IB 247 Final Exam

The Leontief Paradox

Leontief (19 53): Since U.S. was relatively abundant in capital, it would export capital-intensive goods and import labor-intensive goods. U.S. exports were less capital intensive than U.S. imports. Possible explanations include: •U.S. has a special advantage in producing products made with innovative technologies that are less capital intensive. •Differences in technology lead to differences in productivity, which then drives trade patterns.

Economic exposure

extent to which a firm's future international earning power is affected by changes in exchange rates. •Concerned with the long-run effect of exchange rates on future prices, sales, and costs.

Quota rent

extra profit that producers make when supply is artificially limited by an import quota.

moral hazard

people behave recklessly because they know they will be saved if things go wrong.

Multilateral and Bilateral Trade Agreements

•Reciprocal trade agreements between two or more partners. •Trump administration withdrew from the TPP and trade agreement with the EU was put on hold. •Agreements are designed to capture gain from trade beyond those agreements currently attainable under WTO treaties.

Spot Exchange Rates

•Rate at which a foreign exchange dealer converts one currency into another currency on a particular day. •Determined by the interaction between supply and demand. •Changes continually.

intermarket segments

•that transcend national borders. •Predicted to become more common. •Global youth segment suggests there are common values among teens around the world.

Profitability

•the rate of return the firm makes on its invested capital.

Franchising

A form of licensing; the franchisor sells intangible property and requires the franchisee agree to abide by strict rules as to how it does business. Advantages: •Eliminates the costs and risks of opening a foreign market alone. Disadvantages: •May inhibit the firm's ability to take profits out of one country to support competitive attacks in another. •The geographic distance of the firm from its foreign franchisees can make it difficult to detect poor quality.

Common law

based on tradition, precedent, and custom. •Found in most of Great Britain's former colonies, including the U.S.

Drivers of Globalization

Two Macro Factors Toward Greater Globalization: 1.Decline in barriers to free flow of goods, services, and capital. 2.Technological change.

Geocentric approach

the best people are sought for key jobs throughout the organization, regardless of nationality. •Not always easy to implement.

Economies of scale

unit cost reductions associated with large scale output.

Foreign Debt Crisis

when a country cannot service its foreign debt obligations, whether private sector or government debt.

ethnocentric behavior

Belief in the superiority of one's own culture

Staffing Policy

Concerned with the selection of employees for a particular job. Selecting people with the right skills for a particular job. Developing and promoting the corporate culture of the firm

Strategic Alliances

Cooperative agreements between potential or actual competitors. •Examples include formal joint ventures and short-term contractual arrangements. The number of international strategic alliances has risen significantly in recent decades.

Outflows of FDI

The flows of FDI out of a country

political economy

The political, economic, and legal systems are known as the

Carry trade

borrows one currency where interest rates are low and invests these in another currency where interest rates are high.

Pull strategy

emphasizes mass media advertising.

Translation exposure

impact of currency exchange rate changes on the reported financial statements of a company. •Deals with the present measurement of past events. •Gains and losses from translation exposure are reflected only on paper.

Price elasticity of demand

measures how responsive demand for a product is to changes in price. •Elasticity of demand is determined by income level and competitive conditions. •Price elasticities tend to be greater in countries with lower income levels and more competitors.

arbitrage

process of buying a currency low and selling it high.

corporate culture

the organization's norms and value systems.

Profit growth

the percentage increase in net profits over time

Global supply chain coordination

the shared decision-making opportunities and operational collaboration of key global supply chain activities. A more integrated, coherent, efficient, and effective supply chain.

World Bank

•Promotes development using low-interest loans. •Seen as less controversial than IMF.

Political Structure of the European Union

1.European Commission: proposes EU legislation, implements it, and monitors compliance. 2.European Council: the ultimate controlling authority within the EU. 3.European Parliament: debates legislation proposed by the commission and forwarded to it by the council. •Treaty of Lisbon increased power. 4.Court of Justice: the supreme appeals court for EU.

Market Segmentation

Identifying distinct groups of consumers whose needs, wants, and purchasing behavior differs from others in important ways. •Geography. •Demography. •Sociocultural factors. Psychological factors.

European Monetary System (EMS).

Prior to the introduction of the euro, some European Union countries operated with fixed exchange rates

switch trading

a specialized third-party trading house buys a firm's counterpurchase credits and sells them to another firm.

oligopolistic industries

industries composed of a limited number of large firms.

Specific tariffs

levied as a fixed charge for each unit of an imported good.

International market research

systematic collection, recording, analysis, and interpretation of data.

Immobile Resources.

•Resources do not always move freely from one economic activity to another. •Governments may help retrain displaced workers.

Banking crisis

•a loss of confidence in the banking system that leads to a run on the banks.

Global learning

•valuable knowledge may also be found in a company's foreign subsidiaries

Smoot-Hawley Act

(1930): created significant import tariffs on foreign goods. Damaged employment abroad.

Making Ethical Decisions Internationally

1.Favor hiring and promoting people with well-grounded sense of personal ethics. 2.Build organizational culture that places high value on ethical behavior. 3.Put decision making processes in place that require people to consider ethical dimensions of business decisions. 4.Institute ethical officers in organization. 5.Develop moral courage. 6.Make corporate social responsibility cornerstone of enterprise policy. 7.Pursue sustainable strategies.

Five-step process helps managers think through ethical issues:

1.How would a decision affect stakeholders? •Internal stakeholders. •External stakeholders. 2.Judge ethics of proposed strategic decision. 3.Establish moral intent. 4.Engage in ethical behavior. 5.Audit decisions.

Qualifications and Assumptions (of comparative advantage)

1.Only two countries and two goods. 2.Zero transportation costs. 3.Similar prices and values. 4.Resources can move freely from production of one good to another within a country. 5.Constant returns to scale. 6.Fixed stocks of resources. 7.No effects on income distribution within countries.

Rise in Nontariff Barriers

1.Subsidies. 2.Quotas. 3.Voluntary export restraints. 4.Antidumping duties.

Seven Main Instruments of Trade Policy

1.Tariffs. 2.Subsidies. 3.Import quotas. 4.Voluntary export restraints. 5.Local content requirements. 6.Administrative policies. Antidumping duties

Export ban

: policy that partially or entirely restricts the export of a good. •Ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic oil at home.

Dumping

: selling goods in a foreign market below their cost of production or below their "fair" market value.

Absolute Advantage

A country has absolute advantage in producing a product when it is more efficient than any other country in producing it. Smith (17 76): countries differ in their ability to produce goods efficiently. •Trade is not a zero-sum game. •Countries should specialize in production of goods they have an absolute advantage in and then trade these goods for goods produced by other countries.

countertrade

A range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money.

Tariffs

A tax levied on imports that effectively raises the cost of imported products relative to domestic products.

Human Resource Management (HRM)

Activities an organization carries out to utilize its human resources effectively. •Determining human resource strategy. •Staffing. •Performance evaluation. •Management development. •Compensation. Labor relations.

Exchange Rate Forecasting

Approaches to Forecasting: 1. Fundamental analysis - Draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates. 2. Technical analysis - •Uses price and volume data to determine past trends that are expected to continue. Many economists are skeptical of technical analysis.

Critiques of Hofstede

Assumes a one-to-one relationship between culture and nation-state. Research may be culturally bound. Informants only worked within a single industry and within one company. Example: computers within IBM.

