Business Explain: November 2017

Archive for November 2017

Describe the different types of regional economic integration and give an example of each type.

Answer:

a. Free trade area (FTA): The goal of a free trade area is to abolish all tariffs among member countries. Free trade agreements usually begin modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an implementation period over which all tariffs are eliminated on all products. In addition, each member country maintains its own external tariffs against non-FTA countries. Examples: the North American Free Trade Agreement, the Association of South East Asian Nations

b. Customs union: In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers. Example: MERCOSUR

c. Common market: A common market has all the elements of a customs union, plus it allows free mobility of production factors such as labor and capital. Example: the European Union

Explain the static effects and dynamic effects of economic integration. What is the difference between trade creation and trade diversion resulting from economic integration?

Answer: Static effects are the shifting of resources from inefficient to efficient companies as trade barriers fall. Dynamic effects are the overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale. Static effects may develop when either of two conditions occurs:

a. Trade creation: Production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

b. Trade diversion: Trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember company might be more efficient in the absence of trade barriers.

Dynamic effects of integration occur when trade barriers come down and the size of the market increases, allowing companies to achieve economies of scale.

What are the functions of the European Commission, the European Parliament, the Council, and the European Court of Justice?

Answer:

a. The European Commission provides the European Union's political leadership and direction. The commission is composed of commissioners nominated by each member government and approved by the European Parliament. It drafts laws that it submits to the European Parliament and Council of the EU.

b. The three major responsibilities of the European Parliament are: legislative power, control over the budget, and supervision of executive decisions. The commission presents community legislation to the parliament. Parliament may approve legislation, amend it, or reject it outright. Parliament also approves the EU's budget each year and monitors spending.

c. The Council is composed of the ministers of the member countries. The Council passes laws and makes and enacts major policies. It works closely with the Commission and Parliament in adopting policies.

d. The European Court of Justice ensures consistent interpretation and application of EU treaties. Member states, community institutions, or individuals and companies may bring cases to the court. The Court of Justice is an appeals court for individuals, firms, and organizations fined by the commission for infringing treaty law. The Court of Justice is relevant to MNEs because it deals mostly with economic matters.

What are the rules of origin and regional content provisions of NAFTA?

Answer: Because NAFTA is a free trade agreement and not a customs union, each country sets its own tariffs for the rest of the world. Rules of origin ensure that only goods that have been the subject of substantial economic activity within the free trade area are eligible for the more liberal tariff conditions created by NAFTA. According to regional content rules, at least 50 percent of the net cost of most products must come from the NAFTA region. The exceptions are 55 percent for footwear, 62.5 percent for passenger automobiles and light trucks and the engines and transmissions for such vehicles, and 60 percent for other vehicles and automotive parts.

What has been the impact of NAFTA on trade and employment in NAFTA nations?

Answer: Trade and investment among the NAFTA members has increased significantly since the agreement was signed in 1994. The U.S. is the largest trade partner of Canada and Mexico, and both countries are among the most important exporters and importers for the U.S. Due to lower wages in Mexico, a lot of FDI has poured into Mexico, potentially displacing jobs in the United States. U.S. firms have come under criticism for taking advantage of cheaper wages and lax environmental standards. In addition, the agreement has not stopped the flow of illegal immigrants from Mexico to the U.S.

Identify and briefly compare the major regional trading groups in Latin America, Asia, and Africa.

Answer:

a. The major trade group in South America is MERCOSUR. In 1991, Brazil, Argentina, Paraguay, and Uruguay established MERCOSUR. MERCOSUR is significant because of its size; it generates 75 percent of South America's GNP. Another major group in South America is the Andean Group (CAN), which is composed of Bolivia, Colombia, Ecuador, and Peru. There are three major regional trading groups in Central America and the Caribbean: the Central American Common Market, the Central American Free Trade Agreement-Dominican Republic (which includes the United States), and the Caribbean Community and Common Market (CARICOM). These groups are hampered by their small markets and dependence on the United States for trade.

b. In Asia, the key group is the Association of South East Asian Nations (ASEAN), which was organized in 1967 and comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It is promoting cooperation in many areas, including industry and trade. In 1993, the ASEAN countries formed the ASEAN Free Trade Area (AFTA) to deal with the specific intrazonal trade issues.

c. The Asia Pacific Economic Cooperation (APEC) is massive since it includes every country that borders the Pacific Ocean. In spite of the size of APEC, it does not engage in treaties like the other trade agreements, so it has potential but not much teeth.

d. Africa is divided into many different trading groups based on geographic proximity and links to former colonial powers. Most groups are hampered by poverty, small market size, and dependence on former colonial powers. The African Union is modeled loosely on the EU, but that type of integration will likely be very difficult.

Are commodity agreements effective? Why or why not?

Answer: Commodity agreements used to be influential in helping to stabilize commodity prices, but now they are more involved in disseminating information and promoting research. OPEC is an example of an effective producers' cartel that operates on quotas to try to stabilize prices. In general, very little can be done outside of market forces to influence price.

Why is geography important to most regional trade agreements? Provide examples of RTAs to illustrate your answer.

Answer: There are a number of reasons why geography matters in the case of RTAs. Neighboring countries often, though not always, share a common history, language, culture, and currency. Unless the countries are at war with each other, they usually have already developed trading ties. Close proximity reduces transportation costs, thereby making traded products cheaper in general. Armenia has RTAs in force with Kazakhstan, Moldova, the Russian Federation, Turkmenistan, and Ukraine. India has a number of trade agreements with most of the countries in its region. Germany, a member of the European Union, exports 62.9 percent of its merchandise exports to other EU members and imports 58.3 percent from them. Switzerland, which is not a member of the EU but which has a trade agreement with the EU, exports 59.7 percent of its merchandise exports to EU countries and imports 78 percent from them. NAFTA includes Canada, the United States, and Mexico.

In a brief essay, explain the roles of the World Trade Organization and the United Nations in international trade.

Answer: The World Trade Organization (WTO) replaced GATT in 1995 as a continuing means of trade negotiations that aspires to foster the principle of trade without discrimination and to provide a better means of mediating trade disputes and of enforcing agreements. The United Nations is composed of representatives of most of the countries in the world and influences international trade and development in a number of significant ways. The UN family of organizations is too large to list, but it includes the WTO, the International Monetary Fund, and the World Bank. If the UN performs its responsibilities, it should improve the environment in which MNEs operate around the world, reducing risk and providing greater opportunities.

What is the difference between a free trade agreement and a customs union? Provide examples of each in your answer.

Answer: The goal of an FTA is to abolish all tariffs between member countries. It usually begins modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an implementation period during which all tariffs are eliminated on all products. Moreover, each member country maintains its own external tariffs against non-FTA countries. NAFTA is an example of a free trade agreement. The EU is considered a customs union by the WTO. In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers. For example, the EU removed internal tariffs from 1959 to 1967, when it established a common external tariff. Now it negotiates as one region in the WTO rather than as separate countries. Customs unions account for less than 10 percent of the RTAs identified by the WTO.

What are the disadvantages of import restrictions in regards to creating domestic employment opportunities?

Answer: One problem with restricting imports in order to create jobs is that other countries might retaliate with their own restrictions. New import restrictions by a major country have usually brought quick retaliation, sometimes causing more job losses than gains in industries protected by the new restrictions. Even if no country retaliates, the restricting country will gain jobs one place and lose them somewhere else, such as in import-handling jobs. Imports may also help create jobs in other industries, and these industries may form pressure groups against protectionism.

