Question (Likes: 15, Dislikes: 0):

Describe the shifts in the world economy over the past 30 years. What are the implications of these shifts for international
businesses based in Great Britain? North America? Hong Kong?

Answer :

Step 1

Over the last three decades, the national economies of the world have become more interconnected. Money, workers, goods and
services all across national borders have become easier due to the collapse of the Soviet Bloc, less trade restrictions, and new
technology such as the Internet. Companies and workers are facing increasing competition from India, Japan, Brazil, China,
Mexico and other nations. Wages have driven down and some occupations have moved partly or in whole to nations with cheap
labor, cheap land, cheap energy and/or less intrusive regulations. Businesses increasingly have found customers and suppliers
from other nations. The World Economy is larger and more interconnected. Economic growth has gone up in many developing or
undeveloped nations. The economic balance has shifted.

Step 2

Great Britain, a former superpower, has become less industrialized due to foreign competition from Brazil because now it has a
smaller economy than Brazil. Britain has involved itself into free trade, becoming a member of both the Commonwealth of
Nations (Britain’s former empire) and the European Union. Businesses have many opportunities to outsource jobs to cheaper areas
in Eastern Europe and India. Easy migration rules also allow British companies to recruit workers from places like Poland and
India. London remains the world’s most prominent financial center, but Singapore and Hong Kong are increasing in importance.
Financial, Insurance, and other London white collar companies increasingly set up subsidiaries or strategic partnerships across the
planet to diversify.

Step 3

North American companies benefit from a free flow of investment capital and ideas. The North American Free Trade Agreement
has led to increased trade and outsourcing between Mexico, Canada, and the US. Restrictions on international labor flow in all
three countries encourage illegal immigration and outsourcing. Many manufacturing, high tech, and green companies faced
massive (often foreign government supported) competitive pressures from East Asia and Europe. Many companies collapsed, but
others thrived, often by exporting to burgeoning foreign markets. There has also been in sourcing. International companies
including Japanese car makers often move production to North America to decrease shipping costs or to generate political
goodwill from the governments, which is still the world’s largest market.

Step 4

Hong Kong is widely known as one of the most business friendly places in the world. It has free capital flows, free labor flows,
non-existent trade barriers, and is one of the easiest places on earth to create a new business. This has enabled Hong Kong to grow
from a barren rock to one of the fourth Asian Tigers. Honk Kong also benefits from ties with Britain’s former empire, its access to
China’s market, and its location at the crossroads of the most economically dynamic areas over the last three decades. Hong Kong
business is likely to grow in importance and reach.
Question (Likes: 0, Dislikes: 0):

“The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for
individuals who are going to work in small firms.” Evaluate this statement.

Answer :

Step 1

This statement is false. International business is not only related to large multinationals, small businesses too needs through
understanding of international business. Most of the exporters in US and abroad are small businesses. In the United States, small
businesses constitute a fifth of exports in value. Many small businesses export and outsource the needs of their company. In turn,
they import key materials from abroad. Therefore, people who are going to work in the small business sector are required to have
knowledge of international business.
Question (Likes: 4, Dislikes: 0):

How have changes in technology contributed to the globalization of markets and production? Would the globalization of
production and markets have been possible without these technological changes?

Answer :

Step 1

The introduction of technologies such as the Internet, cell phones, satellites, and optical fiber have resulted in quick, cheap, and
easy communication to and from all parts of the world. The introduction of efficient shipping containers, airfreight, and
commercial jet travel have resulted in quick, cheap, and easy transportation of goods and people internationally.

Step 2

Communications breakthroughs makes management and collaboration possible required for interlinked global production.
Transportation breakthroughs make production profitable. Transportation breakthroughs allow a company such as McDonalds to
profitably supply a global market with products. Lower prices due to cheap transportation enable a significant global market to
exist. Communications breakthroughs, particularly the internet and mass media stimulate consumption of services and intellectual
products such as songs and Disney movies, creating a globalized market.

Step 3

The globalization of products and markets would likely not have been possible without these technological changes. If it is too
expensive or difficult to communicate with a production subsidiary in China, then, there will be little globalized production.
Likewise, if transportation costs make it less expensive to make goods in the US than to make them in China, then, goods will be
produced in the US. If small businesses can’t cheaply advertise and access customers through the internet, then, globalized
markets will be much more limited.

Thus, it is clear from the above that technological changes played a significant role in globalization of production and markets.
Question (Likes: 2, Dislikes: 0):

“Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in
having a separate course on international business.” Evaluate this statement.

Answer :

Step 1

This statement is false. There are many issues that arise in international business that is not studied in domestic business course.
Today’s globalized world needs a good understanding of international business to compete with other countries. Tariffs, different
contract/property laws, corruption, different business cultures, the foreign exchange market, differing accounting systems, and the
sheer difficulty of coordinating and overseeing international logistics/research/marketing/production/strategies/etc makes it
important to study international business in addition to domestic business.
Question (Likes: 4, Dislikes: 0):

How does the Internet affect international business activity and the globalization of the world economy?

Answer :

Step 1

Internet plays a dominant role in today’s world. There is no field left untouched where internet is not used. It is used in
architecture, medicine, education, therapy, meditation etc. Internet plays a dominant role in the business too.

When it comes to international business, then the role of internet becomes more important. The business transactions take place
faster with the help of internet. Companies who invest in other countries need some connectivity which is established through
internet.

Following are the uses of the internet in the international business:

(i) Fast process of transaction: The transactions are expedited because of the use of the internet. It helps the users to process the
transactions faster than before. The companies at the other end in some other country gets the information same very day.

(ii) Delivery and logistics is improved: The delivery of the material, documents etc. are

completed faster with the help of internet. This happens because logistics are

improved by using the latest Internet communication techniques.

(iii) Helps in understanding the legal and governmental norms: Internet also provides all

relevant information related to the governmental and legal norms of the foreign

country. One can be prepared accordingly.

Moreover, it also provides the recent information about any regulatory procedure

which is newly introduced. This helps the foreign country to enter the home country

prepared with all the expected proceedings.

Step 2

Internet also affects the globalization of the world economy. The economy of all the countries are boosted up by using the internet
technologies. The countries can understand the expectations of the home country and thus the foreign direct investment is routed
accordingly. This leads to the faster understanding of the processes. This generates more funds for the developing nations and thus
developed nations can also earn more with the same revenue.

Thus, internet plays a dominant role in the globalization of the world’s economy.
Question (Likes: 3, Dislikes: 0):

If current trends continue, China may be the world's largest economy by 2020. Discuss the possible implications of such a
development for (a) the world trading system, (b) the world monetary system, (c) the business strategy of today's European and
U.S.-based global corporations, and (d) global commodity prices.

Answer :

Step 1

The availability of rich natural resources, advancement in the technology and the human resource would make the country C the
global economic power in no time. Some of the possible implications of the development are as follows:

a)

If the country C becomes the world’s largest economy in the coming four years, it might affect the world trading system to most
extent. Being a developing country, C is receiving several benefits and investments by the World Trade Organization. If it attains
the stage of a developed country, then it would not get any benefits. Moreover, the country C plays a vital role in the regulation
and implication of trade policies.

b)

Even the terms of trade between different countries could be effected by the country C. The currency Yuan might dominate the
dollar value and would become a bench mark currency of the world.

c)

Step 2

Most of the businesses might shift to the country C and the major part of the work from Eurpen and UnSts global corporations
might outsource the work. It would set policies and regulations which would benefit the country and the corporations as well.

