Nejla's Int'l Business Set

FDI is shifting away from extractive industries and manufacturing, and towards services

- the general move in many developed countries toward services - the fact that many services need to be produced where they are consumed

Four main benefits of FDI

1. resource transfer effects - FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available 2. employment effects - FDI can bring jobs to a host country that would otherwise not be created there 3. balance of payments effects 4. effects on competition and economic growth - FDI in the form of greenfield investment increases the level of competition in a market, driving down prices and improving the welfare of consumers

Inward FDI has three main costs:

1. the possible adverse effects of FDI on competition within the host nation 2. adverse effects on the balance of payments 3. the perceived loss of national sovereignty and autonomy

Swoot Hawley Tariff

1930, Created large tariff on foreign goods, Backfired

European Union

27 countries with a common currency (Euro), no protectionism within their borders.

Specific Tariff

fixed charge import tax

economic union

free flow of products and factors of production between member countries and the adoption of a common external trade policy, but also requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy

encourage outward FDI (Home)

government-backed insurance programs to cover major types of foreign investment risk

encourage inward FDI (Host)

governments offer incentives to foreign firms to invest in their countries

free market view

international production should be distributed among countries according to the theory of comparative advantage. - Free Market embraced by US, Britain, Chile, Hong Kong

restrict outward FDI (Home)

limit capital outflows, manipulate tax rules, or outright prohibit FDI

Voluntary export restraints (VERs)

may limit a firm's ability to serve a country from locations outside that country

European Free Trade Association

norway iceland liechtensteing and switzerland, free trade ares

Trade diversion

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

Regional economic integration:

opens new markets makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal

restrict inward FDI (Host)

ownership restraints and performance requirements

European Council

resolves major policy issues and sets policy directions

European Commission

responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws

The Helms-Burton Act and the D'Amato Act

sanctions

Pragmatic nationalism

suggests that fdi has both benefits, such as inflows of capital, technology, skills and jobs and cost such as repatriation of profits to the home country and negative balance of payment effec

The benefits of FDI for the home country include:

the effect on the capital account of the home country's balance of payments from the inward flow of foreign earnings the employment effects that arise from outward FDI the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

Court of Justice

the supreme appeals court for EU law

Council of the European Union

the ultimate controlling authority within the EU

stock of FDI

total accumulated value of foreign-owned assets at a given time

Andean Pact

trade block between bolivia, columbia, ecuador, peru

CARICOM

tried to establish customs union in Caribbean, but did NOT work

free trade

unrestricted purchase ability of foreign products

Advalorem Tariff

variable charge import tax, ex 2%

Paul Krugman argues (strategic trade)

- aimed at establishing domestic firms in a dominant position in a global industry policies that boost national income at the expense of other countries - strategic trade policy is almost certain to be captured by such groups who will distort it to their own ends

Strategic trade policy

- suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages - also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

political union

A central political apparatus coordinating the economic, soical, and foreign policy of its member states

Benefits of the Euro:

A common currency will make it easier to compare prices across Europe There are savings from having to handle one currency, rather than many

Regional economic integration

Agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other

Import Quotas

Directly restrict the quantity of some good that is imported

Greenfield Investment

Establishing a new operation in a foreign country

Voluntary Export Restraints

Export quotas imposed by an existing country to restrict its exports

Quota Rent

Extra profit producers make when supply is artificially set.

Subsidy

Government payment to domestic producers

Home-Country Costs

The home country's balance of payments can suffer: from the initial capital outflow required to finance the FDI if the purpose of the FDI is to serve the home market from a low cost labor location if the FDI is a substitute for direct exports Employment may also be negatively affected if the FDI is a substitute for domestic production

Foreign Direct Investment

Investment made by a foreign company in the economy of another country.

externalities

Knowledge spillovers

John Dunning

Location-specific advantages

Disadvantages of NAFTA

Mexican northern emmigration, Mexico would lose sovereginty

Advantages of NAFTA

Mexico gains jobs, US companies benefit because

North American Free Trade Agreement

NAFTA an alliance that merges canada, mexico and the united states into a single market

Costs of the Euro:

National authorities lose control over the monetary policy The EU is not an optimal currency area

Trade creation

Occurs when low-cost producers within the free trade area replace high-cost domestic producers.

Dumping / Antidumping

Selling goods in a foreign market below their cost of production or fair price

Treaty of Rome

The European Economic Community was formed

Europe has two trade blocs

The European Union (EU) with 27 members The European Free Trade Area (EFTA) with 4 members

NAFTA has helped...

The agreement has helped to create the background for increased political stability in Mexico

flow of FDI

The amount of FDI undertaken over a given time

Outflows / Inflows of FDI

The flow of FDI in/out of a country

Gross Fixed Capital Formation

The summary of the total amount of capital invested in factories, stores, office buildings, and the like

common market

a group of countries that act as a single market, without trade barriers, common external policy

_______ is the ultimate decision making body of the European Union. a) Council of the European Union b) European Parliament c) Court of Justice d) European Commission

a) Council of the European Union

NAFTA is an example of a(n)

a) Free trade area

Which of the following is not true of NAFTA?

a) It created a free trade area of nearly 800 million people

Most FDI is direct toward

a) developed countries

NAFTA does what?

abolished tariffs removed most barriers on the cross-border flow of services protects intellectual property removes most restrictions on FDI

free trade area

an alliance of nations without trade barriers between its members

infant industry argument

an industry should be protected until it can develop and be viable and competitive internationally

All barriers to the free flow of goods and services between member countries are removed, and a common policy toward nonmembers is established in a a) Free trade area b) Customs union c) Common market d) Economic union

b) Customs union

Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are

b) Location advantages

Which theory suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages?

b) Strategic trade theory

Which of the following is not a political argument for government intervention? a) protecting jobs

b) protecting infant industries

When higher cost suppliers within the free trade area replace lower cost external suppliers

c) There is trade diversion

What is the most common political reason for trade barriers?

c) To protect jobs

Which of the following is not a cost of outward FDI for host countries?

c) gains from learning valuable skills from foreign markets

Maastricht Treaty

committed the EU to adopt a single currency By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar The euro is used by 12 of the 25 member states

The Asia-Pacific Economic Cooperation (APEC):

currently has 21 members including the United States, Japan, and China wants to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region

_______ is responsible for proposing EU legislation.

d) European Commission

All of the following except _____ are key issues on the table at the Doha Round.

d) Infant industry protection

Benefits of FDI include all of the following except

d) National sovereignty and autonomy

A ________ demands that some specific fraction of

d) local content requirement

European Parliament

debates legislation proposed by the commission and forwarded to it by the council

Why do firms choose FDI instead of: Exporting or Licensing

exporting - producing goods at home and then shipping them to the receiving country for sale or licensing - granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells