KEY CONCEPTS FOR EXAMINATION ONE: CH 1- 4

CHAPTER ONE
What is globalization?
- The trend towards a more integrated global economic system
- Refers to the shift towards a more integrated and interdependent world economy

What are the effects of globalization?

- Improvements in technology
- Cars people drive
- Food people eat
- Jobs where people work
- Clothes people wear

What do global business managers need to know to manage in a global

marketplace?
- Countries differ so they need to know cultural differences, translations of
language, religious differences and what the predominant religion is
- International companies must work within the limits imposed by
governmental intervention and the global trading system
- International transactions require converting funds and being susceptible to
exchange rate changes

Globalization and its impact on national economies.

-
Implications of drivers on globalization of markets and globalization of production
What are global institutions?

- They manage, regulate, and police the global market place

- They promote the establishment of multinational treaties to govern the global
business system
o Examples:
 World Trade Organization: responsible for policing the world
trading system and ensuring the nations adhere to the rule
established in WTO treaties
 International Monetary Fund: maintains order in the
international monetary system
 World Bank: promotes economic development
 United Nations: maintains international peace and security,
develops friendly relations among nations, cooperates in
solving international problems and promotes respect for human
rights, and is a center for harmonizing the actions of nations

Globalization of markets: what is it?

- The fact that in many industries historically distinct and separate national
markets are merging into one huge global marketplace in which the tastes and
 preferences of consumers in different nations are beginning to converge upon
some global norms
o Means markets are merging and products are coming from all over the
world at cheaper costs and shipped to another country as well as
people traveling around the world and the reduction of differences
between cultures and people
 Ex: Coca-Cola, McDonald’s hamburgers
 Ex: Cheaper for roses to be grown in Ecuador and cut to be
sold in New York 2 days later while still fresh

Globalization of production: what is it?

- Improvements in transportation technology have enabled firms to better
respond to international customer demands
- The tendency among many firms to source goods and services from different
locations around the globe in an attempt to take advantage of national
differences in the cost and quality of factors of production (such as land, labor,
capital, and energy), thereby allowing them to compete more effectively
against their rivals
o Ex: Boeing, Lenovo
- As a result of technology innovations, real costs of information processing and
communication fell dramatically
o Made it possible for a firm to create and manage a globally dispersed
production system, further facilitate the globalization of production

Drivers of globalization:
- Reduction of trade barriers
o Under the WTO, a mechanism now exists for dispute resolution and
the enforcement of trade laws, and there is a push to cut tariffs on
industrial goods, services, and agricultural products
o Reduction of barriers has contributed to increased international trade,
world output, and foreign direct investment (investing resources and
business activities outside a firm’s home country)
- Reduction of restrictions on foreign direct investment
o After WWII, the industrialized counties of the West began removing
barriers to the free flow of goods, services, and capital between nations
o Under GATT (General Agreement on Tariffs and Trade—international
treaty that committed signatories to lowering barriers to the free flow
of good across national borders and led to WTO) over 100 nations
negotiated further decreases in tariffs and made significant progress on
the number of non-tariff issues
- Technological change
o This made globalization possible
o Microprocessors and Telecommunications
 Major advances in communication and information processing
lowered cost of global communication and thus the cost of
coordinating and controlling a global organization
 o The Internet and the Web
 Web-based transactions have grown from virtually zero in 1994
to almost $7 trillion in 2004
o Transportation Technology
 Most important developments are probably development of
commercial jet aircraft and super freighters and the
introduction of containerization, which greatly simplifies trans-
shipment from one mode of transport to another
o Containerization
 Reduction of shipping goods over long distances and before
this moving shipments from one mode of transport to another
was very labor intensive
- Regional trade agreements

What is the globalization debate? Pros/cons/supporters/opponents.

- Is the shift toward a more integrated and interdependent global economy a
good thing?
o Critics
 The gap between rich and poor has gotten wider and that the
benefits of globalization have not been shared equally
 Argue it will forever change the world in a negative way
 The home country traditions, ethics, and
 Jobs that could go to people at home are being lost to low-wage
nations
 Economic power is shifting away from national governments
and toward supranational organizations such as the WTO, EU
and UN
 Free trade encourages firms from advanced nations to move
manufacturing facilities to less developed countries that lack
adequate regulations to protect labor and the environment from
abuse by the unscrupulous
• Adhering to labor and environmental regulations
significantly increases cost of manufacturing
enterprises and puts them at competitive disadvantage
in global market
o Supporters

 Supporters of free trade suggest that the actions of

governments have made limited economic improvement in
many countries
 Free trade will result in countries specializing in the production
of those goods and services that they can produce most
efficiently, while importing goods and services that they cannot
produce as efficiently
 • Thus as the cost of production of goods goes down the
prices to purchase goes down and thus results in more
spending

What are the changing demographics of multinational companies? Of FDI?