Explain the rationale for and problems with making the infant-industry argument work as intended.

Answer: The infant-industry argument holds that a government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports. Developing countries still use this argument to support their protectionist policies. The infant-industry argument is based on the logic that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets; over time the costs will decrease to a level sufficient to achieve efficient production. The cost reductions may occur for two reasons: As companies gain economies of scale and employees become more efficient through experience, total unit costs drop to competitive levels.

Although it is reasonable to expect costs to decrease over time, they may not go down enough, which poses two problems for protecting an industry. First, governments have difficulty identifying those industries that have a high probability of success. If infant-industry protection goes to an industry that does not reduce costs enough to make it competitive against imports, chances are its owners, workers, and suppliers will constitute a formidable pressure group that may prevent the importation of a cheaper competitive product. Second, even if policymakers can ascertain which industries are likely to succeed, it does not necessarily mean that companies in those industries should receive governmental assistance. Entrepreneurs may incur the costs and reap the benefits instead. For the infant-industry argument to be fully viable, future benefits should exceed early costs.

Why do developing countries sometimes impose import restrictions to increase their levels of industrialization?

Answer: Countries with a large manufacturing base generally have higher per capita incomes than do countries without such a base. Moreover, a number of countries, such as the United States and Japan, developed an industrial base while largely preventing competition from foreign-based production. Many developing countries use protection to increase their level of industrialization because of industrial countries' economic success and experience. Specifically, they believe:

a. Surplus workers can more easily increase manufacturing output than they can increase agricultural output.
b. Inflows of foreign investment in the industrial area will promote growth.
c. Prices and sales of traditional agricultural products and raw materials fluctuate too much, harming economies that depend on too few of them.
d. Markets and prices for industrial products will grow faster than those for agricultural products.

What is the difference between import substitution policies and export-led development policies? What are the potential effects of each?

Answer: Developing countries promote industrialization by restricting imports in order to encourage local production for local consumption goods which they formerly imported. This is known as import substitution. If the protected industries do not become efficient, consumers may have to support them by paying higher prices or higher taxes. In contrast to import substitution, some countries have achieved rapid economic growth by promoting export industries, an approach known as export-led development. These countries try to develop industries for which export markets should logically exist. Industrialization may result initially in import substitution, yet export-led development of the same products may be feasible later.

Many companies and industries argue that they should have the same access to foreign markets as foreign industries and companies have to their markets. In a short essay, discuss this issue of "comparable access," or "fairness."

Answer: From an economic standpoint, comparable access argues that in industries in which increased production will greatly decrease cost, either from scale economies or learning effects, producers that lack equal access to a competitor's market will have a disadvantage in gaining enough sales to be cost-competitive. The argument for equal access also is presented as one of fairness. There are at least two arguments against this fairness doctrine. First, there are advantages of freer trade, even if imposed unilaterally. Restrictions may deny one's own consumers lower prices. Second, governments would find it cumbersome and expensive to negotiate separate agreements for each of the many thousands of different products and services that might be traded.

What are common reasons that governments enact export restrictions? What are the possible negative consequences of such restrictions?

Answer: A country may limit exports of a product that is in short supply worldwide in order to favor domestic consumers. Typically, greater supply drops local prices beneath those in the intentionally undersupplied world markets. However, this discourages domestic producers from increasing output and encourages them to smuggle output to sell abroad. It also encourages foreign producers to develop substitutes or production of their own. Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business, after which they charge monopoly prices. However, competition among foreign producers limits their ability to charge exorbitant prices. The ability to price low abroad may result from high domestic prices due to a lack of competition at home or from home country governmental subsidies.

What is dumping? What are the possible effects of dumping on a country's economy?

Answer: When companies export below cost or below their home country price, this is called dumping. Most countries prohibit imports of dumped products, but enforcement usually occurs only if the imported product disrupts domestic production. If there is no domestic production, then the only host country effect is a low price to its consumers. Companies may dump because they cannot otherwise build a market abroad. They can afford to dump if the competitive landscape allows them to charge high domestic prices or if their home country government subsidizes them. They may also incur short-term losses abroad if they believe they can recoup those losses after eliminating competitors in the market. Home country consumers or taxpayers seldom realize that they are, in effect, paying so that foreign consumers have low prices. A company believing it is competing against dumped products may ask its government to restrict the imports.

Briefly discuss the four non economic rationales for governmental intervention in the free movement of trade: maintaining essential industries, preventing shipments to unfriendly countries, maintaining or extending spheres of influence, and preserving national identity.

Answer:

a. Maintenance of essential industries (especially defense): A major consideration behind governmental action on trade is the protection of essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war. This is called the essential-industry argument. This argument for protection has much appeal in rallying support for import barriers. However, in times of real crisis or military emergency, almost any product could be essential. Because of the high cost of protecting an inefficient industry or a higher-cost domestic substitute, the essential-industry argument should not be accepted without a careful evaluation of costs, real needs, and alternatives. Once an industry becomes protected, that protection is difficult to terminate because protected companies and their employees support politicians who will support their protection from imports.

b. Prevention of shipments to unfriendly countries: Groups concerned about security often use defense arguments to prevent exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies or that might be in short supply domestically. Export constraints may be valid if the exporting country assumes there will be no retaliation that prevents it from securing even more essential goods from the potential importing country. Trade controls on nondefense goods also may be used as a weapon of foreign policy to try to prevent another country from easily meeting its economic and political objectives.

c. Maintenance or extension of spheres of influence: Governments frequently give aid and credits to, and encourage imports from, countries that join a political alliance or vote a certain way within international bodies. A country's trade restrictions may also coerce governments to follow certain political actions or punish companies whose governments do not follow the actions.

d. Conservation of activities that help preserve a national identity: Countries are held together partially through a common sense of identity that sets their citizens apart from other nationalities. To protect this "separateness," countries limit foreign products and services in certain sectors, particularly the media.

Describe and compare the different types of tariffs (duties).

Answer: A tariff, or duty, the most common type of trade control, is a tax that a government levies on a good shipped internationally. If collected by the exporting country, it is known as an export tariff; if collected by a country through which the goods have passed, it is a transit tariff; if collected by the importing country, it is an import tariff. The import tariff is by far the most common. Import tariffs primarily serve as a means of raising the price of imported goods so that domestically produced goods will gain a relative price advantage.

A tariff may be protective even though there is no domestic production in direct competition. Tariffs also serve as a source of governmental revenue. Import tariffs are of little importance to large industrial countries, but are a major source of revenue in many developing countries. Transit tariffs were once a major source of revenue for countries, but they have been nearly abolished through governmental treaties. A government may assess a tariff on a per-unit basis, in which case it is a specific duty. It may assess a tariff as a percentage of the value of the item, in which case it is an ad valorem duty. If it assesses both specific and an ad valorem duty on the same product, the combination is a compound duty. A specific duty is easy for customs officials who collect duties to assess because they do not need to determine a good's value on which to calculate a percentage tax. Because an ad valorem tariff is based on the total value of the product, meaning the raw materials and the processing combined, developing countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariff rate.

In a short essay, list and discuss the nontariff barriers that relate to direct price influences: subsidies, aid and loans, customs valuations, and other direct price influences.

