Global Business and Society Exam #1

globalization

process by which the exchange of goods, services, capital, technology, and knowledge across international borders becomes increasingly interconnected

globalization is a process that leads to

compression of time and space and higher speed and proximity of interactions

what are the key characteristics of globalization?

political,

political characteristic of globalization

increased political cooperation of global level

economic characteristic of globalization

free trade → positive and negative effects

cultural factor of globalization

different languages, religions, traditions → “world culture”

the cultural element of globalization often generated controversy

often used by the political class to affirm/re-affirm forms of nationalism

main reasons for international business investments

increased profits, greater access to suppliers for materials and at lower costs, reduced manufacturing costs through access to cheaper labor, and social and environmental concerns

global competitions

competing organizations that serve international customers through enhanced communication and improved shipping and supply chains

international trade theories

simply different theories to explain international trade

trade is the concept of

exchanging goods and services between 2 people or entities (in 2 different counties)

why do people or entities trade?

they believe they both benefit from the exchange (may need or want the goods)

the main historical trade theories are called

classical

classical trade theories are from the perspective of a

country

by mid-twentieth century, classical theories shifted to explain from a

firm perspective

theories that are firm based or country based are called

modern theories

classical theories

mercantilism, absolute advantage, comparative advantage, and heckscher-ohlin

modern theories

country similarity, product lifecycle, global strategic rivalry, porter’s national competitive advantage

mercantilism

stated that a country’s wealth was determined by the amount of its gold and silver holdings

what was one of the earliest efforts to develop and economic theory?

mercantilism

mercantilists believe a country should

increase gold and silver holdings by promoting exports and discouraging imports

if foreigners buy more from you than they sell to you, they have to pay the difference in gold and silver

thus the objective of each country was to have a trade surplus and avoid a trade deficit

trade surplus

a situation where the value of exports are greater than the value of imports

trade deficit

a situation where the value of imports is greater than the value of exports

when did mercantilism thrive?

from 1500-1800, 1500 marked the rise of new nation-states, whose rulers wanted to strengthen nations by building larger armies and national institutions

one way many nations promote exports was to

impose restrictions on imports (protectionism)

how did nations expand their wealth?

by using their colonies around the world to control not trade and amass more riches (British colonial empire one of the most successful, sought to increase wealth using raw materials from now across the Anericas and India

other successful examples of empires

france, netherlands, portugal, and spain

how does mercantilism still remain a way of modern thinking?

• Japan, China, Singapore, Taiwan, and Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions on domestic-industry subsidies 

  • Nearly every country has at sometime implemented protectionist policies

    • Export-oriented companies support protectionist policies that favor industries or firms and hurt other companies and conusmers 

      • Taxpayers pay for government subsidies of select exports through higher taxes

import restrictions lead to

higher prices for consumers

what theory did adam smith use to question the leading mercantile theory in “The Wealth of Nations”

absolute advantage

absolute advantage focused on

a country’s ability to produce a good more efficiently than another nation

absolute advantage reasoned that

trade between countries should not be regulated or restricted by the government or intervention, it should flow naturally according to market forces

according to absolute advantage, countries should

specialize in the goods they can produce the best and trade with other countries for specialized goods

more specialization leads to

efficiency because labor force would be more skilled doing the same tasks

production also becomes more efficient under specialization,

with an incentive to create faster, better production methods to increase specialization

absolute advantage argued that

a nations wealth shouldn’t be measured by how much gold and silver it had, but by the living standards of its people

comparative advantage

theory introduced by david ricardo in 1817 that reasoned that even if Country A had the absolute advantage in the production of both products, specialization could still occur between 2 countries

comparative advantage occurs when

a country cannot produce more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods

comparative advantage focuses on the relative productivity differences, whereas

absolute advantage looks at the absolute productivity

heckscher-ohlin theory (factor proportions theory) was developed when

in the early 1900s, swedish economists Eli Heckscher and Bertie Olin focused their attention on how a country could gain a comparative advantage by producing products that utilized factors that were in abundance in their country

