3. 5-3
What Is Ethics?
Ethics - accepted principles of right or wrong that
govern
the conduct of a person
the members of a profession
the actions of an organization
Business ethics - accepted principles of right or
wrong governing the conduct of business people
Ethical strategy - a strategy, or course of action,
that does not violate these accepted principles
4. 5-4
Which Ethical Issues Are Most
Relevant To International Firms?
The most common ethical issues in
business involve
1. employment practices
2. human rights
3. environmental pollution
4. corruption
5. moral obligations of multinational
companies
5. 5-5
How Are Ethics Relevant
To Employment Practices?
Suppose work conditions in a host nation
are clearly inferior to those in the
multinational’s home nation
Which standards should apply?
home country standards
host country standards
something in between
6. 5-6
How Are Ethics Relevant
To Employment Practices?
Firms should
establish minimal acceptable standards that
safeguard the basic rights and dignity of
employees
audit foreign subsidiaries and subcontractors
regularly to ensure they are meeting the
standards
take corrective action as necessary
7. 5-7
How Are Ethics Relevant
To Human Rights?
Basic human rights are taken for granted
in developed countries
freedom of association
freedom of speech
freedom of assembly
freedom of movement
Question: What are the responsibilities of
firms in countries where basic human
rights are not respected?
8. 5-8
How Are Ethics Relevant
To Human Rights?
Question: Is it ethical for companies to do
business with countries with repressive
regimes?
Myanmar
Nigeria
Question: Does multinational investment actually
help bring change to these countries and
ultimately improve the rights of citizens?
China
9. 5-9
How Are Ethics Relevant
To Environmental Regulations?
Some parts of the environment are a public good that no
one owns, but anyone can despoil
What happens when environmental regulations in host
nations are far inferior to those in the home nation?
Is it permissible for multinationals to pollute in
developing countries simply because there are no
regulations against it?
legal versus ethical behavior
The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation
10. 5-10
How Are Ethics Relevant
To Corruption?
The U.S. Foreign Corrupt Practices Act outlawed
the practice of paying bribes to foreign
government officials in order to gain business
amended to allow for facilitating payments
The Convention on Combating Bribery of
Foreign Public Officials in International Business
Transactions was adopted by the Organization
for Economic Cooperation and Development
(OECD)
obliges member states to make the bribery of
foreign public officials a criminal offense
11. 5-11
How Are Ethics Relevant
To Corruption?
But, is it permissible for multinationals to
pay government officials facilitating
payments if doing so creates local income
and jobs?
is it ok to do a little evil in order to do a greater
good?
does grease money actually improve
efficiency and help growth?
12. 5-12
How Are Ethics Relevant
To Moral Obligations?
Social responsibility refers to the idea that
managers should consider the social
consequences of economic actions when
making business decisions
there should be a presumption in favor of
decisions that have both good economic and
good social consequences
it is the right way for a business to behave
13. 5-13
How Are Ethics Relevant
To Moral Obligations?
Advocates argue that businesses need to
recognize their noblesse oblige -
honorable and benevolent behavior that is
the responsibility of successful companies
give something back to the societies that have
made their success possible
But, are multinationals morally required to
use their power to enhance local welfare?
14. 5-14
What Are Ethical Dilemmas?
Ethical dilemmas - situations in which none of
the available alternatives seems ethically
acceptable
real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear
cut
the right course of action is not always clear
15. 5-15
Why Do Managers
Behave Unethically?
Several factors contribute to unethical behavior
including
1. Personal ethics - the generally accepted
principles of right and wrong governing the
conduct of individuals
expatriates may face pressure to violate their
personal ethics because they are away from their
ordinary social context and supporting culture
managers fail to question whether a decision or
action is ethical, and instead rely on economic
analysis when making decisions
16. 5-16
Why Do Managers
Behave Unethically?
2. Decision-making processes - the values and
norms that are shared among employees of an
organization
organization culture that does not
emphasize business culture encourages
unethical behavior
2. Organization culture - organization culture can
legitimize unethical behavior or reinforce the
need for ethical behavior
3. Unrealistic performance expectations -
encourage managers to cut corners or act in
an unethical manner
17. 5-17
Why Do Managers
Behave Unethically?
5. Leadership - helps establish the culture of an
organization, and set the examples that others
follow
when leaders act unethically, subordinates may act
unethically, too
5. Societal culture – firms headquartered in
cultures where individualism and uncertainty
avoidance are strong are more likely to stress
ethical behavior than firms headquartered in
cultures where masculinity and power distance
rank high
19. 5-19
What Are The Philosophical
Approaches To Ethics?
