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[BUSI 2701] - Final Exam Guide - Comprehensive Notes for th..
[BUSI 2701] - Final Exam Guide - Comprehensive Notes for the exam (37 pages long!)

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Carleton University
BUSI 2701
Diane A Isabelle

Waterloo BUSI 2701 FINAL EXAM STUDY GUIDE find more resources at Chapter 1 Globalization: Trend away from distinct national economic units and toward one huge global market. (Different facets: 1,2 and the globalization of consumers. 1) The globalization of markets: Moving away from an economic system in which national markets are distinct entities, isolated by trade barriers of distance, time, and culture, and toward a system in which national markets are merging into one global market.By offering a standardized product worldwide they help create a global market. Shortened: Refers to the merging of separate national markets into one huge global marketplace. Slides 41 & 42 2) The globalization of production: The trend by individual firms to disperse parts of their productive processes to different locations around the globe to take advantage of differences in costs and the quality of factors of production. Slide 44 Global Institutions: Help manage, regulate, and police the global marketplace and promote the establishment of multinational treaties to govern the global business system. The United Nation (1945) - Tries to maintain international peace and security. - Develops friendly relations among nations. - Cooperates in solving international problems and in promoting respect for human rights. - In a center for harmonizing the actions of the nations. - its effectiveness has been hampered by organizational issues and competing agendas of member states - High/valued reputation of its individual agencies (UNCTAD - UN Conferenc on Trade and Development, WHO, UNESCO) General Agreement on Tariffs and Trade (GATT): International treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to WTO. - The first effective worldwide tariff reduction agreement - A forum for negotiating trade and related issues if can not be resolved on a bilateral basis World Trade Organization (WTO): The organization that succeeded the GATT as a result of the successful completion of the Urguay Round of GATT negotiations. - regulates the world trading system (that individual nations have already agreed to) - makes sure that nation-states adhere to the rules laid down in trade treaties - A forum for governments to negotiate/settle trade agreements. - promotes economic development find more resources at find more resources at - Cooperates with other international organizations International Monetary Fund (IMF): International institution set up to maintain order in the international monetary system. (188 members) - Created to assist nations in becoming and remaining economically viable. - plays an important role in international trade by: Helping to maintain stability in financial markets. Assisting countries that are seeking economic development and restructuring. reduces poverty around the world - The IMF is often seen as the lender-of-last-resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations. - The point being that if a country has a currency that is of a small value, it makes it hard for them to trade with other countries. - And this effects global trade for everybody World Bank: International institution set up to promote general economic development in the world’s poorer nations. Mission: to bight poverty with passion and professionalism for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors. (World Bank, 2011) - Its main goal is to reduce poverty improve living standards by promoting sustainable growth and investment in people. - The World Bank provides loans, technical assistance, and policy guidance to developing-country members to achieve its objectives. Drivers of Globalization 1)Decline of Trade and Investment Periods - After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. (huge manufacturing capacity, thirst for new/larger markets) - Under GATT, over 100 nations negotiated even further decreases in tariffs and made signibicant progress on a number of non-tariff issues - Under the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws ----> increased International trade and FDI 2) Technological Change While the lowering of trade barriers made globalization of markets and production theoretical possibility, technological change made it a tangible reality. - lower transportation costs - firms can disperse production to economical, geographically separate locations GTA is now closer to Tokyo than it was to Montreal find more resources at find more resources at - lower information processing and communication costs -firms can create and manage globally dispersed production systems – headquarters in Ottawa managing a firm in Cairo - global communication networks and global media - create aworldwide culture, and a global market for consumer products What is the most important innovation? Microprocessors!!! It enabled the explosive growth of high power, low cost computing, vastly increasing the amount of information that can be processed by individuals and firms. Technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information that flows among these electronic highways. Global Trends World Output: The share of world output (quantity of goods or services produced in a given time) accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020. What does this all mean to International Business? Opportunities/markets in developing countries & Strong competition that could threaten Western firms Foreign Direct Investment: Direct investment in business operations in a foreign country.