Globalization Notes

Question 1

What are the different types of economic crisis that would be addressed by the International Monetary Fund (IMF)?

Answer 1

The IMF maintains order in the international monetary system by providing funds to countries

1. Financial crisis
2. Currency crisis
3. Banking crisis
4. Debt crisis

Question 2

What is the primary purpose of International Monetary Fund (IMF)?

Answer 2

The objective of the International Monetary Fund is to maintain order in the international monetary system by providing funds to countries in financial crisis.

Question 3

What is the primary purpose of World Bank?

Answer 3

The objective of the World Bank is to promote general economic development, especially in developing countries, primarily by leading for infrastructure, agricultural, education, and similar needs.

Question 4

What is the primary purpose of World Trade Organization?

Answer 4

The World Trade Organization oversees general agreements on tariffs and trade and related international undertakings.

Question 5

What is the primary purpose of the United Nations (UN)?

Answer 5

The main purpose of the United Nations is to facilitate cooperation in international law, international security, economic development, social progress, human rights, and ultimately world peace, but it does not make loans to developing nations.

Question 6

What are several purposes of General Agreement on Tariffs and Trade (GATT)?

Answer 6

Primary purpose of encouraging international trade by

1. Eliminating tariffs
2. Eliminating subsidies
3. Eliminating import quotas
4. Eliminate other trade barriers
5. Harmonize intellectual property laws
6. Reduce transportation costs

Question 7

Why would FOREIGN DIRECT INVESTMENT invest in foreign production facilities and not foreign bonds?

Answer 7

Foreign direct investment involves investments in non-monetary assets (e.g., property, plant, equipment, etc.) in a foreign location.

Question 8

Over the past 50 years, have imports (share of purchases) and exports (share of output) increased or decreased? Or one has increased and one has decreased?

Answer 8

Both have increased. Over the past 50 years, U.S. imports as a share of GDP and exports as a share of GDP have both increased.

Question 9

The US exports more of what than it imports?
Second question.
The US imports more of what than it exports?

Answer 9

1. US exports more agricultural goods than it imports. It exports more services. Net exports is positive.
2. US imports more industrial materials and manufactured goods than it exports. Net exports is negative.

Question 10

As of 2018, what are the three largest exporters (countries) of goods/services?

Answer 10

1. China
2. Germany
3. USA

Question 11

Why would local country capital be preferred in order to protect a foreign investment/reduce potential loss from host-government expropriation?

Answer 11

Local capital would be preferred. The parent company could then default on the local creditors in the event that the subsidiary is expropriated from them. The creditors’ claims would have to be satisfied by the expropriating host government.

Question 12

As of 2018, what are the three largest importers (countries) of goods/services?

Answer 12

1. USA
2. China
3. Germany

Question 13

Outsourcing of goods involves acquisition of?

Answer 13

1. Raw materials
2. Final goods
3. Intermediate goods

Question 14

Define quality risk, security risk, market risk, and currency exchange risk?

Answer 14

1. Quality risk - the risk that the good will not meet the buyers’ standards.
2. Security risk - the risk that the provider will misappropriate intellectual property, trade process, proprietary data, or other proprietary asset of the buyer.
3. Market risk - the risk that the value of an asset will decline as a result of a decline in general economic conditions.
4. Currency exchange risk - the risk that the domestic currency (e.g., dollars) required to satisfy the obligation will increase as a result of changes in the exchange rate between the domestic currency and the foreign currency.

Question 15

Would an arbitration clause in the contract with foreign suppliers mitigate the risks associated with outsourcing?

Answer 15

Yes, including an arbitration clause in the contract with the foreign supplier would mitigate the risk associated with outsourcing by providing a predetermined mechanism for resolving differences between the buyer and the supplier.

Question 16

Would negotiating for payment to the foreign supplier be a way to mitigate risk of outsourcing?

