Untitled Flashcards Set

Exam Overview

Exam Details

• Course: International Business (CH3400)

• Date: Thursday, March 6

• Format: 50 questions (Multiple choice & True/False)

• Duration: 80 minutes

• Total Points: 100

• Requirements: Laptop with Lockdown Browser installed

Grading Policy

• Attendance & Participation: 100 points

• Closing Case Report: 200 points

• Discussion Leadership Presentation (Group): 100 points

• Final Project Presentation & Report (Group): 230 points

• Final Project Presentation Critique: 70 points

• Exams #1-3: 300 points (100 points each)

• Total Points Available: 1,000 points

Chapter 7: Government Policy and International Trade

Instruments of Trade Policy

• Tariffs: Taxes on imports/exports; can be specific or ad valorem.

• Subsidies: Government payments to domestic producers to enhance competitiveness.

• Import Quotas: Limits on the quantity of goods that can be imported.

• Voluntary Export Restraints (VERs): Agreements to limit exports to avoid tariffs.

• Local Content Requirements (LCRs): Mandates for domestic production in goods.

• Administrative Policies: Bureaucratic rules that hinder imports.
  ![Here's a concise alt text/caption for the image:

25% off steel and 10% off aluminum.](https://storage.googleapis.com/qzlt-prod-services-notes-notes-data/aee523d4-4f12-4de4-aaa1-bdf1e743040f/images/90ccab5500304e34ba3a38408a85b0d8.jpg?Expires=1741812264&GoogleAccessId=notes-svc%40qzlt-prod-webapp.iam.gserviceaccount.com&Signature=lZPIIHExkeIUYao0eyI4AKlg6fnkM5%2BGgVIjr027rVdu7VblFB3pspdsZ648muu0T5in1yF2Y8y%2FHWZGe1natTFIlJWaKoVH4%2F4ik6k34vYUf79TaqPevueNLaGgPPqUsDG6hwNFv%2FZ8rr6jmE9LPW2QIcENbznEwXhufs9gsr%2F5R0%2F%2F1j9piObcMzLMWWB8VRq2wRoKfHO8Flukrcz0u%2Bqvt1s%2Ffyy3Yw5x8CWyuxiNbZkUQdvkgkq7nkT3OQOMfo4Uk2kaBhMp0XdVUaNV6hirPbCDdK%2FSZ8tp1NNDt0A5fwUg1O9ueAu5lopBbovPxcMV4WtaJs2g4LK23kJC1w%3D%3D)

Tariffs

• Definition: A tax imposed on imported goods to protect domestic industries.

• Types: Specific tariffs (fixed fee per unit) and ad valorem tariffs (percentage of value).

• Impact: Can raise prices for consumers and protect local jobs.

• Example: Export tariffs on textiles in China.

• Economic Effects: Can lead to trade wars and retaliation from other countries.

Subsidies

• Definition: Financial support from the government to local businesses.

• Purpose: To help domestic producers compete against foreign imports.

• Example: Agricultural subsidies in the U.S.

• Economic Impact: Can lead to market distortions and higher prices for consumers.

• Debate: Who ultimately bears the cost of subsidies?

Voluntary Export Restraints (VERs)

• Definition: Self-imposed limits on exports to avoid tariffs.

• Purpose: To appease protectionist measures in importing countries.

• Example: Mexico and Brazil's agreement in 2012.

• Quota Rent: Economic benefits derived from limited supply, e.g., U.S. sugar industry.

• Impact: Can lead to higher prices for consumers.

Chapter 8: Foreign Direct Investment (FDI)

Trends in FDI

• Destinations: Emerging markets are increasingly popular for FDI.

• Sources: Developed countries remain the primary investors.

• Forms of FDI: Joint ventures, mergers, and acquisitions.

• Theories of FDI: Explain motivations behind FDI, including market access and resource acquisition.

• Political Ideologies: Radical, free market, and pragmatic nationalism views on FDI.

