IB

Question 1

Describe the benefits, volume, and patterns of international trade.

Answer 1

• International Trade: Purchase, sale, or exchange of goods and
services across national borders
• Benefits of International Trade:
• Greater choice of goods and services
• Important engine for job creation in many countries

Question 2

Explain how mercantilism worked and identify its inherent flaws

Answer 2

Trade theory that nations should accumulate financial

wealth, usually in the form of gold, by encouraging exports and discouraging imports

Question 3

Detail the theories of absolute advantage and comparative advantage

Answer 3

Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another. Even if one country has an absolute advantage in producing all goods, different countries could still have different comparative advantages.

Question 4

Summarise the factor proportions theory of trade.

Answer 4

Trade theory stating that countries produce and
export goods that require resources (factors) that are abundant and import goods that require resources in short supply

“a country will have a comparative advantage in producing products that intensively use resources (factors of
production) it has in abundance.”

Question 5

Explain the international product life cycle theory

Answer 5

Product life cycle theory divides the marketing of a product into four stages: introduction, growth, maturity and decline. When product life cycle is based on sales volume, introduction and growth often become one stage.

Question 6

Outline the new trade theory

Answer 6

• Emerged in the 1970’s and 1980’s.
• Gains to be made from specialisation and increasing economies of scale.
• Companies first to enter a market can create barriers to entry.
• Government may play a role in assisting its home-based companies.

Question 7

Outline the First-Mover strategy

Answer 7

First-Mover Advantage
• Economic and strategic
advantage
• Formidable barrier to market
entry for potential rivals
• Country’s export and homebased
firm

Question 8

Describe each main type of political system.

Answer 8

– Democracy
• Political system in which government leaders are elected directly by the wide participation of the people or by their representatives

– Totalitarianism
• Political system in which individuals govern without the support of the people, the government maintains control over many aspects of people’s lives, and leaders do not tolerate opposing viewpoint

Question 9

List the main types of legal systems and explain how they differ

Answer 9

Talmudic law, Hindu law, Marxist law, Muslim law

Question 10

Explain why governments sometimes intervene in trade

Answer 10

Political Motives
• Protect Jobs
• Preserve National Security
• Respond To Unfair Trade
• Gain Influence

Economic Motives
• Protect Infant Industries
• Pursue Strategic Trade Policy

Cultural Motives
• Achieve Cultural Objectives
• Protection of National Identity

Question 11

Outline the instruments that governments use to promote trade

Answer 11

Trade Promotion
• Subsidies
• Export Financing
• Foreign Trade Zones
• Special Government Agencies

Question 12

Describe the instruments that governments use to restrict trade

Answer 12

Trade Restriction
• Tariffs
• Quotas
• Embargoes
• Local Content Requirements
• Administrative Delays
• Currency controls

Question 13

Summarize the main features of the global trading system

Answer 13

The basis for the development of the global trading system is the
normal trade relations (formally known as the most favoured nation)
principle:
– All member nations are treated in the same way
• ‘A requirement that members extend the same favourable
terms of trade to all members that they extend to any single
member’ – (Wild et al., 2009 p.213)

Question 14

Why does FDI occur

Answer 14

National, provincial and even municipal governments compete worldwide to attract FDI to their territory:
• mainly for job creation
• create export industries
• to enhance the local research, technology and skills base
• to offset current account deficits

Question 15

Explain why governments intervene in FDI

Answer 15

National, provincial and even municipal governments compete worldwide to attract FDI to their territory:
• mainly for job creation
• create export industries
• to enhance the local research, technology and skills base
• to offset current account deficits

Question 16

Define regional economic integration and identify its five levels

Answer 16

Member countries remove all barriers to trade between themselves but are free to independently determine trade policies with nonmember nations.

