MGT1111 – LECTURE NOTES

LECTURE 01: GLOBALIZATION

Globalization - is the process by which businesses or other organizations develop international influence
or start operating on an international scale. It is the process by which people and goods move easily
across borders. It is the ability to move and communicate easily with others all over the world in order to
conduct business internationally.

The Globalization of Markets

 The merging of historically distinct and separate national markets into one huge global
marketplace.
 Falling barriers to cross-border trade and investment.
 Global tastes.
 Benefits small and large companies.
 Significant differences between national markets.
 Products that serve universal needs are global: oil.
 Competitors may not change among nations.

The Globalization of Production

 Sourcing goods to take advantage of differences in cost and quality of factors of production.
 Factors of production include labor, energy, land, capital.
 Early outsourcing was confined to manufacturing.
 Modern communications technology has advanced outsourcing today for service activities.

The Emergence of Global Institutions

Institutions needed to help manage, regulate, and police global marketplace.

 General Agreement on Tariffs and Trade (GATT).

 World Trade Organization.
 International Monetary Fund.
 The World Bank.
 The United Nations.
GATT General Agreement on Tariffs and Trade
THIS IS A LEGAL AGREEMENT BETWEEN MANY COUNTRIES , WHOSE OVERALL
PURPOSE WAS TO PROMOTE INTERNATIONAL TRADE AMONG NATIONS BY REDUCING
TRADE BARRIERS SUCH AS TARIFFS OR QUOTAS. IT COVERS INTERNATIONAL TRADE ON
GOODS. THE WORKINGS OF THE GATT AGREEMENT ARE THE RESPONSIBILITY OF THE
COUNCIL FOR TRADE IN GOODS. WHICH IS MADE UP OF REPRESENTATIVES FROM ALL
WTO MEMBER COUNTRIES.( TARIFFS – TAX TO BE PAID ON ANY PARTICULAR CLASS OF
IMPORTS OR EXPORTS).

GATT No Longer Exists

THE INTERNATIONAL AGENCY (GATT) NO LONGER EXIST TODAY IT HAS NOW BEEN
REPLACED BY THE WORLD TRADE ORGANIZATION (WTO). THERE ARE 164 COUNTRIES
THAT ARE CURRENTLY MEMBERS OF WTO. THESE COUNTRIES DEALS WITH THE RULES
OF TRADE BETWEEN NATIONS. Liberia is the 163rd member while, Afghanistan is the 164th
member. Afghanistan is the newest member joining effective July 29,2016 only. Saudi Arabia joined
only in 2005.
World Trade Organization (WTO) – was formed on January 1, 1995. Its main purpose is to reduce
tariffs and other barriers to trade. Main headquarters located in Centre William Rappard, Geneva,
Switzerland.

 Polices the world trading system.

 Ensures nation-states adhere to the rules.
 Facilitates multinational agreements among members.
 164 nations that account for 98 percent of world trade were members as of 2019.

14 Countries that are NOT members of WTO.

 ARUBA
 ERITREA
 KIRIBATI
 KOSOVO
 MARSHALL ISLANDS
 MICRONESIA
 MONACO
 NAURU
 NORTH KOREA
 PALAU
 THE PALESTINIAN TERRITORIES
 SAN MARINO
 SINT MAARTEN
 TUVALU
 The International Monetary Fund

 The IMF works to achieve sustainable growth and prosperity for all of its 190 member
countries. The IMF supports economic policies that promote Financial stability and monetary
cooperation, which are essential to increase productivity, job creation, and economic well-being.
The IMF is governed by and accountable to its member countries.

 Established to maintain order in the international monetary system.

 Often seen as the lender of last resort.
 In return for loans, requires nation-states to adopt specific economic policies aimed at returning
their economies to stability and growth.

THE IMF FOSTERS INTERNATIONAL FINANCIAL STABILITY BY:

 Monitoring economic and financial developments and advising countries.
 Loans and other financial aid to member countries.
 Technical assistance and training to help governments to implement sound economic policies.

Sources of IMF Funds

1. Quotas – Fixed shares coming from member countries or pooled funds of member nations or
governments with equity shares in the bank. The United States is the IMF’s largest member with
a quota of $118 BILLION DOLLARS.
2. Loans

The United Nations

 Established in 1945. Main Headquarter in New York, New York, United States of America. The
most powerful organ of the UN is the Security council. It takes decision relating to war and
peace.
 Promotes peace through international cooperation and collective security.
 Settlement of disputes.
 193 member countries.
UN Charter - 4 Basic Purposes:

 Maintain international peace and security.

 Develop friendly relations among nations.
 Cooperate in solving international problems and in promoting respect for human rights.
 Be a center for harmonizing the actions of nations.
The 4 Principles of UNO
1. The equality and self-determination of nations.
2. Respect of Human Rights.
3. Obligations of the member countries to obey the charter.
4. Cooperate with the UN Security council and to use peaceful means to resolve conflicts.

The World Bank

 The World Bank is an International Development Organization owned by 187 countries. John
Maynard Keynes is the founder of World bank on July 1944 It’s role is to reduce poverty by
lending money to the government s of its poorer members to improve their economies and to
improve the standard of living of their people. Also focuses on strengthening the private sector in
developing countries.
 Promotes economic development.
 Focused on making low-interest loans to cash-strapped governments in poor nations that wish to
undertake significant infrastructure investments.
 Considered less controversial than the IMF.

