Global Business Module 4

Five stages of economic integration

1. Free Trade 2. Customs Union 3. Common Market 4. Economic Union 5. A Political Union

NAFTA

1. Free Trade Area 2. North American Free Trade Agreement signed 1992, and implemented 1994 3. goal to encourage trade between Canada, the US, and Mexico 4. In 1988, the US and Canada signed the Canada-United States FTA -Mexico had negotiations as well and Canada appealed the MFN 5. reduce barriers and hope to create a free trade zone where companies can benefit from the transfer of goods 6. as a free trade agreement, the member countries can establish their own trading rules for nonmember countries 7. before NAFTA, tariffs on Mexican exports to the US average 4%, and most goods entered the US duty free, so NAFTA's primary impact was to open the Mexican market to US companies 8. When the treaty went into effect, tariffs on about half the items traded across the Rio Grande disappeared 9. Since NAFTA, US-Mexican trade has increased from $80 billion to $515 billion 10. the pact removed a web of Mexican licensing requirements, quotas, and tariffs that limited transactions in US goods and services 11. Mexican Maquiladoras: production facilities located in border towns in Mexico that take imported materials and produce the finished good for export to US and Canada 12. now, as wages in Mexico increased, more companies are moving out of Mexico to lower wage areas such as Vietnam and Cambodia 13. US imposing tariffs on Canadian softwood lumber imports is one of the longest trade disputes between the two nations - the dispute is the US claim that the Canadian government is unfairly subsidizing Canadian lumber production by providing access to public land while the US producers harvests softwood lumber on their property

CARICOM

1. The Caribbean Community and Common Market or simply the Caribbean Community 2. Formed in 1973 with the intent of creating a single market with the free flow of goods, services, labor, and investment 3. Divided into more developed and less developed countries 4. CARICOM and trading bloc nations and the DR have been tied to the EU through an economic partnership agreement signed in 2008 and is known as Cariforum

multinational corporation

1. corporation that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located

trends that will continue to propel the dramatic growth in world trade

1. market expansion 2. resource acquisition 3. the emergence of China and India

Horizontal FDI

1. occurs when a company is trying to open a new market (ex. Walmart)

Vertical FDI

1. when a company invests internationally to provide input into its core operations-usually in its home country (ex. automobiles) -backward vertical FDI: when a firm brings the goods or components back to its home country (supplier) -forward vertical FDI: when a firm sells the goods into the local or regional market (distributor)

A political union

1. when a single nation if formed 2. there is unification of all policies by a common organization 3. a political union is an ideal some say hasn't been achieved but others say the United Arab Emirates and the United States are examples

Module 4

Relationships, Foreign Investment, and Trade

preferential tariff

a tariff that is lower for some nations than others

free trade zone

few duties or rules restrict trade among the partners

trade creation

the replacement of more expensive domestic production or imports with cheaper imports from a partner within the trading bloc

dividend repatriation

the return of earnings from foreign subsidiaries to their parent companies back in the home country

Resource Acquisition

1. they want to acquire the resources they need to operate efficiently 2. cheap or skilled labor, scarce raw materials, technology, or capital -ex. Nike uses Asian factories for cheap labor

Factors that influence a firm's decision to invest in a foreign country

-cheaper? is it cheaper even if transportation cost is high? -does the company have a significant local market? -is the company interested in obtaining access to local resources or commodities? -does the company want access to local technology or business process knowledge? -does the company's clients or competitors operate in the country? -are there local incentives? -simple? -labor is ready or need to be trained? -how well this investment impact the companies revenue and profitability? -can the company take profits out of the country? -can the company easily exit?

China and Africa

1. "Belt and Road Initiative" to increase trade 2. Beijing Declarations and FOCAC Beijing Action plan 3. Africa is now politically and economically with China

Asia-Pacific Economic Cooperation (APEC)

1. 1989, by 12 member economies (now 21) -APEC is the only regional trading group that uses member economies rather than countries, in deference to China -Taiwan was allowed to join but only under the Chinese Taipei 2. focused primarily on economic growth and cooperation -liberalizing trade and investment -business facilitation -economic and technical cooperation -enhances security -as a result of the Pacific Ocean Connection, this geographic grouping includes the US, Canada, Mexico, Chile, Peru, Russia, Papua New Guinea, New Zealand, and Australia with their ASIA-Pacific rim counterparts -the regional group has had success in liberalizing and promoting free trade as well as facilitating business, economic and technical cooperation between member economies 3. with the extension of Doha Round of the WTO, APEC members have been discussing establishing a free trade zone

