Quiz 1
US ==> USMCA
1 billion worth of US export creates 5000 jobs, therefore how many jobs will be lost if a total of $601 billion worth of US export to Canada and Mexico are cancelled 5000 x 601 = 3,005, 000 jobs will be automatically lost in the United States
Some Newer Explanations for the Direction of Trade: Differences in Resource Endowments
1) Resource Endowment Theory •The land, labor, capital, and related production factors a nation possesses • •For example, the United States has a large supply of fertile farmland, Chile has abundant supplies of copper, and Saudi Arabia has extensive amounts of crude oil. • •Hence, each of them should export products associated with their respective endowment
Explaining FDI: Theories of International Investment
1)Greenfield investment •The establishment of new facilities from the ground up 2)Cross-border acquisition (Grey Investment) •The purchase of an existing business in another country
Environment :all forces surrounding and influencing the life and development of the firm. •Uncontrollable Forces external forces over which management has no direct control, although it can exert an influence
Environment :all forces surrounding and influencing the life and development of the firm. •Controllable Forces internal forces that management administers in order to adapt to changes in the uncontrollable forces.
Explaining Trade: International Trade Theories •Comparative advantage (David Ricardo's trade theory) •When one nation is less efficient than another nation in the production of each of two goods, the less efficient nation has a comparative advantage in the production of that good for which its absolute disadvantage is less.
Explaining Trade: International Trade Theories •Comparative advantage - Example •Ethiopia has an absolute advantage in producing both Coffee and Tea over Kenya. Note that compared with Ethiopia, Kenya is less efficient in producing Coffee by about five times, or 3.3 times percent less efficient than Ethiopia in the production of tea. This means, if specialization and trade partnership needs to be designed by both countries, Ethiopia should make an effort to make a priority in the production of Coffee and Kenya in the production of Tea.
The forces over which the management does not have any command are called
External/uncontrollable
Rapid urbanization of populations combined with industrialization is quickly shifting the world's economic center of gravity from Asia back to Europe and the Americas.
False
The old Mercantilists and today's neo-mercantilists believe import and export are good for building the wealth of a nation
False
The foreign environment is composed of all the uncontrollable forces originating in the __________ that surround and influence the life and development of the firm.
International arena, host nation & foreign country
Hofstede's power distance measure captures
None of the above [a society's level of comfort with uncertainty | individual anxiety about uncertainty in a cultural context | social anxiety and the use of alcohol in its reduction | avoidance of aggressive behavior in a society ]
•Terms-of-Trade estimates •Commodity terms of trade (a.k.a. barter terms of trade) •Measure of the international exchange ratio •Measures the relation between the prices a nation gets for its exports and the prices it pays for its imports
z
Globalization is
ØThe tendency toward an international integration of goods, technology, information, labor, and capital, and the process of making this integration happen
The Five Drivers of Globalization
ü Political Drivers ü Technological Drivers ü Market Drivers ü Cost Drivers ü Competitive Drivers
Explaining Trade: International Trade Theories •Absolute advantage (Adam Smith's trade theory) •A nation's ability to produce more of a good or service than another country for the same or lower cost of inputs
•Adam Smith argued against mercantilism by claiming that market forces, not government controls, should determine the direction. •A nation should specialize in making those goods it could produce most efficiently. That is goods for which it had an absolute advantage over the trading partner.
How evenly has trade grown? Should we be worried?
•Although the absolute value of the global merchandise exports increased, the proportion of world trade originating from North America, Latin America, Africa, and the Middle East decreased since 1980. On the other hand, the proportion of merchandise exports from Asia has nearly doubled since 1980, with China accounting for nearly two-thirds of the increase.
Annual Inflows of FDI in Developing Countries
•FDI flowing into developing countries was 7 times larger in 2000 than 1990 and tripled again by 2013, although the proportion of FDI funds flowing to these nations fluctuates widely. •Asia has seen a dramatic increase in FDI inflows in recent years, accounting for nearly half of all investments not directed at the U.S. and the EU during 2010-2013.
Future employees and managers need to have a basic knowledge of international business
To meet the challenges of global competition|.....to be employable by international business firms and global organizations such as UN bodies, World Bank, IMF, WTO|......to internationalize domestic firms
Hofstede's collective cultural dimension indicates
True
In examining the volume of international trade exports of services grew faster than trade in merchandise for the last 20 years
True
What is the relevance of Mercantilism and Today's trading policy Mercantilism Its philosophy: An economic philosophy based on the belief that (1) a nation's wealth depends on accumulated treasure, usually precious metals such as gold and silver; and (2) to increase wealth, government policies should promote exports and discourage imports. (17-18 centuries)
What is the relevance of Mercantilism and Today's trading policy Neo-Mercantilism •To view trade as a zero-sum activity, in which one party must lose in order for another to gain. We still use the term "favorable" trade balance to mean a nation exports more goods and services than it imports. In balance-of-payments accounting, an export that brings money to the country is called positive, but imports that cause monetary outflows are labeled negative.
