978-0134324838 Chapter 6 Solution Manual Part 2

Market economy

■ Market economies– decisions regarding production levels, consumption, investment,

and savings resulting from the interaction of supply and demand (market forces).

■ Economic decisions are left to individuals and firms.

Mixed economy

■ Mixed economy– exhibits market and command economy features, thus combining

state intervention and market mechanisms.

■ Most industries are under private ownership, and entrepreneurs freely establish, own,

and operate corporations- but the government also controls certain functions, such as

pension programs, labor regulation, minimum wage levels, and environmental

regulation.

6-11. What are the specific characteristics of democracy? How do these

characteristics facilitate international business?

Democracy

■ Democracy- become the prevailing political system in much of the world’s advanced

economies.

■ Two key features:

■ Private property rights: The ability to own property and assets and to increase one’s

 6-12. Describe the major types of legal systems. Which systems are most

widely encountered?

Visit MyManagementLab for suggested answers.

6-13. Who are the major actors in political and legal systems? Which participant

do you believe is most influential in international business?

■ Actors include government, which exists at the national, state, and municipal levels.

■ The World Trade Organization and the United Nations are typical of international

organizations that influence international business.

■ Regional organizations such as the European Union promote region-based trade.

6-14. Describe proactive actions that firms can take to minimize country risk.

Managing country risk:

■ Successful management requires developing an understanding of the political and

legal context abroad.

● APPLY YOUR UNDERSTANDING

6-15. Country risk refers to the ways governments restrict, or fail to restrict,

business activities. The nature of such restrictions varies around the world. In

each country, national economic success substantially depends on the quality of

laws and regulations. Government must strike the right balance – too little

regulation promotes uncertainty; too much causes hardship. Country risk is

revealed in various ways:

▪ Foreign investment laws

▪ Controls on operating forms and practices

▪ Environmental laws

▪ Contract laws

▪ E-commerce laws

▪ Underdeveloped legal systems

▪ Accounting and reporting laws

Conduct research online and give specific examples of each type of country risk.

Describe how each might help or hinder company activities.

■ Foreign Investment Laws

● These laws might hinder company activities because it imposes restrictions

such as ownership of businesses, forcing foreign companies to partner with a

local firm, and paying high taxes.

● Recently, Myanmar relaxed its foreign investment laws to attract foreign

● The new law allows foreign firms to lease land from the government for up to

50 years, and can be extended twice, good for 10 years with each extension.

■ Controls On Operating Forms and Practices

● In Indonesia, a public company must have three components consisting of

general meeting of shareholders, board of directors, and board of supervisors.

● This presents issues for foreign shareholders because they are not Indonesian

nationals.

oFor example, when an American company chooses to form a

oThis may cause the firm to not be as profitable as planned, and it

■ Environmental Laws

● Recently, China has posed stronger environmental laws on foreign firms; if the

firms do not stay ahead of the law, they may expose themselves to risks

involving their reputation and profits.

oIf a foreign firm needs to do any type of construction work, it must be

● Environmental laws may both hinder and help company activities.

oHinders: Firms must be aware and follow the environmental laws, or

■ Contract Laws

● In many countries where foreign companies do not receive the best legal

protection, the foreign company would be at risk when breaking a contract.

■ E-Commerce Laws

● Weak e-commerce laws and regulations may hinder a foreign company’s

activities.

■ Underdeveloped Legal Systems

● Countries with underdeveloped legal systems may also have weak intellectual

property rights protection.

● Weak intellectual property rights protection hinders company activities.

■ Accounting and Reporting Laws

● The differences in accounting and reporting laws around the world could

potentially hinder and/or help company activities.

oIn South Korea, research and development costs are capitalized instead of

expensed.

ADDITIONAL INFORMATION:

For business enterprises to thrive, some minimum conditions must be present,

including recognition of private property rights and limited government

intervention. To what extent may totalitarianism, socialism, and democracy

interfere with the ideal commercial environment for firms?

