CHAPTER 1 GLOBALIZATION TODAY LEARNING OBJECTIVES: 1.1: Identify the types of companies active in international business. 1.2: Explain globalization and the significance of global markets and production. 1.3: Detail the forces that drive globalization. 1.4: Summarize the main arguments in the debate about globalization. 1.5: Identify the skills this course will help you develop for your career. CHAPTER OUTLINE: Introduction and Key Players Key Players in International Business What Is Globalization? Evolution of Globalization Recent Events Measuring Globalization Globalization of Markets Reduces Marketing Costs Creates New Market Opportunities Levels Uneven Income Streams Local Buyers’ Needs Global Sustainability Globalization of Production Access Lower-Cost Workers Access Technical Expertise Access Production Inputs Drivers of Globalization Falling Barriers to Trade and Investment World Trade Organization Regional Trade Agreements Other International Organizations Global E-commerce The Internet Intranets and Extranets Digital Transformation Communication and Transportation Communication Transportation Technologies
Globalization Debate Globalization Harms Jobs and Wages Globalization Improves Jobs and Wages Summary of the Jobs and Wages Debate Debate about Income Inequality Inequality within Nations Inequality between Nations Globalization and Culture Globalization and National Sovereignty Menace to Democracy? Guardian of Democracy? Globalization and the Environment Workplace Skills Skill for Your Career The Global Business Environment A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 1. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline 1.1
INTRODUCTION AND KEY PLAYERS International business is rooted in the cultural political, economic and legal moorings of nations. The study of international business involves learning about government policies, company activities, the work of managers, the work and social lives of ordinary people, and a host of social issues. People are at the center of each of these topics and are what makes international business a dynamic and thrilling journey of discovery. 1.1.1 Key Players in International Business 1. A multinational corporation (MNC) has direct investments abroad in multiple countries. They generate significant jobs, investment, and tax revenue for the regions and nations they enter. a. Some MNCs have more employees than small nations have citizens (e.g., Walmart has 2.3 million employees globally). b. If Walmart were a country, it would rank one place behind Poland in terms of economic power (Figure 1.1). 2. A born global firm is a company that has a global perspective, engages in international business from inception, and quickly
achieves a competitive advantage. a. They tend to have innovative cultures and knowledge-based organizational capabilities that are difficult to imitate. 1.2
WHAT IS GLOBALIZATION? Globalization is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. It is marked by ―denationalization,‖ which is not ―internationalization.‖ See Figure 1.2 which shows the home country for each of the 500 largest companies in the world. You can see a rise of Chinese firms, going from having no companies in the top 500 in 1990 to having 124 in 2020. You will also see a drop in the number of US firms, peaking from 175 top 500 firms in 2000 and 20 years later having 121. Over the same period, Japan lost more than half of its top spots from 1990 to 220 and around half of Britain’s firms dropped off the list. 1.2.1 Evolution of Globalization During the first age of globalization trade and capital flowed more freely than ever before. Trade was becoming increasingly more important. Up until around 1870 the global trade to GDP ratio never exceeded 10 percent. This means that, on average, a country traded around 10 percent of its total annual output. Figure 1.3 shows that the global trade to GDP ratio grew to 27 percent by 1970. This means countries traded 27 percent of their yearly output, a gain of 17 percentage points in 100 years. 1. Recent Events Throughout the 1990s and early 2000s trade has been expanding. Membership in the European Union has been expanding, the agreement between the United States, Mexico and Canada had been revised, and China entered the World Trade Organization. The global trade to GDP ratio has been growing significantly. But a trade war between China and the United States forced companies to re-examine their strategies of outsourcing to China and their lengthy supply chains placed distant production and distribution activities at risk. Then the global pandemic arrived and the economic shutdowns it prompted helped shrink the economy by 8 percent in 2020.