There are several different approaches to
business ethics
Straw men approaches deny the value of
business ethics or apply the concept in an
unsatisfactory way
Others approaches are favored by moral
philosophers and are the basis for current
models of ethical behavior
20. 5-20
What Are The Straw Men
Approaches To Business Ethics?
There are four common straw men approaches
1. Friedman doctrine - the only social responsibility
of business is to increase profits, so long as the
company stays within the rules of law
2. Cultural relativism - ethics are culturally
determined and firms should adopt the ethics of
the cultures in which they operate
“when in Rome, do as the Romans do”
21. 5-21
What Are The Straw Men
Approaches To Business Ethics?
3. Righteous moralist - a multinational’s home
country standards of ethics should be followed
in foreign countries
4. 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
All approaches offer inappropriate guidelines
for ethical decision making
22. 5-22
What Are Utilitarian And
Kantian Approaches To Ethics?
Utilitarian ethics - (David Hume, Jeremy
Bentham, John Stuart Mill) - the moral worth of
actions or practices is determined by their
consequences
actions are desirable if they lead to the best possible
balance of good consequences over bad
consequences
but, it is difficult to measure the benefits, costs, and
risks of an action
the approach fails to consider justice
23. 5-23
What Are Utilitarian And
Kantian Approaches To Ethics?
Kantian ethics - (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
people are not machines
24. 5-24
What Are Rights Theories?
Rights theories - human beings have
fundamental rights and privileges which
transcend national boundaries and cultures
establish a minimum level of morally acceptable
behavior
the Universal Declaration of Human Rights - basic
principles that should always be adhered to
irrespective of the culture in which one is doing
business
Moral theorists argue that fundamental human
rights form the basis for the moral compass that
managers should navigate by when making
decisions which have an ethical component
25. 5-25
What Are Justice Theories?
Justice theories focus on the attainment of a just
distribution of economic goods and services
a just distribution is one that is considered fair and
equitable
John Rawls argued that all economic goods and
services should be distributed equally except
when an unequal distribution would work to
everyone’s advantage
impartiality is guaranteed by the veil of ignorance -
everyone is imagined to be ignorant of all his or her
particular characteristics
26. 5-26
How Can Managers
Make Ethical Decisions?
1. 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
27. 5-27
How Can Managers
Make Ethical Decisions?
2. 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 - formal statement of the ethical
priorities a business adheres to
implement a system of incentives and
rewards that recognize people who engage
in ethical behavior and sanction those who
do not
28. 5-28
How Can Managers
Make Ethical Decisions?
3. Make sure that leaders within the
business articulate the rhetoric of ethical
behavior and act in a manner that is
consistent with that rhetoric
give life and meaning to words
make sure that leaders emphasize the
importance of ethics verbally and through
their actions
29. 5-29
How Can Managers
Make Ethical Decisions?
4. Put decision-making processes in place that
require people to consider the ethical
dimensions of business decisions
Ask whether
decisions fall within the accepted values of
standards that typically apply in the
organizational environment
decisions can be communicated to all
stakeholders affected by it
if colleagues would approve of decisions
30. 5-30
How Can Managers
Make Ethical Decisions?
Managers can also use a five-step process to
think through ethical problems:
Step1: 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
internal stakeholders are people who work for or who own
the business such as employees, the board of directors,
and stockholders
external stakeholders are the individuals or groups who
have some claim on a firm such as customers, suppliers,
and unions
31. 5-31
How Can Managers
Make Ethical Decisions?
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
32. 5-32
How Can Managers
Make Ethical Decisions?
Step 4: Engage in ethical behavior
Step 5: Audit decisions and review them to
make sure that they are consistent
with ethical principles
this step is often overlooked even
though it is critical to finding out
whether a decision process is working
33. 5-33
What Is An Ethics Officer?
Many firms now have ethics officers to
ensure
all employees are trained in ethics
ethics is considered in the decision-making
process
the company’s code of conduct is followed
34. 5-34
How Can Managers
Make Ethical Decisions?
5. Develop 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 her 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
35. 5-35
How Can Managers
Make Ethical Decisions?
In the end, there are clearly things that an
international business should do, and
there are things that an international
business should not do
But, it is important to remember that not all
ethical dilemmas have a clean and
obvious solution
in these situations, firms must rely on the
decision-making ability of its managers
37. 5-37
Why Is Free Trade Beneficial?
Free trade - a situation where a
government does not attempt to influence
through quotas or duties what its citizens
can buy from another country or what they
can produce and sell to another country
Trade theory shows why it is beneficial for
a country to engage in international trade
even for products it is able to produce for
itself
38. 5-38
Why Is Free Trade Beneficial?
International trade allows a country
to specialize in the manufacture and export of
products and services that it can produce
efficiently
import products and services that can be
produced more efficiently in other countries
limits on imports may be beneficial to
producers, but not beneficial for consumers
39. 5-39
Why Do Certain
Patterns Of Trade Exist?
