Global Business Issues and Trade Theories

A collection of flashcards covering key concepts related to globalization, international trade theories, foreign direct investment, and government policies impacting business in a globalized environment.

Globalization

The process by which businesses develop international influence or operate on an international scale.

Multi-node networks

A global operational model where different stages of production occur in various countries.

Just-in-case

A supply chain strategy that prioritizes having extra inventory or resources to mitigate risks.

Tech accelerator

Technology that speeds up processes and reduces costs, impacting coordination and cross-border trade.

ESG (Environmental, Social, Governance)

Standards for a company's operations that socially conscious investors use to screen potential investments.

Risk-adjusted globalization

A globalization approach that incorporates resilience constraints into international operations and strategies.

Political systems

The structure of government that influences policy stability and regulatory predictability.

Economic systems

The organizational methods of production and distribution of goods, ranging from market-oriented to command economies.

Legal systems

The framework of laws governing contracts, property rights, and judicial processes in a country.

Foreign Direct Investment (FDI)

Investment made by a company or individual in one country in business interests in another country.

OLI Framework

A model that explains why firms engage in FDI based on Ownership, Location, and Internalization advantages.

Traditional trade theory

Economic theories that explain trade patterns based on comparative advantage and factor endowments.

New Trade Theory (NTT)

Theory that emphasizes the role of economies of scale and variety in intra-industry trade.

Regional Economic Integration

The process where countries in a geographical region reduce trade barriers to promote economic cooperation.

Foreign Exchange (FX)

The international system of exchanging one currency for another for trade or investment.

Transaction exposure

The risk that a company faces when it enters into transactions involving foreign currencies.

Tariffs

Taxes imposed by a government on imported goods to protect domestic industries.

Supply-chain choreography

The careful coordination of supply chain activities across various geographies to optimize efficiency.

Tariff supply/demand incidence

The analysis of how tariffs affect prices and market equilibrium between producers and consumers.

Globalization

The accelerating process by which businesses, technologies, philosophies, and products develop international influence or operate on an international scale, driven by factors like technological advancements, trade liberalization, and cross-border investment, leading to increased interconnectedness and interdependence among nations.

Multi-node networks

A global operational model where different stages of production, R&D, and service delivery occur in various countries. This distributed approach leverages local advantages, reduces costs, enhances efficiency, and provides access to diverse markets and resources, though it can increase coordination complexity and geopolitical exposure.

Just-in-case

A supply chain strategy that prioritizes having extra inventory, buffer stock, or redundant resources to mitigate various risks such as unexpected demand surges, supply disruptions, geopolitical events, or natural disasters. It contrasts with 'just-in-time' by focusing on resilience and continuity over lean efficiency.

Tech accelerator

Advanced technologies such as Artificial Intelligence (AI), automation, blockchain, and the Internet of Things (IoT) that speed up processes, optimize decision-making, and significantly reduce operational costs. These technologies play a crucial role in enhancing coordination across global supply chains and facilitating cross-border trade by improving efficiency and transparency.

ESG (Environmental, Social, Governance)

A set of non-financial standards for a company's operations that socially conscious investors use to screen potential investments. Environmental criteria assess a company's impact on nature; Social criteria examine its relationships with employees, suppliers, customers, and communities; Governance deals with a company's leadership, executive pay, audits, internal controls, and shareholder rights.

Risk-adjusted globalization

A strategic globalization approach that integrates resilience constraints and risk management into international operations and strategies. It involves diversifying supply chains, nearshoring or friend-shoring critical production, building redundancy, and robust geopolitical analysis to balance efficiency gains with protection against disruptions, learning from recent global events.

Political systems

The structure of government that defines how power is exercised and decisions are made within a country, significantly influencing policy stability, regulatory predictability, and the overall business environment. Examples include democracies, monarchies, totalitarian regimes, and autocracies, each with distinct implications for foreign investment and trade.

