Ch 6
involves the acquisition of foreign assets to control them.
Foreign direct investment (FDI)
involves investing in "passive holdings" of financial assets, such as by purchasing stocks and bonds for reasons other than control.
Foreign portfolio investment (FPI)
combines the ownership advantage and internalization theories and adds an important third component: location.
John Dunning' s eclectic theory
holds that trade is a zero-sum game, and countries that EXPORT MORE than they import will enjoy a net INFLOW of wealth (measured in gold and silver), whereas countries that import more than they export will suffer a net outflow of wealth
The theory of mercantilism
Mercantilism presented several opportunities to domestic producers. For example, a mercantilist government might offer ..... to stimulate sales to foreigners and increase the country's exports. Likewise, the government could use ......to manage foreign competition and reduce the country' s imports.
subsidies or tax incentives tariffs and quotas
A number of other factors affect a firm's decision to undertake FDI. Three categories include
supply, demand, political
Today, 65% of world exports in flowers and plants go through ....
the Netherlands
in 2011, The top five importers were ......
the United States, China, Germany, Japan, and FRANCE
proposes that two countries can gain from trade even if one does not have an absolute advantage, as long as the countries specialize in producing the good for which they have a comparative advantage.
theory of comparative advantage,
Harvard professor Michael Porter has proposed the most recent trade theory: the ....
theory of national competitive advantage
theory of mercantilism ultimate goal.
to maximize their holdings of gold and silver
Companies maintain ..... rather than getting patents because patent applications are public, and they only offer protection for a specified amount of time. ...... can be maintained indefinitely- as long as companies are able to keep them secret.
trade secrets
The issue of opportunity cost reflects the fact that people have to make ....... because of SCARCITY
trade-offs
the costs of negotiating, monitoring, and enforcing contracts with a second firm in the host country.
transaction costs-
Japan restricts the importation of products in some industries (such as automobiles), and the European Union restricts the importation of many ..... products.
agricultural
influencing fdi- Political factors include (2 things)
avoidance of trade barriers and economic development incentives.
world trade growth is much more ... than world GDP growth
volatile
Michael Porter advocates for the use of ...... because they provide shared practices and drive innovation within Porter suggests that international competition is being transformed from a firm-versus- firm basis to a ...... one.
business clusters cluster-versus-cluster
Businesspeople demonstrate the theory of comparative advantage when they ....
buy goods at their lowest price
France can produce 4 bottles of wine or 6 clock radios. If it exhausts all of its resources, Japan can produce 1 bottle of wine or 5 clock radios. japan's comparative adv
clock radios, 1 clock radio = 1/5 wine bottles france- 1 clock radio = 2/3 wine bottles
classical trade theories remain useful for analyzing and describing the trade of .........- standardized goods such as wheat, sugar, lumber, or oil.
commodities
undifferentiated goods that are bought on the basis of price rather than brand name.
commodities
Dr. Phalin emphasized that trade is .... ; it does not occur unless both parties believe that they will gain from the exchange.
voluntary
influencing fdi- demand factors include (4 things)
customer access, marketing advantages, exploitation of competitive advantages, and customer mobility.
.... in FDI in Russia in recent years.
decrease
Modern trade theories are best used to describe trade patterns in ......, such as cars, personal care products, and consumer electronics.
differentiated goods
country based vs firm based theories- who developed it
economists academics (business professors)
Costs fall as a firm gains experience manufacturing a product, providing ....firms a competitive advantage over new firms.
established
Since the 1980s, U.S. foreign direct investment abroad ("outward FDI") has ..... foreign direct investment in the United States ("inward FDI").
exceeded
France can produce 4 bottles of wine or 6 clock radios. If it exhausts all of its resources, Japan can produce 1 bottle of wine or 5 clock radios. Abs advantage?
france has both- no trade would occur
In 2011, the greatest portion of exports (23%) was in ......., an increase (from 14% in 1990) that was driven in part by the expansion of the ..... and .....
fuels and mining products Chinese population and economy.
absolute advantage 3 assumptions
2 countries 2 goods 1 factor of production (labor)
FDI flows to Myanmar increased more than ...% in 2017. Dr. Phalin attributes this upsurge to recent democratization in the country.
