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MGT321 Intro to International Business

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Globalization
Chapter 1

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
1

Understand what is meant by the term globalization.

Recognize the main drivers of globalization.

Describe the changing nature of the global economy.

Explain the main arguments in the debate over the
impact of globalization.

Understand how the process of globalization is
creating opportunities and challenges for
management practice.

What Is Globalization?

The Globalization of Markets
• Refers to 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.

What Is Globalization?

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.

What Is Globalization?
The Globalization of Production

continued

• Robert Reich and “global products.”
• Impediments prevent optimal dispersion of activities:
• Formal and informal barriers to trade.
• Barriers to foreign direct investment.
• Transportation costs.
• Political and economic risk.
• Challenge of coordinating globally dispersed supply chain.

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.

The Emergence of Global Institutions

The World Trade Organization
• 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.

The Emergence of Global Institutions

The International Monetary Fund
• 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 Emergence of Global Institutions

The World Bank
• 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.

The Emergence of Global Institutions

The United Nations
• Promotes peace through international cooperation and
collective security.

• 193 member countries.
• UN Charter – four 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.
© McGraw Hill

The Emergence of Global Institutions

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.

Drivers of Globalization

Declining Trade and Investment Barriers
• 1920s to 1930s: Many barriers to international trade and
foreign direct investment.
• International trade: when a firm exports goods or services to
consumers in another country.
• Foreign direct investment: when a firm invests resources in business
activities outside its home country.

• GATT lowered barriers.
• Uruguay Round extended GATT and established WTO.

Drivers of Globalization

Declining Trade and Investment Barriers

continued

• 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.

Figure 1.1 Value of world merchandised trade and
world production 1960 to 2019

Access the text alternative for slide images

Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.

Drivers of Globalization

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.

Drivers of Globalization
Role of Technological Change

continued

• Transportation Technology.
• Commercial jets, superfreighters, 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
1

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.
• China and BRIC countries growing more rapidly.

• Developing nations may account for more than 60 percent of world
economic activity by 2025.

The Changing Demographics of the
Global Economy
2

The Changing Foreign Direct Investment Picture
• As barriers to the free flow of goods and services fell, nonU.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.

Figure 1.2 FDI outward stock outward as a
percentage of GDP

Access the text alternative for slide images

Sources: OECD data 2019, World Development Indicators 2019, UNCTAD data base, 2019

Figure 1.3 FDI inflows (in millions of dollars)

Access the text alternative for slide images

Source: United Nations Conference on Trade and Development, World Investment Report 2019. (Data for 2019–2020 are forecast.)

The Changing Demographics of the
Global Economy
3

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.
• In 2003, 38.8 percent of the world’s 2000 largest multinationals were
U.S. firms.
• By 2019, 28.8 percent of the top 2000 global firms were U.S.
multinationals, a drop of 201 firms.

Figure 1.4 National share of the largest
2,000 multinational corporations in 2019

Access the text alternative for slide images

Source: Forbes Global 2000 in 2019

The Changing Demographics of the
Global Economy
4

The Changing Nature of the Multinational Enterprise
continued

• The Rise of Mini-Multinationals.
• Growth in the number of medium- and small-sized businesses.
• Internet is lowering barriers that smaller firms faced in international
trade.

The Changing Demographics of the
Global Economy
5

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.

The Changing Demographics of the
Global Economy
6

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:
• Countries may pull back.
• Risks are high.

The Globalization Debate

Antiglobalization Protests
• Began with 1999 protests at WTO meeting in Seattle.
• Protestors now typically show up at major meetings of
global institutions.
• Protestors believe globalization causes detrimental effects
on living standards, wage rates, and the environment.
• Theory and evidence suggest these fears may be exaggerated.

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.
•

Destroy manufacturing jobs in wealthy advanced economies.

• Services also being outsourced:
•

Contributing to higher unemployment and lower living standards in their home
nations.

The Globalization Debate
Globalization, Jobs, and Income

continued

• 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.
•

As a result, the whole economy is better off.

•

Companies can reduce their cost structure, and consumers benefit.

The Globalization Debate
Globalization, Jobs, and Income

continued

• Data suggests the share of labor in national income has
declined over the past two decades.
• Share of national income by skilled labor has increased.
• 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.
• Technological change has a bigger impact than globalization on
declining share of national income enjoyed by labor.
© McGraw Hill

The Globalization Debate

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.

Figure 1.5 Income levels and
environmental pollution

Access the text alternative for slide images

Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018

The Globalization Debate

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 nationstates collectively agree to grant.
• These organizations exist to serve the collective interests of member
states.

The Globalization Debate

Globalization and the World’s Poor
• Critics argue gap between the rich and poor nations has
gotten wider.
• Totalitarian governments.
• Poor economic policies.
• Corruption and lack of property rights.
• Expanding populations in developing countries.
• Debt burdens.

• Supporters argue best way to change the situation is to
lower barriers to trade and investment and promote free
market policies.
© McGraw Hill

Figure 1.6 Percentage of the world’s population
living in poverty during 1981 to 2015

Access the text alternative for slide images
© McGraw Hill

Source: World Bank Data Base on Poverty and Equity, World Development Indicators, 2019

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.
• Countries are different.

• Range of problems is wider and problems more complex.
• Must find ways to work within limits imposed by government.
• Transactions involve converting money into different currencies.

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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything. ®

National Differences
in Political,
Economic, and Legal
Systems
Chapter 2

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
1

Understand how the political systems of countries
differ.

Understand how the economic systems of countries
differ.

Understand how the legal systems of countries differ.

Explain the implications for management practice of
national differences in political economy.

Introduction
Political Economy
• Political, economic, and legal systems of a country.
• These systems are interdependent.
• They influence each other.

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.

Political Systems

Collectivism and Individualism
• Collectivism:
• The needs of society as a whole are generally viewed as being more
important than individual freedoms.

• Socialism:
• Public ownership of the means of production for the common good.

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

Privatization.

Political Systems

Collectivism and Individualism

continued

• 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.
• Two tenets:
•

Guarantee of individual freedom and self-expression.

•

Welfare of society best served by letting people pursue their own economic selfinterest.