Economic systems

The organizational methods by which societies produce, distribute, and consume goods and services. These range from market-oriented economies (e.g., capitalism, emphasizing private ownership and free markets) to command economies (e.g., socialism or communism, characterized by central planning and state control), directly impacting resource allocation, pricing, and business opportunities.

Legal systems

The framework of laws, regulations, and judicial processes governing commercial and individual interactions in a country. Key types include common law (based on precedent), civil law (based on codified statutes), and religious law, all of which dictate contract enforceability, property rights, intellectual property protection, and dispute resolution mechanisms for businesses operating internationally.

Foreign Direct Investment (FDI)

An investment made by a company or individual in one country in business interests in another country, aiming to establish lasting interest and control. FDI can take various forms, such as establishing new facilities (greenfield investment), acquiring existing companies (mergers and acquisitions), or reinvesting profits, typically driven by market access, resource acquisition, or efficiency gains.

OLI Framework

A theoretical model, also known as the Eclectic Paradigm, that explains why firms engage in Foreign Direct Investment (FDI) based on three advantages: Ownership (firm-specific competitive advantages such as technology or brand), Location (country-specific advantages like market size, resources, or low labor costs), and Internalization (advantages of performing transactions within the firm rather than through external markets, to protect proprietary assets).

Traditional trade theory

Economic theories, like David Ricardo's comparative advantage or the Heckscher-Ohlin model, that explain patterns of international trade. These theories attribute trade flows primarily to differences in production costs between countries, arising from varying resource endowments, labor productivity, or technological capabilities, suggesting countries specialize in and export goods they produce relatively more efficiently.

New Trade Theory (NTT)

A set of economic models that emphasizes the role of economies of scale (internal and external) and product differentiation in explaining international trade patterns, especially intra-industry trade (trade of similar goods among similar countries). NTT suggests that countries may specialize in specific varieties or niches within an industry due to increasing returns to scale, leading to greater product variety and lower costs for consumers globally.

Regional Economic Integration

The process where countries in a specific geographical region reduce, and eventually remove, trade and investment barriers among themselves to promote closer economic cooperation and mutual prosperity. Stages of integration can include Free Trade Areas (FTAs), Customs Unions, Common Markets, Economic Unions, and Political Unions, each involving deeper levels of policy harmonization.

Foreign Exchange (FX)

The global decentralized market for the trading of currencies, where one currency is exchanged for another for a variety of purposes including international trade, investment, tourism, and speculation. This system facilitates payments and transfers across borders and is crucial for global commerce, with exchange rates determined by supply and demand, influenced by economic factors, interest rates, and geopolitical events.

Transaction exposure

The financial risk that a company faces when it enters into transactions (e.g., importing/exporting goods, borrowing, lending) denominated in a foreign currency. This risk arises from unexpected changes in exchange rates between the date a transaction is agreed upon and the date it is settled, potentially leading to losses or gains in the company's domestic currency value. Companies often use hedging strategies to mitigate this exposure.

Tariffs

Taxes imposed by a government on imported goods or services. Tariffs serve a dual purpose: they generate revenue for the government and, more significantly, protect domestic industries from foreign competition by making imported goods more expensive. They can be specific (a fixed amount per unit) or ad valorem (a percentage of the imported good's value) and often lead to higher prices for consumers and reduced trade volumes.

Supply-chain choreography

The intricate and careful coordination of all supply chain activities (e.g., logistics, inventory management, production scheduling, procurement, and information flow) across various geographical locations and multiple entities (suppliers, manufacturers, distributors). The goal is to optimize efficiency, responsiveness, and resilience, ensuring seamless movement of goods and information from raw material sourcing to final delivery in a complex global network.

Tariff supply/demand incidence

The analysis of how the burden (incidence) of a tariff is distributed between producers and consumers in both the importing and exporting countries, and its effect on market equilibrium. Tariffs typically lead to higher prices and reduced quantity demanded for imported goods, with consumers usually bearing part of the cost through increased prices, while domestic producers may benefit from reduced competition, and the government collects revenue. The exact incidence depends on the elasticity of supply and demand.

