Introduction to International Business

1. Introduction to International Business July 21, 2008 Second Discussion Section: Culture & Ethics; International Trade

2. Agenda • Chapters 1, 2 in a Nutshell • Review Chapters 3 and 4 • Discussion 1: • Selling Domino’s Pizza Worldwide • Review Chapters 5 and 6 • Discussion 2: • Boeing v. Airbus

3. Chapters 1 and 2 • Chapter 1: • What is globalization? • What is driving globalization? • What are the trends in globalization? • What are the debates about globalization? • Chapter 2: • How are countries different: politically, economically, legally? • What are the factors leading to economic development? • How to measure economic development • Protection of property rights + Innovation? What about the legal and political systems of the country?

4. Chapter 3: Differences in Culture • What is Culture? • Values and Norms • Culture, Society, and the Nation-State • The Determinants of Culture • Social Structure • Individuals and Groups • Social Stratification • Religious and Ethical Systems • Language • Culture and the Workplace • Hofstede study • Power distance; individualism vs. collectivism; uncertainty avoidance; masculinity vs. femininity

5. Chapter 3 Learning Goals • Know what is meant by the culture of a society. • Identify the sources that lead to differences in social culture. • Identify the business and economic implications of differences in culture. • Understand how differences in social culture influence values in the work place. • Develop an appreciation for the economic and business implications of cultural change.

6. Chapter 3 Exercise: Domino’s Pizza commercials from around the world • U.S. • http://www.youtube.com/watch?v=8QuozSISqW4 • http://www.youtube.com/watch?v=VIHj7f8mOLI • http://www.youtube.com/watch?v=YoZhpsNztgY • Australia • http://www.youtube.com/watch?v=iyHQHEWpf3A • http://www.youtube.com/watch?v=f5J8TnWHxVI • Mexico/Latin America • http://www.youtube.com/watch?v=x8tSR-itf9o • http://www.youtube.com/watch?v=YTqtta8VMyo • Europe • http://www.youtube.com/watch?v=MdTXbQ6t5os • http://www.youtube.com/watch?v=GRpixqTRejs • Middle East • Israel: http://www.youtube.com/watch?v=lOKPCxRKhdg • Asia • Japan: http://www.youtube.com/watch?v=HOlsj46QOwU • Korea: http://www.youtube.com/watch?v=hh52CqPVj6E • http://www.youtube.com/watch?v=_k7kcEqdaH4 • India: http://www.youtube.com/watch?v=nhz9JjN942k • http://www.youtube.com/watch?v=pTQskWbBtW8&feature=related

7. Chapter 3: Critical Thinking • Outline why the culture of a country might influence the costs of doing business in that country. Illustrate your answer with examples.

8. Chapter 3: Critical Thinking • Choose two countries that appear to be culturally diverse. Compare the culture 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.

9. Domino’s Discussion Questions • 1. Domino’s has successfully grown its international presence very quickly. Compare and contrast its strategy with that of another well-known international fast food operation, McDonald’s. What similarities do you see? Are they any significant differences between the two companies? What has led to the success of Domino’s?

10. Domino’s Discussion Questions • 2. While its pizza appears to be universally accepted, Domino’s has had to make some adjustments to its marketing mix. Discuss the different components in the marketing mix and how the company has responded to local needs.

11. Chapter 4: Ethics in International Business • Ethical issues in International Business • Employment Practices; Human Rights; Environmental Pollution; Corruption; Moral obligations  • Ethical Dilemmas • What are they? • The Roots of Unethical Behavior • How do they arise? • Philosophical Approaches to Ethics • Straw Men • Friedman Doctrine; Cultural Relativism; Righteous Moralist; Naïve Immoralist • Utilitarian and Kantian Ethics • Rights Theories • Justice Theories • Ethical Decision Making • Hiring and Promotion; Organization Culture and Leadership; Decision-Making Processes; Ethics Officers; Moral Courage

12. Chapter 4 Learning Goals • Be familiar with the ethical issues faced by international businesses. • Recognize an international dilemma. • Discuss the causes of unethical behavior by managers. • Be familiar with the different philosophical approaches to ethics. • Know what managers can do to incorporate ethical considerations into their decision making.

