Module 3 Ethics and International Business, Global Environmental Regulations 

Trade and Investment Environment

Ethical issues can arise when environmental regulations
in host nations are inferior to those in the home nation.
3.0 Ethics and International Business
Many developed nations have substantial regulations
governing the emission of pollutants, the dumping of
Introduction
toxic chemicals, the use of toxic materials in the
Ethics, corporate social responsibility, and sustainability workplace, and so on. Those regulations are often
are interconnected issues facing countries, companies, lacking in developing nations, and, according to critics,
and societies. These “social” issues arise frequently in the result can be higher levels of pollution from the
international business, often because business practices operations of multinationals than would be allowed at
and regulations differ from country to country.  home. 

Ethics serves as the foundation for what people do or do Corruption   

not, and ultimately what companies engage in globally.
As noted corruption has been a problem in almost every
As such, companies’ involvement in corporate social
society in history and it continues to be one today. There
responsibility practices and sustainability initiatives can
always have been and always will be corrupt
be traced to the ethical foundation of its employees and
government officials. International businesses can and
other stakeholders, such as customers, shareholders,
have gained economic advantages by making payments
suppliers, regulators, and communities. Ethics refers to
to those official. 
accepted principles of right or wrong that govern the
conduct of a person, the members of a profession, or the Moral Obligation of Multinational Corporations 
actions of an organization. Business ethics are the
accepted principles of right or wrong governing the The ethical obligations of a multinational corporation
conduct of businesspeople, and an ethical strategy is a toward employment conditions, human rights, corruption,
strategy, or course of action, that does not violate these and environmental pollution are not always clear-cut.
accepted principles Hill (2019). However, what is becoming clear-cut is that managers
and their companies are feeling more of the 
Ethics and International Business  marketplace pressures from customers and other
stakeholders to be transparent in their ethical decision
Many of the ethical issues in international business are
making Hill (2019)
rooted in differences in political systems, laws, economic
development, and culture across countries.  In the
3.1 International Trade Theory (Classical)
international business setting, the most common ethical
issues involve employment practices, human 
Introduction
rights, environmental regulations, corruption, and the
moral obligation of multinational corporations. Free trade and globalization have provided benefits to
countries that engage in trade. New industries realized
Employment Practices
and have thrived in some countries because of trading.
When work conditions in a host nation are clearly inferior This case was clear in Bangladesh for its garments. The
to those in a multinational’s home nation, which United States was known as the supplier of aircraft.
standards should be applied? Those of the home nation, Taiwan and Korea have specialized and both known for
those of the host nation, or something in between? While semiconductors. These industries are also the primary
few would suggest that pay and work conditions should exporters of commodities to other countries either as a
be the same across nations, how much divergence is finished product or as an intermediate product. Despite
acceptable? For example, while 12-hour workdays, the benefits brought by trading, there are still winners
extremely low pay, and a failure to protect workers and losers in trading. Economists, however, made it
against toxic chemicals may be common in some less clear that the benefits outweigh the cost. 
developed nations, does this mean that it is okay for a
Countries that engage in trade were guided with trade
multinational company to tolerate such working
theories in crafting policies for their respective countries. 
conditions in its subsidiaries or to condone it by using
These trade theories have already existed for a long time
local subcontractors?
and known as classical theories of trade. These theories
Human Rights  will be examined in this lesson including the arguments
on the manner of the conduct of trade and why it is
Basic human rights still are not respected in a large favorable. There are three notable theories of trade that
number of nations, and several historical and current will be subjected to this analysis. These are
examples exist to illustrate this point. Rights taken for mercantilism, absolute advantage, comparative
granted in developed nations, such as freedom of advantage.
association, freedom of speech, freedom of assembly,
freedom of movement, and freedom from political
repression. 
3.2 New Trade Theories

Introduction

The classical trade theories are static. The models failed

to consider the role of trade to the change in the stock of
resources of countries. The efficiency of countries in
utilizing resources was not considered in the model. The
productivity of countries in producing goods will change
over time because of the availability of factor inputs from
abroad. Likewise, it was believed that trade will lead
countries to be efficient in the use of its stock resources.
The source of this efficiency could come from the
expansion of the market and the demand for goods and
services because of trade.

The first modern theory of trade was advanced by

Vernon. The theory was called the product life
cycle. This was based on the observation of the
emergence of new products coming from the United
States. The large size of the United States' wealth and
markets gave incentives to firms to produce new
products.  Eventually, production in other countries will
occur as products and markets grow mature. The
maturity of products and the market will standardize the
process of production and pricing will be the basis of
competition. Firms have to consider the cost of
production and need to locate production to where labor
cost is lower. Products will re-enter the US markets as
an export to the United States.

Another theme that was observed in the patterns of trade

in recent times was attributed to economies of scale
and first-mover advantage.  Economies of scale are
achieved because of the reduction in the per-unit cost of
production due to large scale production. The possible
sources of the occurrence of economies of scale are the
ability of firms to utilize more productive inputs and the
equal spread of fixed cost due to large scale production.
The first-mover advantage is described as the strategic
advantage secured by firms who enter the market ahead
of others. The pattern of trade that can be observed on
products where economies of scale are significant and
with a large proportion of world demand may reflect first-
mover advantage. Countries were able to dominate
exports of these products because these countries were
able to achieve economies of scale and first-mover
advantage (Hill,2011). 