Single European Act

Committed EC countries to work toward establishment of a single market by 1992. Objectives of the Act: •Remove all frontier controls between E C countries. •Apply the principle of mutual recognition to product standards. •Institute open procurement to nonnational suppliers. •Lift barriers to competition in retail banking and insurance. •Remove all restrictions on foreign exchange transactions between member countries. •Abolish restrictions on cabotage. Impact of the Act: •Helped restructure large segments of European industry via production and distribution systems. •Faster economic growth: raised GDP by between 2 and 5 percent in its first 15 years.

Heckscher-Ohlin Theory

Comparative advantage reflects differences in national factor endowments: extent to which a country is endowed with resources such as land, labor, and capital. Theory has commonsense appeal. •Export goods that make intensive use of factors that are locally abundant. •Import goods that make intensive use of factors that are locally scarce.

Make-or-Buy Decisions

Decisions about whether to perform a certain value creation activity in-house or outsource it to another firm. Main factors in the decision are cost and production capacity. Other factors include: •Product success. •Specialized knowledge. •Strategic fit. •Cost and production capacity. •Supplier competencies. Inventory planning.

Local Content Requirement (L C R)

Demands that some specific fraction of a good be produced domestically. •Can be in physical terms or in value terms.

Just-in-Time (JIT) Inventory

Economizes on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before. •Can result in major cost savings from reduced warehousing and inventory holding costs. •Can help firms spot defective parts, take them out of the manufacturing process, and boost product quality.

Joint Ventures

Establishment of a firm that is jointly owned by two or more otherwise independent firms. Advantages: •Firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. •Shares the costs and risks of opening a foreign market with a partner. •Can help firms minimize the risk of nationalization or other adverse government interference. Disadvantages: •Firm risks giving control of its technology to its partner. •Firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies. •Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.

Wholly Owned Subsidiaries

Firm owns 100 percent of the stock. Two methods: •Set up a new operation in that country, called a greenfield venture. •Acquire an established firm. Advantages: •Reduce the risk of losing control over core competencies. •Allow for tight control over operations in different countries necessary for engaging in global strategic coordination. •May be required if a firm is trying to realize location and experience curve economies. Disadvantages: •Firm bears the full costs and risks of setting up overseas operations.

Transnational Strategy

Firm simultaneously faces both strong cost pressures and strong pressures for local responsiveness. Attempts to simultaneously: •Achieve low costs through location economies, economies of scale, and learning effects. •Differentiate the product offering across geographic markets to account for local differences. •Foster a multidirectional flow of skills between different subsidiaries.

Totalitarianism

Form of government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited. In most ______ regimes: There is widespread political repression. There are no free and fair elections. Media is censored. Basic civil liberties are denied. Challenges to regime are prohibited.

Association of Southeast Asian Nations (ASEAN)

Fosters freer trade between member countries and cooperation in their industrial policies. •Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. •Laos, Myanmar, Vietnam, and Cambodia joined recently. ASEAN Free Trade Area (AFTA) (2003) between the six original members of ASEAN came into full effect to reduce import tariffs among members.

Implications of Changing Political Economy

Global Changes in Political and Economic Systems: Markets formerly off-limits to Western business are now open. •China (population of 1.3 billion) could be a bigger market than U.S., E U, and Japan combined. •India (population 1.2 billion) is also a potentially huge market. •Latin America has 600 million potential consumers. No guarantee that democracy will thrive in newer democratic states.

The Changing Demographics of the Global Economy

Global Economy: Early 1960s: •U.S. dominated the world economy, world trade. •U.S. dominated world FDI. •U.S. M N Es dominated international business. •About half the world was off limits to Western international business. Today, much has changed. The Changing World Output and World Trade Picture: Early 1960s. •U.S. was dominant in industrial power, accounting for about 38 percent of world manufacturing output. Today: •U.S. accounts for only 24 percent. •Germany, France, the U.K., and Canada had similar decline. •Rapid economic growth now in countries like China, India, Russia, and Brazil. •Chinese economy could surpass U.S. within a decade. •Further relative decline by the U.S. and others is likely. The Changing Foreign Direct Investment Picture: •World output generated by developing countries has been steadily increasing since 19 60s. •Stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries is declining. •Cross-border flows of foreign direct investment is rising. •Largest developing country recipients of FDI are China, Mexico, and Brazil. The Changing Nature of the Multinational Enterprise: •A multinational enterprise (M N E) is any business that has productive activities in two or more countries. •In last 50 years, rise of non-U.S. multinationals and growth of mini-multinationals. •Non-U.S. Multinationals. •Large number of U.S. multinationals reflects U.S. economic dominance. •Today, world economy is shifting away from North America and western Europe. •The Rise of Mini-Multinationals. •More small- and medium-size businesses (mini-multinationals) are involved in international trade and investment. •Internet lowers barriers that smaller firms face in building international sales. The Changing World Order: Collapse of communism throughout eastern Europe: •Greater export and investment opportunities, but political unrest is an increasing risk. Economic development in China: •Huge opportunities despite continued government control, but also new competition from Chinese firms. Free market reforms and democracy in Latin America: •New markets and new sources of materials and production, but economic and political risk remain high. Global Economy of the Twenty-First Century: A more integrated global economy. •New opportunities for firms. •But political and economic disruptions can upset plans. •Risks associated with global financial crisis. •Impact of global supply chain disruptions. Hedging strategies increasing in importance.

Market Economy

Goods and services a country produces and the quantity in which they are produced is determined by supply and demand. •Supply must not be restricted by monopolies. •Government encourages free and fair competition between private producers. •Constant incentive to improve products and processes.

Command Economy

Goods and services a country produces, the quantity in which they are produced, and the price at which they are sold are planned by government. •All businesses are state-owned and have little incentive to control costs and be efficient. •Because there is no private ownership, there is little incentive to better serve consumer needs. •Dynamism and innovation are absent.

Global Leadership and Organizational Behavior Effectiveness (GLOBE)

Identifies nine cultural dimensions: •Power distance, uncertainty avoidance, humane orientation, institutional collectivism, in-group collectivism, assertiveness, gender egalitarianism, future orientation, and performance orientation.

countervailing duties

If the complaint has merit, antidumping duties,

Maastricht Treaty

In 1992, committed E U members to adopt a single currency, the euro. •The euro is used by 19 of the member states. •Created the euro zone, encompassing 330 million E U citizens. •Countries that participate have agreed to give up control of their monetary policy. Britain, Denmark, and Sweden opted out.

Mercantilism

In a country's best interest to maintain a trade surplus—to export more than it imports. •Gold and silver considered mainstays of national wealth. •Advocated government intervention to achieve a surplus in balance of trade. Viewed trade as a zero-sum game: one in which a gain by one country results in a loss by another. Critics charge China with having a neo-mercantilist policy to keep currency value low in order to sell more goods to developed nations.

