summary of ib lecture notes 1 4

Globalization of Markets There is the “global market”  falling trade barriers make it easier to sell globally  consumers’ tastes and preferences are converging on some global norm  fi

Summary-of-IB - Lecture notes 1-4 International Business (Western Sydney University) Summary-of-IB - Lecture notes 1-4 International Business (Western Sydney University)

Chapter 1: Globalization

Definition

Globalization is the shift toward a more integrated and interdependent world economy.

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system

Globalization of Markets

There is the “global market”

 falling trade barriers make it easier to sell globally

 consumers’ tastes and preferences are converging on some global norm

 firms promote the trend by offering the same basic products worldwide

Globalization of Production

Firms source goods and services from locations around the globe to capitalize on national

differences in the cost and quality of factors of production like land, labor, energy, and capital

Companies can

 lower their overall cost structure

 improve the quality or functionality of their product offering

Global institutions

Global institutions help manage, regulate, and police the global marketplace and promote the

establishment of multinational treaties to govern the global business system

The World Trade Organization (like its predecessor GATT)  polices the world trading system

 makes sure that nation-states adhere to the rules laid down in trade treaties  promotes lower barriers to trade and investment  159 members in 2013

The International Monetary Fund (1944)  maintains order in the international monetary system  lender of last resort for countries in crisis  Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece

The World Bank (1944)  promotes economic development via low interest loans for

infrastructure projects

The United Nations (1945)  maintains international peace and security  develops friendly relations among nations  cooperates in solving international problems and in promoting respect for human rights  is a center for harmonizing the actions of nations

The G20  forum through which major nations tried to launch a coordinated policy response to the 2008-2009 global financial crisis

 What Does Globalization Mean For Firms?

Lower barriers to trade and investment mean firms can  view the world, rather than a single country, as their market  base production in the optimal location for that activity

But, firms may also find their home markets under attack by foreign firms

Technological change means

 lower transportation costs  help create global markets and allow firms to disperse production to economical, geographically separate locations

 low cost information processing and communication  firms can create and manage globally dispersed production

 low cost global communications networks  help create an electronic global marketplace

 global communication networks and global media  create a worldwide culture and a global consumer product market

Multinational enterprise (MNE) - any business that has productive activities in two or more

countries

 Since the 1960s  the number of non-U.S multinationals has risen  the number of mini-multinationals has risen

Chapter 2: International Business

Political

Political economy of a nation - how the political, economic, and legal systems of a country are

interdependent

 they interact and influence each other

 they affect the level of economic well-being in the nation

Political system - the system of government in a nation

Assessed according to

 the degree to which the country emphasizes collectivism as opposed to individualism

 the degree to which the country is democratic or totalitarian

In the early 20th century, socialism split into

1 Communism – socialism can only be achieved through violent revolution and totalitarian

dictatorship in retreat worldwide by mid-1990s

2 Social democrats – socialism is achieved through democratic means

 retreating as many countries move toward free market economies

 state-owned enterprises have been privatized

Economic System

There are three types of economic systems

1 Market economies - all productive activities are privately owned and production is

determined by the interaction of supply and demand

 government encourages free and fair competition between private producers

2 Command economies - government plans the goods and services that a country

produces, the quantity that is produced, and the prices as which they are sold

 all businesses are state-owned, and governments allocate resources for “the good

of society”

 because there is little incentive to control costs and be efficient, command

economies tend to stagnate

3 Mixed economies - certain sectors of the economy are left to private ownership and free

market mechanisms while other sectors have significant state ownership and government planning

 governments tend to own firms that are considered important to national security

Legal System

Legal system - the rules that regulate behavior along with the processes by which the laws are

enforced and through which redress for grievances is obtained

 the system in a country is influenced by the prevailing political system

Legal systems are important for business because they

 define how business transactions are executed

 identify the rights and obligations of parties involved in business transactions There are three types of legal systems

1 Common law - based on tradition, precedent, and custom

2 Civic law - based on detailed set of laws organized into codes

3 Theocratic law - law is based on religious teachings

How Are Contracts Enforced In Different Legal Systems?

