Louis Vuitton's Online Expansion in Japan

Running head: LOUIS VUITTON IN JAPAN
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Louis Vuitton in Japan
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Louis Vuitton in Japan
Name
Institution
SECTION 1 Introduction.
In Japan market, some of the opportunities the firm can take
advantage of is the high number of people who are wealthy.
Most of the wealthy population are old thus giving them the
opportunity to spend much on the luxury products. The second
opportunity that exists is the online business. Most people buy
goods and services online thus reducing the overhead cost to the
firm. The firm can take a bold step to venture into the online
sales increase its sales (Hata, 2004).The firm is also
experiencing some challenges. First, the firm is faced with stiff

competition from the large and the small firms which have
established links with the customers. Some firms offer door to
door delivery. The second challenge is the production of
counterfeit products in the name of Louis Vuitton thus painting
the name of the firm negatively. The fake products are also
cheap thus denying the genuine firm its revenue ("Louis Vuitton
in Japan by Jessica Kelley on Prezi", 2018).
SECTION 2 Opportunities.
As highlighted the Japanese population consist of a huge
number especially the women who are rich but old. This is a
good opportunity that the firm can capitalize on since this group
is ready to spend their saving having in mind that they will die
soon. Women are always easy spenders and the product of
Louis Vuitton can be their target based on the quality of the
goods. Another opportunity is the online businesses (Hata,
2004). With the advancement in technology, the company can
take its products online so that the sale can improve. The online
sales will reduce the expenses incurred but at the same time
increase the earnings since many people will be able to get
access to the products. The online business bridges the gap
between the seller and the buyer without movement or extra cost
incurred ("Louis Vuitton in Japan by Jessica Kelley on Prezi",
2018).
SECTION 3 Challenges.
As an organization that operates in a competitive market
structure, it is faced with competition from both well
established and the upcoming firms. Some of the firms that
compete with Louis Vuitton include, Burberry Bulgari and
Gucci. Some of these firms offer comparatively lower prices
compared to Louis Vuitton thus reducing the marketability of
her products. The second challenge the organization faces is the
production of the counterfeit products. The liberalization has
made it hard to determine the genuine products from the fake
products. The counterfeit products are cheaper than the original

products thus barring the genuine companies from reaping to the
maximum based on the cost of production. The competition
forces the firm to reduce its prices but retains the quality thus
reducing her revenue (Hata, 2004).
SECTION 4
Solution
s.
The firm needs to take advantage of the opportunities and make
the firm more profitable. The firm must reduce its cost of
production to continue attracting more clients. In addition to the
price reduction, the firm needs to put more effort in the
advertisement so that more customers can be aware of the
products of the firm thus increase in sales. On the challenges,
the firm needs to collaborate with the body that deals with
product quality so as to weed out the counterfeit products. The
firm can also organize education forum that will help the
customers differentiate genuine products from the counterfeits.
Offering its products online will also ensure that the firm grows
to greater levels (Hata, 2004).
SECTION 5 Conclusion
The firm had learned how to deal with different situations in the
market thus has risen above her competitors. The advancement

in technology has enabled the firm to produce more goods and
reach more customers. The variation of prices based on the
economic situations has been the cornerstone of the firm in the
industry. Finally, the success of the firm has largely been
contributed by dedicated management who are keen to handle
all the issues within the firm before they spill to the public
(Hata, 2004).
References
Hata, K. (2004). Louis Vuitton Japan. New York, NY:
Assouline.
Louis Vuitton in Japan by Jessica Kelley on Prezi. Retrieved 17
March 2018, from https://prezi.com/wexbfvnk4tvn/louis-
vuitton-in-japan/
2/26/18
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Governments and Trade
Learning objectives

! Explain why governments try to enhance and restrict trade
! Show the effects of pressure groups on trade policies
! Compare the potential and actual effects of government
intervention on the free flow of trade
! Illustrate the major means by which trade is restricted and
regulated
Learning Objectives
" Demonstrate the business uncertainties and opportunities
created by governmental trade policies
" Discern how businesses may respond to import competition
" Fathom how the growing complexity of products and trade
regulations may affect the future
Introduction
• Protectionism - policies that
– affect the ability of foreign producers to compete in your
home market
– limit or enhance your company’s ability to sell abroad or

acquire needed foreign supplies
Conflicting Results
of Trade Policies
• Governments intervene in trade to achieve economic, social,
and political goals
• Policymakers are challenged by
• conflicting objectives
• interest groups
The Role of Stakeholders
• Proposed policies on trade spark debate
• Stakeholders include
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– Workers
– Owners
– Suppliers
– Local politicians
• Consumers usually don’t care
Economic Rationales for Government Intervention
• Why governments intervene in trade
– Economic rationales
• Fighting unemployment
• Protecting infant industries
• Promoting industrialization
• Improving comparative position
– Non-economic rationales
• Maintaining essential industries
• Promoting acceptable practices abroad
• Maintaining or extending spheres of influence
• Preserving national culture
Fighting Unemployment
• The unemployed are the most effective pressure group
• But, import restrictions

• can lead to retaliation by other countries
• are less likely retaliated against effectively by small
economies
• are less likely to be met with retaliation if implemented by
small economies
• may decrease export jobs because of price increases for
components
• may decrease export jobs because of lower incomes abroad
Protecting ‘Infant Industries’
• The infant industry argument
• government protection of import competition is necessary to
help certain industries evolve from high-cost to low-cost
production
• Used by developing countries
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production
Developing an industrial base
• Countries promote industrialization because it
– brings faster growth than agriculture
– brings in investment funds
– diversifies the economy
– creates growth in manufactured goods
– reduces imports and promotes exports
– helps the nation-building process
Economic Relationships
With Other Countries
• Trade controls can be used
• to improve the balance of payments
• to gain fair access to foreign markets
• comparable access argument
• as a bargaining tool

• believability and importance
• to control prices
• dumping
• optimum-tariff theory
Noneconomic Rationales for Government Intervention
• Noneconomic rationales include
Maintaining Essential Industries
• The essential industry argument
– protect essential industries so the country is not dependent
on foreign supplies during war
• Countries must
– determine which industries are essential
– consider costs and alternatives

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– consider political consequences
Promoting Acceptable
Practices Abroad
• Import trade controls can be used
– to promote changes in foreign countries’ political policies or
capabilities
– as a foreign policy weapon
– to pressure governments to alter their stances on a variety
of issues
• human rights
• environmental protection
Maintaining or Extending Spheres of Influence

• Governments provide assistance and encourage imports from
countries that join a political alliance or vote a preferred way
within international bodies
• A country’s trade restrictions may coerce governments to
follow certain political actions or punish companies whose
governments do not
Preserving National Culture
• In order to preserve national culture, countries
• limit foreign products and services in certain sectors
• Canada’s cultural sovereignty
• prohibit exports of art and historical items deemed important
to national heritage
Instruments of Trade Control
• Two types of trade controls
• those that indirectly affect the amount traded by directly
influencing prices of exports or imports
• those that directly limit the amount of a good that can be

traded
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traded
Tariffs
• Tariffs are also known as duties
• refer to a government levied tax on goods shipped
internationally
• Tariffs may be levied
• on goods entering, leaving, or passing through a country
• for protection or revenue
• on a per unit basis or a value basis
• export tariffs
• transit tariffs
• import tariffs

Nontariff Barriers:
Direct Price Influencers
• Subsidies
– direct assistance to companies to make them more
competitive
• agricultural subsidies
• overcoming market imperfections
• valuation problems
Nontariff Barriers:
• Aid and loans
– tied
– untied
• Customs valuation
• Other direct-price influences
– special fees and requirements
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Nontariff Barriers:
Quantity Controls
• Quotas
– limit the quantity of a product that can be imported or
exported in a given time frame
• Voluntary export restraint (VER)
• Embargoes
Nontariff Barriers:
Quantity Controls
• “Buy local” legislation
• Standards and labels
• Specific permission requirements
• import or export license
• Administrative delays
• Reciprocal requirements
• Countertrade or offsets
• Restrictions on services

Dealing with Governmental Trade Influencers
• Companies facing import competition can
• Move abroad
• Seek other market niches
• Create greater efficiency or superior products
• Try to get governmental protection
Tactics For Dealing
With Import Competition
• Convince decision makers of the merits of particular policies
• Involve the industry and stakeholders
• Prepare for changes in the competitive environment
Dynamics and Complexity
• Trade restriction changes bring about winners and losers
among countries, companies, and workers
• Gains to consumers from freer trade may come at the
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expense of companies and workers
• The international regulatory situation is becoming more
complex
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Cross-national cooperation and agreements
Toyota in Europe
• In 1990, Toyota had 20 production facilities in 14 countries
• In 2012, it had 50 manufacturing facilities in 27 countries
– Including factories in Czech Republic, France, Poland,
Portugal, the UK, and Russia
• Before 2002, Toyota suffered from low market share and

growth in Europe, not posting a profit for its European
operations for 30 years
Toyota in Europe: Why the slow growth?
• After WWII, the Japanese government asked European car
makers to significantly decrease exports to Japan
– Rebuild the Japanese car industry
• Europeans reciprocated by limiting Japanese access to
European markets
– Quota system
• E.g., France at 3% of its market
• E.g., Italy at 3,000 units
• In 1999, the EU lifted the import quota
Toyota in Europe: Upswing
• The lifting of the quota allowed Toyota to:
– Invest more heavily in design and manufacturing facilities in
the EU
– Broaden the range of products marketed there
– Customize their options to better appeal to European

customers
• European Design and Development Center established in
southern France
• Manufactures all best-selling European vehicles in Europe
– Low costs (wages) in Eastern Europe
– State-of-the-art production facilities in the Czech
Republic and Poland
• Elimination of internal tariffs in the EU allows Toyota to
manufacture its cars anywhere in the EU and ship to other
member nations duty-free
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Toyota in Europe: Meeting European Tastes
• Faced with high unemployment and low growth, Europeans
turned to more economical and higher-quality cars
• Erosion of brand loyalty to European car makers
• Emphasis on environmental sustainability increases appeal of
hybrid models
– Maintaining a comparative advantage over rivals in hybrid
technology
• Shifting decision-making power from Japan to Brussels
(European division) to better meet European demand