45
In total, sovereign wealth funds worldwide had approximately $.... trillion in assets in 2012.
5
CONSUMPTION accounts for ....% of the U.S. GDP. This is very different from other countries like China, where the largest component is ....., making up ...% of the GDP in China.
70 exports 40
In the early 1800s, British economist ...... proposed the theory of comparative advantage
David Ricardo
receives more FDI than any other region in developing Asia ($136.3 billion), followed by Hong Kong
China
country-based trade theories that were developed to explain trade into and out of a specific COUNTRY as a whole. arose during the 1500s when European nation-states began to emerge.
Classical trade theories
Latin America and the Caribbean - .... receives the most FDI ($62.7 billion) in this regron. Mexico has the second-highest FDI flows but attracts only about half as much
Brazil
In his seminal work,..................- which is sometimes simply called The Wealth of Nations- Smith argued that trade can make everyone better off. individuals who are acting for their own benefit will do what's best for society when they are allowed to produce and exchange goods, services, and assets without government intervention.
An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
exist when a firm is able to reduce its costs by producing a larger variety of goods
Economies of scope
... receives by far the most FDI ($25.3 billion) among the transition economies that emerged from the former Soviet Union.
Russia
In 1980, developing economies accounted for roughly .....of world exports and imports, but they account for nearly ..... of global imports and exports today
a third half
"I know this much: When we buy goods manufactured abroad, we get the goods, and the foreigner gets the money. When we buy goods manufactured at home, we get both the goods and the money."
abraham lincoln
5 classical trade theories
mercantilism, absolute advantage, comparative advantage, Heckscher-Ohlin theory, the Leontief paradox.
These theories were developed after World War II, reflecting the growing importance of multinational enterprises (MNEs) after the war, because country-based theories (like comparative advantage) could not explain INTRA-industry trade
modern trade
London is the current financial capital of the world, but now other major cities around Europe, including Paris and Frankfurt, are pitching themselves to financial companies to convince them to move their offices to their respective cities. Dr. Phalin played a commercial produced by the city of Frankfurt, welcoming investment bankers to ......
"Fall in love with Frankfurt."
In 1990, the greatest amount of exports (29%) was in the general category ......, followed by ...... products.
"others," fuels and mining
three reasons why trade theories are relevant for international business:
1. International trade is pervasive in the modern business world. 2. Governments use these theories 3. You can use them in your career.
In fact, .... million U.S. workers in advanced industries are FDI-employed.
1.4
According to the U.S. government, ownership and control of ....% or more of a company's assets qualifies an investment as FDI.
10
FBI special agent applications peaked in 2009 during the height of the recession (with 68,500 applicants) but have since plummeted to ..... applicants during the last fiscal year that ended in September.
11,500
China, for example, was ranked 30th in world exports and 22nd in world imports in 1980, and rose to ........ and ...... , respectively, by 2011. South Korea, one of the Asian Tigers, was ranked 32nd and 20th, in exports and imports, and rose to ..... and ....., respectively.
1st and 2nd 7th and 9th
countries that are close allies on a geopolitical defense level are up to .....% more likely to engage in trade and business with one another.
20
Dr. Phalin pointed out that .... and .....have become more important players in international trade since 1980. producing more to sell to the world, improved its economy to such an extent that both are buying significantly more as well.
China South Korea
We can divide trade theories into two groups:
Classical trade theories Modern trade theories
The ..... visa program allows foreign nationals to have permanent U.S. residency in exchange for an investment of at least $500,000 that creates at least 10 full-time jobs
EB-5 investor
Rising labor and land costs have created opportunities for other countries to become successful flower exporters. Colombia and ....... are major flower producers for the North American market, ..... and ..... are major flower producers for Europe, China is a major flower producer for Asia.