Answer:

a. Subsidies: Countries sometimes make direct payments (called subsidies) to domestic companies to reduce their costs or compensate them for losses incurred from selling abroad.

b. Aid and loans: Governments also give aid and loans to other countries. If the recipient is required to spend the funds in the donor country, some products can compete abroad that might otherwise be noncompetitive.

c. Customs valuation: Most countries have agreed on a procedure for assessing values when their customs agents levy tariffs, but customs must ascertain whether the invoice correctly identifies the product, its price, and its origin.

d. Other direct price influences: Countries frequently use other means to affect prices, including special fees, requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have customs clearance.

List and define the types of nontariff barriers that limit the quantity of goods traded: quotas, embargoes, buy local legislation, standards and labels, specific permission requirements, administrative delays, and reciprocal requirements.

Answer:

a. Quotas: The most common type of import or export restriction based on quantity is the quota. From the standpoint of imports, a quota most frequently limits the quantity of a product allowed to be imported in a given year. The amount frequently reflects a guarantee that domestic producers will have access to a certain percentage of the domestic market in that year.

b. Embargoes: An embargo is a specific type of quota that prohibits all trade on a whole category of products or on all products from a given country. Governments use embargoes in an attempt to use economic means to achieve political goals.

c. "Buy Local" legislation: Another form of quantitative trade control is "buy local" legislation. If government purchases are a large part of total expenditures within a country, they comprise an important part of the market. Most governments favor domestic producers in their purchases of goods. Sometimes they specify a content restriction—in which a certain percentage of the product is of local origin.

d. Standards and labels: Countries commonly have set classification, labeling, and testing standards in a manner that allows the sales of domestic products but inhibits that of foreign-made ones. The purpose of testing standards is to protect the safety or health of the domestic population. However, there have been situations where exporters have argued that such restrictions protect domestic producers instead.

e. Specific permission requirements: Some countries require that potential importers or exporters secure permission from governmental authorities before conducting trade transactions, a requirement known as an import license.

f. Administrative delays: Closely related to specific permission requirements are intentional administrative delays, which create uncertainty and raise the cost of carrying inventory.

g. Reciprocal requirements: Governments sometimes require that exporters take merchandise in lieu of money or that they promise to buy merchandise or services in the country to which they export. This requirement is common in the aerospace and defense industries—sometimes because the importer is short of foreign currency to purchase what it wants, and sometimes because the sales are so large the buyer has strong negotiating power.

What are the main arguments for limiting trade in services? What is your opinion on limiting trade in services?

Answer: Countries restrict trade in services for three reasons:

a. Essentiality: Countries judge certain service industries to be essential because they serve strategic purposes or because they provide social assistance to their citizens. They sometimes prohibit private companies, foreign or domestic, in some sectors because they feel the services should not be sold for profit.

b. Standards: Governments limit foreign entry into many service professions to ensure practice by qualified personnel. The licensing standards of these personnel vary by country. At present, there is little reciprocal recognition in licensing from one country to another because occupational standards and requirements differ substantially.

c. Immigration: Satisfying the standards of a particular country does not guarantee that a foreigner can then work there. Governmental regulations often require that an organization—domestic or foreign—search extensively for qualified personnel locally before it can even apply for work permits for personnel it would like to bring in from abroad.

As an international business manager, how can you benefit from an understanding of international trade theories?

Answer: Trade policies have an impact on business because they affect which countries can produce given products more efficiently and whether countries will permit imports to compete against their domestically produced goods and services. In turn, a country's policies influence which products companies might export to given countries, as well as what and where companies can produce in order to sell in the given countries.

In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as they apply to international business.

Answer: Mercantilism holds that a country's wealth is measured by its holdings of treasure, which usually meant gold. According to the theory, countries should export more than they import and, if successful, receive gold from countries that run deficits. To export more than they imported, governments imposed restrictions on most imports and subsidized production of many products that could otherwise not compete in domestic or export markets.

A favorable balance of trade indicates that a country is exporting more than it is importing. An unfavorable balance of trade indicates that a country is importing more than it is exporting, which is known as a deficit. However, it is not necessarily beneficial to run a trade surplus nor is it necessarily disadvantageous to run a trade deficit. A country that is running a surplus, or favorable balance of trade, is, for the time being, importing goods and services of less value than those it is exporting. In effect, the surplus country is granting credit to the deficit country. If that credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance actually may turn out to be disadvantageous for the country with the surplus.

In a short essay, discuss the theory of absolute advantage and the reasons a country's efficiency improves based on this theory.

Answer: The theory of absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Developed by Adam Smith, the theory of absolute advantage says the real wealth of a country consists of the goods and services available to its citizens. Smith reasoned that if trade were unrestricted, each country would specialize in those products that gave it a competitive advantage. Each country's resources would shift to the efficient industries because the country could not compete in the inefficient ones. Through specialization, countries could increase their efficiency because of three reasons:

a. Labor could become more skilled by repeating the same tasks.
b. Labor would not lose time in switching from the production of one kind of product to another.
c. Long production runs would provide incentives for the development of more effective working methods.

What is the difference between the free trade theories of absolute advantage and comparative advantage? How can free trade improve global efficiency?

Answer: Absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Based on this theory, Adam Smith questioned why the citizens of any country should have to buy domestically produced goods when they could buy those goods cheaper abroad. But what happens when one country can produce all products at an absolute advantage? David Ricardo examined this question and expanded on Adam Smith's theory of absolute advantage to develop the theory of comparative advantage. Ricardo reasoned that there may still be global efficiency gains from trade if a country specializes in products that it can produce more efficiently than other products—regardless of whether other countries can produce those same products even more efficiently.

What assumptions underlie the theories of specialization in international trade? What are the limitations of these assumptions?

Answer: The assumptions that underlie the theories of specialization in international trade include the following:

a. Full employment: When countries have many unemployed or unused resources, they may seek to restrict imports to employ or use idle resources.
b. Economic efficiency: Countries may pursue objectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology.
c. Division of gains: If a country perceives a trading partner is gaining too large a share of benefits, it may forgo absolute gains for itself so as to prevent relative losses.
d. Two countries, two commodities: Two countries trading only two commodities is unrealistic.
e. Transport costs: If it costs more to transport the goods than is saved through specialization, then the advantages of trade are negated.
f. Statics and dynamics: The relative conditions that give countries advantages or disadvantages in the production of given products are dynamic, not static, as the theories view countries' advantages.
g. Services: An increasing portion of world trade is in services, and the theories deal with commodities.
h. Production networks: Specialization may take place by function or by component as well as by final product.
i. Mobility: The assumption that resources can move domestically from the production of one good to another, and at no cost, is not completely valid.

What is the theory of country size? How is country size determined? How does country size affect national trade patterns?

Answer: The theory of country size says that countries with large land areas are more likely to have varied climates and an assortment of natural resources than smaller countries, thus making them more self-sufficient. Although land area is the most obvious way of measuring a country's size, countries also can be compared on the basis of economic size. Distance to foreign markets affects trade patterns in large and small countries differently. Normally, the farther the distance, the higher the transport costs, the longer the inventory carrying time, and the greater the uncertainty and unreliability of timely product delivery. In addition, large countries' production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade.

What is the country similarity theory? According to this theory, what factors affect trade patterns?

Answer: Observations of trade patterns reveal that most of the world's trade occurs among countries that have similar characteristics, specifically among industrial, or developed, countries. The country similarity theory says that once a company has developed a new product in response to observed market conditions in the home market, it will turn to markets it sees as most similar to those at home. In addition, markets in industrial countries can support products and their variations. Thus, companies from different countries produce different product models, and each may gain some markets abroad.

In a short essay, discuss the four stages of the international product life cycle.