Answer 16

No. It would subject the domestic buyer to foreign currency exchange risk, i.e., the risk that changes in the exchange rate between the currencies will increase the cost of acquiring goods.

Question 17

Capital markets facilitate the trading of what two things?

Answer 17

Stocks and bonds.

Question 18

Regarding investment in foreign currency, if dollar weakens or strengthens, how will this result as far as dollars earned?

Answer 18

Dollar strengthens - Fewer dollars earned

Dollar weakens - More dollars earned

Question 19

Regarding borrowing in foreign currency, if dollar weakens or strengthens, how will this result as far as dollars costed?

Answer 19

Dollar strengthens - Less dollars costed

Dollar weakens - More dollars costed

Question 20

The best reason corporations issue Eurobonds rather than domestic bonds is that?

Answer 20

Eurobonds are not subject to extensive regulation like U.S. issued domestic bonds; therefore, they are less expensive to issue.

Question 21

What is the US % share of worldwide GDP output? % share of worldwide exports?

Answer 21

GDP Output - 25%

Worldwide exports - 10%

Question 22

Which region of the World has had the greatest increase on worldwide output over the past 30 years?

Answer 22

Asia. Led by China. 10% increase.

Question 23

Name a country that has not experienced a decrease in worldwide output?

Answer 23

Brazil. Increased from 2% to 4%.

Question 24

What are the advantages associated with acquisition of pre-existing foreign entity?

Answer 24

1. May block competition from entering the foreign market in which the acquired entity operates
2. Provides quicker entry into a market than developing a new entity in foreign market
3. Provides historical financial information that is useful o the acquiring entity

Question 25

Does government imposed trade barriers restrict imports or exports?

Answer 25

Both. Governments can restrict exports too. Export restrictions normally are imposed to protect technology or to preclude countries from receiving certain goods.

Question 26

Goods with a low value-to-weight ratio are less likely to be suitable for importing than goods with a high value-to-weight ratio. Is this statement correct?

Answer 26

Yes.

Question 27

Define foreign franchising.

Answer 27

Foreign franchising is a special form of licensing in which the franchisor (licensor) authorizes use of intangible property by a foreign party (franchisee) and mandates strict operating requirements of the franchisee.

Question 28

Define foreign joint venturing.

Answer 28

Foreign entity owned by two or more otherwise unrelated entities.

Question 29

Define foreign licensing.

Answer 29

Foreign licensing is the granting to a foreign entity the right to use intangible property (e.g. patents, copyrights, formulas, etc.) in return for a royalty payment.

Question 30

What is the most elementary form of internal business?

Answer 30

Exporting and importing

Question 31

Which form of international business is most likely to give an entity the greatest control over an international business activity? Why?

Answer 31

A foreign subsidiary is most likely to give an entity greatest control over an international business activity. Since a parent entity has controlling ownership of a subsidiary, under normal circumstances, it has complete control of the activities of a subsidiary.

Question 32

What is an import quota?

Answer 32

Import quotas restrict the quantity of a good that can be imported into a country and are not directly concerned with the flow of cash.

Question 33

What is a default risk premium?

Answer 33

A default risk premium is the interest rate factor charged on debt for the possibility that the borrower may not pay interest or repay principal when due.

Question 34

What is a foreign trade deficit?

Answer 34

A foreign trade deficit is the extent to which a country’s imports of goods and services exceed its exports of goods and services.

Question 35

What is repatriation?

Answer 35

repatriation is concerned with the movement of funds from a foreign country to the home country of an entity. For a corporation, repatriation is commonly concerned with moving profits from a foreign operation to the parent’s home country.

Question 36

For a company reviewing cash flows, what would be the primary key consideration in company cash flow analysis?

Answer 36

Repatriation restrictions. If the foreign country imposes restrictions on repatriation of profits (or other funds), this may limit the desired flow of cash from foreign operations (subsidiaries) to the parent and would be a consideration in a company’s cash flow analysis.