(Slide64) The Changing Nature of Multi Natural Enterprises: A firm that owns business operations in more than one country. Two noticeable trends: 1) The rise of non-U.S. multinationals, particularly Japanese multinationals 2) The growth of mini-multinationas Read rest on slides.. Chapter 2: Country Differences in Political Economy Political Economy: The political, economic, and legal systems of a country. find more resources at find more resources at Political System: System of government in a nation. Can be assessed according to two related dimensions. 1) The degree to which they emphasize collectivism as opposed to individualism. 2) The degree to which they are democratic or totalitarians. *Systems that emphasize collectivism tend toward totalitarian. Collectivism: A political system that emphasizes collective goals as opposed to individual goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual free forms. Socialist ideology split into two broad camps. 1) Communists: believed that socialism could be achieved through violent revolution and totalitarian dictatorship. 2) Social Democrats: committed themselves to achieving socialism by democratic means and turned their backs on violent revolution and dictatorship. Individualism: An emphasis on the importance of guaranteeing individual freedom and self expression. (Opposite of collectivism) The Second tenet of individualism is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body dictating what is in society's best interest. *Individual economic and political freedoms are the ground rules on which society should be based. (central message of individualism) Democracy: Political systems in which government is by people, exercised either directly or through elected representatives. Representative democracy: A political system in which citizens periodically elect individuals to represent them in government. ● Citizens periodically elect individuals to represent them. ● These elected representatives then form a government, whose function is to make decisions on behalf of the electorate. ● A representative democracy rests on the assumption that if elected representatives fail to perform this job adequately, they will be voted down at the next election. To guarantee that elected representatives can be held accountable or their actions by the electorate, and ideal representative democracy has a number of safeguards; 1) An individual's right to freedom of expression, opinion and organization 2) A free media 3) Regular elections in which all eligible citizens are allowed to vote 4) Universal adult suffrage 5) Limited terms for elected representatives find more resources at find more resources at 6) A fair court system that is independent from the political system 7) A nonpolitical state bureaucracy 8) A nonpolitical police force and armed service 9) Relatively free access to state information Totalitarianism : Form of government in which one person or political party exercises absolute control over all human spheres of human life and opposing political parties and prohibited. *Democracy and individualism and collectivism and totalitarianism go hand in hand. Four major of totalitarianism: 1) Communist Totalitarianism: A version of collectivism advocating that socialism can only be achieved through a totalitarian dictatorship. (most recently widespread) 2) Theocratic totalitarianism: Found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. (most common form is based in Islam) 3) Tribal Totalitarianism: occurs when a political party that represents the interests of a particular tribe (and not always the majority tribe) monopolizes power. (exists in africa) 4) Right-Wing Totalitarianism: Generally permits one individual economic freedom but restricts individual political freedom on the grounds that it would lead to rise of communism. (common feature, overt hostility to socialist or communist ideas) Market Economy: An economic system in which the interaction of supply and demand determines the quantity in which goods are services are produced. ● If demand for a product exceeds supply, price will rise. ● The purchasing patterns of consumes, as signalled to producers through the mechanism of th price system, determine what is produced and in what quantity. (read page 48 on market economy) ● Must be no restrictions on supply or demand. ● The goods and services that a country produces, and the quantity in which they are produced, is not planned by anyone. ● economy the good and services that a country products, and the quantity in which they are produced, is not planned by anyone. Rather it is determined by the interaction of supply and demand and signalled to producers through the price system Command Economy (pure): The goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. All businesses make investments that are in the best interests of the nation as a whole, rather than in the interests of private individuals. Resources are allocated ”for the good of the society”. The government owns most, if not all businesses. find more resources at find more resources at Mixed Economy: Certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant government ownership and government planning. Economic system in which certain sectors are left to private ownership and free market mechanism, while other sectors are owned and managed by the government. Example on slides. Legal Systems: System of rules that regulates behaviour and the processes by which the laws of a country are enforced and through which redress of grievances is obtained. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Types of Laws... Common Law: A system of law based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics. Tradition refers to a country’s legal history, precedent to cases that have come before the courts in the past, and custom to the ways in which laws are applied in specific situation. - A common law system has a certain degree of flexibility because judges have the power to interpret the law due to unique circumstances of each individual case. Civil Law: Based on a very detailed set of laws organized into codes. (Example: Criminal Code of Canada) Judges under a civil law system have less flexibility than a common law system because they have to follow the codes set in place. - The greatest difference between common and civil is judges in a common law system have the power to interpret the law and judges in a civil law system only apply the law. The laws are more “Cast in stone”. Theocratic Law: A system of law based on religious teachings. Islamic Law is the most widely practised theocratic legal system in the modern world. It is primarily a moral rather than commercial law and is intended to govern all aspects of life. - Ontario’s 1991 Arbitration Act allows religious groups to resolve family disputes within the traditions of their faith . - Lawyers have little power. Mixed Legal System - Democracies is associated with common law, civil law and .. Differences in Contract Law Contract: A document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. Contract Law: is the body of law that governs contract creation and enforcement. The parties to an agreement normally invoke contract law when one party believes the other has violated either the letter or the spirit of an agreement. find more resources at find more resources at - Common law contracts tend to be more detailed, where every detailed is specified. Whereas civil law contracts tend to be much shorter and brief because many of the issues covered in the civil law contract are already covered in the code, with no need to repeat. - It is more expensive to draw up contracts in a common law jurisdiction, and that resolving contract disputes can be a very difficult process in common law systems. - Common law systems have the advantage of greater flexibility and allows for judges to interpret a contract dispute in light of the prevailing situation. - International businesses need to be sensitive to these differences since approaching a contract dispute in a state with a civil law system, as if it had a common law system may backfire (and vice-versa). - United Nations Convention on Contracts for International Sale of Goods (CISG): A set of rules governing certain aspects of the making and performance of commercial contracts between sellers and buyers who have their places of business in different nations. - By adopting CISG, a nation signifies to the other nations that have adopted it that it will treat the convention’s rules as a part of its law. - CISG applies automatically to all contracts for the sale of goods between different firms based in the countries that have ratified the convention, unless the parties to the contract explicitly opt out. - It is currently ratified by 76 countries since 1988. - When firms do not wish to accept CISG, the often opt for arbitration by a recognized arbitration court to settle contract disputes. Property Rights: Bundles of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource. Property rights can be violated in two ways… 1) Private Action - Refers to the theft, piracy, blackmail, and the like by private individuals or groups. 2) Public Action and Corruption - occurs when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. ex: taking assets into state ownership without compensating the owners. Foreign Corrupt Practises Act: U.S law regulating behaviour regarding the conduct of international business in the taking of bribes and other unethical actions. - Passed during the 1970s Bill S-21: Otherwise known as the Corruption of Foreign Public Officials Act that received Royal Assent on December 10th, 1988. It is Canadian legislation that makes the bribery, or other business corruption “tool” of a foreign official by a Canadian business person, a criminal offence. The Protection of Intellectual Property - Refers to the property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula of a new drug. find more resources at find more resources at - Established through patents, copyrights or trademarks Patent: Grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights: are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks: are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products. Paris Convention for the Protection of Industrial Property: International agreement to protect intellectual property; signed by 187 countries. TRIPS agreement (Trades Related Aspects of Intellectual Property Rights) ● Agreement amongst members of the world trade. ● World Trade Organization to to oversee the enforcement of stricter intellectual property regulations. Product Safety and Product Liability Product Safety Laws: Laws that set certain safety standards to which a product must adhere, where it is going to be commercialized. Product Liability: Involves holding a firm and its officers responsible when a product causes injury, death, or damage. - Can be much greater if a product does not conform to required safety standards. The Determinants of Economic Development Different countries have different levels of economic development.. 