ASEAN

1. Association of Southeast Asian Nations (ASEAN), 1967 -essentially a common market 2. founding-members: Malaysia, Thailand, Indonesia, Singapore, and Philippines -now include: Myanmar (Burma), Vietnam, Cambodia, Laos, and Brunei 3. primary focus is on economic, social, cultural, and technical cooperation as well as on promoting regional peace and stability 4. previous mission was to prevent domination of Southeast Asia by external powers, specifically China, Japan, India and the US. Now, have agreements with some. -free trade agreement with China, ASEAN-China Free trade Area (ACFTA), 2010 -Signed a free trade with India, ASEAN-India Free Trade Agreement (AIFTA), 2009 -signed with New Zealand and Australia 5. their intent is to forge even closer ties among the ten member nations, enabling them to negotiate more effectively with global powers like the EU and the US

The emergence of China and India

1. China's exports have boomed thanks to foreign investment; cheap labor, aim to use manufacturers into China to expand their production base 2. India teams to devise software platforms and multimedia features for next, generation devices 3. an accelerating trend is that technical and managerial skills in both China and India are becoming more important than cheap labor 4. China will stay dominant in mass manufacturing and continue to be one of the few nations building multibillion dollar electronics and heavy industrial plants 5. India: software, design, services, and precision industry

Mercosur

1. Customs union, 1988 2. The common market of the south 3. Argentina, Brazil, Paraguay, Uruguay, and Venezuela - Venezuela and Paraguay suspended due to lack of commitment to democracy and violations of human rights 4. The group has been strategically oriented to develop the economies of their members, helping them to become more internationally competitive so they would not have to rely on the closed market are a -has brought nations with long standing rivalries together 5. Recently signed a trade deal with the EU which could become the largest free trade agreement in the world if it is ratified 6. Clear political goals -committed to the consolidation of democracy and maintenance of peace throughout the southern cone (ex. Worked to reach agreements between Brazil and Argentina in the nuclear fields 7. Surging trade, rising investment, and expanding output

NAFTA controversies

1. Environmental list: Mexico has lax environmental laws 2. Unions were concerned with job relocation 3. To ease tensions: provisions were added dealing with workers rights, environmental protection, and a means of dispute resolution

NAFTA rules

1. Establish own external trade agreements 2. Ensure that a foreign exporter will not just ship to a NAFTA country with the lowest tariff for non member countries 3. Require that at least 50% of the net cost of most products must come from or be incurred in the NAFTA region

Central America Free Trade Agreement (CAFTA-DR)

1. Passed in 2005 2. US, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua 3. Unusual because the US is so much larger than the other nations 4. The US is already the principal exporter to these nations so economists do not think it will result in a significant increase in US exports 5. Deepened FDI in developing countries - US exporters of petroleum products, plastics, paper, textiles, motor vehicles, machinery, medical equipment, and agricultural products have seen an increase in exports 6. All tariffs on US consumers and industrial exports were removed as of 2015, and it is expected that tariffs will be removed on agricultural products by 2020 7. Goal of the agreement was to create a free trade zone like NAFTA 8. Seen as a stepping stone to Free Trade Area of the Americas (FTAA) - the more ambitious grouping for free trade agreement that would encompass all the South Americas, Caribbean nations, North America, and South America except for Cuba - Canada is currently negotiating a similar treaty called the Canada Central American Free Trade Agreement - any resulting agreements will have to recognize differences in rules and regulations with NAFTA as well as other existing agreements 9. CAFTA-DR requires that the majority of goods and services industries be deregulated in Central America 10. Benefit for Central America - reduction in barriers to the US, their largest export market - increased attraction for foreign direct investors 11. Losses - for the US, the potential for increasing trade deficits and shifting productions overseas to decrease jobs and decrease wages - for Central America, imports of staple crops and falling prices can displace subsistence farmers, the opportunities in new exports are expected to be less than imports and weakened rules on workers' rights might prevent workers from organizing 12. Economic instability for El Salavador, Honduras, and Guatemala - economic instability provides an environment conducive to drug trade and increased emigration rates -Central America goods: agricultural products, manufactured products, public services such as health care and energy. In return, the US has pledged to increase access to textiles and agricultural products such as sugar