Mixed Economy

Includes some elements of market economies and some elements of command economies. •Governments take over troubled firms considered vital to national interests. (Becoming less common)

Political Economy and Economic Progress

Innovation and Entrepreneurship Are the Engines of Growth: •For a country to sustain long-term economic growth, the business environment needs to be conducive to innovation and entrepreneurial activity. Innovation and Entrepreneurship Require a Market Economy: Countries with high economic freedom have high economic growth and richer citizens. •Hong Kong, Switzerland, Singapore, U.S., Canada, and Germany. Countries that lack economic freedom fail to achieve respectable economic growth. Innovation and Entrepreneurship Require Strong Property Rights: •Individuals and businesses must have opportunity to profit from innovative ideas. •Economist Hernando de Soto argues developing world will not benefit from capitalism until property rights are better defined and protected. The Required Political System: Democratic regimes tend to be more conducive to long-term economic growth than dictatorships, even the benevolent kind. Limiting human freedom also suppresses human development and therefore limits progress. Some of the fastest growing economies of past 40 years began as undemocratic governments: •China, South Korea, Taiwan, Singapore, and Hong Kong. •But only in a well-functioning, mature democracy are property rights truly secure. Economic Progress Begets Democracy: Democracy is often a consequence of economic growth. •South Korea and Taiwan. Contributed to attitude of many Western governments towards human rights violations in China. Geography, Education, Demographics, and Economic Development: Belief that geography influences economic policy, and thus economic development, goes back to Adam Smith. Economist Jeffrey Sachs argues that by virtue of favorable economy, certain societies are more likely to engage in trade, which promotes economic growth. Investment in education promotes faster economic development. Demographic forces are also important determinants of economic growth rate.

Managing in the Global Marketplace

International Business: Any firm that is engaged in international trade or investment. Managing international business differs from managing domestic business. •Practices vary by country. •Issues are more complex. •Need to understand rules governing international trade and investment. •Need to convert currency.

Declining Trade and Investment Barriers (Driver of Globalization)

International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDII) occurs when a firm invests resources in business activities outside its home country. During 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries. After WWII, advanced Western countries reduced barriers. •GATT, Uruguay Round, and WTO. Trade in goods and services has been growing faster than world output for decades. By 2019, sales of foreign affiliates of multinational corporations reached $27 trillion. Implications of fast-paced volume of world trade: •More companies dispersing parts production. •Economies of nation-states becoming more intertwined. World becoming significantly wealthier. Some firms finding home markets under attack from foreign competitors. Global financial crisis of 2008 to 2009 and drop in global output that occurred led to more calls for trade barriers to protect jobs at home. •Resulting trade wars, such as one between U.S. and China. •May slow the rate of globalization and production. COVID-19 global pandemic has had a significant impact on global supply chains, and thus on globalization.

The Globalization Debate

Is A More Integrated and Interdependent Global Economy Good?: •Experts believe globalization promotes greater prosperity in the global economy, more jobs, and lower prices for goods and services. •Others feel that globalization is not beneficial. Antiglobalization Protests: Began with W T O protest in December 19 99 in Seattle. •Protest turned violent. Other protests have occurred worldwide. Critics fear globalization has detrimental effects on living standards, wages, and the environment. •Theory and evidence suggests these fears are exaggerated. Globalization, Jobs, and Income: •Critics say that falling trade barriers destroy manufacturing jobs in wealthy economies (U.S. and western Europe). •Service activities are increasingly outsourced to nations with lower labor costs. •Supporters say benefits outweigh the costs. •Outsourcing allows a company to reduce its cost structure and reduce prices. Share of labor in national income has declined. •Attributed to a fall in unskilled labor. •Gap between poorest and richest segments of society has widened.In most countries, real income levels have increased for all. Many advanced economies report shortage of highly skilled workers and an excess of unskilled workers. In most countries, real income levels have increased for all. Many advanced economies report shortage of highly skilled workers and an excess of unskilled workers. Globalization, Labor Policies, and the Environment: Critics argue that the lack of labor and environmental regulations in less developed countries attract investment. •Adhering to environmental regulations increases costs of manufacturing. Supporters argue that tougher regulations lead to economic progress. •Tougher regulations come with economic progress. Studies show a hump-shaped relationship between income levels and pollution levels. Globalization and National Sovereignty: Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, European Union, and UN. •Believe that unelected bureaucrats impose policies and undermine sovereignty. Supporters say the power of these organizations is limited to what nation-states collectively agree to grant. •Must be able to persuade member states to follow certain actions. •Without the support of members, the organizations have no power. Globalization and the World's Poor: Critics argue the gap between rich and poor is wider, and the benefits of globalization are not shared equally. •Many poor nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, have rapidly expanding populations, are burdened by high debt. •No money to invest in public infrastructure. Debt relief movements: •Rich nations like the U.S. offer debt relief for "highly indebted poorer countries" (H I P Cs). Reduce import barriers from poor nations.

Bill of Lading

Issued to the exporter by the common carrier transporting the merchandise. Serves three purposes: •Receipt. •Contract. Document of title.

Differences in Economic Development

Level of Economic Development: •Affects a country's attractiveness as a possible market or production location for firms. •Common measure is gross national income (GNI). •Purchasing power parity (P P P) adjustment provides a more direct comparison of living standards in different countries. •G N I and PPP data give a static picture of development. •Economic growth rates provide a dynamic picture of development. Differences in Standards of Living: Official figures can be misleading. Unrecorded cash transactions can be significant. GNI and PPP data don't indicate growth rates. Broader Conceptions of Development: Amartya Sen Economist Amartya Sen argues development should be assessed less by material output and more by the capabilities and opportunities people enjoy. UN created the Human Development Index (HDI) based on life expectancy, education attainment, and whether average incomes are sufficient to meet basic needs of life in a country.

Foreign Exchange Market

Market for converting the currency of one country into that of another country. •Can have a significant impact on the sales and profits of an enterprise. •Managers must understand how foreign exchange market works and its possible impact. Two Functions: 1.Enables conversion of the currency of one country into the currency of another. 2.Provides some insurance against foreign exchange risk—the adverse consequences of unpredictable changes in exchange rates.

Draft

Most export transactions an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount at a specified time. •Also called a bill of exchange. A sight draft is payable on presentation to the drawee. A time draft allows for a delay in payment. •30, 60, 90, or 120 days. •Negotiable.

Christianity

Most widely practiced religion. In 1904, Max Weber suggested that the Protestant work ethic was the driving force of capitalism. •Focus on hard work, wealth creation, and frugality. •Protestantism gave individuals more freedom to develop own relationship with God, which may have paved way to economic freedom. Some scholars claim connection between Protestant-inspired individualism and entrepreneurial activity in a nation.

Exporting

Often the first method firms use to enter foreign market. Advantages: •Relatively low cost. •Firms may achieve experience curve and location economies .Disadvantages: •Lower-cost manufacturing locations may exist. •Transport costs can be high. •Tariff barriers can make it uneconomical. •Foreign agents fail to act in the exporter's best interest.

Mercosur

Originated as free trade pact between Brazil and Argentina. •Expanded to include Paraguay and Uruguay in 1990. •Venezuela joined in 2012 but was suspended in 2016 for human rights violations.

Product Life-Cycle Theory in the Twenty-First Century

Product life-cycle theory may not be as relevant today. •Many products are now introduced in Japan or South Korea. •Many new products are introduced simultaneously into U.S., Europe, and Asia. Production is often globally dispersed.

Importance of Culture

Society's culture affects values found in workplace. Geert Hofstede isolated five dimensions that summarized different cultures: 1.Power distance. 2.Individualism versus collectivism. 3.Uncertainty avoidance. 4.Masculinity versus femininity. Long-term versus short-term orientation. A move to add a sixth dimension: indulgence versus restraint.

Buddhism

Suffering originates in people's desire for pleasure. Stresses spiritual growth and afterlife, rather than achievement while in this world. The Noble Eightfold Path. Economic Implications of Buddhism: •Does not support caste system. Recent trend of "Zen" orientation into Western businesses.

Extensions of the Ricardian Model

Suppose the following assumptions are relaxed: 1.Resources move freely from the production of one good to another within a country. 2.Constant returns to scale. 3.Trade does not change a country's stock of resources or the efficiency with which those resources are utilized.

