CHP 2 Flashcards
What is Mercantilism?
economic philosophy
nations wealth depends on accumulated treasure (usually gold)
to increase wealth, government policies should promote exports and discourage imports
Goods and services in ‘00 and ‘08?
7.9 T in ‘00. and Exceeding $19.5 T in ‘08
North America, Asia, and the EU proportions of world trade have increased. With the EU, new members account for some of the growth
How much of everything grown/made in the world is exported?
1/4
Who is part of the increase in world trade?
North America, Asia, And portions of EU>new members account for some of the growth
Who did developed nations trade primarily with after WW1?
other developed nations
Why is there a decline in developed nations trading with developing nations?
developing nations are trading with developing nations
Given regional trade agreements, what is changing over time?
Direction of trade among nations or regions
What are the advantages of focusing attention on a nation that is already a sizable purchaser of goods from the would-be exporters country?
- Business climate in the importing nation is relatively favorable
- The trading partner’s government may be applying pressure on importers to buy from countries that are good customers for that nation’s exports
Why are rankings of America’s trading partners rapidly changing?
Asia nations, like China, have become increasingly important and challenging trade partners for both exports and imports
International trade theory attempts to answer the question…?
“why do nations trade”
What is believed behind the reason of “Why do nations trade?”
Mercantilism> one of the initial economic doctrines (1550-1800) that accumulating wealth through trade is associated with political power
What impact did liberalism Adam Smith have?
attacked mercantilism and said that to trade in order to accumulate gold and other precious metals was foolish…By means of free, unregulated trade, a nation could acquire what it did not produce
What did Adam smith strongly believe?
Comparative Advantage: a nation should produce only those goods which it was most efficient. The surplus could be traded to obtain the products that could not be produced advantageously
What is the Theory of Comparative Advantage
a nation having an absolute disadvantage in production of two goods has a comparative advantage in the production of the good in which its absolute disadvantage is less
Theory of Absolute Advantage
Country “A” has absolute advantage when it can produce a larger amount of goods or services for the same amount of inputs as country “B” or when “A” can produce the same amount using fewer inputs than “B
Terms of Trade (ratio of international prices)
With specialization, now the total production of both goods is greater, but to consume both products, the two countries must trade some of their surplus.
Who created the Theory of Comparative advantage and what did he believe?
David Ricardo (Principles of Political Economy - 1817) showed that if a nation were less efficient in the production of two products, it could still gain from international trade if it were not equally less efficient in the production of both goods.
What was wrong with Smith and Ricardo’s theories?
considered labor as the only important factor in calculating production costs. Capital and land are other factors of production.
G. How Money Can Change the Direction of Trade.
- Traders must know a price in domestic currency to determine if is better to produce locally or import.
What is Exchange rate?
the price of one currency stated in terms of the other
How can countries regain a competitive position?
Through Currency Devaluation
Some countries have more abundant resources that others, which can result in?
different opportunity cost of producing these resources and bringing them to market
What does difference in resource endowments suggest?
developed countries would more likely trade with developing countries rather than other developed countries with similar factor endowments.
What affects a market demand in any country.
Consumers’ tastes, preferences, and their nation’s per capita income
b. Customers in countries with similar levels of per capita demand will…?
demand similar goods and services
National competitiveness results?
from a country’s ability to complete the functions necessary to drive a product/service to market and while increasing ROI: design, produce, distribute, and service
International trade occurs primarily because…?
of relative price differences among nations
Differences stem from differences in production costs which result from? (4)
- Differences in the endowment of factors of production
- Differences in the levels of technology that determine factor intensities used
- Differences in the efficiencies with which these factor intensities are utilized
- Foreign exchange rates.
Foreign investment is divided into two components
(1) portfolio investment and (2) direct investment
What is beginning to blur the distinction between portfolio investment and direct investment?
growing size and number of international mergers, acquisitions, and alliances
Portfolio Investment
the purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested… directly concerned with the control of a firm but to gain ROI through financial assets (stock and bonds
Foreign Direct Investment (FDI)
the investors participate in the management of the firm in addition to receiving a return on their money
The Outstanding Stock of FDI
The book value—or the value of the total outstanding stock—of all foreign direct investment (FDI) worldwide
Annual Outflows (Flows) of FDI
The amount invested each year into other nations
Outflows hit a historical high in ?
