Som 354 Study Guide Chapters 1-4

KEY CONCEPTS FOR EXAMINATION ONE: CH 1- 4 CHAPTER ONE What is globalization? - The trend towards a more integrated global economic system - Refers to the shift towards a more integrated and interdependent world economy What are the effects of globalization? - Improvements in technology - Cars people drive - Food people eat - Jobs where people work - Clothes people wear What do global business managers need to know to manage in a global marketplace? - Countries differ so they need to know cultural differences, translations of language, religious differences and what the predominant religion is - International companies must work within the limits imposed by governmental intervention and the global trading system - International transactions require converting funds and being susceptible to exchange rate changes Globalization and its impact on national economies. Implications of drivers on globalization of markets and globalization of production What are global institutions? -

They manage, regulate, and police the global market place They promote the establishment of multinational treaties to govern the global business system o Examples:  World Trade Organization: responsible for policing the world trading system and ensuring the nations adhere to the rule established in WTO treaties  International Monetary Fund: maintains order in the international monetary system  World Bank: promotes economic development  United Nations: maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations

Globalization of markets: what is it? - The fact that in many industries historically distinct and separate national markets are merging into one huge global marketplace in which the tastes and

preferences of consumers in different nations are beginning to converge upon some global norms o Means markets are merging and products are coming from all over the world at cheaper costs and shipped to another country as well as people traveling around the world and the reduction of differences between cultures and people  Ex: Coca-Cola, McDonald’s hamburgers  Ex: Cheaper for roses to be grown in Ecuador and cut to be sold in New York 2 days later while still fresh Globalization of production: what is it? - Improvements in transportation technology have enabled firms to better respond to international customer demands - The tendency among many firms to source goods and services from different locations around the globe in an attempt to take advantage of national differences in the cost and quality of factors of production (such as land, labor, capital, and energy), thereby allowing them to compete more effectively against their rivals o Ex: Boeing, Lenovo - As a result of technology innovations, real costs of information processing and communication fell dramatically o Made it possible for a firm to create and manage a globally dispersed production system, further facilitate the globalization of production Drivers of globalization: - Reduction of trade barriers o Under the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws, and there is a push to cut tariffs on industrial goods, services, and agricultural products o Reduction of barriers has contributed to increased international trade, world output, and foreign direct investment (investing resources and business activities outside a firm’s home country) - Reduction of restrictions on foreign direct investment o After WWII, the industrialized counties of the West began removing barriers to the free flow of goods, services, and capital between nations o Under GATT (General Agreement on Tariffs and Trade—international treaty that committed signatories to lowering barriers to the free flow of good across national borders and led to WTO) over 100 nations negotiated further decreases in tariffs and made significant progress on the number of non-tariff issues - Technological change o This made globalization possible o Microprocessors and Telecommunications  Major advances in communication and information processing lowered cost of global communication and thus the cost of coordinating and controlling a global organization

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o The Internet and the Web  Web-based transactions have grown from virtually zero in 1994 to almost $7 trillion in 2004 o Transportation Technology  Most important developments are probably development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies transshipment from one mode of transport to another o Containerization  Reduction of shipping goods over long distances and before this moving shipments from one mode of transport to another was very labor intensive Regional trade agreements

What is the globalization debate? Pros/cons/supporters/opponents. - Is the shift toward a more integrated and interdependent global economy a good thing? o Critics  The gap between rich and poor has gotten wider and that the benefits of globalization have not been shared equally  Argue it will forever change the world in a negative way  The home country traditions, ethics, and  Jobs that could go to people at home are being lost to low-wage nations  Economic power is shifting away from national governments and toward supranational organizations such as the WTO, EU and UN  Free trade encourages firms from advanced nations to move manufacturing facilities to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous • Adhering to labor and environmental regulations significantly increases cost of manufacturing enterprises and puts them at competitive disadvantage in global market o Supporters 

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Supporters of free trade suggest that the actions of governments have made limited economic improvement in many countries Free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently

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Thus as the cost of production of goods goes down the prices to purchase goes down and thus results in more spending