- A multinational enterprise is any business that has productive activities in two
or more countries
o Non-U.S. Multinationals
 Expect the growth of new multinational enterprises from the
world’s developing nations
o The Rise of Mini-Multinationals
 The number of small and medium sized companies is on the
rise
CHAPTER TWO
Chapter 2: National Differences in Political Economy

What is a political economy versus a political system?

• Political Economy: The combination of the political, economic, and legal
systems pertaining to a specific country
• Political System: System of government in a nation, assessed according to:
o The degree of emphasis upon collectivism versus individualism
o Degree to which they are democratic versus totalitarian
What is collectivism? Individualism?
• Collectivism: A system that stresses the primacy of collective goals over
individual goals
o The needs of the society as a whole are generally viewed as more
important than individual freedoms
o Commonly feature state-owned enterprises and restricted markets
 Asian Cultures and use of censorship
• Individualism: A political philosophy that an individual should have freedom
over his or her economic and political pursuits
o Guarantees individual freedom and self-expression
o Allowing the pursuit of self-interests as a means for achieving the best
overall good for society
o Typically accompanied by a free market system
What is socialism?
• A broad set of economic theories of social organization advocating public or state
ownership and administration of the means of production and distribution of
goods as well as compensation. As a political system whose basic ideals criticize
the effects of industrialization and private ownership on society, countries with
socialistic political systems are typically unfavorable to global businesses.
• Communists generally believed that collectivism could only be achieved through
revolution and totalitarian dictatorship, while social democrats worked to achieve
the same goals by democratic means
What is democracy? Totalitarianism and the four types of totalitarianism?
 • Democracy: Political system in which the government is devised by its citizens,
exercised either directly or through elected representatives
o Most common is Representative Democracy, for which elected
representatives vote on behalf of constituents
• Totalitarianism: Form of government in which one person or political party
exercises absolute control over all spheres of human life, and opposing political
parties are prohibited
o Communist Totalitarianism: Advocates achieving socialism through
totalitarian dictatorship  USSR
o Theocratic Totalitarianism: Political power is monopolized by a party,
group, or individual that governs according to religious principles  Iran,
Afghanistan
o Tribal Totalitarianism: A political party that represents the interests of
particular tribe monopolizes power  African nations, Zimbabwe, Kenya
o Right-Wing Totalitarianism: Individual economic freedom is allowed
but individual political freedom is restricted in the belief that it could lead
to communism Fascism in Germany and Italy
 Right-Wing Totalitarianism draws support from middle classes
seeking to maintain economic and social status quo, while Left-
Wing stems from working class movements to eliminate class
distinctions and redistribute wealth
What are the three types of economic systems?
• Market Economy: The types of goods and services, as well as quantities,
produced by a country are determined by supply and demand  The U.S., China
(to some extent), Singapore
• Command Economy: The types and quantities of goods and services produced
by a country, as well as sale prices, are all planned by the government  China,
Cuba, North Korea, Libya, Iran
• Mixed Economy: Includes some elements of a market economy and some
elements of a command economy  The United States, India
What are the three types of legal systems? Which countries use each type?
• Differences in the structure of law can impact the attractiveness of a country as an
investment site and/or market
• Common Law System: Based on tradition, precedent, and custom  most of
Great Britain’s former colonies, including the United States
• Civil Law: Detailed set of laws organized into codes  found in over 80
countries including Germany, France, Japan, and Russia
• Theocratic Law System: Laws based upon religious teachings  Islamic law is
the most widely practiced theo system in the modern world
Why are property rights important? Give examples.
• Property Rights: The legal rights over the use to which a resource is
implemented and the income generated by such resource
o Very important for the functioning of business, but can be violated by
either private action or public action
 o Property rights typically protect the competitive advantages of companies
or individuals who invented such products, procedures, or services from
exploitation and declining margins
o This property typical involves high R&D costs and skilled labor 
Pharmaceutical companies, Biotechnology
What is private action? Public action? What is the impact of corruption on
business?
• Private Action: Refers to theft, piracy, blackmail, and rent-seeking by private
individuals or groups  KGB, Russian Mafia, Corruption in private sector
• Public Action and Corruption: When public officials extort income or resources
from property holders using various legal mechanisms including excessive
taxation, requiring expensive licenses or permits from property holders, or taking
assets into state ownership with compensating the owners The United States
and its use of unfair trade barriers such as quotas, lobbying, and eminent domain;
China and its public officials exercising corruption
• Corruption makes businesses less productive, draining private and public capital
resources from much needed activities, such as research, funding for public
works, employee salaries, improved facilities and equipment; furthermore,
corruption disincentives firms to be competitive or innovative due to the lack of
compensation for such activities
What is Foreign Corrupt Practices Act? What is its effect on US companies doing
business?
• FCPA: It is a violation of United States law to bribe a foreign government official
