbi (or yuan) is convertible in current accounts (accounts for day-to-day banking) but not yet in capital accounts (longer-term accounts), although China has made loosening of controls a goal so that the renminbi could become a hard currency, used for trade and as a part of foreign reserves.

LESSON 15 CHAPTER 15 1. Define: 1) Current rate method 2) Temporal method

Current rate method: An approach in foreign currency translation in which assets and liabilities are valued at current spot rates. Temporal Method: An approach in foreign currency translation in which monetary accounts are valued at the spot rate and accounts carried at historical cost are translated at their historic exchange rates.

Explain the relationship between the current and capital accounts related to trade.

Deficits and Surpluses in BOP Accounts The BOP current account and capital account add up to the total account. A deficit in the current account is always accompanied by an equal surplus in the capital account, and vice versa. Let's see how this works. If you purchase a case of French wine in the United States for $200, your payment, as it heads out of the United States and to the French winery, will be recorded as a debit in the U.S. current account. Once the winery receives your dollars, it has to do something with them. If the treasurer of the winery decides to deposit your payment in a dollar account at a U.S. bank, the amount will show up as a credit in the U.S. capital account. If the winery exchanges your dollar payment for euros, then the bank receiving the dollars will have to make a decision about how to spend or invest them. Sooner or later, these dollars will show up as a credit on the U.S. account. Page 227 Contrary to commonly held belief, a current account deficit is not always a sign of bad economic conditions; it simply shows the country is importing capital. This is no more unnatural or dangerous than importing wine or cheese. A current account deficit is a response to conditions in the country. Among these could be excessive inflation, low productivity, or inadequate saving. In the case of the United States, a current account deficit could occur because investments in the United States are secure and profitable, so that many foreigners want to own them (foreign direct investment, an import of capital) and export their earnings (repatriation). If there is a problem, it is in the underlying conditions and not in the deficit per se.25 Countries with relatively high price levels, high gross national products, high interest rates, and strong exchange rates, as well as relatively low barriers to imports and attractive investment opportunities, are more likely to have current account deficits than are other countries.26 In recent years the United States has had a substantial deficit in its current account. Citizens of the United States are importing more goods than they are exporting, yet they are exporting more services than they are importing. There also is a surplus in the U.S. capital account. Those dollars that leave the United States to pay for imported goods come back into the United States in the form of foreign-owned investments in the country (for example, Treasury bills and investment property in New York City). So let's remember that a deficit or surplus in the current account cannot be explained or evaluated without simultaneously examining an equal surplus or deficit in the capital account. They need to be reviewed together. At this point, the international monetary system is a work in progress, one that is evolving to support an expanding and increasingly complex global trading system. It is flexible, offers a way to store value, and does not have inordinate storage or transportation costs. We also believe in it. We have confidence that it will be able to transfer value accurately and swiftly among us all.