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Measuring Globalization Although we intuitively feel that the world is getting smaller, researchers have measured the extent of globalization. a. The KOF Swiss Economic Institute’s Globalization Index ranks nations on their economic, social, and political engagement. b. Richest nations are the most global, with many in Europe. The United States is currently ranked 25th (see Map 1.1). c. The least global nations are found in Africa, East Asia, South Asia, Latin America, and the Middle East. Globalization of Markets Convergence in buyer preferences in markets around the world a. Reduces marketing costs by standardizing activities b. Creates market opportunities abroad if home is small or saturated c. Levels uneven income streams for global seasonal products d. Companies must not overlook local buyers’ needs e. Need for global sustainability— development that meets the needs of the present without compromising the ability of future generations to meet their own needs Globalization of Production Dispersal of production activities to locations that help a company to minimize costs or maximize quality a. Access lower-cost workers to cut overall production costs b. Access technical expertise (e.g., tech support, record keeping) c. Access production inputs unavailable or more costly at home
DRIVERS OF GLOBALIZATION Forces increase competition among nations by leveling the global business playing field. 1.3.1 Falling Barriers to Trade and Investment 1947 General Agreement on Tariffs and Trade (GATT) promoted free trade by reducing tariffs and nontariff barriers. 1994 GATT revision (1) reduced tariffs and lowered subsidies for agricultural products; (2) defined and protected
intellectual property rights; and (3) created the WTO. 1. World Trade Organization a. World Trade Organization (WTO) is the international organization that enforces the rules of international trade. b. WTO goals: (1) to help the free flow of trade, (2) help negotiate the further opening of markets, and (3) settle trade disputes. c. WTO agreements are contracts committing members to fair and open trade policies. WTO dispute settlement system is the spine of the global trading system. d. Critics say the WTO is at risk of becoming irrelevant today because it is not adequately addressing changes in the global trading system. 2. Regional Trade Agreements a. Groupings of nations smaller than the WTO are also integrating their economies (e.g., USMCA, European Union, Asia-Pacific Economic Cooperation). b. A key advantage of regional trade agreements is that negotiating with fewer nations can be easier than dealing with the WTO’s many more members. 3. Other International Organizations a. The World Bank was formed to finance European reconstruction after the Second World War. It later shifted its focus to the general financial needs of developing countries. Today it finances development projects in Africa, South America, and Southeast Asia. b. The International Monetary Fund was created to regulate fixed exchange rates and to enforce the rules of the international monetary system. Among the purposes of the IMF are promoting international monetary cooperation, facilitating the expansion and balanced growth of international trade, avoiding competitive exchange devaluation, and making financial resources temporarily available to members that suffer from severe balance of payment problems.
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Global E-commerce Technology accelerates globalization by making it easier, faster, and less costly to move data, goods, and equipment around the world. Businesses and consumers use technology to conduct transactions. E-commerce is the use of computer networks to purchase, sell, or exchange products; to service customers; and to collaborate with partners. 1. The Internet a. Helps firms sharpen forecasting, lower inventories, improve communication with suppliers, and communicate quickly and cheaply with distant managers. b. Reduces the cost of reaching an international customer base, which is essential for the competitiveness of small firms. c. North America comprised 12 percent of the world’s internet users in 2011 but just 6.5 percent in 2021. Africa made up 6.2 percent of world internet users in 2011 but grew to 12.5 percent in 2021. d. The Internet of Things (IoT) includes all devices and equipment that are readable, recognizable, locatable, addressable, and/or controllable via the internet. 2. Intranets and Extranets a. Intranets are private networks of company Web sites and other information sources that allow employee access to information from distant locations. b. Extranets are computer networks that give distributors and suppliers access to a company’s database so they can place orders or restock inventories electronically and automatically. 1.3.3 Digital Transformation This is fundamental change in which digital technologies penetrate all areas of operations, strategy, and culture to produce customer-focused competitive advantage. Technological innovation involves the process of changing information from analog to digital form for use by computers and other information technologies, referred to as digitization. This leads to efficiency gains and cost savings. Digitalization is the use of digital data and
technology to develop new business operations, strategies, or business models. 1.3.4 Communication and Transportation Operating across borders and time zones complicates the job of coordinating and controlling business activities. Technological innovation in the various methods of communication and transportation can ease the task of international management. 1. Communication a. Communication technology can speed the flow of information and ease the task of coordination and control (i.e., videoconferencing). 2. Transportation Technologies a. Makes global shipping more efficient and dependable (i.e., GPS, RFID). Outsourcing lengthens and complicates supply chains and distribution channels. Corporate logistics departments and logistic specialist firms assist international companies in dealing with these issues. 1.4
GLOBALIZATION DEBATE 1.4.1 Globalization Harms Jobs and Wages 1. Critics say globalization eliminates manufacturing jobs in developed nations as good-paying manufacturing jobs go abroad to developing countries. They say lower-priced goods are not worth lost jobs. 2. They say it causes worker dislocation that gradually lowers wages because new jobs that replace lost manufacturing jobs often pay less. 3. They say it exploits workers in lower-wage nations who work for lower wages servicing western consumers. 1.4.2 1.
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Globalization Improves Jobs and Wages Supporters say globalization increases wealth and efficiency in all nations because trade openness raises output. Firms grow more efficient and pass savings on to consumers. They say it generates labor market flexibility in developed nations that allows an economy to rapidly deploy labor where demand is relatively high. They say it advances the economies and
living standards of developing nations by injecting capital that creates higher-paying jobs. This helps expand the middle class. Summary: Although globalization eliminates jobs in some economic sectors, it creates jobs in other sectors. The key point of difference in the debate is whether or not overall gains in a nation’s economy is worth the lost livelihoods that some individuals suffer. 1.4.3 Debate about Income Inequality 1. Inequality within Nations a. Globalization critics claim that income disparity in developed nations is increasing as firms move factory jobs to developing and emerging nations. b. The evidence is mixed, but people in developing nations seem to benefit from an open economy. 2. Inequality between Nations a. Globalization opponents say it is widening the gap in average incomes between developed and developing nations. b. But evidence shows that open nations are benefiting from trade whereas closed ones are not. 1.4.4 Globalization and Culture 1. Critics say globalization homogenizes our world and lets MNCs destroy cultural diversity. 2. Yet globalization allows nations to: (1) specialize and trade for goods they do not produce, (2) import other peoples’ cultural goods, and (3) still protect deeper values and cultural norms. 1.4.5 Globalization and National Sovereignty 1. Menace to Democracy? a. Critics say supranational institutions with international goals and appointed officials undermine national sovereignty and democracy. b. They say political authorities undercut democracy and local and regional authority with international agreements on citizens’ behalf. 2. Guardian of Democracy? a. Supporters say globalization has helped spread democracy worldwide (e.g., more democratic nations than ever).