13. Chapter 4 Critical Thinking • QUESTION 1: 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?

14. Chapter 4 Critical Thinking • QUESTION 2: 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?

15. Chapter 4 Critical Thinking • QUESTION 3: Are facilitating payments ethical?

16. Chapter 4 Critical Thinking • QUESTION 4: 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.

17. Chapter 5: International Trade Theory • An Overview of Trade Theory • Mercantilism • Absolute Advantage (Adams Smith) • Comparative Advantage (David Ricardo) • The Gains from Trade/Qualifications and Assumptions • Simple Extensions of the Ricardian Model • Heckscher-Ohlin Theory  • The Leontief Paradox • The Product Life-Cycle Theory (Raymond Vernon) • Evaluating the Product Life-Cycle Theory • New Trade Theory (1970’s economists) • Increasing Product Variety and Reducing Costs • Economies of Scale, First-Mover Advantages and the Pattern of Trade • Implications of New Trade Theory  • National Competitive Advantage: Porter’s Diamond • Factor Endowments • Demand Conditions • Related and Supporting Industries • Firm Strategy, Structure, and Rivalry • Evaluating Porter’s Theory

18. Chapter 5 Learning Goals • Understand why nations trade with each other. • Be familiar with the different theories explaining trade flows between nations. • Understand why many economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system. • Be familiar with the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries. • Understand the important implications that international trade theory holds for business practice.

19. Chapter 5: Critical Thinking • What are some potential costs of adopting a free trade regime? Do you think governments should do anything to reduce these costs? What?

20. Chapter 5: Critical Thinking • The world’s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interest of such nations! Discuss.

21. Chapter 5 Critical Thinking • 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?

22. Chapter 5 Critical Thinking • a) Who benefits from the outsourcing of skilled white collar 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 other countries? • c) Is there a difference between the transference of high paying white collar jobs, such as computer programming and accounting, to developing nations, and low paying blue collar jobs? 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?

23. Chapter 5 Critical Thinking • Drawing on the new trade theory and Porter's theory of national competitive advantage, outline the case for government policies designed to build a national competitive advantage in biotechnology. What kind of policies would you recommend the government adopt? Are these policies at variance with the basic free trade philosophy?

24. Chapter 6: The Political Economy of International Trade • Instruments of Trade Policy • Tariffs • Subsidies • Import Quotas and Voluntary Export Restraints • Local Content Requirements/ Administrative Policies • Antidumping Policies • The Case for Government Intervention • Political Arguments for Intervention • Protecting jobs and industries; national security; retaliation; protecting consumers; furthering foreign policy objectives; protecting human rights • Economic Arguments for Intervention • The infant industry argument; strategy trade policy •  The Revised Case for Free Trade (or, counter-arguments to the case for government intervention) • Retaliation and Trade War • Domestic Politics • Development of the World Trading System • From Smith to the Great Depression  1947–1979: GATT, Trade Liberalization, and Economic Growth  1980–1993: Protectionist Trend  The Uruguay Round and the World Trade Organization WTO: Experience to Date The Future of the WTO: Unresolved Issues and the Doha Round

25. Chapter 6 Learning Goals • Describe the policy instruments used by governments to influence international trade flows. • Understand why governments sometimes intervene in international trade. • Articulate the arguments against strategic trade policy. • Describe the developments of the world trading system and the current trade issues. • Explain the implications for managers of developments in the world trading system.

26. Chapter 6: Critical Thinking • Do you think that governments should consider human rights when granting preferential trading rights to countries? What are the arguments for and against taking such a position?

27. Chapter 6: Critical Thinking • Whose interests should be the paramount concern of government trade policy - the interests of producers (businesses and their employees) or those of consumers?