Totalitarianism Command economies ● Most government interference

● Least innovation

● Adverse commercial environment

Democracies cultivate the ideal commercial environment as democracy is characterized

by private property rights, individual freedom, consumer sovereignty, and limited

government.

■ Democratic governments devise laws that protect property rights. People and firms

■ Socialism occurs as communism or social democracy. Communism proved to be

ineffective for allocating resources and declined sharply with the collapse of the

Totalitarianism/Command economy (centrally planned economy)

■ The state is responsible for making all decisions:

◘ What goods and services the country produces

■The state owns all wealth, land, and capital, and allocates resources based on which

■ Command economies were common in the twentieth century; they proved so

■ Central planning is less efficient than market forces in synchronizing supply and

demand.

Examples– China, India, Russia, and certain countries in Central Asia, Eastern Europe,

and the Middle East.

Democracy/Capitalism/Market economy

■ Market economies– decisions regarding production levels, consumption, investment,

and savings resulting from the interaction of supply and demand (market forces).

Socialism/Mixed economy

■ Most industries are under private ownership, and entrepreneurs freely establish, own,

■ The state usually funds public education, health care, and other vital services and

■ Examples– France, Germany, Japan, Norway, Singapore, and Sweden,

■ The last century saw a substantial increase in the number of mixed economies and a

■ Governments in Europe, Japan, and North America imposed regulations for

6-16. Suppose you get a job at Aoki Corporation, a firm that manufactures glass

for industrial and consumer markets. Aoki is a large firm, but has little

international experience. Senior managers are considering a plan to move Aoki’s

manufacturing to China, Mexico, or Eastern Europe, and to begin selling its glass

in Latin America and Europe. However, they know little about the country risks

that Aoki may encounter. Describe how each of the following factors might

contribute to country risk as Aoki ventures abroad: foreign investment laws,

controls on operating forms and practices, and laws regarding repatriation of

income, environment, and contracts?

(LO 6.5; LO 6.6; LO 6.7; AACSB: Analytical Thinking)

Foreign investment laws

■ These laws affect the type of entry strategy firms choose, as well as their operations

and performance.

■ Foreign investment laws may restrict FDI.

■ Examples–

◘ Japan- daitenhoo (large-scale retail store law) restricted foreigners from

opening warehouse-style stores such as Wal-Mart or Toys“R”Us.

◘ Malaysia- firms that want to invest in local businesses must obtain permission

Controls on operating forms and practices

■ Governments impose laws and regulations on how firms should conduct production,

marketing, and distribution activities within their borders.

■ Example– China- huge telecommunications market, government requires foreign

investors to seek joint ventures with local firms; local operations cannot be wholly

owned by foreigners- this is to ensure that China maintains control of its

telecommunications industry and obtains inward transfer of technology, knowledge, and

capital.

Laws regarding income repatriation

■ MNEs earn profits in various countries and typically seek ways to transfer these funds

Environmental laws

■ Governments enact laws to preserve natural resources, combat pollution and the

abuse of air, earth, and water resources, and ensure health and safety.

■ Examples–

(4) FDI, especially where this is done in collaboration with a foreign entity, in

order to create and operate a foreign subsidiary; and

(5) Joint ventures and other types of cross-border collaborations.

■ Some convergence-1980- the United Nations instituted the Convention on Contracts

for the International Sale of Goods (CISG), a uniform text of law for international sales

contracts.

