July 16, 2007 Second Discussion Section: Culture & Ethics; International Trade

Agenda
Chapters 1, 2 in a Nutshell
Review Chapters 3 and 4 Discussion 1: Selling Dominos Pizza Worldwide Review Chapters 5 and 6 Discussion 2: Boeing v. Airbus

Chapters 1 and 2
Chapter 1: What is globalization? What is driving globalization? What are the trends in globalization? What are the debates about globalization? Chapter 2: How are countries different: politically, economically, legally? What are the factors leading to economic development?

How to measure economic development Protection of property rights + Innovation? What about the legal and political systems of the country?

Chapter 3: Differences in Culture

What is Culture? Values and Norms Culture, Society, and the Nation-State The Determinants of Culture Social Structure Individuals and Groups Social Stratification Religious and Ethical Systems Language Culture and the Workplace Hofstede study

Power distance; individualism vs. collectivism; uncertainty avoidance; masculinity vs. femininity

Chapter 3: Critical Thinking

Outline why the culture of a country might influence

the costs of doing business in that country. Illustrate your answer with examples.

Case: Selling Dominos Pizza Worldwide

View video presentation
Additional videos: U.S. Pizza Hut Commercial http://www.youtube.com/watch?v=xEqHOETejjU U.S. Dominos Pizza Commercial http://www.youtube.com/watch?v=MxR3CKzXm_s

Dominos Discussion Questions

1. Dominos has successfully grown its international

presence very quickly. Compare and contrast its strategy with that of another well-known international fast food operation, McDonalds. What similarities do you see? Are they any significant differences between the two companies? What has led to the success of Dominos?

Dominos Discussion Questions

2. Dominos owes its rapid expansion into foreign

markets to its franchisees. Consider the companys franchising strategy. How does Dominos ensure that its corporate values and strategies are adopted by the franchise operations?

Dominos Discussion Questions

3. While its pizza appears to be universally accepted,

Dominos has had to make some adjustments to its marketing mix. Discuss the different components in the marketing mix and how the company has responded to local needs.

Dominos Discussion Questions

4. Dominos made some significant changes to its

Mexican operation in the late 1990s. Discuss Dominos efforts there, the economic risk the company was facing, and the strategies it used. Is Dominos current strategy viable in the long-term? Why or why not?

Chapter 4: Ethics in International Business

Ethical issues in International Business Employment Practices; Human Rights; Environmental Pollution; Corruption; Moral obligations Ethical Dilemmas What are they? The Roots of Unethical Behavior How do they arise? Philosophical Approaches to Ethics Straw Men

Friedman Doctrine; Cultural Relativism; Righteous Moralist; Nave Immoralist

Utilitarian and Kantian Ethics Rights Theories Justice Theories

Ethical Decision Making Hiring and Promotion; Organization Culture and Leadership; Decision-Making Processes; Ethics Officers; Moral Courage

Etch-A-Sketch Case
Was it ethical of the Ohio Art Company to move

production to China? What were the economic and social costs and benefits of this decision? What would have happened if production had not been moved?

Etch-A-Sketch Case
Assuming that the description of working conditions

given in The New York Times is correct, is it ethical for the Ohio Art Company to continue using Kin Ki to manufacture Etch-A-Sketch toys?

Etch-A-Sketch Case
Is it possible, as Mr. Killgallon claims, that the Ohio

Art Company had no knowledge of labor problems at Kin Ki? Do you think company executives had any knowledge of the working conditions?

Etch-A-Sketch Case
What steps can executives at the Ohio Art Company

take to make sure that they do not find the company profiled in The New York Times again as an enterprise that benefits from sweatshop labor?

Chapter 5: International Trade Theory

An Overview of Trade Theory Mercantilism Absolute Advantage (Adams Smith) Comparative Advantage (David Ricardo)

The Gains from Trade/Qualifications and Assumptions Simple Extensions of the Ricardian Model

Heckscher-Ohlin Theory The Leontief Paradox The Product Life-Cycle Theory (Raymond Vernon) Evaluating the Product Life-Cycle Theory New Trade Theory (1970s economists) Increasing Product Variety and Reducing Costs Economies of Scale, First-Mover Advantages and the Pattern of Trade Implications of New Trade Theory National Competitive Advantage: Porters Diamond Factor Endowments Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry Evaluating Porters Theory

Critical Thinking Questions

What are some potential costs of adopting a free trade

regime? Do you think governments should do anything to reduce these costs? What?

Critical Thinking Questions

The worlds poorest countries are at a competitive

disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interest of such nations! Discuss.

