Globalization

Opening Case: The Globalization of Health Care

There is a shortage of radiologists in the United States and demand for their services is growing twice as fast as the rate of graduation Solution to the problem: Send images over the Internet to be interpreted by radiologists in India

Opening Case: The Globalization of Health Care

Outsourcing health care is not only limited to radiology; we are beginning to see patients travel internationally for treatments as well as surgery In 2004 some 170,000 foreigners visited India for medical treatments; the number is expected to grow at 15% for the next several years Question: Will demand for American health services soon collapse as work moves offshore to places like India?

What is Globalization?

Globalization of Markets
The merging of distinctly separate national markets into a global marketplace
- Falling barriers to cross-border trade have made it easier to sell internationally - Tastes and preferences converge onto a global norm - Firms offer standardized products worldwide creating a world market

Globalization of Markets
Difficulties that arise from the globalization of markets
- Significant differences still exist among national markets - Country-specific marketing strategies - Varied product mix

Globalization of Markets
The most global markets are not consumer markets The most global markets are for industrial goods and materials that serve a universal need the world over

Globalization of Production
Refers to sourcing of goods and services from locations around the world to take advantage of
- Differences in cost or quality of the factors of production
Labor Land Capital

Globalization of Production
Historically this has been primarily confined to manufacturing enterprises Increasingly companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to low-cost producers in other nations

Globalization of Production
Outsourcing of productive activities to different suppliers results in the creation of products that are global in nature Impediments to the globalization of production include
Formal and informal barriers to trade Barriers to foreign direct investment Transportation costs Issues associated with economic risk Issues associated with political risk

The Emergence of Global Institutions

Globalization has created the need for institutions to help manage, regulate and police the global marketplace
GATT WTO IMF World bank United Nations

Drivers of Globalization
Two macro factors seem to underlie the trend toward greater globalization
- Decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II - Technological change

Declining Trade and Investment Barriers

During the 1920s and 30s, many of the nation-states of the world erected formidable barriers to international trade and foreign direct investment Advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.

Average Tariff Rates on Manufactured Products

Growth Trends Affects of Lowering Trade Barriers The Role of Technology

Lowering of trade barriers made globalization possible; technology has made it a reality Since the end of World War II the world has seen advances in

- Communication - Information processing - Transportation technology

Internet Usage Growth

The Changing Demographics of the Global Economy
World output and trade Changing foreign direct investment Changing nature of multinationals

The Globalization Debate

Pro Factors
Lower prices for goods and services Economic growth stimulation Increase in consumer income Creates jobs Countries specialize in production of goods and services that are produced most efficiently Destroys manufacturing jobs in wealthy, advanced countries Wage rates of unskilled workers in advanced countries declines Companies move to countries with fewer labor and environment regulations Loss of sovereignty

Con Factors

Managing in the Global Marketplace

Much of this book is concerned with the challenges of managing an international business (any firm that engages in international trade or investment) Managing an international business is different from managing a purely domestic business in four areas:
- Countries are different - Range of problems confronted by a manager in an international business is wider and the problems themselves are more complex than those confronted by a manager in a domestic business - An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system - International transactions involve converting money into different currencies

Looking Ahead
Chapter 2: National Differences in Political Economy
Political Systems Economic Systems Legal Systems The Determinates of Economic Development Development States in Transition Managerial Implications

World Trade Organization

The successor of the General Agreement on Tariffs and Trade (GATT) Primarily responsible for:
- Policing the world trading system - Promoting the lowering of barriers to trade

As of May 2005 there were 148 member nations that collectively accounted for
3

97% of world trade

IMF and World Bank

Both the International Monetary Fund (IMF) and the World Bank were created in 1944 by 44 nations that met at Bretton Woods, New Hampshire The IMF was created to maintain order in the international monetary system The World Bank was created to promote economic development through lowinterest loans

United Nations
The United Nations was established October 24, 1945 by 51 countries committed to preserving peace through international cooperation and collective security Membership is now at 191 countries Four main purposes of the UN are:
To maintain international peace and security To develop friendly relations among nations To cooperate in solving international problems and in promoting respect for human rights To be a center for harmonizing the actions of nations

International Trade
Occurs when a firm exports goods or services to consumers in another country

Foreign Direct Investment

Occurs when a firm invests resources in business activities outside its home country

World Output and Trade

Changing Foreign Direct Investment

Changing Nature of Multinationals

Non-U.S. Multinationals
In the 1960s global business activity was dominated by large U.S. multinational corporations In 1973 48.5% of multinationals were U.S. firms In 2002 28% of largest multinationals were U.S. firms Globalization of the world economy has resulted in a relative decline in the dominance of U.S. firms in the global marketplace

Rise of Mini-Multinationals
- Growth of medium-size and small multinationals has become a trend in international business - Consider Lubricating Systems Inc. which employs 25 people and generates sales of $6.5 million, of which $2 million are from global sales - International business is conducted not just by large firms but also by medium-size and small enterprises