Group of Twenty (G20)

 Finance ministers and central bank governors of the 19 largest economies in the world, plus
representatives from the European Union and the European Central Bank.
 Represents 90 percent of global GDP and 80 percent of international global trade.
International Trade

 The exchange of capital goods, and services across international Borders or territories because
there is a need or want of goods or services. In most countries such trade represents a significant
share of GDP.
Importance of International Trade

 Allows countries to expand their markets and access goods and services that otherwise may not
have been available domestically.
Types of International Trade

 Export Trade – when goods manufactured in a specific country are purchased by the residents of
another country,
 Import Trade – Goods and services purchased into one nation from another.
 Entrepot Trade – a form of international trade mainly confined to commodities such as Tin and
Tea.
Top 10 Imports of the Philippines

 Electrical Machinery and Equipment Machinery

 Mineral fuels and Oils
 Vehicles
 Iron and Steel
 Plastics
 Cereals
 Optical
 Photographic
 Medical Equipment.

Biggest Importers of the Philippines

 China
 Japan
 United States
 South Korea
 Indonesia

Drivers of Globalization
Declining Trade and Investment Barriers - Between 1960 and 2018 the value of the world economy
increased 9.4 times, while the value of international goods increased 22.4 times.

 Trade in goods and services and the value of foreign direct investment have all been growing
faster than world output.
 More firms dispersing production process to different locations around the globe.
 Economies of the world’s nation-states are becoming more intertwined.
 World has become significantly wealthier in the past two decades.
Foreign Direct Investment - A LARGE Australian mining company acquires a smaller Angolan one for
diversification. Where a business decision is made to take a stake in a company by an investor located
outside its borders.

Role of Technological Change

Communications

 Development of the microprocessor single most important innovation since World War II.
 Moore’s Law predicts that the power of microprocessor technology doubles and its cost of
production falls in half every 18 months.
The Internet

 More than half of the world’s population uses the Internet.

 Global e-commerce sales over $2.5 trillion.
 The Internet acts as an equalizer.

Founder of the Internet

The computer scientist, Vinton Gray Cerf, an American internet pioneer, and Robert Elliot Kahn,
better known as Bob Kahn, is an American Electrical Engineer from Princeton University. They are
credited for being the founders of Internet Communication protocols we use today.

Transportation Technology

 Commercial jets, super freighters, and containerization have all “shrunk the globe.”
Implications for the Globalization of Production.

 Locating production in geographically separate locations has become more economical.

Implications for the Globalization of Markets.

 Cultural distance has been reduced and has brought some convergence of consumer tastes and
preferences.
The Changing Demographics of the Global Economy
The Changing World Output and World Trade Picture

 1960s: U.S. accounted for 38.3 percent of world output.

 2018: U.S. accounted for 24 percent of world output.
This reflects the faster economic growth of several other economies, particularly China and BRIC
COUNTRIES. According to Goldman Sachs and Jim O Neil by 2050 these countries will dominate the
Global economy.

 China and BRIC countries( BRAZIL, RUSSIA, INDIA, CHINA,) growing more rapidly.
 Developing nations may account for more than 60 percent of world economic activity by 2025.
The Changing Foreign Direct Investment Picture
As barriers to the free flow of goods and services fell, non-U.S. firms increasingly invested across
national borders.

 Desire to disperse production activities to optimal locations and to build a direct presence in
major foreign markets.
 Outward stock of foreign direct investment: the total cumulative value of foreign investments by
firms domiciled in nations outside of that nation’s borders.
The Changing Nature of the Multinational Enterprise

 Multinational enterprise (MNE) is any business that has productive activities in two or more
countries.
 Non-U.S. Multinationals.
o In 2003, 38.8 percent of the world’s 2000 largest multinationals were U.S. firms.
o By 2019, 28.8 percent of the top 2000 global firms were U.S. multinationals, a drop of
201 firms.
The Rise of Mini-Multinational Enterprise

 Growth in the number of medium- and small-sized businesses.

 Internet is lowering barriers that smaller firms faced in international trade.
The Changing World Order
Former communist countries present export and investment opportunities.

 Signs of growing unrest and commitment to market-based economic systems cannot be assumed.
 Risks of doing business in these countries are high.
- China moving to industrial superpower.
- In Latin America debt and inflation are down, more private investors, expanding economies.
- COUNTRIES IN LATIN AMERICA , BRAZIL, PERU, ARGENTINA, COLOMBIA, MEXICO,
ECUADOR, CHILE, COSTA RICA, URUGUAY, BOLIVIA, PANAMA, GUATEMALA,
VENEZUELA, PARAGUAY, NICARAGUA, HONDURAS, EL SALVADOR, DOMINICAN
REPUBLIC, CUBA, HAITI, BELIZE,SURINAME, GUYANA AND JAMAICA.

Global Economy of the Twenty-First Century

 Barriers to the free flow of goods, services, and capital have been coming down.
 Strengthened by the widespread adoption of liberal economic policies by countries that had
opposed them.
 Globalization is not inevitable:
o Countries may pull back.
o Risks are high.

The Globalization Debate

Globalization, Jobs, and Income
Critics of globalization argue:

 Falling trade barriers allow firms to move manufacturing activities to countries where wage
rates are much lower.
o Destroy manufacturing jobs in wealthy advanced economies.
 Services also being outsourced:
 o Contributing to higher unemployment and lower living standards in their home
nations.
Supporters argue:

 Benefits outweigh the costs.

 Free trade will result in countries specializing in the production of goods and services that they
can produce most efficiently, while importing goods and services that they cannot produce as
efficiently.
o As a result, the whole economy is better off.
o Companies can reduce their cost structure, and consumers benefit.
 Data suggests the share of labor in national income has declined over the past two decades.
o Share of national income by skilled labor has increased.
o Unskilled labor experienced a fall in income, but not necessarily standard of living due to
economic growth.
 The weak growth rate in real wage rates for unskilled workers is likely due to a technology-
induced shift within advanced economies.
o Technological change has a bigger impact than globalization on declining share of
national income enjoyed by labor.
Globalization, Labor Policies, and the Environment
Critics argue:

 Labor and environmental regulations increase manufacturing costs.

