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Glossary of IB Midterm

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GATT
General Agreement on Tariffs and Trade

Developed as part of the Havana, Cuba, conference in 1947

Provided forum for trade ministers to discuss barriers to international trade

In January 1995, it was replaced by the World Trade Organization, which adopted the GATT’s mission







ITO
International Trade Organization

ITO’s mission was to promote international trade

Organization never came into being because of a controversy over how extensive its powers should be



The Role of the GATT
The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers

GATT first focused on reducing the general level of tariff protection

It sponsored a series of eight negotiating “rounds,” generally named after the location where each round of negotiations began during its lifetime

Tariffs imposed by the developed countries fell from an average of more than 40 percent in 1948 to approximately 3 percent in 2005





MFN principal
Most Favored Nation (MFN) Principle


The most favored nation principle requires that any preferential treatment granted to one country must be extended to all countries

Under GATT rules, all members were required to utilize the MFN principle in dealing with other members

Because of the MFN principle, multilateral, rather than bilateral, trade negotiations were encouraged, thereby strengthening the GATT’s role








Exceptions to the MFN Principle
1. Members permitted to lower tariffs to developing countries without lowering them for more developed countries

In the U.S. tariff code, such reduced rates offered to developing countries are known as the generalized system of preferences

2. Regional arrangements promote economic integration (e.g., EU and NAFTA)





Goals of the World Trade Organization (WTO)
1. Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies

2. Reduce remaining trade barriers through multilateral negotiations

3. Establish impartial procedures for resolving trade disputes among members





WTO
World Trade Organization

The eighth and final round of GATT negotiations began in Uruguay in 1986

The participants agreed to create the WTO

Headquartered in Geneva, Switzerland, as of May 2006 the WTO includes 149 member and 32 observer countries







Differences between WTO and GATT
GATT focused on promoting trade in goods

WTO’s mandate is much broader: It is responsible for trade in goods, trade in services, international intellectual property protection, and trade-related investment

Second, the WTO’s enforcement powers are much stronger than those possessed by the GATT



The WTO’s Principles of the Trading System
1. Without discrimination
2. Freer
3. Predictable
4. More competitive
5. Beneficial for less developed countries



WTO Challenges
The Cairns Group

Multifibre Agreement

General Agreement on Trade in Services (GATS)

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

Trade-Related Investment Measures Agreement (TRIMS)









Cairns Group
Group of major agricultural exporters led by Argentina, Australia, Brazil, Canada, and Thailand

Pressuring other WTO members to ensure that the Doha Round significantly reduces barriers to agricultural trade

Multifibre Agreement

Trade in textiles

Created a complex array of quotas and tariffs

Uruguay Round
Developed a set of principles under which such trade should be conducted

National treatment





National treatment
Country treats foreign firms the same way it treats domestic firms
Enforcement of WTO Decisions
Country failing to live up to the agreement may have a complaint filed against it

WTO panel evaluates complaint

If found in violation, the country may be asked to eliminate the trade barrier

If the country refuses, the WTO will allow the complaining country to impose trade barriers on the offending country equal to the damage caused by the trade barrier

Furthermore, the offending country is not allowed to counterretaliate by imposing new trade barriers against the complainant









Forms of Economic Integration
Free trade area
Customs union
Common market
Economic union
Political union





Free trade area
Encourages trade among its members by eliminating trade barriers (tariffs, quotas, and other nontariff barriers [NTBs]) among them

Ex. NAFTA

Customs union
Combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers

Because of the uniform treatment of products from nonmember countries, a customs union avoids the trade deflection problem

A firm from a nonmember country pays the same tariff rate on exports to any member of the customs union



Common market
Eliminate internal trade barriers among themselves

Adopt a common external trade policy toward nonmembers

Eliminate barriers that inhibit the movement of factors of production—labor, capital, and technology—among its members





Economic union
Represents full integration of the economies of two or more countries

Eliminating internal trade barriers

Adopting common external trade policies

Abolishing restrictions on the mobility of factors of production among members,

Requires its members to coordinate their economic policies (monetary policy, fiscal policy, taxation, and social welfare programs) in order to blend their economies into a single entity









Political union
Complete political as well as economic integration of two or more countries

Making them one country



European Union (EU)
Most important regional trading bloc
27 member countries
491 million population
Combined GDP of $14.4 trillion






EU history
Motivated by the desires of war-weary Europeans to promote peace and prosperity through economic and political cooperation

Benelux nations signed the Treat of Rome, establishing ECC

EEC changed its name twice and expanded its membership to 25 countries

Changed name to European Community (EC)

EC members signed the Treaty of Maastricht; as a result of this agreement, the EC became known as the EU

Norway and Switzerland are the only major Western European nations that do not belong to the EU

Although they were invited to join, both declined for domestic political reasons













Governing Organizations of the EU
The European Council
The Council of the European Union
The European Commission
The European Parliament
The European Court of Justice





EU
European Union

EU’s members are sovereign nations that have agreed to cede certain of their powers to the EU


EU can be characterized both as:

an “intergovernmental government” (because it is a government of national governments)

“supranational government” (because it exercises power above the national level).

The EU is governed by four organizations that perform its executive, administrative, legislative, and judicial functions












The Council of the European Union

Composed of 25 representatives

Each selected directly by and responsible to his or her home government

European Commission

Composed of 25 people

One from each member state

Selected for five-year terms

Primary mandate is to be the “guardian of the Treaties.”





The European Parliament

Comprises 732 representatives elected in national elections to serve five-year terms
The European Court of Justice

Consists of 25 judges who serve six-year terms

The judges are selected jointly by the governments of the member states

The Court interprets EU law and ensures that members follow EU regulations and policies





Budgetary powers EU
The European Parliament shares responsibility for adopting the EU’s budget with the European Commission
Legislative process in EU
the Commission proposes, the Parliament advises, and the Council disposes

As the Parliament has gained increased powers, the complexity of passing legislation has increased exponentially

Co-decision procedure is used in such areas as education, environmental protection, health, consumer policy, and free movement of workers

On issues where the co-decision process is not used, the process is simpler and the Parliament’s power is weaker







European Community
Designed to be a common market

Slow Progress in creating common market until 1985

Relied on harmonization: member states should work together to bring regulatory rules closer together

Didn’t work: each country fought for using its own rules as the EC-wide standard









Struggle to create a common market
Cassis de Dijon case (1982): mutual recognition (policy adopted by one member state should be recognized as valid by all other member states)

1986: White Paper on Completing the Internal Market

1987: Single European Act--”Europe Without Frontiers”





Single European Act
1987 amendment to the Treaty of Rome

Mandates adoption of common rules in 279 different areas by Dec. 31, 1992 (EC ‘92)

EC adopts common rules, but the rules are implemented by independent actions of the national governments





European act improved
Access to markets
Prices of consumers
Regulatory costs
Economies of scale
Production costs
Foreign investment






