CHAPTER 2

ANSWERS TO QUESTIONS FOR DISCUSSION

2.1 What are the benefits arising from international trade? Are they the same for
industrial goods as for consumer goods? What costs to consumers arise from
international trade?

The major potential benefits are lower prices and an increased variety and supply of goods from
which to choose. For the most part, these benefits are the same for industrial goods as they are
for consumer goods. The import of consumer goods has a direct effect; the import of industrial
goods results in lower domestic production costs and/or better products and/or the acquisition of
new technology thereby benefiting the consumer indirectly. Consumers in the country of export
may also benefit to the extent that domestic firms that export can generate economies of scale
in production, which can then be passed on to domestic buyers in the form of lower prices.

If exported products are in short supply relative to demand, then market prices in the producing
country may be driven higher.

2.2 Discuss how exports and imports help to increase productivity and efficiency.

Briefly, exports and imports lead to increased international specialization, with the most efficient
industries in each country tending to increase their output, thereby gaining economies of scale.
The transfer of technology, including the importation of new equipment and systems, also leads
to improved productivity.
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2.3 The productivities of factor inputs with respect to different products are determined
by a combination of natural and acquired advantages. Is the productivity of the
Japanese due primarily to natural or acquired advantages? How about the French or
the Chinese? Explain.

Japan is not exceptionally well endowed with the natural resources of mineral wealth, soil, and
climate. Until recently, it was also short of capital. The high level of productivity of the Japanese,
therefore, must be due to the acquired advantages of knowledge, skills and techniques. France
is better endowed with the factors of production so some advantages have been natural.
However, there has also been substantial acquisition in the form of learning of how to use the
factors available and in developing products that are less natural-resource-dependent. China
has extensive natural resources but is less rich in most of these, on a per capita basis, than
France. In its current economic development efforts, it is relying heavily on improving the skills
and motivation of its people and on the acquisition of technology. In the end, all advantages due
to managerial know-how and overall human resources are, in fact, acquired advantages.

2.4 (a) Briefly explain the different types of economic advantage for two countries, A and B,
each able to produce two products, X and Y, and discuss the conditions for trade to
be advantageous (assuming no transaction costs). (b) How is it possible for an
individual business firm to have a comparative advantage?

(a) If A can produce X more cheaply than B can produce X, and B can produce Y more cheaply
than A can produce Y, we have a case of absolute advantage.

If A can produce both X and Y more cheaply than B can produce X and Y, but A has a
proportionally greater cost advantage over B in producing X, it is a case of comparative
advantage.

If A can produce both X and Y more cheaply than B can produce X and Y, and the ratios of
As advantages are the same for both products (say, for example, A can produce each of the
products at exactly half of the cost that B can produce them), it is a case of equal advantage
or equal differences.

Trade is advantageous under conditions of absolute and comparative advantage, but not
under conditions of equal advantage/differences.

(b) An individual business firm can have a comparative advantage in much the same way as a
nation. But, this would apply to a multi-product company. If at least two of the products of
this company were in demand at home and in a foreign country, and there was a company
in the other country making the same products, relative cost differences could lead to a
situation of comparative advantage. This could lead to a potential trading relationship if the
products were relatively homogeneous and branding was not an important attribute.

2.5 Find an example of a country that is exporting a product for which it has an absolute
disadvantage with a trading partner but where there is a comparative advantage.
Explain the nature of this relationship.

Students answers will vary. One example the instructor could use would be the export of
machine tools from China to the United States. In labor hours per unit of production of both
standard machine tools and technically advanced machine tools, production in China is more
costly. But the difference in the cost of producing technically advanced machine tools in China is
relatively much higher than the cost of producing standard machine tools. Since the overall low
level of productivity in China results in low wages relative to the US, China is able to export
standard machine tools to the US while importing technically advanced machine tools from the US.

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2.6 Explain the product life-cycle concept as it relates to international trade and
investment. What does the concept mean to the individual firm?

As a product goes through its life cycle of introduction, growth, maturity, and decline, the
location where it is most advantageous to produce the product tends to shift. In the introductory
phase, the advantage is in the country of introduction (usually an economically developed
nation), with rapid change and market uncertainties allowing high profit margins and dictating
small-scale production. As output grows, exporting becomes possible. As the life cycle changes
from growth to maturity, lower costs become a greater concern and production tends to shift to
other consuming nations and/or lower labor-cost areas. Eventually, the country of origin may
even import the product from a low labor-cost area.