Free Trade Area

1. The Free Trade area is the most basic form of economic cooperation -member countries remove all barriers to trade between themselves but are free to determine trade policies with non member nations independently -more advanced free trade areas include trade in services as well as goods in the region 2. no Internal tariffs 3. ex. NAFTA, South Asian Free Trade Association (SAFTA) - to trade services requires a transferable professional certificate -services traded are usually highly skilled professionals such as legal, accounting, technology, and medical services -common practice in free trade areas is the establishment of "rules of origin" to identify where a product comes from in the hope of avoiding duty evasion through re-exportation of products

Regional Economic Integration

1. Regional Economic integration is a unification between states or countries with a partial or full abolition of tariff and non tariff restrictions on trade between them -the ideal would be global free trade 2. trade blocs with free trade among members -trade takes place in trade blocs; 80% of FDI and over 1/2 of world -trade blocs generally come into being more often for economic rather than political reasons -integrating into a trade bloc is expected to increase intraregional trade lead to a more competitive trade position and more efficient resource allocation -by forming a trade block with other nations in a geographic region, the goal is to help all nations in the trade bloc attain a high standard of living by encouraging specialization, lowering prices, providing more choices on goods and services, increase productivity, and allowing for more efficient use of natural resources

The European Union: History and Purpose

1. The EU originally began in 1950 to end the frequent wars between neighboring countries in Europe 2. Founding nations: France, West Germany, Italy, and the Benelux (Berlin, Netherlands, and Luxembourg) -treaty to run their coal and steel industries under common management 3. The EU is the most integrated form of economic cooperation 4. Initial focus was on the development of the coal and steel industries for peace purposes 5. Treaty of Rome, 1957 -established the European Economic Community (EEC) and created a common market between the members -9 more members added and became the European Community in the 1970s, then the EU in 1993 6. Treaty of Maastricht in 1993 -formal economic union was created with 3 aims a. single, common currency (euro) into effect 1999 b. create monetary and fiscal targets for member countries c. the treaty called for a political union, which would include the development of a common foreign and defense policy and common citizenship 7. a primary goal for the development of the EU was that Europeans realized that they needed a larger trading platform to compete against the US and the emerging markets of China and India 8. Treaty of Lisbon -amends the previous treaties -designed to make the EU more democratic, efficient, and transparent and tackle global challenges such as climate change, security and sustainable development 9. European Economic Area (EEA), 1994 -following an agreement between the member states of the European Free Trade Association (EFTA) and the EC (now, EU) -allowed Iceland, Liechtenstein, and Norway to participate in the EU's single market without a conventional EU membership

European Union Governance

1. The European Council -provides political leadership for the EU -functions as the EU's head of state 2. The European Commission -provides day-to-day leadership and initiates legislation. -The EU's executive arm 3. The European Parliament -forms 1/2 of the EU's legislative body -parliament consists of 751 members, who are elected by popular vote in their respective countries -the purpose of the parliament is to debate and amend legislation proposed by the European Commission 4. The Council of the European Union -forms the other 1/2 of the EU's legislative body--council or council fo ministers -consists of a government minister from each member country 5. The Court of Justice -composes the judicial branch of the EU -three different courts: it reviews, interprets, and applies the treaty laws of the EU

Benefits of Foreign Direct Investment

1. inflow of capital 2. invested capital goes to businesses with the highest potential for growth 3. the motive is objective 4. investors can decrease their risk by diversifying 5. increase growth and increase jobs, decrease poverty 6. business can expect the latest and greatest in management practices, accounting and legal guidance, technology, operational practices, and financing tools

USMCA

1. Updated NAFTA to be renamed to United States- Mexico- Canada agreement 2. It is an agreement to provide protection and enforcement for intellectual property rights - US creators are given the same rights in intellectual protection domestic markets as they are given in foreign markets -10 year data protection for biological drugs 3. The country of origin rule that automobiles must have 75% of their components manufactured in the member countries to qualify for a zero- tariff rate 4. Labor provisions for wages state that 40-45% of automobile parts must be made by workers earning a minimum of $16/ hour by 2023 5. The Canadian dairy market is more accessible to US farmers 6. A sunset clause that states the agreement expires in 16 years and is subject to review every six years