Step 3

d)

Also, it might become the largest market in the world by attracting foreign investments in the form of companies. As a result, it
might produce more products which would increase the supply eventually leading to the reduction in the prices.
Question (Likes: 1, Dislikes: 2):

Reread the Management Focus on Vizio and answer the following questions:

a. Why is the manufacturing of flat panel TVs migrating to different locations around the world?

b. Who benefits from the globalization of the flat panel display industry? Who are the losers?

c. What would happen if the U.S. government required that flat panel displays sold in the United States had to also be made in the
United States? On balance, would this be a good or a bad thing?

d.What does the example of Vizio tell you about the future of production in an increasingly integrated global economy? What does
it tell you about the strategies that enterprises must adopt in order to thrive in highly competitive global markets?

Answer :

Step 1

a) The manufacturing of flat panel TV migrated to different locations around the world because both the availability of capital and
labor was not present at the same place. American companies invented the process of making flat panel TVs. The making of the
glass panels is highly capital intensive as they must be created to extremely precise dimensions and kept extremely clean. The
cutting and assembling of the panels is highly labor intensive. The main market is the United States. Since American companies
did not pursue the technology, so, Japanese companies did. Japanese built the capital intensive portion in Japan and shipped the
parts to Mexico. Mexico has cheap labor and is a short distance from the US. So, the fully assembled TVs could be transported
and sold easier. Japan’s relapse into its “lost decade” of economic stagnation resulted in portions of the capital intensive process
being moved to Korea. The Asian Financial Crisis of 1997 resulted in some of the capital intensive production moving to Taiwan
and now China.

Step 2

b) Consumers benefit from the globalization of the flat panel display industry as they get quality technology TV, which is
assembled in different parts of the world.

Step 3

American employee, who were working in flat TV company were losers as the flat TVs started making in East Asia and Mexico
based on their technology.

Step 4

c) If U.S government allows the flat panel displays sold in the United States, then, it would result in less competition, higher
prices, and lower quality.

Step 5

If it allows the flat panel displays to be made there, then, it might result in more American jobs in the short run, but, may not be
beneficial in the long-run because of the increased tariffs.

Thus, on the whole, this would not be a good step.

Step 6

d) Vizio shows that production is increasingly becoming incomprehensibly complicated as companies sometimes create products
d) Vizio shows that production is increasingly becoming incomprehensibly complicated as companies sometimes create products
made of components from dozens of countries, while many processes such as logistics, engineering, and manufacturing are
completely outsourced. Each component is made wherever it is cheapest to manufacture and transport to the place of assembly.
Due to outsourcing, the company has less than 100 employees, but has over $2 billion sales.

This shows that in today’s highly competitive global market, companies must adopt the most efficient and lowest cost methods in
order to thrive.
Question (Likes: 5, Dislikes: 1):

Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss.

Answer :

Step 1

State-directed economies make the decisions regarding production. The state directs on behalf of the public at large. If an
entrepreneur comes up with an innovation, but is not on the state planning board, then, whatever new process or invention
individual come up with most likely to go nowhere. In addition, individual would not spend time, money, and effort discovering
some new invention or strategy, if all the benefits of his efforts go to the state.

Step 2

In a free market economy, an entrepreneur has the ability and incentive to invent, produce, and become more efficient. Therefore a
free market economy stimulates economic growth, while a state-directed economy stifles it.
Question (Likes: 1, Dislikes: 0):

A democratic political system is an essential condition for sustained economic progress. Discuss.

Answer :

Step 1

Democracy: The political system in which the government is controlled by the people of the nation by their elected
representatives. Democracy and individual are similar but the democratic values or individual values dominate the system.

In democratic system, people have more freedom when compared to collectivism. Even though, the government intervention is
required in some aspects of the market, the people can make independent decision following the law.

Step 2

However, democratic system cannot be considered as most important for economic progress due to the following reasons:

• Economic development is dependent on political and economic stability of the country. If the economic planning and policies
are inconsistent to the economic environment, the rate of development will decline.

• As the government is controlled by the public representatives, the people play an important role. If there is any conflict between
the proposals made by the government and people, it cannot contribute to the economic development.

• The resources available in the nation contribute more to the economy. Hence, economic progress is not possible if there are few
resources.

• Apart from the political system, several factors of economic environment such as recession, inflation etc. impact the economic
progress of the country

There are some countries with totalitarian system which have been developed into strong economies. The economic development
is determined by several national and international factors irrespective of the political system. Hence, democratic political system
may or may not contribute for the economic development.
Question (Likes: 4, Dislikes: 0):

What is the relationship between corruption in a country (i.e., bribe taking by government officials) and economic growth? Is
corruption always bad?

Answer :

Step 1

The cost of bribes, extortion payments, and other illegal or “legal” expenses reduces business profits and decreases efficiency. As
a result, there is less foreign investment and trade. The loss of investment, trade, and efficiency results in lower economic growth.

Step 2

Corruption is always bad for society. It acts as a hidden tax on businesses and introduces distortions and inefficiencies into the
economy. Unlike taxes, the money is spent on the goods by the bribe taker rather than spending on society.
Question (Likes: 4, Dislikes: 0):

You are the CEO of a company that has to choose between making a $100 million investment in Russia or Poland. Both
investments promise the same long-run return, so your choice is driven by risk considerations. Assess the various risks of doing
business in each of these nations. Which investment would you favor and why?

Answer :

Step 1

The investment choice is between Russia and Poland. It has been assumed that the long-term return on investment is the same for
both countries. Therefore the evaluation would be based on the perceived risk of investing in either country.

Poland is a democracy which has transited out of the Soviet Bloc having elected its first government in 1989. Russia has had many
elections after the breakup of the Soviet Union but it does not have a democracy. Although it has elected officials, they are only
for name sake. There is no political freedom in that country. It seems to be regressing into the old Communist type of government.

Therefore the political risk in Russia is much higher than that in Poland.

Step 2

Although Poland is still a mixed economy, it is rapidly trying to reform its economy and move towards a more market based
economy. Russia still has large state owned establishments and whatever private industries exist, they do so under the patronage of
either the state or the oligarchs.

Therefore the economic risk is also higher in Russia than in Poland.

Step 3

The level of corruption in Russia is many times higher than that in Poland. Poland is carrying out measures to reform its tax
system and its various legal systems. These systems are very opaque in Russia.

Step 4

Therefore it can be concluded that it would be better to invest in Poland than in Russia.
Question (Likes: 6, Dislikes: 0):

Read the Country Focus on Chavez's Venezuela, then answer the following questions:

a. Under Chavez's leadership, what kind of economic system is being put in place in Venezuela? How would you characterize the
political system?

b. How do you think that Chavez's unilateral changes to contracts with foreign oil companies will impact upon future investment
by foreigners in Venezuela?

c. How will the high level of public corruption in Venezuela impact future growth rates?

d. Currently Venezuela is benefiting from a boom in oil prices. What do you think might happen if oil prices retreat from their
current high level?

e. In your estimation, what is the long-run prognosis for the Venezuelan economy? Is this a country that is attractive to
international businesses?

Answer :

Step 1

a) Chavez is instituting a Command Economy in Venezuela. I would describe the Venezuelan political system as a nominal
representative democracy that if effectively a totalitarian dictatorship. Chavez has purged the military, police and the bureaucracy.
He maintains private militias. He has airtight control of the media, bureaucracy, and the state oil company.

