MGT 302 exam 1 notes

Lecture: power-point presentation of chapter 1: Globalization 

• Globalization / components of globalization 

  • Globalization of Markets: the merging of distinctly separate national markets into a global marketplace. 

    • Starbucks and McDonalds - same product in many nations. Standardized. Boeing (airplanes).  

    • Cost saving.  

  • Globalization of Production: The sourcing of goods & services from locations around the world to exploit national differences in the cost and quality of factors of production.  

    • Every country has good things / is good at something. How can I use it to make lowest cost and highest quality product.  

    • Where parts come from. 

  • Example of both components: IKEA 

    • Uses the same retail concepts globally (ex: knockdown principal - setting up yourself?, and identical showrooms, and Swedish names for products) and sells many of the same products in its stores. 

    • IKEA uses a global network of many suppliers in many countries to manufacture products designed by the company. IKEA designs, does not manufacture.  

• Limits to globalization of markets 

  • Significant differences still exist among national markets with respect to consumer tastes and preferences, distribution channels, cultural values, business systems and legal regulations.  

    • If you ignore these, you could end up with products no one wants, or end up in legal trouble. You need to try to accommodate and make modifications. McDonalds making modifications depending on culture and food tastes in different countries.  

  • These differences require companies to customize marketing strategies, product features and operating practices. 

• Limits to globalization of production: 

  • Managing a global web of suppliers and production facilities is complex 

  • The costs of using a nations factors of production can change 

    • Government policies and barriers to trade 

    • Transportation costs 

    • Exchange rate fluctuations 

    • Resource availability 

  • Pandemic made people realize that it is not great to be reliant on another country, because what are you going to do if boarders close? Pandemic made countries focus on themselves - to detriment of their trade partners.  

  • "its not a matter of if, but when, something goes wrong". Something will go wrong and disrupt your supply chain. Pandemic, trade dispute, labor dispute, natural disaster, boat gets stuck in canal, etc. 

  • Making a house of cards - gets blown down by AC or something. SC is a house of cards waiting for something to knock it down.  

  • Iceland - volcano erupts and disperses in Europe airspace - stopped flights in Europe. People realized you should have multiple sources of production, so that if one goes offline for something, you have another supplier you can use.  

• Risks in international business: 

  • Commercial 

    • Loss due to poorly developed or executed business strategies, tactics, or procedures 

    • Necessary for success. Why its in the middle of everything. Under your control, other risks are not.  

  • Political 

    • Changes in gov policies that adversely impact the profitability or value of a firm 

  • Economic 

    • Loss due to the adverse impact of fluctuations in exchange rates 

  • Legal 

    • Loss due to contract violations, inadequate protection of property rights, and/or violations of intellectual property rights. 

  • Cultural 

    • Loss due to culturally-based differences in customs, attitudes, values, language, and/or religion. 

    • Doing/saying something inappropriate.  

    • Ex: 

      • Coca Cola Russia Add - colors and Christmas could be blunders. Backlash because of the map "inaccuracy" (disputed area of land - maybe Ukranian land, maybe Russian).  

  •  

• Egglife foods - wraps made with eggs rather than flour tortilla. Fits dietary needs and is healthy. Has had significant growth since its start in 2019. Announced international expansion to Canada. Talked about examples of "risks in international business" above.  

• Phases of globalization 

  • Phase 1: late 1800's to 1914  

    • 1st globalization golden age. 

    • Started with launch of industrial revolution. Improved technology. Rapid industrialization and focus on manufacturing. Telephone invented. Communication technology and transportation technology improvements - helps globalization and makes world seem smaller. Open-ish borders. 

    • Ended with WW1.  

  • Phase 2: 1918 - 1939 

    • Economic and physical damage to many countries. Allied forces ended WW1 with punishing Germany with huge War reparations - Treaty of Versaille. They couldn't afford it, so they printed $ to pay. Causes the Worth of their currency decreases (becomes worthless), and triggers hyper inflation. Economic collapse leads Germans to listening to the Nazi party.  

    • Widespread shift towards socialism/communism because people decided that it is the Governments job to protect citizens from hardship.  

    • Great depression - Smoot-Hawley Act (substantial tariffs on our trade partners to help us). Caused retaliatory tariffs and trade war. Made stuff worse.  

    • WW2 - economic hardship. What should be the role of government 

  • Phase 3: 1944 - 1973 

    • 1944: WW2 going on. World leaders meet to discuss postwar economy and preventing future wars. Helping Germany and Japan rather than hurting like they did after WW1. Global coordination and cooperation. Fate of our econ is intertwined with other economies. So we need to work together. 

      • Brettonwood's exchange rate system/agreement (lasted until early '70's- removed exchange rate risk, and made people more likely to / encouraged them to invest in other (poor) countries that they wouldn’t have before (because of risk) 

      • Created IMF, World bank, seeds for GAATT (now WTO) 

  • Phase 4: late 1970's to late 2000's 

    • Stagflation - stagnant economy and inflating prices. 

      • Maybe because of government regulations (for banks and firms) 

    • Pro Free market officials take office (ex: Reagan). Deregulation - less gov control over business strategy.  

    • Privatization.  

    • Shifts away from socialism/communism 

  • Phase 5: 2016 - current 

    • 2016: UK leaves European Union (Brexit). President Trump being elected. 