Globalization

The accelerating process by which businesses, technologies, philosophies, and products develop international influence or operate on an international scale. This interconnectedness is driven by a multitude of factors including significant technological advancements (e.g., internet, faster transport), widespread trade liberalization (e.g., reduced tariffs, free trade agreements), and substantial cross-border capital flows in the form of investment, leading to increased interdependence among nations. Key impacts include economic growth, cultural exchange, but also potential challenges such as increased global competition, cultural homogenization, and issues of income inequality.

Multi-node networks

A global operational model where different stages of production, R&D, and service delivery are deliberately geographically distributed across various countries. This distributed approach is adopted to leverage distinct local advantages such as specialized talent pools, lower labor costs, proximity to raw materials or key markets, and favorable regulatory environments. While it reduces costs and enhances efficiency, it significantly increases coordination complexity, logistical challenges, and exposure to geopolitical risks across multiple jurisdictions.

Just-in-case

A strategic approach to supply chain management that prioritizes the maintenance of extra inventory, buffer stock, or redundant resources (e.g., multiple suppliers, alternative production sites) to proactively mitigate various forms of disruption. This strategy is particularly vital in the face of unpredictable events like unexpected demand surges, natural disasters, geopolitical instability, or major supply chain interruptions such as those experienced during the COVID-19 pandemic. It intentionally contrasts with the 'just-in-time' philosophy by emphasizing resilience and continuity over strict lean efficiency and minimal inventory holdings, incurring higher holding costs but lower risk of stockouts.

Tech accelerator

Refers to a suite of advanced technologies, including Artificial Intelligence (AI) for predictive analytics, automation (e.g., robotics, automated warehousing), blockchain for secure and transparent record-keeping, and the Internet of Things (IoT) for real-time data collection. These technologies are instrumental in speeding up operational processes, optimizing data-driven decision-making, and significantly reducing overall operational costs. They play a crucial role in enhancing cross-continental coordination across complex global supply chains and streamlining cross-border trade by improving efficiency, transparency, and traceability of goods and information.

ESG (Environmental, Social, Governance)

A comprehensive set of non-financial performance standards used by socially conscious investors and stakeholders to evaluate a company's ethical impact and sustainability practices.

• Environmental criteria assess a company's impact on natural systems, including its carbon footprint, pollution levels, energy efficiency, waste management practices, and climate change policies.

• Social criteria evaluate the company's relationships and reputation with its employees (e.g., labor practices, diversity, health, and safety), suppliers (e.g., ethical sourcing), customers (e.g., product safety, data privacy), and local communities (e.g., community development, human rights).

• Governance criteria scrutinize the company's leadership structure, executive compensation policies, audit committee independence, shareholder rights, internal controls, and overall corporate transparency. Adherence to strong ESG standards can enhance a company's reputation, reduce regulatory risk, and attract responsible investment.

Risk-adjusted globalization

A sophisticated strategic approach to international business that consciously integrates resilience constraints and proactive risk management frameworks into a company's international operations and strategic planning. This involves diversifying supply chains to avoid over-reliance on single regions, selectively using nearshoring (moving production closer to home markets) or friend-shoring (moving production to politically aligned countries) for critical components, building redundancy in vital processes, and conducting robust geopolitical analysis. The aim is to balance the traditional efficiency gains of globalization with enhanced protection against disruptive events, drawing critical lessons from recent global crises and trade tensions.

Political systems

The formal and informal structures of government that define how political power is acquired, exercised, and transferred within a country, fundamentally shaping policy stability, regulatory predictability, and the overall business environment. Examples include democracies (governance through elected representatives), monarchies (rule by a hereditary sovereign), totalitarian regimes (absolute state control over public and private life), and autocracies (rule by a single individual). Each system presents distinct levels of political risk (e.g., expropriation, policy reversals) and opportunities for foreign direct investment and international trade, impacting market access, operational continuity, and legal recourse.

