MAN3600 Exam 2 Study Guide

Mixed systems

Two or more legal systems operating together The contrast between civil and common law has become blurred as countries combine both systems

Civil law is found in where (countries)

Found in France, Germany, Italy, Japan, Turkey, and much of Latin America

*Why do nations pursue economic integration?* (4)

1) Expand market size 2) Achieve economies of scale and productivity 3) attract direct investment from outside the bloc 4) acquire stronger defensive and political posture

The GATT's concept of most favored nation

*(aka normal trade relations)* requires each member nation extend the tariff reductions covered in a trade agreement with one country to all other countries

If an economic integration has factor mobility, free move of product, labor, and capital, it should be ______________. [Hint: please read all answer choices before making your selection.] free trade agreement only customs union only common market only economic union only either common market or economic union

*either common market or economic union* (not positive that this is the correct answer)

6 ways to respond to gov't intervention

-*RESEARCH* (to gather knowledge and intelligence) -*ENTRY STRATEGIES* (choose the most appropriate) -*FTZs* (take advantage of foreign trade zones) -*Customs Classifications* (seek favorable customs classifications for exported products) -*Investment Incentives* (take advantage of these and other gov't support programs) -*LOBBY* (for free trade and investment)

Managing Country risks (4)

-Proactive *environmental scanning* -Strict adherence to *ethical standards* -Alliances with qualified *local partners* -Protection through *legal contracts*

Consequences of Protectionism

-Reduced supply of goods to buyers -Price inflation -Reduced variety, fewer choices available to buyers -Reduced industrial competitiveness -Various adverse unintended consequences (e.g., while the home country dithers, other countries can race ahead)

4 objectives of Defensive Barriers

-Safeguarding industries, workers, special interest groups -Protecting infant industries -Promoting national security (export controls) -National Culture and Identity

Country risk arising from HOST country (6)

-foreign investment laws -controls on operating firms and practices -marketing and distribution laws -laws on income repatriation -environmental laws -contract laws

2 objectives of Offensive Barriers

-national strategic priorities (value-adding industries) -increase employment

Who are the main actors in political and legal systems?

-the government, or the "public sector" -International organizations such as the World Bank, WTO, and United Nations -regional economic blocs (such as the European Union, NAFTA) -local competing firms

*4 Main Objectives of Gov't Intervention*

1) To generate revenue 2) To ensure citizen safety, security, and welfare 3) To pursue economic, political, and social objectives 4) To serve company and industrial interests (to stimulate development of homegrown industries)

*implications of economic integrations* (4)

1) internationalization by firms inside the economic bloc 2) internationalization by firms outside the bloc 3) regional products and marketing strategy 4) rationalization of operations

5 characteristics of the EU Economic Union

1) market access 2) common market 3) trade rules 4) standards harmonization 5) common fiscal, monetary, taxation, and social welfare policies

Maquiladoras account for about ___ of Mexico's exports

1/2

how many members are in the EU

27?

*economic bloc*

A geographic area consisting of two or more countries that agree to pursue economic integration by reducing tariffs and other barriers to the cross-border flow of products, services, capital, and, in more advanced cases, labor.

export controls

A government measure intended to manage or prevent the export of certain products or trade with certain countries

Testing, certification, or inspection requirements are a type of _______________________. Quotas Local content regulations Subsidies Administrative barriers Tariff barriers

Administrative barriers

Which of the following countries is NOT on the U.S. Sanction Program according to the course materials? Iran North Korea Afghanistan Zimbabwe

Afghanistan

International Cartels

An association of producers of a particular good (e.g., OPEC- Organization of Petroleum Export Countries) who agree to fix prices, allocate sales territories, and restrict production.

Who is on the U.S. Sanction list

Balkans, Belarus, Burma (Myanmar), Cuba, Iran Iraq, Libya, Lebanon, North Korea, Somalia, Sudan, Syria, Zimbabwe

Civil law

Based on all-inclusive system of laws that have been "codified" - clearly written by legislative bodies Laws are more "cast in stone" and not strongly subject to interpretation by court

founder members of EU

Belgium, Italy, France, Germany, Luxembourg, and the Netherlands.

Explain socialism

Capital is vested in the state and used primarily as a means of production for use rather than for profit *Group welfare outweighs individual welfare* Gov role is to control the basic means of production, distribution, and commercial activity Socialism occurs often as social democracy (e.g. Western Europe, Brazil, India)

CAFTA (definition and name)

Central American Free Trade Agreement Provide immediate and retroactive duty relief for textile and apparel merchandise shipped to/from the following member

3 socialist countries

China, India, Russia

4 kinds of legal systems

Common law Civil law Religious law Mixed systems

_____ is the seizure of corporate assets without compensation. Sanction Embargo Confiscation Expropriation

Confiscation

2 totalitarian countries

Cuba, North Korea

Democracy and Openness

Democracy is associated with "openness", the lack of regulation and barriers to the entry of firms in foreign markets

Explain democracy

Economic activity occurs freely, as per market forces -limited government -private property rights

The Rule of Law

Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the gov

what is country risk?

