International Business Test #2

demands that some specific fraction of a good can be produced domestically benefit domestic _______ and jobs, but _______ face higher prices

local content requirements producers, consumers

The factor that impacts all the theories of trade because companies should produce where it is most efficient is...

location

What are the three main implications for international businesses?

location, first-mover advantages, and government policy

Contracting out manufacturing in an effort to build strategic flexibility is best suited for _____ value-added manufacturing.

low

When transportation costs are high, exporting can be unprofitable, which means there's a...

low value-to-weight ratio

Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _______ prices and _______ economic welfare.

lower, increase

In the first two decades, the WTO has been successful based on what two measures?

member countries have faith in the WTO's dispute resolution procedures, countries involved in formal procedures for trade disputes have adopted WTO recommendations

encourage exports and discouraged imports, viewed trade as a zero-sum game (16th and 17th centuries)

mercantilism

What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?

monopoly

A firm engaged in FDI is a...

multinational enterprise

trade can increase the variety of goods available and decrease the average cost of those goods because of economies of scale: unit cost reductions associated with a large scale of output

new trade theory

According to the US Department of Commerce, an interest of _____ _____ in a foreign business creates an FDI.

over 10%

When the value of a currency is fixed relative to a reference currency, a ________ exchange rate exists.

pegged

independent states combined into a single union, requires that a central political apparatus coordinate economic, social, and foreign policy for member states

political union

If the spot exchange rate is $1 to 110 Yen and the 90-day forward rate is $1 to 100 Yen, then the Yen is selling at a ________ to the dollar in the 90-day forward market.

premium

When a currency is expected to appreciate, it is at a...

premium

Tariffs are generally pro _______ and anti ______.

producer, consumer

as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade

product life-cycle theory

The fixed exchange rate _______ the growth of international trade and investment.

promotes

An import _______ is a type of trade restriction that sets a physical limit on the quantity of a product that can be imported into the country in a set period of time.

quota

extra profit that producers make when supply is artificially limited by an import quota

quota rent

Foreign exchange markets can provide some insurance against volatile changes in exchange rates, which is called foreign exchange _____.

risk

According to Michael Porter, domestic ________ creates pressures for companies to innovate, improve quality, reduce costs and invest in upgrading advanced factors.

rivalry

What are three drawbacks to government intervention?

self-defeating as it protects the inefficient, dangerous as it might invite retaliation, unlikely to be well-executed as can be captured by special interest groups

The 1997 WTO agreement opened the telecommunications market to foreign competitors and exemplifies how ______ are impacted by FDI.

services

The primary problem that supporters of mercantilism claim is trade should...

show a gain by one country that results in a loss by another.

A tax on imports that is specified as a monetary amount per unit of import is called a ______ tariff.

specific

levied as a fixed charge for each unit of a good imported

specific tariff

rate at which a foreign exchange dealer converts one currency into another currency on a particular day, determined by the interaction between supply and demand, and so change continually

spot exchange rate

The consequences of free trade include _______ economic gains in terms of higher domestic consumption and more efficient use of resources.

static

total accumulated value of foreign-owned assets at a given time

stock of FDI

The _______ trade policy argument suggests that governments should subsidize promising domestic firms in emerging industries and should also assist firms in overcoming barriers to entry created by foreign firms due to first-mover advantages.

strategic

What are four non tariff barriers?

subsidies, quotas, voluntary export restraints, antidumping duties

a government payment to a domestic producer

subsidy

a tax levied on imports that effectively raises the cost of imported products relative to domestic products

tariff

a hybrid of a quota and tariff where a lower tariff is applied to imports within the quota than to those over the quota

tariff rate quota

_______ ______ _______ permit a specific quantity of imported goods to enter the country under a reduced rate of duty during the quota period.

tariff rate quotas

A firm's bargaining power with the host government is highest when...

the host government places a high value on what the firm has to offer when there are few comparable alternatives available, and when the firm has a long time to negotiate

