Global Business Module 4
How the government discourages FDI
-Host governments can specify ownership restrictions if they want to keep control of local markets or industries in their citizens' hands. -A company's home government usually imposes taxes and sanctions 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
Foreign Direct Investment (FDI)
-refers to an investment in or the acquisition of foreign assets with the intent to control and manage them. -They can purchase the assets of an international company, invest in the company through new capital, or participate in a joint venture with a foreign company, which typically involves an investment of capital or know-how. - a long-term strategy
Benefits of FDI
1) An inflow of capital can benefit the global and local economy. Invested capital goes to businesses with the highest potential for growth. 2) The profit motive is color blind, and investments are made regardless of religion or politics. 3)Investors can decrease their risk by diversifying Investing in capital for firms can lead to growth and, subsequently, increased jobs in the host country
5 stages of economic integration
1) Free Trade 2) Customs Union 3) Common Market 4) Economic Union 5) Political Union
Which of the following is a reason for a government to promote FDI? 1) The inflow of capital benefits the host country's economic development. 2) The outflow of capital benefits the home country's economic development. 3)The outflow of capital generates more jobs for home country's workers. 4)The inflow of capital decreases competition in the host country.
1) The inflow of capital benefits the host country's economic development.
Three types of pegged float exchange rates
1)Crawling Peg 2)Crawling bands 3)Pegged with a horizontal band
How the Government encourages FDI
1)Financial incentives: Host countries offer businesses a combination of tax incentives and loans to invest. Home-country governments may also offer a combination of insurance, loans, and tax breaks to promote their companies' overseas investments. 2)Infrastructure: Host governments improve or enhance local infrastructure—energy, transportation, and communications—to encourage specific industries to invest. This also is to improve the local conditions for domestic firms.
How governments discourage FDI
1)Tax rates and sanctions: A company's home government usually imposes these restrictions to persuade companies to invest in the domestic rather than foreign market. 2)Ownership restrictions: Host governments can specify ownership restrictions if they want to keep the citizens in control of local markets or industries.
Government seeks to limit or control FDI:
1)to protect local industries and critical resources (oil, minerals, etc.), preserve the national and local culture, protect segments of the domestic population, maintain political and economic independence, and manage or control economic growth.
The Government wants to promote FDI:
1)when they are eager to expand their domestic economy and attract new technologies, business knowledge, and capital to their country.
European Union (EU)
1950- the world's largest common market, composed of 28 European nations.
ASEAN
1967- the Association of Southeast Asian Nations, an alliance that promotes economic growth and peace in the region
15. Which of the following is not a supplier of US dollars? 1) US investors who want to buy stocks in Europe 2). U.S. investors who want to make foreign direct investment in Middle Eastern countries 3) U.S. tourists leaving to visit Japan 4) European investors who want to purchase bonds in the US bond market
4) European investors who want to purchase bonds in the US bond market
Labor Provision for wages
40-45% of all automobile parts must be made by workers earning a minimum of $16 an hour by 2023
Which economic actor benefits as the U.S. dollar weakens?
A US investor abroad
pegged exchange rate
A currency system that fixes an exchange rate around a certain value, but still allows fluctuations, usually within certain values, to occur
A country's government allows its currency value to fluctuate within a certain range but would manage the currency value once the fluctuation exceeds the range. This country has been practicing
A pegged floating exchange rate system
Foreign Vistors to Us
A strong USD meands that their currencies are relatively weaker
f Floating Exchange Rate
A system where the value of currency in relation to others where a currency's value is allowed to fluctuate according to the supply and demand of the currency
Horizontal FDI
A type of FDI in which a firm produces the same products or offers the same services in a host country as at home, when trying to open a new market.
What is a benefit of creating a regional economic integration agreement?
Accelerated Economic Growth
North American Free Trade Agreement (NAFTA)
Agreement that created a free-trade area among the United States, Canada, and Mexico. January 1st 1994 includes protection and enforcement of IP rights
Greenfield FDI
An FDI strategy in which a multinational company builds new facilities from scratch. Creates long- term jobs in foreign countries and offers tax breaks, subsidies, and other incentives.