The way in which the product life cycle affects a companys export product mix is discussed in
Chapter 9. At this point, it is sufficient to say that a companys product (i.e., its brand of the
product) goes through such a cycle over time. Moreover, the product itself may be in different
stages in different foreign markets. A company will find it difficult to manage a product in
different stages of the cycle. Thus, the stage of a product in a foreign market may influence a
company's decision to market it in that country.

2.7 Export motives may be classified as internal or external, and reactive or proactive.
What is meant by these terms with respect to export marketing? Give examples of
each of the combinations of export motives.

Internal motives are those that arise from stimuli within the firm, while external motives are
those that arise from stimuli outside the firm. Reactive motives are those that arise simply in
response to some occurrence in the environment, while proactive motives arise from the
executives actively seeking new opportunities.

A decision to actively seek economies of scale by opening new markets overseas would
represent proactive motives generated internally. A decision to undertake additional foreign
marketing activities as a result of opportunities coming to their attention from outside would be
classed as proactive, external. A decision to undertake activities in order to avoid risks in
marketing only domestically would be classed as reactive, internal. Simply responding to
unsolicited orders from overseas would be reactive, external.

Depending upon the circumstances, a particular action may be motivated by differing

combinations, but understanding the classification scheme helps one understand how a
particular company is motivated.

Students examples will differ.

2.8 Why might some companies be willing to undertake new or additional international
and export marketing even though it apparently offers only similar (or even lower)
levels of profitability?

The companies see offsetting advantages in increased stability of sales and/or profits,
diversification of risk, greater growth opportunities, outlets for excess production, or the need to
protect existing overseas markets from new government restrictions.

2.9 What is meant by a change agent in export marketing? Give examples of each type
of change agent.

A change agent in export marketing is some organization external to the company that
encourages and assists the company in starting or expanding international marketing activities.
Government agencies, trade associations, etc., may be active in this area. Other companies,
such as export agents and foreign importers, may also do this.

Examples of change agents will vary.

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2.10 How can a company determine how internationalized it is? Explain.

A company may gain some evaluation of how internationalized it is through use of a number of
different measures.

Quantitative measures include the number of countries in which a company is doing business;
foreign assets, sales, or profits; the number of employees overseas; etc. These may be stated
either in absolute terms, or as percentages of the same factors for domestic operations.

Qualitative measures that are very difficult to measure might include top managements
international orientation and its commitment to international marketing, or how decisions are
made regarding sourcing and market penetration.

Exhibit 1.1 in Chapter 1 provided one specific approach.

2.11 Find an example of a company that has expanded its export/international marketing
activity, or started such activity, and determine the companys objectives for doing
so and the results achieved.

If the student does not have personal knowledge of any such company, he or she can find
examples in business periodicals. The instructor might draw examples from Case 1.4,
DaimlerChrysler. Toyota undertook exporting because the Japanese market was too small to
provide the level of sales and profits they wanted. They began manufacturing overseas because
of trade barriers in the US and European markets. They have succeeded very well, now earning
the greatest profits of any Japanese company. The actions of Mercedes-Benz, its reasons for
acquiring Chrysler, and the resulting problems are discussed at some length in the case.

2.12 How can a company make operational use of the network model and relationship
marketing in planning and implementing international marketing programs?

Selecting suppliers and distributors is a part of planning and implementing marketing programs.
Relationship marketing emphasizes the building of lasting relationships or informal partnerships,
often with substantial sharing of information, with suppliers and distributors. The objectives are
to reduce transaction costs, and to work cooperatively with others in the value chain to improve
quality and responsiveness and lower costs. An assumption is that the value of such
cooperation will more than offset the advantages of short- term competition over cost and quality
between possible suppliers.

The network model portrays the relationships between the various partners as a set of networks
that may be global in nature, and may be grouped by geographical areas, products, techniques, etc.

When a company recognizes the existence and importance of networks of business

relationships in particular industries and regions, it is in a position to identify and expand its own
position and relationships through international expansion into nets new to the firm, penetration
by developing existing positions, and international integration by increasing coordination
between its positions in different national nets. Increased and improved relationships facilitate
the gathering of information, the development of useful contacts with others that control or can
facilitate access to needed resources (including, for example, marketing channels and
government approval agencies), and the building of personal confidence.