Differences in Culture
Chapter Overview
What is culture? Social Structure Religious and Ethical Systems Language Education Culture and the Workplace Cultural Change

What is Culture?
Culture is that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society. - Edward Tylor

What is Culture?
A system of values and norms that are shared among a group of people and that when taken together constitute a design for living. - Hofstede, Namenwirth, and Weber

Components of Culture
Values Norms Society

Folkways and Mores

Folkways: Routine conventions of everyday life.
- Little moral significance - Generally, social conventions such as dress codes, social manners, and neighborly behavior

Mores: Norms central to the functioning of society and its social life
- Greater significance than folkways - Violation can bring serious retribution
Theft, adultery, incest and cannibalism

Culture, Society, and the Nation State

A society is a group of people bound together by a common culture There is not a strict one-to-one correspondence between a society and a

nation state Nation State:

- Is a political creation - May contain a single culture or several cultures

The Determinants of Culture Social Structure

Social structure refers to its basic social organization Two dimensions that are particularly important include:
- The extent to which society is group or individually oriented - Degree of stratification into castes or classes

Religious and Ethical Systems

Religion: a system of shared beliefs and rituals that are concerned with the realm of the sacred Ethical systems: a set of moral principles, or values, that are used to guide and shape behavior
- Most of the worlds ethical systems are the product of religions

Among the thousands of religions in the world today, four dominate in terms of numbers of adherents:
Christianity with 1.7 billion adherents Islam with 1 billion adherents Hinduism with 750 million adherents Buddhism with 350 million adherents

Religious and Ethical Systems Language

Spoken
- Verbal cues - Language structures perception of world

Unspoken
- Body language - Personal space

Education
Formal education plays a key role in a society
- Formal education: the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society - Also supplements the familys role in socializing the young into the values and norms of a society - Schools teach basic facts about the social and political nature of a society, as well as focusing on the fundamental obligations of citizenship - Cultural norms are also taught indirectly at school
Examples include: respect for others, obedience to authority, honesty, neatness, being on time Part of the hidden curriculum

- The use of a grading system also teaches children the value of personal achievement and competition

Culture in the Workplace

6

 Four dimensions of culture

- Power distance - cultures are ranked high or low on this dimension based on the particular societys ability to deal with inequalities - Individualism versus collectivism - this dimension focuses on the relationship between the individual and his/her fellows within a culture - Uncertainty avoidance - this dimension measures the extent to which a culture socializes its members into accepting ambiguous situations and tolerating uncertainty - Masculinity versus femininity - this dimension looks at the relationship between gender and work roles

Work-Related Values for 20 Selected Countries

Problems with Hofstede

Assumes one-to-one relationship between culture and the nation state Research may have been culturally bound Survey respondents were from a single industry (computer) and a single company (IBM)

Cultural Change
Culture is not a constant; it evolves over time
- Since 1960s American values toward the role of women have changed - Japan moved toward greater individualism in the workplace

Globalization will continue to have impacts on cultures around the world

Cultural Change Managerial Implications

Cross-cultural literacy Culture and competitive advantage Culture and business ethics

Looking Ahead to Chapter 4

Ethics in International Business
Ethical Issues in International Business Ethical Dilemmas The Roots of Unethical Behavior Philosophical Approaches to Ethics Ethical Decision Making

Values
Values for the bedrock of a culture They provide the context within which a societys norms are established and justified They include attitudes toward
- Individual freedom - Democracy

Truth Justice Honesty Loyalty Social obligations

Values are also reflected in the political and economic systems

Norms
Norms are the social rules that govern peoples actions toward one another

Society
Society refers to a group of people who share a common set of values and norms

Individual vs. Group Orientation

Individual societies tend to view individual attributes and achievements as being more important than group membership Emphasis on individual performance can be both beneficial and harmful
- Encourages entrepreneurship - Can lead to high degree of managerial mobility

Group societies see groups as the primary unit of social organization Group members
- Often form deep emotional attachments - See group membership as all important

Emphasis on the group can be both beneficial and harmful

- Strong group identification creates pressure for mutual self-help and collective action - Discourages managers and workers from moving from company to company - Discourages entrepreneurship

Social Stratification
Social stratification refers to the fact that all societies are stratified on a hierarchical basis of social categories Strata are typically defined on the basis of characteristics such as family background, occupation, and income Societies are all stratified to come degree but they differ in two related ways
- Social mobility refers to the extent to which individuals can move out of the strata into which they are born - The extent to which the stratification of a society affects the operation of business organizations, this is known as significance

Christianity
This is the most widely practiced religion in the world, approximately 20% of the worlds people identify themselves as Christians Christianity grew out of Judaism and has monotheistic beliefs Christianity can be subdivided into three separate organizations
- The Orthodox church - The Roman Catholic church - Protestants which is an umbrella for several denominations

Economic Implications of Christianity

Several sociologists have argued that protestants have made a significant economic impact

 Max Weber commented

- That business leaders and owners of capital, as well as the higher grades of skilled labor, and even more the higher technically and commercially trained personnel of modern enterprises, are overwhelmingly Protestant. - That Protestant ethics emphasize the importance of hard work and wealth creation (for the glory of God) and frugality (abstinence from worldly pleasures). - That the combination of hard work and the accumulation of capital, which could be used to finance investment and expansion, paved the way for the development of capitalism in Western Europe and subsequently in the United States.