Some patterns of trade are fairly easy to
explain
it is obvious why Saudi Arabia exports oil,
Ghana exports cocoa, and Brazil exports
coffee
But, why does Switzerland export
chemicals, pharmaceuticals, watches, and
jewelry?
Why does Japan export automobiles,
consumer electronics, and machine tools?
40. 5-40
What Role Does
Government Have In Trade?
The mercantilist philosophy makes a crude case
for government involvement in promoting
exports and limiting imports
Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
New trade theory and Porter’s theory of national
competitive advantage justify limited and
selective government intervention to support the
development of certain export-oriented
industries
41. 5-41
What Is Mercantilism?
Mercantilism (mid-16th
century) suggests
that it is in a country’s best interest to
maintain a trade surplus—to export more
than it imports
advocates government intervention to achieve
a surplus in the balance of trade
Mercantilism views trade as a zero-sum
game—one in which a gain by one country
results in a loss by another
42. 5-42
What Is Smith’s Theory
Of Absolute Advantage?
Adam Smith (1776) argued that a country
has an absolute advantage in the
production of a product when it is more
efficient than any other country in
producing it
countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these goods for
goods produced by other countries
43. 5-43
How Does The Theory
Of Absolute Advantage Work?
Assume that two countries, Ghana and South
Korea, both have 200 units of resources that
could either be used to produce rice or cocoa
In Ghana, it takes 10 units of resources to
produce one ton of cocoa and 20 units of
resources to produce one ton of rice
Ghana could produce 20 tons of cocoa and no rice,
10 tons of rice and no cocoa, or some combination of
rice and cocoa between the two extremes
44. 5-44
How Does The Theory
Of Absolute Advantage Work?
In South Korea it takes 40 units of
resources to produce one ton of cocoa
and 10 resources to produce one ton of
rice
South Korea could produce 5 tons of cocoa
and no rice, 20 tons of rice and no cocoa, or
some combination in between
45. 5-45
How Does The Theory
Of Absolute Advantage Work?
Without trade
Ghana would produce 10 tons of cocoa and 5
tons of rice
South Korea would produce 10 tons of rice
and 2.5 tons of cocoa
With specialization and trade
Ghana would produce 20 tons of cocoa
South Korea would produce 20 tons of rice
Ghana could trade 6 tons of cocoa to South
Korea for 6 tons of rice
46. 5-46
How Does The Theory
Of Absolute Advantage Work?
After trade
Ghana would have 14 tons of cocoa left, and
6 tons of rice
South Korea would have 14 tons of rice left
and 6 tons of cocoa
If each country specializes in the
production of the good in which it has an
absolute advantage and trades for the
other, both countries gain
trade is a positive sum game
47. 5-47
How Does The Theory
Of Absolute Advantage Work?
Absolute Advantage and the Gains from Trade
48. 5-48
What Is Ricardo’s Theory
Of Comparative Advantage?
David Ricardo asked what happens when one
country has an absolute advantage in the
production of all goods
The theory of comparative advantage (1817)—
countries should specialize in the production of
those goods they produce most efficiently and
buy goods that they produce less efficiently from
other countries
even if this means buying goods from other
countries that they could produce more
efficiently at home
49. 5-49
How Does The Theory Of
Comparative Advantage Work?
Assume Ghana is more efficient in the
production of both cocoa and rice
In Ghana, it takes 10 resources to
produce one ton of cocoa, and 13 1/2
resources to produce one ton of rice
So, Ghana could produce 20 tons of
cocoa and no rice, 15 tons of rice and no
cocoa, or some combination of the two
50. 5-50
How Does The Theory Of
Comparative Advantage Work?
In South Korea, it takes 40 resources to
produce one ton of cocoa and 20
resources to produce one ton of rice
So, South Korea could produce 5 tons of
cocoa and no rice, 10 tons of rice and no
cocoa, or some combination of the two
51. 5-51
How Does The Theory Of
Comparative Advantage Work?
With trade
Ghana could export 4 tons of cocoa to South
Korea in exchange for 4 tons of rice
Ghana will still have 11 tons of cocoa, and 4
additional tons of rice
South Korea still has 6 tons of rice and 4 tons
of cocoa
if each country specializes in the production of
the good in which it has a comparative
advantage and trades for the other, both
countries gain
52. 5-52
How Does The Theory Of
Comparative Advantage Work?
Comparative advantage theory provides a
strong rationale for encouraging free trade
total output is higher
both countries benefit
Trade is a positive sum game
53. 5-53
How Does The Theory Of
Comparative Advantage Work?
