International Business Exam 2,
why is FDI chosen
FDI is chosen because of threats of trade barriers, cost of shipping and transport
Other important source countries: the United Kingdom, the Netherlands, France, Germany, and Japan
FDI outflows
Which of the following is true of the provisions of the North American Free Trade Agreement?
It seeks the removal of most barriers on the cross-border flow of services.
demand and supply curve changes with tariffs
Tariffs create dead weight loss, less consumer surplus, and less total economic surplus
the complete trade picture
The Current Account is offset by the Capital Account thus CA + KA = 0, thus trade deficits mean that there are investments coming in to the USA
since world war 2 what country has the most fdi
US
why are sugar prices higher in the USA compared to the rest of the world
US sugar imports are strictly controlled by tariff rate quotas
who are the biggest importers in 2018 (in order)
US, China, Germany
countries with the most FDI outflows (top 4)
US, UK, Netherlands, Germany
who is the USMC agreement
USA, Mexico, Canada
what replaced NAFTA
USMCA
what industry most often gets a subsidy
agriculture
what is the most protected industry
agriculture
who critiques mercosur
alexander yeats
political union-level of integration
all the above PLUS central political: economic, social, and foreign policy (USA States)
common market-level of integration
all the above PLUS common currency, harmonized tax rates (EU)
customs union-level of integration
all the above PLUS common external trade policies (andean com)
NAFTA -
phasing out and replaced with USMCA - regional integration between Mexico, Canada, and USA. There are unintended consequences with these agreements, including the decimation of many Mexican small family farms forcing them to migrate (legally and illegally) to the USA for work on large USA farms.
Potential world production is greater with unrestricted trade rather that restricted trade
comparative advantage
who absorb the csots of subsidies
consumers
who suffers from tariffs
consumers
host country
country hosting another company
home country
country in another
comparative advantage states that
country should focus on producing goods at home they are best at and import goods that although better at than other countries but not best
Free trade is best BUT
politics often blocks or reduces trade, but FDI can mitigate, but even better - participate in a regional integration group = free trade within the group!
economic arguments (for government intervention)
infant industry argument, strategic trade policy (protect industries that are in first-mover position, help domestic firms overcome barriers of entry)
Licensing
involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.
balance of payments or trade balance
is the sum of all that a country has imported and exported for a given time-period
stereotyping in Europe: most corrupt
italy, spain, greece, poland, czech rep
what are the national factor endowments
land labor capital
new trade theory is limited to what type of firms
large
Costs of a Common Currency
loss of monetary policy
The ________ committed European Community members to adopt a common currency by January 1, 1999.
maastricht treaty
what is the 4th largest economic grouping in the world
mercosur
new trade theory
most large MNE located in certain countries are the result of First Mover Advantages and Economies of Scale (where large fixed costs can be spread over high sales volume) these large fixed costs are a barrier to startups
product life cycle theory
most new products begin in the US or other advanced economies, then through expanding markets to developing nations, these nations eventually are the exporters back to the original developed nations
flaw with with the product life cycle theory
most products are now introduced simultaneously across the globe
what are the two trade agreements outside of the WTO
multilateral and bilateral trade agreements
key words for heckscher-ohlin
national factor endowments (land, labor, capital)
cons of political factors
national sovereignty is lost
basic factors of porters diamond
natural resources, climate, location, demographics
does the UE approve of refuges
no
free trade area
no barriers (tariffs, quotas)
free trade area-level of integration
no barriers-USMCA
free trade means
no tariffs, no quotas
finaland exports
nokia phones
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
saudia arabia exports
oil
what is China, Australia, India, Mexico, and Greenland's top import?
oil
european council does?