 Lack of regulation can lead to abuse.
 Firms move production to nations that do not have regulations.
Supporters argue:

 Tougher environmental regulations and stricter labor standards go hand in hand with economic
progress.
 Free trade leads to less labor exploitation and less pollution.

Globalization and National Sovereignty

Critics argue:

 Shift of power away from national governments toward supranational organizations.

 WTO, EU, United Nations.
Supporters argue:
  The power of supranational organizations is limited to what nation-states collectively agree to
grant.
 These organizations exist to serve the collective interests of member states.
Globalization and the World’s Poor

 Critics argue gap between the rich and poor nations has gotten wider.
o Totalitarian governments.
o Poor economic policies.
o Corruption and lack of property rights.
o Expanding populations in developing countries.
o Debt burdens.
 Supporters argue best way to change the situation is to lower barriers to trade and investment and
promote free market policies.

Managing in the Global Marketplace

Managers

 International business is any firm that engages in international trade or investment.

 Managing an international business differs from managing a purely domestic business.
o Countries are different.
o Range of problems is wider and problems more complex.
o Must find ways to work within limits imposed by government.
o Transactions involve converting money into different currencies.
LECTURE 02: NATIONAL DIFFERENCES IN POLITICAL, ECONOMIC, AND LEGAL SYSTEMS

Political Systems
- The system of government in a nation is called the political system.
Assessed according to two dimensions:

 Emphasis on collectivism or individualism.

 Degree to which they are democratic or totalitarian.
Collectivism and Individualism
Collectivism - Emphasizes collective goals over individual goals.
Socialism

 Public ownership of the means of production for the common good.

 Karl Marx: the few benefits at the expense of the many in a capitalist society where individual
freedoms are not restricted.
 Communists versus social democrats.
Individualism

 An individual should have freedom in economic and political pursuits.

 The interests of the individual should take precedence over the interests of the state.
2 Tenets:

 Guarantee of individual freedom and self-expression.

 Welfare of society best served by letting people pursue their own economic self-interest.
Democracy and Totalitarianism
- Democracy and individualism go hand in hand, as do the communist version of collectivism
and totalitarianism.
Democracy - government is by the people, exercised either directly or through elected representatives.

 Representative democracy: citizens periodically elect individuals to represent them.

 Includes a multitude of safeguards that are typically based in constitutional law, including:
o Freedom of expression.
o Free media.
o Universal adult suffrage.
o Fair court system.

Pseudo-democracies:
  Lie between pure democracies and complete totalitarianism systems.
 Authoritarian elements have captured some or much of the machinery of state and use this to
deny basic political and civil liberties.

Totalitarianism - one person or political party exercises absolute control over all spheres of human life
and prohibits opposing political parties.

4 Types of Totalitarianism
1. Communist totalitarianism - socialism can be achieved only through a totalitarian dictatorship.
2. Theocratic totalitarianism - monopolized by a party, group, or individual that governs
according to religious principles.
3. Tribal totalitarianism - a party, group, or individual that represents the interests of a particular
tribe monopolizes political power.
4. Right-wing totalitarianism - generally permits individual economic freedom but restricts
individual political freedom, including free speech, on the ground that it would lead to the rise of
communism.

Economic Systems
Market Economy

 All productive activities are privately owned.

 Production is determined by supply and demand.
 To work, supply must not be restricted.
 Role of government is to encourage vigorous free and fair competition.
Command Economy

 Government plans the goods and services, quantity, and price, then allocates them for “the good
of society.”
 All businesses are state owned.
 Historically found in communist countries.
 No incentive for individuals to look for better ways to serve needs.
Mixed Economy

 Some sectors are privately owned, some are government owned.

 Once common in developed world, less so now.
 Government may aid troubled firms whose operations are vital to national interests.
 U.S. helped Citigroup, General Motors in 2008 recession.

Legal Systems

 Some sectors are privately owned, some are government owned.

  Once common in developed world, less so now.
 Government may aid troubled firms whose operations are vital to national interests.
 U.S. helped Citigroup, General Motors in 2008 recession.

Different Legal Systems

Common Law

 Evolved in England over hundreds of years.

 Based on tradition, precedent, custom.
 More flexible than other systems.
Civil Law

 Based on detailed laws organized into codes.

 Less adversarial than a common law system.
Theoretic Law

 Based on religious teachings.

 Most common is Islamic law.

Differences in Contract Law

Contract - specifies conditions under which an exchange is to occur, and details rights of parties
involved.
Contract law - body of law that governs contract enforcement.
Under Common Law:

 Contracts are very detailed with all contingencies spelled out.

 More expensive and can be adversarial.
Under Civil Law:

 Contracts tend to be much shorter and less specific.

United Nations Convention on Contracts for the International Sale 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 their places of business in
different nations.
 Applies automatically to all contracts for the sale of goods between different firms based in
countries that have ratified the convention unless the parties opt out.

Property Rights and Corruption

Property - a resource that an individual or business owns (Land, buildings, equipment, capital, mineral
rights, businesses, intellectual property.)
Property Rights - legal rights over the use to which a resource is put and over the use made of any
income that may be derived from that resource.
Private Action - Theft, piracy, blackmail by private individuals or groups.
Public Action and Corruption - Public officials extort income, resources, or property.