9. Describe the Foreign Corrupt Practices Act.

During the 1970s, revelations of questionable or dubious payments by U.S. companies to foreign officials rocked governments in the Netherlands and Japan. Congress considered corporate bribery bad business and unnecessary. In response to these corruption scandals, it passed the Foreign Corrupt Practices Act (FCPA). Key provisions of the act prohibit bribery of foreign officials and set requirements for transparency of accounting transactions. The FCPA makes it unlawful to bribe foreign government officials to obtain or retain business. Facilitating payments for routine government actions such as visa issuance, import approvals, and the processing of government papers are permissible under the FCPA, though. There's no question that the intent of FCPA is positive. Yet it does present U.S. businesses with some challenges. One is that there are a number of uncertainties about the terms used in the FCPA. According to the FCPA's drafters, for instance, the act does not outlaw grease, which refers to facilitating payments made solely to expedite nondiscretionary official actions like customs clearance. However, the law makes no clear distinction between supposedly legal grease payments and illegal bribes. The act is also very broad in defining what constitutes a foreign official, and the government's relevant criterion for a bribe is not the amount but rather the intent of the payment. The accounting standards required by the FCPA have raised questions about how far management must go to learn whether any employees, subsidiaries, or agents may have violated the act; even if management were unaware of an illegal payment, it could be in violation if it had reason to know or could be expected to know that some portion of a payment abroad might be used as a bribe. In January 2010, nearly two dozen U.S. corporate executives were indicted in an undercover sting operation for bribing an African minister of defense. After a record-setting level of enforcement that year, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) continued to pursue companies in situations that might encourage corruption, in a process called sweeping. When a company is reported to have engaged in corruption, DOJ and SEC will look closely at it and at other companies in the industry and related industries, and the travel and expense claims of their agents. In 2013 alone, the DOJ and SEC collected more than $635 million in civil and criminal penalties for FCPA violations. IBM settled charges of illegal travel and entertainment payments in Korea and China for $10 million. Diebold Inc., a provider of ATMs, settled charges of improper travel, gifts, and leisure payments in Indonesia, Russia, and China for $48 million. In April 2014, HP pleaded guilty to bribery charges that resulted from a four-year investigation in Russia, Mexico, and Poland. The company will pay $108 million in fines and penalties.40 Increased enforcement efforts will apparently produce a growing level of FCPA prosecutions and fines in the future.41 Page 172 When the FCPA was passed, critics believed it would harm U.S. companies' competitiveness abroad because it would demand of them a higher standard of behavior than was common in the competitive environment. Congress decided the potential economic damage to exports would be minimal and that the only companies hurt would be those whose sole means of competing was through the payment of bribes. The United States actively lobbied the international community to introduce similar legislation, which resulted in the OECD Convention on Bribery in 1997. The FCPA was amended in 1998 to incorporate antibribery conventions developed by the OECD. You may wonder whether U.S. laws on bribery do place U.S. businesses at a disadvantage in international competition. The FCPA, along with the OECD convention, EU legislation, UK legislation, and a UN initiative, have certainly brought a discussion of bribery and transparency out into the open. Such discussions were further stimulated by the Asian financial crisis of 1997, one of the apparent causes of which was lack of transparency in financial dealings. Having an international reputation for transparency and integrity, and being perceived as "above board," have become increasingly important for global companies. With integrity, there is no invisible third party (the briber) in the transaction, the value of whose impact cannot be assessed. With an ethical approach, you know where your dollars are going and you can measure their impact. Unfortunately, we tend to be more aware of companies with unethical approaches, since their violations make them notable, but many ethical companies operate internationally, focused on keeping their operations transparent and doing what is right. Companies recognized for their ethical approach by the Ethisphere Institute, a leader in setting the standards of ethical business practice, include Gap, Levi Strauss, Ford, National Australia Bank, Intel, Google, Microsoft, Wipro, Henkel, Kao, Texas Instruments, TATA Power, Fluor, Kellogg, PepsiCo, illycaf, 3M, General Electric, Marriott, Marks and Spencer, and UPS.42 Among the most noteworthy of new agreements on bribery is the UN Convention against Corruption (UNCAC) and the United Kingdom Bribery Act. The UNCAC has been signed by more than 170 countries as well as the EU, as of 2014.43 It goes beyond bribery to address a broader range of corruption, such as general abuse of power and trading in official influence, as well as the recovery of assets from officials accused or convicted of engaging in corruption. In 2011, the United Kingdom Bribery Act came into force, which includes penalties for corporate failure to prevent bribery. The person engaging in a bribe does not need to be British and the act of bribery does not need to have occurred in the United Kingdom. A corporation can be charged under this law as long as it engages in "a business or part of a business" in the United Kingdom, suggesting that this law applies extraterritorially.44 Finally, Transparency International's Corruption Perception Index is not formally connected to U.S. law, but it is published periodically and assesses the likelihood that firms from industrialized nations will engage in bribery abroad. It is developed through survey data obtained from government and corporate managers working internationally, and focuses on countries rather than businesses. Denmark and New Zealand tied for first place ranking in 2013, with Finland and Norway tied for third. The Scandinavians set an example here! You can see all of the current rankings and raw scores at http://cpi.transparency.org/cpi2013/results/. Table 6.4 summarizes selected rankings of Transparency International's index. The fluctuation in the rankings suggests that businesses and national governments worldwide are placing more value on ethical business behavior and developing improved ways to monitor it, and changes in the political environment influence levels of transparency. One challenge of increasing ethical behavior is that, although we consider ethics at the national or business levels, ethical behavior actually occurs at the level of the individual manager, who in the international context often has a great deal of discretion. Training in the value of ethical, transparent approaches to doing business is critical.

4. Define these hiring practices: 1) Ethnocentric 2) Polycentric 3) Geocentric

Ethnocentric policy: A policy of hiring and promoting based on the parent company's home-country frame of reference. Polycentric Policy: A policy of hiring and promoting based on the specific local context in which the subsidiary operates. Geocentric Policy: A policy of hiring and promoting based on ability and experience without considering race or citizenship.

5. Define triple-bottom-line accounting.

FIGURE 4.4The Company in a Societal Context One way a company can measure its activities in this larger context and share the results of its social, environmental, and economic performance with its stakeholders is to use triple-bottom-line accounting (3BL). Note, though, that 3BL does not allow for comparisons cross companies, since the measurements, especially in the social and environmental areas, are not standardized. For an example of triple-bottom-line reporting, see Freeport-McMoRan's Sustainable Development Reports at www.fcx.com. The company's public materials suggest it is using a stakeholder approach, increasing value, and contributing to the quality of life for many constituencies, including indigenous peoples, while operating low-impact mining in one of the most socially and environmentally challenging sectors, extraction.

List four ways inflation affects international business.

First, the inflation rate determines the real cost of borrowing in capital markets. You'll recall the Fisher effect from our discussion of exchange rates. When the firm operates in multiple countries, it has multiple currency exposures, and the complexity of dealing with inflation increases because inflation rates vary among countries. When management decides to raise capital, should they use equity or debt? In which capital markets? In what currency? These are critical questions, and inflation rates play a role in the answers. Further, rising inflation rates encourage borrowing (debt), because loans can be repaid in the future with inflated, cheaper money. But high inflation rates also bring high interest rates because banks have to offer more reward to draw in deposits. Then inflation may discourage lending, because lenders may fear that, even with high interest rates, the amount repaid plus interest will be worth less than the amount lent. Thus, you see how the relationship between inflation and interest rates can affect business decisions. And in our discussion of the international Fisher effect we have seen the relationship between currency exchange rate trends and interest rates. So there is a relationship between inflation and currency exchange rates. Inflated currencies tend to weaken. In inflated economies, instead of lending, the money holder may buy something that is expected to increase in value, thereby further fueling inflation. In Brazil during a recent inflationary period, farmers hoarded their crops and then used them in barter for imported farming equipment and Mercedes cars. Lenders have begun to use variable interest rates, which rise or fall with inflation, to shift financial risk to the borrower. This shift requires that the borrower be much more careful about borrowing. The original rate and any future changes are based on a reference interest rate, such as the U.S. prime rate (the rate of interest at which banks lend to their best customers), or the London Interbank Offer Rate (the bank-to-bank interest rate in London—LIBOR). Finally, inflation rates cause the cost of the goods and services produced in a country to rise, and thus the goods and services become less competitive globally. Producers in the high-inflation country find export sales more difficult. Such conditions may lead to balance-of-payments deficits in the trade account, where a nation's international transactions are recorded, so under these conditions management must be alert to government policy changes that attempt to correct the deficits, such as more restrictive fiscal or monetary policies, currency controls, export incentives, and import obstacles. Because monitoring balance-of-payment accounts is important, we now take a look at the balance of payments.