Ecuador Kenya and Ethiopia
Of developing economies in Africa, ..... currently attracts the most FDI ($7.4 billion), followed by Ethiopia ($3.6 billion) but Dr. Phalin claims ..... is the second
Egypt Nigeria
According to Porter, four factors determine the global competitiveness of an industry.
Factor conditions Domestic demand conditions Related and supporting industries Firm strategy, structure, and rivalry
..... theory is a modem extension of the theory of comparative advantage.
Heckscher-Ohlin (also called the theory of relative factor endowments or the H- O theorem)
proposes that a country's comparative advantage is dependent upon which products can be produced using the resources that the country has in abundance country specializes in producing high-tech computer chips must have a wealth of high-skilled labor and high-tech capital.
Heckscher-Ohlin theory (theory of relative factor endowments)
emergency meeting occurred just a couple of days after an attempt to deliver humanitarian assistance at the Colombia-Venezuela border failed and ended in violence. Pence urged regional partners to freeze oil assets of Venezuela's state-owned oil company (PDVSA) controlled by Maduro, and transfer the proceeds to Interim President ........, the opposition leader who the U.S. and 50 other nations recognize as Venezuela's only legitimate president.
Juan Guaido
The ..... consists of leaders from 12 Western nations and was established two years ago in effort to end the crisis in Venezuela that has resulted from the dictatorship of Nicolas Maduro.
Lima Group
American investor ..... was arrested for fraud in Russia earlier this week. He is the founder of BARING VOSTOK, a private equity fund manager based in Moscow, and one of the last American investors remaining in Russia.
Michael Calvey
theories that were developed after World War II to explain trade between FIRMS
Modern trade theories
"Fall in love with Frankfurt." This tactic worked to get .... (3 companies) on board to establish offices in Germany's financial center.
Morgan Stanley, Goldman Sachs, and Citigroup
Of the most structurally weak, vulnerable, and small economies, ...... currently attracts the most FDI ($4.3 billion)
Myanmar
...... countries (like the United Arab Emirates) and countries with ....... (like China) own some of the largest sovereign wealth funds. Many sovereign wealth funds are owned by emerging countries.
Oil- rich large budget surpluses
pools of capital controlled by governments.
Sovereign wealth funds
is the voluntary exchange of goods, services, money, or assets between people or organizations
Trade
In 2012, the stock of FDI by foreigners in the United States was $2.7 trillion, and the ..... was the largest investor in the United States. That year, the stock of FDI by U.S. residents in other countries was $4.5 trillion, and most of this FDI was in developed countries, including the Netherlands and United Kingdom. ....... account for a disproportionately high share of outbound FDI because they act as offshore financial centers for tax purposes.
United Kingdom Small Caribbean islands
Whereas Adam Smith focused on ..... productivity differences, David Ricardo focused on .... productivity differences.
absolute relative
In Wealth of Nations, Adam Smith proposed the theory of ........., which proposes that all nations can benefit from free trade by completely specializing in producing the goods that they can make more productively and efficiently- that is, with the least amount of labor input- and export those goods. should IMPORT the goods that other countries can make more productively.
absolute advantage
(1723 - 1790) was a Scottish economist and philosopher who argued against mercantilist and protectionist policies in the 1700s;
adam smith
considered the father of modem free-market economic theory (also known as the father of modem economics and capitalism).
adam smith
exports directly .... GDP, while imports directly .... GDP.
add to reduce
country based vs firm based theories- when was it developed?
before WWII after WWII
During the Colonial Era, countries funded their mercantilist policies by ..... from colonies. (This is one of the factors that led to the American Revolution.) Moreover, decreased competition from foreign firms drives up ....., which is bad for domestic consumers and makes firms less efficient.