 Can be done legally by levying excessive taxation, requiring licenses or permits from property
holders, taking assets into state ownership without compensating owners, redistributing assets
without compensating prior owners.
 Can be done illegally through corruption, demanding bribes.
Foreign Corrupt Practices Act (FCPA)

 Illegal to bribe a foreign government official to obtain or maintain business over which that
foreign official has authority.
 Requires all publicly traded companies to keep detailed records that would reveal whether a
violation of the act has occurred.
Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions (1997)

 Makes bribery of a foreign public official a criminal offense.

 Allows for facilitating or expediting payments.
The Protection of Intellectual Property
Intellectual Property - property that is the product of intellectual activity, such as computer software, a
screenplay, a music score.
Types of Intellectual Property

 Patent - inventor’s exclusive rights for a defined period.

 Copyrights - exclusive legal rights of authors, composers, playwrights, artists, and publishers.
 Trademarks - officially registered designs and names used to differentiate products.
World Intellectual Property Organization - international organization whose members sign treaties to
protect intellectual property. Paris Convention for the Protection of Industrial Property .

Product Safety and Product Liability

 Product safety laws set certain safety standards to which a product must adhere.
 Product liability involves holding a firm and its officers responsible when a product causes injury,
death, or damage.
o Can be much greater if a product does not conform to safety standards.
o Criminal and civil laws apply.
o Raises ethical issues when doing business abroad.

360° View: Managerial Implications- The Macro Environment Influences Market Attractiveness
2 Broad Implications for International Business

 Political, economic, and legal systems of a country raise important ethical issues that have
implications for international business.
 Political, economic, and legal environments of a country clearly influence the attractiveness of
that country as a market or investment site.
o A country with democratic political institutions, a market-based economic system, and a
strong legal system is more attractive to do business in.
LECTURE 03: NATIONAL DIFFERENCES IN ECONOMIC DEVELOPMENT

Economic Development
- Differences among nations affect how attractive it is for doing business.
Trends that foster greater economic development:
• Democratic forms of government.
• Market-based economic reforms.
• Legal systems that better enforce property rights.
Differences in Economic Development
Gross Domestic Product (GDP) - Measures the total monetary or market value of all the finished goods
and services produced within a country's borders in a specific time period.
- Japan, Sweden, Switzerland, Australia, and the United States have high GDP. China and
India are significantly poorer.
- GDP does not consider differences in the cost of living.
- Purchasing power parity (PPP) is an adjustment in gross domestic product per capita to reflect
differences in cost of living.
Broader Conceptions of Development - Amartya Sen

 Economic development should be assessed by the capabilities and opportunities people enjoy.
o Development requires removing major impediments to freedom: poverty, tyranny, poor
economic opportunities, systematic social deprivation, neglect of public facilities.
 Economic progress requires the democratization of political communities to give citizens a voice.
 The United Nations used Sen’s ideas to develop the Human Development Index (HDI) to
measure quality of human life in different nations.
o Life expectancy at birth.
o Educational attainment.
o Whether average incomes are sufficient to meet the basic needs of life.

Political Economy and Economic Progress

Innovation and Entrepreneurship Are the Engines of Growth
Innovation
  New products along with new processes, new organizations, new management practices, and new
strategies.
Entrepreneurs

 First to commercialize innovative products and processes.

 Provides much of the dynamism in an economy.

Innovation and Entrepreneurship Require a Market Economy

 In market economies, any individual is free to try out an innovative idea by starting a business,
and existing businesses are free to improve their operations through innovation.
 In planned economies, there is little incentive to develop new innovations because the state owns
all means of production and captures the gains.
 Strong relationship between economic freedom and economic growth.
Innovation and Entrepreneurship Require Strong Property Rights
- Without strong property rights, individuals and businesses risk having innovations and
potential profits stolen.
o This reduces the incentive for innovation and entrepreneurism.
- Economist Hernando de Soto claims that inadequate property protection in many developing
nations limit economic growth.
The Required Political System
- Democratic regimes are probably more conducive to long-term economic growth.
o China, South Korea, Taiwan, Singapore, and Hong Kong all had undemocratic
governments but experienced rapid economic growth.
o Property rights are only secure in well-functioning, mature democracies.
- Totalitarian states are detrimental to progress.
o They limit freedom and suppress human development.

Geography, Education, Demographics and Economic Development

- Economist Jeffrey Sachs argues that countries with favorable geography are more likely to
engage in trade and are open to market-based systems.
o Promotes faster economic growth.
- Countries that invest in education have higher growth rates because the workforce is more
productive.
o Countries in Southeast Asia have offset their geographical disadvantage by investing in
education.
- In terms of demographics, countries with a young and growing population have greater
growth potential.
o Growing population increases supply of labor.
o Younger workers tend to consume more than older workers.
o Aging population implies a stress on government finances.
States in Transition
Political economy of nation-states is marked by three trends:
1. Democratic revolutions during late 1980s and early 1990s led to greater commitment to free
market capitalism.
2. Moving away from centrally planned and mixed economies toward a freer market approach.
3. Since 2005, a shift back to greater authoritarianism in some nations has resulted in a retreat from
the free market model.

The Spread of Democracy

In 2021, Freedom House ranked countries into three broad categories:

 82 countries classified as free: 42 percent of nations.

 59 countries classified as partly free: 30 percent of nations.
 54 countries classified as not free: 28 percent of nations.
3 Reasons for the Spread of Democracy
1. Many totalitarian regimes failed to deliver economic progress to the bulk of their populations.
2. New information and communication technologies.
o Reduced state’s ability to control access to uncensored information.
o Created new conduits for the spread of democratic ideals.
3. Economic advances have led to a prosperous middle class that has pushed for democratic
reforms.

- Since 2005, there has been a drift back toward more authoritarian modes of government in
many nations.
o Elections have been compromised; civil liberties restricted; independent press has been
attacked; opposition parties have been restricted.
o Examples: Turkey, Russia, Ukraine, Indonesia, Ecuador, Venezuela.