passes legislation from the commission into law/debates issues in agriculture, transportation, taxes, immigration
who came up with the new trade theory
paul krugman
who came up with the revised case for free trade
paul krugman
who is anti teriff
paul krugman
what is the Russia, Canada, and USA's top export
petroleum
tvs are what type of thoery
product life cycle
product life cycle theory #2
proposed that most new products were developed by the US and went through a life cycle that brought them back as imports 5 stages
porters diamond (current trade theory)
proposed that there were 4 broad attributes and 2 additional vairables Factor Endowments - factors of production (skilled labor / infrastructure) Demand Conditions - home demand for product or service (sophisticated and demanding) Relating and Supporting Industries - presence of suppliers assists growth and provides new technology (Silicon Valley) Firm Strategy, Structure and Rivalry - competitive advantage unique to firm
european commission does?
proposing legislation and implementing, monitoring compliance
capital account (balance of payments)
records one time changes in stock of capital assets
current account (balance of payments)
records the economic transactions with other countries for a given time period
where is the european parliament
Strasbourg, France
who came up with the absolute advantage theory
adam smith
usa exports
boeing airplanes
CAFTA
- regional integration with Costa Rica, Nicaragua, El Salvador, Honduras, Guatemala and Dominican Republic AND the USA
why do governments impose tariffs
-Increase government revenues -Provide protection to domestic producers and labor force from external competitors
how do subsidies help domestic producers
-compete against low-cost foreign imports -gain export markets
Brexit (british exit)
-not comfortable with loss of national sovereignty -immigration was an issue -exports to EU may fall -governments and domestic producers benefit -consumers suffer bc they're paying more
once a company owns *___* then it is considered to be an FDI?
10%
GDP of EU
11 trillion
euro zone
19/27 of European Union nations whose national currency is the euro.
European commission has how many members
27
court of justice has how many judges
27
porter's diamond theory
4 factors - Demand Conditions, Relating and Supporting Industries, Firm Strategy, Structure & Competition AND Factor Endowments (Basic and Advanced)
EU population
450 million
european parliament has how many members
732
Heckscher-Ohlin Theory
Agreed with adam smith that countries differ in their ability to produce goods efficiently Agreed with Ricardo about comparative advantage with labor BUT believed comparative advantages arose from differences in national factor endowments
host country COSTS
Adverse Effects on Local Competition •MNEs have greater economic power than locals Adverse Balance-of-Payments Effects •Foreign MNEs repatriate earnings to parent National Sovereignty Loss •Economic independence •
HOME country costs are
Adverse Employment •Could suffer unemployment in specific sectors Adverse Balance-of-Payments Effects •Capital outflow to finance FDI and lower exports
comparative advantage
Agreed that countries differ in their ability to produce goods efficiently (labor productivity) if a country has absolute advantage in 2 items, they should focus on what they produce more efficiently trade should take place based on opportunity cost and limited resources Trade is a positive sum game in Potential world production is greater with unrestricted trade rather that restricted trade
what countries are in the mercouser agreement
Argentina, brazil, paraguay, Uruguay, venezuela (suspended in 2016 for human rights violation)
what did the absolute advantage theory argue
Argued that countries differ in their ability to produce goods efficiently Therefore one country might have Absolute Advantage in producing textiles (UK) while another has Absolute Advantage in making wine (FR) country should take advantage of what they are best at Trade is a positive sum game Countries should specialize in producing goods they have absolute advantage in and trade these for goods produced by other countries who are advantaged in other products
technical formula
BCA + BKA + BRA = 0
strategic trade policy meaning
By appropriate actions, government can help raise national income if it can ensure that firms that gain first-mover advantages in an industry are domestic Might be beneficial for a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms with first-mover advantages
who are the biggest exporters in 2018 (in order)
China, US, Germany
FDI flows are generally increasing in what type of nations
DEVELOPING nations
Anti-dumping duties
Dumping is the sale of merchandise in export markets at unfair prices Special import charges equal to the dumping margin
what country was the first designed to prevent further wars in Europe
EU
mercantilism beliefs
Encourages exports Discourage imports Viewed trade as zero sum game
structure of the EU
European Commission: proposing legislation and implementing, monitoring compliance European Council: passes legislation from the commission into law/debates issues in agriculture, transportation, taxes, immigration European Parliament: debate and propose amendments to council-passed laws cour of justice: supreme appeals court for EU law
FDI has grown more rapidly than world trade and world output because:
Firms still fear protectionist policies (barriers of trade) The shift toward democratic political institutions and free market economies encourages FDI Globalization is prompting firms to ensure they have a significant presence in many regions of the world
monetary policy
Government policy attempts to manage the economy by controlling the money supply and thus interest rates.
example of voluntary export restraint
Honda Civic in 1974 - Japan agreed to 2,000 vehicles /yr Today more than 1.4 Million Hondas sold each year
What countries are in the CAFTA agreement
Honduras, el salvador, guatemala, costa rica, Nicaragua, Dominican Republic, United States
U.S. firms that believe a foreign firm is dumping can file a complaint with the World Trade Organization (WTO)
If the complaint has merit, antidumping duties, also known as countervailing duties, may be allowed by the WTO
neo mercantalism
Import raw materials -> cheap lab0r -> export finished goods Exports have been greater than imports
strategic trade policy
Krugman states that this is a "beggar thy neighbor" meaning helping your nation at the expense of other nations and creates retaliation and trade wars
what established the euro as a common currency
Maastricht treaty
what is the objective of dumping
Objective is to protect domestic producers from unfair foreign competition
voluntary export restraint
Quota on trade imposed by the exporting country, typically at the request of the importing country's government
who came up with the product life cycle theory
Raymond Vernon
HOST country BENEFITS are
Resource-Transfer Effects •FDI can bring capital, technology, and management resources Employment Effects •FDI can bring jobs Balance-of-Payments Effects •FDI can help achieve a current account surplus Competition and Economic Growth
HOME country BENEFITS are
Resource-Transfer Effects •FDI gain valuable skills in foreign markets Employment Effects •FDI outward gives HQ jobs Balance-of-Payments Effects •Capital account increase from inward flow of earnings
Samuelson Critique
Rich country freely trades with poor country results in cheaper goods, but also job losses or lower real wages which may not make up for the cheaper goods
what are the 5 stages of the life cycle
Stage 1: US production, US demand Stage 2: US multiple production, US & Foreign demand Stage 3: US & US-Foreign production, US & Foreign demand Stage 4: US-Foreign & Foreign production, US & Foreign demand Stage 5: Foreign production only, US & Foreign demand
Revised Case for Free Trade
Strategic Trade Policy is a beggar-thy-neighbor policy •Boosts National Income •At Expense of Other Countries Creates Retaliation and Trade War •Requires the need for the WTO •Help Regulate and Negotiate Terms for Trade
foreign exchange and balance of payments
The world supply and demand for dollars comes from the exchanges of trade through both Current and Capital Accounts
what does nafta do
United States, Canada, and Mexico Abolished tariffs on 99% of goods traded Removed barriers on the cross-border flow of services Protects intellectual property rights Removal of most restrictions on FDI among members Application of national environmental standards Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
does it matter that the USA has a trade deficit
Yes and No. As long as the world desires to use US Currency to buy assets (Capital Account) If this slows or stops, then yes it could be a problem.
absolute advantage states that
a country should never produce goods at home that it can import at a cheaper price
import quota
a direct restriction on the quantity of a good that can be imported into a country
tariff rate quota definition
a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
tariff rate quota
a lower tariff rate is applied to imports within the quota than those over the quota
export band
a policy that partially or entirely restricts the export of a good
zero sum game
a situation in which an economic gain by one country results in an economic loss by another
export tariff
a tax placed on the export of a good
Over time the euro will impact the pan-European capital market by leading to
an increased efficiency with which investment funds are allocated.