4. Define American depository receipts.

Foreign shares held by a custodian, usually a US bank, in the issuer's home market and traded in dollars on the US exchange.

8. Explain: 1) Forward market hedge 2) Currency option hedge

Forward market hedge: Foreign currency contract sold or bought forward to protect against foreign currency movement Currency option hedge: An option to buy or sell a specific amount of foreign currency at a specific time in order to protect against foreign currency risk

currency arrangements Free floating

Free floating exchange rates rely on the market. Governments may intervene, but to moderate the rate of change rather than to establish the currency's level. Countries following this approach are the Canada, the UK, the United States, Sweden, Japan, and the EU countries.

5. Explain the choice-of-law clause.

In more routine business issues, such as a business contract dispute, the choice-of-law provisions in the contract specify which law will govern. For example, if there is a U.S. seller and an Australian buyer, the parties may agree that Australian law will govern any dispute. The choice defaults to the CISG rules if no other provisions have been made, a process that can be lengthy and complicated. For this reason, it is prudent to include both a choice-of-law clause and a choice-of-forum clause in contracts. A choice-of-forum clause in a contract specifies where the dispute will be settled. For example, the parties in the preceding example may agree to have the dispute decided in California, in a process that begins with mediation and then moves, if required, to state courts in Los Angeles County, California. Despite legal uncertainties of doing business in other countries, international business activities will continue to increase in the future, and it is likely that disputes will as well. For this reason, international businesspeople must be aware of the legal environment in which they find themselves. Legal systems vary significantly from country to country, and it is important to understand the differences. The assumptions we make on the basis of the U.S. or any other legal system may not apply in other countries

LESSON 12 CHAPTER 6 1. Why is the rule of law better for international business?

International businesspeople need to determine that a country is governed by the rule of law, rather than by the rule of a political dictatorship or a powerful elite. When a country's legal system is based on the rule of law, foreign investment is encouraged because investors know their interests will be protected. Countries that follow the rule of law also tend to protect the human rights of local peoples, an increasing concern of global companies. For example, while Shanghai has been attracting increased foreign investments since the global financial crisis in 2008, Hong Kong continues to offer advantages over Shanghai, largely because Hong Kong has a tradition of law adopted from British colonial days that has been tried and tested and is trusted by international businesses. Shanghai courts, on the other hand, have been perceived to favor Chinese litigants. This disparity in the two cities' legal systems has been reduced recently, and in 2012, nearly 80 percent of the intellectual property cases brought to Shanghai courts were decided in favor of the foreign party.8 Yet perception lags reality in this case, and this lag favors Hong Kong. The World Bank "Doing Business" survey ranks Hong Kong 2nd overall to Singapore for investor protection in the region and 1st for contract enforcement. China ranks 15th for investor protection and 3rd for contract enforcement, while among cities in China, Shanghai ranks 4th for contract enforcement. A World Bank summary of governance indicators including the rule of law that scores nations on a 100-point scale gives China a 40 and Hong Kong a 90.9 These rankings suggest that Hong Kong has advantages due to its more highly developed legal system. Figure 6.1 maps the rule of law globally.

2. Describe life cycle assessment (LCA).

Life cycle assessment (LCA) is an approach used to evaluate the environmental impact aspects of a product or service throughout its life cycle, sometimes called cradle-to-grave analysis. In the recent past, manufacturers handed over the product to the consumer at the factory gate, but no longer. Now manufacturers are concerned about the impact their product has on the environment. Using life cycle assessment, they examine the whole chain of activities that contributes to the production of their product, and to which their product contributes. This emerging "product stewardship" is a result of thinking informed by LCA and means corporations are increasingly accepting responsibility for the extended impacts of their activities. Page 93 In his work on sustainability in the business context, business educator Ronald Whitfield uses a pencil to illustrate the application of LCA. The pencil's environmental footprint consists of all the products of its manufacture, such as exhaust from the sawing and milling equipment, water used in the processing, emissions from the paint shop, and scrap wood, metal, and graphite. The manufacturer will analyze these to discover cost-effective alternatives that are more ecologically efficient. In an extended analysis of the value chain, the manufacturer includes suppliers. Is the cedar being harvested in a sustainable way? What about the production of the pencil's stain, wax, paint, and eraser, and the transportation and distribution of these components? What happens to the pencil when it is no longer used? An LCA also often includes carbon dioxide emissions, ozone depletion, water use and release, toxic releases, and resource depletion. Here's a simple yellow wooden pencil, but its LCA can be complex. LCA helps us understand the cumulative impact of the products we purchase and can help a company focus on reducing its environmental footprint, its cost structure, and the potential dangers of carcinogens its inputs, processes, and waste might pose to employees, consumers, and the environment. Patagonia learned from an LCA that the production of one tee-shirt required more than 700 liters of water. In response, the company switched from industrially produced cotton to organic cotton, which uses far less water. Akzo Nobel, a chemical company, learned from a series of LCAs on packaging that steel drums are the best packaging for its chemicals, due to steel's high levels of recycling.7 LCAs can help identify the "low-hanging fruit" for companies that want to improve their environmental performance. The actions they often suggest—such as retro-fitting plants, installing energy-saving devices, and installing centralized controls for heating, lighting, and cooling systems—offer high returns on investment and short pay-back periods.