collecting taxes domestic prices
Many European countries participated in mercantilist ......, prohibiting their colonies from trading with any other country but them. Mercantilist policies also kept their workers and manufacturers happy, because they were busy at work producing goods to export.
colonialism
Gains from trade due to .... are the key driving force behind international trade
comparative advantage
relative advantage that one nation enjoys over another nation, as opposed to an absolute advantage
comparative advantage
refers to the leverage a company has that makes it better than, and different from, its competitors.
competitive advantage
GDP(Y) is equal to
consumption (C) + investment (I) + government purchases (G) + net exports (NX) Y = C + I + G + NX
Production becomes more efficient as the firm produces a greater number of goods because the firm is able to spread its fixed costs out over a greater number of units, so its average .... falls as .... increases.
cost per unit production
According to Staffan Linder's ..... theory, trade in manufactured goods should be between countries that have similar per capita incomes, so intra-industry trade in manufactured goods should be pretty common.
country similarity
On Sunday February 24th, President Trump announced that he will ..... the 25% additional tariffs on Chinese imports that were scheduled to begin on March 1st. Trump did not declare a new deadline, but he stated (in a series of tweets) the reason for suspending the new tariffs is that the U.S. and China have made progress in discussions concerning ...... protection, technology transfer, agriculture, and services, among other issues
delay intellectual property
the idea that democracies do not go to war with one another since they are typically bound by economic ties.
democratic peace
There has been a significant shift in the focus of international trade; ...... economies account for a greater share of world exports and world imports today than they did in 1980.
developing and emerging
change in relative shares of exports 1990-2011 for sectors, such as clothing, automotive products, and textiles?
didn't fluctuate much
Commodities stand in contrast to ......, such as automobiles or bottles of wine.
differentiated goods
Michael Calvey arrest- two important messages to other foreign investors: first, .......; second, ......
even those who do things by the book are subject to the rules of Russian business even having foreign citizenship and a perfect investment record do not justify an exemption
Therefore, the theory of mercantilism held that countries should promote ..... industries and place restrictions on .....to be successful
export imports
When production exceeds consumption, the U.S. .... product; when production begins to decrease and finally falls below consumption in the standardized product stage, the U.S. ..... product to make up for the difference.
exports imports
Net exports (NX) are equal to
exports - imports (X - M)
A firm that invests in research and development can become a ..... in innovative industries, giving it a leg up on competitors.
first mover
According to the Brookings Institution, ....., majority-owned affiliates of foreign companies, employ 5.6 million workers in the United States and account for about 5% of all private employment
foreign-owned establishments (FOEs)
Some politicians are concerned that sovereign wealth funds will make investment decisions to ........ rather than just to earn returns. The International Monetary Fund has called on sovereign wealth funds to voluntarily adopt a code of conduct that would prohibit this kind of investing.
further political goals
graph that compared the growth rate of the volume of world trade to the growth rate of world GDP from 1981 to 2015. The data illustrates that there is a clear correlation between .... and ....
how fast world trade is increasing and how fast the world economy is increasing.
In this second stage, less-advanced countries see consumption start to really take off, which is supplied by ..... Consumption reaches its maximum and begins declining in the beginning of the .... product stage, while production increases exponentially. Production ultimately surpasses consumption, providing less- advanced countries with ..... opportunities.
imports. standardized export
global trade has ...... since 1990. The ..... in trade in both goods and services was consistent, except for a dip around 2008 and 2009 as a result of the Great Recession.
increased significantly increase
In the new product stage for the U.S., consumption increases steadily, while production ...... Consumption continues a steady increase for the next two stages, while production reaches its peak in the ..... product stage
increases even more quickly maturing
an increase in low-price imports might put pressure on domestic firms to reduce their prices. As firms find a way to reduce their prices, they might also try to reduce their costs. This may lead domestic industries to become more competitive.
indirect effect of imports
However, mercantilism reduces a nation's wealth in the long-run, and it results in the ...... It requires the government to subsidize domestic export industries, which requires the government to .....
inefficient allocation of resources. collect more taxes.