Treaty of Maastricht

Creation of European Monetary Union

European Political Union
Common defense policies
Common foreign policies

Cohesion Fund

Name in common usage changes from EC to EU










Cohesion fund
Funneling economic development aid to countries whose per capita GDP is less than 90 percent of the EU average
Economic and Monetary Union
The creation of a single currency called the euro

European Central Bank

European Central Bank
Responsible for controlling the Eurozone’s money supply, interest rates, and inflation

3 Pillars of the Maastricht Treaty
European Community (EC)

Common Foreign and Security Policy (CFSP)

Justice and Home Affairs (JHA)


A new agreement to create common foreign and defense policies among members

A new agreement to cooperate on police, judicial, and public safety matters

The old familiar European Community, with new provisions to create an economic and monetary union among member states












Treaty of Amsterdam / Treaty for Europe
A strong commitment to attack the EU’s chronic high levels of unemployment

A plan to strengthen the role of the European Parliament by expanding the number of areas that require use of the co-decision procedure

Establishment of a two-track system





Harmonization
Set of rules that countries can voluntarily adopt
Treaty of Nice
Sought to reduce the risk of political gridlock as the number of members increases:

Reduced number of areas where unanimity is required for Council approval

Adjusted number of votes assigned to each Council member





NAFTA
The North American Free Trade Agreement

Implemented in 1994 to reduce
barriers to trade and investment
among Canada, Mexico, and the
United States






5 convergence criteria
Country’s inflation no higher than 1.5% of average of 3 EU countries

Country’s LT interest rate no more than 2% of average of 3 EU countries with lowest LT interest rates

Country has to be member of exchange-rate mechanism for two years

Country’s government budget deficit no more than 3% of GDP

Country’s outstanding government debt is no more than 60% of GDP









Free Trade Agreements in Central and South America and the Caribbean
Caribbean Basin Initiative (CBI)

The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)

The Mercosur Accord

Andean Community









CBI
Caribbean Basin Initiative

Overlaps two regional free trade areas: the Central American Common Market and the Caribbean Community and Common Market

Acts as a unidirectional free trade agreement

Permits duty-free import into the United States of a wide range of goods that originate in Caribbean Basin countries, or that have been assembled there from U.S.-produced parts







CAFTA-DR
USA, Central America, Dominican Republic

Reduction of tariffs, barriers -> duty-free export



Mercosur Accord
In 1991, the governments of Argentina, Brazil, Paraguay, and Uruguay signed

An agreement to create a customs union among themselves

They agreed to establish common external tariffs and to cut, over four years, their internal tariffs on goods that account for 85 percent of intra-Mercosur trade



Andean Community
Resulted from a 1969 agreement to promote free trade among five small South American countries:

Bolivia, Chile, Colombia, Ecuador, and Peru

To make them more competitive with the continent’s larger countries

Free market between members

Stalled creation of common external tariff









ASEAN
Association of Southeast Asian Nations

Established in August 1967 to promote regional political and economic cooperation

Its founding members were Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand

Cambodia, Laos, Myanmar, and Vietnam joined during the 1990s.







APEC
Asia-Pacific Economic Cooperation

Includes 21 countries from both sides of the Pacific Ocean

It was founded in 1989 in response to the growing interdependence of the Asia-Pacific economies

A 1994 APEC meeting in Indonesia led to a declaration committing members to achieve free trade in goods, services, and investment among members by 2010 for developed economies and by 2020 for developing economies

This objective was furthered at APEC’s 1996 meeting in Manila, where many countries made explicit pledges to reduce barriers to Asia-Pacific trade

In 2004, merchandise exports from APEC members were valued at more than $4.0 trillion and represented about 44 percent of total world merchandise exports











Screwdriver plant
Factory where product undergoes little transformation (still almost like raw resource)

Nonmember firms using this in Mexico to invade tariffs in Canada and USA



Future EU challenges
State aid to industry

Rule: may not provide subsidies that distort competition → but many local firms going broke with FDIs

Corporate takeovers

Common agricultural policy

Democracy and accountability

Many want power to be given to Parliament only → it is elected











Treaty of Lisbon
Reform Treaty → adopted many changes from the Constitution

Create President of European Council

European Commission → reduction in size → more manageable

Strengthening Parliament → co-decision in more areas

Can voice concern about proposed EU legislation









Free Trade Agreements in Africa
Southern African Development Community (SDAC)

Economic and Monetary Community of Central Africa (CEMAC)

Economic Community of West African States (ECOWAS)

Although these groups were established during the 1970s and early 1980s, they have not had a major impact on regional trade

This is due to inadequate intraregional transportation facilities and the failure of most domestic governments to create economic and political systems that encourage significant regional trade

Intra-Africa trade to date accounts for less than 10 percent of the continent’s total exports











Major Regional Trade Associations
AFTA ASEAN Free Trade Area

ANCOM Andean Community

APEC Asia-Pacific Economic Cooperation

CACM Central American Common Market

CARICOM Caribbean Community and Common Market

CEMAC Monetary and Economic Community of Central Africa

CER Australia–New Zealand Closer Economic Trade Relations Agreement

ECOWAS Economic Community of West African States

EU European Union

EFTA European Free Trade Association

GCC Gulf Cooperation Council

MERCOSUR Southern Cone Customs Union

NAFTA North American Free Trade Agreement

SADC Southern African Development Community



























Australia-New Zealand Agreement
NZ workers immigrate to Australia → called for CER

Eliminated tariffs between countries

Cooperation to promote tourism, movement of people, transport, etc.





Trade Arrangements in Asia-Pacific Region
Australia-New Zealand Agreement:

Association of Southeast Asian Nations

ASEAN Free-Trade Agreement

Asia-Pacific Economic Cooperation initiative







Mutual recognition
One member determines a product is good for sale → all countries have to follow
Foreign Market Analysis
(1) assess alternative markets

(2) evaluate the respective costs, benefits, and risks of entering each

(3) select those that hold the most potential for entry or expansion





International Strategic Management
A comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally
Strategic planning
Process of developing a strategy
Fundamental questions for firm’s strategic planners:
Where and how will it make those products/services?
Where and how will it sell them?
Where and how will it acquire the resources to make?
How does it expect to outperform its competitors?




Factors Affecting International Strategic Management
Financing
Market research
Advertising
Money
Transportation/ communication
Control
Contracts

Language
Culture
Politics
Economy
Governmental interference
Labor
Labor relations















Managers developing a strategy for a domestic firm
Must deal with:
one national government
one currency
one accounting system
one political and legal system
usually, a single language
comparatively homogeneous culture





Managers responsible for developing a strategy for an international firm
Must understand and deal with:
multiple governments
multiple currencies
multiple accounting systems
multiple political systems
multiple legal systems
variety of languages and cultures





Sources of Competitive Advantage
Global efficiencies
Multinational flexibility
Worldwide learning

International strategy
Developing
Implementing
Monitoring
Controlling




Difficult to Exploit All 3 Sources Simultaneously
Global efficiencies are promoted when a single unit of MNC is given world-wide responsibility for a task

This makes it harder to customize products to meet the differing needs of customers in different countries

If power is centralized, will HQ ignore information gathered by the subsidiaries?