Learning objectives
• Discuss the three major approaches to economic integration
• Discuss the pros and cons of global (the WTO), bilateral, and
regional integration
• Identify how the different approaches to economic integration
can be a free trade agreement, a customs union, or a
common market
• Describe the static and dynamic impact of trade agreements
on trade and investment flows
• Examine how the EU works and its implications for business
Introduction
• Economic integration
– the political and monetary agreements among nations and
world regions in which preference is given to member
countries
• Bilateral integration
• Regional integration
• Global integration

Introduction
• Trade agreements
– Define the size of the regional market and the rules under
which a company must operate
– MNEs are interested in regional trade groups because they
also tend to be regional
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• Triad regions = Europe, North America, Asia
• Of the 500 largest companies (in terms of FDI and trade),
320 generate at least 50% of their revenues from their
home region; only 9 are global (generating at least 20% in
each of the three regions)
• A 1% increase in distance results in a 1% decrease in
trade
– MNEs also care about trade agreements to determine where
to import or source from
Rise of bilateral agreements
• Bilateral agreements
– can be between two individual countries or can involve one
country dealing with a group of other countries
• Also known as

– Preferential trade agreements (PTAs)
– Free trade agreements (FTAs)
• Though not easy to negotiate, can be simpler than multilateral
agreements
– E.g., U.S. signed FTAs with Colombia and South Korea in
2012
Regional economic integration
• Regional trade agreements
– integration confined to a region and involving more than two
countries
• Examples include
– European Union (EU)
– European Free Trade Area (EFTA)
– North American Free Trade Area (NAFTA)
– Association of Southeast Asian Nations (ASEAN)
– Common Market of Eastern and Southern Africa (COMESA)
• Geography matters

– Shorter distances mean lower transportation costs
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– Geographic proximity, according to country similarity theory,

suggests consumers’ tastes are more similar and companies
can more easily export products produced for the home
market to neighboring countries
– Neighbors tend to share a common history and may be
more willing to negotiate policies
• However, FTAs exist between non-neighbors, too
• Major types of economic integration
– Free trade area
• no internal tariffs
• individual external tariffs
– Customs union
• common external tariffs
– E.g., Toyota had to reach an agreement with the EU as
a whole, not individual countries
– Common market
• customs union plus factor mobility

– E.g., EU workers can work in any EU country
Effects of integration
• Effects of regional integration
– Allows for specialization and trade based on comparative
advantage
– Static effects: shifting of resources from inefficient to
efficient
companies
• trade creation: production shifts to more efficient producers
• trade diversion: trade shifts to countries in the group at the
expense of countries not in the group
– Dynamic effects: overall growth in the market
– Growth allows companies to increase production
• Economies of scale: the average cost per unit falls as the
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number of units produced increases
• Increased competition: pushes companies to become
more efficient
– E.g., mergers and acquisitions in the EU to match large
market

Major regional trading groups
• Companies are interested in regional trading groups because:
– New markets
– Sources of raw materials
– Production locations
• The larger and richer the new market, the more likely it will
attract attention from MNEs
• Reduced tariffs and other restrictions provide better access to
these regions
The European Union
• European Union (EU)
– The largest and most successful regional trade group in the
world
– Some key features
• provides free movement of goods, services, capital, and
people
• has a common agricultural policy
• uses common external tariffs

• has a common currency
The European Union
• Key governing bodies
– European Commission
• provides political leadership, drafts laws, and runs the
various daily programs of the EU
– Council of the EU
• composed of the heads of state of each member country;
ministers meet regularly to discuss policy
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– European Parliament
• has legislative power, control over the budget, and is
supervisor of executive decisions; grouped by political
affiliation rather than nationality
– European Court of Justice
• interprets and applies EU treaties; serves as appeals court
for individuals, firms, and organizations fined by the
commission for infringing treaty law
The European Union
• Single European Act
– designed to eliminate the remaining nontariff barriers to
trade (e.g., certification procedures) in Europe

– However, some barriers still remain (e.g., labeling)
• Lisbon Treaty
– strengthens the EU’s governance process and improves the
ability of the EU to make and implement decisions
– Some opposed because of threats to national sovereignty
• Treaty of Maastricht
– fostered political and monetary union
• the euro
• another way barriers to trade are reduced
Doing business with the EU
• Lucrative market
– Size, income
• Influences corporate strategy, especially for outside MNEs
– Determining where to produce
• Centrality = lower transportation costs, but higher labor
costs
• E.g., Toyota producing in Eastern Europe
– Determining whether to grow through new investments,

expanding existing investments, or through joint ventures/
mergers
• Many U.S. companies are buying European companies to
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gain market presence, eliminate competition, and take
advantage of existing distribution channels
– Balancing “common” denominators with national differences
• Different cultures and histories
• Different rates of growth in different member nations
• Adopt a pan-European or different regional strategies?
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3/13/18
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Globalization, Ethics, and Society
Learning Objectives
• Examine the broad foundations of ethical behavior
• Understand cultural differences in morality
• Understand cultural differences in perceptions of justice
• Demonstrate the cultural and legal foundations of ethical
behavior
• Discuss key ethical issues for international business
Ethics Defined
• People have a responsibility to do what is right and to avoid
doing what is wrong
• Ethics are complicated in the international sphere, because
definitions of what is right and wrong as well as people’s
modes of moral reasoning and judgment vary across cultures
Foundations of Ethical Behavior
• Kohlberg’s model of moral development

– Moral development progresses as cognitive reasoning
develops
– Three levels of moral development
1. Preconventional
2. Conventional
3. Postconventional
Foundations of Ethical Behavior Across Cultures
• Review of 45 studies examining 27 different cultural areas
• Some universality
– Many children reasoned at the preconventional level
– In no cultural group did the average adult reason at the
preconventional level
– Can explain reasoning at the preconventional vs.
conventional level
• However, cultural differences exist at the postconventional
level
– Common in Western, industrialized cultures
– Not found in tribal communities

• Risk of ethnocentrism
• People’s moral judgments are guided by three codes of ethics
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1. Ethic of Autonomy
• Based on individual rights and freedoms, personal choice,
and the right to engage in free contracts
• Violations are those that infringe on individual liberties
and/or directly hurt another person
2. Ethic of Community

• Based on duties to conform to one’s role in a community
and/or the social hierarchy
• Violations are those in which people fail to uphold their
interpersonal and social duties and obligations
3. Ethic of Divinity
• Based on sanctity and the standards set by a
transcendent authority
• Violations are those that cause impurity or degradation of
the self or others and/or disrespect God or God’s
creations
• Examples of ethics violations
• Cultures differ in the extent to which each of the three codes
of ethics is emphasized
– E.g., controversies over depiction and caricatures of the
prophet Mohammed

Culture and Distributive Justice
• People can decide to allocate resources based on three
principles
1. Principle of need
• Resources are directed towards those who need them the
most
• Often institutionalized (e.g., welfare)
2. Principle of equality
• Resources are shared equally
• One form is seniority systems (i.e., time with the company
or age are rewarded)
3. Principle of equity
• Resources are distributed based on an individual’s
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contributions
• Social systems built on the principle of equity are called
meritocracies
• Cultural differences in distributive justice
• The case of seniority systems in Japan
• Benefits of meritocracies
– High motivation
– High performance
• Costs of meritocracies
– Finite resources create winners and losers
– Breeds competition

• Benefits of seniority systems
– Harmony and low conflict
• Costs of seniority systems
– Lower motivation
– However, Japanese workers are some of the most hard-
working (e.g., voluntary overtime, not taking vacations)
• Westerners are more likely than those from other cultures to
view the equity principle as most fair
– Meritocracies are most common in individualistic cultures
• Other cultures, like India, tend to favor the need principle
Why Do Companies Care?
• Understand social responsibilities, obligations, and norms
across cultures
• Ethical behavior can help a company
– develop a competitive advantage
– avoid being perceived as irresponsible
• NGOs becoming more active in monitoring companies

Relativism versus Normativism
• Relativism
– ethical truths depend on the groups holding them
• E.g., “If it’s OK to bribe in Country X, I guess I need to
bribe when I’m in Country X”
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• Normativism
– there are universal standards of behavior that all cultures
should follow
• Companies may face both pressures

– Governments can reinforce these
Legal Justification: Pro and Con
• Legal justification is appropriate because
– The law embodies many of a country’s moral principles
– The law provides a clearly defined set of rules
– The law contains enforceable rules that apply to everyone
– The law reflects careful and wide-ranging discussions based
on consensus
• The law is inadequate because
– Some things that are unethical are not illegal
– Laws are slow to develop in emerging areas of concern and
develop in response to events that have happened (can’t
anticipate)
– Laws may be based on imprecisely defined moral concepts
– The law often needs to undergo scrutiny by the courts
– The law is not very efficient (i.e., achieving ethical behavior
at low cost)
Extraterritoriality