Theories of FDI

• Limitations of Exporting: High transportation costs and trade barriers can make exporting less viable.

• Limitations of Licensing: Risk of losing proprietary technology to competitors.

• Internalization Theory: Firms prefer FDI to avoid market imperfections.

• Strategic Behavior: Firms may engage in FDI to gain competitive advantages in oligopolistic markets.

• Location-Specific Advantages: Externalities that make certain locations more attractive for investment.

Benefits and Costs of FDI

• Host-Country Benefits: Job creation, technology transfer, and infrastructure development.

• Home-Country Benefits: Increased exports and foreign earnings.

• Host-Country Costs: Potential exploitation of local resources and labor.

• Home-Country Costs: Capital flight and loss of jobs.

• Balancing Act: Weighing the pros and cons of FDI for both host and home countries.

Limitations of Licensing

Internalization Theory

• Internalization theory addresses market imperfections that arise when firms engage in licensing agreements.

• Licensing can lead to the risk of a firm inadvertently transferring valuable technological know-how to foreign competitors, potentially undermining its competitive edge.

• Unlike FDI, licensing does not provide firms with tight control over production, marketing, and strategic decisions in foreign markets, which can limit profitability.

• The competitive advantage of a firm often relies on its unique management, marketing, and manufacturing capabilities, which are not easily transferable through licensing agreements.

• Firms may face challenges in ensuring quality and consistency in products when relying on licensees in foreign markets.

Foreign Direct Investment (FDI) in the World Economy

Forms of FDI: Acquisitions vs. Greenfield Investments

• Greenfield Investment: Establishing new operations in a foreign country from the ground up, allowing for complete control over the new entity.

• Acquisitions and Mergers: Involves purchasing existing firms, which can be executed more quickly than starting anew.

• Acquisitions can provide immediate access to valuable strategic assets and established market presence.

• The efficiency of the acquired unit can be enhanced through the transfer of capital, technology, or management skills from the parent company.

• Acquisitions may also reduce competition and increase market share in the target country.

Theories of Foreign Direct Investment

• Internalization Theory: Explains why firms prefer internal transactions (FDI) over market transactions (licensing) to maintain control over their proprietary assets.

• The relationship between FDI and competitive behavior in oligopolistic industries is highlighted by Knickerbocker's theory, which suggests that firms imitate each other's FDI strategies to maintain competitive parity.

• The concept of multipoint competition indicates that firms may engage in FDI in multiple markets to counteract rivals' moves.

• The Eclectic Paradigm by John Dunning emphasizes the importance of location-specific advantages, which are unique to certain regions and cannot be easily licensed.

• Firms often find it difficult to license their unique capabilities, making FDI a more attractive option for leveraging location-specific resources.

Political Ideology and Foreign Direct Investment

Pragmatic Nationalism

• Pragmatic nationalism recognizes that FDI has both benefits and costs for host and home countries.

• Policies should aim to maximize national benefits from FDI while minimizing associated costs, reflecting a balanced approach to foreign investment.

• Countries may actively court FDI that aligns with their national interests, promoting sectors that can drive economic growth.

• The approach encourages a strategic evaluation of FDI projects to ensure they contribute positively to the national economy.

Benefits and Costs of FDI

Host-Country Benefits

• Balance-of-Payments Effects: FDI can improve a country's current account surplus by reducing imports and increasing exports through foreign subsidiaries.

• Multinational Enterprises (MNEs) can utilize foreign subsidiaries to export goods and services, enhancing the host country's trade position.

• FDI can lead to job creation and skill development in the host country, contributing to economic growth.

Home-Country Benefits and Costs

• The home country's balance of payments benefits from the inward flow of foreign earnings generated by its MNEs operating abroad.

• Employment effects can be positive as MNEs gain valuable skills and knowledge from foreign markets, which can be transferred back home.