Multinational corporations influence on economies

1. a multinational corporation (MNC) differs slightly from a transnational corporation (TNC) because MNCs are traditionally national companies with foreign subsidiaries, a TNC does not identify itself with one national home 2. to compete, political entities may offer MNCs incentives such as tax breaks, pledges of governmental assistance or subsidized infrastructure, or lax environmental labor regulations 3. promise of economic growth 4. influence over political entities once they are established through their control over technical and intellectual property 5. because of their size, multinational corporations can also have a significant impact on government policy through the threat of market withdrawal 6. MNCs play an important role in the world economy through economic globalization: the increase of economic interdependence of national economies across the world through rapid increase in cross border movement of goods, services, technology, and capital -establishing multiple links between the economies of various countries -these multiple links lead to increasing economic integration between various economies, resulting in the emergence of a global market place or a single world market

Demanders and Suppliers of currency in foreign exchange markets

1. a person or firm who demands one currency must at the same time supply another currency and vice versa 2. Four groups who participate in the market: -MNCs: costs for workers, suppliers, and investors are measured in the currency where production occurs, while their revenues from sales are measured in the currency of the country where sales happen; think of getting money to pay workers so supply foreign and demand home -tourists: supply home and demand foreign -international investors-FDI -international investors-portfolio investment:

fixed exchange rates

1. a system where a currency's value is tied to the value of another single currency, to a basket of other currencies, or another measure of value, such as gold 2. the central bank of a country remains committed at all times to buy and sell, its currency at a fixed price 3. to intervene, the central bank keeps reserves of foreign currencies and gold 4. too far below, the government buys it's currency in the market to increase demand and therefore, value 5. too far high, the government sells to put more in circulation 6. most famous is the gold standard 7. usually used to stabilize the value of a currency against the currency to which it is pegged -this makes trade and investments between the two countries easier and more predictable 8. belief that fixed rates lead to stability is only partially true, since speculative attacks tend to target currencies with fixed exchange rate regimes 9. maintained -capital controls (residency based measures): like transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account -buying and selling reserves -can make it illegal to trade currency at any other rate. Difficult to enforce and can lead to a black market. 10. drawbacks -cannot use its monetary or fiscal policies with a free hand; cannot address other macroeconomic conditions such as price level, unemployment, and recessions resulting from the business cycle -maintained by the government buying and selling of its reserves, adjusting its interest rates, and altering its fiscal policies

the floating exchange rate

1. a system where the value of currency in relation to others is allowed to freely fluctuate subject to market forces -the currency is known as a floating currency 2. the rate automatically adjust to economic circumstances -minimizes things likes shocks, foreign business cycles, and preempting possibility of having a balance of payment crisis 3. managed floating regimes (which most are), otherwise known as dirty floats, fluctuates day to day and central banks attempt to influence their country's exchange rates by buying and selling currencies 4. floating are preferred to fixed 5. allow a country to dampen the impact of shocks and foreign business cycles 6. can stabilize the country's employment or prices from the country being able to pursue other monetary obligations with the money 7. threats -not as stable; rapid appreciation -- exports become too expensive and not enough sold or rapid depreciation-- the country wouldn't be able to afford imports

Benefits of regional economic integration

1. a trade bloc is a free trade zone (or near free trade), formed by one or more tax, tariff, and trade agreement between 2 or more countries 2. trade agreements create more opportunities for countries to trade with one another by removing the barriers to trade and investment -lower prices for consumers in the bloc countries -the increase in the amount of trade is due to shifts in resource allocation -production moves to the members in the trading block, which have a comparative advantage which leads to more efficient production, low prices, increase consumer demand 3. contributes to the relatively high growth rates in less developed countries 4. by removing restrictions on the labor movement, economic integrations can help expand job opportunities -the losers, of course, are nations that relied on tariff production to protect their spot in the industry because they were not the most efficient producers 5. member nations may find it easier to agree with small numbers of countries. Regional understanding and similarities may also facilitate closer political cooperation

Government and Foreign investors

1. according to the Levin Institute, the rapid increase in FDI may be due to : technology and transportation, the lure for higher profits, the fall of the Berlin Wall and financial liberalization -technology in internet and email improved communications with foreign affiliates. The price and speed of air travel have increased transportation options -when investors see that developing economies are having a period of rapid growth, it is appealing to investors to invest in that economy in anticipation of significant returns of their investment -conversion of many socialist economies to capitalists at the end of the Cold War -in addition, the demise of the Soviet Union made investors feel more comfortable that funds invested in developing nations would not be expropriated if the current government was overthrown