The New World Order and Global Terrorism

- Author Francis Fukuyama argues the new world order will be characterized by democratic
regimes and free market capitalism.
- Political scientist Samuel Huntington argues that while many societies are modernizing,
they are not becoming more Western.
o Predicts a world split into different civilizations that will be in conflict, making business
difficult.
- Political position is more likely to be somewhere between Fukuyama and Huntington.
Huntington
- Global terrorism is a product of tensions between civilizations and a clash of value systems
and ideology.
 - ISIS and al-Qaeda.
Former U.S. Secretary of State Colin Powell maintained that terrorism is one of the major threats to
world peace and economic progress

The Spread of Market-Based Systems

- A shift from centrally planned economies to market-based economies.
o More than 30 countries in the former Soviet Union and eastern European communist bloc
have changed economic systems.
o Change also occurring in Asian and African states.
- Command and mixed economies failed to deliver the sustained economic growth achieved in
market-based countries.
The Nature of Economic Transformation
The shift toward a market-based system involves:

 Deregulation.
 Privatization.
 A legal system to safeguard property rights.
Deregulation

 Removing legal restrictions to the free play of markets, the establishment of private enterprises,
and the manner in which private enterprises operate.
 In command economies and mixed economies, the state sets prices, owns businesses, limits
private enterprise, restricts investment by foreigners, and restricts international trade.
Privatization

 Transfers ownership of state property to private individuals.

o Movement started in Great Britain in early 1980s.
 In many nations, economic activity is still dominated by state-owned enterprises.
 Selling state-owned enterprises not enough to guarantee economic growth.
 For privatization to work, it must be paired with a general deregulation and opening of the
economy.
Legal Systems

 A well-functioning market economy requires laws.

o Need to protect property rights.
o Mechanisms for contract enforcement.
 Adoption of a legal system requires time to function well.
 Institutional weaknesses undermine contract enforcement in most countries.
  Progress being made regarding laws on property rights.
Implications of Changing Political Economy
- Ideological conflict between collectivism and individualism is less prevalent today.
- Western ideology more widespread.
- Markets formerly off-limits to Western business are now open, presenting a huge potential for
business.

Potential Risks are Large:

 Will democracy thrive during difficult times?

 Will totalitarian regimes return?
 Is the risk associated with investment worth it?
 Is China’s financial system stable?
360° View: Managerial Implications
Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally
Countries are more likely to have higher sustained rates of economic growth with:

 Democratic regimes.
 Market-based economic policies.
 Strong property rights protection.
- These markets are more attractive to international businesses.
Benefits:

 Based on size of the market, as well as current and future purchasing power of its consumers.
 First-mover advantages enjoyed by early entrants.
 Late-mover disadvantages suffered by late entrants.
 A country’s economic system, property rights regime, and education systems are good predictors
of economic prospects.
Costs:

 Political system - is it necessary to pay bribes to get market access?

 Economic level - are the necessary supporting businesses and infrastructures in place?
 Legal system - how do local laws and regulations affect business decisions? Are there well-
established contract laws?
Risks:

 Political risk - likelihood that political forces will cause drastic changes in a country’s business
environment that will adversely affect a business’s profit and other goals.
 Economic risk - likelihood that economic mismanagement will cause drastic changes in a
country’s business environment that adversely affect a business’s profit and other goals.
  Legal risk - likelihood that a trading partner will opportunistically break a contract or expropriate
property rights.
Overall Attractiveness:

 Based on balancing the benefits, costs, and risks associated with doing business in that country.
 Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in
politically stable developed and developing nations that have free market systems and no
dramatic upsurge in either inflation rates or private sector debt.

LECTURE 04: DIFFERENCES IN CULTURE

Background
- Understanding and adapting to the local cultural is important in international companies.
Cross-Cultural Literacy - refers to understanding how cultural differences across and within countries
can affect how business is practiced.

 Cultural differences create a common bond among people.

 Numerous values and norms exist in these cultural systems that might affect international
business.
 Culture can and does evolve.
What is Culture?
Culture - A system of values and norms shared among a group of people and that when taken together
constitute a design for living.
Values - Ideas about what a group believes to be good, right, and desirable.
Norms - Social rules and guidelines that prescribe appropriate behavior in particular situations.
Society - A group of people sharing a common set of values and norms.

Values and Norms

Values

 Provide the context within which a society’s norms are established and justified.
 They are invested with emotional significance.
 Reflected in the economic systems of a society.
Norms

 Social rules that govern people’s actions toward one another.

 Folkways are routine conventions of everyday life.
o Examples: appropriate dress code, good social manners.
 o Include rituals and symbolic behavior.
 Mores are norms seen as central to functioning of society.
o Example: laws against theft.
o Have greater moral significance than other norms.

Culture, Society, and the Nation-State

 The relationship between a society and a nation-state is not strictly one-to-one.

 Nation-states are political creations.
 A nation can have several cultures, and a culture can embrace several nations.
 Can be different levels of culture within a country.

Determinants of Culture
The values and norms of a culture evolve over time.

 Religion.
 Political philosophy.
 Economic philosophy.
 Education.
 Language.
 Social structure.

Social Structure
- Refers to the basic social organization of a society.
Two dimensions help explain differences among cultures:
1. The degree to which the basic unit of social organization is the individual, as opposed to the
group.
2. The degree to which a society is stratified into classes or castes.
Individuals and Groups
The Individual:
  In many Western societies, the individual is the basic building block of social organization.
o Emphasis on individual achievement.

The Group:

 A group is an association of two or more individuals who have a shared sense of identity and
interact in structured ways based on common expectations.
o The primary unit of social organization in many non-Western societies.
o Importance of group membership/identification.