Islam
The central principle of Islam is that there is but the one true omnipotent God
- Islam requires unconditional acceptance of the uniqueness, power, and authority of God and the understanding that the objective of life is to fulfill the dictates of his will in the hope of admission to paradise

According to Islam, worldly gain and temporal power are an illusion Other major principles of Islam include:
Honoring and respecting parents Respecting the rights of others Being generous but not a squanderer Avoiding killing except for justifiable causes Not committing adultery Dealing justly and equitably with others Being of pure heart and mind Safeguarding the possessions of orphans Being humble and unpretentious

Economic Implications of Islam

The Koran establishes some explicit economic principles, many of which are pro-free enterprise
- The Koran speaks approvingly of free enterprise and of earning legitimate profit through trade and commerce (the prophet Mohammed was once a trader) - The protection of the right to private property is also embedded within Islam - Islam is critical of those who earn profit through the exploitation of others

Given the Islamic proclivity to favor market-based systems, Muslim countries are likely to be receptive to international businesses as long as those businesses behave in a manner that is consistent with Islamic ethics

Ethics in International Business

Introduction
Ethical Issues in International Business
Many of the ethical issues and dilemmas in international business are rooted in the fact that political systems, law, economic development, and culture vary significantly from nation to nation In the international business setting, the most common ethical issues involve
Employment practices Human rights Environmental regulations Corruption Moral obligation of multinational corporations

Employment Practices
Ethical issues associated with employment practices abroad include
- When work conditions in a host nation are clearly inferior to those in a multinationals home nation, what standards should be applied? - While few would suggest that pay and work conditions should be the same across nations, how much divergence is acceptable?

Human Rights
Questions of human rights can arise in international business because basic human rights still are not respected in many nations
- Rights that we take for granted in developed nations, such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and freedom from political repression are by no means universally accepted

The question that must be asked of firms operating internationally is: What is the responsibility of a foreign multinational when operating in a country where basic human rights are trampled on?

Environmental Pollution
Ethical issues arise when environmental regulations in host nations are far inferior to those in the home nation
- Developing nations often lack environmental regulations, and according to critics, the result can be higher levels of pollution from the operations of multinationals than would be allowed at home

Environmental questions take on added importance because some parts of the environment are a public good that no one owns, but anyone can despoil
- The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation

Corruption
Corruption has been a problem in almost every society in history, and it continues to be one today International businesses can, and have, gained economic advantages by making payments to government officials The United States passed the Foreign Corrupt Practices Act to fight corruption
- Outlawed the paying of bribes to foreign government officials to gain business

In 1997, the trade and finance ministers from the member states of the Organization for Economic Cooperation and Development (OECD) followed the U.S. lead and adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
- Obliges member states to make the bribery of foreign public officials a criminal offense

Moral Obligations
Multinational corporations have power that comes from their control over resources and their ability to move production from country to country Moral philosophers argue that with power comes the social responsibility for corporations to give something back to the societies that enable them to prosper and grow
- Social responsibility refers to the idea that businesspeople should consider the social consequences of economic actions when making business decisions - Advocates of this approach argue that businesses need to recognize their noblesse oblige (benevolent behavior that is the responsibility of successful enterprises)

10

Ethical Dilemmas
Managers must confront very real ethical dilemmas
- The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut - Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable

The Roots of Unethical Behavior

Why do managers behave in a manner that is unethical?
- Business ethics are not divorced from personal ethics - Businesspeople sometimes do not realize they are behaving unethical because they fail to ask if the decision is ethical - The climate in some businesses does not encourage people to think through the ethical consequences of business decisions - Pressure from the parent company to meet unrealistic performance goals that can be attained only by cutting corners or acting in an unethical manner - Leaders help to establish the culture of an organization and they set the example that others follow

The Roots of Unethical Behavior Philosophical Approaches to Ethics: Straw Man

Straw man approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a multinational enterprise
- The Friedman Doctrine states that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law

Philosophical Approaches to Ethics: Straw Man

Cultural Relativism believes that ethics are nothing more than the reflection of a culture (When in Rome, do as the Romans) The Righteous Moralist claims that a multinationals home-country standards of ethics are the appropriate ones in all countries The Nave Immoralist asserts that if a manager sees that firms from other nations are not following ethical norms in a host country then they should not either