infant industry argument
an industry should be protected until it can develop and be viable and competitive internationally
anti dumping law
arbitration by World Trade Organization (WTO) which allows retaliation by one nation with tariffs if another company (country) is "dumping" which is selling goods for below their fair price or even cost
ad valorem tariffs
are levied as a proportion of the value of the imported good
leontify paradox
argued that this did not hold true for many capital intense countries like Hong Kong, England, USA who are all rich capital centers of the world
diminishing returns
at a certain point, additional resources come at a higher cost (inefficient)
why has turkey been denied entrance to the EU
because of human right issues (Turkish polices toward its Kurdish minority)
why has FDI increased more rapidly that trade
because of the threat of trade barriers and supply chain issues
USA and China trade imbalance
began to deepen with the joining of China to the WTO
what country accounts for 79% of the GDP in mercosur
brazil
largest cane sugar producers
brazil, india, thailand, china, mexico
largest exporters of sugar
brazil, thailand, austrailia, guatemala, mexico
which countries did not join the euro zone
britian, denmark, and sweden
administrative trade policies
bureaucratic rules that are designed to make it difficult for imports to enter a country These polices hurt consumers by denying access to possibly superior foreign products
japan exports
cars
what is the Russia, Canada, and USA's top import
cars
what are the two additional variables that can influence the diamond in important ways
chance and government
example of a neo mercantilist country
china
what other country has joined high FDI
china
who are the lead exporters (top 4 in order)
china, EU, US, japan
ghana exports
cocoa
brazil exports
coffee
To spur trade, Cormoran, Brithea, and Asmakush decided on economic integration where there were no barriers to trade between the three countries, they agreed on a common external trade policy, and allowed factors of production to move freely between the three countries. In short, the three countries formed a
common market
advanced factors of porters diamond
communication, infrastucture, skilled labor, research facilities, tech
who came up with comparative advantage
david ricardo
european parliament does?
debate and proposes amendments to council passed laws
views of the EU nations continue to?
decline
local content requirement
demands that some specific fraction of a good be produced domestically Local content requirements benefit domestic producers and jobs, but consumers face higher prices Local content requirements benefit domestic producers and jobs, but consumers face higher prices
what is the goal of export tariffs
discriminate against exporting
Who benefits from import restraints?
domestic producers by limiting import competition, but they raise the prices of imported goods for consumers
2 aspects of integration
economic and political factors
what is the new trade theory
economies of scale first mover advantages Disagrees with H-O since other countries have the factor endowments required Agrees with Ricardo's comparative advantage as economies of scale result in improves productivity acknowledges the place that governments play in creating 1st mover advantages with certain industries ---boeing airplaine supplier, airbus customers, military contracts
south korea exports
electronics
mercantilism
encourage exports while discouraging imports - hoard the gold - ZERO SUM game approach
opportunity cost
equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison. The opportunity cost is the difference in value lost from producing a smartphone rather than a computer. If China earns $100 for a computer and $50 for a smartphone then the opportunity cost is $50.
what is the 2nd largest currency zone after the USA
euro
Which of the following is responsible for proposing European Union legislation, implementing it, and monitoring compliance with European Union laws by member-states?
european commission
how did noika succeed
factor endowments: Finland area has very skilled labor to support demand: home demand bc of the land and how far away everything was related and supporting industries: nokia was very structured company to begin with firm strategy/structure/rivalry: they had competitive advantage since they were the first
where is Nokia from
finland
theory of regional intergration
free flow of goods (no tariffs, quotas) economically improves all in the group (Comparative Advantage); Strengthens the nations in the integration because they now have the economic power of the USA or China; prevents possible future wars as all are interdependent (this was one of the reasons for establishing the EU after WWII)
Which of the following is defined as a group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies?
