Chapter 3

Question 1

World Trade Organization (WTO)

Answer 1

International organization that monitors trade policies and whose members work together to enforce rules of trade and resolve trade disputes.

Question 2

Absolute Advantage

Answer 2

Condition whereby a country is the only source of a product or is able to make more of a product using the same or fewer resources than other countries.

Question 3

Comparative Advantage

Answer 3

A condition whereby one nation is able to produce a product at a lower opportunity cost compared to another nation.

Question 4

Comparative Advantage: Oppurtunity Cost

Answer 4

The Opportunity cost are the products that a country has to decline in order to produce something else.

Example: Someone gives up going to see a movie to study for a test in order to get a good grade. The opportunity cost is the cost of the movie and the enjoyment of seeing it.

Question 5

Balance of Trade

Answer 5

Difference between the value of a nation’s imports and its exports during a specified period.

Question 6

Trade Surplus

Answer 6

Condition whereby a country sells more products than it buys, resulting in a favourable trade balance.

Question 7

Trade deficit

Answer 7

A condition whereby a country buys more products than it sells, resulting in an unfavourable trade balance.

Question 8

Balance of Payments

Answer 8

Difference between the total flow of money coming into a country and the total flow of money going out.

Question 9

Importing

Answer 9

Practice of buying products overseas and reselling them in one’s own country.

Question 10

Exporting

Answer 10

The practice of selling domestic products to foreign customers.

Question 11

International Licensing Agreement

Answer 11

An agreement that allows a foreign company to sell a domestic company’s product or use its intellectual property in exchange for royalty fees.

Here’s how it works: You own a company in the United States that sells coffee-flavoured popcorn. You’re sure that your product would be a big hit in Japan, but you don’t have the resources to set up a factory or sales office in that country. You can’t make the popcorn here and ship it to Japan because it would get stale. So you enter into a licensing agreement with a Japanese company that allows your licensee to manufacture coffee-flavoured popcorn using your special process and to sell it in Japan under your brand name. In exchange, the Japanese licensee would pay you a royalty fee.

Question 12

Foreign Direct Investment (FDI)

Answer 12

The formal establishment of business operations (such as the building of factories or sales offices) on foreign soil.

Question 13

International Franchise

Answer 13

Agreement in which a company (Franchiser) gives a foreign company (Franchisee) the right to use its brand and sell products.

The franchisee is responsible for all operations but agrees to operate according to a business model established by the franchiser. In turn, the franchiser usually provides advertising, training, and new-product assistance.

Example: Mcdonalds KFC

Question 14

International Contract Manufacturing

Answer 14

Practice by which a company produces goods through an independent contractor in a foreign country.

Question 15

Outsourcing

Answer 15

The practice of using outside vendors to manufacture all or part of a company’s actual products.

Question 16

Strategic Alliance

Answer 16

Agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners.

Benefits

• Enhancing marketing efforts
• Building sales and market share
• Improving products
• Reducing production and distribution costs
• Sharing technology

Question 17

Joint Ventures

Answer 17

Alliances in which the partners fund a separate entity (partnership or corporation) to manage their joint operations. It is it’s own company

In 2012, technology giant Microsoft and world energy leader General Electric (GE) created a joint venture aimed at using data to improve healthcare quality and patient experience.

The venture, named Caradigm, is probably one of the most famous examples of joint ventures you’ll find. Its premise was to bring together Microsoft’s strengths in creating large-scale data platforms with GE’s experience in developing healthcare applications, to form a child company that would be able to act more nimbly than either of the parent companies.

Question 18

Offshoring

Answer 18

Setting up facilities in a foreign country that replace the native country’s manufacturing facilities to produce goods that will be sent back to the native country for sale.

Question 18

Culture

Answer 18

System of shared beliefs, values, customs and behaviour that govern the interaction of members of society.

Language (It is better to learn the language than to use a translator)

Time and Sociability (Some cultures are more relaxed on timings while others are not like when to attend the meet).

High and Low-context Cultures

Intercultural Communication (Each culture has different communication styles)

• Some cultures are more relaxed than others
• Some favour body language than others (Even distance can play a role)
• Some cultures like to directly deliver messages, other cultures use subtle and less direct language to communicate their point. [Example: The Chinese are more direct and the Japanese are more in-direct]

Finally do not lump closely-related cultures and do not assume that two people from the same culture will act the same.

Question 20

Exchange Rate

Answer 20

Value of one currency relative to another.

Question 21

Multinational Corporation (MNC)

Answer 21

A large corporation that operates in many countries.

