International Business Short Response

Lead strategy

- Collecting foreign currency receivables early when a foreign currency is expected to depreciate - Paying foreign currency payables before they are due when a currency is expected to appreciate

Lag strategy

- Delaying collection of foreign currency receivables if that currency is expected to appreciate - Delaying payables if the currency is expected to depreciate

1. How do patents, copyrights, and trademarks differ from each other?

-Patents- grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention -Copyrights - the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit -Trademarks -designs and names, officially registered, by which merchants or manufacturers designate and differentiate their products

1. Why did the gold standard collapse?

-The gold standard worked fairly well from the 1870s until the start of World War I -After the war countries started regularly devaluing their currencies to try to encourage exports -Confidence in the system fell, and people began to demand gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility -The Gold Standard ended in 1939

Floating Rates

1. Monetary Policy Autonomy ¦The removal of the obligation to maintain exchange rate parity restores monetary control to a government Ø With a fixed system, a country's ability to expand or contract its money supply is limited by the need to maintain exchange rate parity Trade Balance Adjustments ¦The balance of payments adjustment mechanism works more smoothly under a floating exchange rate regime Ø Under the Bretton Woods system (fixed system), IMF approval was needed to correct a permanent deficit in a country's balance of trade that could not be corrected by domestic policy alone Crisis Recovery ¦Supporters of floating rates argue that they automatically help countries deal with economic crises

· Wholly owned-subsidiaries:

100% ownership of the subsidiary o Firms establishing a wholly owned subsidiary can: o Set up a new operation in that country o Acquire an established firm o Advantages: § They reduce the risk of losing control over core competencies § They allow for the tight control over operations in different countries that is necessary for engaging in global strategic coordination § They may be required if a firm is trying to realize location and experience curve economies o Disadvantages: § Firms bear the full costs and risks of setting up overseas operations

1. Describe and give examples of the two types of local content requirements.

A local content requirement demands that some specific fraction of a good be produced domestically a. Can be in physical terms or in value terms Local content requirements benefit domestic producers and jobs, but consumers face higher prices Have been widely used by developing countries to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture of component parts and have been used in developed countries to try to protect local jobs and industry from foreign competition - Buy America Act ~ specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have significant price advantage - Local content regulations provide protection for a domestic producer of parts in the same way an import quota does : by limiting foreign competition.

1. What is the Bretton Woods System and what caused its collapse?

A new international monetary system was designed in 1944 in Bretton Woods, New Hampshire a. The goal was to build an enduring economic order that would facilitate postwar economic growth The Bretton Woods Agreement established two multinational institutions b. The International Monetary Fund (IMF) to maintain order in the international monetary system c. The World Bank to promote general economic development Under the Bretton Woods Agreement d. The U.S. dollar was the only currency to be convertible to gold, and other currencies would set their exchange rates relative to the dollar e. Devaluations were not to be used for competitive purposes f. A country could not devalue its currency by more than 10% without IMF approval · The U.S dollar played a special role in the system. As the only currency that served as the reference point for all others, the dollar occupied a central place in the system. Any pressure on the dollar to devalue could wreak havoc with the system, and that is what occurred. Many trace the breakup of the fixed exchange rate system to the U.S. macroeconomic policy package of 1965-1968. A key force that led to the breakdown of Bretton Woods was the rise in inflation in the US that began in 1965. To finance both Vietnam conflict and his welfare programs, President Lyndon Johnson backed an increase in U.S. government spending that was not financed by an increase in taxes. Instead, it was financed by an increase in the money supply, which led to a rise in price inflation from less than 4% in 1966 to close to 9% by 1968. At the same time, the rise in gov. spending had stimulated the economy. With more money in their pockets, people spent more - particularly on imports - and the U.S. trade balance began to deteriorate. The increase in inflation and the worsening of the U.S. foreign trade position gave rise to speculation in the foreign exchange market that the dollar would be devalued.