in order to obtain or maintain business over which the foreign official has
authority
o Requires all publicly traded countries to keep detailed records to identify
if a violation of the act occurs
o Grease Payments: Can bribe customs officers or government officials if
you already have business operations with them, to maintain relationships
o The effect of U.S. companies doing business under this agreement is
trying to adhere to American cultural and business practices while
respecting the customs of the nations within which business is also being
conducted
o Companies from the U.S. may have to partner with a foreign firm in order
to help facilitate business transactions and acclimate to the country’s
systems politically, legally, and socially
What is intellectual property and why is it important to protect it?
• Intellectual Property: Software, literary works, chemical formulas, processes, or
anything that is a revenue producing mechanism created through intellectual
activity
o Patents: Documents giving the inventor of a new product or process
exclusive rights to the manufacture, use, or sale of their invention for a
specified period of time (typically 20 years)
 o Copyrights: Exclusive legal rights for authors, composers, playwrights,
artists, and publishers to publish and dispose of their work as they see fit
(Valid for 20 years)
o Trademarks: Designs and names, often officially registered, by which
merchants or manufacturers designate and differentiate their products
(Good for as long as you use it)
o Importance of intellectual property protection is the competitive advantage
created from being the exclusive producer
o If a system is replicable and others can legally make it, how do your
capitalize from developing the idea first?
o From an economic standpoint, the United States’ largest export is its
intellectual capital and the property produced by it
 If we were to forgo the property protection, other nations would
replicate our exports more easily at lower prices and decline the
value created by this intellectual property significantly  Pirated
music and movies; pharmaceuticals, financial software and product
ingenuity
What are the three measures of economic development? (PLEASE NOTE: NOT
ABSOLUTELY CERTAIN ON THIS QUESTION)
• Based on the Human Development Index:
o Life Expectancy
o Education Attainment
o Standard of Living (Whether average incomes are sufficient to meet the
basic needs of life in that country)
How can political economy impact economic development? How can countries
improve conditions for economic development?
• Argument that innovation and entrepreneurship are the engines of growth 
Economic freedom associated with a market economy is argued to create greater
incentives for innovation and EEE over any other economy type
• Strong legal protection of property rights creates a business environment
conducive to innovation, EEE, economic growth, and attracting business to
operate within its borders
• Democratic regimes seem more appropriate for long-term economic growth than a
dictatorship, fostering business interests and individual wealth creation
• Countries that invest more in the education of its younger generations develop
faster economically and significantly improve their standards of living through
wage increases from more specialized and skilled professions
Is the world becoming more democratic or communistic? Free market or command
market?
• Since the late 1980s, a wave of democratic revolutions swept the world, from the
collapse of the Chinese communist regime and across Asia, to Brazil and South
America, and across Europe
• There has been a move away from centrally planned and mixed economies toward
free markets
 • Many totalitarian regimes failed to deliver economic progress to the majority of
their population
• Access to new information and communication technologies (the internet) have
limited the abilities to maintain state control over restricting access to uncensored
information
• The rapidly growing middle and working classes within even emerging
economies who have pushed for democratic and business-friendly reforms
• However, as a result of the current recession, even capitalistic nations such as the
United States are implementing socialistic policies aimed towards redistributing
wealth from corporations to the poor and working class, as well as the
development of centralized programs to move its economy back on track
• Additionally, Venezuela and Russia have been taking increasing steps along with
Cuba and even China and Iran to maintain their nationalized oil industries and
control over their nation’s economies
What three activities move a country toward a more market based system?
• Deregulation: Removing the restrictions over free operations and flow of markets
• Privatization: Transfers the ownership of state property into the hands of private
investors (and away from the tax payers and government budget)
• Legal Enforcement of Property Rights: Without the legal protection and
enforcement of property rights, the incentive to engage in economic activity can
be substantially reduced by private and public entities that expropriate the profits
generated by the efforts of private sector entrepreneurs
What are the three types of risk in investing in a country?
• Political Risk: Likelihood that political forces will cause drastic changes in a
country’s business environment that adversely affect the profit and other goals of
a business enterprise
• Economic Risk: Likelihood that economic mismanagement will cause drastic
changes in a country’s business environment that adversely affects the profit and
other goals of a business enterprise
• Legal Risk: Likelihood that a trading partner will opportunistically break a
contract or expropriate property rights
What is a first mover advantage?
• First Mover Advantage: Advantages that accrue to early entrants into a market
o Help establish loyalty and experience in a country
How do you assess the overall attractiveness of a market?
• The overall attractiveness of a country as a potential market and/or investment
site for international business depends on balancing the benefits, costs, and risks
associated with doing business in that country