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Some losses of sovereignty have had positive social impacts, as in human rights, workers’ rights, and discrimination. Globalization and the Environment Most international firms today support reasonable environmental laws because (if for no other reason) they want to expand future local markets for their goods and services. They recognize that healthy future markets require a sustainable approach to business expansion.
WORKPLACE SKILLS International business today is rapidly changing. Driving disruption across all industries are digitalization strategies, automation of routine physical and cognitive tasks, implementation of artificial intelligence, and expansion of the green economy. 1.5.1 Skills for Your Career The most competitive businesses focus on constantly upgrading their employees’ skills to keep pace with technological advancements. This course will assist in developing employability skills. 1. Application of knowledge refers to the ability to learn a concept and appropriately apply that knowledge to another setting to achieve a higher level of understanding. 2. Reflective (critical) thinking involves purposeful and goal directed thinking used to define and solve problems, make decisions, or form judgments related to a set of circumstances. 3. Analytical thinking involves following a fact pattern to draw a conclusion. 4. Communication skills which involve the use of oral, written and nonverbal language along with technology to communicate ideas effectively and to listen effectively. 5. A keener sense of ethical understanding and social responsibility serves as guiding principles that influence the way individuals and organizations behave with society. 1.5.2 The Global Business Environment What makes international business special is that it occurs within a dynamic, integrated system that weaves together four distinct elements: 1. Global forces are transforming societies and commercial activities. Globalization increases competition everywhere, forcing
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companies to be vigilant to ethical situations, social responsibility issues, and sustainability in all its forms. Each national business environment consists of unique cultural, political, legal, and economic characteristics. Companies must be attentive to nuances and adapt products and practices as needed. The international business environment influences how business is conducted so firms must closely monitor events. The context of international business management is defined by the characteristics of the national and international business environments. Managers must abide by the prevailing rules in each market in which it operates.
Quick Study Questions Quick Study 1.1 1.
Q: How do you define the terms international business, imports, and exports?
A: International business is a commercial transaction that crosses the border of two or more nations. Imports are goods and services purchased abroad and brought into a country. Exports are goods and services sold abroad and sent out of a country. 2.
Q: What is a multinational corporation, and why is it
significant to our study of international business? A: A multinational corporation (MNC) is a business that has direct investments abroad in multiple countries. They generate significant jobs, investment, and tax revenue for the regions and nations they enter. They are economically powerful entities and the largest of them generate revenue that exceeds the output of medium-sized nations. 3.
Q: Why might a company be referred to as a ―born global firm? A: A born global firm is a company with a global perspective that engages in international business from inception and quickly achieves a competitive advantage. They tend to have innovative cultures and knowledge-based organizational capabilities that are difficult to imitate.
Quick Study 1.2 1.
Q: How does globalization influence the institutions and economies of nations? A: Nations historically retained absolute control over the products, people, and capital crossing their borders. Today, economies are increasingly intertwined. This greater interdependence can mean an increasingly freer flow of goods, services, money, people, and ideas across national borders. Globalization is the name we give to this trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies.
2. Q: What has been the evolution of globalization and what is its recent history? A: The first age of globalization extended from the mid-1800s to the 1920s. In 1870, countries traded an average of around 10 percent of their total annual output but traded 27 percent of output by 1970. The second age of globalization began around 1989 with the decline of communism. Countries then traded nearly 40 percent of their output. Globalization today involves greater competition and forces companies to grow more competitive in the face of greater rivalry. Today, countries trade nearly 70 percent of their annual output. 3.
Q: What benefits might a company obtain from the globalization of markets? A: Globalization of markets refers to convergence in buyer preferences in markets around the world. Potential benefits for companies include (1) reduced
marketing costs by standardizing activities, (2) market opportunities abroad if home market is small or saturated, and (3) levels an uneven income stream by letting international sales offset domestic sales for a company selling a global seasonal product. Yet companies must not overlook buyer needs and should concern itself with sustainability in all of its operations. 4.
Q: For what reasons might a company wish to globalize its production activities? A: Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or qualitymaximization objectives. Potential benefits for companies include (1) access to lower-cost workers, (2) access to technical expertise, and (3) access to production inputs and resources that are unavailable or more costly at home.
Quick Study 1.3 1.