European Union Current Challenges and Opportunities

1. advantages -monetary union (euro) has become the world's second-largest reserve currency behind the US dollar; not every European country is apart of the EU and not every member uses the Euro -single market of 500 million people -free flow of goods, services, capital, and people in the EU -although there is a single tariff on goods entering an EU country, once it is in the market, no additional tariffs or taxes can be levied on the goods -organizations conducting business with one country in the EU now finds it cheaper and easier, in many cases, to transact business with the other EU countries -there is no longer a currency exchange rate risk -reduces transaction costs -further, having a single currency makes pricing more transparent and consistent among countries and markets 2. disadvantages -union's markets are suffering from rigidity, regulation, and tax structures lead to high unemployment, low employment responsiveness to economic growth (especially for low-skilled labor) -the opening of national EU markets has decreased national telephone calls by 50% and lowered airfare prices due to the pressure of competition -the removal of national restrictions has enabled more than 15 million Europeans to go to another EU country to work or retire -very tough antitrust enforcers unlike the US, the EU can close corporation offices for unspecified periods of time to prevent the destruction of evidence, and can enter the homes, cars, yachts, and other personal property of an executive suspected of abusing their companies' market power or conspiring to fix prices -possibility of protectionist movement towards any country outside the EU

The Common Market

1. allows for the creation of economically integrated markets between member countries -trade barriers are removed, as are any restrictions on the movement of labor, technology, and capital between member countries -there is a common trade policy for trade with nonmember nations -the primary advantage for workers is that they no longer need a visa or work permit to work in another member country of a common market -the key characteristic is the free movement of labor and capital -requires cooperation from all member countries when making policies about economics and labor practices -a potential drawback is that labor may move to the country that offers the highest wages and investment capital may be transferred to the country that offers the highest return on investment -COMESA (common market for eastern and souther Africa)

Portfolio Investment

1. an investment in another country is purely financial and doesn't involve any management responsibility (stocks, bonds, or assets) 2. typically, investors in this category are looking for a financial rate of return, as well as for diversifying investment risk -diversifying: the process of allocating capital in a way that reduces the exposure to any one particular asset or risk 3. as a stock owner, the foreign portfolio investor is eligible to receive dividend payments, participate in all decisions made by shareholders, and sell the stock at anytime for a profit or at a loss -dividend: a sum of money paid regularly by a company to its shareholders out of its profits 4. by buying stocks in multiple different industries, the shareholders' risk is decreased 5. a shareholder can quickly sell stock at will

Foreign Direct Investment (FDI)

1. an investment in or the acquisition of foreign assets with the intent to control and manage them -through purchasing the assets of an international co; investing in the company or new property, plants, or equipment; or participating in a joint venture 2. LONG TERM STRATEGY 3. companies investing in foreign enterprises usually expect to benefit through access to local markets and resources, often in exchange for expertise, technical know-how, and capital 4. Inward: coming in; outward: going to foreign companies 5. the difference between inward and outward FDI is called the net FDI inflow, which can be either negative or positive 6. at least 10%

The African Economic Community (AEC)

1. an organization of the African union states; signed in 1991 and implemented in 1994 2. it provides for a staged integration of the regional economic agreements -community of Sahel-Saharan States (CEN-SAD) -Common Market for Eastern and Southern Africa (COMESA) -East African Community (EAC) -Economic community of Central African States (ECCAS or CEEAC) -Economic Community of West African States (ECOWAS) -Intergovernmental Authority on Development (IGAD) -Southern African Development Community (SADC) -Arab Maghreb Union (AMU or UMA) 3. free trade zones will address government instability 4. wants to foster the creation of a free trade zone and customs union in its regional bloc -beyond that, there are hopes for a shared currency and eventually economic and monetary union

strengthening and weakening currency

1. appreciating or strengthening: when the exchange rate for a currency rises so the currency exchanges for more of other currencies 2. depreciating or weakening: when the exchange rate for currency falls so a currency trades for less of other currencies 3. increase price: good for sellers, bad for buyers; low price: good buyers and bad for sellers