Answer: The international product life cycle theory of trade states that certain kinds of products go through a continuum, or cycle, that consists of four stages—introduction, growth, maturity, and decline. The location of production will shift internationally depending on the stage of the cycle.

a. Introduction: Most new products are produced in and exported from developed countries because of their combined demand conditions and labor skills. Many reasons account for the dominant position of developed countries, including competition, demanding consumers, the availability of scientists and engineers, and high incomes. Early production also generally occurs in a domestic location so the company can obtain rapid market feedback, as well as save transport costs.

b. Growth: As sales of the new product grow, competitors enter the market. At the same time, demand is likely to grow substantially in foreign markets, particularly in other developed countries. In fact, demand may be sufficient to justify producing in some foreign markets to reduce or eliminate transport charges, but the output at this stage is likely to stay almost entirely in the foreign country with the additional manufacturing unit. The original producing country will also increase its exports in this stage but lose certain key export markets in which competitors commence local production.

c. Maturity: In this stage, worldwide demand begins to level off, although it may be growing in some countries and declining in others. There is often a "shake-out" of producers such that product models become highly standardized, making cost an important competitive weapon. Longer production runs become possible for foreign plants, which in turn reduce per-unit cost for their output. The lower per-unit costs create demand in developing countries.

d. Decline: As a product moves to the decline stage, those factors occurring during the mature stage continue to evolve. The markets in developed countries decline more rapidly than those in developing countries as affluent customers demand newer products. By this time, market and cost factors have dictated that almost all production is in developing countries, which export to the declining or small-niche markets in developed countries. In other words, the country in which the innovation first emerged and exported from then becomes the importer.

What are the arguments for and against nations developing and implementing strategic trade policies?

Answer: The two basic approaches to government policy are to alter conditions that will affect industry in general—a non-strategic approach—and to alter conditions that will affect a targeted industry—a strategic approach. Regardless of whether a government takes a general or specific approach, it may alter the competitive positions of specific companies and production locations.

The first approach means altering conditions that affect factor proportions, efficiency, and innovation. A country may upgrade production factors by improving human skills through education, providing infrastructure, promoting a highly competitive environment so that companies must make improvements, and inducing consumers to demand a higher quality of products and services.

The second approach is to target specific industries. This approach has usually resulted in only small payoffs, largely because governments find it difficult to identify and target the right industries. Moreover, too many countries may identify the same industries.

From an economic standpoint, why do production factors move from one country to another? How does factor movement affect international trade?

Answer: Capital, especially short-term capital, is the most internationally mobile production factor. Companies and private individuals primarily transfer capital because of differences in expected return. Short-term capital is more mobile than long-term capital, especially direct investment, because there is more likely to be an active market through which investors can quickly buy foreign holdings and sell them if they want to transfer capital back home or to another country. Furthermore, investors feel more certain about short-term political and economic conditions in a foreign country than about long-term ones. People are also internationally mobile. Unlike funds that can be cheaply transferred by wire, people must usually incur high transportation costs to work in another country. Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products. If trade could not occur and production factors could not move internationally, a country would have to either forego consuming certain goods or produce them differently, which in either case would usually result in decreased worldwide output and higher prices. In some cases, however, the inability to gain sufficient access to foreign production factors may stimulate efficient methods of substitution, such as the development of alternatives for traditional production methods.

What is gross national income? How is it calculated? Illustrate your answer with a specific example.

Answer: Gross National Income is the broadest measure of economic activity. It is the market value of final goods and services newly produced by domestically owned factors of production, which includes the international production activities of national companies. For example, the value of a Ford car manufactured in the United States and the portion of the value of a Ford manufactured in Mexico using U.S. capital and management counts in U.S. GNI. However, the portion of the value of a Japanese Toyota manufactured in the United States using Japanese capital and management would not be counted in U.S. GNI, but it would be counted in Japanese GNI.

What general characteristics of a country should managers consider when analyzing an economic environment? What specific indicators help managers measure the economic development, performance, and potential of a country?

Answer: Managers apply three perspectives to help make sense of the economic environments of various countries. First, they estimate how much freedom they will have to make investments and run operations as they see fit. Second, they evaluate the type of economic system in the country, studying how current policies shape development and performance. The third investigates the points of change that drive economic change, assessing the conditions that moderate economic freedom as well as move a country from one economic system to another. Collectively, the insights help managers pinpoint where investments should go and, perhaps more importantly, where they should not. The key dimension used to distinguish one country from another is the gross national income (GNI). In particular, countries are classified according to per capita GNI, or the size of GNI of a nation divided by its total population. Those countries with high populations and high per capita GNI are generally most desirable in terms of market potential. A country's GNI growth rate also indicates its economic potential. Businesses comparing markets will also likely examine the purchasing power parity (PPP) of a possible foreign market.

What is inflation? How does inflation affect international business?

Answer: Inflation means that prices are going up as measured against a standard level of purchasing power. The inflation rate is the percentage increase in the change in prices from one period to the next, usually a year. Economists use different types of indices to measure inflation. In the United States, the Consumer Price Index is the official measure of inflation. The CPI measures a fixed basket of goods and compares their prices from one period to the next. A rise in the index results in inflation. Inflation affects interest rates, exchange rates, the cost of living, and the general confidence in a country's political and economic system.

Describe the three ways economies can be categorized. Which one do you believe is best? Why?

Answer:

a. Market economy: A market economy is one in which resources are primarily owned and controlled by the private sector, not the public sector. The key factors that make the market economy work are consumer sovereignty and freedom of companies to operate in the market. Prices are determined by supply and demand.

b. Command economy: In a command economy, also known as a centrally planned economy, all dimensions of economic activity, including pricing and production decisions, are determined by a central government plan. The government owns and controls all resources. The government sets goals for every business enterprise in the country by how much they produce and for whom. In this type of economy, the government considers itself a better judge of resource allocation than its businesses or citizens.

c. Mixed economy: In actuality, no economy is purely market or completely command oriented. Most economies are mixed economies, falling in the middle and combining elements of both. In a mixed economy, economic decisions are principally market driven and ownership is principally private, but the government intervenes, from slightly to extensively, in resource allocations and economic decisions.

What is meant by the idea of economic freedom? What factors are used in the Economic Freedom Index? For managers, what role does the Economic Freedom Index play in analyzing the potential of a country?

Answer:
a. Economic freedom is the "absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself." Rather than the state, individuals decide how they wish to work, produce, consume, save, and invest. Importantly, that freedom is both protected by the state as well as unconstrained by the state.

b. The economic factors on which the index of economic freedom is based are trade freedom, business freedom, monetary freedom, investment freedom, freedom from corruption, freedom from government, property rights, financial freedom, and labor freedom.

c. The study is helpful in that it identifies ways that governments control economic activity and the degree to which they do so. Operationally, this index helps managers understand the degree to which the government of a country intervenes with the principles of free choice, free enterprise, and free prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency. This information helps managers make better plans to invest funds and run operations in a particular country.

What is state capitalism? Why do you think state capitalism is becoming increasingly popular around the world?

Answer: State Capitalism is an economic system whereby the State decides how, when, and where assets will be valued and resources allocated. The State develops national champions, manages trade relations and exchange rates to promote exports and punish imports, leverages control of the financial system to provide low-cost capital to domestic industries, and maintains accommodative legal and regulatory systems. The global credit crisis has expanded the scale and scope of State Capitalism. Countries that favored a larger state presence, higher taxes, heavier regulation, tougher job-protection laws, and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. More fundamentally, State Capitalism professes to better protect protected social values, equalize income distribution, and prevent the accumulation of vast wealth and powerful self-interests that threaten social harmony.