Economic systems

The distinct organizational methods by which societies manage the production, distribution, and consumption of goods and services, directly influencing resource allocation, pricing mechanisms, and entrepreneurial opportunities. These systems exist on a spectrum:

• Market-oriented economies (e.g., capitalism) emphasize private ownership of resources, free enterprise, and supply and demand dictating prices and production, fostering innovation and competition.

• Command economies (e.g., socialism or communism) are characterized by central planning and significant state control over resources and economic activity, aiming for egalitarian distribution but often struggling with efficiency and innovation.

• Mixed economies combine elements of both, with varying degrees of market freedom and government intervention. The prevailing economic system profoundly impacts business operations, market entry strategies, and investment decisions for international firms.

Legal systems

The comprehensive framework of laws, regulations, and judicial processes that govern commercial and individual interactions within a country, providing the foundation for business conduct and dispute resolution. Key types include:

• Common law systems (e.g., UK, USA) are based on judicial precedent and case law, evolving through court decisions.

• Civil law systems (e.g., most of Europe, Japan) are based on comprehensive, codified statutes and legislative enactments.

• Religious law systems (e.g., Sharia law in some Islamic countries) derive legal principles from religious doctrines.
  These systems dictate critical aspects such as contract enforceability, protection of property rights (including intellectual property), investor protection, and the mechanisms for dispute resolution, all of which are paramount for businesses operating across international borders.

Foreign Direct Investment (FDI)

An investment made by a company or individual in one country (the home country) into business interests in another country (the host country), with the primary goal of establishing a lasting interest, managerial control, and often significant influence over the foreign business entity. FDI can manifest in various core forms:

• Greenfield investment: Establishing entirely new production facilities or operations in a foreign country.

• Mergers and Acquisitions (M&A): Acquiring or merging with existing foreign companies.

• Reinvestment of earnings: Plowing back profits generated from existing foreign operations.
  Motivations typically include securing new markets, accessing raw materials or cheaper labor, gaining technological expertise, or bypassing trade barriers.

OLI Framework

A widely recognized theoretical model, also known as John Dunning's Eclectic Paradigm, that provides a comprehensive explanation for why firms undertake Foreign Direct Investment (FDI) instead of merely exporting or licensing. It posits that a firm's decision to engage in FDI is contingent upon the simultaneous possession of three types of advantages:

• Ownership (O) advantages: Firm-specific competitive strengths such as proprietary technology, brand reputation, patents, management expertise, or economies of scale that give the firm an edge over local competitors.

• Location (L) advantages: Specific attractions of a particular foreign country, including market size and growth potential, availability of natural resources or skilled labor, favorable government policies, low production costs, or reduced transportation costs to target markets.

• Internalization (I) advantages: Benefits derived from performing activities within the firm's organizational boundary rather than through external market transactions (e.g., licensing or outsourcing). This helps to protect proprietary assets, control quality, or avoid market imperfections like transaction costs or potential opportunism by external partners.

Traditional trade theory

A collection of foundational economic theories that seek to explain patterns of international trade based primarily on differences in production costs and resource endowments among countries. Key theories include:

• David Ricardo's Comparative Advantage: States that countries should specialize in producing and exporting goods for which they have a lower opportunity cost, even if another country has an absolute advantage in all goods, leading to mutual gains from trade.

• Heckscher-Ohlin Model (Factor Proportions Theory): Postulates that a country will export goods that intensely use its relatively abundant and cheap factor of production (e.g., labor-abundant countries export labor-intensive goods) and import goods that intensely use its relatively scarce and expensive factors. These theories emphasize national differences in productivity, resource availability, and technological levels as core drivers of trade flows and specialization.

New Trade Theory (NTT)

A set of economic models that emerged to explain international trade patterns not fully accounted for by traditional theories, particularly the prevalence of intra-industry trade (trade of similar goods between similar countries). NTT emphasizes two primary drivers:

• Economies of scale: Firms can achieve lower average production costs by increasing output. Internal economies of scale occur within a firm, while external economies exist at the industry level. This leads to specialization and efficient production of a narrower range of goods, which are then traded globally.