Step 2

b) Chavez’s changes in oil contracts are effectively legalized theft in the eyes of the oil companies and in the eyes of potential
investors in Venezuela. Investors will likely find somewhere safer to invest their money.

Step 3

c) The high level of public corruption will act as a hidden tax, reducing profits and scaring off investors.

Step 4

d) Considering Venezuela’s debt, high social spending, government dependence on oil revenues, and the lack of economic
diversification; a decrease in the price of oil will be disastrous for Chavez and the economy. A number of possible futures include
an undisguised dictatorship, a coup, complete collapse, or hopefully a peaceful transition to someone with a better grasp of
economics.

Step 5

e) Assuming no changes in trends, the long term prognosis is dim. Oil production will continue to drop without foreign investment,
technology, and expertise. Oil prices have to go down at some point. Most of the non-petroleum portions of the economy have
been completely wiped out partly due to government economic policies.

Thus, this country is not attractive to international business in the long-run.

Read the Management Focus feature: Did Walmart violate the Foreign Corrupt Practices Act? What is your opinion? If you think
it did, what do you think the consequences will be for Walmart?

Answer :

Step 1

As per the stated case, WXY Ltd was held responsible for offering bribe to the local government authorities. The purpose was to
attain the ownership of the land on which they wanted to build up their store. This led to the huge scandal which was highlighted
by many renowned newspapers.

This case was then shifted by the WXY ltd to the Mexican government as the rules and regulations in Mexico were liberal as
compared to the Arkansas. This basically led to the violation of the foreign corrupt practices Act.

The government of Arkansas tried hard to bring back the case from the Mexican government but all the documents and files were
shifted to the Mexican headquarters.

The consequences for WXY Ltd in this case may be in the form of huge fines and imprisonment of the executives for few years.
Question (Likes: 1, Dislikes: 0):

What is the relationship between property rights, corruption, and economic progress? How important are anticorruption efforts in
the effort to improve a country’s level of economic development?

Answer :

Step 1

Protection of Property Rights is fundamental for economic development. It guarantees that any entrepreneur or innovator who
invested his funds or his skills will be justly rewarded for the same. The fruits of his labor will not be stolen used by others.
Without this protection, the incentive to invest does not exist.

Corruption can play a very big role in halting the progress of economic development. Even if there is the IPR protection with
corruption, one can never be sure whether the protection would be available when it is required. Also corruption plays a major
role in dissuading new investors into any country. This corruption starts from the beginning of making an application to getting the
permission for starting a business. It may also continue with every additional regulation that one has to get an approval for. This is
the taking of bribes.

In addition, there can be a much higher level of corruption where high-ranking politicians siphon off funds from the state treasury
for personal gain.

Step 2

Anti-corruption drives are very effective in restoring the faith of investors in a country and its economy. China has recently carried
out a major anti-corruption drive and there have been some very high level Communist Party officials who have been convicted
for taking bribes. India has being suffering because corruptions and scandals are a daily occurrence.
Question (Likes: 1, Dislikes: 0):

You are a senior manager in a U.S. automobile company considering whether to invest in production facilities in China, Russia, or
Germany. These facilities will serve local market demand. Evaluate the benefits, costs, and risks associated with doing business in
each nation. Which country seems the most attractive target for foreign direct investment? Why?

Answer :

Step 1

Foreign Direct Investment:

It is the investment made by a corporate firm or an individual in other country maybe by establishing business there or by
acquiring the business assets in other countries.

Step 2

The evaluation for each country in terms of benefits, costs and risks is shown as below:

Country CH:

Benefits:

• Affordability

• Service standards

• Higher output in swift time

Risks:

• Duplication

• Unpredictable economic and political factors

• High competition

The Country CH possess huge resources available at competitive prices and could be considered as one of the low costs. The
multi-skill personnel are also available at affordable pricing. The costs incurred are worth in relation to the business

Step 3

Country RU:

Benefits:

• Human capital and large consumer markets

• Technology advanced economy

• Attractive taxation system

Risks:

• Shifting consumer preferences

• Financing structures

• Slow recovery, if case of precipitous collapse

The logistics and the infrastructure are considered to be expensive but, the natural resources and cheap energy brings in
competitive advantage in terms of automobile industries
Step 4

Country GE:

Benefits:

• Great economy with IPR protection

• Strong R&D and premium markets

• Friendly FDI markets for establishing new one’s

Risks:

• Money laundering and fraud

• Legal issues and past litigations

• Investor, management and workforce issues

The standards of premium markets will be witnessed in every minute of the production process as they are expensive with
involvement of robust technologies. The resources are high in terms of manufacturing.

Step 5

Thus, it can be concluded that Country CH with good infrastructure, mixed labours available at reasonable rates, flexible FDI and
security policies with controlled market economy is the best place to invest in production facilities. The competition, costs and
control are bothering factors in case of Country RU and Country GE.
Question (Likes: 2, Dislikes: 0):

Reread the Country Focus on India, and answer the following questions:

a. What kind of economic system did India operate under during 1947–1990? What kind of system is it moving
toward today? What are the impediments to completing this transformation?

b. How might widespread public ownership of businesses and extensive government regulations have affected (i) the
efficiency of state and private businesses and (ii) the rate of new business formation in India during the 1947–1990
time frame? How do you think these factors affected the rate of economic growth in India during this time frame?

c. How would privatization, deregulation, and the removal of barriers to foreign direct investment affect the efficiency
of business, new business formation, and the rate of economic growth in India during the post-1990 time period?

d. India now has pockets of strengths in key high-technology industries such as software and pharmaceuticals. Why
do you think India is developing strength in these areas? How might success in these industries help generate growth
in the other sectors of the Indian economy?

e. Given what is now occurring in the Indian economy, do you think the country represents an attractive target for
inward investment by foreign multinationals selling consumer products? Why?

Answer :

Step 1

Economic systems refer to the system of production distribution of products to customers within a geographical area or society.

Step 2

a.

During 1947-1990, IN had a mixed economy with most major industries being state owned. Whatever private firms that were
operating had to get permission to do so. Any change in the size of the firm or its product mix took many years to get sanctioned.
There were very high import duties and progressively foreign investment was being diluted and driven out of the country.

Many companies like Coca-Cola and IBM left since they were not willing to dilute since they feared for their IPR being lost or
mis-appropriated.

Labor laws were such that people could not fire their employees. The annual budget was burdened with subsidies most of which
never reached the intended beneficiary. Corruption was and still is quite rampant.

Step 3

IN is trying to move towards a market economy. Most of the restrictions on setting up industries as well as foreign investment
have either been removed or are being removed progressively. Having joined the WTO, it has had to reduce its import duties and
remove a lot of restriction on foreign currency transactions.

IN today is a multi-party coalition and has been one for many decades now. This means that there must be a consensus every time
a major policy decision is taken. Considering that the Communist Party was part of the ruling coalition for some period things like
labor reform and FDI are very difficult to achieve.

There is also a tendency to lean away from being the largest democracy in the world and be inclined more towards being a
religious state under the dominant religion, Hinduism.

Step 4

b.
b.