Contract - document that specifies the conditions under which an exchange is to occur and

details the rights and obligations of the parties involved

Contract law is the body of law that governs contract enforcement

 under a common law system, contracts tend to be very detailed with all contingencies spelled out

 under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code

Chapter 4: Differences in Culture

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 where

 values are abstract ideas about what a group believes to be good, right, and desirable

 norms are the social rules and guidelines that prescribe appropriate behavior in particular

situations

What Are Values And Norms?

Values provide the context within which a society’s norms are established and justified and form the bedrock of a culture

Norms include

 folkways - the routine conventions of everyday life

 mores - norms that are seen as central to the functioning of a society and to its social life

Social Structure

Social structure - a society’s basic social organization

Consider  the degree to which the basic unit of social organization is the individual, as opposed

to the group  the degree to which a society is stratified into classes or castes

Social Stratification

1 Social mobility - the extent to which individuals can move out of the strata into which

they are born

 Caste system - closed system of stratification in which social position is

determined by the family into which a person is born  change is usually not possible during an individual's lifetime

 Class system - form of open social stratification  position a person has by birth can be changed through achievement or luck

2 The significance attached to social strata in business contacts

 Class consciousness - a condition where people tend to perceive themselves in

terms of their class background, and this shapes their relationships with others

 An antagonistic relationship between management and labor raises the cost of production in countries with significant class differences

Religion

Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred

Four religions dominate society

1 Christianity

2 Islam

3 Hinduism

4 Buddhism

5 Confucianism is also important in influencing behavior and culture in many parts of Asia

Ethical systems - a set of moral principles, or values, that are used to guide and shape behavior

 Religion and ethics are often closely intertwined

Language

Language - the spoken and unspoken (nonverbal communication such as facial expressions,

personal space, and hand gestures ) means of communication

 Countries with more than one language often have more than one culture  Canada, Belgium, Spain

Language is one of the defining characteristics of culture

 Chinese is the mother tongue of the largest number of people

 English is the most widely spoken language in the world

 English is also becoming the language of international business

 but, knowledge of the local language is still beneficial, and in some cases, critical for business success

 failing to understand the nonverbal cues of another culture can lead to communication failure

Education

Formal education is the medium through which individuals learn many of the language,

conceptual, and mathematical skills that are indispensable in a modern society

 Important in determining a nation’s competitive advantage

 Japan’s postwar success can be linked to its excellent education system

 General education levels can be a good index for the kinds of products that might sell in a country  Example: impact of literacy rates

Hofstede’s dimensions of culture:

1 Power distance - how a society deals with the fact that people are unequal in physical and intellectual capabilities

2 Uncertainty avoidance - the relationship between the individual and his or her fellows

3 Individualism versus collectivism - the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity

4 Masculinity versus femininity - the relationship between gender and work roles

Hofstede’s work has been criticized for several reasons

 made the assumption there is a one-to-one relationship between culture and the nation-state

 study may have been culturally bound

 used IBM as sole source of information

 culture is not static – it evolves

But, it is a starting point for understanding how cultures differ, and the implications of those differences for managers

Culture evolves over time  changes in value systems can be slow and painful for a society

Social turmoil - an inevitable outcome of cultural change

 as countries become economically stronger, cultural change is particularly common 

economic progress encourages a shift from collectivism to individualism

 Globalization also brings cultural change

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability

Ethics

Ethics - accepted principles of right or wrong that govern

 the conduct of a person

 the members of a profession

 the actions of an organization

Business ethics - accepted principles of right or wrong governing the conduct of business people Ethical strategy - a strategy, or course of action, that does not violate these accepted principles

The most common ethical issues in business involve

1 employment practices

2 human rights

3 environmental pollution

4 corruption

5 moral obligations of multinational companies

How Are Ethics Relevant To Employment Practices?

Firms should

 establish minimal acceptable standards that safeguard the basic rights and dignity of employees

 audit foreign subsidiaries and subcontractors regularly to ensure they are meeting the standards

 take corrective action as necessary

How Are Ethics Relevant To Human Rights?