Which two of the following describe countervailing duties?

they can be substantial and stay in place for 5 years, they are a special tariff

International business use foreign exchange markets for what three reasons?

to pay a foreign company for its products or services in its country's currency, to convert foreign currencies it receives from transactions into its own currency, to invest spare cash for short terms in money markets

In what two ways can a government use intervention in trade as a foreign policy instrument?

to pressure or punish "rogue states", to grant preferential trading terms to countries it wants to build relations with

What are the two reasons that export tariffs are levied?

to raise revenue for the government, to reduce exports from an industry sector, often for political reasons

Suppose a US company agrees to buy products worth 1 million euros. At the time of the agreement, the dollar/euro exchange rate was $1= euro 1.10, but at the time of the payment, the exchange rate is $1= euro .80. The additional money owed by the US company due to the adverse movement in exchange rates between the time of the deal and the time when payment is due is called _________ exposure.

transaction

Suppose a company agrees to buy products in 2014 with payment due in 2015. __________ exposure refers to money lost due to an adverse movement in exchange rates between the time the deal is signed and the time when the products are paid for.

transaction

extent to which the income from individual transactions is affected by fluctuations in foreign exchange values, can lead to a real monetary loss

transaction exposure

What can the exchange rate risk be divided into?

transaction, translation, economic

Firms should rely on what four things to predict exchange rate movements?

transition and translation exposure, monthly foreign exchange exposure reports, forecasting future exchange rates, establishing good reporting systems

impact of currency exchange rate changes on the reported financial statements of a company, deals with the present measurement of past events, gains and losses from this exposure are reflected only on paper

translation exposure

FDI will be favored over exporting when...

transportation costs and trade barriers are high

Unilateral lowering of trade barriers has not occurred mostly due to a lack of _______ among governments.

trust

A self-imposed trade restriction on the quantity of a good that the exporting country is allowed to export to another country is called...

voluntary export restraint

quota on trade imposed by the exporting country, typically at the request of the importing country's government

voluntary export restraint

one in which a gain by one country results in a loss by another

zero-sum game

If you need to buy $200 at $1.76/pound, how many pounds do you need? or convert into indirect quotation?

113.64 pounds 200*(1/1.76) = 113.64 pounds

promoted unrestricted free trade, believed countries differ in their ability to produce goods efficiently (1776) built on Smith's ideas (19th century) refined Ricardo's work (20th century)

Adam Smith, David Ricardo, Eli Heckscher and Bertil Ohlin

Mercosur is a free trade pact started in 1988 by which two South American economies?

Brazil, Argentina

If the interest rate in Canada is 6.5% and the interest rate in the US is 4%, the international Fisher effect predicts that...

Canada's currency will depreciate by 2.5% against the US dollar.

The _______ Round started in 2001 and continues today to deal with the issues of agriculture protectionism, protection of intellectual property, and other priorities of the WTO.

DOHA

What are two key political institutions of the EU?

European Commission & Council of the European Union

T/F: An acquisition is considered beneficial because it effectively reduces the number of businesses in a market.

False

T/F: Knickerbocker's theory is attractive because of its explanation of why FDI is more efficient than exporting for expanding abroad.

False

T/F: Like transaction exposure, economic exposure is concerned with the effect of exchange rates changes on individual transactions, most of which are short-term affairs.

False

T/F: The greater the number of countries involved in economic integration, the easier it is to reach an agreement among the countries.

False

What are equity entry modes? What are the pros/cons?

Greenfield's, Brownfield's, acquisitions, strategic alliances, mergers, turnkey solutions, pro: learn a lot con: expensive

The Middle East has an abundance of oil reserves; therefore exporting oil supports the ________ theory which is based on creating an advantage based on factor endowments.