6-17. Ethical Dilemma:

The United States imposed a trade and investment embargo on Iran. U.S. citizens

were barred from doing business with Iran. Proponents argued the embargo was

justified because Iran has supported terrorism, is developing nuclear weapons,

and is a disruptive force in the Middle East. However, critics condemned the trade

sanctions for several reasons. First, they argued the sanctions represented a

double standard because the United States supports other countries that have

engaged in terrorism and other bad behaviors. Second, the best way to nurture

healthy dissent and civil society in Iran may be to engage the country rather than

restrict economic relationships. Third, the sanctions harmed the Iranian people,

who were deprived of the benefits of trade with the United States. Fourth, the

sanctions were largely ineffective because other countries supply Iran with

products it needs. Finally, the sanctions harmed U.S. companies, especially oil

and gas firms, which were prevented from doing business with Iran. What is your

view? Using the Ethical Framework in Chapter 4, analyze the arguments for and

against trade with Iran. Can the United States, acting alone, compel desired

changes in Iran by imposing sanctions? Justify your answer

■ Framework for making ethical decisions consists of five steps:

1. Identify the problem

2. Examine the facts

3. Create alternatives

Evaluate each proposed action to assess its consistency with accepted

ethical standards, using the approaches described earlier:

4. Implement course of action

5. Evaluate results

A FRAMEWORK FOR MAKING ETHICAL DECISIONS [Chapter 4]

1. Identify the problem

The United States imposed a trade and investment embargo on Iran. U.S. citizens were

2. Examine the facts

Critics:

◘ First, they argue the sanctions represent a “double standard,” as the United

States supports other countries that have engaged in terrorism and other bad

behaviors.

3. Create alternatives

■ The United States imposed trade and investment embargo on Iran has certain

negative effects on the Iranian people. Supporters of the embargo argue that it is

justified because Iran harbors terrorists and is developing nuclear weapons. However,

most Iranians are law-abiding, good citizens who only wish to live out their lives in

■ The fact that Iran has been known to harbor terrorists who have attacked the United

■ If the trade embargo were lifted, this would alleviate the burden on U.S. oil and gas

■ The U.S. government may have had its own citizen’s best interests at heart with the

imposition of the embargo and the not the interests of Iran- and some would argue, why

should Iran’s interests supersede those of America? The removal of this embargo would

Utilitarian – which action results in the greatest good and least harm?

Rights – which action respects the rights of everyone involved?

Fairness – which action treats people most fairly?

Common Good – which action contributes most to the overall quality of life of

the people affected?

Virtue – which action embodies the character strengths that you value?

4. Implement course of action

Implement your decision.

5. Evaluate results

Which underscores the most important message that the U.S. wants to send to the

world? Terrorism is rampant in the Middle East. Can the U.S. feasibly levy an embargo

against every country that harbors terrorists? Which alternative fosters future

partnerships, peace and harmony? Most decisions have both positive and negative

outcomes. What is paramount in this situation- economic, political, or societal agenda?

In the end, we may have to accept this less than perfect decision, as some would argue

that it is more important to stand for something than to jeopardize our principles.

● GlobalEDGE™ INTERNET EXERCISES http://globaledge.msu.edu

6-18. Supranational organizations such as the World Bank (www.worldbank.org)

and the World Trade Organization (www.wto.org) oversee much of the legal

framework within which the world trading system operates. Political frameworks

for industries or country groupings are influenced by organizations such as the

Organization of Petroleum Exporting Countries (www.opec.org) and the

Organisation for Economic Co-operation and Development (www.oecd.org).

Using globalEDGE™ and the online portals cited here, address the following

question: What is the goal of each organization, and how does it go about

achieving its goal? By viewing the news and press releases at each Web site,

summarize the latest initiatives of each organization.

World Bank

The main goal of the World Bank (based in Washington DC) is global poverty reduction

and the improvement of living standards in poor countries throughout the world. The

Bank’s two major units are the International Bank of Reconstruction and Development

(IBRD) and the International Development Bank (IDB). The IBRD’s role is to reduce

World Trade Organization

161 members as of 26 April 2015

The primary goal of the World Trade Organization (WTO), based in Geneva,

Switzerland, is to facilitate the free, fair, and smooth flow of international trade among

system among countries, the WTO’s strategy for achieving its goal is multifaceted. For

example, it administers trade agreements, acts as a forum for trade negotiations, settles

trade disputes, reviews national trade policies, assists developing countries in trade

policy issues via technical assistance and training programs, and cooperates with other

international organizations that influence international business.