Likewise, there also some notion about strategic trade

theory involving government intervention. This theory
suggests that government intervention in certain
industries can enhance the chances of favored firms of
international success (Peng,2012). However, this theory
advocating government intervention was criticized by
those who favor free trade.

The last theory was the national competitive

advantage by analyzing Porter's Diamond. Porter's
Diamond focused on the four broad attributes of a
country. These attributes are said to shape the business
environment where domestic firms compete and can
promote or hinder the creation of competitive advantage.
Module 4 The Global Monetary System and Global and balance of payments, exchange rate policies of
Expansion governments, and investor psychology. 

4.1 Nature and Function of the Foreign Exchange 4.3 Implications for Managers and Business
Market
Introduction
Introduction
Managers who engage in international business need to
Firms that engage in international trade are the major know that the exchange rate exerts influence on the
participants in the foreign exchange market while the profitability of trade and investment deals of the firm.
second is the individual people like tourists. Firms Unexpected changes and most importantly
receive payments from its export of goods to other counterintuitive changes in the exchange rate can make
countries. Investment of firms in other countries also profitable ventures unproductive. The foreign exchange
receives income from their foreign investment. These risk poses transaction, translation, and economic
payments and income received by firms from foreign exposure to firms. Tactics and strategies must be
countries have to be converted to domestic currency employed by the firm to protect short term cash flows
before it can be used to purchase goods. Tourists who from the adverse changes in the exchange rate.
travel abroad need to convert their domestic currency to
the currency of the country where they intend to visit. 4.4 Strategy and the Firm
The domestic currency is not an accepted legal tender
for the payment of goods in foreign countries (Hill,2011). If we talk about strategy and the firm, we refer to the firm
in the most common way as a method to organize
Moreover, according to Hill (2011), the foreign exchange activities. This means that the firm can also be called
market has two main functions. The first function multinational enterprise, multinational corporation, an
is currency conversion and the second is to provide international business, international organization, global
insurance against foreign exchange risk. The company, and so on. A unique type of firm, though, is
existence of a system and a functioning foreign what we call an SME—a small and medium-sized
exchange market enable companies to trade despite the enterprise. SMEs are companies that have fewer than
differences in currencies of countries. 500 employees (U.S.) or fewer than 250 employees
(Europe). Throughout the text, we use a variety of 
4.2 Determinants and Theories of Foreign Exchange terminologies in largely the same context for the larger
Rates firms, but we specify clearly when we talk about SMEs
since these companies have global strategies that
Introduction sometimes differ from their larger counterparts.

The foreign exchange market is governed by the law of A firm’s strategy can be defined as the actions that
supply and demand. The interaction between the supply managers take to attain the goals of the firm. For most
of currency and the demand for currency in the market firms, the preeminent goal is to maximize the value of
results in an equilibrium exchange rate and equilibrium the firm for its owners and its shareholders (subject to
quantity. The graph below illustrates the model of the very important constraint that the activities
exchange rate determination. undertaken are done in a legal, ethical, and socially
responsible manner. To maximize the value of a firm,
managers must pursue strategies that increase
the profitability of the enterprise and its rate of profit
growth over time.

Managers can increase the profitability of the firm by

pursuing strategies that lower costs or by pursuing
strategies that add value to the firm’s products, which
enables the firm to raise prices and/or to maintain an
existing customer base. Managers can increase the rate
at which the firm’s profits grow over time by pursuing
strategies to sell more products in existing markets or by
pursuing strategies to enter new markets. Making a
decision to expand internationally can help managers
boost the firm’s profitability and increase the rate of profit
According to Peng (2012), there are five determinants of growth over time 
foreign exchange rates. These are the differences in
the relative prices of goods between countries as 4.5 Global Expansion
explained by the law of one price and measured
using the purchasing power parity (PPP).  The other
determinants are interest rate and inflation, productivity
Expanding globally allows firms to increase their
profitability and rate of profit growth in ways not available
to purely domestic enterprises. Firms that operate
internationally are able to;

1. Expand the market for their domestic products by

selling those products (or services) in international
markets.
2. Realize location economies by dispersing value
creation activities to those worldwide locations
where they can be performed most efficiently and
effectively.
3. Realize greater cost economies from experience
effects by serving an expanded global market from a
geographically central location, thereby reducing the
costs of value creation.
4. Earn a greater return by leveraging any valuable
skills developed in foreign operations and
transferring them to other entities within the firm’s
global network of operations Hill (2019)

4.6 Cost pressures and pressures for Local

responsiveness

Firms that compete in the global marketplace typically

face two types of competitive pressure that affect their
ability to realize location economies and experience
effects and to leverage products and transfer
competencies and skills within the enterprise. They face 
pressures for cost reductions and pressures to be
locally responsive . These competitive pressures place
conflicting demands on a firm. Responding to pressures
for cost reductions requires that a firm try to minimize its
unit costs. But responding to pressures to be locally
responsive requires that a firm differentiates its product
offering and marketing strategy from country to country
in an effort to accommodate the diverse demands arising
from national differences in consumer tastes and
preferences, business practices, distribution channels,
competitive conditions, and government policies Hill
(2019).