BEC 10 - Globalization Flashcards
Describe the primary objective of the International Monetary Fund (IMF)
The primary objective of the IMF is to maintain order in the international monetary system, primarily by providing funds to economies in financial crisis, including: 1.Currency crisis - dramatic decreases in the value of a country’s currency;
- Banking crisis - dramatic levels of withdrawals from a country’s banks (a “run on banks”);
- Financial debt crisis - country unable to satisfy its foreign debt obligations.
Describe the primary objective of the World Bank.
The primary objective of the World Bank is to promote general economic development world-wide, focusing on lending to developing countries for infrastructure, agricultural, educational and similar projects.
Identify the primary purposes of the General Agreement on Tariffs and Trade (GATT).
- Liberalizing and encouraging trade by eliminating trade barriers;
- Harmonizing certain business-related laws;
- Reducing transportation and other costs of doing international business.
Identify special costs associated with international trade that often are critical in determining the viability of such trade.
- Transaction costs, including costs of using letters of credit and costs of mitigating currency exchange risk;
- Transportation costs, the extra costs of shipping goods long distances and/or using more costly transportation methods;
- Tariff and other compliance costs, including the direct costs of tariffs and complying with other requirements;
- Time costs, the costs associated with the extra time due to distance and other requirements.
Both U.S. imports and exports have grown dramatically over the past 50 years. The U.S. is by far the world’s largest importer and one of the top three exporters. Imports and exports each account for about 15% of purchases and output, respectively. The U.S. exports only more agricultural products and services than it imports.
Changes in the US international trade over the past 50 years.
Identify factors that have facilitated or enabled an increase in global trade.
- Reductions in trade barriers;
- Increased economic integration between nations;
- Regional trade agreements;
- Development in communications (e.g., internet);
- Development in the financial sector.
Identify and describe the two major ways goods may be acquired internationally.
- Foreign outsourcing - acquiring goods from foreign suppliers;
- Foreign direct investment - producing goods in facilities owned or controlled by U.S. companies but located in foreign countries.
Identify risk encountered when engaging in foreign outsourcing.
- Quality risk - goods/services so not meet buyer’s standards;
- Security risk - foreign provider misappropriates proprietary information;
- Export/Import risk - trade barriers prevent transfer of goods/services;
- Currency exchange risk - Exchange rates change unfavorably;
- Legal risk - Home country or foreign country laws are violated.
Identify the potential benefits of international capital markets (as compared with domestic markets) to both lenders and borrowers.
For investors, a greater range of investments is available and an increase in portfolio diversification is possible.
For borrowers, a larger number of funding sources, increased levels of funding, and lower cost of borrowing are possible.
Describe the Eurodollar market (Euromarket).
Eurodollars are U.S. dollars maintained outside the U.S. Investors holding these Eurodollars offer short-term and intermediate-term loans denominated in the U.S. dollar. These loans are outside the normal banking systems and, therefore, generally carry a lower cost of borrowing than conventional bank loans.
While total world-wide output has more than tripled over the last 50 years, the growth has not been uniform among countries/regions. The most dramatic changes have been in the decline of European share of output and the increase in the Asian share of output. The European share of world-wide output has declined from about 36% to about 27% and the Asian share has increased from about 15% to about 25%. The share of output held by the U.S., Latin America and Africa/Middle East has remained fairly constant.
the shifts in the share of world-wide GDP (output) over the past 50 years or so.
The total level of world-wide trade has grown dramatically in the past 50 years. During that time the four largest export countries have been the China, Germany, U.S., and Japan (in that order). The share of world-wide exports attributable (in total) to the four countries has remained fairly constant, around 30%. But, among those countries the share has changed significantly. The U.S. has lost share, from about 18% to 8%. Germany has maintained about a 9% share. Japan has increased share from about 3% to about 5% and China has increased share from about 2% to about 9%.
the shifts in the share of world-wide trade over the past 50 years or so.
Define a “greenfield venture”.
A Greenfield venture is a new, wholly-owned subsidiary established in a foreign country.
Identify the advantages and disadvantages of a wholly-owned (100%) foreign subsidiary.
Advantages: Gives the parent entity security of assets and proprietary information, and ability to control and coordinate activities of the subsidiary entity.
Disadvantages: A costly means of undertaking international business and parent has entire cost and risk of the undertaking.
Identify the primary way an entity may engage in international business activity.
The alternative ways of engaging in international business activity include:
- Importing/Exporting;
- Foreign licensing;
- Foreign franchising;
- Forming a foreign joint venture;
- Creating or acquiring a foreign subsidiary.