What are the changing demographics of multinational companies? Of FDI? - A multinational enterprise is any business that has productive activities in two or more countries o Non-U.S. Multinationals  Expect the growth of new multinational enterprises from the world’s developing nations o The Rise of Mini-Multinationals  The number of small and medium sized companies is on the rise CHAPTER TWO Chapter 2: National Differences in Political Economy What is a political economy versus a political system? • Political Economy: The combination of the political, economic, and legal systems pertaining to a specific country • Political System: System of government in a nation, assessed according to: o The degree of emphasis upon collectivism versus individualism o Degree to which they are democratic versus totalitarian What is collectivism? Individualism? • Collectivism: A system that stresses the primacy of collective goals over individual goals o The needs of the society as a whole are generally viewed as more important than individual freedoms o Commonly feature state-owned enterprises and restricted markets  Asian Cultures and use of censorship • Individualism: A political philosophy that an individual should have freedom over his or her economic and political pursuits o Guarantees individual freedom and self-expression o Allowing the pursuit of self-interests as a means for achieving the best overall good for society o Typically accompanied by a free market system What is socialism? • A broad set of economic theories of social organization advocating public or state ownership and administration of the means of production and distribution of goods as well as compensation. As a political system whose basic ideals criticize the effects of industrialization and private ownership on society, countries with socialistic political systems are typically unfavorable to global businesses. • Communists generally believed that collectivism could only be achieved through revolution and totalitarian dictatorship, while social democrats worked to achieve the same goals by democratic means What is democracy? Totalitarianism and the four types of totalitarianism?

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Democracy: Political system in which the government is devised by its citizens, exercised either directly or through elected representatives o Most common is Representative Democracy, for which elected representatives vote on behalf of constituents • Totalitarianism: Form of government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited o Communist Totalitarianism: Advocates achieving socialism through totalitarian dictatorship  USSR o Theocratic Totalitarianism: Political power is monopolized by a party, group, or individual that governs according to religious principles  Iran, Afghanistan o Tribal Totalitarianism: A political party that represents the interests of particular tribe monopolizes power  African nations, Zimbabwe, Kenya o Right-Wing Totalitarianism: Individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism Fascism in Germany and Italy  Right-Wing Totalitarianism draws support from middle classes seeking to maintain economic and social status quo, while LeftWing stems from working class movements to eliminate class distinctions and redistribute wealth What are the three types of economic systems? • Market Economy: The types of goods and services, as well as quantities, produced by a country are determined by supply and demand  The U.S., China (to some extent), Singapore • Command Economy: The types and quantities of goods and services produced by a country, as well as sale prices, are all planned by the government  China, Cuba, North Korea, Libya, Iran • Mixed Economy: Includes some elements of a market economy and some elements of a command economy  The United States, India What are the three types of legal systems? Which countries use each type? • Differences in the structure of law can impact the attractiveness of a country as an investment site and/or market • Common Law System: Based on tradition, precedent, and custom  most of Great Britain’s former colonies, including the United States • Civil Law: Detailed set of laws organized into codes  found in over 80 countries including Germany, France, Japan, and Russia • Theocratic Law System: Laws based upon religious teachings  Islamic law is the most widely practiced theo system in the modern world Why are property rights important? Give examples. • Property Rights: The legal rights over the use to which a resource is implemented and the income generated by such resource o Very important for the functioning of business, but can be violated by either private action or public action

o Property rights typically protect the competitive advantages of companies or individuals who invented such products, procedures, or services from exploitation and declining margins o This property typical involves high R&D costs and skilled labor  Pharmaceutical companies, Biotechnology What is private action? Public action? What is the impact of corruption on business? • Private Action: Refers to theft, piracy, blackmail, and rent-seeking by private individuals or groups  KGB, Russian Mafia, Corruption in private sector • Public Action and Corruption: When public officials extort income or resources from property holders using various legal mechanisms including excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership with compensating the owners The United States and its use of unfair trade barriers such as quotas, lobbying, and eminent domain; China and its public officials exercising corruption • Corruption makes businesses less productive, draining private and public capital resources from much needed activities, such as research, funding for public works, employee salaries, improved facilities and equipment; furthermore, corruption disincentives firms to be competitive or innovative due to the lack of compensation for such activities What is Foreign Corrupt Practices Act? What is its effect on US companies doing business? • FCPA: It is a violation of United States law to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority o Requires all publicly traded countries to keep detailed records to identify if a violation of the act occurs o Grease Payments: Can bribe customs officers or government officials if you already have business operations with them, to maintain relationships o The effect of U.S. companies doing business under this agreement is trying to adhere to American cultural and business practices while respecting the customs of the nations within which business is also being conducted o Companies from the U.S. may have to partner with a foreign firm in order to help facilitate business transactions and acclimate to the country’s systems politically, legally, and socially What is intellectual property and why is it important to protect it? • Intellectual Property: Software, literary works, chemical formulas, processes, or anything that is a revenue producing mechanism created through intellectual activity o Patents: Documents giving the inventor of a new product or process exclusive rights to the manufacture, use, or sale of their invention for a specified period of time (typically 20 years)