Multinational flexibility is enhanced when power is decentralized to local managers

Yet this hinders ability to achieve global efficiencies

May also hinder knowledge flows from one subsidiary to another











Global Efficiencies - competitive advantage
Location efficiencies:
lower production and/or distribution costs
improve quality of service

Economies of scale: build factories to serve the world

Economies of scope: broaden product lines globally and locally, lowering production, marketing, and distribution costs







Multinational Flexibility - competitive advantage
Global and national environments are constantly changing

Domestic firms can respond only in their home country

MNCs can respond to change in one country by altering operations in a second country





Worldwide Learning - competitive advantage
Diverse operating environments contribute to organizational learning

Adapt to change in market A, use knowledge to compete more effectively in market B



Strategic Alternatives
Home replication strategy

Multidomestic strategy

Global strategy

Transnational strategy







Home replication strategy
Firm uses FSA developed at home as its main competitive weapon when it enters foreign markets

Ethnocentric approach: best way of dealing with foreign markets is to treat them the same way as we treat our home market



Multidomestic Strategy
MNC is a collection of relatively independent subsidiaries, each focusing on a specific domestic market

Polycentric approach: each country is different

Works best when clear differences exist among national markets, economies of scale are low, coordination costs between HQ and subsidiaries are high





Global Strategy
Geocentric philosophy: world is a single market; goal is to create standardized goods that address needs of customers worldwide

Exact opposite of multidomestic approach

Power and decision-making usually centered at corporate HQ





Transnational Strategy
Combines benefits of global scale efficiencies with benefits of local responsiveness

Certain functions centralized (not necessarily at HQ), others decentralized

“Think globally, act locally”--so-called glocal approach





Assesses these four strategic approaches against two criteria, the need for local responsiveness, and the need to achieve global integration
Firms must pay particular attention to local conditions when:
consumer tastes or preferences vary widely across countries

large differences exist in local laws, economic conditions, and infrastructure

host-country governments play a major role in the particular industry

Pressures for global integration arise when:
firm is selling a standardized commodity with little ability to differentiate its products through features or quality

ex. agricultural goods, bulk chemicals, ores, and low-end semiconductor chip

If trade barriers and transportation costs are low, such firms must strive to produce their goods at the lowest possible cost

Conversely, if the product features desired by consumers vary by country or if firms are able to differentiate their products through brand names, after-sales support services, and quality differences, the pressures for global integration are lessened















Components of International Strategy
Distinctive competence
Scope of operations
Resource deployment
Synergy


Distinctive competence
Answers question: What do we do exceptionally well, especially as compared to our competitors?

What separates them from all the other similar products?
Quality
Cutting-edge technology
Well-respected brand names
Efficient distribution networks
Superior organizational practices

Wants to exploit advantage by expanding operations into as many markets as resources allow










Scope of operations
Answers question: Where are we going to conduct business?

Geographic regions →countries, regions, many countries
Can be market within more than one region → since resources have limits → have to decide best markets

Market niches → tied with distinctive competence
Have it in certain regions → focus on those areas







Resource deployment
Answers question: Given that we are going to compete in these markets, how should we get resources to them?

Can be specified along product lines, geographical lines or both
Determines market priorities with the firm’s limited resources




Synergy
Answers the question: How can different elements of our business benefit each other

Goal: create situation in which whole is greater than sum of parts

Ex. Disney → know characters from TV → plan vacation to theme park -> buy merchandise → watch characters on TV again

Want to create the endless cycle







Developing International Strategies
Carried out in two stages:

Strategy formulation
Strategy implementation


Strategy formulation
Deciding what to do

Establish goals and strategic plan that will lead to goal

Agree on which markets to enter / best compete in it





Strategy implementation
Actually doing it

Develop tactics to achieve the strategy formulated

Achieved through organization’s design, work of employees and control systems

Done in steps methodical steps:







Steps in International Strategy Formulation
Develop a mission statement
Perform a SWOT analysis
Set strategic goals
Develop tactical goals and plans
Develop a control framework





Mission statement
Planning process → missions statement

Clarifies organization’s purpose, values and directions

For informing people → overview on target consumers, markets, products, technologies, plans for growth/expansion, etc.





SWOT
SWOT: Strength, Weaknesses, Opportunities, Threats

S&W: internal ( skills, resources, new technology, brand name)
Indicates skills of internal managers, labor relations, poor distribution, deficiencies, etc.

O&T: external (economic, financial, political, social, competitive changes)
Indicates shrinking markets, increase competition, new laws, etc.

Use SWOT to develop effective strategies

Exploit environmental opportunities/organizational strength

Neutralize threats

Protect/overcome internal weaknesses

Initiate SWOT with environmental scan

Systematic collection of data of everything in the external and internal environment of the firm

Value chain - breakdown of firm into its important activities

Include: production, marketing, human resource management, etc.

Can identify competitive advantages and disadvantages

























Strategic goals
Major objectives the firm wants to accomplish through pursuing a course of actions

Goals are:
Measurable
Feasible
Time-limited






Tactics

After SWOT, strategic goals set → move on to tactics

Develop specific tactical goals and plans

Daily activities → focus on details of implementing the firm’s strategic goals





Control framework
Set of managerial and organizational processes that help the firm moving towards strategic goals

Can make revision of previous steps

Managerial processes → strategic goals → organizational processes





Single-business strategy
Firm replies on single business for all revenue

Advantage: concentrate all resources on one product

Disadvantage: increase vulnerability to competition





Related diversification
Most common → firm operates in several different but related businesses at the same time

Advantage: leverage distinctive competence in one market to strengthen competitive edge in others

Less vulnerable to competition → one product threatened → other products can make up for it

Can produce economies of scale for a firm

Can use technology developed in one market to enter another more cheaply and easily

Disadvantage: cost of coordinating all operations











Unrelated diversification
Firm operates in many unrelated industries

Advantage: raise capital on all industries, reduced riskiness

Disadvantage: unrelated firms -> operations can’t sustain or enhance the others





Advantages of Related Diversification
Less dependence on single product

Greater economies of scale

Entry into additional markets more efficient and effective





Business Strategy
Strategic business units: when unrelated and related diversification bundle businesses together

Helps improve distinctive competence- one business strategy for all the firms in the SBUs

Related diversification: SBU have similar products

Unrelated diversification: SBU have dissimilar products







3 forms of corporate strategy
Single-Business Strategy
Related Diversification
Unrelated Diversification