Philosophical Approaches to Ethics: Utilitarian and Kantian Ethics

Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences

11

- An action is judged to be desirable if it leads to the best possible balance of good consequences over bad consequences - One problem with utilitarianism is in measuring the benefits, costs, and risks of an action - The second problem related to utilitarianism is that it does not consider justice, so the minority will always be at a disadvantage

Philosophical Approaches to Ethics: Utilitarian and Kantian Ethics

Kantian ethics hold that people should be treated as ends and never purely as means to the ends of others
- People are not instruments like a machine - People have dignity and need to be respected - Kantian ethics are viewed as incomplete

Philosophical Approaches to Ethics: Rights

Rights theories recognize that human beings have fundamental rights and privileges which transcend national boundaries and cultures Rights establish a minimum level of morally acceptable behavior Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions which have an ethical component

Philosophical Approaches to Ethics: Rights

The notion that there are fundamental rights that transcend national borders and cultures was the underlying motivation for the United Nations Universal Declaration of Human Rights
- All human beings are born free and equal in dignity and rights - They are endowed with reason and conscience and should act toward one another in a spirit of brotherhood - Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment

Philosophical Approaches to Ethics: Rights

United Nations Universal Declaration of Human Rights
- Everyone, without any discrimination, has the right to equal pay for equal work - 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 - Everyone has the right to form and to join trade unions for the protection of his interests

Philosophical Approaches to Ethics: Justice

Justice theories focus on the attainment of a just distribution of economic goods and

12

services
- A just distribution is one that is considered fair and equitable - There is no one theory of justice - Several theories of justice conflict with each other in important ways

Valid principles of justice are those with which all persons would agree if they could freely and impartially consider the situation
- Impartiality is guaranteed by a conceptual device called the veil of ignorance - Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her particular characteristics
race, sex, intelligence, nationality, family background, and special talents

Philosophical Approaches to Ethics: Justice

Rawls argues that under the veil of ignorance people would unanimously agree on two fundamental principles of justice
- Each person be permitted the maximum amount of basic liberty compatible with a similar liberty for others - Once equal basic liberty is assured, inequality in basic social goods is to be allowed only if such inequalities benefit everyone
Difference principle states that inequalities are justified if they benefit the position of the leastadvantaged person

Moral philosophers have a problem with Rawls concept of the veil of ignorance because decisions generally include some of the factors

Ethical Decision Making

Five things that an international business and its managers can do to make sure ethical issues are considered
- Favor hiring and promoting people with a well-grounded sense of personal ethics - Build an organizational culture that places a high value on ethical behavior - Make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent with that rhetoric - Implement decision-making processes that require people to consider the ethical dimension of business decisions - Develop moral courage

Hiring Practices: A Job Seekers Audit Organization Culture and Leadership

To foster ethical behavior, businesses need to build an organization culture that values ethical behavior Three things that are need to build an ethical culture
- Businesses must explicitly articulate values that emphasize ethical behavior in a code of ethics - Leaders in the business must give life and meaning to those words by repeatedly emphasizing their importance and then acting on them - Incentive and benefit systems, including promotions, must reward people who engage in ethical behavior and sanction those who do not

Decision-Making Process
According to experts, a decision is acceptable on ethical grounds if a
13

businessperson can answer yes to each of these questions:

- 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 or on television? - 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?

Decision-Making Process
Five-step process to think through ethical problems
- Businesspeople should identify which stakeholders a decision would affect and in what ways
Stakeholders are individuals or groups that have an interest, claim, or stake in the company

Judge the ethics of the proposed strategic decision, given the information gained in Step 1 Managers must establish moral intent Implement the ethical behavior Review the decision to make sure it was consistent with ethical principles

Moral Courage
Moral courage enables managers to walk away from a decision that is profitable, but unethical Moral courage gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical Moral courage gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company Moral courage does not come easy and employees have lost their jobs when acting on this courage

Looking Ahead
International Trade Theory
Overview of Trade Theory Mercantilism Absolute Advantage Comparative Advantage Heckscher-Ohlin Theory The Product Life-Cycle Theory New Trade Theory National Competitive Advantage: Porters Diamond

Ethics in International Business

Introduction
Ethical Issues in International Business
Many of the ethical issues and dilemmas in international business are rooted in the fact that political systems, law, economic development, and culture vary significantly from 14

nation to nation In the international business setting, the most common ethical issues involve
Employment practices Human rights Environmental regulations Corruption Moral obligation of multinational corporations

Employment Practices
Ethical issues associated with employment practices abroad include
- When work conditions in a host nation are clearly inferior to those in a multinationals home nation, what standards should be applied? - While few would suggest that pay and work conditions should be the same across nations, how much divergence is acceptable?

Human Rights
Questions of human rights can arise in international business because basic human rights still are not respected in many nations
- Rights that we take for granted in developed nations, such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and freedom from political repression are by no means universally accepted

The question that must be asked of firms operating internationally is: What is the responsibility of a foreign multinational when operating in a country where basic human rights are trampled on?