• Basic problem with using the law: laws differ from one
country
to another
• Home-country governments may practice extraterritoriality
– imposing domestic legal and ethical practices on the foreign
subsidiaries of companies headquartered in their
jurisdictions
• Challenge for MNEs
– Cumbersome and costly to monitor and follow various laws
and regulations
– Counter to globalization
Legal Justification
• The law remains a good starting point
• Countries looking for solutions to common problems take
similar legal steps
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similar legal steps
Corruption and Bribery
• Corruption
– the misuse of entrusted power for private gain
• Bribes
– payments or promises to pay cash or anything of value
– Occurs
• to obtain government contracts
• to get public officials to do what they should be doing
anyway
• to gain a competitive advantage
– E.g., Ralph Lauren

• Problems with corruption
– Related to lower levels of national growth and per capita
income
– Can erode the authority and legitimacy of the governments
that condone it
– Downfall of heads of state and business executives
• Imprisoned, fined, forced to resign, even executed
– Compromise the legitimacy and reputation of MNEs for both
local and global communities
– It is costly
• “When in Rome, do as the Romans do” (relativism) is a
tempting approach to IB
• International initiatives have made headway in introducing
the
rule of law into more and more IB activities
• More international integration in laws and practices helps

MNEs implement ethical behavior
Siemens and Bribery
• In 2006, police raided the offices of Siemens AG
– Found tens of thousands of documents to support that the
company diverted funds into a network of “black accounts”
– Funds were used for bribing officials in countries like Italy,
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Greece, Argentina, and Saudi Arabia for lucrative public-
sector contracts
– Suspicious payments went back as far as the early 1990s
and totaled $570 million USD

Siemens and Bribery
• Siemens was fined $1.6 billion USD, the largest fine for
bribery in modern corporate history
• Managers caught up in the scandal claimed that knowledge
and approval of bribery went as far up the ranks as the CEO
Klaus Kleinfeld and board chief Heinrich von Pierer
Siemens and Bribery
• Are top managers responsible for corruption?
• What is the role of law?
• How could corruption and bribery at Siemens have been
reduced?
Ethics and the Environment
• Companies compromise the environment
– contamination of air, soil, or water during manufacturing
– producing products that emit fossil-fuel contaminants
• Effect of natural resource extraction
– renewable versus non-renewable

What is Sustainability?
• Sustainability
– meeting the needs of the present without compromising the
ability of future generations to meet their own needs
• Regardless of how businesses feel about the principle of
sustainability, they should set policies for reasonable behavior
toward the earth
• Is sustainability good business practice?
– yes
Global Warming, Kyoto Protocol
• Kyoto Protocol (1997)
– signed to require countries to cut greenhouse gas emissions
to 5.2% below 1990 levels between 2008 and 2012
• Some countries have adopted stricter requirements
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– others have not ratified the agreement including
• the U.S., China, India
Implications for Business
• Companies operating in countries that have adopted the
Kyoto Protocol must do one of the following:
– Reduce emissions to target levels
– Buy credits from companies that have reduced emissions
below target levels
• Many MNEs have to reconsider their global strategies
– If country’s standards are more aggressive than those set
forth in the Protocol, MNEs must adhere to these stricter
standards
• E.g., Germany’s target is 21% below 1990s levels

• Even if MNEs are not bound by the Protocol at home (e.g.,
U.S.), they face the same standards as foreign companies
when operating in the foreign country (e.g., EU)
• Many MNEs therefore engage in voluntary emissions
reductions at home
– E.g., Between 2000-2005, GM achieved a 10% reduction in
its emissions from North American plants
• Two approaches to responsible corporate behavior
– Legal approach
• Comply with local laws and standards
– Ethical approach
• Go beyond the law to do whatever is necessary and
economically feasible to reduce emissions
Ecomagination at GE
• Strategy developed by CEO Jeffrey Immelt in 2005
– “Green is Green” – demonstrate that an ecologically
conscious conglomerate can grow its bottom line while

doing something for the environment
– Goals include:
• Reduce emissions and improve energy efficiency of
operations
• Double investment in R&D of “clean” technologies
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• Increase revenues from those technologies
• Reduce its global water use by 20%
• Keep the public informed
• Immelt assembled a cross-business, cross-functional team to
oversee planning and monitoring of the goals

Ecomagination Success
• In 2005, GE marketed only 17 products that met its
Ecomagination criteria
• By 2011
– there were 140 products and solutions generating $105
billion in revenues
– Emissions were reduced by 29% from 2004 levels
– Website keeps the public informed
Ecomagination as a Response to Globalization
• A response to political environments
– GE actively participates in shaping international political
debate over global warming and lobbies American
lawmakers on mandatory emissions reductions
– Half of GE’s markets are outside the U.S.
• Under stricter regulations (e.g., Kyoto Protocol)
• Being ecologically proactive is a forward-looking approach to
create a strategic advantage
– One step ahead of where environmental standards are

going
• E.g., Climate deal signed Saturday, Oct 15, 2016 in Kigali,
Rwanda by 150 nations (incl. U.S. and EU) to reduce
emissions of HFCs (hydrofluorocarbons), used in
refrigerators and air conditioners
• A response to consumer demand
– Markets for green products and services are growing and
profitable
– Especially growing economies like those of China and India
are in great need of cleaner technologies
• E.g., China has set aside $85 billion for environmental
spending
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spending
• A response to competitors
– Many of GE’s competitors (e.g., in Europe) had already
been investing in clean technologies
Ethical Dimensions of
Labor Conditions
• Labor issues include
– Wages
– Child labor
– Working conditions
– Working hours
– Freedom of association
Labor Conditions
• Labor conditions are particularly critical for retail, clothing,
footwear, and agriculture industries

Labor Conditions
• Child labor – ILO estimates 250 million children aged 5–17
years work
• Some companies avoid operating in countries where child
labor is common
• Others establish responsible policies in those countries
• E.g., IKEA
Corporate Codes of Ethics
• How should a company behave?
– Fine line between relativism and normativism
• Managers need to exhibit ordinary decency—principles of
honesty and fairness
• The UN Global Compact is a good place to start
– Establishes ten broad principles for appropriate behavior in
the areas of human rights, labor, the environment, and anti-
corruption
– Not legally binding, but a useful guide for companies to
establish a code of conduct

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Motivations for
Corporate Responsibility
• Unethical and irresponsible behavior could
– result in legal sanctions
– result in consumer boycotts
– lower employee morale
– cost sales because of bad publicity
• A code of conduct
– sets global policy that must be complied with
– communicates the code to employees, suppliers, and
subcontractors
– ensures that policies are carried out

– reports results to external stakeholders
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Cross-na.onalcoopera.on
andagreements2
1-1
Tue,Mar13
Session16
INB302
Dr.Hanek
Learningobjec.ves

• Discusstheprosandconsofglobal(theWTO),
bilateral,andregionalintegra.on
• Iden.fythemajorcharacteris.csoftheWTO
andNAFTA
• CompareandcontrastdifferentFTAsandtheir
implica.onsforbusinesses
3/10/18
2
TheWorldTradeOrganiza.on
• WorldTradeOrganiza/on(WTO)
– Themajorbodyfor
• reciprocaltradenego.a.ons
• enforcementoftradeagreements
• GeneralAgreementonTariffsandTrade(GATT)
– Formedin1947toreducetariffsandabolishquotas

– Majordriveroftradeliberaliza.oninthesecondhalf
ofthe20thcentury
– SucceededbyWTOin1995
GATT:PredecessortotheWTO
• Mostfavoredna/on(MFN)clause
– tradewithoutdiscrimina.on
• Onceacountryanditstradingpartnersagreedtolower
tariffs,thattariffcutappliedtoallmemberna.ons
• GATTranintosomeproblemsastradebecame
morecomplex,includingnotbeingableto
enforcecompliancewithagreements
– LedofficialstocreatetheWTO
3/10/18
3
WhatdoestheWTOdo?

• WTO
– 159members,includingBRICs
– Membersaccountformorethan97%ofworldtrade
– con.nuestheMFNclauseofGATT
– providesamechanismfordisputeseblement
• DohaRound
– agriculturalsubsidies
• Cri.cizedfor
– failingtopayenoughaben.ontolaborandenvironmentalconcerns
– underminingglobaldiversity
– benefidngrichattheexpenseofthepoor
WalmartinChina
• Openeditsfirststores(WalmartSupercenterand
Sam’sClub)inChinain1996
• Oneofthefirstforeignretailerstoofferbig-box
shoppingandavarietyofgoodsfromclothingto
food
• WalmartwasChina’sbiggestsuper-sizedstore
andhadamarketleadfrom2007-2009

• Inthespanoftwoyears(2013-2015),Walmart’s
importsintoChinaincreasedfrom212containers
ofproductsto2,800containers
3/10/18
4
ChinaagerWTOAccession
• Economicandsocialgains10yearslater
• 2ndlargesteconomyinGDP
• 1stlargestmerchandiseexporter
• 2ndlargestmerchandiseimporter
• 1stdes.na.onforinwardFDIamongdeveloping
countries
• 1stinvestorforoutwardFDIamongdeveloping
countries
TradeinChina
• 1stlargesttradingpartnerof

