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International Business > International Business > Flashcards

International Business Flashcards

1
Q

Tariff

A

A Tax levy on products imported or exported.

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2
Q

What is free trade?

A

When government does not influence through quotas or duties of what citizens can buy from another country.

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3
Q

What are the benefits of free trade?

A

Absolute advantage, comparative advantage.

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4
Q

Flaws of mercantilism

A

Zero sum game= a gain by one country is a loss of another.

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5
Q

New trade theory

A

Countries specialize in the production and export of particular products because certain industries in the world can support only a limited number of firms.

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6
Q

Mercantilism

A

Gold and silver were the mainstrays of national wealth and essentials to commerce.

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7
Q

Beliefs (tenets) of mercantilism

A

It is in a countries best interest to maintain a trade surplus to export more than it imported. It advocates government intervention to achieve a surplus in the balance of trade.

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8
Q

Absolute advantage

A

Production of a product when it is more efficient than any other country in producing it.

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9
Q

Comparative advantage

A

Buy goods that the country produces less efficiently from other countries and make those (specialize) in production of those goods produced more efficiently.

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10
Q

Benefit of comparative advantage

A

World production is greater with unrestricted free trade.

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11
Q

Factors of endowments

A

The extent to which a country is endowed with land, labor, and capital. The more abundant a factor the lower it’s cost.

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12
Q

Product life-cycle theory

A

As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade. Proposed by Ray Vernon mid 1960s.

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13
Q

Does the product life cycle theory hold?

A

The globalization and integration of the world economy has made this theory less valid today.

  • Theory is ethnocentric
  • Production today is dispersed globally
  • Products today are introduced in multiple markets simultaneously
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14
Q

Economies of scale

A

Unit cost reductions associated with a large scale of output.

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15
Q

Balance of payments

A

A country’s balance of payments accounts keep track of the payments to and receipts from other countries for a particular time period.

  • double entry bookkeeping
  • sum of the current account balance, the capital account and the financial accnt should be zero.
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16
Q

What are the main accounts for the balance of payments?

A

Current account
Capital account
Financial account

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17
Q

Subsidy

A

A government payment to a domestic producer.

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18
Q

Forms of subsidies

A

Cash grants, low interest loan, tax breaks, and government equity participation in domestic firms.

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19
Q

Import quotas

A

Restriction on the quantity of a good that might be imported into a country.

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20
Q

Tariff rate quota

A

A lower tariff is applied to imports within the quota than those over the quota.

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21
Q

Effects of import tariffs

A
  1. Pro-producer and anti-consumer

2. Reduce the overall efficiency of the world economy.

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22
Q

What are the benefits of import tariffs?

A

Helps domestic producers:

  1. To compete against foreign imports
  2. To gain export markets
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23
Q

Administrative trade policies

A

Rules that make it difficult for imports to enter a country.

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24
Q

Strategic trade policy

A

When government can help raise national income if it can ensure that a domestic firm can gain first mover advantage in an industry rather than a foreign enterprise.

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25
Q

Dumping

A

Selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their fair “market” value.

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26
Q

Political arguments for government intervention

A
  • protecting jobs and industries
  • national security
  • retaliation
  • protecting consumers
  • furthering foreign policy objectives
  • protecting human rights
  • protecting the environment
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27
Q

Local content requirements

A

A requirement that some specific fraction of a good be produced domestically.

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28
Q

Economic arguments for intervention

A
  • infant industry argument

- strategic trade policy

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29
Q

How has the current world trading system emerged?

A

Protectionism trends emerged:

  • Japan’s perceived protectionist policies created intense political pressures in other countries.
  • persistent trade deficits by the US
  • use of non-tariff barriers increased.
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30
Q

What are two types of FDI?

A
  1. Greenfield investments

2. Acquisitions and mergers

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31
Q

Foreign Direct Investment

A

When a firm invests directly in facilities to produce or market a product in a foreign country.