5. Define offshore financial center.

Location that specializes in financing nonresidents, with low taxes and few banking regulations.

3. Explain the UN Convention on the International Sale of Goods (CISG).

Many countries, including the United States, have ratified the UN Convention on the International Sale of Goods (CISG) to solve jurisdictional problems related to contract performance. The CISG is a set of uniform legal rules that govern the formation of international sales contracts and the rights and obligations of the buyer and seller. It applies automatically to all contracts for the sale of goods between traders from different countries that have ratified it. This automatic application will take place unless the parties to the contract expressly exclude—opt out of—the CISG.

4. Explain arbitration.

Many people outside the United States dislike the U.S. court system. Likewise, many U.S. businesspeople dislike or fear litigation in other countries. Also, arbitration is, by agreement, binding, while one country's court decisions are difficult to enforce on a nonresident. For these reasons, international businesspeople often agree by stipulating in their contract that any disputes will be resolved by arbitration rather than by litigation. Arbitration is usually quicker, less expensive, and more private than litigation, and it is usually binding on all parties. At least 30 organizations now administer international arbitrations, the best known of which may be the International Court of Arbitration of the International Chamber of Commerce in Paris. The Court has about 100 members from 90 countries who arbitrate cases. In addition, London and New York are centers of arbitration. Some organizations specialize in the type of arbitration cases they will consider. For example, the World Intellectual Property Organization (WIPO) Arbitration and Mediation Center handles technological, entertainment, and intellectual property disputes. In 2009 the Center settled a dispute between the Canadian company Research in Motion Ltd., maker of the BlackBerry smartphone, and a private party, George Elias of the United States, over domain names using variations on the word BLACKBERRY.11 The International Centre for the Settlement of Investment Disputes specializes in investment disputes.

6. Explain how mountains and deserts have affected business.

Mountains Barriers such as mountains tend to separate neighbors and impede exchange and interaction, whereas plains and plateaus facilitate them unless climate makes exchange unlikely, as in the Sahara and Gobi Deserts. Mountains that are massive and rugged, and that don't have transecting valleys, are significant barriers. Travel across the Himalayas is so difficult that transportation between India and China is by air or sea rather than overland, and the cultures and languages of the Indians to the south and the Chinese to the north are in high contrast to one another. The Central Asian Hindu Kush runs from north central Pakistan through eastern and central Afghanistan. Page 103 Another example of the influence of mountain barriers occurs in Afghanistan, where mountains dominate the landscape, running northeast to southwest through the center of the country, including the Hindukush area. More than 40 percent of Afghanistan sits at altitudes above 6,000 feet, and high passes cut through these mountains, creating a network for caravans. (In comparison, in the United States there are only two peaks east of the Mississippi River that reach 6,000 feet, Mt. Mitchell and Mt. Washington.) The 10 major ethnic groups and 33 languages spoken in Afghanistan offer further evidence of the ability of mountain ranges to separate populations. In similar fashion, the Alps, Carpathians, Balkans, and Pyrenees have long separated the Mediterranean cultures of Europe from those of the North. These mountain ranges create regional markets, each with its own distinctive industries, climate, culture, dialect, and sometimes even language. In Spain, Catalonia and the Basque country have separate languages. In Switzerland, German, Swiss, Italian and Romish regions, cultures, and languages challenge firms that would like to standardize their products and marketing. In China, the government made Mandarin the official language in 1956, recognizing that language diversity was hindering the country's economic development. Yet there are at least 56 Chinese ethnic groups, each with its own language, and many separated by mountain ranges. In Colombia, the three major ranges of the Andes divide the country and separate people, as well. Deserts and Tropical Forests Deserts and tropical forests also separate markets, increase the cost of transportation, and create population concentrations. More than one-third of the Earth's surface consists of arid and semiarid regions located either on the coasts of continents, where the winds blow away from the land, or in their interiors, where mountains or long distances cause the winds to lose their moisture before reaching these regions. Every continent has deserts and tropical forests, and every western coast between 20 and 30 degrees north or south of the Equator is dry. Only in latitudes where there is a major source of water, as in Egypt, is there a concentration of population. In Figure 4.6, which depicts the distribution of the world's population, Australia well illustrates the relationship between water supply and population concentration. A continent the size of the continental United States but with just over 7 percent of the U.S. population, Australia has a coastline that is humid and fertile, while the huge center of the country is mainly desert, closely resembling the Sahara. Australia's population is concentrated along the coastal areas in and around the state capitals, which are also major seaports, and in the southeastern fifth of the nation, where more than half the population lives. Australia's topography creates one of the highest percentages of urban population in the world, at about 93 percent. FIGURE 4.6World Population Map The Green Wall of China, in Taipusia, Inner Mongolia, planted to fend off the encroaching Gobi desert Page 104 Tropical rain forests, at the other extreme, also are a barrier to economic development and human settlement, especially when they are combined with a harsh climate and poor soil, as in the Amazon basin, Southeast Asia, and the Congo. Except in parts of West Africa and Java, rain forests are thinly populated and little developed economically. The Canadian Shield, although neither desert nor rain forest, is a vast outcropping of bedrock thinly covered with soil that covers about half the country (1.7 million square miles), is mostly in permafrost, and does not support populations, although it is the source of minerals, diamonds, and ores. International managers know that in more densely populated nations, marketing and distribution cost less because population centers are closer together, communication systems are more efficient, and more people are available for employment. Therefore, when they compare average population densities such as Canada's 3 inhabitants per square kilometer, Australia's 3, Brazil's 23, and the United States' 34 with the Netherlands' 495 or Japan's 351, they can avoid drawing the wrong conclusions. They know the populations of Canada, Australia, and Brazil are highly concentrated in relatively small areas because of deserts, tropical rain forests, and, in Canada, the Shield.