Andean Community

1. called the Andean Pact until 1996 2. a free trade agreement signed in 1969 among Bolivia, Chile, Colombia, Ecuador, and Peru -Chile left and Venezuela joined then left 3. This trading bloc had limited impact for the first two decades, but has recently experienced a renewal of interest after Mercosur implementation -Mercosur members became associate members

Drawbacks of Foreign Direct Investment

1. careful not to allow foreign ownership of strategically important industries as this could lower the competitive advantage of the nation 2. foreign investors could also take advantage of the company they're investing in and take away all valuable assets then leave the country 3. Four Agencies keep track of the Statistics on FDIs -the UN Conference Trade and Development (UNCTAD) publishes the Global Investment Trends Monitor, which summarizes FDI trends from around the world -The organization for Economic Cooperation and Development, publishes the inflow and outflows of FDI for all its members -IMF published World Wide Survey of Foreign Direct Investment Positions; now an online database covering 72 countries -the Bureau of Economic Analysis: reports on the FDI activities of foreign affiliates of US companies

How do trade agreements and efforts impact business

1. challenges: outside of a new trade bloc and rules for their industry change -businesses have to monitor and navigate these evolving trade agreements to make sure there is a positive impact 2. example: American companies doing businesses in any of the ASEAN countries become members of the ASEAN Business Council to monitor and possibly influence new trade regulations 3. the council leads major business missions to key economies -arrange genuine dialogues, solve problems, and facilitate opportunities in all types of market conditions and it provides market entry and exclusive advising services 4. increase in bilateral and multilateral trade agreements because the agreement are not linear strands but rather criss crossing linking countries and trading blocs in self benefitting trading alliances 5. overall, global businesses have benefitted from the regional trade agreements by having more consistent criteria for investment and trade as well as reduced barriers to entry -easier and cheaper to move goods between member countries

An Economic Union

1. created when countries enter into an economic agreement to remove barriers to trade and adopt common economic policies -member countries strive to have a standard product and labeling standard, eliminate border controls and establish unified policies for energy,, agriculture, and social services -the members use a common currency, harmonized taxes, monetary, and fiscal policy 2. The European Central Bank is responsible for setting the monetary policy for the Eurozone -a standard set of laws and requirements is instituted regarding competition, mergers, corporate behaviors, and licensing standards for professionals 3. ex. Eurozone and the adoption of the Euro

currencies

1. dollarize: use the US dollar as their currency 2. most of the international economy takes place in a situation of multiple national currencies In which both people and firms need to convert from one currency to another when selling, buying, hiring, borrowing, traveling, or investing across national borders 3. foreign exchange market: the market in which people or firms use one currency to purchase another currency

The strength of a dollar

1. for a us firm selling abroad, a stronger US dollar is problematic -foreign currencies are corresponding weaker and buys fewer dollars -may lower exports, raise selling price -a stronger currency reduces a country's exports 2. Foreign firm selling in the US economy -good -increase imports into the country, consumers will buy more, even may reduce price 3. tourists elsewhere: good -you'll get more of the foreign currency 4. tourists into the country: bad -your currency wouldn't be able to buy as much 5. Investor: FDI -bad; not enough money to pay workers 6. Foreign investor -good

considerations when investing

1. market capitalization: the total dollar value of a company's outstanding shares of stock -can be sensitive to economic growth rates, exchange rate stability, health of the foreign banking system, liquidity of the stock and bond market, interest rates, and level of foreign exchange reserves held by the central banks 2. FDI is done for many reasons, including to take advantage of cheaper wages in the country and special investment privileges such as tax exemptions offered 3. trade policy and privatization policies are also important as well as any restrictions on bringing home or repatriating earnings or profits in the form of dividends, royalties, interest, or other payments 4. one theory for how to best help developing countries is to increase their inward flow of FDI -however, identifying the conditions that best attract such investment flow is difficult since foreign investment varies significantly across countries and overtime -knowing what has influenced these decisions and the resulting trends in outcomes can be helpful for governments, nongovernment organizations, businesses, and private donors looking to invest in developing countries

Greenfield FDI

1. occurs when MNCs enter into a developing countries to build new factories or stores -built new in an area where there may not have been a previous facility -wholly subsidiary; "ground up" -name originates from the thought of a building a facility on a greenfield such as farmland or a forested area -creates longterm employment -countries often offer prospective companies tax breaks, subsidies, and other incentives to set up greenfield investments -MNCs provide infrastructure, energy, and water to increase jobs and wages