      • we are moving towards deglobalization. Looking inward rather than outward. Move away from free trade. Using tariffs. Wanting to be self-sufficient (pandemic helped with this mindset).  Protectionist.  

• Globalization debate: 

  • Video:  

    • Wanting to make things in USA.  

    • Making things in other countries reduces American jobs. And USA companies cant keep up with abroad's cheaper prices. Hoodie they make here costs $108. People buy it though because it is said to be greatest by a magazine and people want to support made in USA. 

  • Positives of globalization 

    • Product diversity 

    • Efficiency  

    • Lower costs / more purchasing power 

    • Reduce poverty  /  creates jobs  /  more sales 

  • Concerns with globalization 

    • Negative Environmental impacts 

    • Things can go wrong in the supply chain and halt things. Complex.  

    • Downward pressure on wages on unskilled workers. Hard to compete when other countries can do it for cheaper.  

      • Job loss for unskilled workers in developed countries.  

  • Winners of globalization: consumers. Unaware they are winning 

  • Losers of globalization: they know they are losing. Ex: you lose your job because your employer is moving production to another countries.  

  • "the benefits of globalization are widely dispersed, often unseen and thus all too easily taken for granted" 

• Intellectual Property Rights:  

  • Patents: grant the investor of a new product or process exclusive rights for a defined period to the manufacture, use or sale of that invention. 

  • Copyrights: the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit.  

  • Trademarks: designs and names by which firms designate and differentiate their products. 

• Factors of production: resources used in the production of goods/services 

  • Land: naturally occurring goods including soil, minerals, plants, animals, water and weather. 

  • Labor: human efforts, including physical and intellectual, provided in the creation of products 

  • Capital: human made goods or means of production including machinery, tools, and buildings. 

• Global Institutions 

  • World trade organization (WTO) 

  • International Monetary Fund (IMF) 

  • World Bank  

• General Agreement on Tariffs & Trade (GATT) & the WTO 

  • GATT emerged from the Bretton Woods Conference and its main objective was reducing barriers to international trade 

  • Agreements on tariff barriers & subsidies were negotiated over 8 rounds between 1947 and 1993 

  • WTO supplanted the GATT agreement in 1993. 

• International Monetary Fund (IMF) 

  • Created to stabilize exchange rates & to supervise the reconstruction of the worlds international payment system. 

  • IMF provides financial assistance to countries experiencing critical financial and economic difficulties, id the countries agree to the IMF's policy conditions. 

• The World Bank 

  • Created to promote economic development 

  • Provides low interest loans and grants to developing countries for education, health and infrastructure development. 

• Key terms: 

  • Trade Barrier: a government policy or regulation that restricts international trade 

    • Tariff: duties imposed by a gov on imported or exported goods. 

    • Nontariff: any governmental regulation, policy or procedure other than a tariff that has the effect of impeding international trade.  

  • Beggar-Thy-Neighbor Trade Policy: a trade policy that results in one trading partner gaining an advantage at the expense of another nation. 

  • Outsourcing: procuring from an outside supplier products or services which were previously performed in-house.  

  • Economies of Scale: cost advantages resulting from increased production.  

  • Intellectual property: property that is the product of Intellectual activity 

  • Intellectual property rights: establish ownership rights over intellectual property.  

Chapter 1 Smart-book Notes: Globalization 

Microprocessors & Moore's Law 

• Microprocessors: They provide a low-cost way to process large amounts of information. 

• The development of the microprocessor has lead to a reduction in the cost of global communications 

• Moore's Law predicts that: microprocessor technology power will double approximately every 18 months. Or "The doubling of the power of microprocessor technology while the costs of its production decreases by half" 

Pro-Globalization 

• Those who support globalization argue that increasing globalization will lead to reduced prices for goods and services. 

• Supporters of globalization argue that bodies such as the World Trade Organization and the United Nations exist to serve the collective interests of member states, not to subvert those interests. 

Anti-Globalization 

• What issue might be raised at an anti-globalization demonstration? Falling barriers to international trade results in job losses in those industries targeted by foreign competitors. 

• Opponents of globalization are concerned that manufacturing jobs will be moved to more Developing countries. And eliminate manufacturing jobs in wealthy economies. 

• Concern of globalization from critics: An interdependent global economy shifts economic power away from national governments and toward organizations such as the United Nations.  

Foreign Direct Investment 

• When a company invests in a company or entity outside its home country, it is participating in: Foreign Direct Investment 

• Half a century ago, which country dominated world foreign direct investment? The USA 

• The outward stock of foreign direct investment refers to the Total Cumulative Value of foreign investments by firms domiciled in a nation outside of that nation's borders. 

• The outward stock of foreign direct investment has Increased for the world as a whole since 1995. 

Internet 

• The Internet has developed into the information backbone of the global economy and reduced the constraints of location, scale, and time zone. 

• By the year 2020, more than 60% of the world's population were Internet users. 

Other 

• Michael works at a lawnmower manufacturing company in St. Louis, Missouri, and his company imports component parts from Thailand and also ships final product to various countries. Michael's company is an example of an international business. 

  • An international business is any firm that engages in cross-border trade or investment. 