U.S. ==> China
1 billion worth of US export creates 5000 jobs, therefore how many jobs will be lost if $120 billion worth of US export to China is cancelled? 5000 x 120 = 600, 000 jobs will be automatically lost
What Is International Business and What Is Different about It? Eleven External (Uncontrollable) Forces
1.Competitive - competitors, their number, locations, activities 2.Distributive - agencies available for distributing goods & services 3.Economic - GNP, GNI, unit labor cost, personal consumption variables that impact a firm's ability to do business 4.Socioeconomic - characteristics & distribution of populations 5.Financial - interest & inflation rates, taxation, etc. 6.Legal - laws governing international operations of MNCs 7.Physical - topography, climate, natural resources 8.Political - local political climate, government structure, international organizations 9.Sociocultural - culture, attitudes, values, beliefs of the local environment 10.Labor - composition, skills, and attitudes of local labor 11.Technological - technical skills & equipment converting resources into product
What are the reasons for the regionalization of trade?
1.The business climate in these importing nations is already relatively favorable. 2.Export and import regulations are not insurmountable. 3.There should be no strong cultural objections at home to buying that nation's goods. 4.Satisfactory transportation facilities have already been established. 5.The business climate in these importing nations is already relatively favorable. 6.Export and import regulations are not insurmountable. 7.There should be no strong cultural objections at home to buying that nation's goods. 8.Satisfactory transportation facilities have already been established.
Monopolistic Advantage Theory
2) Monopolistic advantage theory •Theory that foreign direct investment is made by firms in industries with relatively few competitors, due to their possession of technical and other advantages over indigenous firms
Some Newer Explanations for the Direction of Trade: Overlapping Demand
2) Overlapping demand (Stefan Linder) •The existence of similar preferences and demand for products and services among nations with similar levels of per capita income •The theory of overlapping demand suggests that international trade in manufactured goods will be greater between nations with similar levels of per capita income than between those with dissimilar levels of per capita income •Product differentiation •Unique differences producers build into their products with the intent of positively influencing demand
Some Newer Explanations for the Direction of Trade: International Product Life Cycle (IPLC)
3) International product life cycle (IPLC) •A theory explaining why a product that begins as a nation's export eventually becomes its import • •As a result of the above, export of a product might be delayed until the product reaches maturity level at a local market (see following graph)
Some Newer Explanations for the Direction of Trade: Economies of Scale and the Experience Curve
4) Economies of scale •The predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases 5)Experience curve •The rising scale on which efficiency improves as a result of cumulative experience and learning
Some Newer Explanations for the Direction of Trade: National Competitive Advantage from Regional Clusters
5) National competitiveness •A nation's relative ability to design, produce, distribute, or service products within an international trading context while earning increasing returns on its resources •three reasons: •(1) the pooling of a common labor force means staffing requirements can be met quickly, even with unexpected fluctuations in demand; • (2) specialized local suppliers can coordinate their operations and skills with the needs of the buyers; and •(3) technological information can be readily shared, enhancing the rate of innovation.
Foreign Investment via Portfolio or Direct
A)•Portfolio investment • •The purchase of stocks and bonds to obtain a return on the funds invested • B)•Direct investment • •The purchase of sufficient stock in a firm to obtain significant management control
When Countries A and B can specialize in the production of X and Y products, and country A is more efficient in the production of X and country B in the production of Y, the two countries are trading with each other based on
Absolute advantage
When considering where to export, pragmatist global marketers would look into the following factors:
All of the above (The cultures of the two countries should be relatively similar and compatible | The climate for foreign direct investment in the importing nation is relatively favorable | Export and import regulations are not insurmountable | The infrastructure for exporting is favorable)
Which of the following is true about uncontrollable forces in international business?
All of the above. (Management can influence them by heavy promotion of new products to change cultural attitudes. | They include competitive and distributive forces. | Management can influence them by lobbying. | Management has no direct control over them.)
Do imports kill jobs (myths and realities)?