1. GNP (Gross National Product) 2. GNI (Gross National Income) replacing PPP - The total income of all citizens of a country, including the income from factors of production used abroad. 3. PPP (Purchasing Power Parity) - An adjustment in gross domestic product per capita to reflect differences in the cost of living 4. HDI (Human Development Index) - An attempt by the United Nations to assess the impact of a number of factors on the quality of human life in a country. The Spread of Democracy On a scale of 1, for the highest degree of political freedom to 7 for the lowest, Freedom House, an independent watchdog organization that supports the expansion of freedom around the world, uses the following criteria for determining the ratings for political freedom: - Free and fair elections of the head of state and legislative representative - Fair electoral laws, equal campaigning opportunities, and fair polling - The right to organize into different political parties - A parliament with effective power - A significant opposition that has a realistic chance of gaining power find more resources at find more resources at - Freedom from domination by the military, foreign powers, totalitarian parties, religious hierarchies, or any other powerful group - A reasonable amount of self-determination for cultural, ethnic, and religious minorities The Spread of Market-Based Systems The Heritage Foundation’s index of economic freedom is based on ten indicators, such as trade policy and taxation rules. A country can score between 1 (least free) and 100 (most free) on each of these indicators. The higher a country's average score across all 10 indicators, the more closely its economy represents the pure market model. The Nature of Economic Transformation - Deregulation: Removal of government restrictions concerning the conduct of a business. - Privatization: The sale of state-owned enterprises to private investors. Seen as a way to unlock gains in economic efficiency by giving new private owners a powerful incentive (the reward of greater profits) to search for increases in productivity, to enter new markets, and to exit losing ones. Chapter 3: The Cultural Environment Several Themes run through this chapter: 1) Business success in a variety of countries requires cross cultural literacy. By cross cultural literacy we mean an understanding of how cultural differences across and within nations can affect the way business is practiced. Example: Wal-Mart failed in Germany because they didn't understand the should learn to speak their language and they didn't understand that they don't use all the same things the consumers in Canada and the US use. 2) A relationship may exist between culture and the cost of doing business in a country or region. Different cultures are more or less supportive of the capitalist mode of production and this may affect the costs of doing business. Example: Some observers have argued that cultural factors lowered the costs of doing business in Japan. Culture: No one has ever been able to think of one definition that defines culture. There are lots of different definitions out in the world. Norms: Social rules and guidelines that prescribe appropriate behaviour in particular situations. They are the social rules that govern people’s actions toward one another. They can be subdivided into two major categories; find more resources at find more resources at Folkways: Are the routine conventions of everyday life. Are social conventions concerning things such as the appropriate dress code in a particular situation, good social manners, neighbourly behaviour, etc. People who violate folkways are considered eccentric or ill-mannered. Mores: are norms that are seen as central to the functioning of a society's and to its social life. They have much greater significance than folkways. It can bring some serious retribution. Mores include such factors as indictments against theft, adultery, incest. Society: A group of people who share a common set of values and norms. Values: Abstract idea about what a society believes to be good, right, and desirable. Values are the bedrock of a culture. They provide the context within which a society’s norms are established and justified. They may include a society’s attitudes toward such concepts as individual freedom, democracy, truth etc. Nation-states: are political creations. They may contain a single culture. Canada has at least 3 cultures; Christians, Frenchies, and First Nation (Aboriginal). The Determinants of Culture: Factors: prevailing political and economic philosophy, the social structure of a society, and the dominant religion, language, and education. Social Structure: Refers to its basis social organization. There are two dimensions that are particularly important when explaining differences between cultures. The first is the degree to which the basic unit of social organization is the individual, as opposed to the group. The second dimension is the degree to which a society is stratified into classes or castes. Some societies are characterized by relatively high dress of social stratification and relatively low mobility between strata while other societies are characterized by a low degree of social stratification and high mobility between strata. Individuals and Groups Group: As association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behaviour. Individual: ● The basic building block of social organization. ● The value system of many western