2.13 There are many who believe that whatever is legal is ethical. Do you agree with this
belief as it might apply to the international marketer? Explain your position and give
examples of behavior in the global marketplace that would support your position.

The position that what is legal may not be ethical is probably easier to defend. Nestles
promotion of baby formula in areas where it was not properly used was legal but considered

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unethical by many people. Activities resulting in serious contamination of the environment are
legal in a number of countries, both less economically developed and more developed, but is
considered unethical by many people. High-pressure tactics to sell unneeded or harmful
products to children or the aged may be legal in some countries but are still viewed as unethical
by many people even in those countries.

2.14 Is being right or wrong about moral issues in international marketing activities an
absolute or is it relative? Explain.

It is relative; that is, deciding whether some action is right or wrong depends upon the
individual marketer, the host society, and the marketers home society. Small (or even large)
bribes are considered right (or even required) in some societies, while considered morally wrong
by some people and perhaps illegal under home country laws. Attempting to provide equal
employment opportunity to women is some countries would be both wrong and illegal to the
host society but perhaps considered morally right by a marketer from another society.

2.15 With what particular issues must international marketers be concerned? Explain.

The ethical and moral issues with which international marketers must be concerned include the
following: safety and effectiveness of the product; market entry and expansion methods should
conform to local and home country values; advertising and promotion should be honest and
activities of sales personnel monitored; prices should be set at a level viewed as fair; and
customers, employees, and suppliers should all be treated in a manner that is viewed as fair.

2.16 Are traditional views about the goals of business the same in Britain, the United
States, and the continental western European countries? If not, how do they differ?

They differ. Traditional British and the US views held that the primary goal of business
organizations was to maximize profits/returns to the stockholders/owners. In much of continental
Europe, business was believed to have much broader obligations including responsibilities
toward customers, employees, suppliers, and society as a whole. In the US a more broad view
of corporate responsibility is developing but it is still far from many of the views in Europe.

2.17 In general, are businesses becoming more or less sensitive to social responsibility
issues? Why?

Businesses are becoming more sensitive to social responsibility issues because of growing
awareness of environmental and product problems, activities of public interest groups, lawsuits
(particularly in the US), some proactive companies, and the possibility that issues related to
apparent failures of businesses to meet social responsibility needs may result in additional laws
or regulations affecting business.

ANSWERS TO CASE QUESTIONS

2.1 Bridgestone Corporation
1. What appears to have caused delays by Firestone in recognizing and responding to
the problem with the tires?

The delays appear to have been caused by a combination of factors:

a Though customer-return data was collected for each model of tire by the line on which it
was produced, and should have allowed the company to spot the problem quickly, the
companys computer information system did not produce the required information quickly or
in a form which facilitated analysis.

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b Information from engineering was not exchanged with the marketing group, delaying
identification of the problem.

c No system for reporting problems of this type, or for taking action, was in place.

d The president of Firestone did not consider the problem serious, and delayed sending
information to Bridgestone (possibly because he did not want to embarrass the subsidiary
or himself).

e The president of the parent company in Japan did not realize the seriousness of the
problem, and thought that the subsidiary should solve it.

2. Why was the response of the company not adequate to satisfy the US public and
government?

Both Firestone and Bridgestone used approaches that have traditionally been satisfactory in
Japan: deny the problem as long as possible, and if that does not work, offer an apology. In
Japan, individuals typically have not brought lawsuits against companies in such situations and
the government has not taken strong action against the companies. Exhibit 3.9 in Chapter 3
provides more information about legal practices, businessgovernment relations, and views of
social responsibility in Japan and the US.

In the US, Firestone did have to defend itself in court against lawsuits, and settled many quietly.
But it did not realize that such a furor could erupt over the defective tires when the press
publicized the problems, lawyers and individuals saw opportunities for more lawsuits, and the
US government started a serious investigation. That is, neither the subsidiary nor the parent had
an adequate understanding of the American social, legal, and political environments.

3. Should a company apply the ethical, behavioral, and legal standards of the home
country or host country in its overseas operations?

Students can be expected to have a variety of viewpoints on this.