China is currently our largest goods trading partner with $659.8 billion in total (two way) goods trade during 2018. Goods exports totaled $120.3 billion; goods imports totaled $539.5 billion. The U.S. goods trade deficit with China was $419.2 billion in 2018
Environments
Domestic Environment Øall uncontrollable forces originating in the home country that surround and influence the firm's life and development. Foreign Environment Øall uncontrollable forces originating outside the home country that surround and influence the firm. International Environment Øinteraction between domestic and foreign environmental forces or between sets of foreign environmental forces.
Table 2.1 Case of absolute cost advantage where Ethiopia and Kenya have absolute and relative advantage on one of the goods Product/Country | Ethiopia | Kenya Coffee | 10 ton | 2 ton Tea | 20 | 6 Given that two nations have equal resources and both agree to specialize in the production of a product that is most efficient, How to determine: follow the following procedure a) Specialization between the two nations b) The range of terms of trade (terms of negotiation) c) The best terms of trade (for even distribution of trade benefit) d) The net benefit for each country e) Limitations of production and export based on such assumption?
a) Ethiopia specializes in coffee, while Kenya specializes in tea. Why? Reason: Based on the information provided in the above table: 1) Ethiopia is five times more efficient than Kenya in coffee production 2) Kenya is relatively less inefficient in the production of tea than in the production of coffee. b) Determining the Range of Terms of Trade: its based on the internal (domestic) trade exchanges of both Products. For Ethiopia, 10 tons of coffee = 20 tons of tea Hence 10c/10 = 20t/10 equals to C=2T For Kenya, 2 Coffee= 6 Tea Hence 2C/2 = 6T/2 equal to C= 3T Range of terms of trade C = 2 T to 3 T c) Best Terms of trade: egalitarian distribution of the benefit of trade C = (2T + 3T)/2 = 2.5T Thus, C=2.5T d) Net benefit for Ethiopia: Table 2.2: After specialization If C = 2.5T ?C = 20 T (missing product 20T * C = 8C (the exchange) 2.5 T The red and in parenthesis figures are products that need to be traded in as they have seized to be locally produced due to specialization 20C - (8C+ 10C) = 2C ; Net benefit for Kenya: If C= 2.5T 2C = ?T 2*2.5T = 5T ; 5T is the amount of sacrifice /exchange needed to capture (get back) the initial need for 2C) Hence the net benefit of trade is equal to 12T - (5T + 6T) = 1 T e) Limitation of the Method/Approach: •transportation cost •technology is fixed, productivity is solely based on labor input •cost of factors of production (which is only labor) is held constant •one is assuming that there is demand for the goods in both countries •the two nations are dependent on each other for the second product
The increased internationalization of business requires __________ to have a basic knowledge of international business.
all managers (managers of multinationals, A. managers of transnationals, managers of purely domestic operations & marketing managers)
1. Polycentric communication across cultural borders indicates that
business managers are ready to manage diverse manpower wherever they go
The theory of overlapping demand suggests that
international trade in manufactured goods will be more common between countries with similar levels of income
Sector-wise FDI and COVID Impact
•FDI flows are expected to decline sharply as a consequence of the pandemic due to supply disruptions, demand contractions, and pessimistic outlook of economic actors. A drop of more than 30% is expected in 2020 even under the most optimistic scenario in which the economy begins to recover quickly in the 2nd half of 2020. •The pandemic is having much greater impacts in some sectors than others, and FDI flows will reflect this. For example, the information and communication sector may possibly see an increase in its earnings, while the manufacturing and primary sectors could see large drops in earnings. •Worst-hit sectors are: accommodation, food service, transportation. , and storage contribute relatively small shares to FDI; However, their suffering will not be fully revealed in terms of FDI as such sectors are targets of FDI.
Does Trade Lead to FDI?
•Historically, FDI followed foreign trade because trade costs less and has less risk than FDI and business can be expanded in smaller, controllable increments rather than incurring large investments and larger risk. •Significant changes in today's global business environment make FDI a possible first step into international trade. •
The Increasing Regionalization of Trade: Regionalization vs Multilateralism of Trade
•In 2014, about half of exports from North American nations went to other nations in North America •A little more than half of Asian nations' exports were to other Asian nations. •Over 70% of exports from European nations went to other European nations. •Regionalization of trade is reinforced by the development of expanded regional trade associations and agreements such as ASEAN, Mercosur, the EU, and NAFTA. • Overall, there are more than 200 regional trade agreements in operation worldwide, and the share of world trade they account for increased from 37 percent in 1980 to more than 70 percent by 2013.
Portfolio Investment
•Not directly concerned with the control of a firm but to gain ROI •Nonresidents owned American stock and bonds amounted to $8.0 trillion in 2014. •Americans owned $8.7 trillion in foreign securities in 2014, out of which $6.5 trillion was in corporate stocks.