An Overview of Trade Theory

The Pattern of International Trade Ricardo's theory of comparative advantage: Trade patterns reflect differences in labor productivity. Heckscher-Ohlin theory: •Trade reflects the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are needed for producing particular goods. Raymond Vernon: •Trade patterns reflect a product's life cycle. Paul Krugman's new trade theory: •World market can only support a limited number of firms in some industries. •Trade will skew toward countries that have firms that are able to capture first-mover advantages. Michael Porter's theory of national competitive advantage: •Country factors explain a nation's dominance in the production and export of certain products.

International Monetary System

The institutional arrangement that governs exchange rates. Recall that the foreign exchange market is the primary institution for determining exchange rates.

States in Transition

Three Trends in Political Economy Since Late 1980s: 1.A wave of democratic revolutions swept the world and many previous totalitarian regimes collapsed. 2.A move away from centrally planned and mixed economies towards free markets. 3.A shift back toward greater authoritarianism in some nations and signs of a retreat from the free market model. The Spread of Democracy: •Many totalitarian regimes failed to deliver economic progress to majority of population. •New information and communication technologies have broken down ability of state to control access to uncensored information. •Economic advances of last quarter century led to increasingly prosperous middle and working classes who pushed for democratic reforms. The New World Order and Global Terrorism: •End of Cold War and "new world order" that followed the collapse of communism, along with collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future of global geopolitics. •Fukuyama argues war of ideas may be at an end and liberal democracy has triumphed. •Huntington saw the world split into different civilizations each with its own value systems and ideology. The Spread of Market-Based Systems: Since the late 1980s, a transformation from centrally planned command economies to market-based economies. •Command and mixed economies failed to deliver the sustained economic performance achieved by countries that had adopted market-based systems. •Many countries shifted to a market-based system.

The Gains from Trade

Trade is a positive-sum game in which all gain. •Potential world production is greater with unrestricted free trade than with restricted trade. •Provides a strong rationale for encouraging free trade.

Confucianism

Until 1949, official ethical system of China. Not a religion, but a guiding ideology. •High moral and ethical conduct and loyalty to others. •Attain personal salvation through right action. Economic Implications of Confucianism: •Three key teachings of Confucianism: loyalty, reciprocal obligations, and honesty. •May lead to a lowering of the cost of doing business in Confucian societies.

Product Life-Cycle Theory

Vernon (mid-19 60s): proposed product life-cycle theory; based on ideas that: •For most of 20th century, majority of world's new products produced and sold in U.S. market. •At the time, the wealth and size of U.S. market gave a strong incentive for U.S. firms to develop new products. As products mature both in location of sales and optimal production, location will change, affecting flow and direction of trade. Product becomes standardized and price becomes main competitive weapon. U.S. switches from an exporter to an importer as production goes to lower-cost foreign locations.

corruption

______ is present in all countries to some degree, but countries with a high level of corruption face: •Foreign direct investment falls. •International trade falls. Economic growth falls.

dollarization

a country abandons its own currency and adopts another (typically, the U.S. dollar).

Fisher effect

a country's nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). •In other words: i = r + I

Barter

a direct exchange of goods and/or services between two parties without a cash transaction. •The most restrictive countertrade arrangement. •Used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy.

concentrated system

a few retailers supply most of the market

compensation or buybacks

a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a percentage of the plant's output as a partial payment for the contract.

Subsidy

a government payment to a domestic producer. Subsidies help domestic producers: •Compete against low-cost foreign imports. •Gain export markets.

society

a group of people sharing a common set of values and norms.

Total quality management (TQM)

a management philosophy with a central focus on the need to improve the quality of a company's products and services.

counterpurchase

a reciprocal buying agreement. •Occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.

Free trade

absence of barriers to the free flow of goods and services between countries.

Production

activities involved in creating a product or service

Six Sigma

aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company.

Flow of FDI

amount of FDI undertaken over a given time period. (Foreign direct investment may be both expensive and risky compared with exporting and licensing.)

group

association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior.

countertrade

barter-like agreements by which goods and services can be traded for other goods and services—to facilitate international trade.

Civil law

based on detailed set of laws organized into codes. •Found in more than 80 countries, including Germany, France, Japan, and Russia.

Contract law

body of law that governs contract enforcement—differently. •A contract specifies conditions under which an exchange is to occur and details rights and obligations of parties.

expatriate managers

citizens of one country working abroad. •When to use expatriates. •Who to send on expatriate postings. •How expatriates should be compensated. How to handle the repatriation of expatriates.

location economies

cost advantages that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be.

pioneering costs

costs that an early entrant bears that a later entrant can avoid—such as: •Costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. •Costs of promoting and establishing a product offering, including the cost of educating customers.

Fixed exchange rate system

countries fix their currencies against each other at a mutually agreed upon value.

Lag strategy

delaying collecting foreign currency receivables if the currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

trademarks

designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products.

First-mover advantages

economic and strategic advantages that accrue to early entrants into an industry. Firms develop economies of scale and create barriers to entry for other firms. •Pattern of trade in world economy may be result of first-mover advantages and economies of scale.

Push strategy

emphasizes personal selling

Treaty of Rome

established the European Economic Community in 1957. •Name changed to the EU in 1993. •Number of members fell to 27 in early 2020 when Britain exited the EU.

United Nations Convention on Contracts for the International Sales of Goods (CISG)

establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have places of business in different nations. •Countries that adopt C I S G signal to other nations they treat the Convention's rules as part of their law.

Greenfield investments

establishing new operations in a foreign country.

Cultural relativism

ethics are culturally determined, and firms should adopt ethics of the cultures in which they operate. •"When in Rome, do as the Romans do."

World Values Survey (WVS)

explores values and norms, how they change, and their impact on society and business.

Transaction exposure

extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. •Mainly concerned with short-term transactions.

Entrepreneurs

first to commercialize innovative new products and processes.

International Fisher effect (IFE)

for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Product liability

holds a firm and its officers responsible when a product causes injury, death, or damage. •Liability laws are usually least extensive in less developed countries.

Polycentric approach

host-country nationals manage local subsidiaries and parent-country nationals hold positions at headquarters.

values

ideas about what a group believes to be good, right, and desirable.

Naive immoralist

if a manager of MNE sees firms from other nations not following ethical norms in host nation, that manager should not either. •Actions are ethically justified if everyone else is doing the same thing.

General Agreement on Tariffs and Trade (GATT)

international treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the WTO.

A society's social structure

is its basic social organization. Two dimensions to consider: •Degree to which the basic unit of social organization is the individual, as opposed to the group. •Degree to which a society is stratified into classes or castes.

European Union (EU)

is the result of: •Devastation of western Europe during two world wars and desire for lasting peace. •Desire by European nations to hold their own on the world's political and economic stage.

Ethnocentric approach

key management positions are filled by parent-country nationals. Can lead to cultural myopia.

Externalities

knowledge spillovers that occur when companies in the same industry locate in the same area.

property rights

legal rights over the use to which a resource is put and over the use made of any income derived from that resource.

Ad valorem tariffs

levied as a proportion of the value of an imported good.

Utilitarian approach to ethics

moral worth of actions or practices is determined by their consequences. •Actions have multiple consequences, some good, some not. •Actions are desirable that produce greatest good for greatest number of people.

universal needs

needs that exist when tastes and preferences of consumers in different nations are similar if not identical. •When major competitors are based in low-cost locations. •Where there is persistent excess capacity. •Where consumers are powerful and face low switching costs.

mores

norms that are central to the functioning of a society and its social life.