At a minimum, the company must conform to the laws of the country in which it is operating, as
well as the laws of the host country which apply to overseas operations. The company should
also try to meet the ethical and behavioral standards of both. In some instances, there may be a
conflict between the two. Cases in point would be: Scandinavian countries prohibiting
discrimination against women in employment while some Middle Eastern countries prohibit
women working certain positions or in jobs where they will be in contact with men; US law
prohibiting the payment of bribes to government officials while such payments are expected in a
number of countries. In all overseas operations, companies must be fully aware of and be
sensitive to laws and customs, and the likely consequences of actions they may take.

4. In your view, and given the time frames indicated in the case, did Ford act as quickly
as it should?

Students can be expected to have a variety of opinions on this. Depending upon the
composition of the class, some will probably defend the company while others will indicate that it
was too slow. Those defending the company might point out that it did recall tires in places
where it appeared that high temperatures might make them unsafe, that many of the problems
in the US may have involved incorrect actions by drivers (under-inflated tires or other actions),
that the tire problems were Firestones responsibility, and that the company pushed Firestone to
make better analyses of potential problems, and that the Ford Explorer had a much-better-than-
average safety record even with Firestone tires. Those who blame the company may note that
the Ford Explorer should have been better designed, that the recommended tire pressure might
have been too low, and that the tire chosen as standard equipment was not of an optimum size.

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The discussion should bring out the fact that different conclusions may be drawn from the same
facts, particularly in social responsibility and ethical issues.

5. Given what is known at this point in time, should the US government have required
that new cars must have tire pressure warning systems?

Students may have varying viewpoints on this, some stressing that it is the governments
responsibility to ensure the highest possible level of safety. Others may argue that the extent of
the problem is not known (sizes and uses of tires where it is important), that the government is
overstepping its role in continually pushing for new equipment to improve safety when some of
this equipment has had unanticipated adverse effect (cars equipped with antilock braking
systems apparently have higher accident rates then cars without the system because drivers
use less caution when they feel safer; airbags have saved many lives but have also proved
dangerous to children and frail persons), and/or that costs will be driven up.

6. What ethical issues arose surrounding the situation in Venezuela?

Ford recognized a problem in the Middle East and recalled tires there in 1999. In February
2000, it recalled tires in Thailand and Malaysia. It did not recall tires in Venezuela until May 2000.
If Ford and/or Firestone recognized that there was likely a serious problem that would also apply
to the tires made in Venezuela and used in Latin America, they should have made an immediate
recall. It is not clear from the case when the problems with the Venezuelan-made tires became
apparent. The Venezuelan government apparently believed that the companies knew about the
problems and did not take action when they should have.

Little has been said in the case about the political, legal, and social environment in Venezuela,
or the details of the recall there. This would be an interesting topic for the students to research,
but is beyond what is covered in the case.

2.2 GlaxoSmithKline
1. Are the present pricing policies of the major pharmaceutical companies ethically
justifiable? Explain your view.

Students can be expected to have different views.

Some can be expected to argue that the prices are ethical because they support the
development of new drugs that are needed to combat diseases, and that price controls would
reduce research and development. In the long run, people everywhere would suffer. It appears
from the comments in the case that R&D work is being shifted from the EU (where prices are
regulated) to the US (where prices are not regulated). They may argue further that having the
government conduct drug research and development would likely not be as efficient or effective
as relying on private R&D under a free market.

Others can be expected to argue that drug companies earn excessive profits, that they spend
excessive amounts on marketing, and sometimes promote expensive but not fully effective
drugs.

2. Are companies in less developed countries ethically justified in producing and

selling generic copies of patented drugs without obtaining the permission (and
paying) the patent holders? Explain your answer.

Students can be expected to have different views.

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Some will argue that the needs of the people in the country who cannot afford the prices
charged by the patent holders justify making unauthorized generic copies. The laws in some
less economically developed countries allow such action. This is a legal rather than an ethical
argument, but may be supported by ethical arguments based on human need. The principles of
utilitarianism, rights, and justice may all be applied, but may be interpreted differently and may
not give consistent results.

Others can be expected to argue that the rights of the patent holders should be upheld in order
to support the research and development which has led to the current drugs and can be
expected to lead to additional drugs. If it were not for the higher prices supported by the patent
system, we likely would not have the AIDS drugs available today.