Environmental Pollution
Ethical issues arise when environmental regulations in host nations are far inferior to those in the home nation
- Developing nations often lack environmental regulations, and according to critics, the result can be higher levels of pollution from the operations of multinationals than would be allowed at home

Environmental questions take on added importance because some parts of the environment are a public good that no one owns, but anyone can despoil
- The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation

Corruption
Corruption has been a problem in almost every society in history, and it continues to be one today International businesses can, and have, gained economic advantages by making payments to government officials The United States passed the Foreign Corrupt Practices Act to fight corruption
- Outlawed the paying of bribes to foreign government officials to gain business

In 1997, the trade and finance ministers from the member states of the Organization for Economic Cooperation and Development (OECD) followed the U.S. lead and adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
- Obliges member states to make the bribery of foreign public officials a criminal offense

Moral Obligations
Multinational corporations have power that comes from their control over resources and

15

their ability to move production from country to country Moral philosophers argue that with power comes the social responsibility for corporations to give something back to the societies that enable them to prosper and grow
- Social responsibility refers to the idea that businesspeople should consider the social consequences of economic actions when making business decisions - Advocates of this approach argue that businesses need to recognize their noblesse oblige (benevolent behavior that is the responsibility of successful enterprises)

Ethical Dilemmas
Managers must confront very real ethical dilemmas
- The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut - Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable

The Roots of Unethical Behavior

Why do managers behave in a manner that is unethical?
- Business ethics are not divorced from personal ethics - Businesspeople sometimes do not realize they are behaving unethical because they fail to ask if the decision is ethical - The climate in some businesses does not encourage people to think through the ethical consequences of business decisions - Pressure from the parent company to meet unrealistic performance goals that can be attained only by cutting corners or acting in an unethical manner - Leaders help to establish the culture of an organization and they set the example that others follow

The Roots of Unethical Behavior Philosophical Approaches to Ethics: Straw Man

Straw man approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a multinational enterprise
- The Friedman Doctrine states that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law

Philosophical Approaches to Ethics: Straw Man

Cultural Relativism believes that ethics are nothing more than the reflection of a culture (When in Rome, do as the Romans) The Righteous Moralist claims that a multinationals home-country standards of ethics are the appropriate ones in all countries The Nave Immoralist asserts that if a manager sees that firms from other nations are not following ethical norms in a host country then they should

16

not either

Philosophical Approaches to Ethics: Utilitarian and Kantian Ethics

Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences
- An action is judged to be desirable if it leads to the best possible balance of good consequences over bad consequences - One problem with utilitarianism is in measuring the benefits, costs, and risks of an action - The second problem related to utilitarianism is that it does not consider justice, so the minority will always be at a disadvantage

Philosophical Approaches to Ethics: Utilitarian and Kantian Ethics

Kantian ethics hold that people should be treated as ends and never purely as means to the ends of others
- People are not instruments like a machine - People have dignity and need to be respected - Kantian ethics are viewed as incomplete

Philosophical Approaches to Ethics: Rights

Rights theories recognize that human beings have fundamental rights and privileges which transcend national boundaries and cultures Rights establish a minimum level of morally acceptable behavior Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions which have an ethical component

Philosophical Approaches to Ethics: Rights

The notion that there are fundamental rights that transcend national borders and cultures was the underlying motivation for the United Nations Universal Declaration of Human Rights
- All human beings are born free and equal in dignity and rights - They are endowed with reason and conscience and should act toward one another in a spirit of brotherhood - Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment

Philosophical Approaches to Ethics: Rights

United Nations Universal Declaration of Human Rights
- Everyone, without any discrimination, has the right to equal pay for equal work - Everyone who works has the right to just and favorable remuneration ensuring for

17

himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection - Everyone has the right to form and to join trade unions for the protection of his interests

Philosophical Approaches to Ethics: Justice

Justice theories focus on the attainment of a just distribution of economic goods and services
- A just distribution is one that is considered fair and equitable - There is no one theory of justice - Several theories of justice conflict with each other in important ways

Valid principles of justice are those with which all persons would agree if they could freely and impartially consider the situation
- Impartiality is guaranteed by a conceptual device called the veil of ignorance - Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her particular characteristics
race, sex, intelligence, nationality, family background, and special talents

Philosophical Approaches to Ethics: Justice

Rawls argues that under the veil of ignorance people would unanimously agree on two fundamental principles of justice
- Each person be permitted the maximum amount of basic liberty compatible with a similar liberty for others - Once equal basic liberty is assured, inequality in basic social goods is to be allowed only if such inequalities benefit everyone
Difference principle states that inequalities are justified if they benefit the position of the leastadvantaged person

Moral philosophers have a problem with Rawls concept of the veil of ignorance because decisions generally include some of the factors

Ethical Decision Making

Five things that an international business and its managers can do to make sure ethical issues are considered
- Favor hiring and promoting people with a well-grounded sense of personal ethics - Build an organizational culture that places a high value on ethical behavior - Make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent with that rhetoric - Implement decision-making processes that require people to consider the ethical dimension of business decisions - Develop moral courage