Chapter 6: The Political Economy of International Trade

Instruments of Trade Policy Tariffs Subsidies Import Quotas and Voluntary Export Restraints Local Content Requirements/ Administrative Policies Antidumping Policies The Case for Government Intervention Political Arguments for Intervention

Protecting jobs and industries; national security; retaliation; protecting consumers; furthering foreign policy objectives; protecting human rights

Economic Arguments for Intervention The infant industry argument; strategy trade policy

The Revised Case for Free Trade (or, counter-arguments to the case for government intervention)
Retaliation and Trade War Domestic Politics

Development of the World Trading System From Smith to the Great Depression 19471979: GATT, Trade Liberalization, and Economic Growth 19801993: Protectionist Trend The Uruguay Round and the World Trade Organization WTO: Experience to Date The Future of the WTO: Unresolved Issues and the Doha Round

Boeing versus Airbus

Boeing 787 Dreamliner http://www.youtube.com/watch?v=JRbV6lZsaE0 Airbus A380 http://www.youtube.com/watch?v=AK10MxtCAHc

Subsidy Dogfight: Boeing v. Airbus

What are the facts?
Boeings development of Boeing 7E7 (now 787), which

promises as much as 20% reduction in operating costs Alliance with three Japanese companies 1992 Agreement limits state aid that both companies can receive from respective governments Does 1992 Agreement extend to other parties in the project? Japanese MET? State of Washington and Kansas Airbus applies for launch aid for A350, direct competitor to 787 Dispute now before WTO as to the legality of the various subsidies

Boeing v. Airbus
Boeings Claim
Airbus receives subsidies from UK, France, German and Spain

Why is this bad? $13.5 billion government subsidies between 1970 and 1990 ($25.9 billion if commercial interest rates applied) Loans at below market interest rates and tax breaks Airbus is believed to have financed 80% of the cost of aircraft for a term of 8 to 10 years at an annual interest rate of approximately 7% In contrast, US Export Import Bank required 20% down payments from Boeing customers, financed only 40% of the cost of an aircraft directly, and guaranteed financing of the remaining 40% by private banks at an average interest rate to 8.5 for 10 years Airbus received government $3.7 billion launch aid and $2.8 billion in indirect subsidies for the development of the A380 superjumbo and need not repay the aid if the aircraft is not a commercial success Catalyst for latest dispute: launch aid for A350, direct competitor to B787 ($700 million by UK, 30% launch aid from EU)

Boeing v. Airbus
Airbus claims
Airbus success due not to subsidies but to good products and strategy Boeing benefited from US government aid for a long time Planes were built under government WWI, WWII. Boeing 707, for

example, was subsidized by the US government 1991 EC study contended that Boeing/McDonnell Douglas received $18 to $22 billion in indirect aid between 1976 and 1990. US Dept of Defense gave as much as $6.34 billion from 1976 to 1990, and NASA gave $8 billion to commercial aircraft production. Moreover, tax exemptions gave an addition $1.7 billion to Boeing and $1.4 billion to MD Boeing rejected these claims, saying no additional 5% for commercial work for every defense contract; only 3% of Boeings R&D from Department of Defense, and only 4% from NASA funding Airbus contends: Boeing received some $12 billion from NASA to develop technology, much of it found its way to commercial jet aircraft Airbus further contends: Boeing would receive as much as $3.2 billion in tax breaks from Washington, $1 billion in loans from the Japanese government

Boeing v. Airbus
How might the repayable launch aid for Airbus change

its decision making on launching a new aircraft? What are the potential consequences for (a) Boeing, (b) airlines, and (c) the profitability of both Boeing and Airbus?

Boeing v. Airbus
When Airbus originally received government aid back

in the 1960s, it was a new enterprise. Today it is the global market share leader in the commercial aerospace business. How do gains in market share effect the legitimacy of claims for subsidies?

Boeing v. Airbus
Do you think that R&D contracts from NASA and the

Pentagon benefit Boeings commercial aerospace business? How?

Boeing v. Airbus
If the EU does file a complaint with the WTO

protesting Japanese launch aid on the Boeing 787 aircraft, how might the Japanese retaliate? Given this, what should Airbus urge the EU to do?

Boeing v. Airbus
At this point, what do you think is the most equitable

solution to the long running battle between the US and EU on subsidies for commercial aircraft development?

Boeing v. Airbus
Application of Concepts/Instruments learned in class

What are some examples of instruments of trade policy in

the aviation industry?

Tariffs

Russia levies a 20% tariff on imported aircraft

Ad valorem Subsidies

Cash grants (e.g., launch aid) Low-interest loans (e.g., 7% versus 8.5% interest) Government equity participation (early version of Airbus consortium)
E.g., if U.S. limited number of allowable importation of foreign aircraft to 100 per decade E.g., if EC limits sale of Airbus aircraft to 100 per decade to the U.S.

Quotas

Voluntary Export Restriction

Local Content Administrative Policies

Boeing v. Airbus
Application of concepts learned in class

Political Arguments for Intervention Protecting jobs and industries National security Retaliation Protecting consumers Economic Arguments for Intervention Infant Industry Strategy trade policy