free trade area
levels of integration from least to greatest
free trade area, customs union, common market, economic union, political union
stereotyping europe: most hard working
germany
stereotyping in europe: least corrupt
germany
Establishment of the euro required participating national governments to
give up control over monetary policy
first mover advantages
global market can only support a limited number of firms producing the same products or services
who gains from traiffs
government and domestic producers
subsidy
government payment to a domestic producer
stereotyping in Europe: least hard working
greece, italy, romania
EU countries that disapprove refugees
greece, sweden, italy, spain, hungary
sweden exports
ikea furniture
comparative advantage problems
immobile resources, diminishing returns, samuelson critique
Chicken tariff
imported SUVs have a 25% tariffs
positive sum game
in which all countries that participate realize economic gains.
results of tariffs
increase government revenues, protect domestic industries - however: dead weight loss and consumers pay more than if free trade
why is FDI increasing in developing nations
increased opportunity
economies of scale
increasing product variety and pressures to reduce fixed costs favors large companies
specific tariffs
tariff levied as a fixed charge for each unit of good imported
what is free trade
refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
MERCOSUR -
regional integration with Argentina, Brazil, Paraguay, Uruguay, and Venezuela; formed in Ouro Preto in 1994 has not lived up to the theories we have studied - Brazil dominant economic power at 80% of GDP
political arguments (for government intervention)
retaliation, National Security, protecting consumers, human rights, protecting jobs and industries, furthering foreign policy objectives
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
cheap subsidies lead to dumping, examples
solar panels and core steel
court of justice does?
supreme appeals court for EU law
instruments of trade policy
tariffs, subsidies, import quotas (tariff rate quota, voluntary export restraint), local content requirements, administrative policies, anti-dumping policies
Flow of FDI
the amount of FDI undertaken over a given time period
opportunity cost
the most desirable alternative given up as the result of a decision
which theory is very ethnocentric
the product life cycle theory
Competitive Advantage of Nations
the term competitive advantage is most frequently used with companies, but it can also be used of nations
whats the major flaw with global trade theories
theres no free trade because of government intervention
main objective of the single european act
to establish a single market
managerical implication
trade barriers create difficulties and may desire to have Foreign Direct Investment (FDI) to avoid these barriers, or avoid the country completely for the global expansion
Suppose the country of Ceria and Lithinia imposed tariffs on imports from all countries, and then they set up a free trade area, scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Now, Ceria begins to import sugar from Lithinia. However, Ceria had previously been importing sugar from another country, Cadnia, which produced sugar more cheaply than Ceria or Lithinia. This is an example of
trade diversion
what does alexander yeasts argue
trade diversion
Dumping is illegal
true
global trade with specialization is better than mercantilism
true
what country has the most pure political union
usa
switzerland exports
watches
comparative advantage definition
when a country is more efficient at producing several products or services and chooses to allocate the most resources to those where the country is most efficient
absolute advantage
when a country is more efficient than any other country at producing a product or service
trade deficit
when the country has imported more goods or services than it has exported for a given time-period
free trade
where a government does not attempt to restrict what its citizens can buy or sell from or to another country.