A third approach would be to examine marginal costing, and see if drugs could be supplied by
patent holders to poorer nations or poorer people who cannot otherwise buy the drugs at lower
than full costs, but costs greater than the marginal cost of production. It would be hard to
calculate the actual costs, and perhaps even more difficult to set up a system to determine who
should get lower prices and who should pay more.

3. With Americans paying substantially higher prices for prescription drugs than
people in other countries, are US consumers unjustifiably having to subsidize the
development and sales of drugs to people in other countries?

Viewpoints will differ. On one hand, due to the higher level of affluence in the US compared to
less economically developed countries, it is perhaps reasonable for US consumers to subsidize
these countries in drug availability. On the other hand, it may be viewed as unfair that other
developed economies, such as those in Europe do not pay the same prices and thus bear the
same portion of R&D costs.

It can be argued that, solely from a financial point of view, US consumers are unfairly treated,
but the social benefit may justify the cost. Finally, insofar as prices actually paid by customers in
other countries exceed the total manufacturing and marketing costs, they do provide funds
available for R&D and profits.

4. Is the selling of drugs abroad at lower prices than in the United States actually a
case of dumping? If not, why not? If so, why do other countries force dumping of
pharmaceuticals when they try to stop dumping of steel?

There are two definitions of dumping: one is selling something below full cost (including both
fixed and variable costs); the other is selling something below what it is sold for in the country of
manufacture. The selling of pharmaceuticals abroad at lower prices than in the US probably
meets both definitions (if you include R&D costs). What makes dumping attractive to the seller
is the opportunity to sell additional amounts of the product, without taking away domestic sales
at full price, at a lower price that still exceeds the variable costs. This helps cover the variable
costs and contribute to total profits.

Countries try to stop the dumping of products that they also make in their own country, like steel,
in order to protect domestic producers. In the case of pharmaceuticals, even if they do produce
the drugs locally, the overriding concern is the welfare of the domestic population (or the costs
to portions of the government-supported medical system).

Countries seldom worry about the dumping into their country of goods they do not make
domestically. This just lowers their costs/improves the terms of trade.

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5. Is advertising by pharmaceutical companies socially desirable?

From the companies standpoint, the purpose of advertising is to acquaint potential consumers
with the product and to encourage them to buy it. From societys standpoint, the purpose of
advertising should be to provide product information to consumers or potential consumers for
making educated purchasing decisions. Without advertising, the awareness of new and existing
useful products would be limited to the publics detriment. Thus, advertisements containing
ethical, non-misleading information have a social value.

Arguments against some of the advertising being done by pharmaceutical companies come
largely from the following:
(1) The inaccuracy of information contained in some/many advertisements.
(2) The promotion of equally or less effective but higher priced drugs.
(3) The high costs that add to the overall cost structure of developing and selling drugs.
(4) The pressure put on doctors by patients who are convinced of the truth of the
advertisements but who have limited medical knowledge about the effects of the drugs.

6. What policies should GlaxoSmithKline adopt with regard to:

(a) pricing of patented products during the early years of protection and as patent protection is
due to expire?

In initial pricing, GSK has a responsibility to its stockholders to set prices high enough to cover
the costs of overall research and development (including failures) and a level of profits high
enough to attract capital. It also has a social responsibility to other stakeholders including
potential and actual customers. Because of the monopoly position of the patented drug, the
companies will always be accused of taking away as much consumer surplus as possible, that
is, charging a price which will maximize profits.

As patent protection nears expiration, GSK has three options:

(1) market its own generic brand to get that brand established in the market while it still
has protection;

(2) lower the price on the existing brand; or

(3) maintain or raise the price on the existing brand while increasing advertising.

(b) attempting to influence public policy through advertising or lobbying?

Advertising may be used in an attempt to influence public opinion and thus indirectly put
pressure on the government with respect to freedom from price, advertising, or other
controls. In 2001, the pharmaceutical companies were sponsoring advertisements to show
the benefits of their research, discoveries, and beneficial new drugs. This appears to be a
useful approach, particularly when sponsored by the pharmaceutical company association.

Lobbying is a more direct approach. A negative stance toward any type of government
program designed to providing drugs to senior citizens or others at a reduced price could be
counterproductive if it irritated enough consumers who might influence public policy. It might
be more useful to support a program that would provide somewhat lower prices in a
program that would supply drugs to a larger population. With the low marginal cost of
additional production common in pharmaceuticals, lower prices with higher volumes
supported by a government program might be profitable. It should also influence favorably
the public and public policy.