– Australia,Chile,Japan,SouthKorea,HongKong,
Malaysia,Russia,Brazil,SouthAfrica,SaudiArabia
• 2ndlargesttradingpartner
– Argen.na,Canada,EU,India,Indonesia,Mexico,
NewZealand,Singapore,U.S.
•
“TheChinesegovernmenthasalwayssupportedtradeliberaliza.onan
d
facilita.on,opposedtradeprotec.onisminanyform,stronglysupporte
dthe
mul.lateraltradesystemandac.velypushedforwardtheDoharoundne
go.a.ons
toachievesuccess”–VicePremier,WangQishan
3/10/18
5
RemainingChallenges:
Walmart’sCase

• Compe.tors
– Foreign:Carrefour(French)
– Domes.c:closer.estolocalsuppliers
• CanogenundercutWalmart’spricesbecauseofbeber
nego.a.onswithlong-standinglocalpartners
• Poli.cal
– Althoughthree-storelimitwasligedin2003,other
disadvantagesremain
• Governmentinves.ga.onsintoWalmart’spricing
• Governmenthighligh.ngfoodscandals
• Consumers
– Changesinpreferencestoonlineshopping
RegionalEconomicIntegra.on
! Regionaltradeagreements
" integra.onconfinedtoaregionandinvolving
morethantwocountries
! Examplesinclude
" EuropeanUnion(EU)
" EuropeanFreeTradeArea(EFTA)

" NorthAmericanFreeTradeArea(NAFTA)
" Associa.onofSoutheastAsianNa.ons(ASEAN)
" CommonMarketofEasternandSouthernAfrica
(COMESA)
3/10/18
6
NAFTA
! TheNorthAmericanFreeTradeAgreement(NAFTA)
! wentintoeffectJanuary1,1994
" includesCanada,theU.S.,andMexico
" Today,theU.S.isMexico’sandCanada’slargesttradingpartner
" involvesfreetradeingoods,services,andinvestments(i.e.,nota
customsunionorcommonmarket)
"
AsofJan1,2008,alltariffsandquotaswereeliminatedonU.S.exportst
oCanada

andMexico
" includescountriesofdifferentsizesandwealth
NAFTA:TradeEffects
! Sta.ceffects
! CanadianandU.S.consumersbenefitfromlower-costagricultural
Mexicanproducts
! Dynamiceffects
! U.S.producersbenefitfromgrowingMexican
market
! SomeU.S.tradeandinvestmenthasbeendivertedtoMexico
! Movingproduc.onfromAsiatoMexico
! Alsoappliestonon-membercountries
! E.g.,SonyinTijuana
3/10/18

7
NAFTA:HowTradeWorks
! Freetradearea
! Eachcountrysetsitsowntariffstotherestofthe
world
" Createscomplexrulesoforigin(incontrasttoEU)
! Regionalcontent
" atleast50%ofthenetcostofmostproductsmust
comefromtheNAFTAregion
" Iftheseregula.onsaremet,acompanycan
manufactureorassembleproductsinNAFTAmember
countriesandshiptoothermembersduty-free
NAFTA
! Addi.onalprovisions
" Workers’rights
" Theenvironment
" ThelargestmarketsforU.S.exportsareCanada

(1)andMexico(2)
" Sedngupproduc.oninMexicoallows
companiestotakeadvantageofothermarkets
MexicohasFTAswith
" Mexicoisbecominganabrac.veconsumer
market
3/10/18
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NAFTA:SpurringFDIinMexico
• Audiopeneditsfirstproduc.onplantin
MexicoonSeptember30,2016
– Exclusiveproduc.onoftheQ5model
• NAFTAwasoneofthemajorreasonsfor
loca.ngproduc.oninMexico
WalmartinMexico

• Priorto1990,WalmarthadoperatedonlyintheU.S.
• Walmartopeneditsfirststore(Sam’sClub)inMexicoCityasa
jointventurein1991
• In1993,WalmartcreateditsInterna.onalDivision
– TheInterna.onalDivisionaccountsforabout15.2%ofsales
• Today,Walmartoperatesabout2,363unitsinMexico
– Thelargestretailerinthecountry
– ThelargestprivateemployerinMexicowith209,000employees
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Walmart’sCompe..veAdvantage
• “EverydayLowPrices”
• Cost-cudngmeasures
– Sheersizeandvolumepurchases,cannego.atewithsuppliers

forthelowestcosts
– Advancedinforma.onsystemsallowssupplierstoplan
produc.onrunsmoreaccurately,savingproduc.oncosts
– Advanceddistribu.onsystem—Distribu.onCenters(DCs)in
centralloca.ons
• Walmart’sbiggestchallengetoitsMexican
opera.onspriortoNAFTAwerehighimport
charges
WalmartinMexico:
TheRoleofTrade
• NAFTAreducedtariffsonAmericangoodssoldto
Mexicofrom10%to3%
• GreaterFDIintoMexico
– ForeigncompaniescouldopenfactoriesinMexicoand
takeadvantageof
• Low-costlabor
• ShiptoNAFTA’sfreetradezone(Mexico,U.S.,Canada)
• E.g.,Sony’sflatscreenTVssoldatSam’sclub

– Inmid1990’s,TVswereimportedfromJapanwith23%tariffsfor
aretailpriceof$1,600
– In1999,SonybuiltaplantinMexico,elimina.ngtariffsfor
Walmartandreducingtransporta.oncosts,loweringretailprice
$600
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WalmartinMexico:
TheRoleofTrade
• Increasedcompe..onamongsuppliers,
pushedformoreefficientproduc.on
• Moreproductsavailabletoconsumers,
increasingdemand
• GreatereconomicgrowthinMexicoandlower
ratesofinfla.on,furtheraddingtothe
purchasingpowerofconsumers

Walmart:BenefitsofLessonsLearned
inMexicointheU.S.
• Adap.ngtoachangingconsumer
demographic
• PilotofMásClubinHouston,TX(2009-2014)
• Incorpora.ngimportsfromMexicointo
Americanretail
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RegionalIntegra.on:
WhyCompaniesNeedtoAdapt
• ThecaseofWalmartinGermany

2/3/18
1
PoliticalandLegal
Environments2
1-1
Tue, Feb 6
Session 7
INB 302
Dr. Hanek
LearningObjectives
• Discusstheprinciplesandpracticesofthelegalsystem
• Profiletrendsincontemporarylegalsystems
•
Identifyanddescribekeylegalissuesfacinginternationalcompanies
3-2

2/3/18
2
TheLegalEnvironment
• Thelegalsystem isthemechanismforcreating,interpreting,and
enforcingthelawsinaspecifiedjurisdiction
3-3
TheLegalEnvironment
• Commonlaw– basedontradition,precedent,andcustom
•
Lawsystemisflexible,allowingjudgestointerpretlawtofiteachcase
• Eachnewcasecreatesnewprecedent
• E.g.,U.K.,U.S.
3-4
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TheLegalEnvironment
• Civillaw– basedonaverydetailedsetofwrittenlawsandcodes
• Lawsystemislessadversarial
• Judgesdonotinterpretthelaw,butapplyit
• E.g.,Germany,France,Japan,Russia
3-5
TheLegalEnvironment
• Theocraticlaw– basedonreligiousteachings
• MostcommonisIslamiclaw
• Primarilyamoralratherthancommerciallaw
•
Inreality,oftenablendofIslamiclawandcommonorcivillawsystems
• E.g.,Pakistan,Egypt,Iran
3-6

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ContractLaw
• Contract
•
Adocumentthatspecifiestheconditionsunderwhichanexchangeisto
occur
anddetailstherightsandobligationsofthepartiesinvolved
• Differencesincontracts
• Commonlawsystems– detailed,contingenciesspelledout
• Civillawsystems– shorter,lessspecific
• Businessimplications
• Costsindraftingcontracts
• Flexibilityininterpretationbyjudgesandcourts
3-7
TrendsinLegalSystems
• Whatisthebasisofruleinacountry?
• Theruleofman

•
legalrightsderivefromtheindividualwhocommandsthepowertoimp
osethem
• associatedwithatotalitariansystem
• Theruleoflaw
•
systematicandobjectivelawsappliedbypublicofficialswhoarehelda
ccountablefor
theiradministration
• associatedwithademocraticsystem
3-8
2/3/18
5
OperationalConcerns
• Operationalissues

• Startingabusiness
• Makingandenforcingcontracts
• Hiringandfiringlocalworkers
• Closingdownthebusiness
• Ingeneral
• richcountriesregulateless
• poorcountriesregulatemore
3-9
EaseofDoingBusiness
• Measuredas:startingabusiness,dealingwithconstructionpermits,
employingworkers,registeringproperty,gettingcredit,protecting
investors,payingtaxes,tradingacrossborders,andenforcingcontrac
ts
•
Easiestincountrieswith:democraticpoliticalsystems,commonorci
villaw
systems,ruleoflaw(e.g.,Singapore)
•
Mostdifficultincountrieswith:authoritarianpolitics,mixedlegalsys
tems,rule
ofman(e.g.,CentralAfricanRepublic)

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2/3/18
6
StrategicConcerns
pCountryCharacteristics
pCountryoforigin– productlabels
pLocalcontentrules– importtaxes
p“Buy-local”campaigns
pLegaljurisdiction
pChoice-of-law-clause:
specifieswhichcountry’slawswillgovernalegaldisputein
cross-nationalbusinessdealings
3-11
StrategicConcerns
pProductsafetyandliability

pProductsafetylaws:setsafetystandardstowhichaproduct
mustadhere
pProductliability:holdingafirmanditsofficersresponsible
whenaproductcausesinjury,death,ordamage
pLiabilitylawsarelikelymostextensiveintheU.S.,somewhatextensi
vein
otherWesterncountries,andleastextensiveinlessdevelopednations
3-12
2/3/18
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IntellectualProperty:
RightsandProtection
•
Intellectualpropertyreferstocreativeideas,expertise,orintangible
insightsthatgrantitsowneracompetitiveadvantage
• Intellectualpropertyrights refertotherighttocontrolandderive
thebenefitsfromwriting,inventions,processes,andidentifiers