currency arrangements Exchange arrangements with no separate legal tender

One country adopts the currency of another, or a group of countries adopt a common currency. Examples of the first strategy are the adoption of the U.S. dollar in El Salvador, Panama, Zimbabwe, and Ecuador, and Kosovo and Montenegro's adoption of the euro (both countries wish to join the European Union). An example of the second, a common currency, is the euro, the shared currency in 18 EU member-countries.

Purchasing Power Parity

PPP is the amount of adjustment that must be made in the exchange rates for two currencies in order for them to have equivalent purchasing power. We use it to show the number of units of a currency required to buy the same basket of goods and services in two markets with different currencies. PPP is an application of the law of one price to a basket of commodity goods, and it suggests that for a dollar to buy as much in the United Kingdom as in the United States, the cost of the goods in the UK should equal their U.S. cost times the exchange rate between the dollar and the pound. This relationship is expressed in the following equation, where P is the price of a basket of commodity goods: £P($/£) = $P Another way to think about what PPP theory states is that currency exchange rates between two countries should equal the ratio of the price levels of their commodity baskets. This relationship is expressed in the following equation, where P is the price of a basket of commodity goods: £P($/£) = $P Page 220 For example, if a basket of goods costs $1,500 in the United States and £1,000 in the United Kingdom, the PPP exchange rate will be $1.50/£. If, in the trading market, the actual spot exchange rate were $2/£, the pound would be overvalued by 33 percent, or, equivalently, the dollar undervalued by 25 percent. The Economist, a British weekly magazine, presents an application of PPP theory in its "Big Mac index," substituting an omnipresent Big Mac for a basket of goods. The Big Mac PPP is the exchange rate that would have a Big Mac in other countries costing an amount equivalent to what it does in the United States. The Big Mac index suggests that in the long term, many of the developing countries' currencies are undervalued and the euro and many European currencies are overvalued. You can check the latest Big Mac index and view a video explaining The Economist's efforts to make economics as simple as it ought to be at http://www.economist.com/content/big-mac-index/.

5. Define: 1) Parent-country national 2) Host-country national 3) Third-country national

Parent-country national: (PCN) Employee who is a citizen of the nation in which the parent comany is headquartered; also called home-country national. Host-country national: (HCN) Employee who is a citizen of the nation in which the subsidiary is operating, which is different from the parent company's home nation. Third-country national:(TCN) Employee who is a citizen of neither the parent company nation nor the host country.

9. List the 3 dimensions of cross-cultural adjustment.

Researchers have identified three dimensions associated with cross-cultural adjustment.46 The first is associated with the work context, such as the extent of job clarity, inherent conflict in the person's role, and amount of discretion associated with completing the job tasks. Adjustment to the general environment, the second dimension, is associated with reacting to differences in housing, food, education, health, safety, and transportation. The third dimension, interaction with local nationals, involves adjusting to differences in behavioral norms, ways of dealing with conflict, communication patterns, and other relationship issues that can produce anger or frustration. An expatriate can experience some degree of culture shock associated with any or all of these three dimensions

4. Define stakeholder theory.

Stakeholder theory was developed by the philosopher R. Edward Freeman,14 and the model it offers differs substantially from the traditional economic business model. It calls for managers to identify and consider the network of tensions caused by the competing internal and external demands within which the business exists. The traditional economic model of business considers a far narrower scope of influences (employees, owners, and suppliers) that are driven by the single goal of creating profits. Stakeholder theory forces a business to address underlying values and principles. It "pushes managers to be clear about how they want to do business, what kind of relationships they want and need to create with their stakeholders to deliver on their purpose."15 Stakeholder theory also gives all stakeholders a voice and suggests that the tensions among them can be balanced. Profit is then a result of value creation rather than the primary driver in the process, and business becomes a network of relationships in the larger social context and the responsibilities that develop from them. Freeman points out that many companies' operations are consistent with stakeholder theory, including Johnson & Johnson (J&J), eBay, Google, and Lincoln Electric. Page 100 To achieve the balance among competing tensions that characterizes the stakeholder approach, a company needs to see itself in relationship to its stakeholders and also in a societal context, as Figure 4.4 illustrates. Taking this view of itself leads the company to clearly identify its larger purpose, principles, and responsibilities through discussions both within the company and in its larger social context. The company then is able to identify limits for its operations, so that what it does is ecologically responsible and acceptable to its stakeholders; analyze and manage the various interdependencies among the ecological, social, and economic systems that form the context of the business; and address ways to achieve equity of distribution.