Political Systems

Democracy and Totalitarianism
• Democracy: government is by the people, exercised either
directly or through elected representatives.

• Totalitarianism: one person or political party exercises
absolute control over all spheres of human life and
prohibits opposing political parties.
• Democracy and individualism go hand in hand, as do the
communist version of collectivism and totalitarianism.

Political Systems

Democracy and Totalitarianism

continued

• Democracy:
• Representative democracy: citizens periodically elect individuals to
represent them.
• Includes a multitude of safeguards that are typically based in
constitutional law, including:
•

Freedom of expression.

•

Free media.

•

Universal adult suffrage.

•

Fair court system.

Political Systems

Democracy and Totalitarianism

continued

• Totalitarianism:
• Communist totalitarianism: socialism can be achieved only through a
totalitarian dictatorship.
• Theocratic totalitarianism: monopolized by a party, group, or
individual that governs according to religious principles.
• Tribal totalitarianism: a party, group, or individual that represents the
interests of a particular tribe monopolizes political power.
• 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.

Political Systems

Democracy and Totalitarianism

continued

• 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.

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.

Economic Systems

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.

Economic Systems

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.

Legal Systems

Legal systems of a country refer to:
• Rules or laws that regulate behavior.
• Process through which laws are enforced.
• Process through which redress for grievances is obtained.
• Influenced by the prevailing political system.

Legal Systems

Different Legal Systems
• Common law:
• 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.

• Theocratic law:
• Based on religious teachings.
• Most common is Islamic law.
© McGraw Hill

Legal Systems

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.

Legal Systems

Differences in Contract Law

continued

• 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.

Legal Systems

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.

Legal Systems

Property Rights and Corruption

continued

• 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.

Figure 2.1 Rankings of corruption by country, 2018

Access the text alternative for slide images.
© McGraw Hill

Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2018.

Legal Systems

Property Rights and Corruption

continued

• 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):
• Bribery of a foreign public official is a criminal offense.
• Allows for facilitating or expediting payments.

Legal Systems

The Protection of Intellectual Property
• Refers to property that is the product of intellectual activity,
such as computer software, a screenplay, a music score.
• 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.
• Paris Convention for the Protection of Industrial Property.

Legal Systems

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.
• Can be much greater if a product does not conform to safety
standards.
• Criminal and civil laws apply.
• Raises ethical issues when doing business abroad.

Focus on Managerial Implications
The Macro Environment Influences Market
Attractiveness
• Two broad implications:
• 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.
•

A country with democratic political institutions, market-based economic system, and
strong legal system clearly more attractive to do business in.

Because learning changes everything.

www.mheducation.com

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything. ®

Differences
in Culture
Chapter 4

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
1

Explain what is meant by the culture of a society.

Identify the forces that lead to differences in social
culture.

Identify the business and economic implications of
differences in culture.

Recognize how differences in social culture influence
values in business.

Demonstrate an appreciation for the economic and
business implications of cultural change.

Introduction
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 the way
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.

What Is Culture?

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.

What Is Culture?
Values and Norms

continued

• Norms:
• Social rules that govern people’s actions toward one another.

• Folkways are routine conventions of everyday life.
•

Examples: appropriate dress code, good social manners.

•

Include rituals and symbolic behavior.

• Mores are norms seen as central to functioning of society.
•

Example: laws against theft.

•

Have greater moral significance than other norms.

What Is Culture?

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.

What Is Culture?

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

• Political philosophy.
• Economic philosophy.
• Education.

• Language.
• Social structure.

Figure 4.1 Determinants of culture

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.

Social Structure

Individuals and Groups
• The Individual:
• In many Western societies, the individual is the basic building block
of social organization.
•

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.
•

The primary unit of social organization in many non-Western societies.

•

Importance of group membership/identification.

Social Structure

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.

• Four basic principles:
• Trait of society.

• Carries over into next generation.
• Generally universal but variable.
• Involves not just inequality but also beliefs.

Social Structure
Social Stratification

continued

• Social Mobility:
• Extent to which individuals can move out of the strata into which they
are born.
•

Varies among societies.

• Caste system is a closed system where social position is determined
by family and change is usually not possible.
•

India has four main castes.

• Class system is less rigid, and position can be changed through
achievement and luck.
•

United Kingdom has a more rigid class structure than U.S.

Social Structure
Social Stratification

continued

• 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:
1.

Christianity.

Islam.

Hinduism.

Buddhism.

Map 4.1 World religions

Access the text alternative for slide images.
© McGraw Hill

Source: “Map 14,” in Allen, John L., and Sutton, Christopher J., Student Atlas of World Politics, 10th ed. New York, NY: McGraw-Hill Companies, Inc., 2013

Religious and Ethical Systems

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 most important
economic implications.
• Max Weber, Protestant ethics, and the spirit of capitalism.

Religious and Ethical Systems

Islam
• The world’s second largest religion,

• Monotheistic, one true omnipotent God (Allah).
• Islamic fundamentalism:
• Associated in the West with militants, terrorists.

• 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.

Religious and Ethical Systems

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.
© McGraw Hill

Religious and Ethical Systems

Buddhism
• Has about 535 million followers.
•

Stresses spiritual growth and the afterlife, rather than
achievement while in this world.

• Economic implications of Buddhism:
• Does not emphasize wealth creation.

• Does not support the caste system, individuals do have some
mobility and can work with individuals from different classes.
• Recently, the “Zen” orientation from Buddhism has been introduced
into business in the Western world.

Religious and Ethical Systems

Confucianism
• Practiced mainly in China, Korea, 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.
•

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.
• Mandarin (Chinese) is mother tongue of the largest number of
people.
• The most widely-spoken language in the world is English.
•

English is becoming the language of international business.

Language

Unspoken Language
• Nonverbal communication refers to the use of nonverbal
cues to communicate meaning.
• Often culturally bound.
• 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.
• The “hidden curriculum” in schools teaches respect for others,
obedience to authority, honesty, neatness, timeliness.

• Provides a national competitive advantage.
• Creates a pool of skilled and knowledgeable workers.
• Represents a good index of what products might sell in a country.