Netflix used to only provide movie rental service to customers. In recent years, Netflix has started to collaborate with foreign TV show producers and started to make Netflix original shows. This represents Netflix's effort in making a___________. *
Backward Vertical FDI
Which level of economic integration permits the free movement of capital, labor and technology from member countries?
Common Market
Which strategy is used by governments to limit the foreign direct investment in a country?
Creating foreign ownerships restrictions in the country
Mercosur is an example of ______stage of economic integration that removes all trade barriers and allow member nations to use same external trade policies.
Custom Union
Which economic integration stage offers economic collaboration by removing trade barriers between member countries and establishing a mutual trading policy with nonmembers?
Custom Unions
Which agreement was formalized in 1993 to create a political and economic union to help a large group of countries cooperate and coordinate key aspects of their economic policy?
EU
Which agreement was formalized in 1993 to create an economic union to help member countries form unified economic policies?
EU
A German engineer plans to move to France and start working their for 2 months. He only needs to hold a valid identity card or passport to move to France. This is due to
EU has the feature of common market stage of economic integration.
Company A is located outside the home country of Company B. Company B has acquired Company A with the intent of controlling and managing Company A's assets. Which practice is being used by Company B?
FDI
How government encourages FdI
Financial incentives and infrastructure
Which exchange rate regime allows a currency's value to fluctuate according to the foreign exchange market?
Floating
. A Japanese company has purchased a German company with the intent of controlling and managing the German company's assets and decision making process. Which practice is used by this Japanese company? *
Foreign Direct Investment
Which economic actors are suppliers of U.S. dollars?
Foreign firms exporting to the US
Which level of economic integration is formed when trade barriers are removed between member countries but there is no mutual policy on trading with nonmember countries?
Free Trade Area
Custom Unions
Has all the features of a free trade area except that member nations have common trade policies with non member countries
Economic Union
Having all the features of a common market, members also coordinate and harmonize economic policies (in areas such as monetary, fiscal, and taxation) to blend their economies into a single economic entity.
Amazon is a U.S. based company. In recently years, Amazon has gradually established Amazon Japan, Amazon China, Amazon UK, etc. This is an example of________
Horizontal FDI
What is a potential influence of the existence of multinational corporations (MNCs) on international relations?
Improves relations between countries where the MNC operates
Which drawback is involved when regional agreements are created?
Member countries will trade less with nonmember countries.
Which agreement was signed in 1994 and aims at removing trade barriers between Canada, the United States, and Mexico?
NAFTA
Mercosur
Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area
Which level of economic integration presents an alliance of all policies by a common organization?
Political Union
Which country characteristic is most important to foreign direct investors according to a study by the World Bank?
Political stability and security
Which of the following is a strategy used by governments to encourage the foreign direct investment in this country?
Provide more education opportunities and job trainings to the workforce.
Common Market
Same as customs, in addition to which restrictions on the movement of labor and technology, capital among member countries have been removed
Which activity is considered a foreign direct investment (FDI) by a multinational corporation?
Setting up manufacturing plants in a host country
A Chinese company would like to operate in Indonesia but is required to purchase 75% of the ingredients directly from Indonesian suppliers. This is_____________ used by the Indonesian government to restrict FDI.
Specific product content requirement strategy
A US Exporting Firm
Strong USD: Bad Weak USD: Good
A foreign tourist in the US
Strong USD: Bad Weak USD: Good
A foreign Firm Exporting to the US
Strong USD: Good Weak USD: Bad
US Tourist Abroad
Strong USD: Good Weak USD: Bad
NAFTA
The 1994 plan to increase regional trade between U.S., Mexico and Canada (North American Free Trade Agreement). Reduces tariffs and trade barriers
A French tourist expects to have a 5 day vacation in Florida. Which of the following would he prefer before going to Florida?
The U.S. dollar is weak relative to Euro.
USMCA
The United States, Mexico, and Canada. The updated agreement of NAFTA. 2019. -Provides protection of IP.