Exposure to potential loss or adverse effects on company operations and profitability cause by developments in a country's political and/or legal environments

Which of the following is currently NOT active? The European Union FTAA NAFTA CAFTA

FTAA

What is the FCPA?

Foreign Corrupt Practices Act (1966; U.S.) made it illegal to offer bribes to foreign parties. But the act may harm U.S. firms because foreign competitors are usually not so constrained

FTAA (definition and name)

Free Trade Area of the Americas A general agreement to form a regional trading zone stretching from Point Barrow, Alaska to Tierra Del Fuego at the tip of Argentina by 2005.

GATT stands for

General Agreement on Tariffs and Trade

Explain totalitarianism

Gov controls all economic and political matters Either theocratic (religion-based) or secular Led by a dictator

non-tariff trade barrier

Government policy, regulation, or procedure that impedes trade.

Most important religious legal systems are based on what religions' law (3)

Hindu, Jewish, and Islamic

Which of the following is NOT true about NAFTA? It has common tariffs arranged among the member countries against non-member countries. The member countries include Mexico, Canada, and the United States. It is a free trade agreement. There have been increased trades among member countries since it was introduced. All of the above are true.

It has common tariffs arranged among the member countries against non-member countries.

Economic Union

Like a common market, but members also aim for common fiscal and monetary policies, and standardized commercial regulations. example: The EU is moving toward an economic union by forming a monetary union with a single currency, the euro.

Common market

Like a customs union, except products, services, and factors of production such as capital, labor, and technology can move freely among the member countries.

_____________ is an economic bloc in Latin America. MERCOSUR ASEAN TPP NAFTA EU

MERCOSUR

Protectionism

National economic policies that restrict free trade. Usually intended to raise revenue or protect domestic industries from foreign competition.

Quota

Quantitative restriction on imports of a specific product (e.g., Imports of Japanese cars).

Political Union

Perfect unification of all policies by a common organization; submersion of all separate national institutions

What are the two sources of country risk?

Political systems and legal systems

RCEP and definition

Regional Comprehensive Economic Partnership a proposed free trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEA)

investment barriers

Rules or laws that hinder foreign direct investment (e.g., Mexico's restrictions in its oil industry).

Customs Union

Similar to a free trade area except the members harmonize their trade policies toward nonmember countries, by enacting *common tariff and nontariff barriers* on imports from nonmember countries. Example: MERCOSUR

*free trade area*

Simplest, most common arrangement. Member countries agree to gradually eliminate formal trade barriers within the bloc, while each member maintains an independent international trade policy with countries outside the bloc. example: NAFTA

Why do some firms favor FTA while others don't?

Strong firms in the industry will favor FTA. Weak firms will oppose it. example: sugar industry Basically, their *strengths in the international market will determine a firm's position* on whether favoring an FTA or not.

Religious law is:

Strongly influenced by religious beliefs, ethical codes, and moral values, viewed as mandated by a supreme being Most important religious legal systems are based on Hindu, Jewish, and Islamic law

examples of mixed economies

Sweden and Singapore

______ affects all industries and all firms in a country. Systematic country risk Unsystematic country risk An expropriation Controllable country risk

Systematic country risk

T/F Continued decline in average tariff rates represent a major driver of market globalization

TRUE

T/F Protectionism/isolationism and the Great Depression prevailed in early 20th century world trade.

TRUE

T/F Agricultural products have higher tariffs than non-agricultural products usually

TRUE Gov't trying to protect certain industries!

example of boycotts

The French hate American brands and boycotted Wendy's and Starbucks

economic freedom is

the absence of government coercion so that people can work, produce, consume, and invest however they want to.

Common law definition

The basis of law is tradition, past practices and legal precedents set by courts via interpretation of statutes, legislation, and past rulings. Judges have much power to interpret laws based on the circumstances of individual cases. Thus, common law is relatively flexible.

Customs

The checkpoint at national ports of entry where officials inspect imported goods and levy tariffs.

Fortress Europe

The concerns of countries outside the EU (non-member countries) that integration of the EU may result in increased restrictions and barriers to trade and investment by outsiders.

*Regional Economic Integration*

The growing economic interdependence that results when nations within a geographic region form an alliance aimed at reducing barriers to trade and investment.

Relationship between Economic and Political Freedom

There is a positive relationship between economic and political freedom. That means if a society has a high level of political freedom then the society is likely to have a high level about economic freedom

Protective Tariff

To protect certain industries or companies in the countries

Punitive Tariff

To punish certain companies or entities

Revenue Tariff

To generate revenue (governments need money for their operations!)