3 Forms of business strategy
Differentiation
Cost leadership
Focus

Differentiation
Common -> wants to establish and maintain image that SBU products are unique
Overall cost leadership
Firms focus on achieving highly efficient operating procedures so costs are lower than competitors’

Result in low levels of unit profitability but high sales volume



Focus
Firm targets specific types of products for certain customer groups

Allows firm to match features of specific product to needs of specific consumer groups



4 areas of functional strategies
Finance
Marketing
Operations
HR and R&D


International financial strategy
Deals with: firm’s desired capital structure, investment policies, foreign-exchange holdings, risk-reduction techniques, debt policies, working capital management

Typically develops financial strategy for overall firm and for each SBU



International marketing strategy
Deals with: correction of firm’s products or services

Guides decisions on issues like: sourcing, plant location, plant layout and design, technology, inventory management



International human resource strategy
Focuses on the people who work for an organization

Guides decisions regarding how the firm will recruit, train and evaluate employees, salary and pay, labor relations



International R&D
Concerned with: magnitude and direction of firm’s investment in creating new products and developing new technologies
Assessing Alternative Foreign Markets
Market potential
Levels of competition
Legal and political environment
Sociocultural influences


Market potential
Step 1. Assess market potential (GDP, population, infrastructure, etc.)
Decisions depend upon position of its products → luxury items won’t sell in poor markets

Step 2. Collect data relevant to specific product line considered

Not only consider past data → must predict future growth/depression too

Country measuring economy objectively or subjectively

Objective: per capita income, GDP

Subjective: paying too much attention/ignoring economic events
Annual growth, bad economy, etc.













Levels of competition
Current and future level → size and number of firms already present

ex. market shares, pricing, strengths, weaknesses

Successful firms continue to monitor
markets -> look for new market opportunities






Legal and political environment
Need to understand host country’s trade policies/legal and political environment - Tariffs, trade barriers → enter via FDI?

Government stability - Price regulations, military coups



Evaluating Costs, Benefits and Risks
Potential Costs:
Direct costs
Operating costs

Potential Benefits:
Sales and profits → expected from market
Lower costs → low acquisition and manufacturing costs
Foreclosing of markets
Competitive advantage → limiting competitors to earn profits
New technology
Synergy

Potential Risks:
Exchange rate fluctuations
Direct financial losses → due to poor market potential assessments and inability to reach right decision
Operating complexities
Political instability

















Choosing a Mode of Entry
Exporting
International licensing
International franchising
Specialized modes
FDI



Exporting
The simplest mode of internationalization

Most common market entry mode



Motivations for Exporting
Proactive

Reactive

Proactive motivations:
Pull firm into foreign market due to opportunities available
Reactive motivations:
Push firm into market due to decreasing opportunities in home market
Forms of Exporting
Indirect
Direct
Intracorporate transfers

Indirect exporting
Occurs when a firm sells its product to a domestic customer, which in turn exports the product, in either its original form or a modified form

A firm also may sell to a foreign firm's local subsidiary, which then transports the first firm's products to the foreign country.



Direct exporting

Occurs through sales to customers—either distributors or end-users—located outside the firm's home country

Research suggests that in one third of cases, a firm's initial direct exporting to a foreign market is the result of an unsolicited order

Its subsequent direct exporting typically results from deliberate efforts to expand its business internationally

Through direct exporting activities, the firm gains valuable expertise about operating internationally and specific knowledge concerning the individual countries in which it operates.







Intracorporate transfers

Sale of goods by a firm in one country to an affiliated firm in another

They account for about 40 percent of all U.S. merchandise exports and imports.

Many MNCs constantly engage in such transfers, importing and exporting semifinished products and component parts in order to lower their production costs



Additional Considerations for Exporting
Governmental policies

Marketing concerns

Logistical considerations

Distribution issues







Export Intermediaries
Third parties that specialize in facilitating international trade

transport
customs documentation
taking title of goods
financing
marketing







Export management company

Acts as client’s export department

Can be commission agent for the exporter

May take title to the goods and resell them





Webb-Pomerene Associations

An association of firms in same industry

Promotes industry exports overseas

May buy products of members and resell





Exporting - advantages
Relatively low financial exposure

Permit gradual market entry

Acquire knowledge about local market

Avoid restrictions on foreign investment







Exporting - disadvantages
Vulnerability to tariffs and NTBs

Logistical complexities

Potential conflicts with distributors





Basic Issues in International Licensing
Set the boundaries of the agreement

Establish compensation rates

Agree on the rights, privileges, and constraints conveyed in the agreement

Specify the duration of the agreement







International trading company
Firm directly engaged in importing and exporting variety of goods for its own account

Provides market research, customs documentation, international transportation, host country distribution, marketing and financing

Have agents and offices worldwide

Soga shosha → most important int. trading companies in global marketplace
Part of Japan’s keiretsu system
Has a large customer base
Invests in natural resources → extremely profitable










Other intermediaries
Manufacturer’s agents

Manufactuere’s export agents

Export and import brokers

Freight forwarders





Manufacturer’s agents
Solicit domestic orders for foreign manufacturers, usually on commission basis
Manufactuere’s export agents
Act as foreign sales department for domestic manufacturers, selling firm’s goods in foreign markets
Export and import brokers
Bring together international buyers and sellers of standardized commodities (coffee, cocoa, grains)
Freight forwarders
Specialized in physical transportation of goods, arranging customs documentation and obtaining transportation services for clients

Licensing
Licensor leases the right to use its intellectual property (technology, work methods, patents, copyrights, brand names, trademarkes) to licensee
Licensing - advantages
Low financial risks
Low-cost way to assess market potential
Avoid tariffs, NTBs, restrictions on foreign investment
Licensee provides knowledge of local markets




Licensig - disadvantages
Limited market opportunities/profits
Dependence on licensee
Potential conflicts with licensee
Possibility of creating future competitor




Franchising
A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.