Leontief Paradox
would predict that since the USA has strong factor endowments for capital, therefore should be a strong exporter of capital goods but this is not the case
cons of economic factors
•"Trade Diversion" lo-cost external trade partners replaced with hi-cost free-trade regional producers •Lose Monetary Policy, Fiscal Policy, and Trade Policy
benefits of a common currency
•Arbitrage Opportunity or Cross Border Bargains •Capital Liquidity •Diversification of Investment Portfolios -bank exchange fees
USMCA the US Mexico Canada agreement
•Compels North American automakers to source fewer parts from Germany, Japan, South Korea, or China •By 2023, 40 percent of parts for any tariff-free vehicle must come from a so-called "high wage" factory. Those factories must pay a minimum of $16 an hour in average salaries for production workers, which is about triple the average wage in a Mexican factory right now. •Critics see results in trade diversion rather than trade creation, and consequences may include higher costs to North American automobile producers and higher prices for consumers
multilateral and bilateral trade agreements
•Designed to capture gain from trade beyond those agreements currently attainable under WTO treaties •A firm may have to locate more production activities in a given market than it would otherwise. •The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country
those for NAFTA argued
•Enlarged base, open new markets •More Efficient, hi cost local -> now lo cost union •Move Mfg for Comparative Advantage •Increased PPP in Mexico can buy more US goods •Increased US employment
why does alexander yeats argue trade diversion
•Fastest growing trade is in autos, trucks and buses •Investing in factories that are not as efficient to produce vehicles to trade among themselves •Once external trade barriers to MERCOSUR have to come down, will not compete with Toyota (currently 70% tariff on cars) Where you used to trade with another country with lower rates but now you trade with each other so its more expensive
theory of regional integration
•Free flow of goods & services improves all nations •Free flow of labor, capital allows for goods to be produced more cheaply in one country, but eventually creating higher labor and efficiencies and raising the standard of living of ALL regions integrated. •Improve global competitiveness against large economies such as the USA and China •EU first designed to prevent further wars in Europe
pros of political factors
•Greater cooperation between neighbors reduces possibility of wars or other conflicts •Together, a region is a strong political voice compared to individual countries with a very small influence
economic arguments for government intervention
•Infant Industry Argument •Strategic Trade Policy •Protect Industries that are in First-Mover position •Help Domestic Firms overcome Barriers of Entry
those against NAFTA argued
•Mass exodus of jobs •Trade deficit •Mexican agriculture decimated, workers head north •Loss of sovereignty •Trade diversion - lo cost external, hi cost union •Trade Fortress - EU •Loss of some 900,000 U.S. jobs and helped decimate manufacturing in Southern states like North Carolina and Texas •Forced the Mexican farmer to compete with USA farmers, rural Mexico's economy has been turned upside down. •Migration of rural Mexicans into the larger Mexican cities and north to the USA
pros of economic factors
•Positive Sum game •Stimulates economic growth within region •"Trade Creation" hi-cost local producers replaced with lo-cost free-trade regional producers
NAFTA
•Removal of trade barriers & restrictions on FDI •Protection of IP and environmental standards •NAFTA created one of the world's largest free trade areas, which now links 444 million people producing $17 trillion worth of goods and services. •January 1, 2008 - All remaining duties and quantitative restrictions were eliminated, as scheduled
objectives of the single european act
•Remove all frontier controls between EC countries •Apply the principle of mutual recognition to product standards •Institute open procurement to nonnational suppliers •Lift barriers to competition in retail banking and insurance •Remove all restrictions on foreign exchange transactions between member countries •Abolish restrictions on cabotage
political arguments for government intervention
•Retaliation •National Security •Protecting Consumers •Protecting Human Rights •Protecting Jobs and Industries •Furthering Foreign Policy Objectives
trade barriers impact firm strategy
•Tariff barriers raise the costs of exporting •Quotas may limit a firm's ability to serve a country •Firms may need to conform to local content requirements by locating production in these countries •Future trade barriers can influence firm strategy
more on mercosur
•The 1994 Treaty of Ouro Preto gave the body a wider international status and formalized a customs union. •The Mercosur presidency rotates between member states every six months. •Mercosur institutions include the policy-making Common Market Council and the Common Market Group, which implements policies and monitors compliance with the council's decisions. •A Mercosur Parliament was inaugurated in December 2006. It began meeting in May 2007 in the Uruguayan capital Montevideo. Initially, the parliament will have no power other than persuasion. •Critics say Mercosur is becoming politicized and is moving away from its free-trade origins.
FDI will be favored over licensing when:
•The firm wants control over its technological know-how •The firm wants control over its operations and business strategy •The firm's capabilities are not amenable to licensing
FDI will be favored over exporting when:
•Transportation costs are high •Trade barriers are high
Inflows of FDI
•the flows of FDI into a country
Outflows of FDI
•the flows of FDI out of a country
Stock of FDI
•the total accumulated value of foreign-owned assets at a given time