CONTEMPORARY CHALLENGES EXAM

10 Pages   |   3,129 Words

Question # 1

Causes of corruption and bribery in international business are multifarious. The core contributory factor for corruption in international business is poor governance and an inadequate judicial system. Lack of transparencies within the judicial system of certain countries and a weak freedom of press breeds corruption and bribery in certain countries (John, 2005). When multinational enter such countries for business growth, they are forced to adapt to the system in place in such countries to continue their business. In addition, absence of any preventive anticorruption policy and awareness of the importance of issues such as ethics, conflicts of interest also leads to corruption and bribery in international business. Weak institutions within countries like civil servants with high authority and little accountability are breeding grounds for corruption.
In view of certain thinkers, low wages in public administration of many countries – especially among police officers and customs make people easy victims of the culture systems where it becomes acceptable to receive bribery. Even though, corruption is an international phenomenon, its origins are generally local customs and variables of different countries. The international corruption index is used as a parameter to rank countries in terms of corruption. It is alleged that international loans are abused for the financing of corrupt governments and also to set standards to require governments to fight corruption. International corruption is, hence, a major contributor to the underdevelopment of poor countries (Finlay and Finlay, 2004). The historical and structural causes of corruption veils and the other are the responsibility of colonial powers that benefit still from dependence and subordination of many countries.
Lack of transparency, exclusion of the majority population, low participation of civil society and the lack of punishment of corruption are the factors which increases the incidence of corruption in certain countries that eventually become an international phenomenon. The consequences of the political system in third countries tend to corrupt activities easier. 
 

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Several measures can be adopted to control the incidence and impact of international corruption. Foremost amongst them is implementation of effective audit system in organizations. Auditors should be placed and given the complete autonomy to check the books. It is important to implement audit in time since forensic auditing is often too late, too expensive and treats individual cases.  Audit procedures utilize tests which recognize early indicators of a lack of transparencies and possible misconduct is quickly recognizable through audit, hence, it can be prevented in time.
Also, giving freedom to press and media is an important step towards the creation of transparency. Proceed methodically but also more specific to the function. Transparency in the process solves many problems at source and often avoids corruption. 
When multinational invest in their world countries, they must make it mandatory to create a transparent organization, especially in the areas of management, finance, human resources and infrastructure investment. To guarantee a transparent organization, the multinational business must contain a motivated long-term employees and management, reported stable and reliable indicators. Also, the business must use tried and tested method against possible fraud act. The organization can avoid fraud by making any relevant function for the quick test and then find out detailed information on potential hazards and methods. In case of any breach in transparency laws, the line and staff managers should be given authority to should solve the problem quickly by uncovering the specific grievances, take the necessary action to clean up the past and ensure a transparent transition in the future. For long-term implementation of transparency in international organizations, it is essential to build reliable control structures, adapt to the systems and develop a culture of transparency.

Question # 2

The statement that the Global Financial Crisis was caused by lack of foresight of regulators is supported by evidence. In fact, the roots of Global Financial Crisis of 2007-08 can be traced to the system of capitalism and overreliance on capital markets worldwide. It was the  lack of appropriate regulation of banks and financial services, and the act of ignoring potential conflicts of interests and perverse economic incentives which were manifested as poor risk management in the banking sector. 
The financial crisis that began in 2007 mainly originated from the monetary policy which was too accommodative. U.S. Federal Reserve, under the mandate of Alan Greenspan , introduced financial innovations which were poorly conceived and inadequately controlled. During the recession that followed the bursting of the dotcom bubble in 2000-2001, the Fed lowered its key rate to 1%, then maintained at a level too low, causing money creation too strong and swelling of bubbles in housing markets and on commodity markets worldwide. Prices of commodities reached their all-time-high levels prior to the Global Financial Crisis (Glenn, Richard and Moen, 2005). In addition, the U.S. government had implemented a policy of home ownership that had encouraged banks to make loans to household which were not adequately protected from default. There are strong evidences to support that banks were encouraged to lower their selection criteria towards mortgage loans. This made the financial institutions unstable which were once considered too big to fail. Hence, it was indeed a lack of appropriate regulation of banks and financial services which led to the formulation of a bubble which possessed the potential to impact the entire economy.
The evidence of the lack of foresight of regulators is evinced by the fact that when in 2006, the Fed had increased its rate by 1% to 5% in order to reduce inflationary pressures in the US economy, a large proportion of mortgage owners defaulted. This increase in rate caused a deflation of the U.S. housing bubble of the 2000s and led to more expensive monthly repayments of mortgage loans. Nearly three million U.S. homes were in default of payment and had to leave their property, seized and sold by credit institutions, leading to increased supply in the housing market, and making therefore further lower prices. 
The functioning of capital market was also partially responsible since due to falling prices, institutions recovered only partially the amount they had loaned. The effects of a deflating housing bubble were generally limited to personal bankruptcies and reduced losses for financial institutions. However, in case of the Global Financial Crisis of 2007-2008 crisis capitalism failed in a big way (Glenn, Richard and Moen, 2005). The mortgage lenders (i.e. the banks) had not kept the real estate debt on their balance sheets but were grouped in investment vehicles, mortgage funds, among others for resale to pension funds and other financial institutions. This caused a cyclical effect of bankrupt financial institutions and a general loss of confidence among financial institutions, which dried up the interbank market. Excessive executive pays were contributory factors in causing regulators to keep quiet about phenomena which could adequately be termed as a financial disaster.
Creation of poorly-conceived financial derivates was also a contributory factor to the Global Financial Recession. First, the pre-crisis years had seen proliferation of financial innovations that led to a market of financial derivates which were aimed at reducing risk, yet they increased risks of default several times. Moreover, rising profits and falling weight of wages had caused maladjustment between supply and demand. In particular the U.S. loans termed as subprime mortgages prompted some of the population to consume above their means, which in turn allowed to ensure the profitability of real estate. Hence, there are several reasons to support the assertion that the Global Financial Recession was an outcome of poorly regulated capitalism and executive greed.