What is the difference between a developing country and a developed country? What significant trends are occurring in each type of market that relate to international business decisions?

Answer: Low- and middle-income nations are known as developing countries. This type has low per capita income—an average of $2,963 in 2009. The vast majority of their citizens have a low standard of living with limited access to few goods and services. Developing countries comprise the largest number of countries (151 or so, according to the World Bank) and have the highest number of inhabitants (a combined 5.5 billion) in the world. In contrast, developed countries are those with high per capita income—an average of $37,970 in 2009. Their citizens have a high standard of living with access to a variety of goods and services. Emerging economies are developing rapidly and have increased their share of the world's foreign-exchange reserves by 70% since the mid-1990s. Since 2001, annual growth in emerging markets has averaged 6.4 percent; in contrast, the rich economies have averaged 1.6 percent. While they expand, the global financial crisis slows and shrinks many developed economies.

What issues complicate international economic analysis?

Answer: International economic analysis uses many scientific principles but still relies on a variety of behavioral assumptions to interpret activity. Assessments are often more conditional than universal because the complexity of even the simplest economic system defies straightforward classification. Stipulating indicators that definitively represent a country's economic performance and potential is difficult. Secondly, marketplace dynamism means that today's valid measures may prove invalid tomorrow. Third, countries are not isolated. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others. Interdependencies complicate interpretations. Adjusting analysis for actions and reactions across a broad scope of markets is difficult.

What is the difference between a command economy and state capitalism?

Answer: State Capitalism is an economic system whereby the State decides how, when, and where assets will be valued and resources allocated. The State develops national champions, manages trade relations and exchange rates to promote exports and punish imports, leverages control of the financial system to provide low-cost capital to domestic industries, and maintains accommodative legal and regulatory systems. In a command economy, the government owns and controls resources, commanding the authority to decide what products to make, in what quantity, at what price, and in what way. Unlike the command economy, State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. Politics has a profound and pervasive impact on the performance of markets. The government uses markets to promote stability and growth, thereby creating the prosperity and wealth that maximize state power and supports its continued rule. State Capitalism does not have an ideological component—the government manages markets for long-term political survival and power projection, not to enforce an abstract ideal or promote the cult of personality as with the command economy.

Why is economic freedom an important factor to consider when analyzing a country's economic development, performance, and potential?

Answer: Economic freedom helps explain a country's development, performance, and potential. Higher-rated countries generally outperform laggards on a variety of measures. Countries with high economic freedom have higher rates of growth and productivity. Income is higher in countries with higher economic freedom; it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed economies. Positive relationships exist between economic freedom inflation, and employment. Economic freedom pays social dividends. Life expectancy, literacy, political openness, and environmental sustainability show positive relationships with economic freedom. Collectively, data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. The data support the argument that liberating resources from government control improves financial performance, economic stability, and standards of living.

What are the advantages and disadvantages of using a nation as a point of reference for a culture?

Answer: The nation, as opposed to the State, provides a workable definition of a culture for international business because basic similarity among people is both a cause and an effect of national boundaries. The laws governing business operations also apply primarily along national lines. Within the bounds of a nation are people who largely share essential attributes, such as values, language, and race. However, these shared attributes do not mean that everyone in a country is alike, nor do they suggest that each country is unique in all respects.

In a short essay, describe the various affiliations upon which a person's status can be based and discuss how social stratification affects such business functions as marketing and employment practices.

Answer:
a. A person's status is partly determined by individual factors and partly by the person's affiliation or membership in a given group. Affiliations determined by birth—known as ascribed group memberships—include those based on gender, family, age, caste, and ethnic, racial, or national origin. Affiliations not determined by birth are called acquired group memberships and include those based on religion, political affiliation, and professional and other associations.

b. Social stratification affects marketing as companies choose to use people in their advertisements whom their target market admires or associates with. Further, stratification affects employment practices such as hiring, promotion, compensation, and staff-reduction. Employers in different countries are differently influenced by social stratification as they make employment decisions.

Describe the four major theories discussed in your text that explain why motivation differs from one country to another.

Answer:

a. Materialism and Leisure: Historically, there is strong evidence that the desire for material wealth is a prime incentive for the work that leads to economic development.

b. Expectation of Success and Reward: Generally, people have little enthusiasm for efforts that seem too easy or too difficult, where the probability of either success or failure seems almost certain. The greatest enthusiasm for work exists when high uncertainty of success is combined with the likelihood of a very positive reward for success and little or none for failure.

c. Masculinity-Femininity Index: The average interest in career success varies substantially among countries. In one study, employees with a high masculinity score were those who admired the successful achiever, had little sympathy for the unfortunate, and preferred to be the best rather than be on a par with others.

d. Needs Hierarchy: According to this theory, people try to fulfill lower-order needs sufficiently before moving on to higher ones. People will work to satisfy a need, but once it is fulfilled, it is no longer a motivator.

What are the characteristics of individualist and collectivist cultures?

Answer: Attributes of individualism are low dependence on the organization and a desire for personal time, freedom, and challenge. Attributes of collectivism are dependence on the organization and a desire for training, good physical conditions, and benefits. In those countries with high individualism, self-actualization will be a prime motivator because employees want challenges. However, in countries with high collectivism, the provision of a safe physical and emotional environment will be a prime motivator.

What is the difference between a low-context culture and a high-context culture? How do these differences affect communication in international business dealings?

Answer: Low-context cultures are environments in which most people consider relevant only firsthand information that bears directly on the decision they need to make. In business, they spend little time on "small talk." High-context cultures are environments in which people consider peripheral information valuable to decision making. When managers from the two types of cultures deal with each other, the low-context individuals may believe the high-context ones are inefficient and time-wasters. The high-context individuals may believe the low-context ones are too aggressive to be trusted.

What is the difference between a monochronic and polychronic culture? How do such cultural differences affect business practices for international firms?

Answer: Cultures such as those in Northern Europe are called monochronic. People prefer to work sequentially, such as finishing with one customer before dealing with another. Conversely, polychronic Southern Europeans are more comfortable working simultaneously with all the tasks they face. Such cultural differences affect the degree of multitasking with which people are comfortable. International companies and individuals must evaluate their business and personal practices to ensure that their behavior may fit with the culture.

What factors influence cultural stability and cultural change? What factors influence how much cultural adjustment organizations must make in foreign countries?

Answer: Individual and cultural values and customs may evolve over time. Change may come about through choice or imposition. Change by choice may take place as a reaction to social and economic changes that present new alternatives. Change by imposition, sometimes called cultural imperialism, has occurred, for example, when countries introduce legal systems into colonies by prohibiting established practices and defining them as criminal. In addition to national boundaries and geographical obstacles, language is a factor that greatly affects cultural stability. Religion is also a strong shaper of values. International companies sometimes have succeeded in introducing new products, technologies, and operating procedures to foreign countries with little adjustment. That's because some of these introductions have not run counter to deep-seated attitudes or because the host society is willing to accept foreign customs as a trade-off for other advantages. Some countries are relatively similar to one another, usually because they share many attributes that help mold their cultures, such as language, religion, geographical location, ethnicity, and level of economic development.

What is culture shock? How can an international employer help prevent culture shock and improve the success of expatriates?