• no“global” patent,trademarkorcopyrightexists
3-13
RightsandProtection
•Attitudestowardsintellectualproperty
• Historicallegacies
• ruleofmanversusruleoflaw
• Economiccircumstances
• levelsofeconomicdevelopment
• Culturalorientation
• individualismversuscollectivism
3-14
2/26/18
1

Governments and Trade
Learning objectives
! Explain why governments try to enhance and restrict trade
! Show the effects of pressure groups on trade policies
! Compare the potential and actual effects of government
intervention on the free flow of trade
! Illustrate the major means by which trade is restricted and
regulated
Learning Objectives
" Demonstrate the business uncertainties and opportunities
created by governmental trade policies
" Discern how businesses may respond to import competition
" Fathom how the growing complexity of products and trade
regulations may affect the future
Introduction
• Protectionism - policies that
– affect the ability of foreign producers to compete in your

home market
– limit or enhance your company’s ability to sell abroad or
acquire needed foreign supplies
Conflicting Results
of Trade Policies
• Governments intervene in trade to achieve economic, social,
and political goals
• Policymakers are challenged by
• conflicting objectives
• interest groups
The Role of Stakeholders
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– Workers
– Owners
– Suppliers
– Local politicians
• Consumers usually don’t care
Economic Rationales for Government Intervention
• Why governments intervene in trade
– Economic rationales
• Fighting unemployment
• Protecting infant industries
• Promoting industrialization
• Improving comparative position
– Non-economic rationales

Fighting Unemployment
• The unemployed are the most effective pressure group
• But, import restrictions
• can lead to retaliation by other countries
• are less likely retaliated against effectively by small
economies
• are less likely to be met with retaliation if implemented by
small economies
• may decrease export jobs because of price increases for
components
• may decrease export jobs because of lower incomes abroad
Protecting ‘Infant Industries’
• The infant industry argument
• government protection of import competition is necessary to
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production
Developing an industrial base
• Countries promote industrialization because it
– brings faster growth than agriculture
– brings in investment funds
– diversifies the economy
– creates growth in manufactured goods
– reduces imports and promotes exports
– helps the nation-building process
Economic Relationships
With Other Countries
• Trade controls can be used
• to improve the balance of payments
• to gain fair access to foreign markets

• comparable access argument
• as a bargaining tool
• believability and importance
• to control prices
• dumping
• optimum-tariff theory
Noneconomic Rationales for Government Intervention
• Noneconomic rationales include
Maintaining Essential Industries
• The essential industry argument
– protect essential industries so the country is not dependent
on foreign supplies during war
• Countries must

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– consider political consequences
Promoting Acceptable
Practices Abroad
• Import trade controls can be used
– to promote changes in foreign countries’ political policies or
capabilities
– as a foreign policy weapon
– to pressure governments to alter their stances on a variety
of issues
• human rights

• environmental protection
Maintaining or Extending Spheres of Influence
• Governments provide assistance and encourage imports from
countries that join a political alliance or vote a preferred way
within international bodies
• A country’s trade restrictions may coerce governments to
follow certain political actions or punish companies whose
governments do not
Preserving National Culture
• In order to preserve national culture, countries
• limit foreign products and services in certain sectors
• Canada’s cultural sovereignty
• prohibit exports of art and historical items deemed important
to national heritage
Instruments of Trade Control
• Two types of trade controls
• those that indirectly affect the amount traded by directly

influencing prices of exports or imports
traded
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traded
Tariffs
• Tariffs are also known as duties
• refer to a government levied tax on goods shipped
internationally
• Tariffs may be levied
• on goods entering, leaving, or passing through a country
• for protection or revenue
• on a per unit basis or a value basis

• export tariffs
• transit tariffs
• import tariffs
Nontariff Barriers:
• Subsidies
– direct assistance to companies to make them more
competitive
• agricultural subsidies
• overcoming market imperfections
• valuation problems
Nontariff Barriers:
• Aid and loans
– tied
– untied
• Customs valuation
• Other direct-price influences
– special fees and requirements

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Nontariff Barriers:
Quantity Controls
• Quotas
– limit the quantity of a product that can be imported or
exported in a given time frame
• Voluntary export restraint (VER)
• Embargoes
Nontariff Barriers:
Quantity Controls
• “Buy local” legislation
• Standards and labels
• Specific permission requirements
• import or export license
• Administrative delays
• Reciprocal requirements

• Countertrade or offsets
• Restrictions on services
Dealing with Governmental Trade Influencers
• Companies facing import competition can
• Move abroad
• Seek other market niches
• Create greater efficiency or superior products
• Try to get governmental protection
Tactics For Dealing
With Import Competition
• Convince decision makers of the merits of particular policies
• Involve the industry and stakeholders
• Prepare for changes in the competitive environment
Dynamics and Complexity
• Trade restriction changes bring about winners and losers
among countries, companies, and workers
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expense of companies and workers
• The international regulatory situation is becoming more
complex
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Cross-national cooperation and agreements
Toyota in Europe
• In 1990, Toyota had 20 production facilities in 14 countries
• In 2012, it had 50 manufacturing facilities in 27 countries
– Including factories in Czech Republic, France, Poland,

Portugal, the UK, and Russia
• Before 2002, Toyota suffered from low market share and
growth in Europe, not posting a profit for its European
operations for 30 years
Toyota in Europe: Why the slow growth?
• After WWII, the Japanese government asked European car
makers to significantly decrease exports to Japan
– Rebuild the Japanese car industry
• Europeans reciprocated by limiting Japanese access to
European markets
– Quota system
• E.g., France at 3% of its market
• E.g., Italy at 3,000 units
• In 1999, the EU lifted the import quota
Toyota in Europe: Upswing
• The lifting of the quota allowed Toyota to:
– Invest more heavily in design and manufacturing facilities in
the EU

– Broaden the range of products marketed there
– Customize their options to better appeal to European
customers
• European Design and Development Center established in
southern France
• Manufactures all best-selling European vehicles in Europe
– Low costs (wages) in Eastern Europe
– State-of-the-art production facilities in the Czech
Republic and Poland
• Elimination of internal tariffs in the EU allows Toyota to
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Toyota in Europe: Meeting European Tastes
• Faced with high unemployment and low growth, Europeans
turned to more economical and higher-quality cars
• Erosion of brand loyalty to European car makers
• Emphasis on environmental sustainability increases appeal of
hybrid models
– Maintaining a comparative advantage over rivals in hybrid
technology

• Shifting decision-making power from Japan to Brussels
(European division) to better meet European demand
Learning objectives
• Discuss the three major approaches to economic integration
• Discuss the pros and cons of global (the WTO), bilateral, and
regional integration
• Identify how the different approaches to economic integration
can be a free trade agreement, a customs union, or a
common market
• Describe the static and dynamic impact of trade agreements
on trade and investment flows
• Examine how the EU works and its implications for business
Introduction
• Economic integration
– the political and monetary agreements among nations and
world regions in which preference is given to member
countries

• Bilateral integration
• Regional integration
• Global integration
Introduction
• Trade agreements
– Define the size of the regional market and the rules under
which a company must operate
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• Triad regions = Europe, North America, Asia
• Of the 500 largest companies (in terms of FDI and trade),
320 generate at least 50% of their revenues from their
home region; only 9 are global (generating at least 20% in
each of the three regions)
• A 1% increase in distance results in a 1% decrease in
trade
– MNEs also care about trade agreements to determine where
to import or source from
Rise of bilateral agreements
• Bilateral agreements
– can be between two individual countries or can involve one

country dealing with a group of other countries
• Also known as
– Preferential trade agreements (PTAs)
– Free trade agreements (FTAs)
• Though not easy to negotiate, can be simpler than multilateral
agreements
– E.g., U.S. signed FTAs with Colombia and South Korea in
2012
• Regional trade agreements
– integration confined to a region and involving more than two
countries
• Examples include
– European Union (EU)
– European Free Trade Area (EFTA)
– North American Free Trade Area (NAFTA)
– Association of Southeast Asian Nations (ASEAN)
– Common Market of Eastern and Southern Africa (COMESA)

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– Geographic proximity, according to country similarity theory,
suggests consumers’ tastes are more similar and companies
can more easily export products produced for the home
market to neighboring countries
– Neighbors tend to share a common history and may be
more willing to negotiate policies
• However, FTAs exist between non-neighbors, too
• Major types of economic integration
– Free trade area
• individual external tariffs
– Customs union
• common external tariffs
– E.g., Toyota had to reach an agreement with the EU as
a whole, not individual countries

– Common market
• customs union plus factor mobility
– E.g., EU workers can work in any EU country
• Effects of regional integration
– Allows for specialization and trade based on comparative
advantage
– Static effects: shifting of resources from inefficient to
efficient
companies
• trade creation: production shifts to more efficient producers
• trade diversion: trade shifts to countries in the group at the
expense of countries not in the group
– Dynamic effects: overall growth in the market

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number of units produced increases
• Increased competition: pushes companies to become
more efficient