Basic human rights are taken for granted in developed countries

 freedom of association

 freedom of speech

 freedom of assembly

 freedom of movement

How Are Ethics Relevant To Environmental Pollution?

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

Ethical Dilemmas

Ethical dilemmas - situations in which none of the available alternatives seems ethically

acceptable

 real-world decisions are complex, difficult to frame, and involve consequences that are difficult to quantify

 the ethical obligations of an MNE toward employment conditions, human rights,

corruption, environmental pollution, and the use of power are not always clear cut  the right course of action is not always clear

Why Do Managers Behave Unethically?

Several factors contribute to unethical behavior including

1 Personal ethics - the generally accepted principles of right and wrong governing the conduct

of individuals  expatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture  managers fail to question whether a decision or action is ethical, and instead rely on economic analysis when making decisions

2 Decision-making processes - the values and norms that are shared among employees of an

organization  organization culture that does not emphasize business culture encourages

unethical behavior

3 Organization culture - organization culture can legitimize unethical behavior or reinforce the

need for ethical behavior

4 Unrealistic performance expectations - encourage managers to cut corners or act in an

unethical manner

5 Leadership - helps establish the culture of an organization, and set the examples that others

follow  when leaders act unethically, subordinates may act unethically, too

6 Societal culture – firms headquartered in cultures where individualism and uncertainty

avoidance are strong are more likely to stress ethical behavior than firms headquartered in cultures where masculinity and power distance rank high

Chapter 6: International Trade Theory

Free trade - a situation where 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

Trade theory shows why it is beneficial for a country to engage in international trade even for

products it is able to produce for itself

Mercantilism

Mercantilism (mid-16th century) suggests that it is in a country’s best interest to maintain a trade surplus—to export more than it imports

 Advocates government intervention to achieve a surplus in the balance of trade 

Mercantilism views trade as a zero-sum game—one in which a gain by one country results in a

loss by another

Absolute advantage

Adam Smith (1776) argued that a country has an absolute advantage in the production of a

product when it is more efficient than any other country in producing it

 Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for goods produced by other countries

Comparative advantage

The theory of comparative advantage (1817)- countries should specialize in the production of

those goods they produce most efficiently and buy goods that they produce less efficiently from other countries

 Even if this means buying goods from other countries that they could produce more efficiently at home

Heckscher-Ohlin Theory

Eli Heckscher (1919) and Bertil Ohlin (1933) - comparative advantage arises from differences in

national factor endowments

 the extent to which a country is endowed with resources like land, labor, and capital The more abundant a factor, the lower its cost

The pattern of trade is determined by factor endowments

 Heckscher and Ohlin predict that countries will  export goods that make intensive use of locally abundant factors  import goods that make intensive use of factors that are locally scarce

Product Life-Cycle

The product life-cycle theory - as products mature both the location of sales and the optimal

production location will change affecting the flow and direction of trade

According to the product life-cycle theory

 The size and wealth of the U.S market gave U.S firms a strong incentive to develop new products

 Initially, the product would be produced and sold in the U.S

 As demand grew in other developed countries, U.S firms would begin to export

 Demand for the new product would grow in other advanced countries over time making it worthwhile for foreign producers to begin producing for their home markets

 U.S firms might set up production facilities in advanced countries with growing demand, limiting exports from the U.S

 As the market in the U.S and other advanced nations matured, the product would become more standardized, and price would be the main competitive weapon

 Producers based in advanced countries where labor costs were lower than the United States might now be able to export to the United States

 If cost pressures were intense, developing countries would acquire a production

advantage over advanced countries

 Production became concentrated in lower-cost foreign locations, and the U.S became an importer of the product

New Trade Theory

New trade theory suggests that the ability of firms to gain economies of scale (unit cost

reductions associated with a large scale of output) can have important implications for

international trade

Countries may specialize in the production and export of particular products because in certain industries, the world market can only support a limited number of firms

Porter’s Diamond Of Competitive Advantage

Identified four attributes that promote or impede the creation of competitive advantage

1 Factor endowments - a nation’s position in factors of production necessary to compete in a

given industry

 can lead to competitive advantage

 can be either basic (natural resources, climate, location) or advanced (skilled labor,