July 16, 2007Second Discussion Section:

Culture & Ethics; International Trade

AgendaChapters 1, 2 in a Nutshell Review Chapters 3 and 4Discussion 1:

Selling Domino’s Pizza WorldwideReview Chapters 5 and 6Discussion 2:

Boeing v. Airbus

Chapters 1 and 2Chapter 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 CultureWhat is Culture?

Values and NormsCulture, Society, and the Nation-StateThe Determinants of Culture

Social StructureIndividuals and GroupsSocial Stratification

Religious and Ethical SystemsLanguageCulture and the Workplace

Hofstede study Power distance; individualism vs. collectivism;

uncertainty avoidance; masculinity vs. femininity

Chapter 3: Critical ThinkingOutline why the culture of a country might

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

Case: Selling Domino’s Pizza WorldwideView video presentationAdditional videos:U.S. Pizza Hut Commercial

http://www.youtube.com/watch?v=xEqHOETejjU

U.S. Domino’s Pizza Commercialhttp://www.youtube.com/watch?v=MxR3CKzX

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Domino’s Discussion Questions1. Domino’s has successfully grown its

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

Domino’s Discussion Questions2. Domino’s owes its rapid expansion into

foreign markets to its franchisees. Consider the company’s franchising strategy. How does Domino’s ensure that its corporate values and strategies are adopted by the franchise operations?

Domino’s Discussion Questions3. While its pizza appears to be universally

accepted, Domino’s 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.

Domino’s Discussion Questions4. Domino’s made some significant changes

to its Mexican operation in the late 1990s. Discuss Domino’s efforts there, the economic risk the company was facing, and the strategies it used. Is Domino’s 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; Naïve 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 CaseWas 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 CaseAssuming 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 CaseIs 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 CaseWhat 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 (1970’s 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: Porter’s Diamond Factor Endowments Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry Evaluating Porter’s Theory

Critical Thinking QuestionsWhat are some potential costs of adopting a

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

Critical Thinking QuestionsThe world’s 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 1947–1979: GATT, Trade

Liberalization, and Economic Growth 1980–1993: 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 AirbusBoeing 787 Dreamliner

http://www.youtube.com/watch?v=JRbV6lZsaE0

Airbus A380http://www.youtube.com/watch?v=AK10MxtCA

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Subsidy Dogfight: Boeing v. AirbusWhat are the facts?

Boeing’s development of Boeing 7E7 (now 787), which promises as much as 20% reduction in operating costs

Alliance with three Japanese companies1992 Agreement limits state aid that both

companies can receive from respective governmentsDoes 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. AirbusBoeing’s 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 B-787 ($700 million by UK, 30% launch aid from EU)

Boeing v. AirbusAirbus’ 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 Boeing’s 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. AirbusHow 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. AirbusWhen 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. AirbusDo you think that R&D contracts from NASA

and the Pentagon benefit Boeing’s commercial aerospace business? How?

Boeing v. AirbusIf 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. AirbusAt 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. AirbusApplication of Concepts/Instruments learned in classWhat are some examples of instruments of trade

policy in the aviation industry?Tariffs

Russia levies a 20% tariff on imported aircraftAd valoremSubsidies

Cash grants (e.g., launch aid) Low-interest loans (e.g., 7% versus 8.5% interest) Government equity participation (early version of Airbus

consortium)Quotas

E.g., if U.S. limited number of allowable importation of foreign aircraft to 100 per decade

Voluntary Export Restriction E.g., if EC limits sale of Airbus aircraft to 100 per decade to

the U.S.Local ContentAdministrative Policies

Boeing v. AirbusApplication of concepts learned in class

Political Arguments for InterventionProtecting jobs and industriesNational securityRetaliationProtecting consumers

Economic Arguments for InterventionInfant IndustryStrategy trade policy