Successful Franchising is More Likely When:
Successful franchising already exists in the domestic market

Franchisor has strong FSAs that can be transferred to foreign market

There are interested foreign firms and government allows franchising activities





Franchising vs. Licensing
More control than licensing: franchisee agrees to adhere to franchisor’s requirements for appearance, financial reporting and operating procedures

More support than licensing: franchisor helps establish the business, provides expertise, advertising & corporate image, helps with suppliers (may be a supplier)



Franchising - disadvantages
Limited market opportunities/profits
Dependence on franchisee
Potential conflicts with franchisee
Possibility of creating future competitor




Franchising - advantages

Low financial risks

Low-cost way to assess market potential

Avoid tariffs, NTBs, restrictions on foreign investment

Maintain more control than with licensing

Franchisee provides knowledge of local market









Specialized Entry Modes for International Business
Contract Manufacturing

Management Contract

Turnkey Project









Foreign Direct Investment - advantages
High profit potential
Maintain control over operations
Acquire knowledge of local market
Avoid tariffs and NTBs




Foreign Direct Investment - disadvantages
High financial and managerial investments

Higher exposure to political risk

Vulnerability to restrictions on foreign investment

Greater managerial complexity







3 methods for Foreign Direct Investment
Greenfield strategy
Brownfield strategy
Joint venture

Greenfield strategy
Involves starting a new operation from scratch

The firm buys or leases land, constructs new facilities, hires and/or transfers in managers and employees, and then launches the new operation





Greenfield strategy - advantages
Select most useful site → site that best meets needs

Construct modern, up-to-date facilities

Starts with clean slate → no debts, old equipment, modify old rules

Reap economic development incentives

Get acclimated to new business culture









Greenfield strategy - disadvantages
Successful implementation takes time and patience

Expensive for land in desired location

Must comply with local regulations

Must recruit and train a local workforce

May be stigmatized as a foreign firm









Basic Issues in International Franchising
Franchise elements
- Franchisor receives fixed payment and royalty based on sales
- Allows some flexibility to meet local customs and tastes
- Have formal contracts with set of terms

Franchise success
- Will work if franchisor has been successful domestically
- Due to unique products or advantageous operating procedures and systems

Transferability
- Effective when successful factors are transferable to foreign locations

Foreign investors













Brownfield strategy
Buying existing assets in a foreign country



Brownfield strategy - advantages
Control over firm’s resources → control acquired firm’s factories, employees, technology, brand anmes, distribution netowrks

Acquire new firms as means of entering new market

Adds no new capacity to industry → less competition

Acquire as a means of entering new market or implementing a major strategic change

Generates immediate revenues









Brownfield strategy - disadvantages
Assumes all firm’s liabilities → financial, managerial

Requires substantial up-front spending

Inherits unresolved problems





Joint Ventures
Created when two or more firms agree to work together

Jointly owned separate firm to promote mutual interests



B-O-T project
Build, operate, transfer

Firm builds, operates facility and transfers ownership later

Contractor profits from operation and ownership of project

Bears financial risks







Turnkey Project
Design, construct, equip

Contract under which a firm agrees to fully design, construct, equip a facility → give to purchaser when ready

Fixed priced (firm keeps cost of production under this)

Payment on a cost-plus basis

Shares risk of cost overruns from contractor to purchaser









Management Contract
Agreement where one firm provides managerial assistance (specialized services, technical expertise, other services ) to a second firm

For return of monetary compensation (flat fee or % of sales)

Allows firm to earn additional revenues withut incurring any investment risks or obligations





Contract Manufacturing
Used by firms that outsource most or all of their manufacturing needs to other companies
Contract Manufacturing - advantages
Reduced costs → lowers financial and human resources

Distinctive competence

Location advantages





Contract Manufacturing - disadvantages
Loss of control → over production process

Quality issues → since it may not be strictly controlled

Unexpected problems





Strategic alliance
A business arrangement whereby two or more firms choose to cooperate for their
mutual benefit

Method to expand or enter international operations

Each participant has self-interest but cooperate to achieve goals






Reasons for creating a strategic alliance
Globalization can be a very expensive process, particularly when a firm must perfectly coordinate R&D, production, distribution, marketing, and financial decisions throughout the world in order to succeed

A firm may lack all the necessary internal resources to effectively compete against its rivals internationally

The high costs of researching and developing new products alone may stretch its corporate budget

Thus, a firm may seek partners to share these costs

Or a firm may develop a new technology but lack a distribution network or production facilities in all the national markets it wants to serve

Accordingly, the firm may seek out other firms with skills or advantages that complement its own and negotiate agreements to work together.









Joint Venture
Special type of strategic alliance

Two or more firms join to create new business that is legally separate from its parents

Established as corporations

Owned by founding parents in negotiated proportions

Joint ownership → can be equal or unequal ownership









Managing a joint venture
Firms share management
One parent (firm) takes responsibility
Independent managers are hired



Non-joint venture:
Formed to allow partners to overcome particular hurdle

For the short-run → less stable than joint ventures

Formed for specific purpose → have natural ending





Benefits of Strategic Alliances
Ease of market entry
Shared risk
Shared knowledge and expertise
Synergy and competitive advantage




Namibia and Joint Ventures
Regulations imposed by national governments also influence the formation of joint ventures

Many countries are so concerned about the influence of foreign firms on their economies that they require MNCs to work with a local partner if they want to operate in these countries

For example, the government of Namibia, an African nation, requires foreign investors operating fishing fleets off its coast to work with local partners



Scope of Strategic Alliances
Significant variation:
Comprehensive alliance
Narrowly defined alliance

Degree of collaboration depends upon basic goals of each partner





Comprehensive alliances
When participating firms agree to perform together multiple stages of the process where goods are brought to the market

Mesh firm’s relative strengths in different areas:
R&D
Production
Marketing
Distribution

Maximize operating procedures → Need formal organization to integrate different procedures
- Usually joint ventures
- Can adopt operating procedures that suit its needs

Achieve greater synergy → through size and total resources

Large scope















Functional Alliances
Narrow in scope

Involve in single functional area

Ex. Production alliances, marketing alliances, R&D alliances, etc.

Less complex → don’t take form of joint venture







Production alliances
Two or more firms manufacture products in a shared facility → provide services

Can use facility one partner already owns



Marketing alliances
Two or more firms share marketing services or expertise

Functional Alliance → market services, market expertise

One partner introduces its products into market that other partner has already entered

Entered firm helps promote and distribute other firm’s product

Ask for fixed price or % profit in return









Financial alliances
Reduce financial risks → associated with project

Equally share contributing financial resources to project

Or one can contribute more (depends)

Provide expertise







R&D alliances
Alliance → partners agree to undertake joint research to develop new products

Not usually joint ventures

Knowledge transferred through private conferences, lab visits, etc.

Form separate legal organization → disrupt research in each firm’s lab

Agree on cross-license (use patents at will)

R&D consortium









R&D consortium
Confederations of organizations that band together to R&D new products for world market

Government plays major role in formation and continued operation



Issues in the Implementation of Strategic Alliances
Selections of Partners

Form of Ownership

Joint Management



4 factors in Selections of Partners
Compatibility between partners

Nature of a potential partner’s products

Relative safeness of the alliance

Learning potential of alliance





Form of Ownership
Joint venture:
- Corporate form - incorporated in country it will be doing business
- Limited Partnership - when joint ventures are restricted

Public-private venture - involves a partnership between privately own firm and government





Joint Management Considerations
Shared management agreement

Assigned arrangement

Delegated arrangement



Delegated arrangement
For joint ventures

Partners not involved in ongoing operations

Delegate management control executives of joint venture

Hired or taken from parent firms
Make day-to-day decisions








Shared management agreement
Each partner fully and actively participates in managing alliance
- Managers pass on details and happenings to partners
- Managers limited authority

Defer decisions to managers from parent firm

High level coordination and perfect agreement between partners

Prone to conflict









Assigned arrangement
One partner assumes primary responsibility of operations

Has power to set own agenda, make decisions, etc.

