Unit 1: Political and Legal Factors of International Business

Protectionism/Tariffs

a system of using tariffs to raise the price of imported goods in order to protect domestic producers

Product Life Cycle Theory

A product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product

Comparative advantage

A situation in which a country cannot produce a product more efficiently than another country, but can produce that product better and more efficiently than it does other goods

Types of Legal Systems

Civil Law, Common Law, Religious Law

Tariffs

Tariffs are taxes imposed on imports. Two kinds of tariffs exist—specific tariffs, which are levied as a fixed charge, and ad valorem tariffs, which are calculated as a percentage of the value. Many governments still charge ad valorem tariffs as a way to regulate imports and raise revenues for their coffers

Absolute advantage

The ability of a country to produce a good more efficiently than another nation

Totalitarianism

Contends that every aspect of an individual's life should be controlled and dictated by a strong central government.

Anarchism

Contends that individuals should control political activities and public government is both unnecessary and unwanted.

Which of the following is a key concept of the factor proportions theory? Firms must develop competitive advantages to counter global competition in their industries Countries will produce and export goods that require resources that are in great supply A nation's competitiveness in an industry will depend on the capacity of the industry to innovate and upgrade Production of a new product will occur completely in the home country of its innovation

Countries will produce and export goods that require resources that are in great supply

International trade

The concept of exchange between people or entities in two different countries

Planned economy

The government or state directs and controls the economy, including the means and decision making for production

Trade Deficit

Situation in which a country imports more than it exports

Porter's Theory determinants

(1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

Barriers to entry obstacles

1. Research and development 2. the ownership of intellectual property rights 3. economies of scale 4. unique business processes or methods as well as extensive experience in the industry 5. control of resources or favorable access to raw materials.

Trade Key Policies

1. Tariffs 2. Subsidies 3. Import quotas and VER 4. Currency controls 5. Local content requirements 6. Antidumping rules 7. Export financing 8. Free-trade zone 9. Administrative policies

What is a trade deficit? A situation in which the value of exports is greater than the value of imports A situation in which exports are promoted by imposing restrictions on imports A situation in which trade policies benefit select industries more than others A situation in which the value of imports is greater than the value of exports

A situation in which the value of imports is greater than the value of exports

Subsidies

A subsidy is a form of government payment to a producer. Types of subsidies include tax breaks or low-interest loans; both of which are common. Subsidies can also be cash grants and government-equity participation, which are less common because they require a direct use of government resources

Porter's National Competitive Advantage Theory

A theory that states a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

Religious law

Also known as theocratic law and is based on religious guidelines. The most commonly known example of religious law is Islamic law, also known as Sharia.

Capitalism

An economic system in which the means of production are owned and controlled privately

Foreign direct investment

An investment in or the acquisition of foreign assets with the intent to control and manage them

Pluralism

Asserts that both public and private groups are important in a well-functioning political system.

Liberization

Change in the economic philosophy of a state, usually referring to fewer government regulations and restrictions, mainly on economic activities

Civil law

Based on a detailed set of laws that constitute a code and focus on how the law is applied to the facts. It's the most widespread legal system in the world

Common law

Based on traditions and precedence. In common law systems, judges interpret the law and judicial rulings can set precedent

Why do some host countries encourage ownership to be maintained by a person of local origin? Because it ensures that the ruling party of that country makes financial gains in the process Because it keeps the control of local markets or industries in their citizens' hands Because it encourages unlimited foreign direct investment in their country Because it expediates a hostile takeover of the foreign company in the future

Because it keeps the control of local markets or industries in their citizens' hands - Some governments prefer to maintain local ownership, rather than allowing foreign entrepreneurs and investors to operate their businesses in ways that may not be beneficial to the local industries and markets.

Modern or Firm-Based Trade Theories

Country Similarity Theory, Product Life Cycle Theory, Global Strategic Rivalry Theory, Porter's National Competitive Advantage Theory

Antidumping rules

Dumping occurs when a company sells product below market price often in order to win market share and weaken a competitor.

Mercantilism

Economic theory stating that a country's wealth is judged by the amount of its gold and silver holdings

What are ad valorem tariffs? Fixed taxes that are levied on customers regardless of the value of the product or the service Fees that are calculated as a percentage of the value of the product or service Taxes that are levied as a fixed charge, regardless of the value of the product or service Fees that are levied on the producers of specific goods as decided by the finance ministry of a country

Fees that are calculated as a percentage of the value of the product or service

Global Strategic Rivalry Theory

Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages through barriers to entry.