the factor production theory is based off of

production factors- land, labor, and capital, which provide the funds for investment in plants and equipment

the factor proportions theory determined that

the cost of any factor or resource was a function of supply and demand, thus factors that were in great supply relative to demand would be cheaper; in great demand relative to supply would be more expensive

factor proportions theory stated that

countries would produce and exports goods with the required resources or factors that were in great supply, and therefore, cheaper production factors; countries would import goods that required resources in short supply, high demand

leontif paradox

in the early 1950s, Wassily Leontif studied the U.S. economy and noted that the U.S. was abundant in capital, and therefore, should export more capital-intensive goods, but his researched showed the opposite: the U.S. was importing more capital intensive goods

the leontif paradox was the reverse of

what was expected by the factor proportions theory, because at that time, labor in the U.S. was both available in steady supply and more productive than in many other countries, so it made sense to export labor-intensive goods

growth of modern or firm-based trade theories

emerged after WWII and was developed in large part by business school professors, not economists and evolved with the growth of the multinational company

country-based theories couldn’t adequately address the

expansion of MNCs or intraindustry trade, which refers to trade between two countries of goods produced in the same industry

what did firm-based theories do?

incorporate other product and service factors, including brand and customer loyalty, technology, and quality into understanding of trade flows

country similarity theory

developed by Stefan Linder as he tried to explain the concept of intraindustry trade

what does the country similarity theory say?

consumers in countries that are in the same or similar stage of development would have similar preferences

stefan linder originally suggested that

companies first produce for domestic consumption and when they export, they find that counties similar to the domestic one in terms of customer preferences offer the most potential for success

according to the country similarity theory,

the most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common, which is useful in understanding trade in goods where brand names and product reputations are important factors in the buyer decision-making and purchasing processes

what are the three stages in the product life cycle?

1. new product

2. maturing product

3. standardized product

product life cycle theory development

developed by raymond vernon in the 1960s

the product life cycle theory assumes

that production of the new product will occur completely in the home country of its innovation, which was useful in the 1960s to explain manufacturing success of the U.S. and also used to describe how PC went through its product life cycle

proposal of global strategic rivalry

proposed by Paul Krugman and Kevin Lancaster in the 1980s

global strategic rivalry addresses the

crucial role of barriers to entry to achieve a competitive advantage in a certain industry: research and development (ownership of IPR), economies of scale (unique business processes or methods), and experience in the industry (control of resources)

the theory of global strategic rivalry focused on

MNCs and their efforts to gain a competitive advantage against other global firms in their industry

the theory of global strategic rivalry states that

firms encounter global competition and to prosper they must develop competitive advantages

what is the critical way a firm can obtain a sustainable competitive advantage?

the barriers to entry for that specific industry

barriers to entry refer to

the obstacles a new firm may face when trying to enter into an industry or new market; barriers corporations may seek to optimize the following

examples of barriers to entry

research and development, ownership of intellectual property rights, economies of scale, unique business processes or methods as well as extensive experience in the industry, control of resources or favorable access to raw materials

porter’s national competitive advantage theory (1990)

stated that a nation’s competitiveness in an industry depends on the capacity to innovate and upgrade, thus it focused on explaining why some nations are more competitive in certain industries

to explain his theory, protect identified 4 determinants which he linked together

local market resources and capabilities (factor conductions), local market demand conditions, local suppliers and complementary industries, and local firm characteristics

factor conditions (porter’s national competitive advantage theory)

factor proportions theory as well as advanced factors, which he defined as skilled labor, investments in education, tech, and infrastructure; these factors provide a country with a sustainable competitive advantage

local market demand conditions (porter’s national competitive advantage theory)

sophisticated home market is critical to ensuring ongoing innovation; also trendsetting and demanding, for example the U.S. phone market

local suppliers and complementary industries (porter’s national competitive advantage theory)

large global firms benefit from having strong, efficient supporting and related industries to produce the inputs required by the industry; certain industries cluster geographically which provide efficiencies and productivity

local firm characteristics (porter’s national competitive advantage theory)

include firm strategy, industry structure, and industry rivalry; local strategy affects competitiveness and a healthy amount of rivalry between local firms supra innovation and competitiveness

porter also noted

the government and chance play a role in the national competitiveness of industries

what is the largest and richest economy in the world?