Hiring Practices: A Job Seekers Audit Organization Culture and Leadership

To foster ethical behavior, businesses need to build an organization culture that values ethical behavior Three things that are need to build an ethical culture

18

- Businesses must explicitly articulate values that emphasize ethical behavior in a code of ethics - Leaders in the business must give life and meaning to those words by repeatedly emphasizing their importance and then acting on them - Incentive and benefit systems, including promotions, must reward people who engage in ethical behavior and sanction those who do not

Decision-Making Process
According to experts, a decision is acceptable on ethical grounds if a businessperson can answer yes to each of these questions:
- 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 or on television? - 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?

Decision-Making Process
Five-step process to think through ethical problems
- Businesspeople should identify which stakeholders a decision would affect and in what ways
Stakeholders are individuals or groups that have an interest, claim, or stake in the company

Judge the ethics of the proposed strategic decision, given the information gained in Step 1 Managers must establish moral intent Implement the ethical behavior Review the decision to make sure it was consistent with ethical principles

Moral Courage
Moral courage enables managers to walk away from a decision that is profitable, but unethical Moral courage gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical Moral courage gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company Moral courage does not come easy and employees have lost their jobs when acting on this courage

Looking Ahead
International Trade Theory
Overview of Trade Theory Mercantilism Absolute Advantage Comparative Advantage Heckscher-Ohlin Theory The Product Life-Cycle Theory New Trade Theory

National Competitive Advantage: Porters Diamond

19

International Trade Theory

Overview of Trade Theory
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country

Trade Theory-Overview
The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish).
- Others are not so easy to understand (Japan and cars)

The history of Trade Theory and government involvement presents a mixed case for the role of government in promoting exports and limiting imports Later theories appear to make a case for limited involvement

Mercantilism: Mid-16th Century

A nations wealth depends on accumulated treasure
- Gold and silver are the currency of trade

Theory says you should have a trade surplus

- Maximize export through subsidies - Minimize imports through tariffs and quotas

Flaw: zero-sum game

Mercantilism-Zero-Sum Game
In 1752, David Hume pointed out that:
- Increased exports lead to inflation and higher prices - Increased imports lead to lower prices

Result: Country A sells less because of high prices and Country B sells more because of lower prices In the long run, no one can keep a trade surplus

Theory of Absolute Advantage

Adam Smith argued (Wealth of Nations, 1776): Capability of one country to
produce more of a product with the same amount of input than another country can vary
- A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient

Trade between countries is, therefore, beneficial Assumes there is an absolute balance among nations
- Example: Ghana/cocoa

Theory of Absolute Advantage

20

Absolute Advantage and the Gains From Trade Theory of Comparative Advantage
David Ricardo (Principles of Political Economy, 1817):
- Extends free trade argument - Efficiency of resource utilization leads to more productivity - Should import even if country is more efficient in the products production than country from which it is buying - Look to see how much more efficient
If only comparatively efficient, than import

Makes better use of resources Trade is a positive-sum game

Comparative Advantage and the Gains From Trade Simple Extensions of the Ricardian Model
Immobile resources:
- Resources do not always move easily from one economic activity to another

Diminishing returns:
- Diminishing returns to specialization suggests that after some point, the more units of a good the country produces, the greater the additional resources required to produce an additional item - Different goods use resources in different proportions

Simple Extensions of the Ricardian Model

Free trade (open economies):
- Free trade might increase a countrys stock of resources (as labor and capital arrives from abroad) - Increase the efficiency of resource utilization

PPF Under Diminishing Returns Influence of Free Trade on PPF Heckscher (1919)-Olin (1933) Theory
Export goods that intensively use factor endowments which are locally abundant
21

- Corollary: import goods made from locally scarce factors

Note: Factor endowments can be impacted by government policy - minimum wage Patterns of trade are determined by differences in factor endowments - not productivity Remember, focus on relative advantage, not absolute advantage

Product Life-Cycle Theory - R. Vernon (1966)

As products mature, both location of sales and optimal production changes Affects the direction and flow of imports and exports Globalization and integration of the economy makes this theory less valid

Product life cycle theory

New Trade Theory

In industries with high fixed costs:
- Specialization increases output, and the ability to enhance economies of scale increases - Learning effects are high.
These are cost savings that come from learning by doing

New Trade Theory-Applications

Typically, requires industries with high, fixed costs
- World demand will support few competitors

Competitors may emerge because of First-mover advantage

- Economies of scale may preclude new entrants - Role of the government becomes significant

Some argue that it generates government intervention and strategic trade policy

Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a nations success in a particular industry Porter studied 100 industries in 10 nations
- Postulated determinants of competitive advantage of a nation were based on four major attributes
Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry

Porters Diamond
Success occurs where these attributes exist
22

 More/greater the attribute, the higher chance of success The diamond is mutually reinforcing