The widespread public ownership of many enterprises meant that they had no incentive to work more efficiently and they were a
great drain on the country’s finances. Also, those private enterprises which were operating were protected by the draconian
licensing and import restriction. This meant that whatever they manufactured the people had to buy. There was no incentive to
make either a better of cheaper product. The overall industrial efficiency suffered as a result.

All these factors were very detrimental to IND’s economic growth during the period leading up to 1990 from 1947. IN had a
economy smaller than some smaller European states and the population was uneducated, with poor health care and the
infrastructure was antiquated.

As a result, many SE Asian nations achieved great economic progress during that time.

Step 5

c.

From 1991 IN embarked on an ambitious plan to revamp its economy. Most industries were deregulated, industrial licensing was
removed, public sector enterprises were merged and privatized, FDI was allowed in key industries like oil and gas, airlines,
telecommunications and power and steel making. The greatest progress was in the automobile and telecommunications sectors.
These saw a sea change with a variety of vehicles being available on the IND’n roads. Where one had to wait many years to get a
telephone, these were now available on demand.

All this meant that the competition in the IN-market place was there for the first time in decades. Those industries who had
flourished during the days of the regulated economy suddenly found themselves in an alien world. Many companies which were
household name in the 1960s and 1970s slowly vanished.

Overall the beneficiary was the INn consumer. For the first time he had a wide choice of what to buy and there were international
brands competing in the same market place where INn brands had ruled for many years.

Step 6

d.

The INn software industry was given a boost by the shortage of trained persons in Western countries. It first started with INn
companies just sending people to work for Western companies. Soon with the infrastructure improving in IN Western companies
realized that they could save money by having the work done in IN. The telecommunications boom in IN meant that
communication with IN was as easy as talking to anyone in the Western countries. This led to the call center boom. Medical
transcription started basically due to the telecommunication expansion and due to the time difference of 10-12 hours between IN
and the US.

The fact that skilled persons are easily available in IN and also because basically any educated INn has some knowledge of
English the information technology has expanded rapidly. Many US based corporation like Texas Instruments, Intel, Microsoft
and Oracle are carrying out a lot of their new products design and development in their centers in IN.

The pharmaceutical industry got a boost in the 1990s when many drug patents expired and gave open markets for the sale of
generics. Having got an entry with generics INn pharmaceutical companies expanded their business and today many have become
MNCs owning and operating manufacturing facilities in various countries of the world.

Step 7

Like with information technology in pharmaceutical the bio-tech industry has expanded rapidly. This is because research persons
are easily available in IN and doing research in IN is much more cost effective.

IN cannot compete in the low-labor industries with countries like Bangladesh or many other African countries. In other industries
IN has to concentrate on technology rich areas where the cost of INn technical man-power is most cost effective. An example is
Toyota designing and manufacturing transmissions for all its SE Asian operations in IN.

Step 8

e.

IN has a large and ever-expanding middle class. Although growth has slowed down it has not stagnated like in many other
countries. Many of INn businesses are growing and doing well. This means that there is still a large market for consumer goods as
the basic INn gets upwardly mobile.

As enumerated earlier getting reforms done in IN’s government structure is difficult. However, in spite of that IN has managed to
pass a law to permit 100% FDI in multi-brand retail. This is a great boost for the consumer market as well as many INn producers
of consumer goods.

Therefore, IN is still an attractive place for foreign firms to invest in the consumer retail business.
Question (Likes: 5, Dislikes: 0):

Outline why the culture of a country might influence the costs of doing business in that country. Illustrate your answer with
examples.

Answer :

Step 1

There are a number of reasons why a country’s culture may affect the cost of business in said country. Countries with strong class
consciousness like Britain or tradition of individualism like the US often have sharply adversarial union-management
relationships. While theoretically both the workers and the management should put aside difference and compromise for the good
of the company, in the US and Britain this is not always the case. In Japan and some Asian nations the opposite is true. Some say
this is because of a Confucian mindset in Asia that gives a competitive advantage due to cooperation between companies,
suppliers, unions, and the government. On the other hand there are a number of Western nations that inherited a Protestant culture
that emphasizes risk and individualism. In the United States, this culture theoretically gives America a competitive advantage in
some areas which are or were heavily entrepreneurial such as the computer/software industry, the oil industry, and biotech.
Question (Likes: 0, Dislikes: 0):

Do you think that business practices in an Islamic country are likely to differ from business practices in the United States? If so,
how?

Answer :

Step 1

Yes, business practices in an Islamic country are likely to differ from business practices in the United States

Step 2

In Islam, property is considered to be owned by God, the humans who have the property are considered stewards who hold the
property in trust. They are allowed to profit, but are expected not to profit by taking advantage and to use the resulting profits for
the benefit of society. One important example of this thought process is though the Islamic conception of interest. Interest is
forbidden under the law of the Koran, Islam’s holy book. Islam is not just a religion, but a political system. Islamic law is often
codified into an Islamic nation’s laws. Even if not, actions contrary to Islamic law are frowned upon. The ban on interest has led to
the rise of Islamic banking services. Islamic loans do not charge interest. Sometimes they accept a percentage of a company’s
profits in lieu of interest payments for a loan. In other cases an Islamic bank buys property, plant or equipment on behalf of the
customer, gives it to the customer, and the customer agrees to buy it from the bank in the future for a higher price. The difference
between the original and later price is roughly what the interest would be.
Question (Likes: 1, Dislikes: 0):

What are the implications for international business of differences in the dominant religion or ethical system of a country?

Answer :

Step 1

Differences in religions or ethical systems can affect international business by changing the cost of doing business in a country and
by affecting entrepreneurship. Some philosophers argue that an individualistic Protestant work ethic increases entrepreneurship,
the founding of new companies, and economic growth in the US and other Christian nations. Some philosophers argue that the
Confucian ethical system encourages cooperation for the good of the company and improves union-management relations giving
East Asian companies a competitive advantage. In India, American restaurants have trouble operating as Pork is considered
unclean by Muslims and Beef comes from cows that are sacred to Hindus, requiring them to offer vegetarian, poultry, and fish
rather than hamburgers and sausages.
Question (Likes: 4, Dislikes: 0):

Choose two countries that appear to be culturally diverse. Compare the cultures of those countries and then indicate how cultural
differences influence (a) the costs of doing business in each country, (b) the likely future economic development of that country,
and (c) business practices.

Answer :

Step 1

a) The cultural differences between the United States and Saudi Arabia affect the relative cost of doing business in said countries.
Due to Saudi Arabia’s strict adoption of Islamic law, banks are not allowed to collect interest. The financial system is much less
developed. The system that does exist is an Islamic banking system that uses a number of complicated tricks to simulate interest
payments in loans without actually collected any un-Islamic interest payments.

Another difference is the cultural emphasis on education. The United States has a long cultural tradition of education going back to
colonial New England. A system of state Colleges based off of the sale of public land began in 1862, and has been supplemented
in modern days by community Colleges. The United States also possesses some of the best Colleges on Earth, many of them
known as the Ivy League. In comparison, Saudi Arabia was a nation of desert tribes until the discovery of oil. Education was
handled by religious schools known as Madrassas that emphasized nothing more than basic literacy in order to read the Koran, the
Islamic Holy book. Western technicians, Central Asian workers, and returning expatriate Saudi Arabian students who studied at
Western Universities make up most of the educated sector in Saudi Arabia. The lack of an educated workforce, in fact the
necessity to import a workforce, severely raises the cost of doing business in Saudi Arabia.