1. What are the advantages and disadvantages of exporting as a mode of entry into foreign markets?

Advantages: It avoids the often-substantial costs of establishing manufacturing operations in the host country and exporting may help a firm achieve experience curve and location economies. By manufacturing the product. In a centralized location and exporting it to other national markets, the firm may realize substantial scale economies from its global sales volume. Disadvantages: Exporting from the firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad. Thus, particularly for firms pursuing global or transnational strategies, it may be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective and to export to the rest of the world from that location. A second drawback to exporting is that high transportation costs can make exporting uneconomical, particularly for bulk products. Another drawback is that tariff barriers can make exporting uneconomical. Similarly, the threat of tariff barriers by the host-country government can make it very risky. . Lastly, a drawback arises when a firm delegates its marketing, sales, and service in each country where it does business to another company

1. Describe Amartya Sen's concept of development.

Argued that development should be assessed less by material output meausres such as GNI per capita and more by the capabilities and opportunities that people enjoy. Development should be seen as a process of expanding the real freedoms that people experience. Development is not just an economic process but a political one too and to succeed requires the democratization of political communities to give citizens a voice in the important decisions made for the community

1. From a profit perspective based on the various international theories, how would a business go about choosing locations for its various productive activities?

Different countries have particular advantages in different productive activities. From a profit perspective is makes sense for a firm to disperse its productive activities to those countries where according to the theory of international trade, they can be performed most efficiently. France = design facilities, Singapore = manufacturing, China = final assembly

1. Describe the disadvantages of licensing as a mode of entry into the foreign market.

Disadvantages: a. The firm doesn't have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies b. The firm's ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised c. There is the potential for loss of proprietary (or intangible) technology or property d. To reduce this risk, firms can use cross-licensing agreements or link the agreement with the decision to form a joint venture

1. What is dumping and why might firms engage in dumping activities? What measures can governments take when an international firm is suspected of dumping?

Dumping:selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their "fair" market value - May be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out, and later raising prices and earning substantial profits Antidumping polices:designed to punish foreign firms that engage in dumping - Goal: protect domestic producers from "unfair" foreign competition U.S. firms that believe a foreign firm is dumping can file a complaint with the government - If the complaint has merit, antidumping duties, also known as countervailing duties may be imposed

1. Discuss leading and lagging strategies and explain why a firm would engage in them.

Firms can minimize their foreign exchange exposure through leading and lagging payable and receivables - paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements. Helps firms minimize their transaction and translation exposure and protects short-term cash flows from adverse changes in exchange rates.

1. In terms of international business, briefly describe pioneering costs

First-mover disadvantages may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as: a. The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes b. The costs of promoting and establishing a product offering, including the cost of educating the customers

1. What are first-mover advantages? Describe three first-mover advantages for international businesses.

First-mover- advantages accruing to the first to enter a market Firms entering a market early can gain first-mover advantages including: Ø The ability to pre-empt rivals and capture demand by establishing a strong brand name Ø The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants Ø The ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business

1. What does the term noblesse obligemean in a business setting? What would an example be?

French term that refers to honorable and benevolent behavior considered the responsibility of people of high noble birth. In a business setting it is taken to mean benevolent behavior that is the responsibility of successful enterprises. EX: A business making social investments designed to enhance the welfare of the communities in which they operate

1. Explain the concepts of "globalization of markets" and "globalization of production."

Globalization of markets~ refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on global norm, thereby helping create a global market. The most global of markets are not typically markets for consumer products - where national differences in tastes and preferences can still be important enough to act as a brake on globalization - but markets for industrial goods and materials that serve universal needs the world over. In global markets the same firms frequently confront each other as competitors in nation after nation. Globalization of production - refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

1. You are the CFO of a European firm whose wholly owned subsidiary in Japan manufactures component parts for your European assembly operations. The subsidiary has been financed by bank borrowings in the European Union. One of your analysts told you that the Japanese Yen is expected to depreciate by 30% against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?

I would engage in hedging in order to insure my firm against foreign exchange risk. 3 of the ways I could insure against FX risk is by Spot exchange rates, Forward exchange rates, and Currency swaps. · Spot exchange rate: the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Ø Determined by the interaction between supply and demand Ø Changes continually · Forward exchange rates - the exchange rate governing a forward exchange o A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future § Forward rates are typically quoted for 30, 90, or 180 days into the future · Currency swap - the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates o Swaps are used when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk · In this situation Forward Exchange Rate would be our best solution out of the three because it means we will be taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed

1. What inconsistency in mercantilism did David Hume point out? Explain in detail.

If England had a balance-of-trade surplus with France (it exported more than it imported), the resulting inflow of gold and silver would swell the domestic money supply and generate inflation in England. In France, however the outflow of gold and silver would have the opposite effect. Frances money supply would contract, and its prices would fall. This change in relative prices between France and England would encourage the French to buy fewer English Goods and the English to buy more French goods. The result would be a deterioration in the English balance of trade and an improvement in France's trade balance, until the English surplus was eliminated. In the long run no country could sustain a surplus on the balance of trade and so accumulate gold and silver as the mercantilists had envisaged. Mercantilism viewed trade as a zero-sum game (a gain by one country results in a loss by another)

1. Discuss the policy implications of Porter's theory of national competitive advantage

If Porter is correct, his model should predict the pattern of international trade in the real world - Countries should export products from industries where the diamond is favorable - Countries should import products from areas where the diamond is not favorable - So, far there has been little empirical testing of the theory Contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of the 4 forces. Their presence is required to boost competitive performance. The gov. can influence each of the four components both positively and negatively. Can be affected by subsidies, policies toward capital markets, policies toward education. Gov. can shape domestic demand through local product standards or with regulations that mandate or influence buyer needs. Gov. policy can influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy, and antitrust laws.

1. What are the various reasons for economic stagnation in many of the world's poorest countries?

Many of the world's poorest countries have suffered from totalitarian governments, economic policies that destroyed wealth rather than facilitated its creation, endemic corruption, scant protection for property rights, and prolonged civil war. Other reasons - the rapidly expanding populations in many of these countries and being held back by large debt burdens.

Fixed Rates

Monetary Discipline ¦Because a fixed exchange rate system requires maintaining exchange rate parity, it also ensures that governments do not expand their money supplies at inflationary rates Speculation ¦ A fixed exchange rate regime prevents destabilizing speculation Uncertainty ¦The uncertainty associated with floating exchange rates makes business transactions more risky Trade Balance Adjustments and Economic Recovery ¦Floating rates help adjust trade imbalances and can help with economic recovery after a crisis ¦There is no real agreement as to which system is better ¦History shows that a fixed exchange rate regime modeled along the lines of the Bretton Woods system will not work ¦ A different kind of fixed exchange rate system might be more enduring and might foster the kind of stability that would facilitate more rapid growth in international trade and investment

1. What are the Sullivan principles?

Named after Leon Sullivan who argued that it was ethically justified for GM to operate in South Africa so long as two conditions were fulfilled. First, the company should not obey the apartheid laws in its own South African operations and second, the company should do everything within its power to promote the abolition of apartheid laws. These principles were widely adopted by US firms operating in South Africa

1. What do we mean by naïve immoralistin a business setting? Example?

Naïve Immoralist- if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either a. Actions are ethically justified if everyone else is doing the same thing Ex: Drug lord problem ~ an American manager in Columbia routinely pays off the local drug lord to guarantee that her plant will not be bombed and that none of her employees will be kidnapped. The manager argues that such payments are ethically defensible because everyone is doing it

1. Discuss why command economies tend to stagnate.

Objective it for the gov. to allocate resources for "good of society." While the objective is to mobilize economic resources for the public good, the opposite often seems to have occurred. In a command economy, state-owned enterprises have little incentive to control costs and be efficient because they cannot go out of business. The abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming prosperous, such economies tend to stagnate.

1. Explain the tragedy of the commons and give an example

Occurs when a resource held in common by all but owned by no one is overused by individuals, resulting in its degradation. Corporations can contribute to the global tragedy of the commons by moving production to locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons. EX: Earth's atmosphere - Earth's atmosphere is another resource that everyone on the planet uses and abuses. Air pollution and greenhouse gases from various industries and transportation increasingly damage this valuable, shared resource.

Outline an administrative trade policy that would dampen the activity of a foreign firm trying to enter the market.

Prior to being shipped, any fruits or vegetables being exported from a foreign country into the U.S. has to be carefully washed to rinse off any pesticides and bacteria that may be foreign to the U.S. Also, any produce that is spoiled must be picked out of the containers being shipped. Then when the produce arrives in the U.S is must be rinsed again before being distributed for retail.

1. Briefly discuss product safety and liability laws.

Product safety laws- set certain safety standards to which a product must adhere Product liability -involves holding a firm and its officers responsible when a product causes injury, death, or damage. Can be much greater if a product does not conform to required safety standards. Both civil and criminal product liability laws exist. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the U.S. than in any other country. Country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad.