Porters Diamond
Factor Endowments
Factor endowments: A nations position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry
- Basic factor endowments - Advanced factor endowments

Basic Factor Endowments

Basic factors: Factors present in a country
Natural resources Climate Geographic location Demographics

While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

Advanced Factor Endowments

Advanced factors: The result of investment by people, companies, and government are more likely to lead to competitive advantage
- If a country has no basic factors, it must invest in advanced factors

Advanced Factor Endowments

Communications Skilled labor Research Technology Education

Demand Conditions
Demand:
- creates capabilities - creates sophisticated and demanding consumers

Demand impacts quality and innovation

Related and Supporting Industries

Creates clusters of supporting industries that are internationally competitive

23

 Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure and Rivalry

Long term corporate vision is a determinant of success Management ideology and structure of the firm can either help or hurt you Presence of domestic rivalry improves a companys competitiveness

Porters Theory-Predictions
Porters theory should predict the pattern of international trade that we observe in the real world Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

Implications for Business

Location implications:
- Disperse production activities to countries where they can be performed most efficiently

First-mover implications:
- Invest substantial financial resources in building a first-mover, or early-mover advantage

Policy implications:
- Promoting free trade is in the best interests of the home country, not always in the best interests of the firm, even though many firms promote open markets

Looking Ahead to Chapter 6

The Political Economy of International Trade
Instruments of Trade Policy The Case for Government Intervention The Revised Case for Free Trade Development of the World Trading System

24

International Trade Theory

Overview of Trade Theory
Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country

Trade Theory-Overview
The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish).
- Others are not so easy to understand (Japan and cars)

The history of Trade Theory and government involvement presents a mixed case for the role of government in promoting exports and limiting imports Later theories appear to make a case for limited involvement

Mercantilism: Mid-16th Century

A nations wealth depends on accumulated treasure
- Gold and silver are the currency of trade

Theory says you should have a trade surplus

- Maximize export through subsidies - Minimize imports through tariffs and quotas

Flaw: zero-sum game

Mercantilism-Zero-Sum Game
In 1752, David Hume pointed out that:
- Increased exports lead to inflation and higher prices - Increased imports lead to lower prices

Result: Country A sells less because of high prices and Country B sells more because of lower prices In the long run, no one can keep a trade surplus

Theory of Absolute Advantage

Adam Smith argued (Wealth of Nations, 1776): Capability of one country to
produce more of a product with the same amount of input than another country can vary
- A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient

Trade between countries is, therefore, beneficial Assumes there is an absolute balance among nations
- Example: Ghana/cocoa

Theory of Absolute Advantage

25

Absolute Advantage and the Gains From Trade Theory of Comparative Advantage
David Ricardo (Principles of Political Economy, 1817):
- Extends free trade argument - Efficiency of resource utilization leads to more productivity - Should import even if country is more efficient in the products production than country from which it is buying - Look to see how much more efficient
If only comparatively efficient, than import

Makes better use of resources Trade is a positive-sum game

Comparative Advantage and the Gains From Trade Simple Extensions of the Ricardian Model
Immobile resources:
- Resources do not always move easily from one economic activity to another

Diminishing returns:
- Diminishing returns to specialization suggests that after some point, the more units of a good the country produces, the greater the additional resources required to produce an additional item - Different goods use resources in different proportions

Simple Extensions of the Ricardian Model

Free trade (open economies):
- Free trade might increase a countrys stock of resources (as labor and capital arrives from abroad) - Increase the efficiency of resource utilization

PPF Under Diminishing Returns Influence of Free Trade on PPF Heckscher (1919)-Olin (1933) Theory
Export goods that intensively use factor endowments which are locally abundant
26

- Corollary: import goods made from locally scarce factors

Note: Factor endowments can be impacted by government policy - minimum wage Patterns of trade are determined by differences in factor endowments - not productivity Remember, focus on relative advantage, not absolute advantage

Product Life-Cycle Theory - R. Vernon (1966)

As products mature, both location of sales and optimal production changes Affects the direction and flow of imports and exports Globalization and integration of the economy makes this theory less valid

Product life cycle theory

New Trade Theory

In industries with high fixed costs:
- Specialization increases output, and the ability to enhance economies of scale increases - Learning effects are high.
These are cost savings that come from learning by doing

New Trade Theory-Applications

Typically, requires industries with high, fixed costs
- World demand will support few competitors

Competitors may emerge because of First-mover advantage

- Economies of scale may preclude new entrants - Role of the government becomes significant

Some argue that it generates government intervention and strategic trade policy

Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a nations success in a particular industry Porter studied 100 industries in 10 nations
- Postulated determinants of competitive advantage of a nation were based on four major attributes
Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry

Porters Diamond
Success occurs where these attributes exist
27

 More/greater the attribute, the higher chance of success The diamond is mutually reinforcing