Step 2

b) Future economic development in the US will likely remain strong due to high levels of education, entrepreneurial spirit,
acceptance of women into the workforce, and a well-developed financial system.

Future economic development in Saudi Arabia will likely be stunted due to an insufficient culture of education, a cultural refusal
to let the female half of the population contribute significantly to economic growth, and a financial system hampered by Islamic
Law.

Step 3

c) Business practices are likely to differ significantly between the US and Saudi Arabia. A US company might start a workday
with a meeting beginning at 8am and ending at 9am with a firm plan for the day’s work, ended with a trip to a bar to blow off
some steam.

Meetings in Arab countries can go on for long periods of time, long past when they were scheduled to end, as time is an
abstraction while the relationship formed in meetings is what is important. Obviously no one would partake in the sin of alcohol,
but there will be lots of coffee. The next week a new meeting will be held to reargue everything agreed upon in the previous
meeting.
Question (Likes: 2, Dislikes: 0):

Reread the Country Focus on Islamic Capitalism in Turkey. Then answer the following questions:

a. Can you see anything in the values of Islam that is hostile to business?

b. What does the experience of the region around Kayseri teach us about the relationship between Islam and business?

c. What are the implications of Islamic values towards business for the participation of a country like Turkey in the global
economy?

Answer :

Step 1

a) Islamic countries like Turkey discourage high levels of female employment, preferring that women focus on the family and
religion. Since half the country does not work as much as in Europe, this reduces the talent pool for business to draw on. Less
people working means results in less income which results in fewer purchases and therefore a weaker domestic economy. In that
manner at least Islamic values are hostile to business.

Step 2

b) Kayseri shows that Islam isn’t an enemy of business. Islam and business can coincide. Islam is often seen as pro-business, as
Islam’s founder Muhammad was a merchant who strongly supported honest business activity. In Kayseri, business is adjusted to
accommodate Islamic practices such as the five prayers per day, limits on alcohol, and Islamic rules on relationships.

Step 3

c) Overall the effect of Islamic values toward Turkish business’s ability to compete in the global economy will be mixed. Turkish
business will be handicapped to a degree in human resources due to Islamic views of women in the workplace. Turkish businesses
might do better in Islamic countries Muslims will be more inclined to buy from and work for a company that follows Islamic
teachings and is run by devout Muslims.
Question (Likes: 3, Dislikes: 0):

Reread the Management Focus on DMG-Shanghai and answer the follow questions:

a. Why do you think that it is so important to cultivate guanxi and guanxiwang in China?

b. What does the experience of DMG tell us about the way things work in China? What would likely happen to a business that
obeyed all the rules and regulations, rather than trying to find a way around them as Dan Mintz apparently does?

c. What are the ethical issues that might arise when drawing upon guanxiwang to get things done in China? What does this suggest
about the limits of using guanxiwang for a Western business committed to high ethical standards?

Answer :

Step 1

a) It is important to developed Gaunxi (relationships) and guanxiwang (relationship networks) in China because relationships and
mutual favors are how business gets done. China has a weak rule of law, extensive regulations, and corruption. If someone ignores
a contract, there is no judicial recourse. Things get done based on friendships and mutual interests, not on legality. Chinese live up
to their obligations out of fear that if they don’t nobody will go into business with them. A good network of relationships is
necessary to compel social pressure and get things done.

Step 2

b) DMGs experience shows that laws can be ignored, repealed or bent depending on your social connections. Business gets taken
care of based upon relationships and mutual interest. Who you know and what favors are owed to you are more important than law
or morality.

Step 3

A business that strictly obeys the law will be at a competitive disadvantage with a company that uses influence to get out of
obeying laws. The former business will likely be defeated in the marketplace by the more influential company.

Step 4

c) When drawing on relationships to get things done in China there are several ethical issues that could result. First, using
friendships developed by scratching an ally’s back to bend the rules is sometime technically illegal and is effectively bribery.
Second, quite often a “friend” will call upon you to break the rules or allow them to.

Step 5

A Western business committed to high ethical standards would find itself highly limited in doing business in China. By following
Western ethics, said business would not be able to do the “favors” needed to develop a relationship network. Said business would
probably not ask for some of the things a business not following Western business would ask for.
Question (Likes: 1, Dislikes: 0):

A visiting American executive finds that a foreign subsidiary in a poor nation has hired a 12-year-old girl to work on a factory
floor, in violation of the company’s prohibition on child labor. He tells the local manager to replace the child and tell her to go
back to school. The local manager tells the American executive that the child is an orphan with no other means of support, and she
will probably become a street child if she is denied work. What should the American executive do?

Answer :

Step 1

In this situation, the American manager faces an ethical dilemma. If the manager follows the company’s no child labor policy, the
12 year old orphan will starve on the street. The decision the manager makes will depend on what ethical viewpoint the manager
has. The manager might be a Friedmanite, Cultural Relatavist, Righteous Moralist, Naïve Immoralist, Utilitarian, or Kantian.

A Friedmanite would look at the situation and ask what would be the most profitable action for the company within the bounds of
the law. His decision would depend on what the local labor law is and how much profit the company could make.

A Cultural Relativist would look at the situation based on the local culture. Since child labor is tolerated in the local country, a
Cultural Relativist would have no problem keeping the child working.

A Righteous Moralist bases the situation on the home country’s sense of ethics. Since child labor is frowned upon in America and
in the Company regulations, the manager would likely fire the child.

A Naïve Immoralist follows the concept of “if everyone else is doing it, it must be okay”. Under this concept, the manager would
look at the actions of other companies and likely allow child labor.

A Utilitarian believes the end result justifies whatever intermediate action is taken. As the child would starve if fired, continued
labor would be just regardless of company policy or the manager’s personal beliefs.

Kantian Ethicists believe that people should not be used and that human beings should be treated with respect. A Kantian would
not allow child labor as it violates the child’s dignity.
Question (Likes: 1, Dislikes: 0):

Drawing upon John Rawls's concept of the veil of ignorance, develop an ethical code that will (a) guide the decisions of a large oil
multinational toward environmental protection, and (b) influence the policies of a clothing company to outsourcing of
manufacturing process.

Answer :

Step 1

According to Mr. JR, no one knows his inner abilities or their place in the society. Mr. JR defines the veil of ignorance as a
method to determine the difference between the right and wrong. This allows an individual or an organization to make sure that
their actions are moral. By using the veil, a person is obliged to consider the consequences of his/ her actions.

For example: Consider a situation in which decision has to be made on arrangement of security at a parking lot. Now decision has
to be made as if the decision maker is a thief, even though he or she might not. So, the concept of JR allows the individuals to
think from perspective of others. So, this theory is concentrated more towards the morality of the action.

Step 2

(a)

In many of the countries, oil multinational companies are not charged even if they cause environmental damages by violating the
law. It is the responsibility of the organization to consider the ethical values and protect the environment. The oil multinational
companies have to strengthen their policies regarding the environment, because this is for the well-being of the society.

Step 3

(b)

Clothing companies adopt a policy of outsourcing their manufacturing process in order to reduce their operational costs. By
outsourcing the manufacturing process, they transfer a portion of their work to foreign country rather than completing it by
internal means. Hence, it might result in ethical issues as the pollution resulted due to manufacturing is being transferred from one
country to other. So, policies have to be designed in order to reduce the wastage while fulfilling the needs of the society.
Question (Likes: 4, Dislikes: 0):

Under what conditions is it ethically defensible to outsource production to the developing world where labor costs are lower when
such actions also involve laying off long-term employees in the firm's home country?