What is a benefit of foreign direct investment?
The inflow of capital benefits global and local economies
Diversifying
The process of allocating capital in a way that reduces the exposure to any one particular asset or risk
What is an accurate characterization of the relationships between multinational corporations (MNCs) and the host country governments in which they operate?
The relationships are mixed because MNCs can cause, but also solve, problems for the host country.
dividend repatriation
The return of earnings from foreign subsidiaries to their parent companies back in the home country
Exchange rate Regime
The way in which an authority manages its currency in relation to other currencies and the foreign exchange market
What is a reason for companies to engage in foreign direct investments?
To take advantage of tax exemptions offered by the host country
drawback of regional economic integration
Trade Diversion, Job loss nations may find that they must give up more of their political and economic rights, give up cultural uniqueness, may encourage mergers and acquisitions within the bloc to create large rivals, The exclusion of external countries reduces global free trade
Benefits of Regional Economic Integration
Trade creation, greater consensus, political cooperation, employment opportunities
Vertical FDI
When a company invests internationally to provide input into its core operations usually in its home country. Such as investing into facilities used for production.
Forward Vertical FDI
When a firm Sells the goods into a local or regional market, acting as a distributor.
Reasoning to strengthen the currency
When the exchange rate for a currency rises so the currency exchanges for more than other currencies (AKA appreciating)
Reasons to weaken the currency
When the exchange rate for currency falls so a currency trades for less of other currencies
US Firm Selling abroad
a strong us dollar means foreign currencies are correspondingly weak.
fixed exchange rate
a system under which the exchange rate for converting one currency into another is fixed. Ex: China makes it illegal to trade its currency at any other rate
Regional Economic Integration
agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other
Country of origin rule
automobiles must have 75% of their components manufactured in the US Canada and Mexico to qualify for a zero tariff rate
Political Union
includes unification of polices by a common organization that can be integrated into a single country or political entity, a political union is an ideal that has not been achieved.
What is the result of the existence of multinational businesses?
is economic integration among countries. This works to promote economic development and trade between home and host countries of multinational businesses.
Why does a company engage in foreign direct investment?
is when a company acquires a foreign firm or asset with the intent to control and manage it to strengthen its economic and financial market position.
Free Trade
member countries reduce or remove all barriers to trade, namely tariffs and quotas among themselves, but independently determine their own trade polices/ with non member nations
Mercusor
trading bloc of the south American countries Brazil, Argentina, Uruguay, and Paraguay, formed in 1991
Brownfield FDI
when a company or government entity purchases or leases existing production facilities to launch a new production activity. EX: when a company buys an "unclean" business site like a steel mill and clean it up, for less polluting purposes.
Backward Vertical FDI
when a firm brings the goods or components back to its home country, acting as a supplier
Which drawback is involved when regional agreements are created?
when a regional agreement is made between countries, those members will trade more with each other and trade less with nonmember countries.
Foreign Firm Selling in the US Economy
when traded back into home currency of the exporting firm, will now buy more.
A US Tourist Abroad
who is exchanging US money for a foreign currency, the tourist receives more currency for each US dollar and consequently the cost of the USD lower
How Governments Discourage or Restrict FDI
- Tax rates/ Sanctions -Ownership restrictions
Which economic actor benefits as the U.S. dollar strengthens?
-A foreign firm exporting to the US -The firm earns U.S. dollars through export sales, then converts it back into their home currency. A stronger U.S. dollar would mean they can buy more of the home currency.
portfolio investment
-An investment in another country is purely financial and does not involve any management responsibility. -refers to act of investing in a company's stocks, bonds, or assets, but not to control or direct the firm's operations or management
CAFTA-DR
-Central American Free Trade Agreement - Dominican Republic -Potential for increasing trade deficits and shifting production overseas, more us job los
How the government encourages FDI
-Host countries offer businesses a combination of tax incentives and loans to invest -Improve infrastructure -Host-country governments streamline the process of establishing offices or production in their countries -Improve workforce through education and job training -Governments can create export processing zones or special economic zones to attract FDI