Bandwagon effect

occurs when expectations on the part of traders turn into self-fulfilling prophecies, and traders join the bandwagon and move exchange rates based on group expectations.

Trade diversion

occurs when higher-cost suppliers within the free trade area replace lower-cost external suppliers.

Class consciousness

people perceive themselves in terms of class background. Shapes relationships with members of other classes. •Evident in the United Kingdom and India. May be emerging in urban China.

intellectual property

property that is the product of intellectual activity.

public action

public officials extort income or resources from property holders.

Antidumping policies

punish foreign firms that engage in dumping, thus protecting domestic producers from unfair foreign competition. Vary from country to country.

current account

records a country's export and import of goods and services.

balance-of-payments account

records a country's payments to and receipts from other countries.

property safety laws

set certain safety standards to which a product must adhere.

Ethical system

set of moral principles, or values, that are used to guide and shape behavior.

currency speculation

short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

Offset

similar to counterpurchase; one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. •This party can fulfill obligation with any firm in the country to which the sale is being made.

ethical strategy

strategy, or course of action, that does not violate these accepted principles.

collectivism

system that stresses the primacy of collective goals over individual goals. •Traced to Greek philosopher Plato. •Society should be stratified into classes. Property should be owned in common. When ______ is emphasized, needs of society are generally viewed as being more important than individual freedoms.

Experience curve

systematic reductions in production costs that occur over the life of a product. A product's production costs decline by some quantity about each time cumulative output doubles.

Export tariff

tax placed on the export of a good. •Goal is to discriminate against exporting to ensure supply.

Marketing mix

the choices the firm offers to its targeted market. •Product attributes. •Distribution strategy (place). •Communication strategy (promotion). •Pricing strategy.

First-mover disadvantages

the disadvantages associated with entering a foreign market before other international businesses

Inflows of FDI

the flows of FDI into a country

gold standard

the practice of pegging currencies to gold and guaranteeing convertibility. •Under the gold standard, one U.S. dollar was defined as equivalent to 23.22 grains of "fine" (pure) gold. •The exchange rate between currencies was based on the gold par value: the amount of a currency needed to purchase one ounce of gold.

expatriate failure

the premature return of an expatriate manager to the home country.

Supply chain management

the procurement and physical transmission of material through the supply chain, from suppliers to customers. •Purchasing. Logistics.

Exchange rate

the rate at which one currency is converted into another.

core competence

the skills within the firm that competitors cannot easily match or imitate. •Enable firm to reduce costs of value creation. •Create perceived value so premium pricing is possible. •Are the source of a firm's competitive advantage.

Norms

the social rules that govern the actions of people toward one another.

Organization architecture

the totality of a firm's organization, including the formal organizational structure, control systems and incentives, organizational culture, processes, and people.

private action

theft, piracy, blackmail, and the like by private individuals or groups.

fragmented system

there are many retailers, none of which has a major share of the market.

Packaging

three different categories: •Primary packaging holds the product itself. •Secondary packaging contains several primary packages. Transit packaging is used to The functions of packaging are to perform, protect, and inform.

Stock of FDI

total accumulated value of foreign-owned assets at a given time. (Advantages of Foreign Direct Investment. •FDI will be favored over exporting when: •Transportation costs are high. •Trade barriers are high. •FDI will be favored over licensing when: •The firm wants control over its technological know-how. •The firm wants control over its operations and business strategy. •The firm's capabilities are not amenable to licensing.)

Demand is inelastic

when a large change in price produces only a small change in demand.

Demand is elastic

when a small change in price produces a large change in demand.

Managed-float or dirty-float system

when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency.

Pegged exchange rate system

when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

multipoint competition

when two or more enterprises encounter each other in different regional markets, national markets, or industries.

Administrative trade policies

•: bureaucratic rules designed to make it difficult for imports to enter a country. •Hurt consumers by denying access to possibly superior foreign products.

Global distribution center

•A facility that positions and allows customization of products for delivery to worldwide wholesalers, retailers, or directly to consumers anywhere in the world. The foundation of a global supply network.

Multipoint Pricing

•A firm's pricing strategy in one market may have an impact on a rival's pricing strategy in another market. •Aggressive pricing in one market can prompt a competitive response from a rival in another market. Central monitoring of pricing decisions around the world is important.

Licensing

•A licensor grants the rights to intangible property to another entity for a specified time period and receives a royalty fee in return. •Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks. Advantages: •Firm does not bear development costs and risks associated with opening a foreign market. •Firm avoids barriers to investment. •Firm with intangible property that might have business applications but doesn't want to develop those applications itself can capitalize on market opportunities. Disadvantages: •Firm doesn't have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies. •Firm's ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised. Potential for loss of proprietary (or intangible) technology or property

first-mover advantages

•Ability to preempt rivals and capture demand by establishing a strong brand name. •Ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants. •Ability to create switching costs that tie customers into their products or services.

North American Free Trade Agreement (NAFTA)

•Abolished tariffs on 99 percent of goods traded among Mexico, Canada, and United States. •Removed barriers on the cross-border flow of services. •Protected intellectual property rights. •Removed most restrictions on F D I among members. •Applied national environmental standards. •Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored. NAFTA was renegotiated under Trump administration: now the United States-Mexico-Canada Agreement (USMCA).

Free Trade Area

•All barriers to the trade of goods and services among member countries are removed, but members determine own trade policies with nonmembers. •Accounts for almost 90 percent of regional agreements.

infant industry argument

•An industry should be protected until it can develop and be viable and competitive internationally. •This argument has been criticized because: •It is useless unless it makes the industry more efficient. •If a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds.

Hiring and Promotion.

•Businesses should strive to identify and hire people with a strong sense of personal ethics. •Prospective employees should research organization's ethical climate.

Strategic trade policy.

•By appropriate actions, government can help raise national income if it can ensure firms that gain first-mover advantages in an industry are domestic. •Might be beneficial for a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms with first-mover advantages.

Group of Twenty (G20)

•Comprised of finance ministers and central bank governors of the 19 largest world economies plus the E U and European Central Bank. •Represents 90 percent of global GDP. •Became a forum for a coordinated policy response to the financial crisis of 2008 and 2009.

Organization: The Implementation of Strategy

•Controls: metrics used to measure the performance of subunits and make judgments about how well the subunits are run. •Incentives: devices used to reward appropriate managerial behavior. •Processes: manner in which decisions are made and work is performed. •Organizational culture: norms and value systems that are shared among the employees. •People: employees and the strategy used to recruit, compensate, and retain those individuals.

Learning Effects

•Cost savings that come from learning by doing. •Labor productivity increases when individuals learn the most efficient ways to perform particular tasks and management learns how to manage the new operation more efficiently.

Economic Union

•Countries committed to the free flow of products and factors of production between members, adoption of a common currency, harmonization of tax rates, and pursuit of a common external trade policy. •Involves sacrificing a significant amount of national sovereignty. •European Union (EU).

Evidence for the Link between Trade and Growth

•Countries that are open to trade have higher growth rates than countries that close economies to trade. •Higher growth rates raise income levels and living standards.

Trade, Jobs, and Wages: The Samuelson Critique

•Dynamic gains can lead to less beneficial outcomes. •Technology advances allow companies to offshore service jobs that were not traditionally internationally mobile. •Lowers market clearing wage rate enough to outweigh positive benefits. •Concedes that free trade has historically benefited rich countries, and that protectionist measures may be harmful.