• However, outward FDI can lead to initial capital outflows, negatively impacting the home country's current account if it substitutes for domestic production.

• The balance of payments may suffer if FDI is primarily aimed at serving the home market from low-cost production locations.

Regional Economic Integration

Levels and Arguments for Integration

• Regional economic integration can take various forms, including free trade areas, customs unions, common markets, economic unions, and political unions.

• Arguments in favor of regional integration include efficient resource utilization, resource transfer, and stimulation of economic dynamics.

• However, critics argue that regional integration can lead to trade creation and trade diversion, impacting global trade patterns.

Characteristics of Major Regional Agreements

• Major regional economic agreements include the European Union (EU), North American Free Trade Agreement (NAFTA), MERCOSUR, and ASEAN.

• Each agreement has unique characteristics and implications for member countries, influencing trade policies and economic cooperation.

• Understanding these agreements is crucial for businesses operating in or entering these markets, as they can affect market access and competition.

Implications for Management Practice

• Regional economic integration presents both opportunities and threats for businesses, including market expansion and increased competition.

• Companies must adapt their strategies to navigate the complexities of integrated markets, leveraging benefits while mitigating risks.

• Effective management practices are essential to capitalize on the advantages of regional integration while addressing potential challenges.

Levels of Economic Integration

Free Trade Area

• A free trade area eliminates all barriers to trade of goods and services among member countries, allowing each country to set its own trade policies regarding non-members.

• Examples include the European Free Trade Association (EFTA) comprising Norway, Iceland, Liechtenstein, and Switzerland, and the North American Free Trade Agreement (NAFTA) involving the U.S., Canada, and Mexico.

• Benefits include increased market access and competition, leading to lower prices and greater consumer choice.

• Challenges may arise from the potential for trade diversion, where trade shifts from a more efficient producer to a less efficient one due to preferential treatment.

• The impact on domestic industries can be significant, as some sectors may face increased competition from imports.

• Historical context: The establishment of NAFTA in 1994 marked a significant step in regional economic integration in North America.

Customs Union

• A customs union not only eliminates trade barriers between member countries but also adopts a common external trade policy towards non-member countries.

• The European Union (EU) began as a customs union, facilitating trade among its members while presenting a unified front in trade negotiations.

• The Andean Community, originally the Andean Pact, includes Bolivia, Colombia, Ecuador, and Peru, and operates as a customs union today.

• The common external tariff can protect member countries from external competition, but may also lead to higher prices for consumers.

• Customs unions can enhance political ties among member states, fostering cooperation beyond economic interests.

• Historical context: The EU's customs union was established in 1968, paving the way for deeper economic integration.

Economic Union

• An economic union requires a high degree of integration, including a coordinating bureaucracy and the sacrifice of some national sovereignty.

• The European Union (EU) exemplifies an economic union, with shared policies on trade, agriculture, and regional development.

• Member states must align their economic policies, which can lead to greater stability and predictability in the market.

• The trade-off involves ceding some control over national economic policies to a central authority, which can be contentious.

• Economic unions can lead to increased investment and economic growth, but may also create disparities among member states.

• Historical context: The Maastricht Treaty of 1992 laid the groundwork for the EU's economic union.

Political Union

• A political union represents the highest level of economic integration, where member states coordinate their political policies and governance structures.

• The EU is moving towards a partial political union, with shared institutions and policies among member states.

• The United States serves as a closer example of a political union, with a federal government that oversees state policies.

• Political unions can enhance collective bargaining power on the global stage but may face resistance from member states concerned about sovereignty.

• The implications for national identity and governance can be profound, as citizens may feel a disconnect from centralized authority.

• Historical context: The evolution of the EU's political structure reflects ongoing debates about sovereignty and integration.

The Case for and Against Regional Integration

The Case for Regional Integration

• Regional integration can lead to economic growth by expanding markets and increasing trade among member countries.

• It can enhance competitiveness by allowing countries to specialize in areas where they have a comparative advantage.