the U.S.

tariff

a tax on imports

ad valorem tariff

a per cent of the imported good’s value or price

specific tariff

expressed as a fixed amount of money per unit of the good

each type of tariff can be directly converted into

an equivalent tariff of the other type

discriminatory tariff

any tariff that applies only to the goods of a particular nation or group of nations

non-discriminatory tariff

one that applies to all goods of a certain category, regardless of their country of origin

most favored nation rule

if a member extends some tariff preference to imports from another member, the same preference must be extended to imports of the same goods from all members

protective tariff

one applied to shield a domestic industry from the competition of foreign suppliers

revenue tariff

one applied to purely raise revenue for the government

when domestic production of an import substitute requires the use of imported inputs that are themselves subject to tariffs,

the nominal rate of tariff applied to the final-good imports may differ quite substantially from the overall extent of protection afforded domestic producers of the import substitute

effective rate of protection

an estimate of the overall extent to which domestic value is protected by the country’s entire tariff structure as it affects the imported final good and all intermediate goods in the production process

ad valorem tariffs effects on domestic price, production, and consumption

• consumption turn towards domestic item → domestic price increases

• production increases → protective effect

• consumption decreases → consumption effect

• imports decrease

• revenues of the state increase → revenue effect

ad valorem tariffs welfare effects

• consumer welfare decreases

• producers welfare increases

• revenues increase

• net social loss

import quotas effects on domestic price, production, and consumption

• generation of excess demand → domestic price increases

• imports decrease

• production increases

• consumption decreases

import quotas welfare effects

• consumer welfare decreases

• producer welfare increases

• earning for importers increase

• net social loss

while tariffs on a final good tend to advantage domestic producers instruments of trade policy 147 of the good,

tariffs on their imported inputs essentially serve as taxes on those same producers

a haphazard or uncoordinated tariff structure may

discourage domestic production of that good if the rate of effective protection afforded by the entire tariff structure is negative, not encourage domestic producers

over roughly the past 2 decades, tariffs have declined very broadly because

the post-war drive for broad trade liberalization, starting with GATT and continuing through the WTO, had led to significant worldwide reduction in tariffs

the least developed WTO members have always had

higher average rates of tariffs

any good a country imports is necessarily one for which there is

excess demand in the domestic market at the prevailing world market price

consumption effect of the tariff

as the price they must pay for the domestic good begins to rise, consumers will tend to reduce their purchases, economizing on this increasingly expensive item

protective effect of the tariff

the extent to which the tariff increases domestic production of the import substitute

prohibitive tariff

there would then no longer be pressure on domestic prices to rise as all those who wish to buy the goods at that price would find a willing domestic supplier; in this scenario, imports would have been completely choked off

for all but prohibitive tariffs,

the domestic price of the protected goods must rise by the full extent of the tariff, so that in the post market equilibrium p^d = p^w + tp^w

revenue effect of the tariff

as the price of the domestic goods rises, increased domestic production from a to b is encouraged, and decreased domestic consumption from d to c results; the quantity of imports falls, too, from before the tariff to after and the government now collects tariff revenue that it did not have before

while consumers of the import and domestic goods are generally made worse by tariffs,

domestic producers will generally be better off and the government also gains some advantage from the tariff; ultimately redistributed wealth from consumers to domestic producers and government, incentivizing government

the tariff may simply be

an affirmative desire to help the favored group, with no particular desire to discourage anyone’s consumption or harm anyone else

economists commonly use consumer surplus to measure

the welfare effects on consumers, and producer surplus to measure the effects on domestic producers

dead-weight loss due to the tariff

welfare the someone in society could be enjoying if it weren’t for the tariff and it measures the magnitude of the net social loss from the tariff that will be borne, period after period, while the tariff is in place