Portfolio investment

1. often linked to expectations about how exchange rates will shift 2. involve firms trying to protect themselves from movements in exchange rates -hedge: using a financial transaction to protect yourself against currency risk -specifically, you can sign a financial contract that guarantees you a specified exchange rate one year from now

The Multinational Advantage

1. overcome trade problems 2. ability to side step regulatory problems 3. MNCs can also shift production from one plant to another as market conditions change 4. MNCs can also tap into new technology from around the world 5. MNCs can often save a lot in labor costs, even in highly unionized countries

pegged float exchange rate

1. pegged floating currencies are pegged to some band or value which is either fixed or periodically adjusted -hybrid of fixed and floating regimes 2. crawling bands: the market value of a national currency is permitted to fluctuate within a range specified by a band of fluctuation -adjusted periodically by central bank; in response to economic circumstances and indicators -determined by international agreements or by unilateral decision by the central bank 3. crawling pegs: exchange rate regime, usually seen as a part of fixed exchange rate regimes, that allows gradual depreciation or appreciation in an exchange rate -the system fully utilize the peg under the fixed and the flexibility under floating -moderate exchange rate change to ensure economic dislocation is minimized 4. pegged with horizontal bands: this system is similar to crawling bands, but the currency is allowed to fluctuate within a larger band of greater than 1% of the currency value

Benefits of being a multinational firm

1. privately owned, so they're not responsible to any single state or an international organization like the UN 2. can move capital and work to other locations at will 3. in the political arena, political globalization has been aided by transnational alliances and multinational corporations 4. some multinational corporations can influence international policy against their home country's interests 5. MNCs can be seen as catalysts or change agents 6. others say MNCs make more efficient use of global resources and therefore boost global output 7. MNCs can constrain the power of individual nation states with revenue earnings higher than the GDP of small states

Customs Union

1. provide for economic cooperation as in a free trade zone -barriers to trade are removed between member countries -primary difference is to treat trade with nonmember countries similarly, which means they share a common external tariff 2. ex. Mercosur

Most favored nation

1. same treatment as one country provides its most favored trading partner 2. the Agreement on Trade-Related Investment Measures (TRIMS) came from the Uruguay Round of negotiations and was developed to help limit investment barriers that affected international trade -to prohibit domestic content provisions -to discourage export performance requirements, such as a requirement for exports to match imports

How governments discourage or restrict FDI

1. seek to protect local industries and critical resources, preserve the national and local culture, protect segments of the domestic population, maintain political and economic independence, and manage or control economic growth -host government can specify ownership restrictions if they want to keep control of local markets or industries in citizen's hands -a company's home government usually imposes taxes and a sanction to persuade companies to invest in the domestic market rather than a foreign one -foreign investors may be required to purchase a certain percentage of intermediate goods from the host countries -changes in governments or changes in policies may lead to governments choosing to expropriate foreign assets to nationalize critical industries such as oil, electric power, mines, and telecommunications

How Governments Encourage FDI

1. tax incentives and loans to invest -governments may also provide a combination of insurance, loans, and tax breaks to promote their companies' overseas investments -international investment agreements ensure that foreign investors are treated in a fair, equal manner 2. host government improve or enhance local infrastructure--energy, communications, transportation--may go to World Bank for aide -also serves to improve the local conditions for domestic firms 3. host country government streamline the process or establish offices or production in their countries 4. countries seek to improve their workforce through education and job training 5. host-country governments seek to reassure businesses that the local operating conditions are stable, transparent (uniform application of law enforcement), and unlikely to change 6. export processing zones or special economic zones are usually a distinct geographic area near a port that is ready to promote export industries -parts are imported and assembled into the final product by cheap labor and then are exported -these zones can attract investment, create jobs, and boost exports

Gulf Cooperation Council (GCC)

1. the cooperation council for the Arab states of the Gulf, Gulf Cooperation Council, 1981 2. members: Bahrain, Kuwait, Saudi Arabia, Oman, Qatar, and the United Arab Emirates (UAE) as a political and economic organization 3. the group focuses on trade, economic, and social issues 4. GCC calls for the coordination of a unified military presence in the form of a peninsula shield force 5. 2008, formed a common market, enabling free flow of trade, investment, and workers 6. in Dec. 2009 Bahrain, Saudi Arabia, Kuwait, and Qatar created a monetary council with the intent of eventually created a shared currency 7. since its creation, the GCC has contributed not only to the expansion of trade, but also to the development of its countries and the welfare of its citizens as well as to promoting peace and stability in the region 8. Arab monarchies initially formed to defend against the Iran-Iraq war 9. anti terrorism measures 10. fastest growing economy