– E.g., mergers and acquisitions in the EU to match large
market
Major regional trading groups
• Companies are interested in regional trading groups because:
– New markets
– Sources of raw materials
– Production locations
• The larger and richer the new market, the more likely it will
attract attention from MNEs
• Reduced tariffs and other restrictions provide better access to
these regions
The European Union
• European Union (EU)
– The largest and most successful regional trade group in the
world
– Some key features
• provides free movement of goods, services, capital, and
people

• has a common agricultural policy
• uses common external tariffs
• has a common currency
The European Union
• Key governing bodies
– European Commission
• provides political leadership, drafts laws, and runs the
various daily programs of the EU
– Council of the EU
• composed of the heads of state of each member country;
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– European Parliament
• has legislative power, control over the budget, and is
supervisor of executive decisions; grouped by political
affiliation rather than nationality
– European Court of Justice
• interprets and applies EU treaties; serves as appeals court
for individuals, firms, and organizations fined by the
commission for infringing treaty law
The European Union
• Single European Act

– designed to eliminate the remaining nontariff barriers to
trade (e.g., certification procedures) in Europe
– However, some barriers still remain (e.g., labeling)
• Lisbon Treaty
– strengthens the EU’s governance process and improves the
ability of the EU to make and implement decisions
– Some opposed because of threats to national sovereignty
• Treaty of Maastricht
– fostered political and monetary union
• the euro
• another way barriers to trade are reduced
Doing business with the EU
• Lucrative market
– Size, income
• Influences corporate strategy, especially for outside MNEs
– Determining where to produce
• Centrality = lower transportation costs, but higher labor
costs

• E.g., Toyota producing in Eastern Europe
– Determining whether to grow through new investments,
expanding existing investments, or through joint ventures/
mergers
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gain market presence, eliminate competition, and take
advantage of existing distribution channels
– Balancing “common” denominators with national differences
• Different cultures and histories
• Different rates of growth in different member nations
• Adopt a pan-European or different regional strategies?
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Globalization, Ethics, and Society
Learning Objectives
• Examine the broad foundations of ethical behavior
• Understand cultural differences in morality
• Understand cultural differences in perceptions of justice
• Demonstrate the cultural and legal foundations of ethical
behavior
• Discuss key ethical issues for international business
Ethics Defined
• People have a responsibility to do what is right and to avoid
doing what is wrong
• Ethics are complicated in the international sphere, because
definitions of what is right and wrong as well as people’s
modes of moral reasoning and judgment vary across cultures

• Kohlberg’s model of moral development
– Moral development progresses as cognitive reasoning
develops
– Three levels of moral development
1. Preconventional
2. Conventional
3. Postconventional
Foundations of Ethical Behavior Across Cultures
• Review of 45 studies examining 27 different cultural areas
• Some universality
– Many children reasoned at the preconventional level
– In no cultural group did the average adult reason at the
preconventional level
– Can explain reasoning at the preconventional vs.
conventional level
• However, cultural differences exist at the postconventional
level

– Common in Western, industrialized cultures
– Not found in tribal communities
• Risk of ethnocentrism
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1. Ethic of Autonomy
• Based on individual rights and freedoms, personal choice,
and the right to engage in free contracts
• Violations are those that infringe on individual liberties

and/or directly hurt another person
2. Ethic of Community
• Based on duties to conform to one’s role in a community
and/or the social hierarchy
• Violations are those in which people fail to uphold their
interpersonal and social duties and obligations
3. Ethic of Divinity
• Based on sanctity and the standards set by a
transcendent authority
• Violations are those that cause impurity or degradation of
the self or others and/or disrespect God or God’s
creations
• Examples of ethics violations
• Cultures differ in the extent to which each of the three codes
of ethics is emphasized
– E.g., controversies over depiction and caricatures of the

prophet Mohammed
• People can decide to allocate resources based on three
principles
1. Principle of need
• Resources are directed towards those who need them the
most
• Often institutionalized (e.g., welfare)
2. Principle of equality
• Resources are shared equally
• One form is seniority systems (i.e., time with the company
or age are rewarded)
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contributions
• Social systems built on the principle of equity are called
meritocracies
• Cultural differences in distributive justice
• The case of seniority systems in Japan
• Benefits of meritocracies
– High motivation
– High performance
• Costs of meritocracies

– Finite resources create winners and losers
– Breeds competition
• Benefits of seniority systems
– Harmony and low conflict
• Costs of seniority systems
– Lower motivation
– However, Japanese workers are some of the most hard-
working (e.g., voluntary overtime, not taking vacations)
• Westerners are more likely than those from other cultures to
view the equity principle as most fair
– Meritocracies are most common in individualistic cultures
• Other cultures, like India, tend to favor the need principle
Why Do Companies Care?
• Understand social responsibilities, obligations, and norms
across cultures
• Ethical behavior can help a company
– develop a competitive advantage

– avoid being perceived as irresponsible
• NGOs becoming more active in monitoring companies
Relativism versus Normativism
• Relativism
– ethical truths depend on the groups holding them
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• Normativism
– there are universal standards of behavior that all cultures

should follow
• Companies may face both pressures
– Governments can reinforce these
• Legal justification is appropriate because
– The law embodies many of a country’s moral principles
– The law provides a clearly defined set of rules
– The law contains enforceable rules that apply to everyone
– The law reflects careful and wide-ranging discussions based
on consensus
• The law is inadequate because
– Some things that are unethical are not illegal
– Laws are slow to develop in emerging areas of concern and
develop in response to events that have happened (can’t
anticipate)
– Laws may be based on imprecisely defined moral concepts
– The law often needs to undergo scrutiny by the courts
– The law is not very efficient (i.e., achieving ethical behavior

at low cost)
Extraterritoriality
• Basic problem with using the law: laws differ from one
country
to another
• Home-country governments may practice extraterritoriality
– imposing domestic legal and ethical practices on the foreign
subsidiaries of companies headquartered in their
jurisdictions
• Challenge for MNEs
– Cumbersome and costly to monitor and follow various laws
and regulations
– Counter to globalization
Legal Justification
• The law remains a good starting point
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similar legal steps
• Corruption
– the misuse of entrusted power for private gain
• Bribes
– payments or promises to pay cash or anything of value
– Occurs
• to obtain government contracts
• to get public officials to do what they should be doing
anyway

• to gain a competitive advantage
– E.g., Ralph Lauren
• Problems with corruption
– Related to lower levels of national growth and per capita
income
– Can erode the authority and legitimacy of the governments
that condone it
– Downfall of heads of state and business executives
• Imprisoned, fined, forced to resign, even executed
– Compromise the legitimacy and reputation of MNEs for both
local and global communities
– It is costly
• “When in Rome, do as the Romans do” (relativism) is a
tempting approach to IB
• International initiatives have made headway in introducing
the

rule of law into more and more IB activities
• More international integration in laws and practices helps
MNEs implement ethical behavior
Siemens and Bribery
• In 2006, police raided the offices of Siemens AG
– Found tens of thousands of documents to support that the
company diverted funds into a network of “black accounts”
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Greece, Argentina, and Saudi Arabia for lucrative public-
sector contracts

– Suspicious payments went back as far as the early 1990s
and totaled $570 million USD
Siemens and Bribery
• Siemens was fined $1.6 billion USD, the largest fine for
bribery in modern corporate history
• Managers caught up in the scandal claimed that knowledge
and approval of bribery went as far up the ranks as the CEO
Klaus Kleinfeld and board chief Heinrich von Pierer
Siemens and Bribery
• Are top managers responsible for corruption?
• What is the role of law?
• How could corruption and bribery at Siemens have been
reduced?
Ethics and the Environment
• Companies compromise the environment
– contamination of air, soil, or water during manufacturing
– producing products that emit fossil-fuel contaminants

• Effect of natural resource extraction
– renewable versus non-renewable
What is Sustainability?
• Sustainability
– meeting the needs of the present without compromising the
ability of future generations to meet their own needs
• Regardless of how businesses feel about the principle of
sustainability, they should set policies for reasonable behavior
toward the earth
• Is sustainability good business practice?
– yes
Global Warming, Kyoto Protocol
• Kyoto Protocol (1997)
– signed to require countries to cut greenhouse gas emissions
to 5.2% below 1990 levels between 2008 and 2012
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– others have not ratified the agreement including
• the U.S., China, India
• Companies operating in countries that have adopted the
Kyoto Protocol must do one of the following:
– Reduce emissions to target levels
– Buy credits from companies that have reduced emissions
below target levels
• Many MNEs have to reconsider their global strategies
– If country’s standards are more aggressive than those set
forth in the Protocol, MNEs must adhere to these stricter
standards

• E.g., Germany’s target is 21% below 1990s levels
• Even if MNEs are not bound by the Protocol at home (e.g.,
U.S.), they face the same standards as foreign companies
when operating in the foreign country (e.g., EU)
• Many MNEs therefore engage in voluntary emissions
reductions at home
– E.g., Between 2000-2005, GM achieved a 10% reduction in
its emissions from North American plants
• Two approaches to responsible corporate behavior
– Legal approach
• Comply with local laws and standards
– Ethical approach
• Go beyond the law to do whatever is necessary and
economically feasible to reduce emissions
Ecomagination at GE
• Strategy developed by CEO Jeffrey Immelt in 2005

– “Green is Green” – demonstrate that an ecologically
conscious conglomerate can grow its bottom line while
doing something for the environment
– Goals include:
• Reduce emissions and improve energy efficiency of
operations
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• Increase revenues from those technologies
• Reduce its global water use by 20%
• Keep the public informed