• Those who promote the idea of free trade say that one way for the world's poorest countries to improve their situation is to adopt economic policies based on free market economies 

• two macro factors that underlie the trend toward greater globalization:  

  • decline in trade barriers 

  • technological change 

• Select the four facts that describe the demographics of the global economy a half a century ago: 

  • Dominance of large, multinational U.S. firms in the international business scene 

  • U.S. dominance in world foreign direct investment 

  • Roughly half of the globe was off-limits to Western international business 

  • U.S. dominance in the world economy and world trade 

• There has been two notable trends in the demographics of multinational enterprises in the last 50 years. These include: 

  • the rise of non-U.S. multinationals. 

  • the growth of mini-multinationals 

• Which statement accurately describes the global economy in the twenty-first century? More nations are becoming part of the developed world. 

• Current trends indicate that, due to the emerging economies, the world is moving closer to an economic system that is more favorable for international business.  Reason: Current trends indicate the world is moving toward an economic system that is more favorable for international business. 

• What is an accurate depiction of Latin America when considering international business? While favorable economic trends have recently occurred, there is no guarantee that they will continue. 

• In terms of conducting international business in China, it can be said that China represents a large -- basically untapped -- market. 

• Which environmental concern has been found to rise steadily with higher-income levels? Carbon dioxide emissions 

• At some point, rising income levels lead to demands for greater environmental protection and, as a result, pollution levels fall. A study by Grossman and Krueger found this generally occurred before per capita income levels reached $8,000. 

• The text lists several reasons that stand out as the cause for economic stagnation in the world's poorest countries. What are three of those reasons? 

  • Prolonged civil war 

  • Poor property rights protection 

  • Totalitarian governments 

Chapters 2 & 3: National Differences 

• Country differences: 

  • Legal Systems 

    • Provide the frameworks for creating, interpreting, and enforcing laws within different jurisdictions. 

    • These systems can be based on various sources, including written statutes, judicial precedents, and religious doctrines, each offering unique approaches to legal processes. 

    • Companies must adapt their strategies and operations to align with the legal requirements of each jurisdiction 

    • Common Law System (AKA case law) 

      • Originated in England and many countries, particularly those that were former British colonies, have adopted common law systems. 

      • Judicial decisions serve as a primary source of law. 

      • Relies heavily on the doctrine of precedent with decisions made in higher courts binding lower courts. 

      • Allows for changes and updates through judicial interpretation and new case law. 

    • Civil Law System 

      • The most widespread legal system globally and it provides a structured and predictable legal environment for international business. 

      • Relies on written statutes and legal codes as the primary source of law. 

      • Judges focus on applying statutes and codes as enacted. 

      • Con: Can be slower to adapt to social, economic, and technological developments since changes to the law require legislative action 

      • Con: If you want to change the law, you have to change the statute. 

      • Con: Controversial issues can be difficult to change law for. 

    • Theocratic Law 

      • Legal principles are derived from the sacred writings of a particular religion. 

      • Theocratic systems include Islamic law and Judaic law. 

      • Pro: Provides clear and authoritative guidance on various aspects of life and governance. 

      • Con: Struggle to adapt to societal changes, technological advancements, and contemporary issues. 

      • Con: Can sometimes conflict with secular or pluralistic views or internationally recognized human rights standards 

  • Political Systems 

    • The framework within which governing power is distributed, exercised, and regulated within a society. 

    • Include various components such as the form of government, the division of power, and electoral processes. 

    • Define how leaders are chosen and how laws are made. 

    • They also determine the degree of citizen participation and the protection of individual rights 

    • Individualism versus Collectivism 

    • Democracy versus Totalitarianism 

    • Individualism: 

      • Prioritize the rights, freedoms, and autonomy of the individual, with a strong emphasis on freedom of speech and expression.  

      • Value personal initiative, self-reliance, and individual achievement.  (Me > We) 

      • Emphasize limited government intervention in personal and economic affairs, encouraging individual responsibility. 

    • Collectivism: 

      • Prioritize group harmony, social cohesion, and the common good over individual autonomy and self-interest. 

      • The state or community take precedence over individual rights and freedoms. 

      • The government plays a central role in redistributing resources for the benefit of the collective and providing social services such as healthcare, education, and housing. 

      • We > Me. Greater good is more important than the individual.  focus on the society as a whole. 

    • Socialism: 

      • An economic and political ideology that advocates for collective / government ownership of the means of production and distribution. 

      • The belief that the state should own enterprises and run them for public good rather than private profit. 

      • Many countries have moved away from state-run enterprises through privatization.  

      • Higher taxes cover lots of stuff (healthcare, education, parental support, etc.)(safety net). Sweden ex: Sweden has highest taxes, but they don't mind it because they get so much back. 

    • Democracy: 

      • Government is by the people, either directly or through elected representatives. 

      • Encourage active citizen participation in political processes and citizens have the right to vote in regular, fair, and transparent elections. 

      • Leaders are accountable to the electorate and can be replaced if they do not meet the people's expectations. 

      • Can have policy changes based on electoral outcomes, but democracies generally provide a stable and predictable environment for business planning 

    • Totalitarianism 

      • One person or party exercises absolute control over all state functions. 

      • Political freedoms are severely restricted or entirely suppressed, with political repression, no free elections, and no free speech. 

      • Public opinion and advocacy have little influence on policy. 

      • Laws are often arbitrary and serve the interests of the leader or ruling party, and the judiciary is typically under the control of the state. 

      • Operating in totalitarian states raises serious ethical concerns, including complicity in human rights abuses and exploitation. 

    • Land of Novo (video shown in class) 

      • Denmark 

      • Novo is a drug company. Success on a drug to combat obesity/cardiovascular disease/diabetes. Helped economy - made lots of money and jobs. Became a huge company. Helping humanity over greed. Social responsibility. Not showing off wealth.  

  • Economic Systems 

    • The frameworks that societies use to determine how to allocate resources, produce goods and services, and distribute wealth. 

    • Differ in government intervention levels and resource allocation mechanisms. 

    • Types of Economic Systems: 

      • Command Economies 

        • The state/government owns and controls the means of production. 

        • The goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. 

        • Government interventions can include price controls, subsidies, tariffs, trade restrictions, labor laws, environmental regulations, and antitrust laws. 

        • Advantages: keeps businesses in check. Government protection / safety net.  

        • Disadvantages: Government not good planners / predictors. Regulations / lack of freedom. Lack of incentives to be efficient / innovative / entrepreneurship. Corruption.  

      • Market Economies 

        • Private individuals and businesses own the means of production. 

        • The goods and services that a country produces are largely driven by the forces of supply and demand with minimal government intervention. 

        • Prices are set by the market. 

        • The role of the government is to promote vigorous free and fair competition. 

        • Advantages: incentive to be efficient / innovative / entrepreneurship. Product diversity. Freedom.  

        • Disadvantages: Profit put over people. Lack of government help. Inequal - some successful, others fail. No government safety net.  

      • Mixed Economies 

        • Combine elements of both market and command economies. 

        • Certain sectors of the economy are left to private ownership while other sectors have significant state ownership and government planning. 

        • Governments may take over firms that they consider to be vital to national interests.  

    • Economic Policy 

      • The actions and strategies implemented by a government to influence its country's economic performance, including decisions on taxation, government spending and interest rates. 

      • These policies aim to achieve macroeconomic objectives such as controlling inflation, reducing unemployment, fostering economic growth, and ensuring financial stability. 

      • Expansionary policy: stimulate econ growth and create jobs.   

      • Contractionary policy: lower econ growth. Do when worried about inflation.  

      • Asset bubble: An asset bubble is a period when the price of an asset increases rapidly and significantly above its fundamental value. When it pops, hurt economy a lot. Ex: 2008 housing crisis.  

Types of Economic Policy: 

• Fiscal Policy 

  • Attempts to influence the direction of an economy through changes in government taxes or through governmental spending. 

  • Jobs are created when consumers, businesses, and governments spend money. 

  • Fiscal policy can take longer than monetary policy to impact an economy. 

  • Fiscal policy decisions are constrained by budgetary considerations, including government debt levels and deficit targets 

• Monetary Policy 

  • Attempts to influence an economy by controlling interest rates and the supply of money. 

  • Often has a quick and substantial impact on a economy. 

  • Central banks need independence from political influence to pursue monetary policy objectives free from short-term political considerations. 

  • Can create risks to financial stability, including asset bubbles and excessive risk taking. 

  • Monetary Policy Tools: 

    • Banking reserve requirements 

      • % of consumer deposits that the bank is required to be held in the reserve (not lend out).  

      • Lower requirement, gives bank more money to lend, and stimulates economic growth. 

      • Increase in requirement constrains economic growth. 

    • Buying and selling of (previously issued) government securities 

      • Government security = IOU from treasury.  

      • Stimulate economic growth - fed reserve buy previously bought security. Gives banks more money to lend out. Boosts econ growth 

      • Constrain economic growth - fed reserve sells off securities. Tightens money supply. Constrains econ growth. 

      • We use this a lot in the USA.  

    • Discount rates 

      • Discount Rate: the interest rate that the Fed charges banks for short term loans. 

      • Federal Funds Rate: interest rate banks charge each other for overnight loans. 

        • What federal reserve is trying to control because it …  

        • This rate drives all other interest rates - mortgage rates, car loans, credit cards. 

        • This increases, other interest rates increase. People don't buy as much cause they cannot borrow. Constrains economy.  

Chapter 2 & 3 Smart-book Notes: 

• What is the objective of a pure command economy? 

  • Allotment of resources for the overall good of society 

• Shondra's company developed a new method for sealing medication bottles and has decided to license their patented method to the leading drug manufacturers in the United States. Shondra's company has the legal right to do this based on the Property rights they have for this method. 

  • The legal rights regarding the use of a resource by a business or individual are known as Property rights. 

• What is Hernando de Soto's main concern with regard to property rights?  

  • The inability of property owners to establish legal title to their property 

• The body of law that governs oral and written agreements associated with the exchange of goods, services, money, and property is known as Contract law. 

• Product Liability is the area of law that holds a firm and its officers responsible for injuries caused by their product. 

• What provides a measure of the total monetary or market value of all the finished goods and services produced within a country's borders during a specified period of time? 

  • GDP (gross domestic product) 

• Amartya Sen would agree that: development should address basic health care and education needs. 

  • What is an accurate depiction of Amartya Sen's arguments regarding development? Development should focus on expanding the capabilities of and opportunities available to people.  

• Sanjay's company was the first to introduce fresh-food meal kits in a box that are delivered directly to consumers who put the meal together at home. Since her company was the first to introduce this idea, it is an example of: innovation 

  • The development of new products, new processes, new organizations, new management practices and new strategies is called Innovation. 