Social Stratification

 Social strata are hierarchical social categories often based on family background, occupation, and
income.
 Individuals born into a particular stratum, which affects life chances.
4 Basic Principles

 Is a trait of society.
 Carries over into next generation.
 Is generally universal but variable.
 Involves not just inequality but also beliefs.
Social Mobility

 Extent to which individuals can move out of the strata into which they are born.
o Varies among societies.
 Caste system is a closed system where social position is determined by family and change is
usually not possible.
o India has four main castes.
 Class system is less rigid, and position can be changed through achievement and luck.
o United Kingdom has a more rigid class structure than U.S.

Significance:

 Can affect business operations.

 Class consciousness is a tendency for individuals to perceive themselves in terms of their class
background.
 Makes it difficult to establish a competitive advantage in a global economy.

Religious and Ethical Systems

Religion - A system of shared beliefs and rituals concerned with the realm of the sacred.
Ethical System - A set of moral principles, or values, that are used to guide and shape behavior.
  Most ethical systems are the product of religions.
 Four dominant religions today:
o Christianity.
o Islam.
o Hinduism.
o Buddhism.

Christianity

 Most widely practiced religion; monotheistic.

 Found throughout Europe, the Americas, and other countries settled by Europeans.

Economic Implications of Christianity

 Sociologists argue that Protestant branch has the most important economic implications.
 Max Weber, Protestant ethics, and the spirit of capitalism.
Islam

 Second largest religion.

 Monotheistic, one true omnipotent God (Allah).
 Islamic fundamentalism:
o Associated in the West with militants, terrorists.
o A response to social pressures to move toward modernization and the influence of
Western societies.
Economic Implications of Islam

 Many pro-free enterprise principles, protection of private property, concern with social justice.
 Prohibits the payment or receipt of interest.
Hinduism
Beliefs:

 A moral force in society requires the acceptance of certain responsibilities, called dharma.
 Rebirth into a different body, called reincarnation.
 The spiritual progression of each person’s soul, called karma.
 Achieving a complete spiritual perfection, called nirvana.
Economic Implications of Hinduism

 Max Weber: Hindus are valued by their spiritual rather than material achievements.
 Caste system abolished in India, but still has an effect.
Buddhism

 Stresses spiritual growth and the afterlife, rather than involvement in this world.
  Economic implications of Buddhism:
o Does not emphasize wealth creation.
o Does not support the caste system—individuals have some mobility and can work with
individuals from different classes.
o Recent trends bring the “Zen” orientation from Buddhism into business in the Western
world.
Confucianism

 Practiced mainly in China, Korea, and Japan.

 Teaches the importance of attaining personal salvation through right action.
 High morals, ethical conduct, and loyalty to others.

Economic implications of Confucianism

 Three values of Confucianism—loyalty, reciprocal obligations, and honesty—may all lead to

lowering the cost of doing business in Confucian societies.
o Guanxi are relationship networks supported by reciprocal obligations.

Language
Spoken Language

 Language structures the way we see the world.

 Countries with more than one language often have more than one culture.
o Mandarin (Chinese) is mother tongue of the largest number of people.
o The most widely spoken language in the world is English.
 English is becoming the language of international business.
Unspoken Language

 Nonverbal communication refers to the use of nonverbal cues to communicate meaning.

o Often culturally bound.
o Personal space is the comfortable distance between a speaker and the listener.
 Varies among cultures, which makes it important to know in business.
Education
Formal Education

 Medium through which individuals learn languages and other skills.

 Socializes the young into the values and norms of a society.
o The “hidden curriculum” in schools teaches respect for others, obedience to authority,
honesty, neatness, timeliness.
 Provides a national competitive advantage.
o Creates a pool of skilled and knowledgeable workers.
o Represents a good index of what products might sell in a country.
Culture and Business
- Culture and values in the workplace were studied by Geert Hofstede.
Hofstede’s Dimensions of Culture

 Power distance refers to how a society deals with the fact that people are unequal in physical and
intellectual capabilities.
 Individualism versus collectivism focuses on the relationship between individuals and their
fellows.
 Uncertainty avoidance measures the extent to which different cultures socialize their members
into accepting ambiguous situations and tolerating uncertainty.
 Masculinity versus femininity looks at the relationship between gender and work roles.
 Long-term versus short-term orientation refers to the extent to which a culture programs its
citizens to accept delayed gratification of their material, social, and emotional needs.
 Indulgence versus restraint added in 2010.
o Indulgence refers to a society that allows relatively free gratification of basic and natural
human drives related to enjoying life and having fun.
o Restraint refers to a society that suppresses gratification of needs and regulates it by
means of strict social norms.
Hofstede’s Results

 Hofstede created an index score for each dimension—from 0 to 100 (100 being a high score).
 Western nations tend to score high on individualism and low on power distance.
 Latin American and Asian countries emphasize collectivism and score high on power distance.
 Japan demonstrates strong uncertainty avoidance and high masculinity.
Hofstede’s work is the leading research on culture but has received criticism.