6. Describe multilateral netting.

Strategy in which subsidies transfer net intracompany cash flows through a centralized clearing center.

LESSON 11 CHAPTER 8 Define the Bretton Woods system.

The 1944 discussions among 44 Allied nations at Bretton Woods (NH) to plan for post-World War II monetary arrangements reached a consensus that stable exchange rates were desirable, but that experience might dictate adjustments. Representatives at the conference also agreed that floating or fluctuating exchange rates had proved unsatisfactory. In establishing the International Monetary Fund (IMF), they also set up the new Bretton Woods system, also called the gold exchange standard and the fixed-rate system. This historic agreement served as the basis of the international monetary system from 1945 to 1971. Bretton Woods set up fixed exchange rates among member nations' currencies, with par value based on gold and the U.S. dollar, which was valued at $35 per ounce of gold. Governments agreed that their central banks would keep their currencies tied to the value of the dollar, which was tied to gold. For example, the British pound's par value was US$2.40, the French franc's was US$0.18, and the German mark's was US$0.2732. There was an understanding that the U.S. government would redeem dollars for gold and that the dollar was the only currency to be redeemable for gold. This dollar-based gold exchange standard established the U.S. dollar as both a means of international payment and a reserve currency for governments to hold in their treasuries. Reserves are funds held by a nation's central bank or treasury and used to back its liabilities; they can include various hard currencies (Japanese yen, U.S. dollar, British pound sterling, EU euro) and gold. They are often called central reserves. The Bretton Woods system supported substantial international trade growth during the 1950s and 1960s. Other countries changed their currency's value against the dollar and gold, but the U.S. dollar remained fixed at $35 per ounce of gold. This meant that the United States, in order to satisfy the growing demand of other countries for reserves (because countries would hold dollars as a proxy for gold), had to run a balance-of-payments deficit. That is, the demand for and flow of dollars out of the United States was greater than the flow in. People outside the United States wanted to hold dollars because they operated as a proxy for gold. The external holdings far exceeded the inflow of dollars due to U.S. export sales and investments by foreigners in the United States. From 1958 through 1971, the United States ran up a cumulative deficit of $56 billion, which it financed partly by using its own gold reserves and partly by incurring liabilities to foreign central banks. As a result, U.S. gold reserves shrank from $24.8 billion to $12.2 billion,8 and U.S. liabilities increased from $13.6 billion to $62.2 billion.9 By 1971, the U.S. Treasury held only 22 cents worth of gold for each U.S. dollar held by foreign central banks.

3. Describe the United Nations Global Compact

The United Nations Global Compact was begun in 2000 to address four areas: human rights, labor, the environment, and anticorruption. Three of the compact's 10 principles address the environment. More than 8,700 corporations from 135 countries have signed on to the compact, including 40 percent of the 500 largest global companies. Participants in the Global Compact file an annual report using the compact's framework that needs to suggest serious and committed engagement with sustainability. You can access the 2013 Global Compact Report at UNglobalcompact.org and check out the visual summary of corporate progress.

Spot Rate

The exchange rate for a purchase or trade for delivery within two business days is known as the spot rate. The spot rate for the euro on April 9, 2014, in dollar terms, was $0.72630.

3. Define 1) brain drain

The loss by a country of its most intelligent and best-educated people.

3. Compare American and German firms along the dimension of transparency and optimism.

The purpose of accounting in all countries is to provide managers with financial data for use in their decision making and to provide external constituencies (investors, governments, lenders, suppliers, and others) with the quantitative information they seek to inform their decisions. Accounting also provides the data governments need to levy taxes. If you think back to what you know about how cultural values vary across nations, you won't be surprised that what is considered useful accounting data varies from country to country. For example, in many countries that follow code or civil law such as Germany, the primary users of financial information tend to be creditors; they care about the firm's financial stability. So accounting in these countries will tend to be conservative and focus on the balance sheet and the company's assets. By contrast, in common law countries such as the United States, individual investors tend to be major users of financial information, and they care most about the future prospects of the company. They look to the income statement as a sign of the company's future and are less interested in the balance sheet than are the Germans, while their financial statements tend to be more optimistic.1

2) reverse brain drain

The return home of highly skilled immigrants who have made a contribution in their adopted country.

4) Technical analysis

The third approach to exchange rate forecasting, technical analysis, looks at history and then, assuming that what was past will be future, projects these trends forward. Technical analysts think in terms of waves and trends. There is no theoretical underpinning to the technical approach, and while academic studies tend to dismiss it, it appears that traders often use it.