o Copyrights: Exclusive legal rights for authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit (Valid for 20 years) o Trademarks: Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products (Good for as long as you use it) o Importance of intellectual property protection is the competitive advantage created from being the exclusive producer o If a system is replicable and others can legally make it, how do your capitalize from developing the idea first? o From an economic standpoint, the United States’ largest export is its intellectual capital and the property produced by it  If we were to forgo the property protection, other nations would replicate our exports more easily at lower prices and decline the value created by this intellectual property significantly  Pirated music and movies; pharmaceuticals, financial software and product ingenuity What are the three measures of economic development? (PLEASE NOTE: NOT ABSOLUTELY CERTAIN ON THIS QUESTION) • Based on the Human Development Index: o Life Expectancy o Education Attainment o Standard of Living (Whether average incomes are sufficient to meet the basic needs of life in that country) How can political economy impact economic development? How can countries improve conditions for economic development? • Argument that innovation and entrepreneurship are the engines of growth  Economic freedom associated with a market economy is argued to create greater incentives for innovation and EEE over any other economy type • Strong legal protection of property rights creates a business environment conducive to innovation, EEE, economic growth, and attracting business to operate within its borders • Democratic regimes seem more appropriate for long-term economic growth than a dictatorship, fostering business interests and individual wealth creation • Countries that invest more in the education of its younger generations develop faster economically and significantly improve their standards of living through wage increases from more specialized and skilled professions Is the world becoming more democratic or communistic? Free market or command market? • Since the late 1980s, a wave of democratic revolutions swept the world, from the collapse of the Chinese communist regime and across Asia, to Brazil and South America, and across Europe • There has been a move away from centrally planned and mixed economies toward free markets

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Many totalitarian regimes failed to deliver economic progress to the majority of their population • Access to new information and communication technologies (the internet) have limited the abilities to maintain state control over restricting access to uncensored information • The rapidly growing middle and working classes within even emerging economies who have pushed for democratic and business-friendly reforms • However, as a result of the current recession, even capitalistic nations such as the United States are implementing socialistic policies aimed towards redistributing wealth from corporations to the poor and working class, as well as the development of centralized programs to move its economy back on track • Additionally, Venezuela and Russia have been taking increasing steps along with Cuba and even China and Iran to maintain their nationalized oil industries and control over their nation’s economies What three activities move a country toward a more market based system? • Deregulation: Removing the restrictions over free operations and flow of markets • Privatization: Transfers the ownership of state property into the hands of private investors (and away from the tax payers and government budget) • Legal Enforcement of Property Rights: Without the legal protection and enforcement of property rights, the incentive to engage in economic activity can be substantially reduced by private and public entities that expropriate the profits generated by the efforts of private sector entrepreneurs What are the three types of risk in investing in a country? • Political Risk: Likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise • Economic Risk: Likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affects the profit and other goals of a business enterprise • Legal Risk: Likelihood that a trading partner will opportunistically break a contract or expropriate property rights What is a first mover advantage? • First Mover Advantage: Advantages that accrue to early entrants into a market o Help establish loyalty and experience in a country How do you assess the overall attractiveness of a market? • The overall attractiveness of a country as a potential market and/or investment site for international business depends on balancing the benefits, costs, and risks associated with doing business in that country CHAPTER 3 Cross cultural literacy- understanding of how cultural differences across and within nations can affect the way business is practiced.

Culture- system of values and norms that are shared among a group of people and that when taken together constitute a design for living. Values- abstract ideas about what a group believes to be good, right, and desirable. - reflected in the political and economic systems of a society. Norms- the social rules and guidelines that prescribe appropriate behavior in particular ssituations. Society- a group of people who share a common set of values and norms. Determinants of Culture- Social structure and religion clearly influence the values and norms of a society, the values and norms of a society can influence social structure and religion. Group- association of 2 or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each others behavior. Ex: human social life Individual- the basic building block of social organization. - many western societies emphasize individual achievement. - Emphasis on entrepreneurship Social Stratification- the hierarchical categories within a society, defined on the basis of such elements as family background, income, and occupation. Social Structure- degree to which the basic unit of social organization is the individual, as opposed to the group - degree to which a society is stratified into classes or castes. Social mobility- 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. The change in that position is usually not possible during an individuals lifetime. - class system- less rigid form of social stratification in which social mobility is possible depending on a persons achievements or even just luck. Class consciousness- people tend to perceive themselves in terms of their class background, shaping how they relate with members of other classes. - emerged due to lack of class mobility and the differences between classes. - More difficult for companies based in countries to establish a competitive advantage in the global economy. Religion- system of shared believes and rituals that are concerned with the realm of the sacred.