May create conflict → but keep alliance from becoming paralyzed when equal partners cannot agree on decision





5 Pitfalls of Strategic Alliances
Incompatibility of partners

Access to information

Conflicts over distributing earnings

Loss of autonomy

Changing circumstances







Organization Design
Overall pattern of structural components and configurations used to manage the total organization
Organization design helps firm to:
Allocate organizational resources

Assigns tasks to employees
Informs employees about firm’s rules etc.

Collects and transmits info necessary for effective organizational control
- Important for MNCs -> info between corporate HQ and subsidiaries







Corollary approach
Firm delegates responsibility for processing orders to individuals within existing department (finance, marketing, etc.)

Small level of international activity

Domestic organization design





Export department
Responsible for overseeing international operations, marketing products, processing orders and working with foreign distributors

When export becomes more significant

Increase in international activities -> export department isn’t expert with foreign markets anymore
- Station employees abroad






International division
allows firm to concentrate resources and create specialized programs that target international business
- Helps keep international different from domestic activities


3 types of knowledge for Global organization designs
Area knowledge - understand culture, commercial, social and economic conditions

Product knowledge - understand technological trends, consumer needs, competition

Functional knowledge - have access coworkers with expertise in basic business functions





Internationalization & Organization Design - Degree of Internationalization (highest to lowest)



Global Design

International Division

Export Department

Corollary Approach







5 forms of Global organization design
Product
Area
Functional
Customer
Matrix





Factors Affecting organizational Design
Country culture
Size
Strategy
Technology
Environment



Polycentric approach
Customize operations for each foreign market
Geocentric approach
Analyze needs of customers then adopt standardize option worldwide
Ethnocentric approach
Operate firms same way both international and domestic
3 Managerial Philosophies Affecting Design
Ethnocentric approach
Polycentric approach
Geocentric approach



Global Product Design
Most common form of organization design

Assigns worldwide responsibility for specific products to separate operating divisions within a firm

Best when there is diverse product lines
- Can be sold in different markets

M-form: related products
H-form: unrelated products









Global product design - advantages
Managerial expertise
Production efficiencies
Production flexibilities
Flexible response to change
Marketing flexibility





Global product design - disadvantages
Unnecessary duplication
Coordination and cooperation difficult


Global Area Design
Organizes firm’s activities around specific areas or regions of the world

For polycentric or multidomestic corporates

For products that are not readily transferable across regions





Global area design - advantages
Good for marketing-driven strategies or firms whose strength = brand power

Develop expertise about local market



Global area design - disadvantages
May sacrifice cost efficiencies that could be gained through global production

Not all innovations generated in that area are adopted by others

Not good for products that go through lots of changes





Global functional design
Firm creates departments or divisions that have worldwide responsibility for common organizational functions

For similar products lines: U-form



Global functional design - advantages
Transference of expertise
Highly centralized control
Focused attention of key functions



Global functional design - disadvantages
Practical only when firm has few products or customers

Coordination difficult

Duplication of resources





Global Customer Design
For when a firm serves different customers each with specific needs
- Need special expertise for each

Good for when various customer groups targeted
- Each group needs distinct marketing approaches

Lots of duplication of resources and bad coordination
- Each is concerned with different market








Global Matrix Design
Most and Very complex

Superimposing one form of organization design on top of an existing different form
- Very fluid where dimensions are created, downscaled and eliminated
- After product development task is complete -> dissolve sector





Global Matrix Design - advantages
Brings together the functional area and product expertise

Promotes organizational flexibility

Provides access to all advantages of other designs





Global Matrix Design - disadvantages
Appropriate for firms with many products and unstable environments

Employees accountable to multiple supervisors

Decisions may take longer





Global Hybrid Design
Create hybrid to best suit their purposes
- Firm size, strategy, tech, environment, culture

Start with basic prototypes, merge them, throw away pieces, create new elements
- Allow firm to respond to changes





Coordination
Process of linking and integrating functions and activities of different groups, units or divisions
- Coordination needs increase as level of interdependence rises

Organizational hierarchy -> manage interdependence and promote coordination
- Rules and procedures

Temporary techniques
- Use employees in liaison roles -> middle man that communicates between two managers

Big collaboration -> have task forces to coordinate

Informal management
- Group of managers from different parts of world who are connected in some way to each other - Personal experiences
- Can band together to short-circuit bureaucracy
- Get things done more effectively















Related issues in global organization design
Centralization vs decentralization
Role of subsidiary board of directors
Coordination in global organization

Decentralization:
Subsidiaries have great discretion over strategy etc.

May focus on subsidiary needs, not firm’s overall



Centralization:
Make all decision making authority at HQ -> better interest for firm
Role of subsidiary boards of directors
Subsidiaries placed in its country of operation
- Limit liability
- Get can legal status as local citizen

Need board of directors
- Elected by corporate shareholders
- Responsible for effective management of subsidiary

Empower the board -> decentralization
- Have local citizens -> good for business conducting

Board is more useful when there is lots of autonomy
- In H-forms -> subsidiaries run independent from one another













Control
The process of monitoring
ongoing performance and making
necessary changes to keep the
organization moving toward its
performance goals



3 levels of control function in int. business
Strategic
Organizational
Operations



Strategic control

Intended to monitor how well international business formulates strategy

Intended to monitor how well it goes about implementing that strategy

Important for foreign market entry decisions

Important for control of firm’s financial resource

Financial control

Special concern -> managing inventory of various currencies

Control of joint ventures and alliances













Organizational control
Focus on design of organization itself
3 types of organizational control
Responsibility center control
Generic organizational control
Planning process control

Responsibility center control
Using this system, the firm first identifies fundamental responsibility centers within the organization

Strategic business units are frequently defined as responsibility centers, as are geographical regions or product groups.

Once the centers are identified, the firm then evaluates each on the basis of how effectively it meets its strategic goals



Generic organizational control
Control systems used are the same for each unit or operation

Authority in HQ -> centralized

Used by international firms that have similar marketing strategies

Stable and predictable operations







Planning process control
Focus on planning -> not outcome

Paired with one of the above controls
Concentrate on mechanics and processes firms use to develop strategic plans

Meetings if failure happens -> see what went wrong and plan again






Operations control
Focuses on operating processes and systems within both the firm and its subsidiaries
- Need operations control for each manufacturing, distribution and admin centers

Involves time period (months or few years)

Deals with performance that needs to be assessed regularly (specific and focused)

Used when we want to increase productivity or enhance quality of products








Steps in International Control
Set control standards for performance
Measure actual performance
Compare performance against standards
Respond to deviations




Set control standards for performance - international control
Need to be objective and consistent with firm’s goals

Establish desired level of performance for which managers are held accountable

Map to help managers open and run new facility etc.