CHAPTER 3

Cross cultural literacy- understanding of how cultural differences across and within
nations can affect the way business is practiced.
Culture- system of values and norms that are shared among a group of people and that
when taken together constitute a design for living.

Values- abstract ideas about what a group believes to be good, right, and desirable.
- reflected in the political and economic systems of a society.

Norms- the social rules and guidelines that prescribe appropriate behavior in particular
ssituations.

Society- a group of people who share a common set of values and norms.

Determinants of Culture- Social structure and religion clearly influence the values and
norms of a society, the values and norms of a society can influence social structure and
religion.

Group- association of 2 or more individuals who have a shared sense of identity and who
interact with each other in structured ways on the basis of a common set of expectations
about each others behavior. Ex: human social life

Individual- the basic building block of social organization.

- many western societies emphasize individual achievement.
- Emphasis on entrepreneurship

Social Stratification- the hierarchical categories within a society, defined on the basis of
such elements as family background, income, and occupation.

Social Structure- degree to which the basic unit of social organization is the individual,
as opposed to the group
- degree to which a society is stratified into classes or castes.

Social mobility- extent to which individuals can move out of the strata into which they
are born.
- caste system- closed system of stratification in which social position is
determined by the family into which a person is born. The change in that
position is usually not possible during an individuals lifetime.
- class system- less rigid form of social stratification in which social mobility is
possible depending on a persons achievements or even just luck.

Class consciousness- people tend to perceive themselves in terms of their class

background, shaping how they relate with members of other classes.
- emerged due to lack of class mobility and the differences between classes.
- More difficult for companies based in countries to establish a competitive
advantage in the global economy.

Religion- system of shared believes and rituals that are concerned with the realm of the
sacred.
 - Christianity is the largest religion
- Islam is the second largest- unconditional acceptance of the uniqueness,
power, and authority of god and hope of admission to paradise.

Ethical System- set of moral principles, or values, that are used to guide and shape
behavior.
Spoken language- structures the way we perceive the world and defines culture.
- English is the most widely spoken language in the world and for international
business.

Unspoken language- communicating with nonverbal cues.

- ex; raising of eyebrows, smile
- failure to understand the nonverbal cues of another culture can lead to a
communication failure.
- personal space- comfortable amount of distance between you and someone
you are talking to.

Education- medium through which individuals learn many of the language, conceptual,
and mathematical skills that are indispensable in a modern society.
- from an international business perspective, one important aspect of education
is its role as a determinant of national competitive advantage.
- General education level of a country is also a good index of the kind of
products that might sell in a country and of the type of promotional material
that should be used.

Geert Hofstede- famous study of how culture relates to values in the workplace.
- collected data on employee attitudes and values from many individuals.
- Power distance- how society deals with the face that people are unequal in
physical and intellectual capabilities and how they grow into inequalities of
power and wealth.
- Individualism vs. collectivism- focused on relationship between the
individual and his or her fellows. Society teaches individuals to prize personal
achievement or to conversely look after the interests of their collective first.
- Uncertainty avoidance- cultures socialize members to accept ambiguous
situations and to tolerate uncertainty.
- Masculinity vs. femininity- relationship between gender and work roles.
- Hofstede’s results showed that many people believe Americans are more
individualistic and egalitarian than the Japanese.

Ethnocentrism- belief in the superiority of ones own ethnic group or culture.