Q: How have falling barriers to trade and investment encouraged globalization? A: The 1947 GATT lowered trade barriers and made it cheaper and easier to ship goods across borders. In 1988 world merchandise trade was 20 times larger than in 1947, and average tariffs dropped from 40 percent to 5 percent. A 1994 GATT revision created the World Trade Organization, the goals of which are (1) to help the free flow of trade, (2) help negotiate further opening of markets, and (3) settle trade disputes. WTO agreements are contracts committing members to fair and open trade policies. The WTO dispute settlement system was designed to be the spine of the global trading system. Smaller groups of nations are integrating their economies by fostering trade and investment within the framework of regional trade agreements. A key advantage of regional trade agreements is that negotiating with fewer nations can be easier than dealing with the WTO’s many more members. The World Bank and the International Monetary Fund have also helped expand globalization by financing development projects.
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Q: What role has e-commerce, the internet and digitization played in propelling globalization? A: E-commerce makes it easier for companies to make their products abroad and to import or export finished goods. Firms use the internet to sharpen forecasting,
lower inventories, and improve communication with suppliers, and to communicate with distant managers quickly, cheaply, and efficiently. The internet also reduces the cost of reaching international customers— important for the competitiveness of small firms. Companies use the Internet of Things (IoT) in many ways because it transmits data in real time. Company intranets allow employees to access information from distant locations to share best practices. Extranets give distributors and suppliers access to a company’s database so they can place orders or restock inventories electronically and automatically. Companies proceed with digitization to change their data from analog to digital form for use by information technologies and to improve efficiency. In digital transformation, technology helps create customer-focused competitive advantage and increases the global reach of companies. 3.
Q: How have advancements in communication and transportation technologies affected globalization? A: Operating across borders and time zones complicates the job of coordinating and controlling business activities. E-mail and videoconferencing speed information flows and ease the tasks of coordination and control. The global pandemic drove rapid growth in the use of videoconferencing. Innovation in transportation technologies is facilitating globalization by making shipping more efficient and dependable.
Quick Study 1.4 1.
Q: How would you summarize the debate about globalization’s impact on jobs and wages? A: Opponents state that globalization eliminates manufacturing jobs in developed nations, causes worker dislocation that gradually lowers wages in developed nations, and exploits workers in lower-wage countries. Supporters state that globalization increases wealth and efficiency in all nations, generates labor market flexibility in developed nations, and advances developing nations’ economies and living standards. In summary, although globalization eliminates jobs in some economic sectors, it creates jobs in other sectors. The key point of difference in the debate is whether or not overall gains in a nation’s economy is worth the lost livelihoods that some individuals suffer.
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Q: What does the evidence tell us about globalization’s effect on income inequality within and between nations? A: Inequality Within Nations: Opponents of globalization argue that freer trade and investment allow international companies to close factories in higher wage, developed nations and to move them to lower wage, developing nations. Studies exploring the openness to the global economy and incomes find that globalization appears to contribute to income inequality. However, additional contributors to income inequality can include advancements in technology, deregulation, education quality, tax structure, labor policies, and more. Inequality Between Nations: Globalization supporters say it lessens inequality between nations. Developing countries and post-communist countries that embraced globalization increased personal incomes, extended life expectancies, and improved education systems. Much of the decline in inequality between nations is due directly to China’s integration with the global economy. India is also embracing globalization and narrowing the income gap with the United States. Nations closed off from the world economy have not fared as well.
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Q: What are the main arguments surrounding the debate about globalization’s impact on cultures? A: National culture is a strong shaper of people’s values, attitudes, customs, beliefs, and communication. People opposed to globalization say it homogenizes our world and destroys the rich diversity of cultures. Yet globalization allows nations to specialize and trade for goods they do not produce, import other peoples’ cultural goods, and still protect deeper values and cultural norms.
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Q: What do supporters and opponents of globalization argue regarding national sovereignty and the environment? A: Globalization supporters argue that the consequence of globalization has been the spread of democracy worldwide. For instance, some losses of sovereignty have had positive social impacts, as in human rights, workers’ rights, and discrimination. Opponents say that globalization helps supranational institutions gain power, may force nations to violate the rights of local and state governments, and undercuts the democratic process and individual liberty. Regarding
the natural environment, most international firms today support reasonable environmental laws because (if for no other reason) they want to expand future local markets for their goods and services. They recognize that healthy future markets require a sustainable approach to business expansion. Quick Study 1.5 1.
Q: Why are certain workplace skills becoming increasingly important? A: International business today is rapidly changing. Jobs with high levels of human interaction are seeing the greatest acceleration in automation. While automation eliminates some jobs, it also creates new ones. By 2030, slightly more than 6 percent of currently employed workers might need to find a different occupation. The most competitive businesses will constantly upgrade their employees’ skills to keep pace with technological advancements. Many emerging professions are in technology fields. Companies seek qualified employees in areas such as artificial intelligence, cloud computing, data analysis, process automation, and many others. Skilled businesspeople will also be sought after in areas including business services and administration, business development, risk management, project management, and strategy, to name several.