A firm's ownership of brand names, trademarks, patents, or copyrights may give it advantages over competitors. Examples include a single pharmaceutical company that owns the patent for a life-saving drug, Louis Vuitton's recognizable brand, and Siemens' patented process for creating solar panels. In these cases, the pharmaceutical company benefits from ....., Louis Vuitton benefits from its ...., and Siemens benefits from its .....
innovative technology brand name proprietary process
country based vs firm based theories- what does it explain
inter-industry trade intra-industry
Country-based theories are useful for explaining ..... trade (trade between two different industries),
interindustry
, a film is more likely to choose FDI when it faces high transaction costs
internalization theory
is a form of international business in which residents of one country supply capital to the residents of another
international investment
is trade between residents of two countries. These residents can be people, firms, nonprofit organizations, or other types of associations.
international trade
Country similarity theory is primarily useful for explaining ..... trade in differentiated products because differences in specific preferences within an industry (such as the demand for certain brands) drive it
intra-industry
The first test of the Heckscher-Ohlin theory was made by Russian-American economist Wassily W. Leontief. He constructed an elaborate input-output model for the U.S. economy to determine whether the goods we export are capital-intensive Surprisingly, he found that U.S. exports were ..... capital-intensive than U.S. imports, which contradicted the predictions of the Heckscher-Ohlin model. This apparent contradiction came to be known as the ......
less Leontief paradox.
internalization theory- When transaction costs are high, a firm is more likely to internalize operations within the firm rather than rely on a partner. When transaction costs are low, a firm is more likely to go global through contractual agreements, such as .... and ...
licensing and franchising.
a country has a comparative advantage if the opportunity cost of producing that good (in terms of the associated decrease in other goods' production) is .....for that country than the comparison country's opportunity cost of the good.
lower
According to Porter, a high level of competition among suppliers will result in (3 things)....
lower prices, higher quality, and more innovation.
Some Chinese firms are building multimillion dollar textile plants in the United States, which has brought thousands of textile jobs back to this country. These goods are "........"
made by China, in America
In less advanced countries, consumption increases at a very low rate in the first stage, and production doesn't even occur until a meager production increase begins in the...... product stage.
maturing
product life cycle theory stage: demand picks up and company expands its capacity to meet foreign and domestic demand. company begins to look to foreign markets as a lucrative source of demand for the product. However, competitors- both domestic and foreign- begin to emerge to take advantage of the profitable opportunity.
maturing
Note the key difference between the theory of absolute advantage and comparative advantage: The theory of absolute advantage holds that a country should specialize in producing goods for which it is ........, whereas the theory of comparative advantage holds that a country should specialize in producing goods for which it is ....
more productive relatively more efficient.
a positive shock to net exports will increase GDP by even more than the size of the shock
multiplier effect, (ex : if a Ford factory sells more cars to foreign buyers, then it will have to hire more workers. The entire economic community surrounding the factory, from restaurants to shopping centers to movie theaters, will benefit from the influx of customers.)
aggressively lobby the government to protect domestic industries with subsidies and import restrictions.
neomercantilists (or protectionists)
product life cycle theory stage: The goal is to closely monitor consumer reaction and then fine-tune the product before making a significant investment in the global market.
new product stage
product life cycle theory stage: firms develop and introduce a new product to meet a need in the market. profit and demand are uncertain, so firms generally only sell to domestic markets. Exports are limited as a result, and firms do not invest heavily in manufacturing capacity.
new product stage
every product life cycle has three stages:
new product stage maturing product standardized product
According to ..... theory, rival firms in the same industry will attempt to expand sales globally in order to grow larger and take advantage of economies of scale
new trade
An alternate modem trade theory views trade patterns as a result of MNCs' strategic decisions to remain competitive globally.
new trade theory
explains trade in differentiated goods using the concept of economies of scale, which are the savings from mass production. This theory also suggests that intra-industry trade will be common.
new trade theory
he states where FDI plays the greatest role in private employment are along the east coast of the United States- particularly in the ...
northeast.