Comparative Advantage and the Gains from Trade
54. 5-54
Is Unrestricted Free Trade
Always Beneficial?
Unrestricted free trade is beneficial, but the gains may
not be as great as the simple model of comparative
advantage would suggest
immobile resources
diminishing returns
dynamic effects and economic growth
the Samuelson critique
But, opening a country to trade could increase
a country's stock of resources as increased supplies become
available from abroad
the efficiency of resource utilization and so free up resources for
other uses
economic growth
55. 5-55
Could A Rich Country Be
Worse Off With Free Trade?
Paul Samuelson - the dynamic gains from trade
may not always be beneficial
free trade may ultimately result in lower
wages in the rich country
The ability to offshore services jobs that were
traditionally not internationally mobile may have
the effect of a mass inward migration into the
United States, where wages would then fall
but, protectionist measures could create a
more harmful situation than free trade
56. 5-56
What Is The
Heckscher-Ohlin Theory?
Eli Heckscher (1919) and Bertil Ohlin
(1933) - comparative advantage arises
from differences in national factor
endowments
the extent to which a country is endowed with
resources like land, labor, and capital
The more abundant a factor, the lower its
cost
57. 5-57
What Is The
Heckscher-Ohlin Theory?
The pattern of trade is determined by
factor endowments
Heckscher and Ohlin predict that countries
will
export goods that make intensive use of
locally abundant factors
import goods that make intensive use of
factors that are locally scarce
58. 5-58
Does The Heckscher-Ohlin
Theory Hold?
Wassily Leontief (1953) theorized that since the
U.S. was relatively abundant in capital compared
to other nations, the U.S. would be an exporter
of capital intensive goods and an importer of
labor-intensive goods.
However, he found that U.S. exports were
less capital intensive than U.S. imports
Since this result was at variance with the
predictions of trade theory, it became known as
the Leontief Paradox.
59. 5-59
What Is The
Product Life-Cycle Theory?
The product life-cycle theory - as products
mature both the location of sales and the
optimal production location will change
affecting the flow and direction of trade
proposed by Ray Vernon in the mid-1960s
At this time most of the world’s new products were
developed by U.S. firms and sold first in the U.S.
60. 5-60
What Is The
Product Life-Cycle Theory?
According to the product life-cycle theory
the size and wealth of the U.S. market gave U.S.
firms a strong incentive to develop new products
initially, the product would be produced and sold in
the U.S.
as demand grew in other developed countries, U.S.
firms would begin to export
demand for the new product would grow in other
advanced countries over time making it worthwhile for
foreign producers to begin producing for their home
markets
61. 5-61
What Is The
Product Life-Cycle Theory?
U.S. firms might set up production facilities
in advanced countries with growing
demand, limiting exports from the U.S.
As the market in the U.S. and other
advanced nations matured, the product
would become more standardized, and
price would be the main competitive
weapon
62. 5-62
What Is The
Product Life-Cycle Theory?
Producers based in advanced countries where
labor costs were lower than the United States
might now be able to export to the United States
If cost pressures were intense, developing
countries would acquire a production advantage
over advanced countries
Production became concentrated in lower-cost
foreign locations, and the U.S. became an
importer of the product
64. 5-64
Does The Product Life-
Cycle Theory Hold?
The product life-cycle theory accurately explains
what has happened for products like
photocopiers and a number of other high
technology products developed in the United
States in the 1960s and 1970s
mature industries leave the U.S. for low cost
assembly locations
65. 5-65
Does The Product Life
Cycle Theory Hold?
But, the globalization and integration of
the world economy has made this theory
less valid today
the theory is ethnocentric
production today is dispersed globally
products today are introduced in multiple
markets simultaneously
66. 5-66
What Is New Trade Theory?
New trade theory suggests that the ability of
firms to gain economies of scale (unit cost
reductions associated with a large scale of
output) can have important implications for
international trade
Countries may specialize in the production and
export of particular products because in certain
industries, the world market can only support a
limited number of firms
new trade theory emerged in the 1980s
Paul Krugman won the Nobel prize for his
work in 2008
67. 5-67
What Is New Trade Theory?
1. Through its impact on economies of scale, trade
can increase the variety of goods available to
consumers and decrease the average cost of
those goods
without trade, nations might not be able to produce
those products where economies of scale are
important
with trade, markets are large enough to support the
production necessary to achieve economies of scale
so, trade is mutually beneficial because it allows for
the specialization of production, the realization of
scale economies, and the production of a greater
variety of products at lower prices
68. 5-68
What Is New Trade Theory?