Answer :

Step 1

It is ethically defensible to outsource production to the developing world to take advantage of lower labor costs if after calculating
the positives/negatives of the firing of the old workers, higher company profits, lower prices for consumers, and new developing
world jobs results in a net benefit.
Question (Likes: 0, Dislikes: 0):

Are facilitating payments ethical?

Answer :

Step 1

The facilitating payments are considered unethical as on the following reasons:

• These involve small gifts either in terms of payments or kind to obtain favor like permits, licenses, etc.

• Though they are considered legal in few states, the encouragement of these practices would increase the expecting rate among
individuals

• There is a greater chance of increasing demands for return in the long run, which would turn into corruption or bribery

• The fair and ethical morals of the individuals would be shattered with the involvement of these practices

• The negative impact is more likely to take place rather than an positive effects with facilitating payments practices

• It might be completely against the norms and regulations of the country, where they might wanted to make facilitating payments

• The environment of the business would have the major impact upon the implementation of these practices

• The economic system of that particular country could also influenced due to involvement of facilitating payments

• The unethical practices would be encouraged through introduction of facilitating payments as it would further converted into
corruption

Hence, the facilitating payments are not healthy for any economic system of the country as it encourages the unethical practices
like corruption and bribery.
Question (Likes: 1, Dislikes: 0):

A manager from a developing country is overseeing a multinational’s operations in a country where drug trafficking and
lawlessness are rife. One day, a representative of a local “big man” approaches the manager and asks for a “donation” to help the
big man provide housing for the poor. The representative tells the manager that in return for the donation, the big man will make
sure that the manager has a productive stay in his country. No threats are made, but the manager is well aware that the big man
heads a criminal organization that is engaged in drug trafficking. He also knows that that the big man does indeed help the poor in
the rundown neighborhood of the city where he was born. What should the manager do?

Answer :

Step 1

Ethics:

The division of knowledge that deals with moral guidelines is referred to as ethics. The moral principles, which are governing a
person’s conduct in an activity or in his behaviour, can be considered as ethics

Step 2

In reference to the situation, the suggested action of the manager would vary from every individual’s perspective. Here the context
defines a person as a manager but not as an individual so, the acts of the manager must be justifying the company requirements
and in view of the company sustainability in that country in the long run.

The manager must go proceed by donating to the big man based on the following reasons:

• It is evident that the criminals and illegal activities rule over the laws and regulations of the country hence, it is necessary for the
company to maintain a support to sustain in the market for smooth functioning in the long run

• The approach from big man is justified as there involve no threats and was very formal in seeking donation for a prospective
cause to help the poor, the manager can grant under the CSR activity that also enhances the goodwill of the organization

• The manager can convince the management for the donation since, he is already evident about the big man’s social service
activities for the poor and needy in the neighbourhood

The ultimate end result is benefiting the poor hence, it would be ethical for manager to donate as they are funding for the society
benefit but not to big man’s illegal activities. This is a win-win situation as the homeless would be benefited and not denying to big
man’s proposal would bring in support to the company especially in view of the legal conditions in the country.
Question (Likes: 0, Dislikes: 0):

Milton Friedman stated in his famous article in the New York Times in 1970 that “the social responsibility of business is to increase
profits.”* Do you agree? If not, do you prefer that multinational corporations adopt a focus on corporate social responsibility or
sustainability practices?

* M. Friedman, “The Social Responsibility of Business Is to Increase Profits,” The New York Times Magazine, September 13, 1970.

Answer :

Step 1

In this growing economy and competitive world, it is very important for any business to maintain a good customer relationship by
providing value to the customers. However, focusing only on maximizing profits will not benefit the business in the long run.

Focusing on maximizing the profit will benefit the organization in the short term and the company will only think about business
interest keeping the customer and society interest aside.

Step 2

There are lots of false values created by many businesses in order to make profits but the most important thing the company
should focus is on corporate social responsibility and sustainability practices.

Corporate social responsibility (CSR) means taking initiatives in business that will benefit the society. This is nothing but creating
a shared value for both business and society. The business functions ethically keeping in mind the national and international
norms.

Step 3

Corporate sustainability takes into consideration all aspects of business operations in social, cultural and economic environment
and build strategies keeping in mind the benefits of the society and creating shared values between consumer and business.

CSR and sustainability are factors for maintaining competitive advantage. For example as a CSR plan if a company is giving
donation in fields like music or education, then they will get positive response from the public. This will also help in the success
of the organization in the competitive world.

Step 4

In order to spread CSR and sustainability, ethical training is provided to the employees to take ethical decision. These types of
training are very useful to protect the organization against reputational damages.

CSR and sustainability includes environmental sustainability like recycling, go green program, reducing paper use. It also includes
sponsoring events, fair trade practices etc.

Step 5

CSR and sustainability helps the business by creating value for people, society and business which in turn benefits the business in
maximizing profits in the long run.

CSR and sustainability helps in maintaining a good customer relationship by following ethical values in operating its business. It
protects the organization against reputational damage and creates a unique brand image.

Thus to maintain its reputation and create opportunities in the emerging market it is very important for the businesses to focus
more on CSR and sustainability rather than only making profits.
Question (Likes: 0, Dislikes: 0):

Reread the Management Focus feature on Unocal and answer the following questions:

a. Was it ethical for Unocal to enter into a partnership with a brutal military dictatorship for financial gain?

b. What actions could Unocal have taken, short of not investing at all, to safeguard the human rights of people impacted by the gas
pipeline project?

Answer :

Step 1

a) A Friedmanite would look at the situation and ask what would be the most profitable action for the company within the bounds
of the law. Since the project was legal and profitable it would be ethical to partner with Burma’s military dictatorship.

A Cultural Relativist would look at the situation based on the local culture. Since slavery, rape, and burning babies alive is
tolerated in Burma, it is ethical to invest.

A Righteous Moralist bases the situation on the home country’s sense of ethics. Since slavery, rape, and burning babies alive is
not acceptable behavior in the US, the company probably shouldn’t have invested in Burma.

A Naïve Immoralist follows the concept of “if everyone else is doing it, it must be okay”. Under this concept, the manager would
see all the other companies leaving as fast as they can and leave also.

A Utilitarian believes the end result justifies whatever intermediate action is taken. Since economic growth would improve the
lives of the Burmese people, that justifies investment despite all human rights issues.

Kantian Ethicists believe that people should not be used and that human beings should be treated with respect. A Kantian probably
would not tolerate the use of people as slave labor or the disrespect of human beings through rape and being burned alive.

Step 2

b) The company could have had company workers clear a path for the pipeline instead of requiring the government to do it (with
forced labor). The company could have insisted on some human rights clauses in the contract. Unless the company was okay with
the pipeline being blown up by guerillas, the relocation of hostile villages would have happened anyway.
Question (Likes: 0, Dislikes: 0):

Mercantilism is a bankrupt theory that has no place in the modern world. Discuss.

Answer :

Step 1

Original Mercantilist theory held that wealth was based on a nation’s ownership of gold and silver. In order to increase the amount
of gold and silver, mercantilists advocated government intervention such as tariffs on imports and subsidies on exports to increase
and maintain a positive net inflow of gold and silver. Gold, silver, or paper currency representing a certain value of gold/silver
acted as money for much of capitalist history.