Economically similar

1. the more similar the economies of the member countries, the more likely the economic block will succeed -if there is a significant difference in wages offered to employees of the same skill and education level, employees will migrate to the country offering the highest wages -if a member country is economically unstable or becomes so, it is easier for the instability to spread throughout the economic bloc 2. members of an economic bloc are usually required to meet strict membership conditions such as low inflation, low unemployment, reasonable wages, and a stable economy before they are allowed to join the union 3. countries in an economic union should have similar political goals and aspirations -each nation must be willing to give up its autonomy for the goals of the union. A country with similar culture and language makes it easier to develop a mutual understanding of the goals for the economic union 4. a close geographic region cuts down on transportation costs and makes shipping of goods between countries both cheaper and easier

Market Expansion

1. the need for businesses to expand their markets is perhaps the most fundamental reason for the growth in world trade 2. the economies of large-scale manufacturing demand big markets 3. sometimes the home country Is so small it can't generate enough demand -ex. Nestle from Switzerland

why form an economic bloc

1. to protect shared interest from a real or perceived external threat or to attract foreign investment 2. they are afraid of becoming an isolated country in a world of trading blocs 3. for political reasons -developing countries may use the reasoning that they need to stick to the ideals and goals of their economic bloc as justification for the pursuit and implementation of pursuit and implementation of what is commonly called the Washington Consensus model of neoliberalism -a reduction in the essential state supports for local industries, a lowering of the tariff, and the privatization of state-owned firms characterizes the Washington Consensus model

Drawbacks of regional economic integration

1. trade diversion: member countries may trade more with each other than with non-member countries -in a way, weaker companies can be protected -essentially creates a trade barrier -increase exclusivity in internal trade may mean increase trade with a less efficient or more expensive producer because it is a membership country 2. countries may move production to cheaper labor markets in member countries as well as workers may move to gain access to better jobs and wages 3. with more agreement and discussions within a regional bloc, nations may find that they have to give up more of their political and economic rights 4. An economic bloc may impose greater external trade blocs to keep all trading internal to the bloc -this emphasis on internal trade and the exclusion of external countries decreases the possibility of achieving the ultimate goal, which is global free trade -may increase the price -may reduce the likelihood that each nation is producing in line with its comparative advantage 5. countries may see a dilution of their national cultural identity 6. regional integration may encourage mergers and acquisitions within the block to create large rivals -power in large firms can lead to more centralized power for the regional economic bloc; this centralized power may result in reallocation and reassignment of workers to distant locations -economic power will tend to go to these large conglomerates in the union -external larger firms can also overwhelm and overshadow small local firms. These small firms no longer enjoy tariff protection and can be eliminated

Brownfield FDI

1. when a company or government entity purchases or leases existing production facilities to launch a new production activity -ex. a commercial site used for an "unclean" business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area 2. less expensive 3. can be implemented faster 4. However, a company may have to deal with other challenges -existing workforce -outdated equipment -entrenched processes (routines) -cultural differences 5. many of the FDIs in developed countries such as in the EU and the US are through mergers and acquisitions between mature companies purposed for restructuring or refocusing on a core competency 6. inflation protection against US dollar to have another currency

international relationship

the study of how various parties in the international community interact with each other -can be evaluated at the individual, national, or global system level -frequently discussed topics between international actors: political theory, diplomacy, conflict, human rights, international politics and the environment -MNCs are heavily engaged in international trade. The successful ones take political and cultural differences into account

Exchange rate regime

the way in which an authority manages its currency in relation to other currencies and the foreign exchange market -no matter what regime a nation picks, there's a trade off -floating, fixed, and pegged exchange rate regimes is closely related to that country's monetary policy -one key economic decisions a nation must make is how it will value its currency in comparison to other currencies -a free floating exchange rate increases foreign exchange rate volatility which can be a significant issue -ex. developing countries often have the majority of their liabilities denominated by foreign currencies, so they get local and then exchange to foreign to pay. if there currency fluctuates and depreciates then they won't have enough to settle their debts