8. List 4 ways US liability laws differ from those in Europe and Japan.

Torts are injuries inflicted on another person, either intentionally or negligently. Tort cases in the United States may result in large monetary awards. Other countries restrict the amount of money that can be obtained in tort actions. One important area of torts, especially in the international arena, is product liability. Product liability laws hold a company and its officers and directors liable and possibly subject to fines or imprisonment when its product causes injury, damage, or death. Such liability for faulty or dangerous products was a growth area for the U.S. legal profession beginning in the 1960s. Liability insurance premiums soared, and there were concerns that smaller, weaker manufacturing companies could not survive. In the 1980s that boom spread to Europe and elsewhere. As foreign firms buy or build U.S. plants, they are being challenged by the same liability and insurance problems U.S. companies have long faced.35 Manufacturers of products are often held to a standard of strict liability, which makes the designer/manufacturer liable for damages caused by a product without the need for a plaintiff to prove negligence in the product's design or manufacture. There are several reasons to believe the impact of strict liability on product designers and manufacturers in Europe and Japan will not be as heavy or severe as it is in the United States. The EU allows companies to use "state-of-the-art" or "developmental risks" defenses, which allow the designer/manufacturer to show that at the time of design or manufacture, the most modern, latest-known technology was used. EU countries also have the option to cap damages. In contrast, in the United States, product liability cases are heard by juries that can award plaintiffs actual damages plus punitive damages. As the name indicates, punitive damages have the purpose of punishing the defendant, and if the plaintiff has been seriously injured or the jury's sympathy can be otherwise aroused, it may award millions of dollars to "teach the defendant a lesson." Outside the United States, judges, not juries, hear product liability cases. Judges are less prone to emotional reactions than juries are, and even if the judge is sympathetic toward a plaintiff, punitive damages are not awarded by non-U.S. courts.

7. Explain: 1) Transaction exposure 2) Translation exposure 3) Economic exposure

Transaction exposure: Change in the value of a financial position created by foreign currency changes between the establishment and the settlement of a contract Translation exposure: Potential change in the value of a company's financial position due to exposure created during the consolidation process Economic exposure: The potential for the value of future cash flows to be affected by unanticipated exchange rate movements

2. Define extraterritorial application of laws.

What laws does the company have a duty or obligation to follow? At first thought, we might conclude that a nation's jurisdiction applies only within its geographic area. Many countries, though, including the United States and members of the European Union, attempt to enforce their laws outside their borders, not by force but through traditional, legal means. This process is referred to as the extraterritorial application of laws. For example, the U.S. government imposes taxes on U.S. citizens and U.S. permanent residents regardless of the source of income or the residence of the taxpayer. If a U.S. citizen is living in Madrid and receives all her income from Spanish sources, the United States will still expect her to comply with U.S. tax laws. Likewise, when U.S. companies operate in other countries with U.S.-based employees, these companies must comply with U.S. laws, including employment laws. Of course, they must also comply with the laws of the host country. Extraterritorial application of laws has been extended to many other areas in addition to tax and employment law, including antitrust and environmental laws. Also, the Alien Tort Statute allows non-U.S. nationals to file lawsuits in U.S. courts for alleged violations of international law, including human rights violations, even when the defendant has no ties to the United States and when the defendant is a corporation. Charles McArthur Emmanuel, the son of the former dictatorial ruler of Liberia, was convicted of torture and conspiracy to torture in a Department of Justice case, and victims were awarded over $22 million (Kpadeh v. Emmanuel, 2008). The U.S. Supreme Court ruled against the Nigerian claimants in Kiobel v. Royal Dutch Petroleum, which claimed the oil company aided the Nigerian government in the violation of human rights law in 2013. Page 156 China and the United States are currently engaged in a legal dispute about a U.S. court's extraterritorial imposition of a decision related to accounting and auditing. The U.S. judge suspended the China affiliates of the Big Four accounting firms from auditing U.S.-listed companies. The U.S. Securities and Exchange Commission (SEC) had requested auditing information from these accounting firms on specific Chinese companies trading in U.S. markets. The Chinese firms refused to hand over the documents to U.S. regulators, claiming that Chinese law considers such information a state secret.

Describe these four approaches to exchange rate forecasting: 1) Efficient market approach

assumes that current prices fully reflect all available relevant information. This assumption also suggests that forward exchange rates are the best possible predictor of future spot rates, because they will have taken into account all the available information. For example, if interest rates are different between two countries, the forward rate will reflect this (per the international Fisher effect). The efficient market approach does not suggest the forward rate will predict the future spot rate with perfect accuracy, though. Rather, any divergence will be random.

LESSON 13 CHAPTER 4 1. Define environmental sustainability.

has a broad scope. It is about maintaining something—the environment, society, the economy, people within the economy, or the organization. Increasingly, when we use the term sustainability in a business context, we mean any of these applications.1 The United Nations World Commission on Environment and Development, known as the Brundtland Commission, drafted a widely accepted definition of sustainable development: it "meets the needs of the present without compromising the ability of future generations to meet their needs."2 This understanding of sustainability calls on businesses to develop new approaches to the way we "design, produce, distribute, and consume goods and services; the way we establish market prices for these goods and services; the way we provide and consume energy; the way we respect and regulate the environment; and the way we insure the health and well-being of all living creatures."3 Sustainability in fact requires us to change the way we manage everything—government institutions, markets, business organizations, and our own individual behavior. Because environmental sustainability requires the commitment of business to operate without reducing the capacity of the environment to provide for future generations,4 the environmentally sustainable firm has the challenge to think both about its competitive present and the needs of future generations. This is no easy feat, since either option could be consuming. Approaches to sustainability in the business context usually consider the ecological, social, and economic systems in which the business functions. In this section, we look at the characteristics of sustainability and of sustainable business practices and then explore a stakeholder model that supports a company's adoption of sustainable approaches. In their early efforts at sustainability, firms looked inside, at their operations, and paid attention to the way they used resources. For example, they measured the amount of water saved and energy consumption reduced due to their conservation efforts. Then they began to examine their value chains, beginning with their direct suppliers and distributors. Today, they have enlarged their focus again to look at their entire supply chain, from raw materials extraction to manufacturing, distribution, use, and final disposal.5 This broader approach has been recognized as positive both for business and for the environment. Walmart realized as early as 2005 that it could compete on low price and build a sustainable business practice. CEO Scott Lee, who recognized early on that they had to focus on the whole value chain, put it this way: "If we focused on just our own operations, we would have [addressed] 10 percent of our effect on the environment [missed] 90 percent of the opportunity that's out there."6

6. Describe the World Intellectual Property Organization.

is a creative work or invention that is protectable by patents, trademarks, trade names, copyrights, and trade secrets. Rights to intellectual property can be protected by patents, trademarks, trade names, copyrights, and trade secrets, depending on the jurisdiction. These terms, which we explore below, all describe safeguards to property rights. Treaties, agreements, and conventions have helped nations standardize some aspects of intellectual property rights. The World Trade Organization's Trade-Related Aspects of Intellectual Property Rights (TRIPS) council works with the World Intellectual Property Organization (WIPO), a self-funding UN forum with 186 members, to develop an intellectual property (IP) system that operates for every nation's benefit.13 WIPO has divisions related to each type of IP (brands and designs, global issues, development, innovation and technology, cultural and creative industries) and administrative and legal functions. It also mediates IP disagreements. WIPO and TRIPS also incorporate the earlier International Convention for the Protection of Industrial Property of 1883 (the Paris Union).

Vehicle currency

is a currency that is used for international trade or investment. For example, the diamond market uses the U.S. dollar as a vehicle currency.

List the 4 main functions of the BIS.

is an international organization of central banks that exists to build cooperation in order to foster monetary and financial stability. One way to understand how it functions is to think of it as the central bank for central bankers. It is the oldest international financial institution in the world, founded in 1930 to address war reparations imposed on Germany by the Treaty of Versailles. Today, the BIS has four main roles: it acts as a banker for central banks, a forum for international monetary cooperation, a center for research, and an agent or trustee for governments in various international financial arrangements. Central bankers of major industrial countries meet at least seven times a year at the BIS in Basel, Switzerland, to discuss the global financial system. The BIS is known as the most discreet financial institution in the world, which may explain its being often overlooked as an institution and even as a physical site. If you've ever spent time in Basel, Switzerland, you may have seen the round tower of the BIS just outside the main train station heading toward downtown. There is no sign identifying the building.

Intervention currency

is one that is used by central banks to intervene in the foreign currency exchange markets. Often the intervention involves buying up domestic currency to reduce its supply in the market, and thereby strengthen it. As we saw in our discussion of the BIS, 87 percent of currency trades used the dollar as a vehicle currency

Forward Rate

that allows managers to lock in contracts to purchase currencies at known rates, for delivery in the future.

9. List 4 unconventional sources of oil.

the world's major oil sands in Canada (Athabasca, in Alberta), Venezuela, and the Republic of Congo. . The sands contain bitumin, a tarlike crude oil, and place Canada first in these reserves and second only to Saudi Arabia in overall proven reserves Then there also is oil-bearing shale, a fine-grained sedimentary rock that yields 25 liters or more of liquid hydrocarbons per ton of rock when heated to 500°C. The largest known source of oil-bearing shale encompasses Utah, Colorado, and Wyoming in the United States. Oil shale has remained underdeveloped because of environmental problems in waste-rock disposal and the great quantities of water needed for processing. Recent technological advances have made these deposits accessible with minimal environmental impact, while increased oil prices have made the exploitation of shale oil economically feasible. These two petroleum sources, oil sands and oil-bearing shale, produce synthetic oil, that is, oil made from a chemical process. It is often called heavy oil, because it does not flow easily. Heavy oil promises to shift the global balance of oil power. In addition to horizontal drilling, the technology called hydraulic fracturing can make shale oil and gas deposits available. Hydraulic fracturing, or fracking, is the cracking of rock by injecting a fluid under pressure. Both horizontal drilling and fracking and have opened new reserves in the United States. In addition, Estonia, China, Brazil, Germany, and Russia are processing oil shale reserves. Greenpeace and other environmental groups have campaigned against oil shale projects on the grounds that extracting the oil from shale creates four times the greenhouse-gas impact as does extracting conventionally drilled oil, and that it creates polluted wastewater. Environmentalists also point out that investing in the development of more nonrenewable energy sources doesn't make sense when they lead to environmental problems and we know we have to switch to renewable energy sources. Their arguments have compelling logic, but they have had limited impact to date. Such is our global dependence on fossil fuels, many of which release high levels of pollutants into the biosphere.

3) Fundamental approach

to exchange rate prediction looks at the underlying forces that help determine exchange rates and develops various econometric models to capture them and their correct relationships. The international finance scholars Cheol Eun and Bruce Resnick have surveyed the research on the various fundamental models and conclude that "the fundamental models failed to more accurately forecast exchange rates than either the forward rate model, which we have termed the efficient market model, or the random walk model."19

2) Random walk hypothesis

which holds that because the factors that influence prices are unpredictable, stock market prices evolve much like a random walk, turning here and there without a controlling logic, so that the best predictor of tomorrow's prices is today's prices.18 Burton Makiel, an economics professor at Princeton, popularized this observation in his 1973 book A Random Walk Down Wall Street.

10. List 4 sources of renewable energy

wind power, biomass fuels, solar photovoltaic power, concentrating solar thermal power, geothermal power, ocean energy, and hydropower. Other forms of alternative energy are under development or used in small applications, but these seven have commercial viability. None of them is available everywhere, but all appear to have applications under appropriate conditions.