Customs Union

•Eliminates trade barriers between member countries and adopts a common external trade policy. •Most countries that enter a customs union desire further integration in the future. •Andean Community established free trade between Bolivia, Columbia, Ecuador, and Peru.

The Group

•Emphasized in non-Westernized societies, such as Japan. •Cooperation and teamwork are encouraged, and lifetime employment is common. •Individual initiative and creativity may be suppressed. •Primacy of the group discourages managers and others from moving from one company to another.

Common Ethical Issues in Business

•Employment practices. •Human rights. •Environmental regulations. •Moral obligations.

Ethics Officers

•Encourage ethical behavior in a business. •Act as an internal ombudsperson.

Societal Culture

•Ethical policies differ by country. •MNEs located in countries with strong individualism and uncertainty avoidance are more likely to emphasize ethical behavior. •MNEs located in countries with high masculinity and high power distance are less likely to promote ethical behavior.

Global Standardization Strategy

•Focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. •Goal is to pursue a low-cost strategy on a global scale. Makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal

Localization Strategy

•Focuses on increasing profitability by customizing the firm's goods or services to match the tastes and preferences in different national markets. •Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense.

Currency Convertibility

•Freely convertible: both residents and nonresidents can purchase unlimited amounts of foreign currency with the domestic currency. •Externally convertible: only nonresidents can convert their holdings of domestic currency into a foreign currency. •Nonconvertible: both residents and nonresidents are prohibited from converting their holdings of domestic currency into a foreign currency.

Purchasing Power Parity (PPP)

•Given relatively efficient markets—markets in which few impediments to international trade and investment exist—the price of a "basket of goods" should be roughly equivalent in each country. •PPP predicts that changes in relative prices result in changes in exchange rates. •When inflation is relatively high, a currency should depreciate.

Rights Theories

•Human beings have fundamental rights and privileges that transcend national boundaries and culture. •Human rights form basis of moral compass that managers should navigate by when making decisions that have an ethical component. •Idea that some fundamental rights transcend national borders and cultures was underlying motivation for UN's Universal Declaration of Human Rights. •Certain people or institutions are obligated to provide benefits or services that secure rights of others.

Decision-Making Processes

•If manager answers "yes" to following questions, the decision is ethically acceptable: •Does my decision fall within the accepted values or standards that typically apply in the organizational environment (as articulated in a code of ethics or some other corporate statement)? •Am I willing to see the decision communicated to all stakeholders affected by it—for example, by having it reported in newspapers, on television, or via social media? •Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other businesses, approve of the decision?

Law of One Price

•In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when price is in the same currency.

Political Union

•Independent states combined into single union. •Requires that a central political apparatus coordinate economic, social, and foreign policy for member states. •The EU is headed toward at least partial political union. •The United States is an example of even closer political union.

Turnkey Projects

•Involve a contractor who handles every detail of the project for a foreign client, including training of operating personnel. •At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation.

International Strategy

•Involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization. •Makes sense when there are low cost pressures and low pressures for local responsiveness.

Letter of Credit

•Issued by a bank at the request of an importer stating the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. •Attractive because both parties are likely to trust a reputable bank even if they do not trust each other.

Andean Community

•Largely based on EU model; failed by mid-1980s. •In late 1980s, Latin American governments began to adopt free market economic policies. •In 1990s, the Andean Pact was relaunched as the Andean Community, and now operates as a customs union. •In 2003, it signed an agreement with Mercosur to restart negotiations towards the creation of a free trade area. Andean Community now operates as a partial customs union.

Legal Systems (The Nature of Economic Transformation)

•Laws protect private property rights and provide mechanisms for contract enforcement. •Without a legal system in place, there is little incentive to engage in economic activity.

Leadership

•Leaders establish the culture of the organization and set the example. •Actions speak louder than words.

International Monetary Fund (IMF)

•Maintains order in the international monetary system. •Lender of last resort. •Requires nation-states to adopt specific economic policies in return for loans.

Foreign Corrupt Practices Act (FCPA).

•Makes it illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority. •All publicly traded companies must keep detailed records so it is clear whether a violation has occurred. •Facilitating or expediting payments to secure performance of routine government actions are permitted.

Global Institutions

•Manage, regulate, and police the global marketplace. •Promote the establishment of multinational treaties to govern the global business system. •Created by voluntary agreement between individual nation-states.

Moral Courage

•Managers must walk away from decisions that are profitable but unethical. •Requires moral courage. •Companies must commit to not retaliating against those exercising moral courage.

Trade Theory and Government Policy

•Mercantilism makes a case for government involvement in promoting exports and limiting imports. •Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade. •New trade theory and Porter justify limited and selective government intervention to support development of certain export-oriented industries.

Transportation

•Movement of raw material, component parts, and finished goods throughout the global supply chain. •Largest percentage of any logistics budget. Ocean is the least expensive and air is the most expensive

Strategic Significance

•Moving down experience curve allows firm to reduce its cost of creating value and increase its profitability. •Once firm has established low-cost position, it can act as a barrier to new competition.

Corporate Social Responsibility (CSR)

•Multinationals need to give something back to the societies that enable them to prosper and grow. •Businesses should consider social consequences of economic actions. •There should be a presumption in favor of decisions that have both good economic and good social consequences. •Noblesse oblige.

Common Market

•No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production. •Requires significant harmony among members in fiscal, monetary, and employment policies. •Mercosur (between Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status.

First-mover advantages

•Particularly true in industries where global market can profitably support a limited number of firms.

World Trade Organization (WTO)

•Polices world trading system and ensures nation-states adhere to the rules established in W T O treaties. •Succeeded the General Agreement on Tariffs and Trade (G A T T). •164 member nations accounted for 98 percent of world trade (2020).

Democracy

•Political system in which government is by the people, exercised either directly or through elected representatives. •Most common form today is representative democracy: elected representatives vote on behalf of constituents.

Unrealistic Performance Goals

•Pressure from parent company to meet goals that are unrealistic and can only be attained by acting in an unethical manner.

Experience Curve Pricing

•Pricing low worldwide to build global sales volume as rapidly as possible, even if this means taking large losses initially. •Firms believe that several years in the future, after moving down the experience curve, they will be making substantial profits and have a cost advantage over less aggressive competitors.

Reverse logistics

•Process of moving inventory from point of consumption to point of origin for the purpose of recapturing value or proper disposal. •Ultimate goal is to optimize the after-market activity or make it more efficient.

Predatory Pricing

•Profit gained in one market is used to support aggressive pricing designed to drive competitors out in another market.

Economies of Scale

•Reductions in unit cost achieved by producing a large volume of a product. •Ability to spread fixed costs over a large volume but unable to attain efficient scale of production unless serving global markets. •Bargaining power increases with suppliers, which may allow economies of scale in purchasing.

Deregulation (The Nature of Economic Transformation)

•Removing legal restrictions to the free play of markets. •Establishment of private enterprises. •Removing price controls.

Theory of Comparative Advantage

•Ricardo (18 17): What happens when one country has an absolute advantage in the production of all goods? •A country should specialize in production of goods that it produces most efficiently and buy goods that it produces less efficiently from other countries.