Some firms invest in production or plant facilities in a country and then sell the goods in the same local or regional market. What type of foreign direct investment are these firms engaging in? Forward vertical Horizontal Reverse inward Backward vertical

Forward vertical - Vertical integration is the control of the different stages of a product as it moves from raw materials through production and final distribution.

How does the government derive its power in a direct democracy? From the people of the country, through means of elected representatives of the people From the people of the country, through means of a petition referendum From the dominant ethnic group of the country From the cultures and traditions of the largest religious community of the country

From the people of the country, through means of a petition referendum - Democracy relies on citizens' participation in the decision making process. In a direct democracy, people vote directly on initiatives, as opposed to a representative democracy, in which representatives chosen by the people vote on initiatives.

Currency controls

Governments may limit the convertibility of one currency (usually its own) into others, usually in an effort to limit imports. Additionally, some governments will manage the exchange rate at a high level to create an import disincentive

Export financing

Governments provide financing to domestic companies to promote exports.

Import quotas and VER

Import quotas and voluntary export restraints (VER) are two strategies to limit the amount of imports into a country. The importing government directs import quotas, while VER are imposed at the discretion of the exporting nation in conjunction with the importing one

Which of the following statements describes foreign direct investment? Offering financial and technical help to charitable organizations and local NGOs Acquiring foreign stocks and other assets with no intent to control and manage them Investing in or acquiring foreign assets with the intent to control and manage them Only investing in foreign assets with no intent of controlling or managing the company

Investing in or acquiring foreign assets with the intent to control and manage them - Foreign direct investment (FDI) gives the investor a controlling interest in a foreign company.

Sharia

Islamic law—which is a moral, rather than a commercial, legal system and governs a number of Islamic nations and communities around the world. It is the most widely accepted religious law system. Sharia has clear guidelines for aspects of life.

Which of the following is true about Sharia law? It does not permit banks to charge large up-front fees It prohibits banks from engaging in sale-buyback or leaseback of an asset It prohibits charging interest on money and other common investment activities It is not a widely accepted religious law system in any part of the world

It prohibits charging interest on money and other common investment activities - Islam forbids simply lending out money at interest, so Islamic rules on transactions have been created to prevent this perceived evil.

Local firm characteristics (Porter's Theory)

Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm's competitiveness.

Local content requirements

Many countries continue to require that a certain percentage of a product or an item be manufactured or "assembled" locally. Some countries specify that a local firm must be used as the domestic partner to conduct business.

Free-trade zone

Many countries designate certain geographic areas as free-trade zones. These areas enjoy reduced tariffs, taxes, customs, procedures, or restrictions in an effort to promote trade with other countries.

Classical or Country-Based Trade Theories

Mercantilism, Absolute Advantage, Comparative Advantage, Hackscher-Ohlin, Leontief Paradox

Democracy

Most common form of government around the world today. Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy)

Local market demand conditions (Porter's Theory)

Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage

Local market resources and capabilities (Porter's Theory).

Porter recognized the value of the factor proportions theory, which considers a nation's resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export

Which term refers to a strategy to promote exports by imposing restrictions on imports? Protectionism Liberalization Capitalism Mercantilism

Protectionism

Barriers to entry

Refer to the obstacles a new firm may face when trying to enter into an industry or new market.

Government-business trade relations

Relationships between national governments and global businesses

Political system

System of politics and government in a country. It governs a complete set of rules, regulations, institutions, and attitudes.

Leontief Paradox

The theory that the United States should have been importing labor-intensive goods, but instead it was actually exporting them.

Hackscher-Ohlin Theory (Factor Proportions Theory)

Theory that countries would produce and export goods from resources in great supply and import goods and resources that are in short supply, but high demand

Country Similarity Theory

Theory which proposes that consumers in similar countries tend to have similar preferences, and most trade in manufactured goods will occur between countries with similar per capita incomes

Administrative policies

These are the bureaucratic policies and procedures governments may use to deter imports by making entry or operations more difficult and time consuming.

Local suppliers and complementary industries (Porter's Theory)

To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry.

Which of the following refers to a political philosophy that contends that every aspect of an individual's life should be controlled and dictated by a strong central government? Capitalism Anarchism Pluralism Totalitarianism

Totalitarianism

Trade Surplus

situation in which a country exports more than it imports