28. Chapter 6: Critical Thinking • Given the arguments relating to the new trade theory and strategic trade policy, what kind of trade policy should business be pressuring government to adopt?

29. Chapter 6: Critical Thinking • You are an employee of an U.S. firm that produces personal computers in Thailand and then exports them to the U.S. and other countries for sale. The personal computers were originally produced in Thailand to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at that time were Malaysia and Hong Kong. The US government decides to impose punitive 100% ad valorem tariffs on imports of computers from Thailand to punish the country for administrative trade barriers that restrict U.S. exports to Thailand. How do you think your firm should respond? What does this tell you about the use of targeted trade barriers?

30. Boeing versus Airbus • Boeing 787 Dreamliner • http://www.youtube.com/watch?v=mBuC9_jRVQ0 • Airbus A380 • http://www.youtube.com/watch?v=AK10MxtCAHc

31. Subsidy Dogfight: Boeing v. Airbus • What are the facts? • Boeing’s development of Boeing 7E7 (now 787), which promises as much as 20% reduction in operating costs • Alliance with three Japanese companies • 1992 Agreement limits state aid that both companies can receive from respective governments • Does 1992 Agreement extend to other parties in the project? Japanese MET? State of Washington and Kansas • Airbus applies for launch aid for A350, direct competitor to 787 • Dispute now before WTO as to the legality of the various subsidies

32. Boeing v. Airbus • Boeing’s Claim • Airbus receives subsidies from UK, France, German and Spain • Why is this bad? • $13.5 billion government subsidies between 1970 and 1990 ($25.9 billion if commercial interest rates applied) • Loans at below market interest rates and tax breaks • Airbus is believed to have financed 80% of the cost of aircraft for a term of 8 to 10 years at an annual interest rate of approximately 7% • In contrast, US Export Import Bank required 20% down payments from Boeing customers, financed only 40% of the cost of an aircraft directly, and guaranteed financing of the remaining 40% by private banks at an average interest rate to 8.5 for 10 years • Airbus received government $3.7 billion launch aid and $2.8 billion in indirect subsidies for the development of the A380 superjumbo and need not repay the aid if the aircraft is not a commercial success • Catalyst for latest dispute: launch aid for A350, direct competitor to B-787 ($700 million by UK, 30% launch aid from EU)

33. Boeing v. Airbus • Airbus’ claims • Airbus success due not to subsidies but to good products and strategy • Boeing benefited from US government aid for a long time • Planes were built under government WWI, WWII. Boeing 707, for example, was subsidized by the US government • 1991 EC study contended that Boeing/McDonnell Douglas received $18 to $22 billion in indirect aid between 1976 and 1990. US Dept of Defense gave as much as $6.34 billion from 1976 to 1990, and NASA gave $8 billion to commercial aircraft production. Moreover, tax exemptions gave an addition $1.7 billion to Boeing and $1.4 billion to MD • Boeing rejected these claims, saying no additional 5% for commercial work for every defense contract; only 3% of Boeing’s R&D from Department of Defense, and only 4% from NASA funding • Airbus contends: Boeing received some $12 billion from NASA to develop technology, much of it found its way to commercial jet aircraft • Airbus further contends: Boeing would receive as much as $3.2 billion in tax breaks from Washington, $1 billion in loans from the Japanese government

34. Boeing v. Airbus • How might the repayable launch aid for Airbus change its decision making on launching a new aircraft? What are the potential consequences for (a) Boeing, (b) airlines, and (c) the profitability of both Boeing and Airbus?

35. Boeing v. Airbus • When Airbus originally received government aid back in the 1960s, it was a new enterprise. Today it is the global market share leader in the commercial aerospace business. How do gains in market share effect the legitimacy of claims for subsidies?

36. Boeing v. Airbus • Do you think that R&D contracts from NASA and the Pentagon benefit Boeing’s commercial aerospace business? How?

37. Boeing v. Airbus • At this point, what do you think is the most equitable solution to the long running battle between the US and EU on subsidies for commercial aircraft development?