Islam

•Second largest of major world religions. •Adherents of Islam are referred to as Muslims. •One true omnipotent God, Allah. •Those who forgo worldly ambitions to seek the favor of Allah may gain the greater treasure—entry into paradise. Islamic Fundamentalism. •Growth in Islamic fundamentalism in past three decades as response to social pressures created by modernization: •In Western media, Islamic fundamentalism is associated with militants, terrorists, and violent upheavals. •Fundamentalists have gained political power in many Muslim countries and tried to make Islamic law the law of the land. Islamic doctrine makes no distinction between church and state. Economic Implications of Islam: •Koran establishes explicit economic principles—many of which are pro-free enterprise. •Under Islam, people do not own property but only act as trustees for God and thus must take care of what they are entrusted with. •Stresses living up to contractual obligations, keeping one's word, and abstaining from deception. •Islamic banks have experimented with two different banking methods—the mudarabah and the murabaha.

Diminishing Returns.

•Simple model assumes constant returns to specialization: the units of resources required to produce a good are assumed to remain constant. •Assumption of diminishing returns is more realistic since not all resources are the same quality and different goods use resources in different proportions.

Currency Swaps

•Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. •Swaps are used when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk.

The Globalization of Production

•Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor, energy, land, and capital). •Lower overall cost structure. •Improvement of the quality or functionality of a product to compete more effectively.

The Benefits of Trade

•Specialize in manufacture and export of products that can be produced most efficiently in that country. •Import products that can be produced more efficiently in other countries. •Gains arise because international trade allows a country to specialize in the manufacture and export of products.

Sustainability

•Sustainable strategies: strategies that help MNEs make profits without harming the environment, while ensuring company operates in a socially responsible manner with regard to its stakeholders. •Good for shareholders, environment, local communities, employees, and customers.

Global inventory management

•The decision-making process regarding the raw materials, work-in-process, and finished goods inventory for an MNC.

Organizational structure

•The formal division of the organization into subunits. •The location of decision-making responsibilities within that structure. •The establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams and or pan-regional committees.

Minimum Efficient Scale

•The level of output at which most plant-level scale economies are exhausted. •The larger the minimum efficient scale, the more likely centralized production makes sense.

Channel Length

•The number of intermediaries between the producer and the consumer.

Connection between culture and 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.

Acquisitions are attractive because

•They are quicker to execute than greenfield investments. •Easier and less risky for a firm to acquire desired assets than build them from the ground up. •Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills.

Dynamic Effects and Economic Growth.

•Trade might increase a country's stock of resources as increased supplies become available from abroad. •Free trade might increase the efficiency of resource utilization and free up resources for other uses. •Dynamic gains will cause a country's PPF to shift outward.

balance-of-trade equilibrium

•When the income a country's residents earn from its exports is equal to the money its residents pay for imports.

Hinduism

•World's oldest major religion. •Moral force in society requires acceptance of certain responsibilities called dharma. •Believe in reincarnation and karma. •Individuals can eventually achieve nirvana by devoting their lives to spiritual (not material) quest. Economic Implications of Hinduism: •Max Weber: Hinduism does not foster entrepreneurism. •Modern India is a dynamic entrepreneurial society. •Mahatma Gandhi embodied Hindu asceticism. •Historically, Hinduism also supported India's caste system, which still influences Indian life.

Import quota

•a direct restriction on the quantity of some good that may be imported into a country.

culture

•a system of values and norms shared among a group of people and, when taken together, constitute a design for living.

optimal currency area

•an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy.

Location-specific advantages

•arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets.

European Free Trade Association (EFTA)

•between Norway, Iceland, Liechtenstein, and Switzerland began in 1960.

Lead strategy

•collecting foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Organizational Culture and Leadership.

•emphasize their importance, and then act on them. •Code of ethics: a business's formal statement of ethical priorities. •Provide incentives and rewards to those who engage in ethical behavior.

Flexible manufacturing technology

•enables firms to produce a wide variety of end products at a unit cost that traditionally would require mass production of a standardized output. •Also known as lean production. •Reduce set up times for complex equipment. •Increase the utilization of individual machines through better scheduling. •Improve quality control at all stages of the manufacturing process. •Lead to mass customization.

Licensing

•granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit the foreign entity sells. Limitations of Licensing: •Internalization theory (or market imperfections approach): •Licensing could result in a firm's giving away valuable technological know-how to a potential foreign competitor. •Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. •Licensing may be difficult if the firm's competitive advantage is not amenable to it.

flexible machine cells

•grouping of various types of machinery, a common materials handler, and a centralized cell controller. •Adopting flexible manufacturing technologies can help the firm customize products to meet the demands of small customer groups in different national markets.

Tariff rate quota

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

Export-Import Bank (EXIM Bank)

•is a wholly owned U.S. government corporation; established in 1934. •Designed to supplement, not compete, with capital lending. •Provides financing aid to facilitate exports, imports, and exchange of commodities between U.S. and other countries. •Has a direct lending operation to lend dollars to foreign borrowers for use in purchasing U.S. exports.

exclusive distribution channel

•is one that is difficult for outsiders to access. •Retailers usually prefer to carry products from established manufacturers.

Trade creation

•occurs when low-cost producers within the free trade area replace high-cost domestic producers.

Inefficient market

•one in which prices do not reflect all available information. •Forward exchange rates are not the best predictors of future spot exchange rates. Companies should invest in forecasting services.

Exporting

•producing goods at home and then shipping them to the receiving country for sale. Limitations of Exporting: •Exporting strategy can be limited by transportation costs and trade barriers. •When transportation costs are high, exporting can be unprofitable. •Low value-to-weight ratio. •Foreign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas.

Voluntary export restraint (VER)

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

Forward exchange

•two parties agree to exchange currency and execute the deal at some specific date in the future.

Forward exchange rates

•typically quoted for 30, 90, or 180 days into the future. Can sometimes work against a company. Important Factors Impacting Future Exchange Rate Movements: 1.A country's price inflation. 2.A country's interest rate. 3.Market psychology.

Currency crisis

•when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend prevailing exchange rates.

capital flight

•when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency.

Floating exchange rate system

•where the foreign exchange market determines the relative value of a currency.

Four major forms of totalitarianism today:

1.Communist totalitarianism: advocates achieving socialism through totalitarian dictatorship. 2.Theocratic totalitarianism: political power is monopolized by a party, group, or individual that governs according to religious principles. 3.Tribal totalitarianism: where a political party that represents the interests of a particular tribe monopolizes power. 4.Right-wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted because it could lead to communism.

Universal Declaration of Human Rights

1.Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment. 2.Everyone, without any discrimination, has the right to equal pay for equal work. 3.Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. 4.Everyone has the right to form and to join trade unions for the protection of his interests.

Four basic principles of social stratification:

1.It is a trait of society, not a reflection of individual differences. 2.It carries over from one generation to the next. 3.It is generally universal but variable. 4.It involves not just inequality but also beliefs.

World Intellectual Property Organization

185 nations are members

Globalization

A shift toward a more integrated and interdependent world economy. Two facets: •Globalization of markets. •Globalization of production.

social strata

All societies are stratified on a hierarchical basis into social categories

360 View: Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally Overall attractiveness of a country depends upon balance between likely benefits of doing business in that country against the likely costs and risks. Benefits: •Function of market size and current and future consumer purchasing power. •May be able to gain first-mover advantages. •Late entrants face late-mover disadvantages. Costs: •Political costs include paying bribes or lobbying for favorable or fair treatment. •Economic costs relate primarily to sophistication of economic system, including infrastructure and supporting businesses. •Legal costs can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights. Risks: •Political risk: likelihood that political forces will cause drastic changes in a country's business environment that adversely affects profit and other goals of a business enterprise. •Economic risk: likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects profit and other goals of a business enterprise. Legal risk: likelihood that a trading partner will opportunistically break a contract or expropriate property rights Overall Attractiveness: •Depends on balancing benefits, costs, and risks associated with doing business in that country. •Generally, costs and risks are lower in economically developed and politically stable markets. •However, potential for growth may be higher in less developed nations.