Culture and Business

Culture and values in the workplace 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 the individual and his or her fellows.
• Uncertainty avoidance measures the extent to which different
cultures socialized their members into accepting ambiguous
situations and tolerating uncertainty.

Culture and Business

• Hofstede’s dimensions of culture: continued
• 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.
•

Indulgence refers to a society that allows relatively free gratification of basic and
natural human drives related to enjoying life and having fun.

•

Restraint refers to a society that suppresses gratification of needs and regulates it
by means of strict social norms.

Culture and Business

• Hofstede’s dimensions of culture: continued
• 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.

Culture and Business

• 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.

Culture and Business

Global Leadership and Organizational Behavior
Effectiveness (GLOBE) instrument:
• A leader’s effectiveness is contextual.
• Embedded in the societal and organizational norms, values, and
beliefs of the people being led.

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

Culture and Business

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.
• In the 1960s, women in management was never heard of
while today it is a welcomed reality.

• There appears to be a move toward greater individualism
in Japan.
• Culture may change as a society becomes wealthier.

• Also evidence of countertrends:
• Shift toward Islamic fundamentalism in some countries.
• Separatist movements in Canada, Russia, United Kingdom.

Focus on 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 Americans tend to be informal and have a
different attitude toward time—these can be misconstrued in an
international business situation.

Focus on Managerial Implications
Cultural Literacy and Competitive Advantage

continued

• 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.
•

Also, Japan less supportive of entrepreneurial activity.

Focus on Managerial Implications
Cultural Literacy and Competitive Advantage

continued

• Connection between culture and competitive advantage
important for two reasons.
• Suggests which countries are likely to produce the most viable
competitors.
• Has important business implications for the choice of countries in
which to locate production facilities and do business.

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Ethics, Corporate
Social
Responsibility, and
Sustainability
Chapter 5

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
5-1

Understand the ethical, corporate social responsibility, and
sustainability issues faced by international businesses.

5-2

Recognize an ethical, corporate social responsibility, and/or
sustainability dilemma.

5-3

Identify the causes of unethical behavior by managers as they
relate to business, corporate social responsibility, or sustainability.

5-4

Describe the different philosophical approaches to business ethics
that apply globally.

5-5

Explain how global managers can incorporate ethical
considerations into their decision making in general, as well as
corporate social responsibility and sustainability initiatives.

Introduction
Ethics, corporate social responsibility, and
sustainability are “social” issues that arise frequently
in international business.
• Ethics are the core starting point.
• Business ethics are the accepted principles of right or wrong that
govern the conduct of businesspeople.
• 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.

Ethics and International Business

Employment Practices
• Suppose work conditions in a host nation are inferior to
those in a multinational’s home nation.

• Which standards should apply?
• Home or host nation or something between?

• Nike case:
• Nike did not break the law, but the case raised questions regarding
the ethics of using sweatshop labor.

Ethics and International Business
Employment Practices

continued

• 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.

Ethics and International Business

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.

Ethics and International Business
Human Rights

continued

• 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.

Ethics and International Business
Human Rights

continued

• 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 Pollution More Evident in
Some Nations

People wearing
breathing masks at
Tian’anmen Square
in China’s capital
city, Beijing.

Source: Kevin Frayer/Getty Images News/Getty Images

Ethics and International Business

Environmental Pollution
• Problems occur when environmental regulations differ
between host nations and home nation.
• 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 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.

• Is it ethical for a company to escape regulations by moving
production to a nation with lax regulations?
© McGraw Hill

Ethics and International Business

Corruption
• Corruption has been a problem in almost every society in
history and continues to be one 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.”

• The Convention on Combating Bribery of Foreign Public
Official in International Business Transactions.
• Makes the bribery of foreign officials a criminal offense.

Ethics and International Business
Corruption

continued

• Ethical implications of corruption:
• Are bribes the price to pay to do a greater good?

• Do bribes reduce businesses’ incentive to invest?

• 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?
• Pressure from customers and stakeholders to be transparent in
ethical decision making.
• No universal worldwide agreement about what constitutes accepted
ethical principles.

• Ethical dilemmas are situations in which none of the
available alternatives seem ethically acceptable.
© McGraw Hill

Figure 5.1 Determinants of ethical
behavior

Roots of Unethical Behavior
Why do managers behave unethically?
• Six determinants of ethical behavior:
• Personal ethics.

• Decision-making processes.
• Organizational culture.
• Unrealistic performance goals.

• Leadership.
• Societal culture.

Roots of Unethical Behavior

Personal Ethics
• The 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.
• Parent company may pressure managers to meet unrealistic goals
that can only be fulfilled by acting unethically.

Roots of Unethical Behavior

Decision-Making Processes
• 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.

Roots of Unethical Behavior

Organizational Culture
• The values and norms shared among an organization’s
employees.

• Culture in some organizations does 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.

Roots of Unethical Behavior

Leadership
• Helps to establish the culture of an organization and set
the examples that others follow.

• Employees often take their cue 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―“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.
•

When in Rome, do as the Romans do.

Philosophical Approaches to Ethics
Straw Men

continued

• 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.

• 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.

Philosophical Approaches to Ethics

Utilitarian and Kantian Ethics
• Utilitarian approaches to ethics:
• Philosophers David Hume, Jeremy Bentham, and John Stuart Mill.

• Actions are desirable if they lead to the best possible balance of
good consequences over bad consequences.
• Best decisions are those that produce the greatest good for the
greatest number of people.
• Drawbacks:
•

Difficult to measure benefits, costs, and risks of an action.

•

It fails to consider justice.

Philosophical Approaches to Ethics
Utilitarian and Kantian Ethics

continued

• 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.
•

System has no place for moral sentiments such as sympathy or caring.

Philosophical Approaches to Ethics

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 can 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 in which one is doing business.

Philosophical Approaches to Ethics
Rights Theories

continued

• 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.
•

This includes governments and corporations.

Philosophical Approaches to Ethics

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.
• Veil of ignorance.
• Difference principle.

Focus on Managerial Implications

Making Ethical Decisions Internationally
1. Hiring and Promotion:

•

Hire and promote people with a well-grounded sense of
personal ethics.

•

Refrain from promoting individuals who have acted
unethically.