  • Which economic system is considered the MOST conducive to innovation and entrepreneurial activity? Market Economies. 

• What is one thing that the fastest-growing economies of China, South Korea, Taiwan, Singapore, and Hong Kong had in common at the start of their economic growth? 

  • Undemocratic Governments 

• Economic progress can be characterized as: often leading to adoption of a democratic government.  

• What is one of the steps that pave the way for a shift toward a market-based economic system?  

  • Creation of a legal system to safeguard property rights 

• True or False: Peruvian development economist Hernando de Soto argued for the importance of business and property rights in relationship to receiving the benefits of capitalism. 

  • True 

  • Hernando de Soto has argued that much of the developing world will fail to reap the benefits of capitalism until property rights are better defined and protected. 

• Identify the TRUE statement about legal systems in various countries throughout the world.  

  • Institutional weaknesses can subvert contract enforcement. 

• For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy 

• Without a legal system that protects property rights, and the machinery that enforces those rights, there is substantially less incentive to engage in economic activity. 

Chapter 6: International Trade Theory 

• Classic Theories of Trade: 

  • Mercantilism 

    • Mercantilism contends a country should strive to maintain a trade surplus by exporting more than it imports. 

    • Countries should maximize exports through subsidies and minimize imports through tariffs and quotas. 

    • Neo-mercantilism is the notion that imports are inherently bad for an economy. 

    • Get gold. Limit imports (ex: tariffs), and do more exports (ex: subsidies).  

      • Problem: too much gold triggers inflation.  

  • Absolute Advantage 

    • Countries should engage in trade when they have an absolute advantage in their ability to a produce good efficiently. 

    • A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient. 

    • Based on work by Adam Smith 

  • (Ricardo's) Theory of Comparative Advantage 

    • Demonstrates that countries can benefit from trade even if a country has an absolute advantage of production in all products. 

    • Opportunity costs.  

    • A country should specialize in the production of goods that it produces most efficiently and buy the goods it produces comparatively less efficiently from other countries.  

    • A nation may import products even when it has an absolute advantage in the production of that product. 

  • Heckscher-Ohlin Theory 

    • Purports that differences in factor endowments and factor costs determine comparative advantage. 

    • Countries should export goods that intensively use factor endowments which are locally abundant and import goods made from locally scarce factors. 

• Contemporary Theories of Trade: 

  • Product Life-Cycle Theory 

    • Contends a product evolves through distinct stages from its introduction to its withdrawal from the market: Introduction, Growth, Maturity, and Decline. 

    • The level of competitive rivalry and the sources of competitive advantage change during each of the stages. 

    • As products mature, both location of sales and optimal production location changes. 

  • New Trade Theory 

    • Contends that countries sometimes specialize in the production and export of certain products not because of underlying differences in factor endowments but because of economies of scale and first mover advantages. 

    • Implications New Trade Theory 

      • Nations may benefit from trade even when they do not differ in resource endowments or technology. 

      • A country may dominate international trade in an industry as a result of being first to enter and achieve economies of scale, thereby discouraging later entrants. 

      • The desire to create first-mover advantages may compel governments to intervene in free trade.  

  • National Competitive Advantage: Porter’s Diamond 

    • AKA Porter's Theory of National Competitive Advantage 

    • The theory attempts to explain the reasons for a nation’s success in a particular industry. 

• Proposes four broad attributes shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.  

• Factor Endowments: 

  • Basic Factors 

    • passively inherited or require only modest investment 

    • natural resources, climate, location and unskilled labor 

  • Advanced Factors 

    • require time and effort to develop and usually more relevant for competitive advantage 

    • highly skilled labor, communication infrastructure and education 

  • Generalized Factors 

    • Can be used by many industrial sectors 

    • infrastructure system, capital markets 

  • Specialized Factors 

    • focused application opportunities 

    • skilled personnel in a specific industry 

    • specialized factors provide more decisive and sustainable bases for competitive advantage 

  • Advanced factors and specialized factors are usually more relevant for sustained competitive advantage. 

  • Basic factors can provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors. 

  • Disadvantages in basic factors can create pressures to invest in advanced factors. 

• Demand Conditions: 

  • Large home market can lead to emphasis on economies of scale. 

  • High consumer expectations will prepare firm to serve the global market. 

  • Specialized demand can create global demand. 

• Related & supporting industries 

  • Competitive advantage in a supplier industry provides access to cost-effective inputs or higher quality inputs. 

  • Firms in related industries can achieve competitive advantage through spill-over effects. 

• Firm Strategy, Structure & Rivalry 

  • Refers to leadership styles and domestic rivalry conditions. 

  • Nations will tend to succeed in industries where their management practices and modes of organization are well suited to the industries’ sources of competitive advantage. 

  • A strong association exists between vigorous domestic rivalry and the persistence of competitive advantage in an industry. 

Balance of Payments 

• Balance of Payments Accounting 

  • National accounting system that tracks both payments to and receipts from other countries. 

  • Transactions are posted to the current, financial, or capital account. 

  • Uses a double-entry system where each international transaction creates two offsetting entries within the three accounts. 

    • Debits (-) = payments to another country 

    • Credits (+) = receipts from other countries 

• Current Account: 

  • The current account records transactions involving: 

    • the import and export of goods 

    • the import and export of services 

    • investment income 

      • income receipts and income payments 

  • Current Account: Income Receipts 

    • Income earned on assets held abroad. 