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Christianity is the largest religion Islam is the second largest- unconditional acceptance of the uniqueness, power, and authority of god and hope of admission to paradise.

Ethical System- set of moral principles, or values, that are used to guide and shape behavior. Spoken language- structures the way we perceive the world and defines culture. - English is the most widely spoken language in the world and for international business. Unspoken language- communicating with nonverbal cues. - ex; raising of eyebrows, smile - failure to understand the nonverbal cues of another culture can lead to a communication failure. - personal space- comfortable amount of distance between you and someone you are talking to. Education- medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society. - from an international business perspective, one important aspect of education is its role as a determinant of national competitive advantage. - General education level of a country is also a good index of the kind of products that might sell in a country and of the type of promotional material that should be used. Geert Hofstede- famous study of how culture relates to values in the workplace. - collected data on employee attitudes and values from many individuals. - Power distance- how society deals with the face that people are unequal in physical and intellectual capabilities and how they grow into inequalities of power and wealth. - Individualism vs. collectivism- focused on relationship between the individual and his or her fellows. Society teaches individuals to prize personal achievement or to conversely look after the interests of their collective first. - Uncertainty avoidance- cultures socialize members to accept ambiguous situations and to tolerate uncertainty. - Masculinity vs. femininity- relationship between gender and work roles. - Hofstede’s results showed that many people believe Americans are more individualistic and egalitarian than the Japanese. Ethnocentrism- belief in the superiority of ones own ethnic group or culture.

Chapter Four Study Guide VOCABULARY

Ethics – refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession or the actions of an organization. Business Ethics – the accepted principles of right or wrong governing the conduct of business people Ethics Strategy – a strategy, or course of action, that does not violate these accepted principles Ethical Dilemma – situations in which none of the available alternatives seems ethically acceptable Code of Ethics - a formal statement of the ethical priorities a business adheres to. Leaders in the business should give life and meaning to the code of ethics by repeatedly emphasizing their importance, and then acting on them. The business should put in place a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not. Internal Stakeholders - people who work for or who own the business such as employees, the board of directors, and stockholders. External Stakeholders - individuals or groups who have some claim on a firm such as customers, suppliers, and unions. Moral Courage – there was no definition for this but I assume it just means the ability to act on what you think is moral and ethical Tragedy of the Commons – a resource held in common by all, but owned by no one, is overused by individuals in its degradation (the environment) Foreign Corrupt Practices Act of 1977 – outlawed the practice of paying bribes to foreign government officials in order to gain business Social Responsibility - idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences Organization Culture - the values and norms that are shared among employees of an organization ^Firms that have organizational culture and don’t promote business culture may have unethical behavior Rights Based Theories - recognize that human beings have fundamental rights and privileges that transcend national boundaries and culture

Justice Based Theories - focus on the attainment of a just distribution of economic goods and services Other Topics Covered: Most common ethical issues in business: 1. employment practices 2. human rights 3. environmental regulations 4. corruption 5. moral obligation of multinational companies OECD– (Organization for Economic Cooperation and Development) - adopted a Convention on Comabting Bribery of Foreign Public Officials in International Business Transactions in 1997 which obliges member states to make the bribery of foreign public officials a criminal offense Some economists suggest that the practice of giving bribes might be the price that must be paid to do a greater good Personal Ethics vs. Business Ethics - Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals) - Expatriates (someone who leaves their country to work in another) may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture, and they are psychologically and geographically distant from the parent company Causes of Unethical Behavior

Philosophical Approaches to Ethics

Friedman Doctrine - the only social responsibility of business is to increase profits, so long as the company stays within the rules of law Cultural Relativism - ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate, or in other words, “when in Rome, do as the Romans do” Righteous moralist - a multinational’s home country standards of ethics are the appropriate ones for companies to follow in foreign countries Naïve Immoralist – they believe that 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 Ethics - 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. Kantian Ethics - based on the philosophy of Immanuel Kant who argued that people should be treated as ends and never purely as means to the ends of others Implications for Managers: Firms that ensure ethical issues are considered in business decisions: • • • • •

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 makes sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in manner that is consistent with that rhetoric put decision making processes in place that require people to consider the ethical dimension of business decisions develop moral courage

5 Step Ethical Decision making process

1. Identify which stakeholders (the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company) a decision would affect and in what ways 2. Determine whether a proposed decision would violate the fundamental rights of any stakeholders 3. Establish moral intent (the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated) 4. Engage in ethical behavior 5. Audit its decisions, reviewing them to make sure that they were consistent with ethical principles Hiring Ethics - Businesses should strive to identify and hire people with a strong sense of personal ethics. Prospective employees should find out as much as they can about the ethical climate in an organization