•

Try to hire only people with strong ethics.

•

Prospective employees should find out as much as they can
about the ethical climate in an organization prior to taking a
position.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

2. Organizational Culture and Leadership:

•

Build an organizational culture that places a high value on
ethical behavior.

•

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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

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?

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

• 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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

• Five-step process to think through ethical problems continued
• 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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

6. Corporate Social Responsibility:

•

Multinationals have the social responsibility to give
something back to the societies that enable them to grow
and prosper.

•

Advocates argue that businesses need to recognize their
noblesse oblige and give something back to the societies
that have made their success possible.

•

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.

Focus on Managerial Implications
Making Ethical Decisions Internationally

continued

7. Sustainability:

•

Pursue sustainable strategies that not only help the firm make
good profits but do so without harming the environment.

•

Core idea is that an organization’s actions do not exert a
negative impact on the ability of future generations to meet
their own economic needs.

•

Actions impart long-run economic and social benefits on
stakeholders.

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International
Trade
Theory
Chapter 6

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
6-1

Understand why nations trade with each other.

6-2

Summarize the different theories explaining trade flows between
nations.

6-3

Recognize why many economists believe that unrestricted free
trade between nations will raise the economic welfare of countries
that participate in a free trade system.

6-4

Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage
in certain industries.

6-5

Understand the important implications that international trade
theory holds for management practice.

An Overview of Trade Theory

Free Trade
• 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.
• Adam Smith’s theory of absolute advantage.
• David Ricardo’s theory of comparative advantage.

• Heckscher-Ohlin theory.

An Overview of Trade Theory

The Benefits of Trade
• Trade theories show why some international trade is
beneficial even for products a country can produce itself.
• Allows specialization.

• Limits on imports are often in the interests of domestic
producers but not domestic consumers.

An Overview of Trade Theory

The Pattern of International Trade
• Much of the observed pattern of international trade is
difficult to explain.
• Ricardo’s theory of comparative advantage focuses on differences in
labor productivity.
• Heckscher-Ohlin theory focuses on factors of production.
• Vernon’s product life-cycle theory focuses on production location
changes as products become more widely accepted.
• Krugman’s new trade theory focuses on first-mover advantages.

Competitive Advantage

A Rolex Group logo sits on display above a luxury
wristwatch store in Vienna, Austria.

Source: ©Bloomberg/Bloomberg/Getty Images

An Overview of Trade Theory

Trade Theory and Government Policy
• Mercantilism advocates government involvement in
promoting exports and limiting imports.

• Smith, Ricardo, and Heckscher-Ohlin:
• Argument for unrestricted free trade.

• New trade theory and Porter:
• Justify limited government intervention for certain export-oriented
industries.

Mercantilism
Mercantilism
• Emerged in 16th century England.
• Gold and silver are mainstays of national wealth.

• 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) The Wealth of Nations
• Attacked the mercantilist assumption of zero-sum game.

• Promoted absolute advantage:
• Country has an absolute advantage in producing a product when it is
more efficient than any other country at 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.
• Both countries benefit from specialization and trade.

Figure 6.1 The theory of absolute advantage

Access the text alternative for slide images
© McGraw Hill

Comparative Advantage

David Ricardo (1817) Principles of Political

Economy
• Promoted comparative advantage.
• A country should specialize in the production of those goods that it
produces most efficiently and buy the goods that it produces less
efficiently from other countries, even if it can produce those goods
more efficiently itself.

Comparative Advantage

The Gains from Trade
• Potential world production is greater with unrestricted free
trade than it is with restricted trade.

• The theory of comparative advantage suggests that trade
is a positive-sum game in which all countries that
participate realize economic gains.

Comparative Advantage

Qualifications and Assumptions
• Simple world with two countries and two goods.
• No transportation costs.
• No differences in price of resources.

• Resources can move freely.
• Constant returns to scale.
• Each country has a fixed stock of resources and free
trade does not change the efficiency with which a country
uses its resources.
• No effects of trade on income distribution within a country.
© McGraw Hill

Comparative Advantage

Extensions of the Ricardian Model
• Immobile Resources:
• Resources do not always move easily from one economic activity to
another.
• Political opposition to the adoption of a free trade regime typically
comes from those whose jobs are most at risk.

Comparative Advantage

Extensions of the Ricardian Model

continued

• Diminishing Returns:
• Comparative advantage model assumes constant returns to
specialization.
• More realistic to assume diminishing returns to specialization.
•

Not all resources are the same quality.

•

Different goods use resources in different proportions.

Comparative Advantage

Extensions of the Ricardian Model

continued

• Dynamic Effects and Economic Growth:
• Trade can result in two types of dynamic gains:
1. Free trade might increase a country’s stock of resources as increased supplies of
labor and capital from abroad become available for use within the country.
2. Free trade might also increase the efficiency with which a country uses its
resources.

• Dynamic gains in both the stock of a country’s resources and the
efficiency with which resources are utilized will cause a country’s
PPF to shift outward.

Figure 6.4 The influence of free trade on the PPF

Comparative Advantage

Extensions of the Ricardian Model

continued

• Trade, Jobs, and Wages: The Samuelson Critique.
• What happens when a rich country (U.S.) enters into a free trade
agreement with a poor country (China) that rapidly improves its
productivity after the introduction of a free trade regime?
• Lower prices may not make up for lower wages in the U.S.
• Concerned with offshoring of service jobs.
• Historically, free trade has benefited wealthy countries.
• Introducing protectionist measures may be harmful to U.S.

Comparative Advantage

Extensions of the Ricardian Model

continued

• Evidence for the Link between Trade and Growth.
• Countries that adopt a more open stance toward international trade
enjoy higher growth rates than those that close their economies to
trade.
• Sachs and Warner created a measure of how “open” to international
trade an economy was.

Heckscher-Ohlin Theory

Factor Endowments
• Comparative advantage arises from differences in national
factor endowments.
• The extent to which a country is endowed with resources such as
land, labor, and capital.

• Countries will export those goods that make intensive use
of factors that are locally abundant.
• Countries will also import goods that make intensive use
of factors that are locally scarce.