• Immelt assembled a cross-business, cross-functional team to
oversee planning and monitoring of the goals
Ecomagination Success
• In 2005, GE marketed only 17 products that met its
Ecomagination criteria
• By 2011
– there were 140 products and solutions generating $105
billion in revenues
– Emissions were reduced by 29% from 2004 levels
– Website keeps the public informed
• A response to political environments
– GE actively participates in shaping international political
debate over global warming and lobbies American
lawmakers on mandatory emissions reductions
– Half of GE’s markets are outside the U.S.
• Under stricter regulations (e.g., Kyoto Protocol)

• Being ecologically proactive is a forward-looking approach to
create a strategic advantage
– One step ahead of where environmental standards are
going
• E.g., Climate deal signed Saturday, Oct 15, 2016 in Kigali,
Rwanda by 150 nations (incl. U.S. and EU) to reduce
emissions of HFCs (hydrofluorocarbons), used in
refrigerators and air conditioners
• A response to consumer demand
– Markets for green products and services are growing and
profitable
– Especially growing economies like those of China and India
are in great need of cleaner technologies
• E.g., China has set aside $85 billion for environmental
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spending
• A response to competitors
– Many of GE’s competitors (e.g., in Europe) had already
been investing in clean technologies
Labor Conditions
• Labor issues include
– Wages
– Child labor
– Working conditions
– Working hours
– Freedom of association
Labor Conditions
• Labor conditions are particularly critical for retail, clothing,

footwear, and agriculture industries
Labor Conditions
• Child labor – ILO estimates 250 million children aged 5–17
years work
• Some companies avoid operating in countries where child
labor is common
• Others establish responsible policies in those countries
• E.g., IKEA
Corporate Codes of Ethics
• How should a company behave?
– Fine line between relativism and normativism
• Managers need to exhibit ordinary decency—principles of
honesty and fairness
• The UN Global Compact is a good place to start
– Establishes ten broad principles for appropriate behavior in
the areas of human rights, labor, the environment, and anti-
corruption

– Not legally binding, but a useful guide for companies to
establish a code of conduct
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Motivations for
Corporate Responsibility
• Unethical and irresponsible behavior could
– result in legal sanctions
– result in consumer boycotts
– lower employee morale
– cost sales because of bad publicity
• A code of conduct
– sets global policy that must be complied with
– communicates the code to employees, suppliers, and

subcontractors
– ensures that policies are carried out
– reports results to external stakeholders
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Cross-na.onalcoopera.on
andagreements2
1-1
Tue,Mar13
Session16
INB302
Dr.Hanek

Learningobjec.ves
• Discusstheprosandconsofglobal(theWTO),
bilateral,andregionalintegra.on
• Iden.fythemajorcharacteris.csoftheWTO
andNAFTA
• CompareandcontrastdifferentFTAsandtheir
implica.onsforbusinesses
3/10/18
2
TheWorldTradeOrganiza.on
• WorldTradeOrganiza/on(WTO)
– Themajorbodyfor
• reciprocaltradenego.a.ons
• enforcementoftradeagreements

• GeneralAgreementonTariffsandTrade(GATT)
– Formedin1947toreducetariffsandabolishquotas
– Majordriveroftradeliberaliza.oninthesecondhalf
ofthe20thcentury
– SucceededbyWTOin1995
GATT:PredecessortotheWTO
• Mostfavoredna/on(MFN)clause
– tradewithoutdiscrimina.on
• Onceacountryanditstradingpartnersagreedtolower
tariffs,thattariffcutappliedtoallmemberna.ons
• GATTranintosomeproblemsastradebecame
morecomplex,includingnotbeingableto
enforcecompliancewithagreements
– LedofficialstocreatetheWTO
3/10/18
3

WhatdoestheWTOdo?
• WTO
– 159members,includingBRICs
– Membersaccountformorethan97%ofworldtrade
– con.nuestheMFNclauseofGATT
– providesamechanismfordisputeseblement
• DohaRound
– agriculturalsubsidies
• Cri.cizedfor
– failingtopayenoughaben.ontolaborandenvironmentalconcerns
– underminingglobaldiversity
– benefidngrichattheexpenseofthepoor
WalmartinChina
• Openeditsfirststores(WalmartSupercenterand
Sam’sClub)inChinain1996
• Oneofthefirstforeignretailerstoofferbig-box
shoppingandavarietyofgoodsfromclothingto
food

• WalmartwasChina’sbiggestsuper-sizedstore
andhadamarketleadfrom2007-2009
• Inthespanoftwoyears(2013-2015),Walmart’s
importsintoChinaincreasedfrom212containers
ofproductsto2,800containers
3/10/18
4
ChinaagerWTOAccession
• Economicandsocialgains10yearslater
• 2ndlargesteconomyinGDP
• 1stlargestmerchandiseexporter
• 2ndlargestmerchandiseimporter
• 1stdes.na.onforinwardFDIamongdeveloping
countries
• 1stinvestorforoutwardFDIamongdeveloping
countries

TradeinChina
• 1stlargesttradingpartnerof
– Australia,Chile,Japan,SouthKorea,HongKong,
Malaysia,Russia,Brazil,SouthAfrica,SaudiArabia
• 2ndlargesttradingpartner
– Argen.na,Canada,EU,India,Indonesia,Mexico,
NewZealand,Singapore,U.S.
•
“TheChinesegovernmenthasalwayssupportedtradeliberaliza.onan
d
facilita.on,opposedtradeprotec.onisminanyform,stronglysupporte
dthe
mul.lateraltradesystemandac.velypushedforwardtheDoharoundne
go.a.ons
toachievesuccess”–VicePremier,WangQishan
3/10/18
5

RemainingChallenges:
Walmart’sCase
• Compe.tors
– Foreign:Carrefour(French)
– Domes.c:closer.estolocalsuppliers
• CanogenundercutWalmart’spricesbecauseofbeber
nego.a.onswithlong-standinglocalpartners
• Poli.cal
– Althoughthree-storelimitwasligedin2003,other
disadvantagesremain
• Governmentinves.ga.onsintoWalmart’spricing
• Governmenthighligh.ngfoodscandals
• Consumers
– Changesinpreferencestoonlineshopping
RegionalEconomicIntegra.on
! Regionaltradeagreements
" integra.onconfinedtoaregionandinvolving
morethantwocountries

! Examplesinclude
" EuropeanUnion(EU)
" EuropeanFreeTradeArea(EFTA)
" NorthAmericanFreeTradeArea(NAFTA)
" Associa.onofSoutheastAsianNa.ons(ASEAN)
" CommonMarketofEasternandSouthernAfrica
(COMESA)
3/10/18
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NAFTA
! TheNorthAmericanFreeTradeAgreement(NAFTA)
! wentintoeffectJanuary1,1994
" includesCanada,theU.S.,andMexico
" Today,theU.S.isMexico’sandCanada’slargesttradingpartner
" involvesfreetradeingoods,services,andinvestments(i.e.,nota
customsunionorcommonmarket)
"

AsofJan1,2008,alltariffsandquotaswereeliminatedonU.S.exportst
oCanada
andMexico
" includescountriesofdifferentsizesandwealth
NAFTA:TradeEffects
! Sta.ceffects
! CanadianandU.S.consumersbenefitfromlower-costagricultural
Mexicanproducts
! Dynamiceffects
! U.S.producersbenefitfromgrowingMexican
market
! SomeU.S.tradeandinvestmenthasbeendivertedtoMexico
! Movingproduc.onfromAsiatoMexico
! Alsoappliestonon-membercountries
! E.g.,SonyinTijuana

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NAFTA:HowTradeWorks
! Freetradearea
! Eachcountrysetsitsowntariffstotherestofthe
world
" Createscomplexrulesoforigin(incontrasttoEU)
! Regionalcontent
" atleast50%ofthenetcostofmostproductsmust
comefromtheNAFTAregion
" Iftheseregula.onsaremet,acompanycan
manufactureorassembleproductsinNAFTAmember
countriesandshiptoothermembersduty-free
NAFTA
! Addi.onalprovisions
" Workers’rights

" Theenvironment
" ThelargestmarketsforU.S.exportsareCanada
(1)andMexico(2)
" Sedngupproduc.oninMexicoallows
companiestotakeadvantageofothermarkets
MexicohasFTAswith
" Mexicoisbecominganabrac.veconsumer
market
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NAFTA:SpurringFDIinMexico
• Audiopeneditsfirstproduc.onplantin
MexicoonSeptember30,2016
– Exclusiveproduc.onoftheQ5model
• NAFTAwasoneofthemajorreasonsfor

loca.ngproduc.oninMexico
WalmartinMexico
• Priorto1990,WalmarthadoperatedonlyintheU.S.
• Walmartopeneditsfirststore(Sam’sClub)inMexicoCityasa
jointventurein1991
• In1993,WalmartcreateditsInterna.onalDivision
– TheInterna.onalDivisionaccountsforabout15.2%ofsales
• Today,Walmartoperatesabout2,363unitsinMexico
– Thelargestretailerinthecountry
– ThelargestprivateemployerinMexicowith209,000employees
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Walmart’sCompe..veAdvantage
• “EverydayLowPrices”