Question # 5

The growth model of China’s economy presents a precept for developing countries in South East Asia like India, Maldives, Bhutan and Bangladesh. The main feature of China's economic development was acceptance of globalization and utilizing it effectively. Towards globalization, China adopted a model of mutually beneficial growth. For this reason, economic growth in China and can serve as a model for other developing countries. In the context of globalization, all developing countries face the risk of losing their dominance to foreign multinationals. The main priority for all developing countries should be the overall development across the country not followed by the social and then individual development.
The positive impact of some key factors that contributed to China’s growth over the last thirty years includes a high rate of savings or institutional reforms. Other contributory factors were low costs of labour and foreign capital inflows (Frankema and Woolthuis, 2005). The backbone of China’s growth was also priorities attached to education, research and development, and urbanization. With these factors, China maintained its growth over the thirty straight years. Like any developing country, China faced problems and imbalances in pursuit of its economic development that pertained to low skilled labour and marginal literacy.
There were serious imbalances between consumption rates and savings. Despite, this shortcoming the country attached increasingly importance in the trade balance and foreign capital inflows. These measures explain increased foreign exchange reserves, which reached 1700 billion USD in June 2008. The introduction of "market socialism" introduced many factories in China, which has been called the workshop of the world, because of social dumping its plants. During its growth phase, the country avoided economic overheating of its markets and formation of financial bubbles. Moreover, the declining dollar presented new challenges at the time of growth.
China compensated for this challenge by creating a background investment in foreign currency and creating the China Investment Corporation (CIC). The State Administration for Foreign Exchange was also assigned the responsibility for optimizing foreign investment of China to offset the negative effects of the falling dollar. The country was also quick to change its obsolete banking system, which limited the granting of credit to individuals and private companies.
Policy makers in China worked hard at setting up various measures. Since the beginning of the reform rate, the country evolved a system of rate to a fixed exchange rate system changes to meet the laws of supply and demand. A major reassessment of the currency helped in resolving global imbalances temporarily. Another key factor of Chinese growth model is the tax system of the country. The tax system is highly decentralized in China, and the provinces and smaller jurisdictions that manage a significant portion of revenues from taxes, and dealing with education and health. There is very little financial solidarity between 47 provinces. Increased autonomy has, therefore, contributed towards growth of businesses.
The lessons can be drawn by developing countries of South East Asia with similar resource endowments and macro-economic conditions. These countries should choose to invest in human resource development and increase the rate of industrialization by attracting foreign capital into the country. Also, tax system should be decentralized to encourage businesses to invest more. Also, currency exchange rate should be controlled for sustained growth to avoid making exports of the country too expensive in foreign markets.

