Global Business Final review

Foreign Direct Investment (FDI)

When a firm invests directly in new facilities to produce and/or market in a foreign country; when an individual or business owns 10 percent or more of a foreign country

FDI Benefits (Host Country)

1. Resource transfer effect

2. Employment effect

3. Balance of payments effect

4. Effects on competition and economic growth

FDI Costs (Host Country)

1. Possible adverse effects of FDI on competition within the host nation

2. Adverse effects on the balance of payments

3. Perceived loss of national sovereignty and autonomy

FDI Benefits (Home Country)

1. Effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings

2. Employment effects that arise from outward FDI

3. The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

FDI Costs (Home Country)

1. Balance of payment suffers from capital outflow and substituting direct exports

2. Employments effects of outward FDI

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

Customers Union

Eliminates trade barriers between member countries and adopts a common external trade policy; Most countries that enter a customs union desire further integration in the future

Common Market

No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production; requires harmony in country policies

Economic Union

Involves 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

Jamaica Agreement

Set of international agreements that ratified the end of the gold standard and created floating exchange rates