Economist David Hume argued that if country A held a positive inflow of gold/silver from country B, then, A would undergo
inflation due to an increasing amount of circulating currency. B would undergo deflation due to a decreasing amount of circulating
currency. Inflation would cause prices in country A to increase, while the opposite would happen in B. This would cause currency
inflows from country A to country B to occur. Therefore, increasing gold reserves was difficult or even futile.

Step 2

Adam Smith pointed out that the best case scenario was that there might be some more precious metals in a nation’s vaults. People
would not necessarily be better off. In fact they may be worse off. Subsidies require taxes to pay for them. Tariffs increase the
price of goods for consumers. The economic dislocation would cause people to expensively make goods in country A that country
B could make much cheaper, leaving A to focus its efforts on goods that it was better at making. If a country is better at making a
certain good than other countries, then that country has an absolute advantage.

If each country produces goods in which it has an absolute advantage, then the result is the most efficient allocation of resources
for the lowest price. Adam Smith defined the wealth of nations not as the amount of gold/silver but in the amount of goods a
country owned. As free trade allowed a focus on absolute advantage, free trade was the key to maintaining and improving a
country’s wealth.

Step 3

Free trade has certainly become the common wisdom of many nations today. With the assistance of organizations such as the
World Trade Organization, tariffs and subsidies have been cut and trade has been increased. However, not only have tariffs and
subsidies not completely been eliminated, many modern day workarounds limit trade. Some country’s get government favor,
access to cheap loans from state owned banks, favorable regulations, dumping, artificially cheap land/electricity, bureaucracy and
other enticements/discouragements that effectively act as subsidies and tariffs. The neo-mercantilists adopt mercantilist policies
that have many differences from the old. In the past currency was gold, silver, or paper notes representing a certain amount of
gold/silver. Today currency is based on fiat, essentially the government says the money has value and the people believe it has
value so it acts as an accepted medium of exchange. Central banks can decrease the amount of money in circulation to combat
inflation due to mercantilist policies. Countries adopt currency controls to keep money from leaving the country, or use the excess
foreign currency as savings or to invest in other countries in the form of a Sovereign Wealth Fund (organization that invests a
government’s excess foreign currency). While a number of countries adopt these policies, the best examples are Japan in the 60s-
80s, China today, and East Asia in general.

Thus, in light of these nations economic growth, it is too soon to say mercantilism is a bankrupt theory.
Question (Likes: 2, Dislikes: 0):

Is free trade fair? Discuss!

Answer :

Step 1

This question will probably generate a fair amount of discussion. Trade theory tells suggests that specialization and free trade
benefits all countries. However, a case can be made in some situations for imposing trade barriers. For example, if a developing
country is trying to establish an industry, trade barriers may be needed in the short term until the industry can become
competitive. While it could be argued that another country could make the product more efficiently already, is it fair to limit a
country’s ability to develop its industrial base?
Question (Likes: 0, Dislikes: 0):

Unions in developed nations often oppose imports from low-wage countries and advocate trade barriers to protect jobs from what
they often characterize as “unfair” import competition. Is such competition “unfair”? Do you think that this argument is in the best
interests of (a) the unions, (b) the people they represent, and/or (c) the country as a whole?

Answer :

Step 1

The theory of comparative advantage suggests that a country should specialize in producing those goods that it can produce most
efficiently, while buying goods that it can produce relatively less efficiently from other countries. Furthermore, the theory
suggests that opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Therefore, it
would follow that if low-wage countries can make certain products more efficiently than high wage countries, the low wage
countries should produce and export those products. While trade barriers may protect workers and companies, they are a short-
term fix at best. Moreover, by protecting industries, the government is not encouraging companies to become more efficient.
Instead, they are promoting inefficiency. Consumers lose out because they face higher prices and less choice.
Question (Likes: 2, Dislikes: 0):

What are the potential costs of adopting a free trade regime? Do you think governments should do anything to reduce these costs?
What?

Answer :

Step 1

Students will probably be divided on this question, and a lively debate should ensue. For example, certainly, students will
probably recognize that by adopting a free trade regime, jobs will be lost in some industries, however they may not agree on
exactly what should be done about the job losses. Some students might suggest that the government provide retraining programs
while others may argue that people lose their jobs everyday and do not receive government assistance to find new ones.
Question (Likes: 0, Dislikes: 0):

Reread the Country Focus on “Is China a Neo-Mercantilist Nation?”

a) Do you think China is pursuing an economic policy that can be characterized as neo-Mercantilist?

b) What should the United States, and other countries, do about this?

Answer :

Step 1

Many students will probably suggest that indeed, China appears to be following a neo-mercantilist philosophy. China has run a
trade surplus for years. In fact, in 2008, the country hit a record trade surplus of $280 billion. Some critics have suggested that
China is limiting its imports by following an import substitution policy. Other students however, may note that in 2008, the
growth in China’s imports actually exceeded the growth in its exports. Students may argue that this indicates a change in China’s
policy. Most students will probably suggest that in order to correct the country’s massive trade surplus, foreign countries like the
United States should continue to pressure China to allow its currency to appreciate, and maintain open markets.
Question (Likes: 22, Dislikes: 0):

Reread the Country Focus feature on moving white collar jobs offshore.

a. Who benefits from outsourcing skilled white color jobs to developing nations? Who are the losers?

b. Will developing nations like the United States suffer from the loss of high-skilled and high-paying jobs to developing nations?

c. Is there a difference between transferring high-paying white collar jobs, such as computer programming and accounting, to
developing nations, and sending low-paying blue collar jobs offshore? If so, what is the difference, and should government do
anything to stop the flow of white collar jobs out of the country to countries like India?

Answer :

Step 1

This question is likely to generate a lively debate. Many students will suggest that the outward flow of white-collar jobs is indeed
a serious issue, one that should be the focus of government attention. Students taking this perspective are likely to suggest that
white-collar jobs are more important to the nation’s future, and that they should remain at home. Other students however, may
argue that companies cannot afford to pay the higher wages commanded by white-collar jobs and still remain profitable.
Therefore, the argument might be that by taking these jobs outside the country, the company is able to remain viable, and keep
other people employed.
Question (Likes: 3, Dislikes: 0):

Drawing upon the new trade theory and Porter’s theory of national competitive advantage, outline the case for government
policies that would build national competitive advantage in biotechnology. What kinds of policies would you recommend the
government adopt? Are these policies at variance with the basic free trade philosophy?

Answer :

Step 1

New trade theory is based on the idea that economies of scale provide a competitive advantage to a firm that produces many units
of a product as compared to a firm that produces only a small amount of a product. These economies of scale occur because a large
firm can have more efficient employees that specialize in certain tasks and certain costs remain at a fixed level regardless of
production volume allowing said fixed costs to be spread across a larger amount of product.

Step 2

Porters Diamond holds that competitive advantages arise out of factor endowments (infrastructure, workforce education), Demand
conditions (demand for a company’s products), Related/supporting industries, and Firm strategy/structure/rivalry (management
ideologies and individual manager backgrounds).