1. Why or why not are facilitating payments ethical?

Some countries allow these payments because they are payments to ensure receiving the standard treatment that a business ought to receive from a foreign government that might not due to the obstruction of a foreign official they are NOT payments to secure contracts that would not otherwise be secured nor are they payments to obtain exclusive preferential treatment. Some believe that giving bribes are the price that must be paid to do a greater good and suggest that in the context of pervasive and cumbersome regulations in developing countries, corruption may improve efficiency and help growth. Foreign Corrupt Practices Act and OECD exclude facilitation payments because they still consider them bribes.

1. Explain how firms conducting business internationally can insure against foreign exchange risk.

Spot exchange rate: the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Ø Determined by the interaction between supply and demand Ø Changes continually · Forward exchange rates - the exchange rate governing a forward exchange o A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future § Forward rates are typically quoted for 30, 90, or 180 days into the future · Currency swap - the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates o Swaps are used when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk

1. Describe how pressures for cost reductions affect the choice of entry mode.

The greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries. By manufacturing in those locations where factor conditions are optimal and then exporting to the rest of the world, a firm may be able to realize substantial location and experience curve economies. The firm may then want to export the finished product to marketing subsidiaries based on various countries. These subsidiaries will typically be wholly owned and have the responsibility for overseeing distribution in their particular countries. Setting up wholly owned marketing subsidiaries is preferable to joint-venture arrangements and to using foreign marketing agents because it gives the firm tight control that might be required for coordinating a globally dispersed value chain. It also gives the firm the ability to use the profits generated in one market to improve its competitive position in another market.

1. What is the best decision from a Utilitarian perspective?

Those that produce the greatest good for the greatest number of people

1. Describe the Leontief paradox.

Using the Heckscher-Ohlin theory, Leontief postulated that since the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. However, he found that U.S. exports were less capital intensive than U.S. imports. Since this result was at variance with the predictions of the Heckscher-Ohlin theory, it has become known as the Leontief paradox.

1. Do you think governments should consider human rights when granting preferential trading rights to countries? What are the arguments for and against such a position? ·

Yes governments most definitely should consider human rights if you are going to engage in preferential trading rights (i.e. lowering tariffs, etc). Protecting human rights is an important part of foreign policy for many. It can improve the human rights policies of the ones they are trading with. It is also the moral thing to do when engaging in trade. Myanmar is a good example. The US imposed trade sanctions with them due to poor human rights, but after they started turning it around the US began to open those trade sanction.The only argument against this stance could be the potential for limited trade from major exporting countries that have poor human rights policies

Caste System -

a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during and individual's life

Murabaha-

a contract where the bank purchases capital at a negotiated price and resells it to a borrower at slightly marked-up price

Mudarabah-

a contract where when an Islamic bank lends money to a business, rather than charging interest on the loan, the bank takes a share in the profits derived from the investment.

Class System-

a less rigid form of social stratification in which social mobility is possible. A form of open stratification in which the position a person has by birth can be changed through his or her own achievements or luck

Tribal totalitarianism -

a political system in which a party, group, or individual that represents the interest of a particular tribe monopolizes political power

Right-wing totalitarianism -

a political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, often on the grounds that it would lead to the rise of communism. Overt hostility to socialist or communist ideas

Theocratic totalitarianism-

a political system in which political power is monopolized by a party, group, or individual that governs according to religious principles

Communist totalitarianism -

a version of collectivism advocating that socialism can be achieved only through a totalitarian dictatorship

1. How can a company ensure ethical decision making?

a. Favor hiring and promoting people with a well grounded sense of personal ethics b. Build an organizational culture that places a high value on ethical behavior c. Put decision making processes in place that require people to consider the ethical dimension of business decisions d. Institute ethical officers in the organization e. Develop moral courage f. Make corporate social responsibility a cornerstone of the enterprise policy Pursue strategies that are sustainable

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. In theory, regional economic integration benefits all members

Free trade area:

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:tariffs placed on the products of nonmember countries may vary from member to member

· Licensing:

an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee i. Intellectual property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks o Advantages: 1. The firm does not have to bear the development costs and risks associated with opening a foreign market 2. The firm avoids barriers to investment 3. It allows a firm with intangible property that might have business applications, but which doesn't want to develop those applications itself, to capitalize on market opportunities

o Factor endowments(factors of production)

can lead to competitive advantage § A nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry § Can be either basic or advanced § Basic factors can provide an initial advantage that is extended by investment in advanced factors § Advanced factors are most significant for competitive advantage