Porters Diamond
Factor Endowments
Factor endowments: A nations position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry
- Basic factor endowments - Advanced factor endowments

Basic Factor Endowments

Basic factors: Factors present in a country
Natural resources Climate Geographic location Demographics

While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

Advanced Factor Endowments

Advanced factors: The result of investment by people, companies, and government are more likely to lead to competitive advantage
- If a country has no basic factors, it must invest in advanced factors

Advanced Factor Endowments

Communications Skilled labor Research Technology Education

Demand Conditions
Demand:
- creates capabilities - creates sophisticated and demanding consumers

Demand impacts quality and innovation

Related and Supporting Industries

Creates clusters of supporting industries that are internationally competitive

28

 Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure and Rivalry

Long term corporate vision is a determinant of success Management ideology and structure of the firm can either help or hurt you Presence of domestic rivalry improves a companys competitiveness

Porters Theory-Predictions
Porters theory should predict the pattern of international trade that we observe in the real world Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

Implications for Business

Location implications:
- Disperse production activities to countries where they can be performed most efficiently

First-mover implications:
- Invest substantial financial resources in building a first-mover, or early-mover advantage

Policy implications:
- Promoting free trade is in the best interests of the home country, not always in the best interests of the firm, even though many firms promote open markets

Looking Ahead to Chapter 6

The Political Economy of International Trade
Instruments of Trade Policy The Case for Government Intervention The Revised Case for Free Trade Development of the World Trading System

29

Foreign Direct Investment

Foreign Direct Investment in the World Economy

Trends in FDI
Flow and stock increased in the last 20 years In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Businesses fear protectionist pressures FDI is seen a a way of circumventing trade barriers Dramatic political and economic changes in many parts of the world Globalization of the world economy has raised the vision of firms who now see the entire world as their market

Slumping FDI
Between 200 and 2004 the value of FDI slumped almost 50% from $1.2 trillion to about $620 billion The slowdown in FDI flows has been most pronounced in developed nations The slowdown is probably temporary and reflects three developments
- General slowdown in the growth rate of the world economy - Heightened geopolitical uncertainty following the September 11, 2001 attack - Bursting of the stock market bubble in the US

FDI Outflows The Direction of FDI

Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets
- The US has been the favorite target for FDI inflows

While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased
- Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia

Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, etc.
- This makes FDI an important source of capital investment and a determinant of the future growth rate of an economy

FDI Flow by Region Gross Capital Fixed Formation The Source of FDI The Form of FDI
Greenfield operation:
- Mostly in developing nations

Mergers and acquisitions:

- Quicker to execute - Foreign firms have valuable strategic assets

30

- Believe they can increase the efficiency of the acquired firm

More prevalent in developed nations

The Shift to Services

The shift to services is being driven by four factors
- Reflects the general move in many developed economies away from manufacturing and toward service industries - Many services cannot be traded internationally - Many countries have liberalized their regimes governing FDI in services - The rise of Internet-based global telecommunications networks has allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs

Horizontal FDI
Horizontal Direct Investment
- FDI in the same industry abroad as company operates at home

FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise FDI is risky because of the problems associated with doing business in another culture where the rules of the game may be different

Market Imperfections
Market imperfections are factors that inhibit markets from working perfectly
- In the international business literature, the marketing imperfection approach to FDI is typically referred to as internalization theory

With regard to horizontal FDI, market imperfections arise in two circumstances:

- When there are impediments to the free flow of products between nations which decrease the profitability of exporting relative to FDI and licensing - When there are impediments to the sale of know-how which increase the profitability of FDI relative to licensing

Horizontal FDI When

Transportation costs for a product are high Market Imperfections (Internalization Theory)
- Impediments to the free flow of products between nations - Impediments to the sale of know-how

Follow the lead of a competitor - strategic rivalry Product Life Cycle - however, does not explain when it is profitable to invest abroad Location specific advantages (natural resources)

Vertical FDI
Vertical FDI takes two forms
- Backward vertical FDI is an investment in an industry abroad that provides inputs for a firms domestic production processes - Forward vertical FDI occurs when an industry abroad sells the outputs of a firms domestic production processes, this is less common than backward

31

vertical FDI

Strategic Behavior
One explanation for firms choice of vertical FDI is that by using vertical backward integration, a firm can gain control over the source of raw materials
- This would allow the firm to raise entry barriers and shut new competitors out of an industry

Another explanation of vertical FDI is that firms use this strategy to circumvent the barriers established by firms already doing business in a country

Market Imperfections
The market imperfections approach offers two explanations for vertical FDI
- There are impediments to the sale of know-how through the market mechanism - Investments in specialized assets expose the investing firm to hazards that can be reduced only through vertical FDI

Decision Making Grid For FDI Looking Ahead to Chapter 8

The Political Economy of Foreign Direct Investment
Political ideology and Foreign Direct Investment The benefits of FDI to host countries The costs of FDI to host countries The benefits and costs of FDI to home countries Government policy instruments and FDI

32