Question # 6

Virtual Organizations is a form of business organization which comprises of legally independent companies or a number of individuals which merge virtually – usually via Internet – for a certain period of time to form a joint business partnership. This entity deals with third parties and clients as a single company even though it is a virtual enterprise comprising of loosely held individual. These organizations are referred to as a virtual organization because the physical location of each participant is not important for these entities. 
The rationale for the formation of a virtual organization is to form a value chain through cooperative collaboration of partners to optimize specific core competencies. For this reason, highly customer-oriented and competitive service provisions are achieved. The information and communication technology (ICT) are vital components in this context because they provide the required medium for overcoming space and time barriers. The rationale for the formation of virtual organization is also derived from the enormous cost saving potential, which is caused by the loss of space, organization and travel costs (John, 2005). With traditional forms of business, it would not be possible to adapt so well and with such flexible virtual organizations to new market demands in a dynamic environment. Also, in virtual organizations each participant brings their core competency, which enhances efficiency of the functioning of this organization.
Another key rationale for the formation of a virtual organization is the attainment of flexibility and customer orientation. Virtual enterprises cooperate without having to start a business, find a location, hire staff and build an organization. Therefore, these organizations are able to utilize temporary market potentials through cooperation. Unlike other collaborations, virtual organizations are waived on the institutionalization of central management functions, hence, they can respond rapidly to market changes. Formation of these organizations is also favored because virtual organization is particularly suitable for the manufacture of customized solutions for these are more suitable for mass production of traditional forms of organization.
Virtual organizations are favoured in contemporary business environment because their structure allows for more flexible temporal, spatial and functional boundaries and to allow a new perspective on the emerging organization. For instance, online department stores or online music stores have gained huge market share from traditional retail businesses and has paved the way for the formation of virtual organizations. 
Management of virtual organizations differs significantly from traditional organizations in a number of ways. Firstly, a virtual organization is primarily a business that relies heavily on telecommuting. For this reason, control of information and communication technologies comprises of significant management for virtual organization (John, 2005). Since, the contact point of the employees of these organizations with the company is only through mobile phones, fax, email and video conferencing, Management by Objectives is the key management criteria. Employees are no longer forced to work in the physical premises of the company. They can work from their homes, premises of customers and suppliers; they are managed through wider objectives rather than through micromanagement procedures. Also, decision making has to be largely decentralized in these organizations since the work itself is largely decentralized.
The management principles of virtual organization are also largely based on trust rather than objective or quantitative measures. Due to the strong dependence between the partners, it may happen that some partners exploit this element of weak touch-points for their own benefit – for example, disclosure of confidential information to third parties. Penalties for such participants are difficult to enforce. Therefore, it is advisable management approach for virtual organization is to enter into partnership with "trusted" or long-term business partners. Since, it can be difficult to develop a sense of belonging and identify with the company, management of such organizations require a more personal and informal approach with the organizational members.

Question # 7

Several key lessons could be drawn from the financial crisis of 1920 and the Great Depression. The first lesson was to control the money supply in the economy. It was easy access to cheap credit that had caused reckless speculation and inflated prices to an unsustainable bubble. In less than 30 months, the Dow had risen 230% from 166 in March 1926 to 381 in September 1929. A correction was inevitable. Another key lesson of this economic crisis was to avoid cutting money supply by a huge measure. Prior to the Great Depression, hoping to limit speculation, the U.S. authorities initially banned all ready for speculative purposes in particular to finance the margin trades. The Fed increased its share to the discount rate so far too drastic of 3.5% in January 1928 up to 6% in August 1929, as a direct result that the total amount of the money supply shrinks by one third in less than six months between August '29 and March '30. Markets responded with a extreme violence. Actions and asset prices s' collapsed, with a sharp contraction in the real economy to the ultimate result.
This financial crisis also imparted the lesson to avoid protectionism in terms of world trade. During the initial period of the depression, U.S. government then took a series of even more devastating steps to increase barriers of trade in the hope of countering the acceleration of the recession. In a protectionist reflex, international trading partners were quick to take similar measures, and the price war that has resulted has paralyzed almost all foreign trade. The direct consequence was a huge loss of productivity worldwide and rising unemployment in all sectors particularly exporters. Tax revenues plummeting and social claims soaring the government of found the solution to bridge the budgetary deficit by increasing the income tax. 
Perhaps the most important lessons of this financial crisis were to maintain a certain level of stability in government policies. As the crisis deepens, the governments of the time issued one disaster emergency measures after another. The rapid succession and the unpredictability of such interventions created a climate of economic insecurity still degrading the overall business climate already very poor. The rapid change of tax laws, subsidies, regulation of wages, prices, interest and production were all previously unknown and government interventions. Businesses hate random uncertainty (Glenn, Richard and Moen, 2005). Given all these unforeseeable risks more and more industrial delayed their investment plans. Another key perspective of these crises is that the origins of the crisis are market frenzy and irresponsibility of bankers, who lent funds to speculators without restraint. Poorly regulated financial markets, unhealthy speculations and reckless activities of banks contributed to escalation of the financial crisis. Also, it was found important to maintain trust in the financial system despite a crisis. Since, lack of trust quickly leads to disasters in consumer markets. When the stock market fell, bank loans have been repaid, the panic set in and the rush to the banks caused the blockage of the monetary and financial system. 8000 banks went bankrupt from 1929 to 1934 due to cyclical effect which could not be checked in time.
Some of these lessons were not heeded by the governments since the Global Financial Recession of 2007-2008 was caused by lack of foresight of regulators and an overly headed credit market. Some of the lessons of the Great Depression were taken into account by policy makers during the Global Financial Recession, when the money supply was expanded following the crisis and pro-trade policies were adopted by the government to maintain stability in markets.
 

Reference

Bart, N. (2003) Trust. Forms, foundations, functions, failures and figures, Ohio: Edward Elgar Publishers.
Finlay, K. and Finlay, P. (2004) Global Strategic Management, New York: Oxford University Press.
Frankema, K. and Woolthuis, K. (2005) Trust under Pressure. Empirical investigations of trust and trust-building in uncertain circumstances, Ohio: Edward Elgar Publishers.
Glenn, M., Richard, W. and Moen, A. (2005) Changing capitalisms? Internationalization, institutional change and systems of economic organization, New York: Oxford University Press.
John, C. (2005) Organization. Contemporary Principles and Practice, Oxford: Blackwell Publishing.

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