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Q: What are some employability skills this course will help you develop for your career? A: Twenty-first century skills will make you a better match for the needs of your future employer and prepare you for success in an expanding digital economy characterized by e-commerce, remote work, and automation. Technology is accelerating change in workplace skills that companies want employees to have so they hit the ground running as soon as they are hired. This course will help you develop these highly useful capabilities, or employability skills, including application of knowledge, reflective or critical thinking, communication, as well as ethical understanding and social responsibility.
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Q: How would you describe the Global Business Environment model used in this text? A: It is helpful to view international business as occurring within an integrated global system consisting of four main elements: (1) Global forces are transforming our societies and commercial
activities. They increase competition everywhere as managers view the entire world as an opportunity. Firms at home and abroad must also remain vigilant to ethical situations, social responsibility issues, and sustainability in all its forms. (2) Each national business environment includes cultural, political, legal, and economic characteristics. (3) The international business environment, which is where the actions of consumers, workers, companies, financial institutions, and governments from different nations converge. (4) International business management involves all the duties of management in a domestic setting, but integrate the influence of globalization. Teaming Up Imagine that you and several of your classmates own a company that manufactures cheap sunglasses. To lower production costs, you decide to move your factory from your developed country to a more cost-effective location. 1-3. Q: Which elements of the national business environment might influence your decision where to move production? A: Students should address the forces at work within potential country locations and between that country and the home country. These include cultural, political, legal, economic, and financial forces. Trends in inflation rates, exchange rates, and interest rates are included here. Credit availability, the paying habits of customers and the potential return on the investment should be considered. Additional national forces include market entry barriers, profit remittance barriers, and other barriers such as political instability, tax laws, safety standards, price controls, and so forth. Finally, competitive forces would be explored for their influence on the location decision. 1-4. Q: What aspects of the globalization of production and marketing do you expect will benefit your company following the move? A: Students must consider key aspects of the globalization of marketing and production. Sunglasses are a global product and a company should be able to standardize at least some marketing elements depending on the price point of its products. Students should also consider key elements affecting investing in a country. For sunglasses production, there will be a
great deal of production machinery involved. Training may be required so employees can operate the equipment safely and efficiently. Students’ responses could also consider: (1) the presence of investment barriers in the country; (2) resources needed to carry out sunglasses production, as well as their availability and cost; (3) availability of modern telecommunications to facilitate communication with the home office; and (4) how the expansion might be financed. Ethical Challenge You are the CEO of a major U.S. apparel company that contracts work to garment manufacturers abroad. Employees of one contractor report 20-hour workdays, pay below the minimum wage, overcrowded living conditions, physically abusive supervisors, and confiscation of workers’ passports so they cannot quit. Local officials say labor laws are adhered to and enforced, though abuses appear widespread. You send inspectors to the offending factory abroad, but they uncover no labor violations. A labor-advocacy group claims that supervisors coached workers to lie to your inspectors about conditions and threatened workers with time in makeshift jails without food if they talked. 1-5. Q: Should you implement a monitoring system to learn the truth about what is happening? A: The implementation of a monitoring system is important. A keener sense of business ethics and social responsibility are critical to success in international business. These concepts serve as the guiding principles that influence the way individuals and organizations behave within society. The issues of personal ethical responsibility and reasoning impact how managers make ethical decisions in specific situations. 1-6. Q: Do you help the factory improve conditions, withdraw your business from the country, or simply do nothing? A: The answer depends on the overall outlook of the production location and opportunities that it presents. If the long-term outlook is good, the company will likely decide to remain engaged and try to resolve the ethical problem. However, if the production advantages are not great, a company may decide to limit potential damage to its reputation and abandon the operation. Social responsibilities
regarding topics such as human rights, fair trade, and sustainable development are extremely difficult for companies to manage. 1-7. Q: How might your actions affect your global corporate reputation, brand image, and brand value? A: Reputation risk is extremely important to corporations in the current age of international business. A company may be held responsible for its supplier’s actions and even the actions of its supplier’s supplier. Individuals worldwide might begin to boycott your company’s products if they learn what is happening. The company’s brand image and market value could potentially be irreparably harmed if the company makes a wrong move. 1-8. Q: How might your actions affect your relations with the factory owner and your ability to do business in the country? A: The company should be thorough and transparent throughout the monitoring process. The monitoring process could seem more impartial by contracting an independent organization to conduct the investigation. You could also have the report made public to all parties simultaneously to eliminate the perception of bias. To implement and maintain rapid, sustainable improvements: monitor and verify codes of conduct regarding labor practices, disseminate information to workers explaining their rights, appeal to government agencies on effective ways to raise labor standards, explain how their reputation as being ethical can be useful in marketing and differentiate the firm in global markets. Practicing Management Case
International
Apple’s Global Strategy 1-11. Q: Why should Apple purchase parts and components that are made outside the United States and subcontract assembly to China and other nations? A: The foundational theory of international business and trade says a country should produce the goods and services in which it is most productive, and then trade with other nations to obtain things it needs but does not produce. For Apple, this means importing components that require labor-intensive processes and
having assembly performed abroad as well. Apple’s parts and components come from a global manufacturing network of firms in dozens of countries where labor costs are lower. Labor costs of Apple’s Chinese subcontractors, for example, account for only about 4 percent of the iPhone’s total cost. The greatest cost is incurred in California, where Apple performs design, engineering, and marketing tasks. 1-12.