2. In those industries when output required to
attain economies of scale represents a
significant proportion of total world demand,
the global market may only be able to support
a small number of enterprises
first-mover advantages - the economic and
strategic advantages that accrue to early
entrants into an industry
economies of scale
first movers can gain a scale based cost
advantage that later entrants find difficult to
match
69. 5-69
What Are The Implications Of
New Trade Theory For Nations?
Nations may benefit from trade even when they
do not differ in resource endowments or
technology
a country may dominate 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
Governments should consider strategic trade
policies that nurture and protect firms and
industries where first-mover advantages and
economies of scale are important
70. 5-70
What Is Porter’s Diamond Of
Competitive Advantage?
Michael Porter (1990) tried to explain why a
nation achieves international success in a
particular industry
identified four attributes that promote or
impede the creation of competitive
advantage
1. Factor endowments - a nation’s position in
factors of production necessary to compete in
a given industry
can lead to competitive advantage
can be either basic (natural resources, climate,
location) or advanced (skilled labor, infrastructure,
technological know-how)
71. 5-71
What Is Porter’s Diamond Of
Competitive Advantage?
2. Demand conditions - the nature of home
demand for the industry’s product or service
influences the development of capabilities
sophisticated and demanding customers pressure
firms to be competitive
3. Relating and supporting industries - the
presence or absence of supplier industries and
related industries that are internationally
competitive
can spill over and contribute to other industries
successful industries tend to be grouped in clusters
in countries
72. 5-72
What Is Porter’s Diamond Of
Competitive Advantage?
4. Firm strategy, structure, and rivalry - the
conditions governing how companies are
created, organized, and managed, and the
nature of domestic rivalry
different management ideologies affect the
development of national competitive advantage
vigorous domestic rivalry creates pressures to
innovate, to improve quality, to reduce costs, and to
invest in upgrading advanced features
73. 5-73
What Is Porter’s Diamond Of
Competitive Advantage?
Determinants of National Competitive Advantage: Porter’s Diamond
74. 5-74
Does Porter’s Theory Hold?
Government policy can
affect demand through product standards
influence rivalry through regulation and antitrust laws
impact the availability of highly educated workers and
advanced transportation infrastructure.
The four attributes, government policy, and
chance work as a reinforcing system,
complementing each other and in combination
creating the conditions appropriate for
competitive advantage
So far, Porter’s theory has not been sufficiently
tested to know how well it holds up
75. 5-75
What Are The Implications Of
Trade Theory For Managers?
1. Location implications - a firm should disperse its
various productive activities to those countries where
they can be performed most efficiently
firms that do not may be at a competitive
disadvantage
1. First-mover implications - a first-mover advantage can
help a firm dominate global trade in that product
2. Policy implications - firms should work to encourage
governmental policies that support free trade
want policies that have a favorable impact on each
component of the diamond
76. 5-76
What Is The
Balance Of Payments?
A country’s balance-of-payments accounts
keep track of the payments to and receipts
from other countries for a particular time period
double entry bookkeeping
sum of the current account balance, the
capital account and the financial account
should be zero
77. 5-77
What Is The
Balance Of Payments?
There are three main accounts
1. The current account records transactions of goods,
services, and income, receipts and payments
current account deficit - a country imports more
than it exports
current account surplus – a country exports more
than it imports
2. The capital account records one time changes in the
stock of assets
3. The financial account records transactions that involve
the purchase or sale of assets
net change in U.S. assets owned abroad
foreign owned assets in the U.S.
79. 5-79
Is A Current
Account Deficit Bad?
Question: Does current account deficit in the
United States matter?
A current account deficit implies a net debtor
so, a persistent deficit could limit future
economic growth
But, even though capital is flowing out of the
U.S. as payments to foreigners, much of it flows
back in as investments in assets
Yet, suppose foreigners stop buying U.S. assets
and sell their dollars for another currency
a dollar crisis could occur
81. 5-81
What Is The Political Reality
Of International Trade?
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
many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups
82. 5-82
How Do Governments
Intervene In Markets?
Governments use various methods to
intervene in markets including
1. Tariffs - taxes levied on imports that
effectively raise the cost of imported
products relative to domestic products
Specific tariffs - levied as a fixed charge
for each unit of a good imported
Ad valorem tariffs - levied as a proportion
of the value of the imported good
83. 5-83
How Do Governments
Intervene In Markets?
Tariffs
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
84. 5-84
How Do Governments
Intervene In Markets?
2. Subsidies - government payments to
domestic producers
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of
subsidies
85. 5-85
How Do Governments
Intervene In Markets?
3. Import Quotas - restrict the quantity of some
good that may be imported into a country
Tariff rate quotas - a hybrid of a quota and a
tariff where a lower tariff is applied to
imports within the quota than to those over
the quota
A quota rent - the extra profit that producers
make when supply is artificially limited by an
import quota
86. 5-86
How Do Governments
Intervene In Markets?