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32
Q

Flow of FDI

A

The amount of FDI undertaken over a given time period. (normally a year)

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33
Q

Stocks of FDI

A

Total accumulated value of foreign owned assets at a given time.

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34
Q

Growth of FDI

A
  1. Fear of protectionism
  2. Political and economic changes
  3. New bilateral investments
  4. The globalization of the world economy
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35
Q

Where is FDI targeted towards?

A

Developed nations

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36
Q

Gross fixed capital formation

A

Summarizes the total amount of capital invested in factories, stores, office buildings, and the like.

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37
Q

Source of FDI

A

The US holds $2.4 billion in cumulative FDI outflows, 1998-2010. UK, Netherlands, Germany and Japan are other important countries.

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38
Q

Acquisitions versus greenfield investments

A
  1. Most cross-border investments is in the form of merges & acquisitions.
  2. In developing countries 75% of FDI is greenfield investments because fewer target companies.
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39
Q

Why choose FDI?

A
  1. Exporting

2. Licensing

40
Q

What is exporting?

A

Producing goods at home and shipping them to the receiving country for sale.

41
Q

What is licensing?

A

Granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit that the foreign entity sells.

42
Q

Limitations on exporting

A
  1. Transportation costs and trade barriers.

2. FDI may be a response to actual or threatened trade barriers such as important tariffs or quotas.

43
Q

Internalization theory

A

Explains why firms prefer FDI over licensing as a strategy for entering foreign markets.

44
Q

What are the major drawbacks for licensing

A
  1. May result in a firm giving away valuable technological know-how to a potential foreign competitor.
  2. Does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that might be required to maximize profitability.
  3. Firms competitive advantage is based on the management, marketing and manufacturing capabilities that produce those products. (can’t amend)
45
Q

Multipoint competition

A

When two or more enterprises encounter each other in different regional markets, national markets, or industries.

45
Q

Dunning’s eclectic paradigm

A
  • location-specific advantages

* externalities

46
Q

FDI benefits to the host country

A
  1. Resource transfer effects
  2. Employment effects
  3. Balance of payments effects
  4. Effects on competition and economic growth
47
Q

Cost of FDI to the host country

A
  1. Competition within the host nation.
  2. Balance of payments.
  3. Perceived loss of national sovereignty and autonomy.
48
Q

FDI benefits to the HOME country

A
  1. Effect on capital account
  2. Employment effects
  3. Gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country.
49
Q

Regional economic integration

A

Agreements between countries in geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other.

50
Q

Common market

A
  1. Has no barriers to trade between member countries
  2. Common external trade policy
  3. Free movement of the factors of production
51
Q

Economic union

A
  1. Free flow of products and factors of production between members
  2. Common external trade policy
  3. Common currency
  4. Harmonized tax rate
  5. Common monetary and fiscal policy
52
Q

Political union

A

Involves a central political apparatus that coordinates the economic, social, and foreign policy of member states.

53
Q

Trade creation

A

When low cost producers within the free trade area replace high cost domestic producers.

54
Q

Trade diversion

A

When higher cost suppliers with the free trade area replace lower cost external suppliers.

55
Q

Hedging

A

A firm that insures itself against foreign exchange.

56
Q

Currency speculation

A

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

57
Q

Forward exchange

A

Two parties agree to exchange currency and execute the deal at some specific date in the future.

58
Q

Currency swap

A

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

59
Q

Arbitrage

A

The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.

60
Q

How are exchange rates determined?

A

By demand and supply for different currencies.

61
Q

Factors that impact future exchange rate movements.

A
  1. A country’s price inflation
  2. A country’s interest rate
  3. Market psychology
62
Q

What is freely convertible currency?

A

When a government of a country allows residents and non residents to purchase unlimited amounts of foreign currency with the domestic currency.

63
Q

Externally convertible currency

A

Only nonresident can convert their holdings of domestic currency into foreign currency.

63
Q

What is nonconvertible currency?

A

Both residents and non residents are prohibited from converting their holdings of domestic currency into a foreign currency.

63
Q

Capital flight

A

When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency. It occurs when the value of domestic currency is depreciating rapidly due to hyperinflation.