Q: Why did the Apple iPhone lose market share in China? What specific actions, if any, do you think Apple could have taken with regard to its presence in China to prevent the loss of market share? A: As China’s economic growth continued and personal incomes grew, Apple began to sell devices there as well as make them. Sales revenue in China grew from $2.8 billion in 2010 to a peak of $59 billion 2015, then fell to around $40 billion in 2020. Several factors contributed to the drop in sales. A trade war began in 2017 between China and the United States as nationalist sentiment grew significantly in both countries. Then the pandemic arrived and the US government actively encouraged a ―supply chain restructuring‖ initiative, or ―decoupling,‖ of the US and Chinese economies. Also, when the US government sanctioned Apple’s Chinese competitor, Huawei, a host of other Chinese smartphone makers rushed in to fill the void. Device makers Xiaomi, Oppo, and Vivo quickly improved their designs and cameras and went head-to-head against Apple with lower-priced phones. The three saw doubledigit growth rates in sales.
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Q: Assume you are part of the top executive team at Apple. How do you personally feel about doing business in China, which appears to have large differences with how business is done in the United States? A: This question essentially presents students with an ethical dilemma because it asks how they personally feel. Students may decide they want Apple to continue doing business in China purely for reasons of maintaining profits. On the other hand, they might want the company to more fully participate in the social and political movement and pull more of its operations out of China. Answers will reflect students’ own beliefs about business objectives and social responsibility.
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previous question about doing business in China, do you recommend that Apple make any changes in its strategy going forward? Explain your answer. A: Students will likely expand upon Apple’s earlier response of moving some iPad production to Vietnam and India, and moving some smart speaker, earphones, and computer assembly to Malaysia. Southeast Asia is where Apple plans to expand production for many core products. In fact, additional action by Apple along these lines is likely its only real option. It is unlikely to abandon China as a key production base for the foreseeable future, yet it is diversifying away from reliance on a single country.
Chapter 2 ETHICS, SOCIAL RESPONSIBILITY, AND SUSTAINABILITY LEARNING OBJECTIVES: 2.1: Summarize the main theories of ethics that are important to international business. 2.2: Explain ways to resolve ethical dilemmas and foster ethical business decisions. 2.3: Describe the main elements of corporate social responsibility and stakeholder theory. 2.4: Explain the importance international firms place on sustainability and climate change. 2.5: Describe several additional issues international managers can face daily in their jobs. CHAPTER OUTLINE: Ethics Theories Utilitarianism Rights Theory Justice Theory Cultural Relativism Business Ethics Resolving Ethical Dilemmas Codes of Ethics Sources of Unethical Behavior Corporate Social Responsibility Efficiency and Profits as Social Responsibility Business Responsibilities to Society Stakeholder Theory Benefit Corporations Sustainability
Carbon Footprints and Climate Change A Circular Economy Greenwashing Environmental, Social, and Governance Funds Additional Key Global Issues Bribery and Corruption Working Conditions and Human Rights Diversity, Equity, and Inclusion DEI Efforts Within Companies A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 2. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline INTRODUCTION Multinational companies must comply with laws and regulations both at home and in every jurisdiction in which they operate. They adhere to environmental regulations, antitrust laws, labor laws, securities laws, and more. Today, cross-cultural business brings moral issues to the fore. Although cultures differ in their views of what defines ethical behavior in certain situations, businesses are expected to be model citizens in every country in which they operate. Global competition means it is critical for each firm to have a competitive advantage—an attribute that is difficult to imitate and enables a firm to outperform its competitors in the same industry. Building trust and behaving ethically are essential for business because their activities are grounded in a motivation for profit. Operating in an ethical and socially responsible manner can bolster a firm’s brand and competitive advantage. There is a moral foundation for ethical behavior, corporate social responsibility, and sustainable business practices. 2.1
ETHICS THEORIES Ethics are the moral principles of society that govern human behavior and decision making. Ethical behavior is individual behavior in accordance with principles of good conduct of morality. An ethical dilemma arises when one’s ethics are challenged in a decision-making situation because no available alternative presents a clear moral solution. Ethical theories can serve as a guide for how a manager can make an ethical decision when facing a dilemma.