    • Examples include when a company’s subsidiary in a foreign country repatriates profits back to the parent or when individual domestic investors receive dividend payments from foreign companies. 

    • Recorded as credits on the current account. 

  • Current Account: Income Payments 

    • Income paid to entities in other nations that is earned on assets they hold in the country. 

    • Examples include when a foreign-owned subsidiary repatriates profits back to its parent firm or when a domestic company makes dividend payments to foreign holders of the company’s stock. 

    • Recorded as debits on the current account. 

• Financial Account 

  • The financial account records transactions involving the purchase or sale of assets, including stocks, bonds, real estate, and corporations 

• Capital Account:  

  • The capital account is used to track one-time changes in the stock of assets, such as debt forgiveness and migrant transfers. 

  • This capital account is small for the United States and for many other countries. 

• Account Balances: 

  • The balance on merchandise trade can be an indicator of a country’s manufacturing competitiveness in international trade. 

  • A current account deficit occurs when a country imports more goods, services, and income than it exports. 

• Are Current Account deficits bad? 

  • Is the debtor nation making wise use of its borrowed funds? 

  • Are the foreign lenders investing in liquid investments such as stocks or bonds or more stable investments such as foreign direct investment? 

  • Is the debtor nation’s level of debt large or small compared to the country’s gross domestic product? 

Smart-book Notes: 

• The Heckscher-Ohlin theory of international trade focuses on Factors of Production when explaining what a country chooses to export. 

• According to mercantilism, Gold & Silver were the mainstays of national wealth and were essential to business activity. 

• When trying to understand why Japan exports automobiles or why Switzerland exports watches, David Ricardo's theory of comparative advantage bases the explanation in terms of differences in Labor Productivity 

• Mercantilism is a theory of trade which advocates that a country should export more than it imports which would result in the accumulation of gold and silver and increased national wealth and power 

• When considering constant returns to specialization, it is assumed that the units of resources required to produce one unit of a good will remail the same no matter where a country is on the production possibilities frontier. 

• A country has an absolute advantage when it is able to produce a greater quantity of a product than its competitors, using the same amount of resources. 

• Which type of returns to specialization happen when additional units of resources are required to produce each additional unit? Diminishing. 

• Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibility frontier? Constant. 

• Heckscher and Ohlin identified differences in national factor endowments as the root of Comparative advantage 

• According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the Leontief Paradox 

• According to Heckscher and Ohlin, each country has certain factor endowments. What are two examples of these? Land & Labor 

• Raymond Vernon's product life-cycle theory was based on the observation that for most of the 1900s the majority of the world's new products were developed in The united states 

• An assembly line in a candy factory is an example of economies of scale because it allows the candy company to benefit from cost reductions based on the vast amounts of candy produced. 

• Which theory was based on the belief that it was better to keep production facilities close to the market and to the firm’s center of decision making, given the uncertainty and risks inherent in introducing new products? Product Life Cycle 

• The cost reductions that comes from increased output of a product are known as economies of scale 

• What are three sources of economies of scale? 

  • The ability of large-volume producers to use effective, specialized employees 

  • The ability of large-volume producers to use specialized equipment 

  • Spreading fixed costs over a large volume of product 

• Which trade theory states that for products where economies of scale are significant and represent a substantial amount of world demand, the first movers in an industry can gain a scale-based cost advantage that is not available to late entrants? New Trade 

• Under new trade theory, as the size of markets increase, companies may be able to develop better Economies of scale 

• Which two of these attributes did Porter believe are MOST significant for competitive advantage? Demand conditions and Factor Endowments. 

• Porter argues that advanced factors are the most significant when determining competitive advantage for a country. 

• According to Porter, when related and supporting industries invest in advanced factors of production, it can help an industry achieve a global competitive advantage. 

• What are two basic factors of production as labeled by Porter? Climate & Natural Resources. 

• How would experts reply to the question, "Is Porter's theory correct?"  

  • We do not know. It has not been subjected to empirical testing. 

• Porter would agree that there is a weak association between vigorous domestic rivalry and the creation of competitive advantage. False.  

• In Porter's model of the determinants of national competitive advantage, he noted many US firms were led by people with finance backgrounds, likely leading to US firms’ lack of attention to improving manufacturing process and product design. 

• Even though it was extra work for the company to implement, Johan was happy that consumers had asked for a better grade of plastic for the toys his company produced. In this instance, the competitive advantage of Johan's company is being affected by demand conditions. 

• Which of the four attributes identified by Porter would be evident in a country that has the necessary infrastructure to compete in a given industry? Factor endowments. 

Chapter 7: International Trade Theory / The Political Economy of International Trade 

• Instruments of Trade Policy 

  • Tariffs 

    • Tariffs are duties imposed by a government on imported or exported goods. 

      • Specific tariffs are levied as a fixed charge for each unit. 

      • Ad valorem tariffs are levied as a proportion of the value of the good. 

    • Why use tariffs? 

      • Government revenue 

      • Protect domestic companies 

      • Bargaining / policy tool 

  • Subsidies 

    • Subsidies are government payments to domestic producers that lower production costs. 

    • Government subsidies may be direct payments or indirect support. 

    • Subsidies, especially agricultural subsidies, are controversial since they can result in trade distortion. 