64
Q

How to minimize exchange rate risk?

A
  1. Have central control of exposure to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies.
  2. Distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand.
  3. Attempt to forecast future exchange rates.
  4. Establish good reporting systems.
  5. Produce monthly foreign exchange exposure reports.
65
Q

International monetary system

A

Arrangements that govern exchange rates.

66
Q

Floating exchange rate regime

A

Exists when a country allows the foreign market to determine the relative value of a currency.

67
Q

Pegged exchange rate

A

Exists when a country fixes the value of its currency relative to a reference currency.

68
Q

Dirty float

A

When a country tries to hold the value of its currency withing some range of a reference currency such as the US dollar.

69
Q

Fixed exchange rate system

A

When countries fix their currencies against each other at some mutually agreed on exchange rates.

70
Q

Gold standard

A

A system in which countries peg currencies to gold and guarantee their convertibility.

71
Q

Why are the 3 main types of financial crises?

A

Currency
Banking
Foreign debt

71
Q

Currency crisis

A

Occurs when a speculative attack on the exchange value of a currency results in sharp depreciation in the value of the currency and forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates.

72
Q

Banking crisis

A

A situation in which a loss of confidence in the banking system leads to a run on the banks as individuals and companies withdraw their deposits.

73
Q

Foreign debt crisis

A

A country cannot service it’s foreign debt obligations, whether private sector or government debt.

74
Q

IMF moral hazard

A

When people behave recklessly because they know they will be saved if things go wrong.

75
Q

Factors responsible for growth of capital markets

A
  • Advances in information technology

* deregulation by governments

76
Q

Eurocurrency

A

Any currency banked outside its country of origin. About 2/3 of all euro currencies are Eurodollars (dollars banked outside the US)

76
Q

Cost of capital

A

The price of borrowing money or the rate of return borrowers pay investors.

76
Q

Foreign bonds

A

Sold outside the borrowers country and are denominated in the currency of the country in which they are issued.

76
Q

Eurobond

A

Underwritten by a syndicate of banks and placed in countries other than the one in which currency the bond is denominated.

77
Q

Why is the eurobond market attractive?

A
  1. Lacks regulatory interference
  2. Has less stringent disclosure requirements than domestic bond markets
  3. More favorable from a tax perspective
78
Q

Global equity market allows firms to?

A
  1. Attract capital from international investors
  2. List their stock on multiple exchanges
  3. Raise funds by issuing debt or equity around the world
79
Q

What is the infant industry argument?

A

An industry should be protected until it can develop and be viable and competitive internationally.

80
Q

What is a greenfield investment?

A

Establishments of a wholly new operation.

81
Q

What has led to the globalization of the world economy?

A

Many companies now view the world as their market, need to be closer to their customers.

82
Q

What are the location-specific advantages?

A

Arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

83
Q

What are externalities?

A

Knowledge spillovers that occur when companies in the same industry locate in the same area. Example - Silicon Valley

88
Q

What is a carry trade?

A

Borrowing in one currency where interest rates are low, and using the proceeds to invest in another currency where interest rates are high.

89
Q

The Jamaica Agreement

A
  1. Floating rates were declared acceptable
  2. Gold was abandoned as a reserve asset
  3. Annual quotas to IMF were increased.
90
Q

What is a currency board?

A

When a country commits itself to converting it’s domestic currency on demand into another currency at a fixed rate.

91
Q

What led to the Asian crisis?

A
  1. Investment boom
  2. Excess capacity
  3. Debt boom
  4. Expanding imports
92
Q

Who are the main players in the generic capital market?

A
  1. Investors
  2. Market makers
  3. Borrowers
93
Q

What are the attractions of the global capital market?

A
  1. Borrower’s perspective: lower cost of capital

2. Investor’s perspective: portfolio diversification

94
Q

What are hedge funds?

A

“long bets” on assets that they think will increase in value and “short bets” on assets that they believe will decline in value.

International Business (1 decks)

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