3 major types of political systems

Totalitarianism Socialism Democracy

Largely democratic countries

U.S., Australia, Canada, Japan, New Zealand, Most European and Latin American countries

Which 5 countries have the highest country risk?

Venezuela, Zimbabwe, Afghanistan, Iran, and Libya

GATT eventually became

WTO

Compound tariff

a combination of the two tariffs. $.50 per unit + 7%

Ad valorem tariff

a fixed percentage of the value of the product. ex: 10% of value

Arbitration

a neutral third party hears both sides of a case and decides in favor of one party or the other, based on an objective assessment of the facts

What is a political system?

a set of formal institutions that constitute a government The system also defines how these groups interact with each other

What is a legal system?

a system for interpreting and enforcing laws It incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities

tariff

a tax on imports

The Trans-Pacific Partnership (TPP)

a trade agreement discussed among Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The Rule of Law is common in ______ economies

advanced

Systematic country risk

affects all industries, all firms in a country

Unsystematic Country Risk

affects only a subset of firms

Tariffs that are ad valorem are ________. assessed as a percentage of the imported product's value based on the weight or size of the imported product intended to provide a steady flow of income for the government charged regardless of the imported product's value

assessed as a percentage of the imported product's value

*The Index of Economic Freedom*

assesses the rule of law, trade barriers, regulations, and other criteria.

Sanctions are

bans on international trade with extra tariffs, trade barriers, import duties, and import/export quotas

Common law is also known as

case law

Totalitarianism is associated with ______ economies.

command;wherein the state makes all decisions on what to produce, how much at what prices

Which of the following legal systems is based on legal precedents and past practices set by the nation's courts through interpretation of statutes, legislation, and past rulings? civil laws religious laws socialist laws common laws

common laws

Democracy is associated with _____ law, _____ law, and ______________.

common, civil, and mixed systems

3 approaches for resolving contract disputes:

conciliation, arbitration, and litigation

Governments sometimes retaliate against subsidies by imposing ________, tariffs on products imported into a country to offset subsidies given to producers or exporters in the exporting country. countervailing duties local content requirements investment incentives antidumping duties

countervailing duties

Which of the following terms indicates potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments? cross-cultural risk country risk currency risk commercial risk

country risk

Conciliation

is a formal process of negotiation whose objective is to resolve differences in a friendly manner. It is the least adversarial method and common in China

Members of ________ agree to adopt common tariffs and non-tariff barriers that are applied to imports from nonmember countries. customs unions free trade areas the NAFTA the EFTA

customs union

two types of rationale for protectionism

defensive barriers and offensive barriers

Administrative barriers

documentations and procedures testing, certification, or inspection requirements

*Antidumping duties*

duties imposed on products whose prices government officials deem too low Fight against some unfair activities and dumping activities of a foreign company in the US or in the domestic market

When the rule of law is weak, _______

economic activity suffers and uncertainty increases

A(n) ______ is an official ban on entire exports to or imports from a particular country, in order to isolate it and punish its government. embargo confiscation sanction expropriation

embargo

Maquiladoras

export assembly plants in northern Mexico along the U.S. border an example of FTZ

Which of the following terms refer to the application of home-country laws to persons or conduct outside national borders? anti-dumping policies anti-boycott regulations extraterritoriality transparency

extraterritoriality

subsidy

financing or other resources that government grants to a firm or group of firms, to ensure their survival or success

Maquiladoras enables...

firms from the U.S., Asia, and Europe to tap low-cost labor, favorable duties, and gov't incentives while serving the U.S. market

GATT was the...

first major effort to reduce trade barriers systematically worldwide

3 types of FDI incentives

fiscal incentives financial incentives non-financial incentives

A formal arrangement between two or more countries to reduce or eliminate tariffs is known as a(n) ________. free trade agreement quota arrangement memorandum of association memorandum of understanding

free trade agreement

NAFTA is an example of which of the following levels of regional integration? free trade area political union economic union common market

free trade area

5 potential levels of regional integration

free trade area, customs union, common market, economic and (sometimes) monetary union, political union

*Countervailing Duties*

government tariffs to offset suspected subsidies provided by foreign governments to their producers

Governments impose offensive barriers to ________. increase employment protect domestic industries promote national security safeguard the interests of special interest groups

increase employment

war and insurrection

indirect effects can be disastrous for company activities

difference between trading blocs (economic blocs) and international cartels

int. cartels are well spread over different geographic areas

OPEC is an example of ______________. international cartel free trade area political union economic union common market

international cartel

________ are transfer payments or tax concessions made directly to foreign firms to entice them to invest in the country. Investment incentives Antidumping duties Countervailing duties Quotas

investment incentives

Common law is mainly _____ in origins and based on _______ ________, whereas civil law is mainly _______ and based on ______________________ .