Heckscher-Ohlin

argued comparative advantage arises from differences in national factor endowments: the extent to which a country is endowed with resources such as land, labor, and capital

Heckscher-Ohlin Theory

_______ theory of FDI suggests that firms follow their domestic competitors overseas.

Knickerbocker's

since the US was relatively abundant in capital, it would export capital intensive goods and import labor-intensive goods

Leontief Paradox

One goal of the ________ - _________ Act, passed by the US Congress in 1930, was to increase import duties by as much as 50% in order to protect farmers against agricultural imports.

Smoot-Hawley

FDI will be favored over licensing when...

The firm wants control over its technological know-how The firm wants control over its operations and business strategy The firm's capabilities are not amenable to licensing

Three factors that have an important impact on future exchange rate movements are...

a country's price inflation country's interest rate market psychology

It is easiest to establish regional economic integration among...

a limited number of adjacent countries.

What type of company is best-suited for contracting out manufacturing in an effort to reduce economic exposure as the result of exchange rate movements?

a textile firm

production of a product when it is more efficient than any other country in producing it, trade is not zero-sum game What should countries do?

absolute advantage specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries

What are the pros of regional integration?

achieve gains from free flow of trade and investment between countries, likelihood of violent conflict and war will decrease

levied as a proportion of the value of the imported good

ad valorem tariff

Informal or ________ trade policies are used to diminish imports and increase exports.

administrative

The Japanese government is used as an example of how governments have effectively used _______ trade policies to limit imports through bureaucratic rules.

administrative

bureaucratic rules that are designed to make it difficult for imports to enter a country these policies hurt _______

administrative trade policies consumers

The Maastricht Treaty committed EC members to...

adopt a common currency by Jan. 1, 1999

Sometimes governments pay subsidies to help companies survive challenging economic climates. In effect these companies have...

an unfair competitive advantage

The WTO does allow ________ duties to be imposted on foreign goods sold below their cost of production when domestic producers are being hurt.

antidumping

If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for...

arbitrage

Which three industries are frequently targeted by antidumping actions?

basic metal, plastics, chemicals

What are FDI benefits and costs?

benefits: inflows of capital, technology, skills, and jobs costs: repatriation of profits to the home country and a negative balance of payments effect

Efficient market school argues that forward exchange rates are the ________ __________ of future spot exchange rates

best predictors

What are cons of regional integration?

can be costly, loss of national sovereignty, people will move to the more developed country

What are two things Porter labels as basic factors of production?

climate, natural resources

no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production (ex: Mercosur)

common market

Heckscher and Ohlin identified differences in national factor endowments as the root of...

comparative advantage

trade is a positive sum game in which all gain What should happen when one country has absolute advantage in the production of all goods?

comparative advantage country should specialize in the production of those goods that it produces most efficiently and buy the goods that it produces less efficiently from other countries

Ricardo's theory of comparative advantage assumes _______ returns to scale.

constant

Which two groups are negatively impacted when an import tariff is enacted?

consumers, foreign producers

According to new trade theory, first movers in an industry can gain a scale-based _______ advantage that later entrants find almost impossible to match.

cost

eliminates trade barriers between member countries and adopts a common external trade policy (ex: The Andean Community)

customs union

When a currency declines in value, it is said to __________. When it increases in value, it is said to __________.

depreciate, appreciate

selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their "fair" market value objective is to protect ____________ producers from unfair foreign competition

dumping domestic

Strategic trade policy suggests an _________ justification for government intervention in trade.

economic

extent to which a firm's future international earning power is affected by changes in exchange rates, concerned with long-term effect of changes in exchange rates on future prices, sales, and costs

economic exposure

involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries' tax rates, and a common monetary and fiscal policy What is the downside of this? (ex: EU)

economic union sacrifices significant amount of national sovereignty

Under new trade theory, as the size of the market increases, companies may be able to develop better ________.

economies of scale

A drawback of Knickerbocker's theory is its failure to address...

efficiency

What is the purpose of the foreign exchange market?