1. FREE TRADE AREA
2. CUSTOMS UNION
3. COMMON MARKET
4. ECONOMIC UNION
5. POLITICAL UNION

Question 17

Discuss the benefits and drawbacks associated with regional economic integration

Answer 17

Pros
– Trade creation VS trade diversion or trade restriction
– Reduced import costs
– More competition
– Economies of scale
– Higher factor productivity
• better use of resources

> Cons
– Reduced national sovereignty and identity
– Risk of cultural dilution: esp. small countries, regions
– Loss of local employment

Question 18

Integration in Europe

Answer 18

Integration in Europe
> Post second world war Europe needed to rebuild itself, and needed to increase its
industrial strength to stay competitive with an increasingly powerful United States.
> Belgium, France, West Germany, Italy, Luxembourg and the Netherlands signed the
Treaty of Paris in 1951, creating the European Coal and Steel Community.
> In 1957, the Treaty of Rome was signed, creating the European Economic
Community.

Question 19

Integration in Asia

Answer 19

Integration in Asia
> ASSOCIATION OF SOUTH-EAST ASIAN NATIONS (ASEAN)
– Formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in 1997 and Cambodia in
1989.
– The ASEAN countries comprise a market of about 500 million consumers and a GDP
of more than US$800 billion.
• Also known as AFTA – (ASEAN Free Trade Area)

Question 20

Integration in the Middle East and Africa

Answer 20

Gulf Cooperation Council (GCC)
– Six Arab nations (1980)
– Economic and political aims
– Free travel; property rights

Economic Community of West
African States (ECOWAS)
 Common market hopes (1975)
 Little progress to date

Question 21

Explain the company analysis techniques that precede strategy selection

Answer 21

Company Mission and Goals
Mission Statement: Written statement of why a company exists
and what it plans to accomplish
Mission statements often spell out how a company’s operations
affect its stakeholders
Stakeholders: All parties, ranging from suppliers and
employees to stockholders and consumers, who are affected by a
company’s activities

Question 22

Describe the various strategies that companies use to reach their goals.

Answer 22

Mission Statement: Written statement of why a company exists and what it plans to accomplish

Question 23

Explain the theory: brief overview of the four different types of staffing approaches used by international companies

Answer 23

– Ethnocentric
The biggest disadvantage and criticism of ethnocentric staffing is that it can
lead to ‘cultural myopia’: The ‘head office’ way of doing things is dominate

The home country way is the best way
Therefore, the subsidiary may underestimate the cultural differences in regard to marketing and management in the country/region where it is established.

– Polycentric
Staffing policy in which individuals from the host country manage operations

Can be implemented at all managerial levels Suited to companies who want to give autonomy in decision-making

“When in Roman do as the Romans do; better yet, have a
Roman do it”

– Regiocentric
Staffing policy in which individuals from a particular region are hired to
fill the position there:
Normally used by MNCs where a subsidiary has a regional rather than a country establishment

For example North America; South-East Asia; Eastern Europe

– Geocentric
Staffing policy in which the best-qualified individuals, regardless of
nationality, manage operations abroad Can be home, host, or third country

Usually for top-level managers

Question 24

Explain the various types of investment entry modes

Answer 24

Exporting, importing and countertrade

Exporting and importing is the most common method of buying and selling internationally
Companies use countertrade when exporting and importing when cash transactions are not an option

Contractual entry

Companies may resort to countertrade if they are unable to pay for imports due to lack of hard currency or convertibility restrictions:
Countertrade: Process of selling good or services that are paid for, in whole or part, with other goods or services.
Different types of countertrade are:

Barter
Counterpurchase
Offset
Switch trading
Buyback

Investment entry

Involves direct investment in plant and equipment in a foreign country coupled with ongoing involvement in the local operation
Three forms of investment entry are:
Wholly-owned subsidiaries
Joint ventures
Strategic alliances

Question 25

What are the Four-Step Model in Developing export strategies

Answer 25

Identify a potential market:
Is there demand for the product?
Seek advise of experts on regulations and the process of exporting

Match needs to abilities:
Does the firm have the ability to satisfy the market?
Standardise or adapt products?

Initiate meetings:
Helps build trust with local distributors/buyers
May need a number of meetings
Negotiations conducted on terms of agreement, and agreement reached

Commit resources:
Objectives of the export program should be clearly set out
Firms may create an export department