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Utilitarianism This ethics theory advocates actions that foster happiness and oppose actions that cause unhappiness. It says companies should behave in a way that maximizes good outcomes and minimizes bad outcomes. 1. A utilitarian manager asks the question ―What outcome should I aim for?‖ and answers, ―That which produces the best outcome for all affected parties.‖ 2. Example: manager pays a bribe based on calculations that more people will benefit than will be harmed by the outcome. 2.1.2 Rights Theory This theory states that every human being has rights and all governments are obligated to protect them. It views these rights as universal and not culture-specific. 1. The United Nations’ Universal Declaration of Human Rights declares every person’s fundamental right as inherent and inalienable. 2. Recognizes that all humans are born free and equal and in dignity and rights regardless of nationality, residence, gender, ethnicity, race, religion, language, or any other status. 3. Several articles in the Declaration deal explicitly with business dealings. These include the right to own property, the right to work and choose one’s work, the right to paid time off work for leisure, and the right to the fruits of one’s creations. 2.1.3 Theory of Justice Theory that describes a society of free citizens who have equal basic rights and who cooperate within an egalitarian economic system. 1. Desires a social contract that bestows society’s rights, freedoms, and resources equitably and fairly to all. 2. A manger following this theory would work to find solutions to ethical dilemmas that are most equitable and fair to all parties. 2.1.4 Cultural Relativism This theory says the morality of an act depends on how the act is perceived within that specific culture at the time of the act. It says a company should adopt local ethics everywhere because all belief systems are determined within a cultural context.
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Sees truth, itself, as relative and argues that right and wrong are determined within a specific situation. ―When in Rome, do as the Romans do‖ captures the essence of cultural relativism.
BUSINESS ETHICS All company employees should sustain a high standard of ethical behavior. This may be more challenging for companies entering cultures that have value systems that are very different than at home. 2.2.1 Resolving Ethical Dilemmas Executives can employ several concepts to resolve ethical dilemmas. 1. The conflict of relative development recognizes that countries and their populations can differ in their stage of development. A manager asks if the practice would be acceptable in the manager’s home country if it were in a similar stage of development. 2. The conflict of cultural tradition asks if a practice would be acceptable if (1) is it not possible to do business successfully in the country without engaging in the practice, and (2) the practice does not violate a core human value. 3. Managers choosing an ethical path to follow can also look for guidance to the ethics theories presented above, including utilitarianism, rights theory, theory of justice, and cultural relativism. 2.2.2 Codes of Ethics A code of ethics is a formal statement that conveys ethical values and describes baseline professional conduct expected of individuals. 1. Describes how employees are to interact ethically with co-workers, suppliers, customers, and others. It guides employees’ attitudes, demeanor, and judgments while they fulfill duties and can be consulted when employees face ethical dilemmas. 2. Ethical imperialism is when a company attempts to export their home country’s ethical beliefs to other countries. This rarely works because ethics are deeply engrained in a people’s culture. 3. Companies also must be careful not to follow cultural relativism and blindly accept local ethics in their entirety if significant
differences exist with the home country. The Academy of Management identifies three general principles that serve as a guide in determining ethical courses of action, including (1) responsibility, (2) integrity, and (3) respect for people’s rights and dignity. 2.2.3 Sources of Unethical Behavior 1. Two principal sources of unethical behavior are the moral integrity of individuals and a firm’s managerial setting or policies. 2. Individuals differ in their moral integrity. Each person possesses a unique set of values learned throughout their life. 3. It is crucial that leaders set an acceptable example. Managers should behave ethically in official meetings as well as when the spotlight is off. 4. Corporate compliance departments traditionally ensure that their companies abide by the relevant laws and regulations and good corporate practices. CORPORATE SOCIAL RESPONSIBILITY Conscientious business leaders know their company’s future depends on healthy communities and environments worldwide. Probably every international company of at least moderate size has a policy for social responsibility. Issues include child labor, human rights, the environment, and more. 2.3.1 Efficiency and Profits as Social Responsibility 1. Historically speaking, to be considered socially responsible a company was to maximize profits for its owners (or shareholders) while operating within the law, and follow basic ethical guidelines. 2. In the modern corporation, managers are hired to run a business for the owners. These managers are legally obligated to work in the best interests of owners (shareholders). 3. Economic theory argues that the presence of private businesses operating in free and competitive markets maximizes economic efficiency and society’s well-being. This is the view of Adam Smith and Milton Friedman. 4. Utilitarianism would support this view, as would cultural relativism. Yet from a justice perspective one might argue that a business should do more to redistribute wealth and income to the less well-off. And from a rights perspective one might say that firms should also defend people’s basic rights and provide equal opportunity for all. 2.3.2 Business Responsibility to Society 4.
2.3
Another perspective views a business as having social responsibilities beyond efficiency and maximizing profits. This view is known as corporate social responsibility (CSR)—the belief that a company should incorporate social objectives within its goals and policies and contribute positively to society. 1. The pyramid of corporate social responsibilities involves four areas: a. Economic—businesses must create economic value for society. b. Legal—businesses must follow each society’s ―codified ethics.‖ c. Ethical—businesses must follow the norms, values, principles, and expectations of society. d. Philanthropic—businesses must voluntarily give back to society. 2. Some social responsibilities differ depending on their industry. For example, sugary and fast-food companies versus oil and gas companies. Other social responsibilities are common to all industries, including respect for human rights and providing safe working conditions. 2.3.3 1.