Heckscher-Ohlin Theory

The Leontief Paradox
• Raised questions about the validity of the HeckscherOhlin theory.

• Found that U.S. exports were less capital intensive than
U.S. imports.

The Product Life-Cycle Theory

Raymond Vernon proposed life-cycle theory in the
mid-1960s.
• Most new products were developed and first sold in the
U.S.

• The wealth and size of the U.S. market gave U.S. firms a
strong incentive to develop new consumer products.
• The high cost of U.S. labor gave U.S. firms an incentive to
develop cost-saving process innovations.
• Over time, demand grows in other countries, and price
becomes the main competitive weapon.

The Product Life-Cycle Theory

Product Life-Cycle Theory in the Twenty-First
Century
• Historically, an accurate theory.
• Now seems ethnocentric and increasingly dated.

New Trade Theory

Economies of Scale
• Cost reductions associated with large-scale production.
• The ability of firms to gain economies of scale can have
important implications for international trade.
• Trade can increase the variety of goods available to consumers and
decrease the average cost of those goods.
• In those industries in which the output required to attain economies
of scale represents a significant proportion of total world demand, the
global market may be able to support only a small number of
enterprises.

New Trade Theory

Increasing Product Variety and Reducing Costs
• What would happen in a world without trade?
• The variety of goods that a country can produce, and the scale of
production are limited by the size of the market.

• What happens in a world with trade?
• Individual national markets are combined into a larger world market.

• Each nation can increase the variety of goods available to its
consumers and lower the costs of those goods.

New Trade Theory

Economies of Scale, First-Mover Advantages, and
the Pattern of Trade
• First-mover advantages:
• Economic and strategic advantages accruing to the first to enter a
market.
• Can gain a scale-based cost advantage that later entrants find
almost impossible to match.

New Trade Theory

Implications of New Trade Theory
• Nations may benefit from trade even when they do not
differ in resource endowments or technology.

• A country may predominate in the export of a good simply
because it was lucky enough to have one or more firms
among the first to produce that good.
• Useful in explaining trade patterns.
• Luck, entrepreneurship, and innovation give a firm firstmover advantages.

National Competitive Advantage: Porter’s
Diamond
1

Porter believed existing theories only told part of the
story.
• Wanted to explain why a nation achieves international
success in a particular industry.

• Four broad attributes of a nation shape the environment in
which local firms compete:
1. Factor endowments.
2. Demand conditions.
3. Related and supporting industries.
4. Firm strategy, structure, and rivalry.

Figure 6.5 The determinants of national
competitive advantage: Porter’s diamond

Access the text alternative for slide images
© McGraw Hill

Source: Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990; republished with a new introduction, 1998), p. 72.

National Competitive Advantage: Porter’s
Diamond
2

Porter’s four attributes constitute a diamond.
• Firms are most likely to succeed in industries or industry
segments where the diamond is most favorable.
• The diamond is a mutually reinforcing system.

• Two additional variables can influence the national diamond.
1. Chance.
2. Government.

National Competitive Advantage: Porter’s
Diamond
3

Factor Endowments
• Basic factors:
• Natural resources, climate, location, demographic.

• Advanced factors:
• Communication infrastructure, sophisticated and skilled labor,
research facilities, and technological know-how.

• Advanced factors are a product of investment by individuals,
companies, and governments.

National Competitive Advantage: Porter’s
Diamond
4

Demand Conditions
• Firms gain competitive advantage if their domestic
consumers are sophisticated and demanding.

Related and Supporting Industries
• The benefits of investments in advanced factors of
production by related and supporting industries can spill
over into an industry, thereby helping it achieve a strong
competitive position internationally.

National Competitive Advantage: Porter’s
Diamond
5

Firm Strategy, Structure, and Rivalry
• Different nations are characterized by different
management ideologies, which may or may not help them
build national competitive advantage.
• There is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive
advantage in an industry.

National Competitive Advantage: Porter’s
Diamond
6

Evaluating Porter’s Theory
• Government policy can influence supporting and related
industries through regulation and influence firm rivalry
through such devices as capital market regulation, tax
policy, and antitrust laws.
• Porter’s theory has not been subjected to detailed
empirical testing.

Focus on Managerial Implications
Location, First-Mover Advantages, and Government
Policy
• Location: from a profit perspective, firms should disperse
production to countries where they can be performed most
efficiently.
• First-mover advantages: it pays to invest substantial
financial resources in trying to build an early advantage.
• Government policy: according to Porter, government
should invest in education, infrastructure, and basic
research.

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything. ®

Government
Policy and
International
Trade
Chapter 7

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Learning Objectives
1

Identify the policy instruments used by governments to
influence international trade flows.

Understand why governments sometimes intervene in
international trade.

Summarize and explain the arguments against
strategic trade policy.

Describe the development of the world trading system
and the current trade issue.

Explain the implications for managers of
developments in the world trading system.

Introduction
Free trade occurs when governments do not
attempt to restrict what citizens can buy from
another country or what they can sell to another
country.
• Nations nominally committed to free trade but intervene to
protect interests of politically important groups.
• Modern international trading system is based on General
Agreement on Tariffs and Trade (GATT) and the World
Trade Organization (WTO).

Instruments of Trade Policy

Tariffs
• Taxes levied on imports.
• Specific tariffs levied as a fixed charge for each unit of imported
good.
• Ad valorem tariffs levied as a proportion of the value of an imported
good.

• Impact:
•

Increase government revenues.

•

Force consumers to pay more for certain imports.

•

Are pro-producer and anti-consumer.

•

Reduce the overall efficiency of the world economy.

Instruments of Trade Policy

Subsidies
• Government payment to a domestic producer.
1. Cash grants.

2. Low-interest loans.
3. Tax breaks.
4. Government equity participation.

• Help domestic producers compete against foreign imports
and gain export markets.
• Domestic producers gain while consumers typically absorb
the costs.
© McGraw Hill

Instruments of Trade Policy

Import Quotas and Voluntary Export Restraints
• Import quotas are direct restrictions on quantity of some
good that may be imported.

• Tariff rate quotas provide a lower tariff rate to imports
within the quota than those over the quota.
• Voluntary export restraint (VER) is a quota on trade
imposed by the exporting country.
• Quota rent refers to the extra profit producers make when
supply is artificially limited by an import quota.