Chapter Four Study Guide

VOCABULARY
Ethics – refers to accepted principles of right or wrong that govern the conduct of a
person, the members of a profession or the actions of an organization.

Business Ethics – the accepted principles of right or wrong governing the conduct of
business people

Ethics Strategy – a strategy, or course of action, that does not violate these accepted
principles

Ethical Dilemma – situations in which none of the available alternatives seems ethically
acceptable

Code of Ethics - a formal statement of the ethical priorities a business adheres to.
Leaders in the business should give life and meaning to the code of ethics by repeatedly
emphasizing their importance, and then acting on them. The business should put in place
a system of incentives and rewards that recognize people who engage in ethical behavior
and sanction those who do not.

Internal Stakeholders - people who work for or who own the business such as
employees, the board of directors, and stockholders.

External Stakeholders - individuals or groups who have some claim on a firm such as
customers, suppliers, and unions.

Moral Courage – there was no definition for this but I assume it just means the ability to
act on what you think is moral and ethical

Tragedy of the Commons – a resource held in common by all, but owned by no one, is
overused by individuals in its degradation (the environment)

Foreign Corrupt Practices Act of 1977 – outlawed the practice of paying bribes to
foreign government officials in order to gain business

Social Responsibility - idea that business people should take the social consequences of
economic actions into account when making business decisions, and that there should be
a presumption in favor of decisions that have both good economic and good social
consequences

Organization Culture - the values and norms that are shared among employees of an
organization
^Firms that have organizational culture and don’t promote business culture may have
unethical behavior

Rights Based Theories - recognize that human beings have fundamental rights and
privileges that transcend national boundaries and culture
Justice Based Theories - focus on the attainment of a just distribution of economic
goods and services

Other Topics Covered:

Most common ethical issues in business:

1. employment practices
2. human rights
3. environmental regulations
4. corruption
5. moral obligation of multinational companies

OECD– (Organization for Economic Cooperation and Development)

- adopted a Convention on Comabting Bribery of Foreign Public Officials in
International Business Transactions in 1997 which obliges member states to make the
bribery of foreign public officials a criminal offense
Some economists suggest that the practice of giving bribes might be the price that must
be paid to do a greater good

Personal Ethics vs. Business Ethics

- Business ethics reflect personal ethics (the generally accepted principles of right and
wrong governing the conduct of individuals)
- Expatriates (someone who leaves their country to work in another) may face pressure to
violate their personal ethics because they are away from their ordinary social context and
supporting culture, and they are psychologically and geographically distant from the
parent company

Causes of Unethical Behavior

Philosophical Approaches to Ethics

Friedman Doctrine - the only social responsibility of business is to increase profits, so
long as the company stays within the rules of law

Cultural Relativism - ethics are culturally determined and that firms should adopt the
ethics of the cultures in which they operate, or in other words, “when in Rome, do as the
Romans do”

Righteous moralist - a multinational’s home country standards of ethics are the

appropriate ones for companies to follow in foreign countries

Naïve Immoralist – they believe that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not
either

Utilitarian Ethics - the moral worth of actions or practices is determined by their

consequences. An action is judged to be desirable if it leads to the best possible balance
of good consequences over bad consequences.

Kantian Ethics - based on the philosophy of Immanuel Kant who argued that people
should be treated as ends and never purely as means to the ends of others

Implications for Managers:

Firms that ensure ethical issues are considered in business decisions:

• favor hiring and promoting people with a well grounded sense of personal ethics
• build an organizational culture that places a high value on ethical behavior
• makes sure that leaders within the business not only articulate the rhetoric of
ethical behavior, but also act in manner that is consistent with that rhetoric
• put decision making processes in place that require people to consider the ethical
dimension of business decisions
• develop moral courage

5 Step Ethical Decision making process

1. Identify which stakeholders (the individuals or groups who have an interest, stake, or
claim in the actions and overall performance of a company) a decision would affect and
in what ways

2. Determine whether a proposed decision would violate the fundamental rights of any
stakeholders

3. Establish moral intent (the business must resolve to place moral concerns ahead of
other concerns in cases where either the fundamental rights of stakeholders or key moral
principles have been violated)

4. Engage in ethical behavior

5. Audit its decisions, reviewing them to make sure that they were consistent with ethical
principles

Hiring Ethics - Businesses should strive to identify and hire people with a strong sense
of personal ethics. Prospective employees should find out as much as they can about the
ethical climate in an organization