Smith's abs advantage theory breaks down when ....
one nation has an absolute advantage in both goods.
In a two-good model, a country can have an absolute advantage in as many as two goods, but it can have a comparative advantage in .....
only one good
comparative advantage encompasses the idea of ...... or what a country must give up in order to produce another unit of a good.
opportunity cost,
eclectic theory- firm will engage in FDI when it has three advantages:
ownership internalization location
Three theories of international investment are as follows:
ownership advantage internalization dunning's eclectic
firms have an "ownership advantage" when they own valuable assets that make them competitive domestically, which can then be used to be competitive globally
ownership advantage theory,
4 Ways to Achieve Sustainable Competitive Advantage
owning intellectual property rights investing in research and development Taking advantage of economies of scope Exploiting the experience curve
Sovereign wealth funds played an important role during the 2008-2009 financial crisis, as they made several large loans to international banks, private equity firms, and hedge funds to shore up their balance sheets. Most of the investments made by sovereign wealth funds are ..... rather than FDI. This allows countries to earn returns without having to control the businesses that they invest in.
passive FPI
(russia) Foreign direct investment (FDI) ...... between 2012 and 2013 , just after Obama was reelected because relations were expected to warm up, or run more smoothly. This was followed by ..... in 2014 when Russia got involved in the civil conflict going on in Ukraine at the time. FDI ...... after Trump's election in 2016, but there has been a ..... over the last two years.
peaked a sudden drop increased a moderate amount sharp decrease
According to Linder, people in countries with similar per capita incomes have similar ...., so they will trade goods of the same type.
preferences
This theory proposes that international trade happens as a result of increasing international demand, which puts pressure on the firm to find lower production costs outside of its home country.
product life cycle theory
suggests that a nation's comparative advantage will change over time because products progress through a typical life cycle
product life cycle theory
4 Modern trade theories
product life cycle theory, country similarity theory, new trade theory, Porter's theory of national competitive advantage.
influencing fdi- Supply factors include (4 things)
production costs, logistics, availability of natural resources, and access to key technology.
In recent years, Russia has experienced diminishing interest from foreign direct investors due to ..... against Russia and the overall .....
sanctions instability of its currency.
Pence also announced that the U.S. was imposing more ....... on Maduro's pro-government allies and pressed for all countries to restrict ...... for Maduro's inner circle.
sanctions visas
Benefits from moving along the experience curve are particularly high in the .... industry.
semiconductor chip
Michael Calvey arrest- highlights the Russian business concept ......, which emphasizes the pecking order of businessmen and politicians, placing Putin at the top.
sistema
product life cycle theory stage: demand for the product stabilizes, and the product becomes more of a commodity. Manufacturers try to cut costs, often by moving production facilities to countries where wage rates are low. As a result, the firm may actually IMPORT its goods back into the home market from the country where they are produced.
standardized
In the United States, labor unions take a neomercantilist stance in industries where domestic producers feel they need protection from foreign competition, particularly in the ..... industry, where we pay more than double the price per pound that the rest of the world pays.
sugar
In 2011, the top five merchandise exporters were ......
the United States, China, Germany, Japan, and the NETHERLANDS
This theory explains why certain industries are competitive on a global scale. It is the first theory to integrate firm-based and country-based theories to explain global competitiveness.
theory of national competitive advantage
In France, an hour of labor can produce 2 bottles of wine or 3 clock radios. In Japan, an hour of labor can produce 1 bottle of wine or 5 clock radios France has an absolute advantage in .....
wine production
Heckscher-Ohlin theory relies on the validity of three observations, which are as follows:
•There are two types of factor endowments: labor and capital. • These endowments vary among countries. • Variation in goods is due to the differing types of resources used to produce them.