Instruments of Trade Policy

Export Tariffs and Bans
• Export tariff is a tax placed on the export of a good.
• Goal is to discriminate against exporting in order to ensure that there
is sufficient supply of a good within a country.

• Export ban is a policy that partially or entirely restricts the
export of a good.
• Example: 1975 ban on U.S. crude oil exports.

Instruments of Trade Policy

Local Content Requirements
• Some fraction of a good must be produced locally.
• Expressed in either physical or value terms.
• Protects domestic producers.
• Consumers face higher prices.

Administrative Policies
• Bureaucratic rules designed to make it difficult for imports
to enter a country.

Instruments of Trade Policy

Antidumping Policies
• Dumping occurs when companies sell goods in a foreign
market at below their costs of production or below their
“fair” market value.
• A way to unload excess production.

• Antidumping policies punish foreign firms that engage in
dumping and thereby protect domestic producers from
unfair foreign competition.
• Also known as countervailing duties.

The Case for Government Intervention

Political Arguments for Intervention
• Protecting Jobs and Industries.
• Most common political reason for government intervention.

• Critics say claims of unfair competition are overstated for political
reasons.

• Protecting National Security.
• Certain industries, like defense-related ones, must be protected.

The Case for Government Intervention
Political Arguments for Intervention

continued

• Retaliating.
• Government should use threat of intervention as bargaining tool to
open foreign markets.
• May liberalize trade and result in economic gains.
• Risky strategy.

• Protecting Consumers.
• Protect consumers from unsafe products.
• Indirect effect is limit or ban of imports.

The Case for Government Intervention
Political Arguments for Intervention

continued

• Furthering Foreign Policy Objectives.
• Government may grant preferential trade terms to a country where it
wants to build strong relations.
• Trade policy can be used to punish “rogue states.”

• Protecting Human Rights.
• Government trade policy used to improve human rights policies of
trading partners.
•

Example: apartheid.

The Case for Government Intervention

Economic Arguments for Intervention
• The Infant Industry Argument.
• Governments should temporarily support new industries until they
have grown strong enough to meet international competition.
• Support comes through tariffs, import quotas, subsidies.
• Two criticisms:
1.

Protection of manufacturing from foreign competition does no good unless the
protection helps make the industry efficient.

Assumes firms are unable to make efficient long-term investments by borrowing
money from the domestic or international capital market.

The Case for Government Intervention
Economic Arguments for Intervention

continued

• Strategic Trade Policy.
• Government can help raise national income when a domestic firm
gains first-mover advantages.
• Might pay for a government to intervene in an industry by helping
domestic firms overcome the barriers to entry created by foreign
firms that have already reaped first-mover advantages.

• Both arguments support government intervention in international
trade.

The Revised Case for Free Trade

Retaliation and Trade War
• Krugman – strategic trade policies aimed at establishing
domestic firms in a dominant position in a global industry
boost national income at the expense of other countries.
• These policies will probably provoke retaliation.
• Help establish antidumping policies and rules that minimize tradedistorting subsidies.

The Revised Case for Free Trade

Domestic Policies
• Governments don’t always act in the national interest.
• Interest groups may influence policy.
• Krugman concludes that strategic trade policy is almost
certain to be captured by special-interest groups which will
distort it to their own ends.

Development of the World Trading System
Strong economic arguments for unrestricted free
trade.
• Governments unwilling to unilaterally lower trade barriers
for fear others might not follow suit.

• General Agreement on Tariffs and Trade (GATT).
• World Trade Organization (WTO).

Development of the World Trading System
From Smith to the Great Depression
• Case for free trade dates to late 18th century work of Adam
Smith and David Ricardo.

• First embraced by Great Britain in 1846.
• Corn Laws.
• Major trading partners did not reciprocate in free trade.

• Smoot-Hawley Act created a wall of tariff barriers against
imports into the United States.

Development of the World Trading System
1947 to 1979: GATT, Trade Liberalization, and
Economic Growth
• Following the Great Depression, U.S. embraced free
trade.

• GATT was designed to liberalize trade by eliminating
tariffs, subsidies, import quotas, etc.
• Tariff reduction was spread over eight rounds with great success.

Development of the World Trading System
1980 to 1993: Protectionist Trends
• Three reasons for increased protectionism:
• Japan’s perceived protectionist (neo-mercantilist) policies created
intense political pressures in other countries.
• Persistent trade deficits in the U.S.
• Use of non-tariff barriers increased (VERs).

Development of the World Trading System
The Uruguay Round and the World Trade
Organization
• Uruguay Round sought to:
• Extend GATT rules to cover trade in services.

• Develop rules on intellectual property.
• Reduce agricultural subsidies.
• Strengthen GATT’s monitoring and enforcement.

Development of the World Trading System
The Uruguay Round and the World Trade
Organization
continued

• The World Trade Organization:
• Encompasses GATT and two other groups:
•

General Agreement on Trade in Services (GATS).

•

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Development of the World Trading System
WTO: Experience to Date
• By 2019, 164 members that account for 98 percent of
world trade.

• Strong early start, but since late 1990s unable to get
agreements to further reduce barriers.
• Limited protectionism returned following global financial
crisis of 2008 to 2009.
• The Brexit vote and election of Donald Trump also suggest
a move toward greater protectionism.

Development of the World Trading System
WTO: Experience to Date

continued

• WTO as Global Police:
• Enforcement mechanisms appear to be having a positive effect.

• Countries involved have mostly adopted WTO’s recommendations.

• Expanded Trade Agreements:
• Global telecommunication and financial services industries.
• Foreign direct investment.

Development of the World Trading System
The Future of the WTO: Unresolved Issues and the
Doha Round
• The current agenda of the WTO focuses on:
1. The rise of anti-dumping policies.

2. The high level of protectionism in agriculture.
3. The lack of strong protection for intellectual property rights in many
nations.