societies, for example, emphasize individual achievement. The social standing of individuals is not so much a function of whom they work for, as of their individual performance in whatever work setting they choose. ● The emphasis on individual performance finds expression in an admiration of “rugged individualism” and entrepreneurship. One benefit is that the high level of entrepreneurial activity in the US and CA. find more resources at find more resources at ● Finds a high degree of managerial mobility between companies, and this is not always good. While moving from company to company may be good for the individual managers who are trying to build impressive resumes, it is not necessarily beneficial for the companies they leave behind. The lack of loyalty and commitment to an individual company, and the tendency to move on when a better offer comes along can result in managers who have good general skills but lack of knowledge, experience, and a network of contacts. ● The emphais of individualism may also make it difficult to build teams within an organization to perform collective tasks. The Group: The group is the primary unit of social organization in many other societies. Strong identification with the group is argued to create pressures for mutual self-help and collective action. Karoshi: Japanese term meaning to die from overwork. The primacy of the value of group identification also discourages managers and workers from moving from company to company. Social Stratification Social Strata: Hierarchical social categories often based on family background, occupation, and income. These strata are typically defined on the basis of characteristics such as family background, occupation, and income. Individuals are born into a particular stratum. They become a member of the social category to which their parents belong. Social Mobility: The extent to which individuals can move out of the social stratum into which they are born. Social mobility varies significantly among societies. The most rigid system of stratification is a caste system. Caste System: A system of social stratification in which social position is determined by the family into which a person is born, and change in the position is usually not possible during an individual's lifetime. Is a closed system. Often a caste position carries with a specific occupation. A class system: is a less rigid form of social stratification in which social mobility is possible. A class system is a form of open stratification in which the position a person has by birth can be changed through his or her own achievements and or/luck. (Mobility between classes is possible) Individualism born into class at the bottom of the hierarchy can work their way up while individuals born into a class at the top of the hierarchy can slip down. Class system varies from society to society. Significance From a business perspective, the stratification of a society is significant if it affects the operation of business organizations. Class consciousness: A tendency for individuals to perceive themselves in terms of their class background, which shapes their relationship with members of other classes. find more resources at find more resources at Religion and Ethical Systems: Religion: A system of shared beliefs and rituals concerned with the realm of the sacred. Ethical Systems: Cultural beliefs about what is proper behaviour and conduct. Most of the world's ethical systems are the product of religions. Christianity: ● The vast majority of Christians live in Europe, America, and Africa. ● It is a monotheistic religion (one God). ● Branches of Christianity: Roman Catholic, Orthodox, and Protestant. Islam - 1.2 billion adherents, the second largest world religion - Monotheistic (one God) - The objective of life is to fulfill the dictates of his will in the hope of admission to paradise - The muslims lives in a social structure that is shaped by Islamic values and norms of moral conduct Islamic Fundamentalism - Is associated in the media with terrorists and violent upheavals such as 9/11 - Fundamentalism has no one cause. In part, it is a response to the social pressure created in traditional Islamic societies by the move towards modernization. - Fundamentalists demand a rigid commitment to traditional religious beliefs i.e islamic woman wearing hijabs Economic Implications of Islam - Some explicit economic principles are set out in the Koran. - Muslim countries are likely to engage in international business so long as those business are mindful of islamic ethics. - Islam prohibits the payment or receipt of interest. Hinduism - 750 million adherents - No one God, Dharma - They believe in reincarnation and are strong believers in karama. - Ultimate goal is to achieve nirvana Economic Implications of Hinduism - Since spiritual achievements outway material achievements in the Hindu religion, Max Weber thought that devout Hindus would be less likely to engage in entrepreneurial activity than devout Protestants - HOWEVER, this is untrue. Millions of hardworking entrepreneurs form the economic backbone of India’s rapidly growing economy. - Hindus do believe in the caste system. However as the world become more and more modernized, the influence of the caste system is now fading. find more resources at find more resources at Buddhism - 350 million followers - A lot of the same practises as hinduism, except buddhists do not believe in the caste system. - With no caste system in place, buddhists aren’t materially encouraged to do better or make more money, which is why you don’t see