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TEST BANK
1 Which theory of international trade is applicable to (or explains) the trading of all goods at
all times?
(a) Classical theory of international trade
(b) The factor proportion theory of international trade
(c) The product life cycle of international trade
(d) All of the above
(e) None of the above

Questions 2, 3, and 4. Both Germany and Denmark make machinery and furniture. For each of
the following three cases in Column A, indicate which item from Column B is the type of
advantage involved.

COLUMN A COLUMN B

2. In Germany, machinery costs $10 per (a) Comparative advantage

unit and furniture costs $5 per unit; in
(b) No advantage
Denmark, machinery costs $12 per unit
and furniture costs $6 per unit. (c) Absolute advantage

3. In Germany, machinery costs $10 per (a) Comparative advantage

unit and furniture costs $5 per unit; in
(b) No advantage
Denmark, machinery costs $5 per unit
and furniture costs $8 per unit. (c) Absolute advantage

4. In Germany, machinery costs $10 per (a) Comparative advantage

unit and furniture costs $5 per unit; in
(b) No advantage
Denmark, machinery costs $12 per unit
& furniture $7 per unit. (c) Absolute advantage

1 Motivation for engaging in exporting may come from which of the following combinations
of factors?
(a) Internal and proactive only
(b) Internal and reactive only
(c) Internal or external and proactive or reactive
(d) External and proactive only
(e) External and proactive only

1 Although international trade grew rapidly in total amount during the last half of the 20th
century, its relative importance decreased in most economies.
(a) True
(b) False

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7. While imports provide consumers with an increase in the supply and variety of goods, they
do not provide any benefits to domestic industry.
(a) True
(b) False

8. The product life-cycle theory says that a nation will export that product for which a large
amount of the relatively abundant (cheap) input is used, and it will import that product in
the production of which the relatively scarce (expensive) input is used.
(a) True
(b) False

9. Many, but not all, exporting companies probably face less total risk than nonexporting firms
by virtue of having diversified geographical markets.
(a) True
(b) False

10. Through which of the following can a company strengthen its international network?
(a) International extension
(b) Penetration
(c) International integration
(d) All of the above
(e) None of the above

11. Relationship marketing is based upon several assumptions including the following:
(a) Transaction costs will be higher, but lower prices will be paid for components
purchased.
(b) Continuous bidding from potential competing suppliers is highly desirable.
(c) Presents dangers of loss of control and release of internal information.
(d) All of the above.
(e) None of the above.

12. Ethics is comprised of what most people in a society view as being moral, good and right.
(a) True
(b) False

13. Examples of differences in ethics between different societies include attitudes toward:
(a) the paying of interest on loans.
(b) the place of women in the workforce.
(c) the paying of bribes or facilitating payments.
(d) All of the above.
(e) None of the above.

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14. The international marketer will always be safe following the laws and customs of the host
country.
(a) True
(b) False

15. A universally agreed upon basis for ethical decision making is:
(a) the principle of utilitarianism.
(b) the principle of rights.
(c) the principle of overall benefits to society as a whole.
(d) All of the above.
(e) None of the above.

16. In the stakeholder concept view of the corporation:

(a) stakeholders include those who have an interest or some share in the undertaking.
(b) some stakeholders have legal rights.
(c) some stakeholders may claim more rights.
(d) All of the above.
(e) None of the above.

17. There is a strong and increasing tendency for many societies to demand that companies act
with increasing concern for overall societal and environmental needs.
(a) True
(b) False

18. Social responsibility and corporate profit are incompatible.

(a) True
(b) False

19. Japan and the United States have almost identical views of what is proper with respect to:
(a) legal practice.
(b) businessgovernment relations.
(c) social responsibility.
(d) All of the above.
(e) None of the above.

ANSWERS TO TEST BANK QUESTIONS

1. (e) 2. (b) 3. (c) 4. (a) 5. (c) 6. (b) 7. (b) 8. (b)

9. (a) 10. (d) 11. (c) 12. (a) 13. (d) 14. (b) 15. (e) 16. (d)
17. (a) 18. (b) 19. (e)

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