 Assumes a one-to-one correspondence between culture and the nation-state when many countries
have more than one culture.
 Research may be culturally bound.
 Research focused on a single industry.
Global Leadership and Organizational Behavior Effectiveness (GLOBE)

 A leader’s effectiveness is contextual.

o Embedded in the societal and organizational norms, values, and beliefs of the people
being led.
 Established nine cultural dimensions:
o Power distance, uncertainty avoidance, humane orientation, institutional collectivism, in-
group collectivism, assertiveness, gender egalitarianism, future orientation, and
performance orientation.
World Values Survey (WVS)
- Explores people’s values and norms, how they change over time, and what impact they have
in society and business.
Dimensions:
 - Support for democracy; tolerance of foreigners and ethnic minorities; support for gender
equality; the role of religion and changing levels of religiosity; the impact of globalization;
attitudes toward the environment, work, family, politics, national identity, culture, diversity,
and insecurity; and subjective well-being.
Cultural Change

 Culture is not a constant; it evolves over time.

o In the 1960s, women in management were not accepted, while today it is a welcomed
reality.
 Economic advancement and globalization may be important factors.
 Culture may change as a society becomes wealthier.
 Also, evidence of countertrends:
o Shift toward Islamic fundamentalism in some countries.
o Separatist movements in Canada, Russia, United Kingdom.

360° View: Managerial Implications

Cultural Literacy and Competitive Advantage
Cross-Cultural Literacy:

 Companies must be informed about the culture of another nation when conducting international
business.
 Ethnocentrism is the belief in the superiority of one’s own ethnic group or culture.
 Edward T. Hall notes that cultural differences in attitude to time can cause myriad problems.
Culture and Competitive Advantage

 Values and norms influence costs of doing business and the costs of doing business influence
ability to establish competitive advantage.
 Some say culture of modern Japan lowers the cost of doing business relative to Western nations.
o Also, Japan less supportive of entrepreneurial activity.
 Connection between culture and competitive advantage is important because it:
o Suggests which countries are likely to produce the most viable competitors.
o Has important business implications for the choice of countries in which to locate
production facilities and do business.

LECTURE 05: ETHICS, COPORATE SOCIAL RESPONSIBILITY, AND SUSTAINABILITY

Ethics

 Ethics, corporate social responsibility, and sustainability are “social” issues that arise frequently
in international business.
 Ethics are the core starting point.
o Business ethics are the accepted principles of right or wrong that govern the conduct of
businesspeople.
o Ethical strategy refers to a strategy, or course of action, that does not violate a company’s
business ethics.
Ethics and International Business

 Many ethical issues rooted in differences in political systems, laws, economic development, and
culture.
 Might be normal in one country and illegal in another.
 Incredibly difficult to come up with global standards.
Most common ethical issues involve:

 Employment practices.
 Human rights.
 Environmental regulations.
 Corruption.
 Moral obligations of multinational corporations.

Employment Practices
- When work conditions in a host nation are inferior to those in a multinational’s home nation,
which standards should apply?
To guard against ethical abuses, firms should:

 Establish minimal acceptable standards that safeguard the basic rights and dignity of employees.
 Audit foreign subsidies and contractors regularly to ensure standards are being met.
 Take corrective action as necessary.
Human Rights
- Basic human rights found in developed nations are not universally accepted worldwide.
 Freedom of association.
 Freedom of speech.
 Freedom of assembly.
 Freedom of movement.
 Freedom from political repression.
Apartheid system in South Africa:

 Mandated segregation and prohibited blacks from managing whites.

 Businesses from developed countries questioned the ethics of doing business in South Africa.
 United Nation’s Sustainable Development Goals 2030.
General Motors adopted the Sullivan principles:

 Company should not obey the apartheid rules in its operation in South Africa.
 Company should promote abolition of apartheid laws.
 Was not sufficient to break down the apartheid regime.
Repressive regimes still exist in the world.

 Is it ethical for multinational corporations to do business with repressive regimes?

  Does multinational investment bring change to these regimes and foster economic growth and
raise living standards?
 Are some regimes so repressive that investment cannot be justified on ethical grounds?
Environmental Regulations
- Problems occur when environmental regulations differ between host and home nations.
 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.
 Global tragedy of the commons is enhanced by corporations that move production
locations where they are free to pump pollutants into the atmosphere or dump them in
oceans or rivers, thereby harming these valuable global commons.
Corruption
- Corruption has been a problem in almost every society in history and continues today.

U.S. Foreign Corrupt Practices Act (FCPA)

 Regulates conduct of international business in the taking of bribes and other unethical actions.
 Amended to allow for “facilitating payments.”
Convention on Combating Bribery of Foreign Public Official in International Business
Transactions

 Makes the bribery of foreign officials a criminal offense.

Ethical Implications of Corruption

 Are bribes the price to pay to do a greater good?

o May improve efficiency and help growth.
 Do bribes reduce businesses’ incentive to invest?
o Reduces the returns on business investment and leads to low economic growth.

Some multinationals adopting a zero-tolerance policy

 BP and Dow Corning.

Ethical Dilemmas

 Ethical obligations of multinational corporations are not always clear-cut.

 How should corporations handle ethical dilemmas regarding employment, human rights,
corruption, and environmental pollution?
o Pressure from customers and stakeholders to be transparent in ethical decision making.
o No universal worldwide agreement about what constitutes accepted ethical principles.
 Ethical dilemmas are situations in which no alternatives seem ethically acceptable.
Roots of Unethical Behavior

 Personal ethics.
 Decision-making processes.
 Organizational culture.
 Unrealistic performance goals.
 Leadership.
 Societal culture.

Personal Ethics

 Generally accepted principles of right and wrong governing the conduct of individuals.
 Formation of ethics is guided by our parents, our schools, our religion, and the media.
 Expatriate managers may face pressure to violate their personal ethics because they are away
from their ordinary social context and culture.
o Parent company may pressure managers to meet unrealistic goals that can only be
fulfilled by acting unethically.
Decision-Making Process

 Businesspeople may act unethically when they fail to ask, “Is this decision or action ethical?”
 Problems arise in processes that do not incorporate ethical considerations into business decision
making.
 Need to better understand how individuals make decisions that are ethical or unethical in an
organizational environment.
Organizational Culture

 Values and norms shared among an organization’s employees.