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting country,
typically at the request of the importing
country’s government
Import quotas and voluntary export
restraints
benefit domestic producers
raise the prices of imported goods
87. 5-87
How Do Governments
Intervene In Markets?
5. Local Content Requirements - demand
that some specific fraction of a good be
produced domestically
benefit domestic producers
consumers face higher prices
6. Administrative Policies - bureaucratic
rules designed to make it difficult for
imports to enter a country
polices hurt consumers by limiting choice
88. 5-88
How Do Governments
Intervene In Markets?
7. Antidumping Policies–also called
countervailing duties–punish foreign firms that
engage in dumping and protect domestic
producers from “unfair” foreign competition
dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
enables firms to unload excess production in
foreign markets
may be predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors
out of that market, and then later raise prices
89. 5-89
Why Do Governments
Intervene In Markets?
There are two main arguments for government
intervention in the market
1. Political arguments - concerned with protecting
the interests of certain groups within a nation
(normally producers), often at the expense of
other groups (normally consumers)
2. Economic arguments - concerned with boosting
the overall wealth of a nation – benefits both
producers and consumers
90. 5-90
What Are The Political Arguments
For Government Intervention?
1. Protecting jobs - the most common
political reason for trade restrictions
results from political pressures by unions or
industries that are "threatened" by more
efficient foreign producers, and have more
political clout than consumers
91. 5-91
What Are The Political Arguments
For Government Intervention?
2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security
aerospace or semiconductors
92. 5-92
What Are The Political Arguments
For Government Intervention?
3. Retaliation for unfair foreign competition
- when governments take, or threaten to
take, specific actions, other countries
may remove trade barriers
if threatened governments do not back
down, tensions can escalate and new trade
barriers may be enacted
risky strategy
4. Protecting consumers from “dangerous”
products – limit “unsafe” products
93. 5-93
What Are The Political Arguments
For Government Intervention?
5. Furthering the goals of foreign policy -
preferential trade terms can be granted
to countries that a government wants to
build strong relations with
trade policy can also be used to punish
rogue states
94. 5-94
What Are The Political Arguments
For Government Intervention?
6. Protecting the human rights of individuals in
exporting countries – through trade policy
actions
7. Protecting the environment – international
trade is associated with a decline in
environmental quality
concern over global warming
enforcement of environmental regulations
95. 5-95
What Are The Economic Arguments
For Government Intervention?
1. The infant industry argument - an
industry should be protected until it can
develop and be viable and competitive
internationally
accepted as a justification for temporary
trade restrictions under the WTO
96. 5-96
What Are The Economic Arguments
For Government Intervention?
Question: When is an industry “grown up” ?
Critics argue that if a country has the potential
to develop a viable competitive position, its
firms should be capable of raising necessary
funds without additional support from the
government
97. 5-97
What Are The Economic Arguments
For Government Intervention?
2. Strategic trade policy – first-mover
advantages can be important to success
governments can help firms from their
countries attain these advantages
governments can help firms overcome
barriers to entry into industries where foreign
firms have an initial advantage
98. 5-98
When Should Governments
Avoid Using Trade Barriers?
Paul Krugman argues that strategic trade
policies aimed at establishing domestic firms in
a dominant position in a global industry are
beggar-thy-neighbor policies that boost national
income at the expense of other countries
countries that attempt to use such policies will
probably provoke retaliation
Krugman argues that since special interest
groups can influence governments, strategic
trade policy is almost certain to be captured by
such groups who will distort it to their own ends
99. 5-99
How Has The Current World
Trading System Emerged?
Until the Great Depression of the 1930s,
most countries had some degree of
protectionism
Smoot-Hawley Act (1930)
After WWII, the U.S. and other nations
realized the value of freer trade
established the General Agreement on Tariffs
and Trade (GATT) - a multilateral agreement
to liberalize trade
100. 5-100
How Has The Current World
Trading System Emerged?
In the 1980s and early 1990s protectionist
trends emerged
Japan’s perceived protectionist (neo-
mercantilist) policies created intense political
pressures in other countries
persistent trade deficits by the U.S
use of non-tariff barriers increased
101. 5-101
How Has The Current World
Trading System Emerged?
The Uruguay Round of GATT
negotiations began in 1986 focusing on
1. Services and intellectual property
going beyond manufactured goods to address
trade issues related to services and intellectual
property, and agriculture
1. The World Trade Organization
it was hoped that enforcement mechanisms
would make the WTO a more effective policeman
of the global trade rules
102. 5-102
How Has The Current World
Trading System Emerged?