Answer: Culture shock is frustration arising from experiencing a new culture and having to learn and cope with a vast array of new cultural cues and expectations. Businesspeople can learn to improve awareness and sensitivity and, by educating themselves, enhance the likelihood of succeeding abroad and avoiding culture shock. Gathering some basic research on another culture can be instructive as well as learning the language. There are country guidebooks based on people's experiences, including those by international managers. Employees can also consult with knowledgeable people at home and abroad, whether in a governmental or private capacity to learn about the culture and avoid adjustment problems.

What is the difference between a polycentric, ethnocentric, and geocentric approach to international management? What key factors should a firm consider before adopting one of these approaches?

Answer: In polycentric organizations, control is decentralized. In other words, business units in different countries have a significant degree of autonomy from the home office and act like local companies. Polycentrism may be, however, an overly cautious response to cultural variety. Ethnocentrism is the belief that one's own culture is superior to others. In international business, it describes a company or individual so taken with the belief that what worked at home should work abroad that environmental differences are ignored. Geocentrism refers to a situation in which a company bases its operations on an informed knowledge of home and host country needs, capabilities, and constraints. This is the preferred approach to business dealing with another culture because it increases introduction of innovations and decreases the likelihood of their failures. In deciding whether to make changes in either home- or host-country operations, a company should consider several factors: the importance of the proposed changes to every party involved, the cost and benefit to the company of each proposed change, the value of opinion leaders in implementing the changes, and timing.

Why should domestic managers have an understanding of globalization and international business? What are the current views regarding the future of globalization?

Answer: International business comprises a large and growing portion of the world's total business. Global events affect almost all companies. A company operating internationally will engage in modes of business, such as exporting and importing, that differ from those it is accustomed to domestically. To operate effectively, managers must understand these different modes.

The three main views of the future of globalization are as follows: further globalization is inevitable, or international business will grow regionally rather than globally, or forces working against globalization will slow both trends. The view that increased growth in international business is inevitable is supported by the power of MNEs who have multiple production and distribution networks and are able to pressure governments to place fewer restrictions on international business. The view that growth will occur regionally rather than globally is based on studies that show that most "global" transactions actually occur between neighboring countries. Finally, the view that globalization will be slowed by pressure from the antiglobalization movement to raise barriers and reject international treaties and organizations stems from the success of such groups in the past.

What are three factors that have led to the increased growth in international business in recent decades? Which do you think has been most important and why?

Answer:

a. Rapid increase in an expansion of technology—By increasing the demand for new products and services, technology has tremendous impact on international business. As the demand increases, so do the number of international business transactions. Improved communications and transportation speed up interactions and improve managers' ability to control foreign operations.

b. Liberalization of cross-border movements—Although the past decrease in restrictions has been erratic, governments have lowered barriers because their citizens have expressed the desire for better access to a greater variety of goods and services at lower prices. Governments also reason that their domestic producers will become more efficient as a result of foreign competition, and they hope to induce other countries to reduce their barriers to international movements.

c. Increase in global competition—The pressures of increased foreign competition can persuade a company to expand its business into international markets. Today companies can respond rapidly to many foreign sales opportunities. They can shift production quickly among countries if they're experienced in foreign markets and because they can transport goods efficiently from most places.

d. Growing consumer pressures—Consumers are savvier and have more income. They want to be able to buy the variety and low-cost products available from anywhere in the world.

e. Development of supporting services—Companies and governments have developed services that ease international business. Today, producers can be paid relatively easily for goods and services sold abroad because of bank credit agreements, clearing arrangements that convert one country's currency into another's, and insurance that covers damage en route and nonpayment by the buyer.

f. Changing political situations—The schism between communist and noncommunist countries is basically over, as communist countries have moved toward transitioning their economies; therefore, trade between these countries has increased.

g. Expanded cross-national cooperation—Countries realize they can't go it alone. They cooperate to gain reciprocal advantages, to attack problems jointly, and to deal with areas outside the confines of any country.

In a short essay, discuss why governments have been liberalizing cross-border movements of goods, services, and resources.

Answer: Generally, governments today impose fewer restrictions on cross-border movements than they did a decade or two ago. They have lowered them for the following reasons:

a. Their citizens have expressed the desire for easier access to a greater variety of goods and services at lower prices.

b. They reason that their domestic producers will become more efficient as a result of foreign competition.

c. They hope to induce other countries to reduce their barriers to international movements.

What is international business? What are the primary reasons that companies engage in international business?

Answer: International business is all commercial transactions—private and governmental—between two or more countries. Private businesses undertake such transactions for profit; governments may or may not do the same in their transactions. These transactions include sales, investments, and transportation.

Firms engage in international business for three main reasons.

1. To expand sales—The number of people and the amount of their purchasing power are higher for the world as a whole than for a single country, so companies may increase their sales by reaching international markets.

2. To acquire resources—Manufacturers and distributors seek out products, services, and components produced in foreign countries.

3. To minimize competitive risk—Many companies enter into international business for defensive reasons. They want to counter advantages competitors might gain in foreign markets that, in turn, could hurt them domestically.

What are the differences between merchandise and service imports and exports? Provide examples to illustrate your answer.

Answer:

a. Merchandise exports are tangible products—goods—sent out of a country. Merchandise imports are goods brought into a country. When a Chinese contractor sends toy action figures from China to Hasbro in the United States, the contractor exports and Hasbro imports.

b. Service exports and imports generate non product international earnings. The company or individual receiving payment is making a service export. The company or individual paying is making a service import. When an American tourist stays at a hotel in London, the hotel stay is the service export.

What is globalization? What modes of international business are used by firms that want to globalize? Briefly describe each method.

Answer: Globalization refers to the widening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. The term can also refer to the integration of world economies through the elimination of barriers to movements of goods, services, capital, technology, and people. Firms have many options available when they want to globalize their operations including licensing, franchising, turnkey operations, management contracts, and direct/portfolio investment.

a. Licensing and franchising—Licensing agreements are used when companies allow others to use their assets, such as trademarks, patents, copyrights, or expertise under contract. Franchising is a mode of business in which one party allows another party the use of a trademark that is an essential asset for the franchisee's business.

b. Turnkey operations—Refers to business operations, performed under contract, that are transferred to the owner when they are ready to begin operating.

c. Management contract—Refers to arrangements in which one company provides personnel to perform general or specialized management functions for another company.

d. Direct and portfolio investment—A direct investment is one that gives the investor a controlling interest in a foreign company. A portfolio investment is a non controlling interest in a company or ownership of a loan to another party.

What is a multinational enterprise (MNE)? How do physical and social factors affect how an MNE functions in a foreign country?

Answer: The multinational enterprise (MNE) is a company that takes a global approach to foreign markets and production. It is willing to consider market and production locations anywhere in the world. However, most writers use the term to mean any company with operations in more than one country. Physical factors, such as a country's geography or demography, and social factors, such as its politics, law, culture, and economy, influence the functioning of an MNE. Physical and social factors can affect how companies produce and market products, staff operations, and even maintain accounts. Geographic barriers—mountains, deserts, jungles, and so forth—often affect communications and distribution channels. And the chance of natural disasters and adverse climatic conditions (hurricanes, floods, droughts, earthquakes, volcanic eruptions, tsunamis) can make business riskier in some areas than in others, while affecting supplies, prices, and operating conditions in far-off countries.

What is foreign direct investment? What social factors in the external environment might affect FDI?