enables the conversion of the currency of one country into the currency of another provides some insurance against foreign exchange risk (adverse consequences of unpredictable changes in exchange rates)

A new trade theorist would say a company needs to rely on what three things to gain first-mover advantage?

entrepreneurship, innovation, and luck

rate at which one currency is converted into another

exchange rate

policy that partially or entirely restricts the export of a good

export ban

tax placed on the export of a good

export tariff

producing goods at home and then shipping them to the receiving country for sale

exporting

What are non-equity based entry modes? What are the pros/cons?

exporting, importing, licensing, franchising pro: less investment, less initial risk, but have long term risk con: don't learn anything

What are four national attributes Porter theorizes shape the environment that local firms compete in?

factor endowments, demand conditions, firm strategy/structure/rivalry, related and supporting industries

What are the four determinants of national competitive advantage: Porter's Diamond?

firm strategy, structure, and rivalry demand conditions related and supporting industries factor endowments

How can firms minimize translation and transaction exposure?

firms can: -buy forward -use swaps -leading and lagging payables and receivables

A ________ exchange rate system is preferable in an economic crisis like the banking crisis that hit Iceland in 2008.

floating

What are two elements of the Jamaica Agreement?

floating exchange rates were acceptable, gold was abandoned as a reserve asset

amount of FDI undertaken over a given time period

flow of FDI

Why do countries want to integrate?

for peace and stability, which leads to economic growth

market for converting the currency of one country into that of another country

foreign exchange market

One way for business to control the uncertainty of the future value of currencies is to utilize the _________ exchange market.

forward

occurs when two parties agree to exchange currency and execute the deal at some specific date in the future

forward exchange

the exchange rate governing such a future transaction

forward exchange rate

_______ ________ can lead to a country gaining from a shift in production, but - at the same time - can also cause suffering.

free trade

refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country

free trade

all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers (ex: European Free Trade Association, NAFTA)

free trade area

The political reasons for regional economic integration have been an important factor in several attempts to establish ______ trade areas and ________ customs unions.

free, custom

What were the first two industries targeted by the WTO as part of its effort to include regulations governing FDI?

global telecommunications, financial services

A number of currencies are NOT freely convertible due to __________ intervention.

government

Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies, and policies towards capital markets.

government

What's the downside of integration?

having to be close can cause for arbitrage

A firm that protects itself against foreign exchange risk is ____

hedging

Tri-state area more ________ than other entities in their country

homogenous

Knickerbocker argued that firms follow the same _______ behavior in their FDI strategies as oligopolies follow.

imitative

direct restriction on the quantity of some good that may be imported into a country

import quota

The _________ __________ ___________ argues that companies should invest in forecasting services.

inefficient market school

According to Alexander Yeats, the countries that produce the fastest-growing products in intra-Mercosur trade do so _______ and at the _______ price.

inefficiently, highest

The oldest argument for government intervention in trade where developing nations must protect their domestic industries until they are ready to compete globally is the ______________ argument.

infant industry

Interest rates reflect anticipated future _______ rates.

inflation

Increase in interest rates reflect likely increases in ________, which is connected to depreciating ________ rates.

inflation, exchange

A swap deal is just like a conventional forward deal in that it...

insures against foreign exchange risk.

FDI can lead to...

international trade

If we accept that the tenets of strategic trade policy are correct, the government should ________ _______ international trade.

intervene in

When governments intervene in foreign trade, they often claim they are protecting _______ from unfair foreign competition.

jobs

involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate

lag strategy

involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate

lead strategy

What predictions of new trade theory are supported by studies?

leads to lower average costs, increases the specialization of production within an industry, and increases the variety of products available

Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyota pioneered ______ production, which enables it to produce higher quality automobiles at a low cost than global rivals.

lean

granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells (doesn't give tight control)

licensing

If you need to buy 200 pounds at $1.76/pound, how many dollars do you need?

$352