The WTO encompassed GATT along with
two sisters organizations
the General Agreement on Trade in Services
(GATS)
working to extend free trade agreements to
services
the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)
working to develop common international
rules for intellectual property rights
103. 5-103
How Has The Current World
Trading System Emerged?
The WTO has emerged as an effective advocate
and facilitator of future trade deals, particularly in
such areas as services
159 members in 2013
so far, the WTO’s policing and enforcement
mechanisms are having a positive effect
most countries have adopted WTO
recommendations for trade disputes
a magnet for various groups protesting free
trade
104. 5-104
What Is The Future Of The
World Trade Organization?
The current agenda of the WTO focuses
on
the rise of anti-dumping policies
the high level of protectionism in agriculture
the lack of strong protection for intellectual
property rights in many nations
continued high tariffs on nonagricultural goods
and services in many nations
105. 5-105
What Is The Future Of The
World Trade Organization?
The WTO launched a new round of talks
at Doha, Qatar in 2001 that have already
gone on for 12 years and are currently
stalled.
The agenda includes
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural
producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
106. 5-106
What Do Trade Barriers
Mean For Managers?
Managers need to consider how trade
barriers affect the strategy of the firm and
the implications of government policy on
the firm
1. Trade barriers raise the cost of exporting
products to a country
2. Voluntary export restraints (VERs) may
limit a firm’s ability to serve a country
from locations outside that country
107. 5-107
What Do Trade Barriers
Mean For Managers?
3. To conform to local content
requirements, a firm may have to locate
more production activities in a given
market than it would otherwise
Managers have an incentive to lobby for
free trade, and keep protectionist
pressures from causing them to have to
change strategies
Editor's Notes
The Opening Case: Exporting Used Batteries to Mexico explores the thriving business of exporting used lead batteries from the United States to Mexico, where the lead is extracted and sold for a profit. Because Mexico’s environmental regulations are weaker and enforcement is lax, this practice results in much higher levels of lead pollution than would be allowed in the United States. Is this practice ethical? The story explores several different companies and the ethical dilemmas surrounding the lead-extracting business.
LO1: Understand the ethical issues faced by international business.
Management Focus: Making Apple’s iPod illustrates how outsourcing can often lead to ethical issues. The feature explores the working conditions in a factory used by Apple Computer.
Management Focus: Unocal in Myanmar explores Unocal’s actions in Myanmar. Unocal, an American, oil and gas enterprise, formed a joint venture with a French company to build a pipeline from Myanmar to Thailand. Unocal made that investment as a number of other American companies were exiting the country in protest of the local government’s policy of brutally suppressing internal dissent.
Management Focus: Corruption at Daimler explores the widespread corruption that became almost standard operating procedure at German auto maker Daimler.
LO2: Recognize an ethical dilemma.
One study found that firms headquartered in countries with high individualism and uncertainty avoidance were more likely to emphasize ethical behavior than countries that had high scores on masculinity and power difference.
LO4: Describe the different philosophical approaches to ethics.
LO5: Explain how managers can incorporate ethical considerations into their decision making.
LO 1: Understand why nations trade with each other.
The Opening Case: Creating the World’s Biggest Free Trade Zone illustrates the benefits of free trade and globalization. President Obama has committed the United States to negotiating a free trade deal with the European Union. The announcement was greeted with enthusiasm that can be traced to widespread acceptance of the key axiom of international trade—trade is good for all countries involved in a free trade agreement.
Country Focus: Is China a Neo-Mercantilist Nation analyzes claims that China is a neo-mercantilist nation. Exports are largely responsible for China’s recent rapid economic growth. The country, capitalizing on its cheap labor force, has been focused on converting raw materials into products that are exported to developing countries like the United States. China’s trade surplus has started to contract [partly as a result of allowing the Chinese currency (the yuan) to appreciate against the US dollar] as export growth has slowed and imports have increased.
LO 2: Summarize the different theories explaining trade flows between nations.
Mercantilism suggests that countries should design policies that lead to an increase in their holdings of gold and silver.
This was usually done by increasing exports and limiting imports. This economic philosophy was used by Europeans from about the 1500s to the late 1700s. It fueled colonialism in Britain, France, the Netherlands and Spain.
Nations increase their wealth by maintaining trade surpluses.
The key problem with the mercantilist view is that it views trade as a zero sum game, where if one country benefits the other must lose. As an economic philosophy, mercantilism is flawed.
Yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade.
LO 2: Summarize the different theories explaining trade flows between nations.
In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game and argued that countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries.
LO 2: Summarize the different theories explaining trade flows between nations.
LO 3: Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare if countries that participate in a free trade system.
The simple example of comparative advantage presented in the text makes a number of assumptions: only two countries and two goods; zero transportation costs; similar prices and values; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries. While these are all unrealistic, the general proposition that countries will produce and export those goods that they are the most efficient at producing has been shown to be quite valid.
