International Business - Final Exam (Alexey Semenov)

What is regional economic integration?:

agreements among countries in a geographic region to reduce and ultimately remove tariff and non-tarriff barriers to the free flow of goods, services, and factors of production between each other.

What are the goals of regional economic integration?

regional economic integration among countries typically leads to a reduction in the cost of trade, improved availability of goods and services and a wider selection of them, and gains in efficiency that lead to greater purchasing power.

What are the five levels of regional economic integration?

free trade area, customs union, common market, economic union, political union

free trade area

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 (ex: EFTA: European Free Trade Association & NAFTA: North American Free Trade Agreement)

customs union

A group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy against trade relations with non-members (ex: Andean community establishing free trade among members and imposes a tariff to 5 to 20% on products imported from the outside)

common market

a group of countries (1) removing all barriers to the free flow of goods, services, and factors of production between each other ad (2) the pursuit of a common external trade policy. Among member countries the trade policy cause labor and capital free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital

economic union

A group of countries committed to (1) removing all barrier to the free flow of goods, service, and factors of production between each other (2) the adoption of a common currency; (3) the harmonization of tax rates; and (4) the pursuit of a common external policy. (ex: the European Union even though it may be imperfect due to the difference in tax regulations and the adoption of currency among the members of the EU)

political union

a central political apparatus that coordinates the economic, social, and foreign policy (similar to the EU and the US (in the United States the independent states are effectively combines into a single nation)

NAFTA is a type of what regional economic integration and what barriers NAFTA eliminates?

free trade area & NAFTA removes all barriers to the free flow of goods and services among the three members.

EU is a type of what regional economic integration and what barrier does the EU eliminates?

political union & the EU removes all barriers to the free flow of goods, services, and factors of production between each other

functions of foreign exchange market?

to convert the currency of one country into the currency of another and to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates.

What is a spot exchange rate?

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

How are spot exchange rates determined?

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

What is a currency swap?

the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

What is the law of one price?

states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency

What is the purchasing power parity (PPP)?

the exchange rate could be found from any individual set of prices..by comparing the prices of identical products in different currencies, it would be possible to determine the "real" of PPP, exchange rate that would exist if markets were efficient. (simply put in a efficient market the price of a basket of goods should be roughly equivalent in each country)

What is an efficient market school of thought?

a market where price is reflective of all available information & there are no trade barriers to impede the free flow of goods and services

What is an inefficient market school of thought?

one in which price is not reflective of all available information..so investing into forecasting services might provide better predictions of future spot rates than forward exchange rates do

What are first-mover advantages?

(1) gains the ability to preempt rivals and capture demand by establishing a strong brand name (2) ability to build sales volume in the country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants (3) ability of early entrants to create switching costs that tie customers into their products or services.

What are first-mover disadvantages?

(1) pioneering costs (costs that an early entrant has to bear that a later entrant can avoid such as effort, time, and expense) (2) a certain liability is associated with being foreigner, and this liability is greater for foreign firms that enter a national market early as the late entrant may benefit by observing and learning from the mistakes made by early entrants.

Pioneering Costs

Costs an early entrant bears that later entrants avoid, such as the time and effort in learning rules, failure due to ignorance, and the liability of being a foreigner. Pioneering costs also include the costs of promoting and establishing a product offering, including the costs of educating customers.

What are the six types of entry mode?

Exporting, Turnkey contracts, Licensing, Franchising, Joint Ventures, Wholly Owned subsidiaries

Exporting

The sale of products/ goods in one country to residents of another country (Advs.) ~ (1) avoids the often substantial costs of establishing manufacturing operations in the host country (2) achieve experience curve for the firm and location economies (Disadvs.) ~ (1) may not be appropriate if lower-cost locations can be found (2) high transportation costs can make exporting uneconomical (3) tarriffs can make it also uneconomical

Turnkey projects

A project in which a firm agrees to set up an operating plant for a foreign client dn hand over the "key" when the plant is fully operational (Advs.) A great way of earning economic returns from an asset and can be a less risky way than conventional FDI (Disadvs.) are no long-term interest in the foreign country and these foreign enterprise may inadvertently create a competitor

Licensing

Arrangement in which a licensor grants the rights to intangible property to a licensee for a specified period and receives a royalty fee in return. (Advs.) the firm does not have to bear and developments costs and risks as often intangible property does not have to be further developed if it already has some business applications. (Disadvs.) no tight control over manufacturing, marketing, and strategy that is required for realizing curve and location economies and the global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another