Encapsulated in the motto “Think globally and act globally”, but they adjust their operations for the different environments as one size does not fit all. Decentralized decision-making enables companies to better adapt, though the headquarters still have a lot of control.

Pros and Cons
- They destroy the livelihoods of workers by moving to countries with people willing to work for less
- There demand for cheaper access to resources is destroying the environment.
- Abuse international trade laws
+ Deliver better and cheaper products for consumers everywhere
+ Creates Jobs
+ Raises the Standard of Living in countries
+ Increases cross-cultural understanding.

Question 22

Low-context Cultures

Answer 22

Cultures in which personal and work relationships are compartmentalized. You don’t need to have that much personal context to deal with a person.

Question 23

Foreign subsidiary

Answer 23

Independent company owned by a foreign firm (called its parent). It is a form of FDI (Foriegn direct investment)

This approach to going international not only gives the parent company full
access to local markets but also exempts it from any laws or regulations that may hamper the activities of foreign firms. The parent company has tight control over the operations of a subsidiary, but while senior managers from the parent company often oversee operations, many managers and employees are citizens of the host country.

IBM and Coca-Cola, for example, have both had success in the Japanese market through their foreign subsidiaries (IBM-Japan and Coca-Cola–Japan).

Question 24

High-context cultures

Answer 24

Cultures in which personal and family connections have an effect on most interactions including those of business. it is very important to get to know your potential business partners as human beings and individuals.

Question 25

Subsidies

Answer 25

Government payments given to certain industries to help offset some of their costs of production.

Question 26

Trade Controls

Answer 26

Government policies that restrict free trade.

Question 27

Protectionism

Answer 27

Use of trade controls to reduce foreign competition in order to protect domestic industries.

Question 28

Tariffs

Answer 28

Government taxes on imports that raise the price of foreign goods and make them less competitive with domestic goods.

Question 29

Quota

Answer 29

Government-imposed restrictions on the quantity of a good that can be imported over a period of time.

Question 30

Embargo

Answer 30

An extreme form of quota that bans the import or export of certain goods to a country for economic or political reasons.

Question 31

Dumping

Answer 31

The practice of selling exported goods below the price that producers would normally charge home markets.

Question 32

Internation Monetary Fund (IMF)

Answer 32

International organization set up to lend money to countries with troubled economies.

Question 33

Trading Blocs

Answer 33

Groups of countries that have joined together to allow goods and services to flow without restrictions across their mutual borders.

Question 34

North American Free Trade Association (NAFTA)

Answer 34

Agreement among the governments of the United States, Canada, and Mexico to open their borders to unrestricted trade.

Question 35

European Union

Answer 35

Association of European countries that joined together to eliminate trade barriers among themselves.

Question 36

Why do nations trade?

Answer 36

No national economy produces all the goods and services that its people need.

Question 37

Benefits/Disadvantages of Trade Deficit

Answer 37

If the country’s economy is strong enough to keep growing, then a deficit can create jobs and allow consumers to buy the best that the world has to offer.

When the trade deficit is rapidly accelerating, creditor nations will eventually stop taking IOUs (I owe you) from debitor nations. So the country will have to stop their national spending. So no country can sustain large trade deficits

Question 38

Benefits/Disadvantages of Trade Surplus

Answer 38

Surpluses can’t always be good things for a country. A country’s domestic goods can have artificially high prices. Since there are not many imports domestic companies can set artificially high prices as there is no international market to compete with. Imported goods can also get high in price due to consumer demand.

Question 39

Culture: Economic environment

Answer 39

World band divides countries into four income categories

• High income—$12,276 or higher (United States, Germany, Japan)
• Upper-middle income—$3,976 to $12,275 (China, South Africa, Mexico)
• Lower-middle income—$1,006 to $3,975 (Vietnam, Philippines, India)
• Low income—$1,005 or less (Kenya, Bangladesh, Haiti)

Low income markets can be of interest sometimes as people want to move up on the economic ladder.

Question 40

Exchange Rate

Answer 40

Value of one currency relative to another.

If the foreign currency goes up relative to the Canadian dollar, Canadians must pay more for goods and services. - Foreign buyers pay less

If the foreign currency goes down relative to the Canadian dollar, Canadians must pay less for goods and services. - Foreign buyers pay more

Question 41

Foreign Corrupt Practices Act

Answer 41

This is U.S law that prohibits bribes and other favours on the conduct of business. However, these are normal practices in some countries, making American businesses at a disadvantage. In theory, since American people can do any of this conduct people should stop expecting it.