• Integration can lead to political stability and cooperation, reducing the likelihood of conflict among member states.

• However, certain groups within countries may face disadvantages, such as job losses in industries exposed to foreign competition.

• The loss of national sovereignty is a significant concern, as countries may have to conform to external policies.

• Historical context: The establishment of the EU was partly motivated by the desire to prevent conflict in post-war Europe.

The Case Against Regional Integration

• Regional economic integration is only beneficial if the trade created exceeds the trade diverted, which is a critical consideration for policymakers.

• Trade creation occurs when lower-cost suppliers replace higher-cost domestic suppliers, benefiting consumers.

• Trade diversion happens when trade shifts from a more efficient global supplier to a less efficient regional supplier due to preferential treatment.

• The World Trade Organization (WTO) aims to prevent trade diversion, but its rules do not cover all non-tariff barriers, complicating the situation.

• The balance between trade creation and diversion must be carefully assessed to ensure net benefits from integration.

• Historical context: The debates surrounding NAFTA included concerns about job losses in certain sectors, highlighting the complexities of trade dynamics.

Regional Economic Integration in Europe

Political Structure of the European Union

• The European Commission is run by commissioners appointed by member countries and approved by the European Parliament, overseeing the implementation of EU policies.

• The European Council serves as the ultimate controlling authority within the EU, with one representative from each member state's government.

• The decision-making process involves negotiations and compromises among member states, reflecting diverse interests.

• The EU's political structure aims to balance national interests with collective goals, which can lead to tensions.

• The role of the European Parliament has grown, enhancing democratic accountability within the EU.

• Historical context: The EU's political structure has evolved significantly since its inception, reflecting the changing dynamics of European integration.

The Establishment of the Euro

• The Maastricht Treaty committed the EU to adopt a single currency, the euro, which is now used by 19 of the 28 member states, forming the eurozone.

• The euro is the second most widely traded currency after the U.S. dollar, facilitating trade and investment across Europe.

• Benefits of the euro include reduced transaction costs, easier price comparisons, and increased market efficiency.

• However, the euro also entails costs, such as the loss of control over national monetary policy, which can be problematic for member states facing economic challenges.

• The concept of an optimal currency area is debated, as not all regions within the eurozone share similar economic conditions.

• Historical context: The introduction of the euro in 2002 marked a significant milestone in European integration.

Benefits and Costs of the Euro

• Benefits include savings from currency handling, easier price comparisons, and pressure on producers to reduce costs.

• The euro promotes the development of a highly liquid pan-European capital market, opening up investment options.

• Costs involve the loss of national monetary policy control, which can limit a country's ability to respond to economic crises.

• The EU's structure may not represent an optimal currency area, leading to disparities in economic performance among member states.

• The euro's impact on trade and investment has been significant, but it also raises questions about economic governance in the EU.

• Historical context: The euro's establishment was a response to the need for greater economic integration in Europe.

The Foreign Exchange Market

Functions of the Foreign Exchange Market

• The foreign exchange market facilitates the conversion of one currency into another, essential for international trade and investment.

• The exchange rate is the rate at which one currency is converted into another, influencing global economic interactions.

• The market provides insurance against foreign exchange risk, allowing businesses to hedge against currency fluctuations.

• Currency speculation, such as the carry trade, involves borrowing in low-interest currencies and investing in high-interest currencies for profit.

• Forward exchange rates allow parties to agree on currency exchanges at a future date, providing certainty in transactions.

• Historical context: The growth of the foreign exchange market has been driven by globalization and increased international trade.

Currency Conversion and Speculation

• Businesses engage in currency conversion for various reasons, including trade, investment, and speculation.

• The carry trade strategy involves borrowing in a currency with low interest rates and investing in one with higher rates, aiming for profit.

• Example: Borrowing in Japanese yen at 0.1% and investing in U.S. dollars at 2.25% can yield significant profits if exchange rates remain stable.