entrepreneurs spiking form buddhist societies. Confucianism - For more than 2000 years up until 1949, it was the official ethical system of China - Teaches the importance of attaining personal salvation through right action - The need for high moral and ethical conduct and loyalty to others is central - Not a religion Economic Implications of Confucianism - Loyalty to one’s superiors is regarded as a sacred duty - ^ reduces conflict and binds employees to their head of office - The superiors are obligated to reward loyalty by bestowing blessings upon them - Guanxi: the relationship networks supported by reciprocal obligations - Honest is important because it prevents employees from acting out if they feel their actions may be dishonest Spoken Language - Shapes the way people perceive the world - Defines culture. Countries with more than one language often have more than one culture - It is important to have some understanding of the language of the business you’re working with internationally. Things can something be lost in translation. - It is also important to under what non verbal communication the other country may use. A failure to understand nonverbal cues may result in a failure of communication. - Example: Making a circle with the thumb and forefinger is a friendly gesture in canada, but a sexual invitation in Turkey and Greece Education - Determinant of competitive advantage, the most skilled gets the job. - Skilled workers? Successful country. Culture and the workplace - How a society's culture affects the values found in the workplace is of considerable importance to an international business with operations in different countries. Hofstede isolated five dimensions that he claimed summarized different cultures: 1. Power Distance find more resources at find more resources at - You may categorize a culture based on the degree to which the upper class is separated from the lowest class. - For people selling consumer products internationally, knowledge of the Power Distance in a country may apply to who you select as actors to feature various consumer products and the words you use to describe them - particularly if a product may be considered to be used by the lower class of people, or upper class. - These considerations would apply to products such as luxury electronic consumer items or expensive watches or high priced vehicles. 2. Individualism versus Collectivism - For some countries, which have a high degree of Collectivism for historical / agricultural reasons, - It would be recommended that marketing consumer products would be more successful if groups of people were in the ad, as compared to individuals. - For example, if you wanted to market a new cell phone feature in Beijing, you would create a TV commercial showing how the person shared this with all their friends, if you wanted to market a new cell phone feature in New York, you'd show an individual and how they used it to save time or money. 3. Uncertainty avoidance - If the culture is very afraid of uncertainty then they will create many laws, rules and regulations to control people's behaviour - on the opposite would be a culture that values freedom and has few laws because the people believe they can take care of themselves and are not uncertain. - A culture that is very afraid of uncertainty can also be sold things based on a different blend of images in print and TV commercials. - For example, tires may be sold in one region based on their safety rating and ability to brake in bad weather, in another region they may be marketed based on their "cool looks" and aggressive tread pattern for SUVs. 4. Masculinity versus femininity - In some cultures, like Afghanistan, the difference between the men and women is quite extreme as it relates to clothing, job opportunities, religious regulations, language, human rights etc. In other countries, like Sweden or Norway, the difference between men and women are minimal. - For example, it may be attractive to have a female actress posing as a lawyer in an IT commercial marketing some IT product, but this would not be "believable" in some regions where female access to post-graduate university education is still not common. 5. Long-term versus short-term orientation - Virtue regardless of truth - Values associated with long-term orientation are thrift and perspective; values associated with short-term orientation are respect for tradition, fulfilling social obligations and protecting one’s “face” find more resources at find more resources at Hofstede’s work has been criticized because... - It made the assumption there is a one-to-one relationship between culture and the nation- state - Studies may have been culturally bound - Used IBM as sole source of information - Culture is not static – it evolves But, it is a starting point for understanding how cultures differ, and the implications of those differences for managers Confucian Dynamism: Theory the confucian teachings affect attitudes towards time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favours. Cultural Change - Culture is not a constant; it evolves over time. - Several studies have suggested that economics may be an important factor in societal change. - The cultures of societies may also change as they become richer because economic progress affects a number of other factors, which in turn influence culture. Cross Cultural Literacy - Doing business in different cultures requires adaptation to conform with the value systems and norms of that culture. - Adaptation embraces all aspects of an international firm's operations in a