 Some organizational culture may not encourage people to think through ethical consequences of
decisions.
Unrealistic Performance Goals

 Pressure from parent company to meet unrealistic performance goals by cutting corners or acting
unethically.
Leadership

 Helps to establish the culture of an organization and set the examples that others follow.
 Employees often take cues from business leaders.
Societal Culture

 Cultures that emphasize individualism and uncertainty avoidance are more likely to stress ethical
behavior than cultures where masculinity and power distance are emphasized.

Philosophical Approaches to Ethics

Straw Men - Offer inappropriate guidelines for ethical decision making.
The Friedman Doctrine - Nobel Prize–winning economist Milton Friedman said, “the social
responsibility of business is to increase profits,” so long as the company stays within the rules of law.
Cultural Relativism

 Ethics are reflection of culture.

o When in Rome, do as the Romans do.

The Righteous Moralist

 Home-country standards of ethics should be followed in foreign countries.

 Typically associated with managers from developed nations.
 Criticized for its proponents going too far.
The Naïve Immoralist - If a manager of a multinational sees that firms from other nations are not
following ethical norms in a host nation, that manager should not either.
Utilitarian and Kantian Ethics
Utilitarian approaches to ethics:

 Philosophers David Hume, Jeremy Bentham, and John Stuart Mill.

 The moral worth of actions or practices is determined by their consequences.
o Actions are desirable if they lead to the best possible balance of good consequences over
bad consequences.
o Best decisions are those that produce the greatest good for the greatest number of people.

Drawbacks:

 Difficult to measure benefits, costs, and risks of the action.

 Fails to consider justice.
Kantian Ethics

 Based on the philosophy of Immanuel Kant.

 People should be treated as ends and never purely as means to the ends of others.
 People have dignity and need to be respected.
 Contemporary moral philosophers view Kantian ethics as incomplete.
o System has no place for moral sentiments such as sympathy or caring.
Rights Theories - Human beings have fundamental rights and privileges that transcend national borders
and cultures.

 Moral theorists argue that fundamental human rights form the basis for a moral compass that
managers should use in ethical decision making.
Universal Declaration of Human Rights.

 Adopted by the United Nations and ratified by almost every country.

 Lays down principles that should be adhered to irrespective of the culture.
Along with rights come obligations.

 We have the right to free speech and must respect the free speech of others.
 Obligations fall on more than one class of moral agents—any person or institution that is capable
of moral action.
o Includes governments and corporations.

Justice Theories - Focus on the attainment of a just distribution of economic goods and services.

 A just distribution is a distribution of goods and services that is considered fair and equitable
John Rawls argued that all economic goods and services should be distributed equally except when an
unequal distribution would work to everyone’s advantage.
 Impartiality is guaranteed by veil of ignorance.
 Difference principle.
360° View: Managerial Implications
Making Ethical Decisions Internationally
1. Hiring and promotion
 Hire and promote people with a strong sense of personal ethics.
 Businesses can give potential employees psychological tests and check with prior
employers regarding ethical behavior.
 Prospective employees should investigate the ethical climate in an organization prior to
taking a position.
2. Organizational culture and leadership
 Articulate values that place a strong emphasis on ethical behavior.
 Emphasize the importance of a code of ethics.
 Implement a system of incentives and rewards that recognize people who engage in
ethical behavior and sanction those who do not.
3. Decision-making processes
 Put decision-making processes in place that require people to consider the ethical
dimension of business decisions.
 Does the decision fall within the accepted values of standards that typically apply in the
organizational environment?
 Is there a willingness to see the decision communicated to all stakeholders affected by it?
 Would people close to me (family members, friends, colleagues) approve of the decision?
Five-step process to think through ethical problems:
Step 1: Identify which stakeholders a decision would affect and in what ways.

 Internal stakeholders.
 External stakeholders.
- Stakeholder analysis involves moral imagination—standing in the shoes of the stakeholder
and asking how a proposed decision might impact that stakeholder.
Step 2: Determine whether a proposed decision would violate the fundamental rights of any stakeholders.
Step 3: Establish moral intent—place moral concerns ahead of other concerns in cases where either the
fundamental rights of stakeholders or key moral principles have been violated.
Step 4: Engage in ethical behavior.
Step 5: Audit decisions to make sure they are consistent with ethical principles.
4. Ethics Officers
Institute ethical officers to:
 Assess the needs and risks that an ethics program must address.
 Develop and distribute a code of ethics.
 Conduct training programs for employees.
 Establish and maintain confidentiality of employees.
 Comply with government laws and regulations.
 Monitor and audit ethical conduct.
 Take action, where appropriate.
 Periodically reviewing and updating the code of ethics.

5. Moral Courage
 Enables managers to walk away from a decision that is profitable but unethical.
 Gives an employee the strength to say no to a superior who instructs employee to pursue
actions that are unethical.
 Gives employees the integrity to go public to the media and blow the whistle on
persistent unethical behavior in a company.

6. Corporate Social Responsibility (CSR)

 With power comes the social responsibility to give something back to the societies that
enable multinationals to grow and prosper.
 Advocates argue that businesses need to recognize their noblesse oblige.
 Power can be used in a positive way to increase social welfare, which is ethical, or used
in a manner that is ethically and morally suspect.

7. Sustainability
 Sustainable strategies help the firm make good profits without harming the environment
while acting in a socially responsible manner to stakeholders.
 Core idea: Organization’s actions do not exert a negative impact on the ability of future
generations to meet their own economic needs and actions impart long-run economic and
social benefits on stakeholders.
 Use precautionary principle when assessing a course of action.
 Do not precipitate or participate in a situation that results in a tragedy of the commons.