4. Continued high tariffs on nonagricultural goods and services in
many nations.

Development of the World Trading System

The Future of the WTO: Unresolved Issues and the
Doha Round
continued

• Antidumping Actions:
• Vague definition of what constitutes “dumping” is a loophole many
countries are exploiting.
• Concentrated in certain sectors: metal industries, chemicals, plastics,
and machinery and electrical equipment.

Development of the World Trading System
The Future of the WTO: Unresolved Issues and the
Doha Round
continued

• Protectionism in Agriculture:
• Tariff rates generally much higher on agricultural products.

• Reflects desire to protect domestic agriculture and traditional farming
communities.
• Net effect is to raise consumer prices.

Development of the World Trading System
The Future of the WTO: Unresolved Issues and the
Doha Round
continued

• Protection of Intellectual Property:
• TRIPS agreement obliges WTO members to grant and enforce
patents lasting at least 20 years and copyrights lasting 50 years.
• Inadequate protections would reduce the incentive for innovation.

Development of the World Trading System
The Future of the WTO: Unresolved Issues and the
Doha Round
continued

• Market Access for Nonagricultural Goods and Services:
• Most developed nations have average tariff rates of under 4 percent
of value.
• Certain imports still have high tariffs, which limits market access and
economic growth.
• Tariffs higher on services than industrial goods.
• WTO goal is to reduce tariff rates to zero.

Development of the World Trading System
The Future of the WTO: Unresolved Issues and the
Doha Round
continued

• A New Round of Talks: Doha.
• Have been ongoing since 2001, currently stalled.

• Agenda includes:
•

Cut tariffs on industrial goods and services.

•

Phase out subsidies to agricultural producers.

•

Reduce barriers to cross-border investment.

•

Limit use of antidumping laws.

Development of the World Trading System

Multilateral and Bilateral Trade Agreements
• Reciprocal trade agreements between two or more
partners.
• Created in response to failed Doha Round progress.
• Designed to capture gain from trade beyond WTO treaties.

Development of the World Trading System
The World Trading System Under Threat
• Two events challenged belief or global consensus to
embrace free trade and lower barriers to cross-border flow
of goods and services.
1. British withdrawal from the European Union.
2. Election of Donald J. Trump.

Focus on Managerial Implications

Trade Barriers, Firm Strategy, and Policy Implications
•

Why should an international manager care about political economy of
free trade?

•

Trade Barriers and Firm Strategy:
• Trade barriers raise the cost of exports which can create a competitive
disadvantage.
• Quotas may limit a firm’s ability to serve a country from locations outside the
country.

• Local content requirements might raise costs.
• Firm might want to locate production activities in another country to reduce
threat of future trade barriers.

Focus on Managerial Implications

Trade Barriers, Firm Strategy, and Policy
Implications
continued

• Why should an international manager care about political
economy of free trade? continued
• Policy Implications:
• Three drawbacks to government intervention:
•

Tends to protect the inefficient rather than help firms become efficient global
competitors.

•

Might invite retaliation and trigger a trade war.

•

Unlikely to be well executed with the opportunity for it to be captured by specialinterest groups.

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National
Differences in
Economic
Development
Chapter 3

Learning Objectives
1

Explain what determines the level of economic
development of a nation.

Identify the macropolitical and macroeconomic
changes occurring worldwide.

Describe how transition economies are moving toward
market-based systems.

Explain the implications for management practice of
national difference in political economy.

Introduction
Economic Development
• Differences among nations affects 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 National Income (GNI)
• Measures the total annual income received by residents of
a nation.

• Japan, Sweden, Switzerland, and U.S. have high GNI.
• China and India have low GNI.
• GNI 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.

Table 3.1 Economic data for select countries
Annual GDP
Growth Rate,
2009 to 2018
(percent)

GNI per
Capita, 2018
($)

GNI PPP per
Capita, 2018
($)

Brazil

$9,140

$15,820

1.2

$1,868

China

9,470

18,140

8.0

13,608

Germany

47,450

55,800

1.3

3,998

India

2,020

7,680

7.1

2,726

Japan

41,340

45,000

0.7

4,970

Nigeria

1,960

5,700

4.2

397

Poland

14,150

31,110

3.5

586

Russia

10,230

26,470

0.9

1,658

Switzerland

83,580

69,220

1.5

706

United Kingdom

41,330

45,660

1.3

2,825

United States

62,850

63,390

1.8

20,494

Country

Source: World Development Indicators Online, 2018

Size of Economy
GDP, 2018
($ billions)

Differences in Economic Development

The “official” figures can be misleading.
• Do not account for black economy transactions that
include unrecorded cash transactions or barter
agreements.
• GNI and PPP data are static and do not consider
economic growth rates.
• China and India are currently relatively poor, but their economies are
growing more rapidly than many advanced nations.
•

China may become the world’s largest economy during the next decade.

•

India will be among the largest economies in the world.

Differences in Economic Development

Broader Conceptions of Development: Amartya Sen
• Economic development should be assessed by the
capabilities and opportunities people enjoy.
• Development requires the removal of major impediments to freedom:
poverty, tyranny, poor economic opportunities.

• Economic progress requires the democratization of
political communities to give citizens a voice.

Differences in Economic Development

Broader Conceptions of Development: Amartya Sen

continued

• The United Nations used Sen’s ideas to develop the
Human Development Index (HDI) to measure quality of
human life in different nations.
• Life expectancy at birth.
• Educational attainment.
• Whether average incomes are sufficient to meet the basic needs of
life in a country.

Map 3.4 Human development index, 2017

Access the text alternative for slide images

Political Economy and Economic Progress
Innovation and Entrepreneurship Are the Engines of
Growth
• Innovation.
• Includes new products, 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.

Political Economy and Economic Progress
Innovation and Entrepreneurship Require a Market
Economy
• Little incentive to develop new innovations in planned
economies because the state owns all means of
production and therefore, captures the gains.
• Strong relationship between economic freedom and
economic growth.

Political Economy and Economic Progress
Innovation and Entrepreneurship Require Strong
Property Rights
• Without strong property rights, individuals and businesses
risk having innovations and potential profits stolen.
• This reduces the incentive for innovation and entrepreneurism.

• Economist Hernando de Soto claims that inadequate
property protection in many developing nations limits
economic growth.