2000—$1.2 trillion, more than 250% of the level in 1997. Outflows subsequently increased, reaching $2.1 trillion by 2007 before declining to $1.9 trillion during the economic downturn of 2008
Much of outward FDI is associated with?
global mergers and acquisitions
What did US corporate restructuring do?
out underperforming business and assets on the market
What do foreign companies want?
rapid access to us advanced techology
What did foreign firms believe if they could access US market?
would be more successful through acquiring known brand names rather than promoting unknown foreign brands
Increased international competition, including pursuit of economies of scale, led to?
restructuring and consolidation of many global industries and acquisition of firms in major markets like the U.S.
The industrialized nations invest primarily in?
one another, just as they trade more with one another
What is the average annual FDI investments that have been going into developed countries in recent years?
70%, but has dropped to 57% in ‘08
Developing countries had a ??% increase in FDI from 1996 to 2000 and an additional ???% increase by 2008
70%; 220%
what nations had less than 3% of FDI inflow from 1985 to 2008?
Africa
Who equaled all of Africa in FDI for the same period
Singapore
Whose inflows fluctuated over the past two decades and declined from 16.5% in 1996 to 8.5% in 2006
Latin American
What was Combined Asian FDI from 2006 to 2008?
43%
T/F….it is impossible to make an accurate determination of the present value of foreign investments?
True
it is Difficult to accurately determine present value of foreign investments
What happens if a nation continues to receive growing amounts of FDI?
its investment climate must be favorable and the political forces of that country are attractive
little investment will occur if???
If there is political instability and low levels of FDI inflow
The introduction from the UNCTAD report says…
“Yes,” there is a direct link between trade and investment and quality of life.
What affects a nation’s export performance?
External and internal factors
What do External factors include?
market access conditions such as transportation costs, geography, physical infrastructure, trade barriers, competition and other factors that influence demand
What are Internal Factors?
supply-side conditions within a nation, such as raw materials, cost of labor and capital, access to technology, economic policy, institutional environment, and market access
Historically, FDI followed foreign trade because…
trade costs less and has less risk than FDI and business can be expanded in smaller, controllable increments rather than incurring large investments and larger risk
As business expanded, a firm would…
start exporting by using agents and then set up an export department with foreign sales personnel
Can FDI now lead to trade?
yes,
What are some significant changes in today’s global business environment that make FDI a possible first step into international trade (6)
a. Fewer government trade barriers
b. Increasing global competition
c. New production technologies
d. New communications technologies
e. Greater integration of the global supply chain and production closer to available resources
f. A growing corporate focus to identify and exploit global business opportunities
What are some accepted theories to explain FDI:?
FDI can either be greenfield investment, where new facilities are built from the ground up, or cross-border acquisition, the purchase of existing business facilities in another nation.
What are some strategic motives for FDI?
finding new markets, accessing raw materials, accessing new technologies or managerial expertise, achieving production efficiencies, enhance political safety of firm’s operations, or respond to competition
Monopolistic Advantage Theory
based on the premise that FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms.
What do some advantages over indigenous firms include?
economies of scale, superior technology, or superior knowledge of marketing, management, or finance, giving the MNE competitive advantage over local firms.
Internationalization Theory
to obtain a higher ROI, a firm will transfer its superior knowledge to a foreign subsidiary and not sell it in the open market. Firms transfer knowledge across borders without it leaving the firms
Dynamic Capabilities
ownership of specific knowledge or resources is necessary but not sufficient enough for success in FDI, but firm must also develop distinctive competitive advantages to complement their knowledge or resources
Eclectic Theory of International Production states
for a firm to invest overseas, it must possess 3 types of advantages
- Ownership Specific
- Location Specific
- Internalization
What is Ownership specific?
tangible and intangible assets not available to competitors but can be transferred abroad (e.g., a recognizable brand name).
What is location Specific?
foreign market offers economic, social or political advantages which will let the firm exploit its ownership specific advantages (market size, tariff or non-tariff barriers, or transportation cost advantages)
What is Internalization?
firms have choice as to the way to enter foreign markets, ranging from arm’s length market transactions to hierarchy via a wholly owned subsidiary. It is in the firm’s interest to exploit ownership specific advantages through internalization in those situations where either the market does not exist or it functions inefficiently.
What does Eclectic Theory (also referred to as OLI Model) explain?
MNCs’ choice of foreign production facilities.
What is the common factor to all 3 of Eclectic theory?
FDI is typically made by large, research-intensive firms in oligopolistic industries and is the reason why these companies find it profitable to invest overseas.