judicial; court decisions legislative; laws passed by national and state legislature

Embargos are

makes trade activities with specific countries ILLEGAL

Democracy is associated with _________ economies

market

Socialism is associated with _______ economies

mixed; which have features of both market and command economies (e.g. Sweden and Singapore)

If the State of Georgia agreed to purchase the cars assembled by Kia Motors in Georgia, an FDI into Georgia from South Korea, it is a ______________ incentive. fiscal financial non-financial physical

non-financial

A government policy that impedes trade through means other than explicit tariffs is known as a(n) ________. non-tariff trade barrier maquiladora subsidy investment incentive

non-tariff trade barrier

Litigation

occurs when one party files a lawsuit against another. The most adversarial approach, it is common in the US (common in low-context societies!)

Prohibitive Tariff

one so high that no one can import any of the items

Common law originated in where and spread to where

originated in England, and spread to Australia, Canada, USA, and other former members of the British Commonwealth

Country risk is also known as:

political risk

Protectionist policies may also lead to ________. price inflation increased choices for buyers easy availability of products high incentive to improve quality

price inflation

The Smoot-Hawley Act (1937)

raised U.S. tariffs to more than 50% (compared to only 3% today).

Totalitarianism is most associated with _____ law and ______ law

religious, socialist

local content requirements

requirement that firms include a minimum percentage of locally sourced inputs in the production of given products or services ex: cars (locally sourced parts)

Specific tariff

set amount charged per unit ex: $.25 per unit Based on weight, volume, or surface area

Harmonized Code

standardized worldwide system that determines tariff amount

fiscal incentives include

tax breaks

Extraterritoriality

the application of home-country laws to other countries. For example, the European Union pursued Microsoft for monopolistic practices

what does "limited government" mean?

the gov performs only essential functions that serve all citizens, such as national defense, maintaining law & order, foreign relations, and providing basic infrastructure

Passage of NAFTA was facilitated by what

the maquiladora program

terrorism

the threat or actual use of force of violence to attain a political goal through fear and intimidation

GOAL of FTAA

to provide free market access for goods and services to the entire continent by 2005.

A ________ government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry. totalitarian socialistic mixed democratic

totalitarian

Boycotts against firms and nations

voluntary refusal to engage in commercial dealings with a nation or a company

terrorism particularly effects which industries

§ - tourism, hospitality, aviation, finance, and retailing

Home country legal systems

§ The foreign corrupt practices act (FCPA) § Anti-Boycott regulations § Accounting and reporting laws § Transparency in financial reporting

Home country legal systems: (4)

§ The foreign corrupt practices act (FCPA) § Anti-Boycott regulations § Accounting and reporting laws § Transparency in financial reporting

what is creeping expropriation

§ The most common expropriation today § The gov. gradually modifies laws and regulations after foreign MNE's have made big local investments

cooperating nations in regional economic integration obtain:

§ increased product choices, productivity, living standards, § lower prices, and § more efficient resource use.

The GATT did:

§Reduced tariffs via continuous worldwide trade negotiations; §Created an agency to supervise world trade §Created a forum for resolving trade disputes; and §Most favored nation

Current EU member states:

· Austria * · Belgium * · Denmark · Finland * · France * · Germany * · Greece * · Ireland * · Italy * · Luxembourg * · Netherlands * · Portugal * · Spain * · Sweden · BREXIT (was the UK)

*Positive Impacts* of FDI (Host Country)

· Capital formation · Transfer of technology and management skills · Regional and sectorial development · Internal competition and entrepreneurship · Favorable effect on balance of payments · Increased employment

*Negative Impacts* of FDI (Home Country)

· Domestic job loss · Giving away technology and competitive position

NAFTA:

· Eliminated tariffs and most non-tariff barriers for products and services. · Established trade and investment rules, uniform customs procedures, and intellectual property rights. · Provided procedures for settling trade disputes.

Non-financial incentives include

· Government purchases · Protection from competitors · Infrastructure

*Positive Impacts* of FDI (Home Country)

· Increase in GNP · Stimulus to economic growth

*Negative Impacts* of FDI (Host Country)

· Industrial dominance · Technological dependence · Disturbance of economic plans · Cultural change

financial incentives include

· Land · Building · Loans · Loan guarantees

El Mercado Comun del Sur (MERCOSUR)

· The leading economic bloc in South America, accounting for nearly all of the region's GDP. · Launched in 1991, the four initial members were Argentina, Brazil, Paraguay, and Uruguay. · Established free movement of products and services, common external tariff and trade policy, and coordinated monetary and fiscal policies.

Countries involved in CAFTA

· United States · Dominican Republic · Costa Rica · El Salvador · Guatemala · Honduras · Nicaragua