• Cost-cudngmeasures
– Sheersizeandvolumepurchases,cannego.atewithsuppliers
forthelowestcosts
– Advancedinforma.onsystemsallowssupplierstoplan
produc.onrunsmoreaccurately,savingproduc.oncosts
– Advanceddistribu.onsystem—Distribu.onCenters(DCs)in
centralloca.ons
• Walmart’sbiggestchallengetoitsMexican
opera.onspriortoNAFTAwerehighimport
charges
WalmartinMexico:
TheRoleofTrade
• NAFTAreducedtariffsonAmericangoodssoldto
Mexicofrom10%to3%
• GreaterFDIintoMexico
– ForeigncompaniescouldopenfactoriesinMexicoand
takeadvantageof
• Low-costlabor

• ShiptoNAFTA’sfreetradezone(Mexico,U.S.,Canada)
• E.g.,Sony’sflatscreenTVssoldatSam’sclub
– Inmid1990’s,TVswereimportedfromJapanwith23%tariffsfor
aretailpriceof$1,600
– In1999,SonybuiltaplantinMexico,elimina.ngtariffsfor
Walmartandreducingtransporta.oncosts,loweringretailprice
$600
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WalmartinMexico:
TheRoleofTrade
• Increasedcompe..onamongsuppliers,
pushedformoreefficientproduc.on
• Moreproductsavailabletoconsumers,
increasingdemand

• GreatereconomicgrowthinMexicoandlower
ratesofinfla.on,furtheraddingtothe
purchasingpowerofconsumers
Walmart:BenefitsofLessonsLearned
inMexicointheU.S.
• Adap.ngtoachangingconsumer
demographic
• PilotofMásClubinHouston,TX(2009-2014)
• Incorpora.ngimportsfromMexicointo
Americanretail
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RegionalIntegra.on:
WhyCompaniesNeedtoAdapt
• ThecaseofWalmartinGermany

2/3/18
1
PoliticalandLegal
Environments2
1-1
Tue, Feb 6
Session 7
INB 302
Dr. Hanek
LearningObjectives
• Discusstheprinciplesandpracticesofthelegalsystem
• Profiletrendsincontemporarylegalsystems
•
Identifyanddescribekeylegalissuesfacinginternationalcompanies

3-2
2/3/18
2
TheLegalEnvironment
• Thelegalsystem isthemechanismforcreating,interpreting,and
enforcingthelawsinaspecifiedjurisdiction
3-3
TheLegalEnvironment
• Commonlaw– basedontradition,precedent,andcustom
•
Lawsystemisflexible,allowingjudgestointerpretlawtofiteachcase
• Eachnewcasecreatesnewprecedent
• E.g.,U.K.,U.S.
3-4

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TheLegalEnvironment
• Civillaw– basedonaverydetailedsetofwrittenlawsandcodes
• Lawsystemislessadversarial
• Judgesdonotinterpretthelaw,butapplyit
• E.g.,Germany,France,Japan,Russia
3-5
TheLegalEnvironment
• Theocraticlaw– basedonreligiousteachings
• MostcommonisIslamiclaw
• Primarilyamoralratherthancommerciallaw
•
Inreality,oftenablendofIslamiclawandcommonorcivillawsystems
• E.g.,Pakistan,Egypt,Iran
3-6

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ContractLaw
• Contract
•
Adocumentthatspecifiestheconditionsunderwhichanexchangeisto
occur
anddetailstherightsandobligationsofthepartiesinvolved
• Differencesincontracts
• Commonlawsystems– detailed,contingenciesspelledout
• Civillawsystems– shorter,lessspecific
• Businessimplications
• Costsindraftingcontracts
• Flexibilityininterpretationbyjudgesandcourts
3-7
TrendsinLegalSystems

• Whatisthebasisofruleinacountry?
• Theruleofman
•
legalrightsderivefromtheindividualwhocommandsthepowertoimp
osethem
• associatedwithatotalitariansystem
• Theruleoflaw
•
systematicandobjectivelawsappliedbypublicofficialswhoarehelda
ccountablefor
theiradministration
• associatedwithademocraticsystem
3-8
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5

OperationalConcerns
• Operationalissues
• Startingabusiness
• Makingandenforcingcontracts
• Hiringandfiringlocalworkers
• Closingdownthebusiness
• Ingeneral
• richcountriesregulateless
• poorcountriesregulatemore
3-9
EaseofDoingBusiness
• Measuredas:startingabusiness,dealingwithconstructionpermits,
employingworkers,registeringproperty,gettingcredit,protecting
investors,payingtaxes,tradingacrossborders,andenforcingcontrac
ts
•
Easiestincountrieswith:democraticpoliticalsystems,commonorci
villaw
systems,ruleoflaw(e.g.,Singapore)
•
Mostdifficultincountrieswith:authoritarianpolitics,mixedlegalsys

tems,rule
ofman(e.g.,CentralAfricanRepublic)
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StrategicConcerns
pCountryCharacteristics
pCountryoforigin– productlabels
pLocalcontentrules– importtaxes
p“Buy-local”campaigns
pLegaljurisdiction
pChoice-of-law-clause:
specifieswhichcountry’slawswillgovernalegaldisputein
cross-nationalbusinessdealings
3-11

StrategicConcerns
pProductsafetyandliability
pProductsafetylaws:setsafetystandardstowhichaproduct
mustadhere
pProductliability:holdingafirmanditsofficersresponsible
whenaproductcausesinjury,death,ordamage
pLiabilitylawsarelikelymostextensiveintheU.S.,somewhatextensi
vein
otherWesterncountries,andleastextensiveinlessdevelopednations
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7
RightsandProtection
•
Intellectualpropertyreferstocreativeideas,expertise,orintangible

insightsthatgrantitsowneracompetitiveadvantage
• Intellectualpropertyrights refertotherighttocontrolandderive
thebenefitsfromwriting,inventions,processes,andidentifiers
• no“global” patent,trademarkorcopyrightexists
3-13
RightsandProtection
•Attitudestowardsintellectualproperty
• Historicallegacies
• ruleofmanversusruleoflaw
• Economiccircumstances
• levelsofeconomicdevelopment
• Culturalorientation
• individualismversuscollectivism
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1
International Trade
Learning objectives
! Understand how different approaches to international trade
theories help policy makers achieve economic objectives
! Comprehend the historical and current rationale for
interventionist trade theories
! Explain how free trade improves global efficiency
! Distinguish factors affecting national trade patterns
• Distinguish factors affecting national trade patterns
• Recognize why a country’s export capabilities are dynamic
• Detect why production factors, especially labor and capital,
move internationally
• Describe the relationship between foreign trade and
international factor mobility
Laissez-Faire vs. Intervention
• Trade theory helps answer

– What products should we import and export?
– How much should we trade?
– With whom should we trade?
• Laissez-faire approach
– Free trade theories – absolute advantage and comparative
advantage
• Intervention approach
– Mercantilism and neomercantilism
Theories of Trade Patterns
• Theories explore
• country size
• factor proportions
• country similarity
• Theories explore trade competitiveness
• Product life cycle
• Diamond of national advantage
Factor Mobility Theory
• A country’s competitiveness depends on

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Factor Mobility Theory
• A country’s competitiveness depends on
– quality and quantity of production factors
• Land
• Labor
• Capital
Interventionist Theories
• Theories that support government intervention in the flow of
trade
• Mercantilism
• Neomercantilism
Mercantilism
• Mercantilism countries should export more than they import
• Maintain a favorable balance of trade
• trade surplus
• Avoid an unfavorable balance of trade

• trade deficit
Neomercantilism
• Neomercantilism run an export surplus to achieve social or
political objectives
Free trade theories
• Two theories that support free trade
• Absolute advantage theory
• Comparative advantage theory
• Market forces should determine trade
• specialization
Theory of absolute advantage
• Theory of absolute advantage
• different countries produce some goods more efficiently than
others
• Free trade brings
• Specialization

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• Free trade brings
• Specialization
• natural advantage
• The more two countries’ natural advantages differ, the
more likely they will favor trade with one another
• acquired advantage
• product technology
• process technology
• Greater efficiency
• Higher global output
Theory of comparative advantage
• Theory of comparative advantage
• free trade can increase global output even if one country has
an absolute advantage in the production of all products
• Consider
• comparative advantage
• absolute disadvantage

Theories of Specialization: Assumptions and Limitations
• Theories of specialization make assumptions that may not be
valid
• full employment
• economic efficiency
• division of gains
• transport costs
• statics and dynamics
• services
• production networks
• mobility
New Trade Theory
• Countries specialize in the production and export of particular
products not because of underlying differences in factor
endowments
• Instead depends on first-mover advantages
– Because certain industries the world market can only
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• Instead depends on first-mover advantages
– Because certain industries the world market can only
support a limited amount of firms
• E.g., Boeing
How Much Does A Country Trade?
• Theory of country size
• large countries depend less on trade than small countries
• Large countries usually
• export a smaller portion of output and import a smaller part
of consumption
• have higher transportation costs for foreign trade
What Types of Products Does A Country Trade?
• Factor proportions theory
• factors in relative abundance are cheaper than factors that
are relatively scarce
• But
• production factors are not homogenous

• labor
• Process technology
• capital versus labor
Manufactured Products
• Manufacturing competitiveness depends on
– New technology, which requires skilled labor and capital to
invest in R&D
• These tend to be more abundant in industrialized countries
• Industrialized countries account for
– Most manufactured products
– Most new product development
With Whom Do Countries Trade?
• Country similarity theory
• most trade occurs among developed countries
• share similar market characteristics
• produce and consume much more than developing
countries

• Trading partners are affected by
• Cultural similarity
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