Answer: In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company. Control need not be a 100 percent or even a 50 percent interest; if a foreign investor holds a minority stake and the remaining ownership is widely dispersed, no other owner may effectively counter the investor's decisions. A nation's political policies of course affect how international business is conducted within its borders. In particular, political disputes can disrupt the flow of international business. Domestic law, which includes both home- and host-country regulations on issues such as taxation and employment, affects how a company can operate internationally. International law—the legal agreements between countries—also obviously affects FDI.

In a short essay, identify and explain three competitive factors that influence international businesses.

Answer:

a. Product strategy—A company's choice of strategy, either cost or differentiation, plays a part in determining how and where the company will operate.

b. Company resources and experience—A company's size, resources, and experience in comparison to competitors' affects how it will operate in international markets. In addition, a company's national market share and brand recognition will affect the operating tactics it employs.

c. Competitors faced in each market—Success for a company in any market will always be influenced by the strategies and operations of competitors within the market.

What is procedural political risk? How does a nation's political and legal environment influence procedural risk for MNEs?

Answer: Procedural risk is associated with moving people, products, and funds from point to point in the global market. Each move creates a procedural transaction between companies or countries. Political actions sometimes impose frictions that slow or stop transactions. The repercussions of, say, public fraud or a partisan judicial system can raise business costs; corrupt officials, for instance, might pressure a foreign firm to pay additional monies to clear goods through customs or obtain a permit to open a factory. Politically motivated interference escalates expenses, thereby lowering returns. Procedural political risk is often classified as a micro risk—that is, it affects some but not all companies.

How does a nation's legal environment affect an MNE's marketplace behavior, especially when the rule of man prevails?

Answer: National laws stipulate permissible practices in all forms of business activities, including sourcing, distributing, advertising, and pricing products. MNEs adjust their manufacturing configuration, supply chain coordination, and marketing strategy accordingly. In countries where the rule of man is the basis of law, acceptable marketplace behavior is unpredictable. MNEs often complain of trumped-up charges, solicitation of bribes, and favoritism for local rivals. Especially controversial in legal systems where the rule of man prevails is the issue of the protection—or lack thereof—of intellectual property.

How has intellectual property theft affected China's economy? What is the relationship between China's legal environment and intellectual property theft?

Answer: MNEs complain that the relentless, widespread, and sophisticated theft of their intellectual property fuels China's economic surge. Aggressive estimates attribute nearly a third of the Chinese economy to piracy. In the United States, the FBI estimates that American companies lose up to $250 billion annually to counterfeiting, half of it because of China's illegal practices. Most analysts point to the mix of China's quest to catch the west, collectivist orientation, rule-of-man legacy, and dubious enforcement of ambiguous laws. These conditions create an unprecedented political and legal morass. Officially, China has a battery of laws that comply with international standards for market access, nondiscrimination, and transparency. However, many Chinese citizens and officials naturally question the legitimacy of laws passed by foreign governments. Hence, foreign made laws are inconsistently enforced in the local marketplace. This gap between domestic traditions and foreign standards, explained a Chinese jurist, means that intellectual property laws exist to protect Chinese intellectual property from foreign intellectual property.

In a brief essay, describe the political and legal systems in China and their effect on MNEs doing business in China.

Answer: China applies state capitalism whereby the government manipulates market activities to achieve political goals. Consequently, MNEs doing business in China often find themselves at a disadvantage. Incorporating in China requires telling the government—in excruciating detail—who you are, what you want to do, how you plan to do it, how much you intend to invest, and how many jobs you will create. China's political and legal systems impose many time-consuming tasks on MNEs. Moreover, China tends to stack the odds against foreigners who are bold enough to forge ahead in the face of an elaborate government bureaucracy and a fledgling legal system.

Compare and contrast the rule of law and the rule of man.

Answer: The rule of man has been around for millennia, in the sense that for much of history, the ruler and the rule were synonymous. The law was the will of the ruler, whether in the person of the king, czar, raj, caliph, or emperor. Regardless of the title used today, such as chairman, general, or supreme leader, the principle places ultimate power in the hands of one person, making his (or her) word and will (and whim) law, no matter how unfair, unjust, or nonsensical. Because it grants inherent authority for the ruling party to act without being subject to checks and balances, the rule of man principle is a keystone of totalitarian government.

The rule of law, in contrast, rejects the notion of an omnipotent leader arbitrarily ruling society. Instead, the rule of law, a hallmark of democracy, holds that governmental authority is legitimately exercised in accordance with written, publicly disclosed laws that have been appropriately adopted and are enforced in keeping with established procedure. Ideally, the rule of law institutes a just political and social environment, guarantees the enforceability of commercial contracts and business transactions, and safeguards personal property and individual freedom. Everyone who lives under it expects every legitimately enacted law, code, and statute to be grounded in and validated by the principles of the rule of law. No individual—whether public official or private citizen—stands above the law.

Contrast common law, civil law, customary law, and theocratic law.

Answer:

a. Common law—The United States and the United Kingdom are examples of countries with a common law system. Common law is based on tradition, precedent, custom, and usage. The courts fulfill an important role in interpreting the law according to those characteristics. In a common law country, contracts tend to be detailed, with all contingencies spelled out.

b. Civil law—Civil law is based on a detailed set of laws that make up a code. Rules for conducting business transactions are a part of the code. More than 70 countries, including Germany, France, and Japan, operate on a civil law basis. In a civil law country, contracts tend to be shorter and less specific because many of the issues that a common law contract would cover already are included in the civil code.

c. Customary law—A customary law system anchors itself in the wisdom of daily experience or, more intellectually, great spiritual or philosophical traditions. Few countries in the world today operate under a legal system that is wholly customary. Still, customary laws sometimes play a significant role, namely in matters of personal conduct, in many countries with mixed legal systems.

d. Theocratic law—A theocratic law system relies on religious and spiritual principles to define the legal environment. Religious leaders hold ultimate legal authority, applying religious law to govern social transactions. The best example of this system is Islamic law, which is prevalent in Muslim countries.

Identify the three common components of modern legal systems and explain their relevance to managers.

Answer: Unquestionably, legal systems differ from country to country, primarily because of differences in tradition, precedent, usage, custom, or religious precepts. Even so, the purpose of every legal system is to establish a comprehensive legal network to regulate social activities.

As such, modern legal systems share three components to achieve this goal, specifically:

1. A system of constitutional law designed to guarantee an open and just political order
2. A system of criminal law designed to safeguard the social order
3. A system of civil and commercial laws designed to ensure fairness and efficiency in business transactions.

Aspects of all three components bear on the decisions made by managers and foreign investors. Certainly, differences in each will adjust how managers see the legal system in a particular country. When the legal system is functioning well, no matter how it blends these three components, it ensures that a society can pursue economic and social development and, when disagreements arise, resolve them without collapsing into anarchy.

What is political risk? What is the relationship between political environment and political risk?

Answer: Investing overseas exposes a company to the risks that arise from the quirks of international politics or, as commonly called, political risk. Generally, political risk is the chance that political decisions, events, or conditions in a country will affect the business environment in ways that lead investors to (1) lose some or all of the value of their investment or (2) be forced to accept a lower than projected rate of return. Although political risks can occur in democratic as well as totalitarian political regimes, they tend to be more prevalent in totalitarian regimes.

What are the differences between democratic and totalitarian political systems? What does current research suggest about the spread of democracy and totalitarianism in the world?