Country Focus: Moving U.S. White-Collar Jobs Offshore goes to the heart of a debate that has been played out many times over the past half century—the transference of jobs from the United States to lower-wage countries. The difference now however, is that rather than blue-collar jobs being transferred, the new trend is for white-collar jobs to move, jobs associated with the knowledge-based economy.
LO 2: Summarize the different theories explaining trade flows between nations.
Basic factors:
Natural resources
Climate
Geographic location
Demographics
While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success.
Advanced factors:
The result of investment by people, companies, and government are more likely to lead to competitive advantage. If a country has no basic factors, it must invest in advanced factors.
LO 2: Summarize the different theories explaining trade flows between nations.
LO 2: Summarize the different theories explaining trade flows between nations.
LO 3: Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare if countries that participate in a free trade system.
LO 2: Summarize the different theories explaining trade flows between nations.
Source: Reprinted by permission of Harvard Business Review. Exhibit from “The Competitive Advantage of Nations,” by Michael E. Porter, March-April 1990, p. 77. Copyright 1990 by the Harvard Business School Publishing Corporation; all rights reserved.
LO 4: Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Porter’s theory should predict the pattern of international trade that we observe in the real world.
Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable.
LO 5: Understand the important implications that international trade theory holds for business practice.
In the United States, the current account deficit has been growing because of its imports of physical products, but the country runs a current account surplus in trade in services.
In the United States, the current account deficit has been growing because of its imports of physical products, but the country runs a current account surplus in trade in services.
Source: Bureau of Economic Analysis
A deficit on the current account is financed by a surplus on the financial account– in other words, by selling assets to other countries. Therefore, a persistent current account deficit raises concerns that resources are being drained from the country, which limits the ability to invest within the country.
The Opening Case: China Limits Exports of Rare Earth Metals explores China’s decision to the limit the export of rare earth metals, which are key components in the manufacture of high-technology products including wind turbines, iPhones, and batteries used in hybrid cars. China claims it lowered the export quotas because several of its manufacturers didn’t meet environmental standards; however, developed countries saw this move as an opportunity for China to give its domestic manufacturers a cost advantage and to encourage foreign manufacturers to move production to China—to gain access to lower-cost supplies of rare earth metals.
LO 1: Identify the policy instruments used by governments to influence international trade flows.
Tariffs are the oldest form of trade policy; they fall into two categories:
Specific tariffs are levied as a fixed charge for each unit
Ad valorem tariffs are levied as a proportion of the value of the imported good
Tariffs are good for government because they generate revenue.
But, while they protect domestic producers, they reduce efficiency and create higher prices for consumers.
Subsidies are government payments to domestic producers. They can be in the form of:
Cash grants
Low-interest loans
Tax breaks
Government equity participation in the company
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiency, and reduced trade.
Management Focus: U.S. Magnesium Seeks Protection explores the dumping charged levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium.
LO 2: Understand why governments sometimes intervene in international trade.
Country Focus: Trade in Hormone-Treated Beef describes the trade battle between the United States and the European Union over beef from cattle that have been given growth hormones. It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has treated the case.
The U.S. has used trade policy against countries like Libya, Iran, Iraq, North Korea, and Cuba.
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil automakers - 10th largest - wilted when protection was eliminated.
Requires government financial assistance.
Today if the industry is a good investment, global capital markets would invest.
Strategic trade policy suggests that:
government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies
governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms
LO 3: Summarize and explain the arguments against strategic trade policy.
LO 4: Describe the development of the world trading system and the current trade issues.
GATT - multilateral agreement established in 1948 under U.S. leadership.
Objective is to liberalize trade by eliminating tariffs, subsidies, and import quotas.
Nineteen original members grew to more than 120 nations.
GATT used ‘rounds of talks’ to gradually reduce trade barriers.
Uruguay Round GATT 1986-93
Mutual tariff reductions negotiated.
Dispute resolution only if complaints were received.
GATT regulations could be circumvented using voluntary export restraints.
The WTO:
--had 159 in early 2013
--resolved more than 400 disputes between 1995 and 2012
--three fourths of the disputes are settled by informal consultation
Because members believe that the protection of intellectual property rights is an essential element of the international trading system, TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years, and copyrights lasting 50 years.
Country Focus: Estimating the Gains from Trade for America explores the results of a study by the Institute for International Economics. The study, which estimated the gains to the American economy from free trade, found that America’s GDP was more than 7 percent higher as a result of reductions in trade barriers than it would have been if the barriers remained. The study also estimated that if tariffs were reduced to zero, significant gains would still result.
LO 5: Explain the implications for managers of developments in the world trading system.