Political Economy and Economic Progress
The Required Political System
• Democratic regimes are probably more conducive to longterm economic growth.
• China, South Korea, Taiwan, Singapore, Hong Kong all had
undemocratic governments but experienced economic growth.
• Property rights are only secure in well-functioning, mature
democracies.

• Totalitarian states are detrimental to progress.
• They limit freedom.
• They suppress human development.

Political Economy and Economic Progress
Economic Progress Begets Democracy
• Economic growth often leads to establishment of
democratic regimes.
• South Korea and Taiwan.

• If China adopts a free market system, belief is that the
country will have greater individual freedoms followed by
democracy.

Political Economy and Economic Progress
Geography, Education, Demographics and
Economic Development
• Economist Jeffrey Sachs argues that countries with
favorable geography are:
• More likely to engage in trade.
• More open to market-based systems.

• Countries that invest in education have higher growth
rates because the workforce is more productive
• Countries in Southeast Asia have offset their geographical
disadvantage by investing in education.

Political Economy and Economic Progress
Geography, Education, Demographics and
Economic Development
continued

• In terms of demographics, countries with a young and
growing population have greater growth potential.
• Growing population increases supply of labor.
• Younger workers tend to consumer more than older workers.
• 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; early 1990s
led to greater commitment to free market capitalism.

2. A move away from centrally planned and mixed
economies toward a more free market approach.
3. Since 2005, there has been a shift back toward
greater authoritarianism in some nations resulting in a
retreat from the free market model.

States in Transition

The Spread of Democracy
• In 2019, Freedom House ranked countries into three
broad categories:
• 86 countries classified as free: 44 percent of nations.
• 59 countries classified as partly free: 30 percent of nations.
• 51 countries classified as not free: 26 percent of nations.

States in Transition
The Spread of Democracy

continued

• Three 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.
•

Reduced state’s ability to control access to uncensored information.

•

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.

States in Transition
The Spread of Democracy

continued

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

Map 3.5 Freedom in the world, 2019

States in Transition

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.
• Predicts a world split into different civilizations that will be in conflict
making business difficult.

States in Transition

The New World Order and Global Terrorism

continued

• Huntington: global terrorism is a product of tensions
between civilizations and a clash of value systems and
ideology.
• Al-Qaeda and ISIS.

• Former U.S. Secretary of State Colin Powell maintains
that terrorism is one of the major threats to world peace
and economic progress.

States in Transition

The Spread of Market-Based Systems
• A shift from centrally planned economies to market-based
economies.
• More than 30 countries in the former Soviet Union and eastern
European communist bloc have changed economic system.
• Change also occurring in Asian and African states.

• Command and mixed economies failed to deliver the
sustained economic growth achieved in market-based
countries.

Map 3.6 Index of economic freedom, 2019

Access the text alternative for slide images

Source: “Interactive Heat Map.” The Heritage Foundation, 2019. www.heritage.org/index/heatmap

The Nature of Economic Transformation
The shift toward a market-based system involves:
• Deregulation.
• Privatization.
• A legal system to safeguard property rights.

The Nature of Economic Transformation

Deregulation
• Removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in
which private enterprises operate.
• Deregulation in mixed economies involved the same
initiatives as in command economies.
• Transition was easier due to a vibrant private sector.

The Nature of Economic Transformation

Privatization
• Transfers ownership of state property into the hands of
private individuals.
• Movement started in Great Britain in early 1980s.

• In many nations economic activity is still in the hands of
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.
© McGraw Hill

The Nature of Economic Transformation

Legal Systems
• A well-functioning market economy requires laws.
• Need to protect property rights.

• 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 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?

Focus on Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
• Countries are more likely to have higher sustained rates of
economic growth when they have:
• Democratic regimes.
• Market based economic policies.
• Strong property rights protection.

• These markets are more attractive to international
businesses.

Focus on Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued

• Benefits:
• Based on the 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 and property rights regime good
predictors of economic prospects.

Focus on Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued

• Costs:
• Political system: is it necessary to pay bribes to get market access?

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

Focus on Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued

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

Focus on Managerial Implications

Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
continued

• 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.

Figure 3.1 Country attractiveness

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Foreign
Direct
Investment
Chapter 8

Learning Objectives
1

Recognize current trends regarding foreign direct
investment (FDI) in the world economy.

Explain the different theories of FDI.

Understand how political ideology shapes a
government’s attitudes toward FDI.

Describe the benefits and costs of FDI to home and
host countries.

Explain the range of policy instruments that
governments use to influence FDI.

Identify the implications for managers of the theory
and government policies associated with FDI.

Introduction
Foreign Direct Investment (FDI)
• Occurs when a firm invests directly in new facilities to
produce or market a good or service in a foreign country.
• 10 percent or greater interest.

• Once a firm undertakes FDI, it becomes a multinational
enterprise.

Foreign Direct Investment in the World
Economy
1

Flow of FDI
• The amount of FDI undertaken over a given time period.

• Stock of FDI—total accumulated value of foreign-owned
assets at a given time.
• Outflows―flows of FDI out of a country.

• Inflows―flows of FDI into a country.

Foreign Direct Investment in the World
Economy
2

Trends in FDI
• Increase in both flow and stock of FDI over past 25 years.

• Growing more rapidly than world trade and world output.
• It is a way to circumvent trade barriers.
• Driven by political and economic changes.
•

Shift toward democratic political institutions and free market economies.

• Globalization has had a positive effect.

Figure 8.1 FDI outflows, 1990 to 2018 ($ billions)

Source: UNCTAD statistical data set,

Foreign Direct Investment in the World
Economy
3

The Direction of FDI
• Historically, mostly directed at developed nations.

• U.S. has been a target for FDI inflows:
• Large and wealthy domestic markets.
• Dynamic and stable economy.

• Favorable political environment and openness to FDI.

• Inflows directed at developing nations and transition
economies over the past decade.

Figure 8.2 FDI inflows by region, 1995 to 2018
($ billions)

Source: UNCTAD statistical data set,

Foreign Direct Investment in the World
Economy
4

The Source of FDI
• U.S. is the largest source since WWII.

• Six countries (U.S., U.K., France, Germany, Japan, an…
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