Long-term vs short-term orientation-

captures attitudes towards time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors

Righteous moralist ~

claims that a multinational's home-country standards of ethics are the appropriate ones for companies to follow in foreign countries This approach can create problems

Customs union:

eliminates trade barriers between member countries and adopts a common external trade policy - Ex:European Union

Power distance-

how a society deals with the fact that people are unequal in physical and intellectual capabilities

Political union:

independent states are combined into a single union - Ex: The U.S. ~ independent states are effectively combined into a single nation

Economic union:

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 - Ex:CARICOM Single Market and Economy (CSME) aims to create an economic space for competitive goods and services to establish a foundation for growth and development of the Caribbean community.

Common market:

no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production - Ex:European Common Market~ aims to provide the free movement of goods, capital, services, and labor within the European Union.

Trade diversion

occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

Trade creation

occurs when low cost producers within the free trade area replace high cost domestic producers

1. Explain the concept of purchasing power parity

states the price of a basket of particular goods should be roughly equivalent in each country. PPP theory predicts that the exchange rate will change if relative prices change. When inflation is relatively high, a currency should depreciate If we can predict inflation rates, we can predict how a currency's value might change Ø The growth of a country's money supply determines its likely future inflation rate Ø When the growth in the money supply is greater than the growth in output, inflation will occur

Cultural relativism ~

the belief that ethics are nothing more than the reflection of a culture - all ethics are culturally determined - and accordingly, a firm should adopt the ethics of the culture in which it is operating. Implicitly rejects the idea that universal notions of morality transcend different cultures, but, some universal notions of morality are found across cultures

o Firm strategy, structure, and rivalry:

the conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry ¦Different nations characterized by different management ideologies ¦There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry

· Joint ventures:

the establishment of a firm that is jointly owned by two or more otherwise independent firms o Advantages: § It can avoid costs and risks of opening up a foreign market o Disadvantages: § It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another § The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

Uncertainty avoidance-

the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity

o Demand conditions:

the nature of home demand for an industry's product or service · Influence the development of capabilities § Sophisticated and demanding customers pressure firms to be more competitive and to produce high quality, innovative products

o Related and supporting industries:

the presence of supplier industries and related industries that are internationally competitive · Investing in these industries can spill over and contribute to success in other industries § Successful industries tend to be grouped in clusters in countries which then prompts knowledge flows between firms

Masculinity versus femininity-

the relationship between gender and work roles

Individualism versus collectivism -

the relationship between the individual and his or her fellows

1. Compare and contrast absolute advantage vs comparative advantage

¦ A country has an absolute advantagein the production of a product when it is more efficient than any other country in producing it - According to Smith: 1. Trade is not a zero-sum game 2. Countries should 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 ¦Ricardo (1817): What happens when one country has an absolute advantage in the production of allgoods? ¦Proposed the theory of comparative advantage o A 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 holds that this is true, even if it means the country buys goods from other countries that it could produce more efficiently itself. ¦The theory of comparative advantage - trade is a positive sum game in which all gain o Potential world production is greater with unrestricted free trade than it is with restricted trade o Provides a strong rationale for encouraging free trade

1. What resulted from the 1976 Jamaica agreement?

¦At the Jamaica meeting, the IMF's Articles of Agreement were revised to reflect the new reality of floating exchange rates ¦Under the Jamaican agreement i. Floating rates were declared acceptable ii. Gold was abandoned as a reserve asset iii. Total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion (today, this number is $767 billion)

What are the economic and political arguments for regional economic integration? Given these arguments, why don't we see more substantial examples of integration in the world economy?

· Generally, many groups within a country oppose the notion of economic integration · Economic Argument: o Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO o Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration · Political Argument: o Politically, integration is attractive because: § By linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease § By linking countries together, they have greater clout and are politically much stronger in dealing with other nations · Impediments: · Integration is not easy to achieve or maintain · There are two main impediments to integration: o It can be costly - while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose o It can result in a loss of national sovereignty

1. Whatare some of the ways in which a firm can reduce the risk of losing its proprietary know-how to foreign companies through licensing agreements?