• Product differentiation: Consumers demand a variety of goods even within the same industry (e.g., different car models). NTT suggests that countries may specialize in producing specific varieties or niches within an industry due to increasing returns to scale, leading to greater product variety and lower average costs for consumers globally. NTT helps explain why countries with similar factor endowments might still engage in significant trade.

Regional Economic Integration

The systematic process through which countries within a specific geographical region reduce, and progressively eliminate, trade and investment barriers among themselves to foster closer economic cooperation, interdependence, and mutual prosperity. This process typically occurs in stages of increasing commitment and harmonization:

• Free Trade Area (FTA): Members eliminate tariffs and quotas internally (e.g., NAFTA/USMCA).

• Customs Union: FTA plus a common external trade policy towards non-member countries.

• Common Market: Customs Union plus free movement of labor and capital across member states.

• Economic Union: Common Market plus harmonization of economic policies (e.g., monetary, fiscal) and sometimes a common currency (e.g., Eurozone within the EU).

• Political Union: Involves a common government and full harmonization of various policies, extending beyond economics.
  Each stage deepens economic ties, but also entails a greater loss of national sovereignty for member states.

Foreign Exchange (FX)

The global, decentralized marketplace for the trading of currencies, facilitating the conversion of one currency into another for a vast array of international transactions. This crucial system underpins global commerce by enabling international trade, cross-border investment, tourism, and financial speculation. Exchange rates, determined by the forces of supply and demand, are influenced by a complex interplay of macroeconomic factors (e.g., inflation rates, economic growth), interest rate differentials, geopolitical events, and market sentiment. The FX market operates 24/5 and is the largest and most liquid financial market in the world, processing trillions of dollars daily.

Transaction exposure

The specific financial risk that an international company faces when it commits to future transactions (e.g., importing or exporting goods, borrowing or lending in foreign markets, servicing foreign debt) that are denominated in a foreign currency. This risk arises from the uncertainty of unexpected fluctuations in exchange rates between the date a transaction is initially agreed upon and the subsequent date when it is actually settled (i.e., when payment is made or received). Adverse exchange rate movements can lead to significant losses or gains when foreign currency amounts are converted back into the company's domestic currency. Companies frequently employ hedging strategies, such as forward contracts or currency options, to mitigate this exposure and lock in an exchange rate.

Tariffs

Taxes or duties imposed by a government on imported goods or services, serving a dual economic and political purpose. Primarily, tariffs generate revenue for the imposing government. More significantly, they are used to protect nascent or vulnerable domestic industries from foreign competition by making imported products more expensive, thereby shifting demand towards domestically produced alternatives. Tariffs can be classified as:

• Specific tariffs: A fixed charge per unit of imported good (e.g., 3 per imported shoe).

• Ad valorem tariffs: A percentage of the imported good's value (e.g., 10\% of the car's value).
  While protecting domestic industries, tariffs typically lead to higher prices for domestic consumers, reduced overall trade volumes, and can provoke retaliatory tariffs from other countries, potentially escalating into trade wars.

Supply-chain choreography

The sophisticated and meticulous coordination of all interconnected activities within a supply chain—encompassing raw material sourcing, production scheduling, inventory management, logistics (including transportation and warehousing), procurement, and real-time information flow—across diverse geographical locations and multiple independent entities (e.g., various suppliers, manufacturers, distributors, retailers). The overarching objective is to optimize key performance indicators such as efficiency, responsiveness to market changes, overall cost reduction, and resilience to disruptions. It requires advanced planning, robust IT systems, data analytics, and seamless collaboration among all participants to ensure the frictionless movement of goods and information from the initial point of origin to the final consumer in a sprawling global network.

Tariff supply/demand incidence

The economic analysis that determines how the ultimate economic burden (incidence) of a tariff is distributed between various market participants, specifically producers (both domestic and foreign) and consumers in both the importing and exporting countries. A tariff fundamentally alters the market equilibrium, causing higher prices and a reduced quantity demanded for the imported goods.

• Consumers in the importing country typically bear part of the tariff burden through increased purchase prices.