  • Import Quotas 

    • Import quotas are restrictions on the quantity of a good to be imported into a country. 

    • Can be enacted by issuing import licenses to a limited number of firms. 

    • With a tariff rate quota, a lower tariff rate is applied to imports within the quota than those above the quota. 

  • Voluntary Export Restraints 

    • Quota on trade imposed by exporting country, typically at the request of the importing country. 

    • Countries agree to voluntary export restraints to avoid other trade actions. 

  • Export Tariffs and Bans 

    • An export tariff is a tax placed on the export of a good. 

    • An export ban is a policy that partially or entirely restricts the export of a good. 

  • Local Content Requirements 

    • Local content requirements mandate that foreign producers use a certain amount of local materials in their domestic production. 

    • May pertain to a percentage of component parts or a percentage of the total value of the good. 

    • Used by developing nations to promote economic development and by developed economies to protect domestic producers. 

  • Administrative Trade Policies 

    • Administrative trade policies are bureaucratic rules that make it difficult for imports to enter a country. 

    • These seemingly neutral policies have either the intent or the consequence of making it more difficult for foreign firms to do business in the country. 

  • Antidumping Policies 

    • Antidumping policies are used to prevent foreign firms from selling goods too cheaply. 

    • Product dumping is selling a good below production costs or below fair market value. 

    • Antidumping duties and countervailing duties are punitive duties used to increase the price of foreign products. 

• The Case for Intervention 

  • Political Arguments for Intervention 

    • Protecting Jobs and Industries 

    • National Security 

    • Retaliation 

    • Protecting Consumers 

    • Furthering Foreign Policy Objectives 

    • Protecting Human Rights 

  • Economic Arguments for Intervention 

    • Infant Industry 

    • Strategic Trade Policy 

• What is the World Trade Organization (WTO) 

  • It’s a set of rules. 

  • It’s a negotiating forum. 

  • It’s a forum for settling disputes. 

• Principles of the WTO Trading System 

  • Trade without Discrimination 

    • Most-favored-nation policy 

      • Treat every WTO trading partner the same.  

    • National treatment 

      • Treat foreign companies the same as domestic ones. Same standards. 

  • Free Trade through Negotiation 

  • Ensuring Predictability 

  • Promoting Fair Competition 

• Current Challenges for the WTO 

  • Agricultural subsidies  

  • Dispute resolution processes 

  • Antidumping policies 

  • Rise in protectionism 

  • Lack of progress in the Doha Round of negotiations 

Smart-Book Notes: 

• What are three main instruments of trade policy?  

  • voluntary export restraints, subsidies, & import quotas 

• What industry tends to benefit the most from subsidies in most countries? 

  • Agriculture 

• Tariff rates on agricultural products tend to be higher than tariff rates on a manufactured good. 

• In order to win a contract from Mexico, QVB Autos Manufacturing must make 65% of the component parts for their automobiles in Mexico. This is an example of a local content requirement 

• Evan works in a country in which the government has stated that 45% of all goods must be produced domestically. What type of requirement does this country have in place? 

  • local content requirement 

• Governments implement administrative trade policies that are designed to make it difficult for imports to enter a country. 

• Which country is pointed to as the master of administrative trade policies? 

  • Japan 

• The infant industry argument for trade intervention states that developing countries need to support new industries until they are strong enough to compete globally. 

• Krugman promoted the idea that if each country seeks to follow a strategic trade policy to protect its interests, this may lead to a trade war. 

• Krugman argues that strategic trade policy should not be embraced because many times governments are influenced by politically important interest groups to intervene in the economy. 

• Which economist was a key figure in the early free trade movement in Great Britain?  

  • Ricardo 

• What can a country use to counteract a country that uses subsidies to support an industry?  

  • establish anti-dumping regulations 

• During the 1980s, the trend was for Greater protectionism around the world. 

• The economic success of Japan put a strain on the world trading system in the 1980s and promoted protectionism measures. 

• For free trade, you need to trust each other.  

• Which round of GATT negotiations provided enhanced protection for intellectual property and significantly reduced barriers on trade in textiles? 

  • The Uruguay Round 

• The Uruguay Round started in 1986 and eventually provided for which three provisions? 

  • Reducing tariffs on manufactured goods 

  • Reducing tariffs on industrial goods 

  • Reducing agricultural subsidies 

• As a result of the Doha Round, more countries are entering into multilateral and bilateral trade agreements. 

• In response to the apparent failure of the current Doha Round, many nations have implemented multilateral trade agreements 

• Rising pressures for protectionism lead to ongoing GATT negotiations via the Uruguay Round. 

• Member nations hoped that the WTO would be a facilitator of future trade deals especially in the area of Services 

• The WTO is more successful than GATT because the WTO has enforcement mechanisms that make it more effective. 

• What measure did many countries use to get around GATT regulations in the 1980s? 

  • voluntary export restraints 

• Which country was the first to officially follow a policy of free trade in the mid 1800s? 

  • Great Britain 

• What are two ways trade barriers hamper a firm's productive activities? 

  • Quotas limit the ability to serve a country from outside locales. 

  • They raise the cost of exporting products. 

• What are two drawbacks of government intervention in free trade? 

  • It invites retaliation and trade wars. 

  • It protects inefficient industries. 

Chapter 9: Regional Economic Integration 

Regional Economic integration (REI): 

• Regional economic integration (REI) refers to preferential trading arrangements in which member countries agree to coordinate their trade, fiscal, and/or monetary policies. 