· If a firm's competitive advantage is based on control over proprietary technological know-how, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of losing control over that technology · Set up operations in a foreign country through a wholly owned subsidiary

1. Whatwere the causes of the sovereign debt crisis in the EU? What does the crisis tell us about the Euro? Why or why not - will the Euro survive the sovereign debt crisis?

· Investors became concerned about growing levels of sovereign debt among several members of the European Union. As they began to assign a higher risk premium to the region, sovereign bond yields increased and put a strain on national budgets. · The Eurozone Crisis began in late 2009 when Greece admitted that its debt had reached 300 billion euros, which represented approximately 113% of its gross domestic product (GDP). · the EU noted several irregularities in Greece's accounting systems, which led to upward revisions of its budget deficits. · Rating agencies promptly downgraded the country's debt, which led to similar concerns being voiced about other troubled countries in the eurozone, including Portugal, Ireland, Italy, and Spain, which had similarly high levels of sovereign debt. If these countries had similar accounting issues, the problem could spread to the rest of the region. · The negative sentiment led investors to demand higher yields on sovereign bonds, which exacerbated the problem by making borrowing costs even higher. Higher yields also led to lower bond prices, which meant larger countries and many eurozone banks holding the sovereign bonds began to lose money. Regulatory requirements for these banks required them to write down these assets and then bolster their reserve ratios by saving more than lending—putting a strain on liquidity. · The eurozone (debt) crisis was caused by (i) the lack of a(n) (effective) mechanisms / institutions to prevent the build-up of macro-economic and, in some countries, fiscal imbalances and (ii) the lack of common eurozone institutions to effectively absorb shocks

Drawing upon John Rawls's concept of the veil of ignorance, develop an ethical code that will (a) guide the decision of a large oil multinational toward environmental protection and (b) influence the policies of a clothing company in their potential decision of outsourcing its manufacturing operations.

· John Rawls suggested that a decision is just and ethical if people would allow for it whendesigning a social system under a veil of ignorance. · Although in some large oil multinational countries will not charge for violating laws if there are leakage of oil happening, but the companies should consider about the ethical dilemmas by contributing toward environmental protection. The policy of the companies should strengthen the ethical issue on the environmental protection because this is an order of the society. · The companies who did outsourcing is to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. This also means that the manufacturing process will be taken place in other countries. Therefore, the companies should consider about the ethical dilemmas issue toward the pollution that might happen the outsourcing countries during the manufacturing process. The company should strengthen the policy on minimization of waste in order to fulfill the order of the society.

1. A visiting American executive finds that a foreign subsidiary in a less-developed country has hired a 12-year-old girl to work on a factory floor, in violation of the company's prohibition on child labor. He tells the local manager to replace the child and tell her to go back to school. The local manager tells the American that the child is an orphan with no other means of support, and she will probably become a child prostitute if she is denied work. What should the American executive do?

· Neither alternative—violating the company's position on childlabor, nor putting the child out on the streets—seems acceptable. But in the aspect of American executive might choose to allow the child to continue to work in the factory which could prevent the little girl became street child and still can earn income for heralthough that has violated the company's policy.

1. Describe in detail what makes the impossible trinity "impossible.

· The Impossible Trinity states that you can have two of the following three: - A fixed exchange rate - No capital controls - Independent monetary policy You cannot have all three. · A trilemma suggests that countries have three options from which to choose when making fundamental decisions about managing their international monetary policy agreements. However, the options of the trilemma are conflictual because of mutual exclusivity, which makes only one option of the trilemma achievable at a given time. · This theory exposes the instability inherent in using the three primary options available to a country when establishing and monitoring its international monetary policy agreements. Side A: A country can choose to fix exchange rates with one or more countries and have a free flow of capital with others. If it chooses this scenario, independent monetary policy is not achievable because interest rate fluctuations would create currency arbitrage stressing the currency pegs and causing them to break. Side B: The country can choose to have a free flow of capital among all foreign nations and also have an autonomous monetary policy. Fixed exchange rates among all nations and the free flow of capital are mutually exclusive. As a result, only one can be chosen at a time. So, if there is a free flow of capital among all nations, there cannot be fixed exchange rates. Side C: If a country chooses fixed exchange rates and independent monetary policy it cannot have a free flow of capital. Again, in this instance, fixed exchange rates and the free flow of capital are mutually exclusive.