Standards come from basis of objectives, experience with similar operations and overall goals







Measure actual performance - int. control
Some easy to measure: actual output, productivity, product quality etc.

Difficult to measure: effectiveness of ad, ethical conducts employee attitudes



Compare performance against standards
Compare measured performance with original control standards

Easy to assess: when standards are objective

Complicated to assess: market share increase by 4% -> 4% significant?





Respond to deviations
3 outcomes when comparing performance and standard:
Control standard has been met
Control standard has not been met
Control standard has been exceeded




3 Essential Control Techniques
Accounting systems
Procedures
Performance ratios





Accounting systems - control technique
Develop system that controls and monitors the performance of overall firm, each division, operating unit and subsidiary
- Can see financial performance of every part of firm

Must abide to local accounting regulations

Must decide whether to evaluate subsidiaries based on home currency, local currency or combination






Procedures - control technique
Policies, standard operating procedures.

Rules and regulations

Alter procedures when facing competition or obstacles





Performance ratios
Inventory turnover -> holding up inventory is not good
- Longer it sits in storage -> longer it’s likely to be damaged or lost
- May not want anything to sit over (ex.) 30 days



Behavioral aspects of international control
Human behavior very important in how well control works

1. Resistance to control

2. Overcoming resistance to control



Operations management
Set of activities an organization uses to transform different kinds of inputs into goods and services

Add or create value to organization’s inputs that directly affect outputs



International operations management
Transformation-related activities of international firms
Strategic context - Int. Operations Management Process
Differentiation
Cost leadership
Focus

Standardize or customize product:

Standardized: all operations systems are globally integrated
- Global product design

Customized: unique operations system in each market
- Global area design -> responsiveness to local conditions











3 Complexities of International Operations Management
Resources - how and where to obtain
Location - where to build facilities
Logistics - modes of transportation, inventory control



Issues more complicated for international firms - int. operations management
Deal with suppliers from different countries -> transportation, time, etc.
Different government regulations
Different markets (market techniques)



Production management
Operations management decisions, processes and issues that involve creation of tangible goods
Service operations management
Creation of intangible services
Manufacturing
Creation of goods

Transforming raw materials -> combinations (money, tech, labor)



3 important dimensions of Production management
Supply chain management
International facilities location
International logistics



Supply chain management
Set of processes and steps a firm uses to acquire the various resources it needs to create its products

Vertical integration
Extent to which a firm either provides its own resources or obtains them from other sources
Process of developing SCM
Determine appropriate degree of vertical integration
- Extent that firm provides or obtains resources from others

High level vertical integration: engaged in all steps of resource transformation
- Suppliers can be within the firm

Low level vertical integration: engage in one or two steps
- Other suppliers

Vertical integration pends on SCM decisions:
- Make-or-buy decision











4 Influence Factors for the Make-or-Buy Decision
Size
Scope of operations
Technological expertise
Nature of product




5 Necessary Trade-offs in Make-or-Buy Decision
Cost
Control
Risk
Investment
Flexibility





Factors affecting Location Decisions
Country-Related Issues
Product-Related Issues
Government Policies
Organizational Issues




Country-related issues - int. facilities location
Resource availability and cost
- Determine if country is suitable location for facility
- Large, low-cost productions and labor

Infrastructure
- Construction materials and equipment
- Electricity, water transportation, phone
- Education, medical care, housing

Country-of-origin marketing effects
- Certain countries known for certain kinds of production











Product-Related Issues - int. facilities location
Product’s value-to-weight ratio
- Low ratio: produced in multiple places to minimize transport
- High ratio: product in single location to minimize competition

Required production technology
- Expected products sales vs. size of facility
- Large sales: multiple locations
Small sales: only one plant

Customer feedback
Want fast feedback -> facility close to final sales destination











Government Policies
Stability of political process
National trade policies
Economic development incentives
Existence of foreign trade zones (FTZ)
- controlled geographic area
- import/export get preferential tariff




Organizational Issues
Cost leadership strategy
- Seek out low-cost locations
- Can concentrate production -> meet organization goals

Global area structure:
- Decentralize authority to area managers

Inventory management policies
- Balance between costs of maintaining inventory against cost of running out of materials and finished goods
- Location affect inventory held -> distance to ship/acquire goods
- Just-in-time: frequent delivery in small batches of products











International logistics
Management of flow of materials, parts, supplies and other resources:
- from supplier to firm
- within and between units of the firm itself
- to customers


3 Differences in Domestic and International Materials Management
Distance involved in shipping
Number of transport modes
Complexity of regulatory context



Globalization and international logistics
Globalization magnified importance of international logistics

IT development -> increase productivity and enhance customer satisfaction, cost savings
- Can promote efficency and productivity of entire supply chain
- Act as substitutes for investment in inventory, reduce capital costs, improve return on assets





International Service Business
Firm that transforms resources into an intangible output that creates utility for its customers
Characteristics of int. services
Services are:

Intangible
Not storable
Require customer participation
Tied to the purchase of other products






Capacity planning
Deciding how many customers to serve at a given time
Product-support services
Assistance with operating, maintaining, repairing product
Role of government in international services trade
Often stipulate which firms are allowed to enter service markets and prices they charge

Need governmental permission to serve in their country

Reduced barriers to services (domestic and international) -> many opportunities
- Trigger strategic alliances and new companies






Issues for Managing service operations
Capacity planning:
- How many customers will be served at once
- Affects quality of services provided to customers

Location planning:
- Should be close to customers they serve
- Set up branch offices in each foreign market -> staff with locals

Facilities design and layout:
- Proper look and layout established
- Highlight foreign identity or blend in local or mix of both

Operations scheduling:
Make their services available to best meet customers’ needs (time, area, etc.)