foreign country, including: • The way deals are negotiated • The appropriate incentive and pay systems for salespeople • The structure of the organization • The name of a product • The tenor of relations between management and the workforce • The manner in which the product is promoted Chapter 5: International Trade Theories Overview of Trade Theory - Encourage exports, discourage imports Free Trade: The absence of barriers to the free flow of goods and services between countries - Adam Smith argued that the invisible hand of the market mechanism should determine what country imports, and which exports. - David Ricardo argued for unrestricted free trade. - This was then modified to the Heckscher-Ohlin theory The Benefits of Trade find more resources at find more resources at - Certain countries simply can produce certain things. Example: Iceland can’t grow oranges but have excessive amounts of fish. - Many think it is important to buy products from their country of residence regardless if it is easier to purchase from another country because it will save their jobs. - This is incorrect however because the cost of labour to produce in your country of residence could be extremely high. The Pattern of International Trade - Some aspects like climate are easy to understand - The proportions in which the factors of production are available in different countries and the proportions in which they are needed for producing particular goods. - Product life-cycle theory: early in their life-cycle, most new products are produced in and exported from the country in which they’re developed - New trade theory: in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can only support a limited amount of firms. - Theory of competitive advantage Trade Theory and Government Policy - Mercantilism makes a case for government involvement in promoting exports and limiting imports. - The argument for unrestricted free trade is that both import controls and export incentives are self-defeating and result in wasted resources - Some limited government intervention to support the development of certain export- oriented industries. Mercantilism - An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. - By doing so, a country would accumulate gold and silver and, consequently, increase its national wealth and prestige. - Advocated government intervention to achieve a surplus in the balance of trade. - Imports were limited by tariffs and quotas, while exports were subsidized. Zero-sum game: A situation in which an economic gain by one country results in an economic loss by another. Positive-sum game: A situation in which all countries can benefit even if some benefit is more than the other. Absolute Advantage - A countries has absolute advantage in the production of a product when it is more efficient than any other country at producing it. Example: Canada has absolute advantage in the production of raw materials such as lumber. - Countries should specialize in the products that they have absolute advantage to. find more resources at find more resources at Comparative Advantage - The theory that countries should specialize in the production of goods and services that they can produce more efficiently. A country is said to have comparative advantage in the production of such goods and services. - Potential world production is greater with unrestricted free trade that it is with restricted free trade Trade and Simple Extensions of the Ricardian Model Immobile Resources - Resources do not always move easily from one economic activity to another. - The process also creates friction and human suffering - Although the gain from free trade may outway the costs by significant margin, it is of little comfort to those that actually suffer the cost. Diminishing Returns - Constant Returns to Specialization: Cost stay the same as specialization increases - More realistic to assume diminishing returns because not all resources are of the same quality and different good use resources in different proportions. - Shows that it is not feasible for a country to specialize to the degree suggested by the simple Ricardian model. - Suggests that the gains from specialization are likely to be exhausted before specialization is complete. Dynamic Effects and Economic Growth - Assumed that trade does not change a country’s stock of resources or the efficiency with which it utilizes those resources. - This static assumption makes no allowance for the dynamic change that may result from trade - If we relax this assumption, it becomes apparent that opening an economy to trade is like to generate dynamic gains of two sorts… - 1. Free trade might increase a country’s stock of resources as increased supplies of labour and capital from abroad become available to use within the country. - 2. Free trade may also increase the efficiency with which a country uses its resources. The Samuelson Critique - Looks at what happens when a rich country such as the US enters into a free trade agreement with a poor country such as China that rapidly improves its productivity after the introduction of a free trade regime. - The lower prices that US consumers pay for goods imported from China following the introduction of the free trade agreement may not be enough to produce a net gain for the US economy. - Particularly concerned about the ability to offshore service jobs that traditionally were not internationally mobile. - Concedes that free trade has historically benefitted rich countries - Some economist have been quick to
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