Answer: Democracy basically involves wide participation by citizens in a decision-making process. As the text notes, Abraham Lincoln, the sixteenth president of the United States, saw democracy as a government "of the people, by the people, and for the people." Practically speaking, a democracy is a political system that endorses the rule of law and grants the voting citizenry the power to alter the laws and structures of government, to make all decisions (either directly or through representatives), and to participate in elections that express their decisions. These are the principles and practices that enable a democracy to institutionalize political freedoms and civil liberties. As a result, democracy is typically represented by a high level of civil liberties, such as freedom of opinion, expression, and the press.

In a totalitarian system, a single agent—whether an individual, group, or party—monopolizes political power and tries to mobilize the population toward two ends: unquestioning support for the official state ideology and opposition to activities that run counter to the goals of the state. The ideological standards of totalitarianism require agents of the government to eliminate dissent within the system. In dramatic contrast to the democratic ideal of freedom, totalitarianism enforces restrictions that subordinate the day-to-day life of people—including occupation, income, personal interests, religion, and even family structure—to the interests of the state through the use of persecution, surveillance, propaganda, censorship, and violence. Consequently, there is little to no political freedom and few, if any, civil liberties.

Current research suggests that there is a slowing momentum of democracy in the world. Trends throughout the world also signal a surge in authoritarianism especially in the Middle East and the former Soviet Union.

What is the difference between individualism and collectivism? What is the relationship between government and business under each orientation?

Answer: The doctrine of individualism emphasizes the primacy of individual freedom, self-expression, and personal independence. Individualism values the individual's ambitions and opposes external interference by the government that constrains individual choice. Under individualism, the role of the government is to protect the liberty of individuals to act as they wish, so long as they do not infringe upon the liberties of others. Countries with an individualist orientation typically have an economy shaped by the idea of laissez-faire, meaning that the government should, for the most part, not interfere with business.

In contrast, the doctrine of collectivism emphasizes the primacy of the group—class, society, or the nation—over the interests of the individual. The group as a whole is greater than the sum of its individual parts. Individuals define themselves in connection with the group. Under collectivism, activities in the marketplace must improve the welfare of society. Systems that feature a collectivist orientation, then, hold that government should intervene in business situations to ensure that business practices benefit the group.

What are the 4 P's of marketing?

Identification, selection and development of a PRODUCT,
Determination of its PRICE,
Selection of a distribution channel to reach the customer's PLACE and
Development and implementation of a PROMOTIONAL strategy

What is a market and what do we mean by exchange?

• Market is a collection of buyers and sellers, OR a group that has similar needs that can be met by a product.
• Exchange is the process of obtaining something of value from someone by offering something in return.

What do we mean by the four different types of utility (time, place, possession, and psychological utility)?

• Time Utility: Products available when the customers want them.
• Place Utility: Products available where the customers want them.
• Possessing Utility: Transfer of ownership or title from the marketer to the customer.
• Psychological Utility: Delivers positive/experiential or psychological attributes that customers find satisfying.

Know some of the major marketing strategy decisions.

Market Segmentation & Target Marketing: The identification and selection of one or more target markets.
Market Program Decisions: Successful programs depend on a carefully crafted blend of the 4 Ps.
Branding and Positioning: What customers think of the company and its offerings.

What do we mean that a product becomes a commodity?

When companies in the same industry offer the same basic products to the same customers. At the point, for the customers, all they care about is the price.

Know the different stages of the strategic planning process (situation analysis and marketing plan).

(1) Situation Analysis: An in-depth analysis of the organization's internal & external environment.

(2) Marketing Plan: A written document that provides the blueprint or outline of the organization's marketing activities, including the implementation, evaluation, and control of those activities.

What do we mean by organization mission and vision?

• Organization Mission: Answers the question "What business are we in?". It's a clear and concise statement that explains the organization's reason for existence.

• Organization Vision: Answers the question "What do we want to become". It's a future oriented statement that represents where the organization is headed.

What are the elements of a good mission statement?

(1) Who are we?
(2) Who are our customers?
(3) What is our operating philosophy (basic beliefs, values, ethics, etc.)?
(4) What are our competitive advantages?
(5) What are the responsibilities with respect to being a good steward of our human, financial, and the environmental resources?

What do we mean by the width of a mission statement?

When it comes to crafting a mission statement, management should be concerned about the statement's width. If the mission is too broad, it will be meaningless to those who read and build upon it.

What is corporate strategy?

The central strategy for utilizing and integrating resources to carry out the organization's mission and achieve the desired goals and objectives.

What is business-unit strategy?

Determines the future direction of each business unit, including its competitive advantages, the allocation of its resources, and the functional business areas.

What is a strategic business unit?

A division of a large company that has its own distinct mission and its own competitors.

What do we mean by competitive or differential advantage?

- Competitive advantages allow a company or country to produce a good or service at a lower price for customers.

-Differential advantage is created when a firm's products or services differ from its competitors and are seen as superior than a competitive offering.

What is a marketing plan?

Detailed formulation of the actions necessary to carry out the marketing program.

Parts of the marketing plan:

• Executive Summary
• Situation Analysis
• SWOT Analysis
• Marketing Goals & Objectives
• Market Strategy
• Market Implementation
• Evaluation and Control

Why is the executive summary very important?

It may be the only element of the marketing plan read by many people. It should be the last element written because it is easier and more meaningful to write after the marketing plan has been developed.

What is the purpose and significance of the Marketing plan?

It's the handbook for marketing implementation, evaluation, and control. The hallmark of a well-developed marketing plan is its ability to achieve its stated goals and objectives.

What is a situation analysis and what are some of the issues to be considered in a situation analysis? (Three key environments)

SA:Describes current and future issues and key trends.

3 key environments: the internal, customer and the external environment.

What are the challenges in conducting a situation analysis?

Analysis Alone is NOT a solution: Situation Analysis is a necessary, but insufficient, prerequisite for effective strategic planning. Its purpose is to empower the manager with information for more effective decision making.

Data is NOT the same as information: Good, useful information is not the same as data. Data, however, do not become informative until a person or process transforms or combines them with other data in a manner that makes them useful to decision makers.

The Benefits of Analysis Must Outweigh the Costs: Situation Analysis is valuable only to the extent that it improves the quality of the resulting marketing plan.

Conducting a Situation Analysis is a Challenging Exercise: It is important that any effort at situation analysis be well organized, systematic, and supported by sufficient resources.

What do we mean by derived demand?

Is the demand placed on one good or service because of changes in the price for some other related good or service.

What are the different competitors that a firm must face?

-Brand Competitors
-Product Competitors
-Generic Competitors
-Total Budget Competitors

What are some of the aspects of the external environment?

• Competition
• Economic Growth & Stability
• Political Trends
• Legal & Regulatory Issues
• Technological Advancements
• Sociocultural Trends

What are some examples of backstage technology?

An example shows that an advance in computer technology have made warehouses storage and inventory control more efficient and less expensive. Also, when it comes to communication technology, field sales reps are more efficient and effective in their dealings with managers and customers.

What do we mean by corporate affairs and public relations?

• Corporate Affairs: Includes all the organization's marketing activities not directed at the end users of its products.

• Public Affairs: Identify issues that may elicit public concern. Develops programs to create and maintain positive relationships between a firm and its stakeholders.

What is the impact of the internet in data collection?

• An incomplete or inaccurate definition of the marketing problem.
• Ambiguity about the usefulness or relevance of the collected data.
• Information overload.
• The expense and time associated with data collection
• Finding ways to organize the collected data and information.

Why do we use the SWOT analysis?

Provides a simple, straightforward framework that provides direction and serves as a catalyst for the development of viable marketing plans. It can be especially useful in uncovering competitive advantages that can be leveraged in the firm's marketing strategy.