Step 3

In order to become dominant in the biotechnology area, the government must take a number of actions. First, the government
should directly subsidize and encourage consolidation in the biotech industry and make clear its intention to create a national
competitive advantage in biotech. Subsidies are a competitive advantage in themselves, and the consolidation allows competitive
advantages from economies of scale. The government should encourage education in hard sciences and other subjects potential
biotech workers need to know and encourage the construction of laboratories, university research establishments and similar
infrastructure. The government should raise tariffs on biotech imports and negotiate access to other nation’s markets to ensure
there are strong demand conditions for the biotech industry. The government should encourage agriculture, pharmaceuticals,
university research and other related job fields to support the biotech industry.

Step 4

Yes, these policies deviate from the free-trade idea.

In 2008, inward FDI accounted for some 63.7 percent of gross fixed capital formation in Ireland, but only 4.1 percent in Japan
(gross fixed capital formation refers to investments in fixed assets such as factories, warehouses, and retail stores). What do you
think explains this difference in FDI inflows into the two countries?

Answer :

Step 1

The fact that Ireland’s FDI inflows accounted for 63.7 percent of its gross fixed capital formation while it accounted for only 4.1
percent in Japan shows the following:

1) Ireland has more FDI-friendly regulations than Japan. It offers better climate for inward FDI than Japan.

2) Ireland probably started from a low base of gross fixed capital. Hence, the percentages are higher.

3) Ireland had more of “greenfield” investments than Japan whereas in Japan they could have been more of JVs or Mergers and
Acquisitions. Therefore, in Ireland more of new fixed assets were created rather than in Japan where existing assets were taken
over.
Question (Likes: 3, Dislikes: 0):

Compare and contrast these explanations of FDI: internalization theory and Knickerbocker’s theory of FDI. Which theory do you
think offers the best explanation of the historical pattern of FDI? Why?

Answer :

Step 1

Internalization theory: firms use foreign direct investment rather than licensing for three reasons. First, licensing can leak
technology that gives the firm a competitive advantage. Second, a firm does not strongly control the licensee in how the product is
made, promoted, priced and other strategic areas. Multinationals that license can be at a competitive disadvantage to those that
don’t. Third, not everything is licensable. For these reasons, a firm will use FDI rather than licensing.

Vernon’s product lifecycle theory: firms introduce a new product in their home market, and conduct FDI to expand into other
markets that are advanced enough to support production of and to have demand for their product. Other companies begin to copy
the first company and the first company continues to expand production. As more products come onto the market, cost becomes
more of a factor and marginal profits are sought. Firms begin investment in low cost developing countries to decrease costs.
Licensing and exporting is not discussed.

Knickerbocker’s theory: oligopolistic industries exist when only a few large firms dominate an industry. Whatever one firm does
has a massive impact on the other firms. Therefore the firms pay attention to the other firm’s actions, including FDI. If one firm
has successful FDI in another nation, then the other firm’s export market to that nation is obliterated. The investing firm may
obtain a first mover advantage or discover something that could grant in a competitive advantage. Therefore the other firms will
initiate FDI to said nation.

Step 2

Internalization theory gives the best explanation.

Step 3

Knickerbocker only addresses FDI in an oligopolistic environment. FDI is not limited to oligopolistic environments. Vernon’s
theory does not even address exports or licensing. Internalization theory follows a logical framework that addresses exports and
licensing while matching with what happens historically.
Question (Likes: 2, Dislikes: 1):

What are the strengths of the eclectic theory of FDI? Can you see any shortcomings? How does the eclectic theory influence
management practice?

Answer :

Step 1

The eclectic theory of FDI is useful in explaining how the location-specific advantage is responsible for deciding the direction of
FDI. It adds on to the theory of internalization by adding the factor endowments of the location to basic assets of the investing
firm, which ultimately defines the rationale and direction for the FDI.

This theory does not seem to have any short-comings since it even explains the effect of secondary factors related to location
which have been termed as externalities.

This theory is very useful in management practice since it clearly helps one to develop a sound rationale for investment in any
country. It evaluates the various factors related to the location, both favorable and unfavorable along with the strength of the
firm’s assets related to technology, capital and management skills to arrive at a final rationale and direction.
Question (Likes: 2, Dislikes: 0):

Read the Management Focus on Cemex, and then answer the following questions:

a. Which theoretical explanation, or explanations, of FDI best explains Cemex’s FDI?

b. What is the value that Cemex brings to a host economy? Can you see any potential drawbacks of inward investment
by Cemex in an economy?

c. Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode. Why?

Answer :

Step 1

a. C#’s FDI decision can be explained by three reasons:

i. The fact that its products, cement and ready-mix cement, were not suitable for export.

• Cement has a very low value-to-weight ratio and hence the transportation costs would be comparatively high making the landed
price un-competitive.

• The ready-mix cement had to be used within 90 minutes of being mixed. This makes it impossible to export.

ii. C# has a unique way as to how it does business which cannot be licensed:

• It funds its dealers and distributors to buy their own trucks for their cement business.

• They have an incentive plan that rewards the dealers with C# stock based on performance

iii. C# would like to maintain control not only on its operations but also its expansion plans. It normally enters into on country in
the region and tends to expand into the neighboring countries over a period of time.

This decision could be explained by the principle of internalization.

Step 2

b. C# brings in a lot of pluses for the host country.

i. It makes the country self-reliant in Cement. This is a product that every developing economy requires since construction is the
basis of any economic development.

ii. It provides direct employment in its cement plants.

iii. It also provides indirect employment at all its distributors and dealers.

iv. It boosts the host country’s economic development by increasing the income levels.

Many of the countries that C# has invested in are politically unstable like Venezuela and Egypt or are facing economic difficulties
like Spain. Therefore, there is a real danger of either the industry may be nationalized or some punitive taxes may be enforced on
foreign investors. These are the risks that C# may face regarding its FDI.

Step 3

c. Cement is an industry that requires a well-defined distribution network as well as a lot of capital investment to start a
manufacturing plant. This process takes a lot of time. By acquiring an existing company rather than making a greenfield
investment C# achieves the following:

i. It saves time in getting started.

ii. It gets a readymade marketing and distribution network.

iv. It acquires a network of suppliers.

v. It gets a brand that has been established in that country.

These would be a great advantage. Also if it has taken over a stagnant companies like it did in Spain or a company working well
below its capacity, it can see immediate profits by just boosting the production. Its superior marketing and management skills
should be able to affect a turnaround very quickly.
Question (Likes: 14, Dislikes: 0):

You are the international manager of a U.S. business that has just developed a revolutionary new personal computer that can
perform the same functions as existing PCs but costs only half as much to manufacture. Several patents protect the unique design
of this computer. Your CEO has asked you to formulate a recom​mendation for how to expand into Western Europe. Your options
are (a) to export from the United States, (b) to license a European firm to manufacture and market the computer in Europe, or (c)
to set up a wholly owned subsid​iary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to
your CEO.

Answer :

Step 1

a) Exporting: Pros include the ability to use existing manufacturing facilities and jobs for the native country. Cons include
reduction of profit margins due transportation costs and the cost of trade barriers.

Step 2

b) Licensing: Pros include not having to spend time, effort, and money creating a subsidiary and not having to pay for
transportation. In addition trade barriers are bypassed. Cons include the loss of the technological advantage after the patents expire
and not having direct control over the licensees actions.

Step 3

c) Setting up subsidiary: Pros include not having to pay for transportation, overcoming trade barriers, having direct control, and not
having to fear the diffusion of competitive advantages to possible future competitors. Cons include having to spend the time,
money, and effort of setting up the subsidiary.