• Domestic producers may benefit from reduced foreign competition and potentially higher prices, allowing them to capture a larger market share.

• Foreign exporters may absorb some of the tariff by lowering their selling prices to remain competitive, thus bearing a portion of the tax.

• The government collects the tariff revenue.
  The exact distribution of this burden is highly dependent on the price elasticities of supply and demand for the good: a less elastic side of the market (either supply or demand) will bear a greater share of the tariff incidence.

Deglobalization

A process of declining interdependence and integration between nation-states, characterized by a reversal of trends seen during globalization. This can manifest as a reduction in international trade, a decrease in cross-border capital flows, a rise in protectionist policies (e.g., higher tariffs, non-tariff barriers), and a shift towards more localized production and supply chains. Drivers often include geopolitical tensions, national security concerns, supply chain vulnerabilities exposed by global crises (e.g., pandemics), reshoring efforts为了就业， and increased focus on domestic priorities.

Just-in-Time (JIT)

A lean inventory management strategy where goods are received from suppliers only as they are needed in the production process, or products are manufactured only when there is a customer order. The primary goal of JIT is to minimize holding costs and reduce waste by eliminating excess inventory, thereby increasing efficiency and reducing lead times. While JIT can lead to significant cost savings and improved responsiveness, it makes the supply chain highly vulnerable to disruptions, as any delay or interruption in supply can immediately halt production.

Cultural systems

The shared values, beliefs, attitudes, norms, and behaviors that characterize a group of people and significantly influence their interactions and decision-making within a society. Understanding cultural systems is crucial for international business, as they impact consumer preferences, management styles, negotiation tactics, and communication. Frameworks like Hofstede's Cultural Dimensions (e.g., Power Distance, Individualism vs. Collectivism, Uncertainty Avoidance) are often used to analyze and compare cultural differences across nations, helping firms adapt their strategies for international markets.

Non-Tariff Barriers (NTBs)

Trade restrictions that governments use to limit imports but are not in the form of a direct tax (tariff). NTBs can be more subtle and complex than tariffs but can impose significant costs on traders and consumers by hindering market access. Common examples include:

• Quotas: numerical limits on the quantity of goods that can be imported.

• Import licenses: government authorization required to import specific goods.

• Product standards: technical, safety, or health regulations that imported goods must meet (often more stringent than domestic standards).

• Bureacratic delays: administrative hurdles or complex customs procedures.

• Subsidies: government support to domestic industries, making them more competitive than imports.

• Embargoes: complete prohibitions on trade with specific countries.

Supply Chain Resilience

The capacity of a supply chain to prepare for, adapt to, and recover from disruptive events, returning to its original state or an even better one. This involves anticipating risks, maintaining flexibility throughout the supply chain (e.g., multiple suppliers, adaptable manufacturing processes), building redundancy (e.g., buffer stocks, alternative transportation routes), and having robust contingency plans. Strategies to enhance resilience often include diversification of suppliers and geographical locations, increased visibility across the network, and the adoption of technologies like AI for predictive risk assessment. It's a key outcome of 'risk-adjusted globalization'.

Reshoring/Nearshoring/Friend-shoring

Strategic adjustments to a company's global supply chain and manufacturing footprint, often undertaken to enhance resilience, reduce geopolitical risks, or meet specific market demands:

• Reshoring (or Onshoring): The practice of bringing production and manufacturing facilities back to the company's home country from overseas locations. Motivations include reducing lead times, improving quality control, decreasing transportation costs, responding to consumer demand for 'made at home' products, and mitigating geopolitical risks.

• Nearshoring: Relocating production or services to a nearby country, often sharing a border or being in the same region. This allows for lower labor costs than reshoring while maintaining shorter lead times, reducing logistical complexity, and potentially benefiting from closer cultural and economic ties.

• Friend-shoring (or Ally-shoring): Shifting supply chains to countries that are politically and economically allied. This strategy aims to reduce dependency on potentially hostile or unstable nations, reinforce geopolitical alliances, and secure access to critical inputs in an increasingly fragmented global economy.