Personal Ethics

Business ethics reflect personal ethics. Expatriates may face pressure to violate personal ethics. •Away from ordinary social context and supporting culture. •Psychologically and geographically distant from parent company.

Decision-Making Processes

Businesspeople may behave unethically because they fail to ask relevant questions. Decisions made based on economic logic.

United Nations (UN)

Committed to maintaining international peace and security on basis of UN Charter: •Develops friendly relations among nations. •Promotes cooperation in solving international problems. •Promotes respect for human rights. •A center for harmonizing the actions of nations. Includes 193 member countries.

Role of Technological Change (Drivers of Globalization)

Communications: •Since World War I I, microprocessor created explosive growth of high-power, lost-cost computing. •Microprocessors also advanced telecommunications. •Moore's Law: as costs of microprocessors fall, their power increases. The Internet: •In 2019, 4.5 billion users (58 percent of global population). •Reduces constraints of location, scale, and time zones. Transportation Technology: •Commercial jets, superfreighters. •Innovation of containerization has significantly lowered shipping costs. Implications for the Globalization of Production: •Lower transportation costs makes geographically dispersed production system more economical; allows firms to better respond to demand shifts. Implications for the Globalization of Markets: •Low-cost communication networks create electronic global marketplace. •Low-cost transportation makes shipping products around the world economical. •Reduced cultural distance. •Converging consumer tastes and preferences.

Justice Theories

Focus on attainment of just distribution—one that is considered fair and equitable—of economic goods and services. John Rawls: all economic goods and services should be distributed equally except when unequal distribution would work to everyone's advantage. Impartiality is guaranteed by veil of ignorance—everyone is imagined to be ignorant of all their particular characteristics. •Race, sex, intelligence, etc. Under Rawls' veil of ignorance, each person is permitted the maximum amount of basic liberty compatible with a similar liberty for others. Once equal liberty is assured, inequality in basic social goods are allowed only if they benefit everyone. •The difference principle suggests that inequalities are justified if they benefit the position of the least-advantaged person.

Kantian ethics

Immanuel Kant argued that people should be treated as ends and never purely as means to the end of others. •People have dignity and need to be respected; they are not machines.

Corruption

Is it ethical to make payments to government officials to secure business? •Foreign Corrupt Practices Act (F C P A). •Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. •Facilitating payments, or speed money, excluded. Some argue paying bribes might be price of doing greater good. Others argue that corruption reduces returns on business investment and leads to low economic growth. Many multinationals have adopted a zero-tolerance policy

Righteous moralist

MNE's home country standards of ethics are appropriate for companies to follow in foreign countries. •Common among managers from developed countries. •Critics say it is not always appropriate to adopt home-country standards.

Roots of Unethical Behavior

Managerial Behavior Influences •Personal ethics. •Decision-making processes. •Organizational culture. •Unrealistic performance goals. •Leadership. Societal culture.

Pseudo-Democracies

Many nations lie between pure democracy and complete totalitarianism. •Authoritarian elements capture much of the machinery of state and use this to deny basic political and civil liberties. •Example: Russia under Vladimir Putin.

economic systems

Political Ideology and Economic Systems Are Connected Three types of economic systems: market economy, command economy, and mixed economy" •Market-based economic system likely in countries where individual goals are given primacy over collective goals. •State-owned enterprises and restricted markets are common in countries where collective goals are dominant.

Legal System

Refers to rules, or laws, that regulate behavior, along with processes by which laws are enforced and through which redress for grievances is obtained. A country's legal system is important because laws: •Regulate business practice. •Define manner in which business transactions are executed. •Set rights and obligations of those involved in business transactions.

enviromental pollution

Should a multinational feel free to pollute in a developing nation if doing so does not violate laws? •Tragedy of the commons. •May be legal, but is it ethical?

political system

System of government in a nation. Political systems assessed in terms of degree to which they: •Emphasize collectivism as opposed to individualism. •Are democratic or totalitarian.

Straw Men

The Friedman doctrine states that the social responsibility of business is to increase profits, so long as company stays within rules of law. •Companies should do only what is mandated by law and what is required to run a business efficiently.

What is GLobalization?

The Globalization of Production continued •Early outsourcing was primarily for manufacturing. •Today, modern communications technology allows companies to outsource services. •Impediments to globalization: •Formal and informal trade barriers. •Barriers to foreign direct investment. •Transportation costs. •Economic and political risk. Managerial challenge for coordinating a globally dispersed supply chain.

The Globalization of Markets

The merging of historically distinct and separate national markets into one huge global marketplace. In many markets, tastes and preferences of consumers in different nations are converging on some global norm, creating a global market. •Examples: Coca-Cola, McDonald's, I K E A, Starbucks, Apple. The most global of markets are for industrial goods and materials that serve universal needs around the world. •Aluminum, oil, wheat, microprocessors.

Determinants of Culture

Values and norms of a culture evolve based on: •Prevailing political and economic philosophies. •Society's social structure. •Dominant religion, language, and education.

Human Rights

What is the responsibility of a foreign multinational when operating in a country where basic human rights are not respected? •South Africa and apartheid. Sullivan principles adopted by GM.

Theocratic law

based on religious teachings. •Islamic law is most widely practiced.

The Individual

•Emphasized in Western societies. •Encourages individual achievement and entrepreneurship. •Fosters managerial mobility. •Encourages job switching and lack of loyalty to the firm.

Individualism

•Suggests individuals should have freedom over economic and political pursuits. •Traced to Aristotle, who argued that individual diversity and private ownership are desirable. •Refined in work of David Hume, Adam Smith, and John Stuart Mill. This political system stresses: •Individual freedom and self-expression. •Letting people pursue self-interests to achieve the best overall good for society. Democratic systems and free markets.

Privatization (The Nature of Economic Transformation)

•Transfers ownership of state property to private individuals. •First seen in Great Britain under PM Thatcher; now a worldwide phenomenon. •Does not guarantee economic growth.

Organizational Culture

•Unethical behavior may exist in firms with an organizational culture that does not emphasize business ethics. •Values and norms shape the culture of a firm, and that culture influences decision making.

Business ethics

•accepted principles of right or wrong governing conduct of business people.

Paris Convention for the Protection of Industrial Property

•agreement signed by 170+ countries to protect intellectual property rights. •Enforcement is lax in many nations, especially China and Thailand.

communists

•believed socialism could only be achieved though violent revolution and totalitarian dictatorship.

copyrights

•exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit.

patents

•give inventor exclusive rights to the manufacture, use, or sale of that invention.

Innovation

•new products, new processes, new organizations, new management practices, and new strategies.

class system

•position a person has by birth but can be changed through achievement or luck. •Social mobility in class system varies from society to society.

folkways

•routine conventions of everyday life.

caste system

•social position is determined by the family into which a person is born, and change in that position is unlikely.

Religion

•system of shared beliefs and rituals that are concerned with the realm of the sacred.

Socialism

•those who believe in public ownership of the means of production for the common good of society. •Modern socialists trace roots to Karl Marx. •Advocates state ownership of basic means of production, distribution, and exchange. •State then manages enterprises to benefit society as a whole.

Social democrats

•who worked to achieve same goals by democratic means. •Many state-owned enterprises failed to succeed, and many nations implemented privatization programs.