• Speculation carries risks, as adverse movements in exchange rates can lead to losses.

• The foreign exchange market operates 24/7, providing liquidity and opportunities for traders worldwide.

• Historical context: The rise of electronic trading platforms has transformed the foreign exchange market, increasing accessibility.

Insuring Against Foreign Exchange Risk

• Forward exchange contracts allow businesses to lock in exchange rates for future transactions, mitigating risk.

• These contracts are typically quoted for 30, 90, or 180 days, providing flexibility for businesses.

• U.S. importers may engage in forward exchanges to protect against unfavorable currency movements.

• The use of derivatives in the foreign exchange market has grown, providing additional tools for risk management.

• Understanding forward exchange rates is crucial for businesses operating internationally, as they can impact profitability.

• Historical context: The development of forward contracts has been essential for businesses navigating global markets.

Understanding Exchange Rates

Demand and Supply of Currencies

• The demand and supply of currencies like USD and JPY are influenced by various underlying factors, not just superficial market movements.

• Key factors affecting currency demand include inflation rates, interest rates, and market psychology, which can lead to fluctuations in exchange rates.

• Understanding these factors allows for better forecasting of exchange rate movements, although no simple explanation exists for these dynamics.

Purchasing Power Parity (PPP)

• PPP is an economic theory stating that the price of a basket of goods should be equivalent across different countries, providing a basis for exchange rate determination.

• The Big Mac Index serves as a practical example of PPP, comparing the price of a Big Mac in different countries to assess currency valuation.

• Example calculations show that the Yuan is undervalued by 44% compared to the USD, while the Norwegian Krona is overvalued by 12%.

• The formula for calculating the percentage difference in prices helps illustrate the concept of currency valuation based on purchasing power.

Economic Theories of Exchange Rate Determination

• Various economic theories, including PPP and the International Fisher Effect, attempt to explain exchange rate movements, but they often fall short in the short term due to investor psychology.

• Investor psychology and bandwagon effects can significantly influence market behavior, leading to rapid changes in exchange rates that are not easily predicted by traditional theories.

Exchange Rate Forecasting Techniques

The Efficient Market Hypothesis

• According to the Efficient Market School, exchange rates reflect all available public information, making it difficult to predict future movements based on past data alone.

• Forward exchange rates are considered unbiased predictors of future spot rates, suggesting that they incorporate all known information.

Approaches to Forecasting Exchange Rates

• Fundamental Analysis: This approach uses economic theory to create econometric models that predict exchange rate movements based on factors like money supply growth, inflation, and interest rates.

• Technical Analysis: This method analyzes past price and volume data to identify trends, assuming that historical patterns will continue into the future.

Managerial Implications of Exchange Rate Fluctuations

Foreign Exchange Rate Risk

• Transaction Exposure: This refers to the risk that fluctuations in exchange rates will affect the income from individual transactions, such as an American airline purchasing an aircraft in euros.

• Example: A contract signed at $1 = €1.10 may result in a loss if the exchange rate changes to $1 = €0.80 at payment time, leading to a significant financial impact.

• Translation Exposure: This is the effect of currency exchange rate changes on a company's financial statements, particularly for subsidiaries operating in foreign currencies.

Reducing Economic Exposure

• Companies can mitigate economic exposure by diversifying their productive assets across various locations, reducing the impact of adverse exchange rate changes on long-term financial health.

• Example: Toyota's global production strategy helps buffer against currency fluctuations, ensuring stability in operations.

Strategies for Reducing Transaction and Translation Exposure

• Forward Exchange Rate Contracts: These contracts lock in exchange rates for future transactions, providing certainty against fluctuations.

• Buying Swaps: This strategy involves exchanging cash flows in different currencies to manage exposure effectively.

• Lead and Lag Strategies: These involve timing the collection and payment of foreign currency receivables and payables based on expected currency movements, optimizing cash flow management.