• Agreements seek to eliminate tariff and non-tariff barriers to the flow of goods, services, and/or factors of production between member nations. 

• Reasons for REI 

  • Economic Benefits 

    • Increases world production 

    • Stimulates economic growth 

    • Provides greater gains than the WTO 

  • Political Benefits 

    • Provides incentives for political cooperation 

    • Enhances economic clout 

• Levels of Economic Integration: 

  • Free Trade Area 

    • Remove internal barriers = Member countries remove trade barriers to one another. 

  • Customs Union 

    • Common external barriers = common barriers for external countries. Agreeing to have the same barrier for external countries.  

      • Prevents back door in by shipping through a 3rd country. 

  • Common Market 

    • Free movement of factors of production. Factors = land, labor, technology, & capitol.  

      • Labor movement = immigration 

  • Economic Union 

    • Econ policy = monetary and fiscal.  

  • Political Union 

• REI & the WTO 

  • GATT’s Article 24 allows regional trade arrangements if: 

    • an agreement impacts substantially all sectors of trade among the members 

    • and non-members are not exposed to more restrictive trade than before the agreement.  

• REI: Friend or Foe? 

  • Successful negotiations for regional trade agreements appear to be coming easier than progress with the Doha Round. 

  • The participating nations in a regional trade agreement are more likely to be able to reach agreements that remove at least some barriers to trade. 

  • Regional trading blocs are increasing in importance and may pit one bloc against another. 

  • Regional trade agreements may be diverting more trade than they are creating. 

  • The comprehensive trade packages discussed under the WTO would more efficiently use the world’s resources. 

The European Union (EU) 

• The EU is composed of 27 member countries and has approximately 446 million inhabitants. 

• The EU’s member states combined represent the world’s 2nd largest economy by GDP, the seventh largest territory by area and the third largest by population. 

• The EU has 24 official languages and an operating budget of €168.3 billion. 

• Political Structure of the EU: 

  • European Commission 

    • The Commission represents the interests of the EU as a whole and is the executive arm of the EU. Face of the EU. 

    • Structure of the Commission: 

      • Commissioners are nominated by their national governments to serve five-year renewable terms and must be approved by the Parliament. 

      • There is one Commissioner per member state and each Commissioner has a specific policy area of focus. 

    • Responsibilities of the Commission: 

      • Proposes legislation to Parliament and the Council. Start of legislative process for EU. Initiates new laws. 

      • Manages and implements the EU budget. 

      • Represents the EU in external trade and the World Trade Organization. Face of the EU. 

      • Monitors compliance with EU laws by member nations. 

    • Commission & Competition Policy:  

      • The Commission controls market power by regulating anti-competitive practices and abuse of dominant market positions. 

      • The Commission has aggressively gone after companies such as Microsoft and Intel. 

      • Some contend the Commission’s penalties are too large since the Commission acts the prosecutor, judge, and jury 

  • Council of the European Union 

    • The Council represents the individual member nations and is the main decision-making body of the EU. 

    • Approve, amend, or reject legislation proposals sent by the commission. 

      • Cannot move forward without approval 

    • Structure of the Council: 

      • Consists of ministers from the national governments who serve at the pleasure of their home governments. 

      • There is one representative per member state at a Council meeting, but minister attendance is determined by the topic to be discussed. 

      • There are nine configurations of the Council, including councils for Economic and Financial Affairs, Agriculture, and Education. 

    • Responsibilities of the Council: 

      • The Council shares with Parliament the responsibility for passing EU legislation and for approving the EU budget. 

      • Coordinates the broad economic and social policies of the member nations. 

      • Signs international agreements between the EU and other countries or international organizations which have been negotiated by the Commission. 

  • European Parliament 

    • The Parliament represents the EU’s citizens and is the directly-elected legislative arm of the EU. 

    • Structure of Parliament: 

      • Members are elected every five years by the people of the member nations. 

      • The number of seats per nation is based on population. 

    • Responsibilities of Parliament 

      • Parliament, in consultation with the Council, passes laws presented by the Commission. 

      • Parliament approves the Commissioners and has the power to dismiss the Commission. 

      • Parliament and Council share joint authority for approving the EU’s budget. 

  • Court of Justice 

    • The Court of Justice is the judicial arm of the EU and it is the final arbiter in disputes about EU law. 

    • The Court ensures EU law is interpreted and applied in the same way in all EU countries. 

    • The Court has one judge from each member country, who serve renewable terms of six years. 

    • The Court of First Instance / General Court addresses cases related to competition law. 

• The Euro Zone: 

  • A subset of 20 nations of the EU use the euro as a common currency. 

    • Croatia began using the euro on January 1, 2023 

    • Many of the newest EU members currently do not yet use the euro. 

    • Denmark and Sweden are notable exceptions to the use of the euro. 

  • Benefits of the Euro: 

    • Lowers foreign exchange costs. 

    • Facilitates price comparisons. 

    • Fosters efficiency and cost reductions. 

    • Creates a pan-European capital market. 

    • Increases the range of investment options for individuals and institutions. 

  • Concerns with the Euro: 

    • The European Central Bank (ECB) controls monetary policy for the euro zone. 

    • The EU is not an optimal currency area. 

    • The EU needs a stronger, centralized political structure.