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Stakeholder Theory Stakeholder theory is a view of capitalism that stresses the interconnected relationships between a business and those who have an interest or ―stake‖ in the company. These individuals are called stakeholders and include all parties who affect, or are affected by, a company’s activities. These individuals can be either internal or external to the organization. The stakeholder view argues that the purpose of a business is to create as much value as possible for all stakeholders, not only shareholders. It can support development of competitive advantage. Benefit Corporation A benefit corporation is a business entity legally empowered to pursue positive stakeholder impacts alongside profits. a. The Certified B Corporation (B Corp) movement is a community of missiondriven entrepreneurs that is creating companies that balance purpose and profit to use business as a force for good.
SUSTAINABILITY Development that
meets
the
needs
of
the
present
without compromising the ability of future generations to meet their needs. Net-zero emissions is reached when the amount of greenhouse gases released into the atmosphere and the amount removed are equal. Businesses are embracing the challenge to become net zero. 2.4.1 Carbon Footprints and Climate Change 1. Carbon footprint is the environmental impact of greenhouse gases measured in units of carbon dioxide that are emitted by human activity. 2. A primary footprint are emissions from the burning of fossil fuels used to produce a good or service. A secondary footprint are emissions from the whole life cycle of products from their manufacture to eventual breakdown. 2.4.2 A Circular Economy 1. A circular economy is an approach that designs products and components that can be reused, disassembled, and upgraded to minimize waste (see Figure 2.7). 2. The circular economy attempts to mimic natural systems and differs markedly from a linear economy. It aims to produce the same or better output with less material input and fewer emissions. 3. This resilient system is good for business, people, and the planet. The circular economy is a systems solution framework that tackles global challenges like climate change, biodiversity loss, waste, and pollution. 2.4.3 Greenwashing 1. Greenwashing is providing false or misleading information that presents a business or its products as being environmentally friendly. 2. There are at least four reasons why companies engage in greenwashing. a. Give the appearance of going green when a company is simply complying with environmental regulations. b. Highlight green features that a product may or may not have to appeal to environmentally-minded consumers. c. Internal reward system might encourage executives to pronounce untruthfully that a business has met sustainability targets. d. Personal biases, preferences, or
3.
2.5
thrill-seeking behavior might motivate individuals to try and get away with lying. Environmental, Social, and Governance Funds a. ESG funds are stock or bond investments for which environmental, social, and governance factors are considered during the investment process. b. These funds are supposed to invest in companies that are good stewards of the environment and have strong stakeholder relationships. c. However, some ESG funds are more genuine than others. Companies are being forced to disclose more information on their business activities and ESG funds are being more closely scrutinized.
ADDITIONAL KEY GLOBAL ISSUES This section covers additional issues that are prominent in international business. 2.5.1 Bribery and Corruption 1. Corruption can lead to the misallocation of resources, hurt economic development, distort public policy, and damage national integrity. 2. The president of US-based Lockheed Martin once bribed Japanese officials to obtain a large sales contract. Public disclosure of the incident resulted in the passage of the Foreign Corrupt Practices Act (FCPA), a law that forbids US companies, subsidiaries, or citizens from bribing government officials or political candidates worldwide. 3. Enron’s failure sent a shockwave around the world. Energy trading markets were in chaos and many lost jobs worldwide. 4. In reaction, the US Congress passed the Sarbanes-Oxley Act, which set more stringent accounting standards and reporting practices. 2.5.2 Working Conditions and Human Rights 1. Managers must monitor their own behavior plus that of employees and business partners. 2. Governments, labor unions, consumer groups, and human rights activists forced apparel companies to implement codes of conduct and the monitoring of international production.
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Diversity, Equity, and Inclusion Diversity in the workplace means that a firm’s employees represent a limitless variety of social viewpoints, cultural perspectives, experiences, and identities. a. Corporations benefit when they develop a diverse, equitable and inclusive workplace at every level of the organization. b. Diversity includes people of different ages, ethnicities, genders, physical abilities, religions, etc. Equity in the workplace means that a company offers every employee an equal opportunity for work and advancement. a. Equity recognizes and eliminates barriers that reduce opportunity for underrepresented employees. b. An employee must know that people from their social and cultural background will receive equal opportunity for success in the organization. Inclusion in the workplace means that a company welcomes every employee, whatever their identity, and helps them to feel they are an integral part of the organization. a. Inclusion fosters acceptance of and respect for all people and is often defined as diversity in action. b. Employees are encouraged to be their authentic selves without fear of recrimination. DEI Efforts Within Companies a. A DEI statement can establish a company’s commitment to these ideals. This helps form the basis of the overall workplace culture and guides policies with employees, suppliers, customers, and all community stakeholders. b. Diversity, equity, and inclusion goals are increasingly integrated into executive and management compensation structures today. c. Some firms achieve DEI goals through a practice called impact sourcing—a practice that brings marginalized groups into the global business service workforce.