Productivity.
Economic measure of efficiency that summarizes the value of outputs relative to the value of inputs used to create the outputs

Helps to determine firm’s overall success
Contributes to long-term survival
Contributes to overall standard of living





Strategies for Enhancing Productivity
Spend more on research and development
Improve operations
Increase employee involvement



Quality
Totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs

American Society for Quality Control





ISO 9000: 2000

International set of quality guidelines
Basis for quality certification
International Organization for Standardization



Total quality management
Integrated effort to systematically and continuously improve quality of product

Start with strategic commitment to quality

Operational component

Statistical process control

Benchmarking







Statistical process control
To monitor and control quality (math)
Benchmarking
Process of legally and ethically studying how other firms do something in high-quality way and then imitate or improve their ways
4 Essential Components of Total Quality Management
Employee involvement
High quality materials
Up to date technology
Effective methods


Information
Data in a form that is of value to manager in making decisions and performing related tasks

Used to understand firm’s environment
Used to understand how to respond to environment
Used to implement strategic plans





Importance of information
Related diversification: need good communication

Centralized goods: need information to go from managers to HQ



Information system
To assemble and provide data in forms useful to managers
Examples of int. business in ethical issues
Minute Maid
Tropicana
Nestle
Nike

Bought fruit juices from suppliers in South America. But a few years ago, it was learned that many of these suppliers rely heavily on child labor to harvest oranges, lemons, and other fruits. Children as young as 9 years old are commonly taken out of school by their impoverished parents and put to work in the citrus groves

Nike manufactures its products under contract with independent operators, mainly in Asian countries. For years there have been allegations – and some real evidence – of occasional child labor abuses, unsafe working conditions, and other violations of local regulations






Ethics
Individual’s personal beliefs about whether a decision, behavior or action is right or wrong

Varies depending on person

Ethical behavior
Behavior that conforms to generally accepted social norms
Ethical Generalizations
Individuals have their own personal belief systems

People from the same cultural context will tend to hold similar beliefs

Behaviors can be rationalized

Circumstances affect adherence to belief systems

National culture is intertwined with ethics









Values
Things a person feels important
Ethics in cross-cultural and international contexts
See through relationships and how people treat each other
- Between organization and employees
- Between employees, organization and other economic agents

How an organization treat its employees
How employees treat the organization
How employees and organization treat other economic agents







How an organization treats its employees
Extreme: strive to hire best people and best opportunity for development
- Respect personal rights
- Provide appropriate benefits

Extreme: hire using prejudicial or preferential criteria
- Limit opportunities
- Minimum compensation
- Bad treatment

Hiring and firing
- Differ in society
- Some based on ethnicity, gender, etc.
- Some based only on ability to perform well

Wages
- Pay more or less depends on firm situation but too little -> unethical

International firms:
- Deal with country-specific ethical issues
- Be prepared to contend with international comparisons
- What is ethical in home country can be viewed poorly in host country but what they do could also be viewed unethical for us -> Must operate on middle ground





















How employees treat the organization
Interest:
When a decision potentially benefits individual but not the firm
- China: guanxi

Secrecy:
Unethical only in certain countries
- Work in competitive industries -> tempted to sell info to another company

Honesty:
Using business phone to call long distance
- Stealing supplies
“if I work here, resources are mine to use”












How employees and the organization treat other economic agents
Agents: customers, competitors, stockholders, etc.

Issues: ads, promotions, shipping, financial disclosures, etc.



Managing Ethical Behavior Across Borders
Guidelines and codes of ethics
Ethics training
Organizational practices
Corporate culture


Guidelines and codes of ethics
Firms create what they expect from managers and employees in ethical behaviors
- Want to eliminate ambiguity about what is ethical and unethical
- Use codes, guidelines, classes







Code of ethics
Written statements of values and ethical standards that gide frims’ actions
Ethics training
Proactive -> teach employees how to deal with ethical dilemma

Again, should it be globally consistent or according to local context



Organizational practices and the corporate culture - ethics
If leaders in firm behave ethically -> everyone else will understand expectations to behave like that as well

Consequently -> leaders are bad, employees will get away with it too

Should have corporate code for managers and employees, affliates and potential business partners
- Laws that keep them away from bribery






CSR
Set of obligations an organization
undertakes to protect and enhance
the society in which it functions

Areas of Social Responsibility
Organizational stakeholders
Natural environment
General social welfare

Organizational stakeholders - CSR
People and organizations that are directly affected by practices of an organization

Have stake in firm’s performance

Firms concentrate on: customers, employees and investors
- Address their needs and expectations

Customers: treat them fair and honestly
Employees: treat fairly, respectfully
Investors: proper account procedures, honest with financial statements










Natural environment - CSR
Must responsibly dispose of waste, release pollutant and respect environment
- Laws that control this

Companies develop methods to reduce acid rain and global warming
- Internet, recycled materials, etc.





General social welfare
Contributions to charities and non-profit organizations
Support public radios, museums and symphonies
Support schools and education for kids worldwide
Some even want firms to correct political and social inequities




4 Approaches to Managing Social Responsibility
Obstructionist
Defensive
Accommodative
Proactive


Obstructionist Stance
Do as little as possible to address social or environmental problems
Deny or avoid responsibility

Examples
Nike
Nestle






Defensive Stance
Do what is required legally, but nothing more
Corporate responsibility is to generate profits

Example
Philip Morris





Accommodative Stance
Meet ethical and legal requirements and more
Agree to participate in social programs
Match contributions by employees
Respond to requests from nonprofits
No proactive behavior to seek such opportunities





Proactive Stance
Strong support of social responsibility
Viewed as citizens of society
Seek opportunities to contribute

Examples
McDonald’s
The Body Shop
Ben & Jerry’s








Managing Compliance Formally using 3 formal dimensions
Legal compliance
Ethical compliance
Philanthropic giving

Legal compliance
Extent to which organization conforms to regional, national and international laws
Ethical compliance
Extent to which members of organization follow basic ethical and legal standards of behavior
Philanthropic giving
Awarding of funds to charities or other social programs
Managing Compliance Formally using 2 informal dimensions
Organization leadership and culture
Whistle-blowing
Organization leadership and culture
Can define the social responsibility stance an organization will adopt
Whistle-blowing
Disclosure by an employee of illegal or unethical conduct on the part of others within the organization

How an organization responds to this practice often indicates its stance toward social responsibility



3 main actors in policy formulation - CSR
The state that passes and enforces laws

The market that has competition, pricing, production output etc.

Civil society that includes churches, non-profit, etc.





Different approaches to managing CSR
Anglo-saxon approach
Asian approach
Continental european approach

The Anglo-Saxon Approach
View the state, the market, and civil society as separate, competitive, and antagonistic

When the government must contract with the private sector to purchase goods or services, such contracting should be done through an open and competitive bidding process

The Asian Approach.
Many Asian countries rely on close cooperation between the private sector and the government.

For example, the economic clout of Japan’s keiretsu and Korea’s chaebol rests on their willingness to do the government’s bidding and vice-versa.

Many Asian leaders view this cooperation as the linchpin of their successful development

From the perspective of the Anglo-Saxon approach, this symbiotic relationship between business and government is viewed as corruption.







The Continental European Approach
3 actors have a much more cooperative way of working with one another

In Germany, for example, large employer associations bargain with umbrella labor organizations under the watchful supervision of the government

In general, public policy process is based upon creating consensus among the three actors

Cooperation, not competition, is the hallmark of this approach







Evaluating CSR
Ensure efforts are producing the desired benefits
- Evaluate how to respond to unethical conduct (ex. Punish, cover up, delay)

Must control social responsibility
- New employees must read code of conduct, etc.

Corporate social audit - formal and thorough analysis of the effectiveness of firm’s social performance







3 levels of international strategy
Corporate strategy
Business strategy
Functional strategy

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