MNC, FDI, Int Strat Flashcards
Why do nations collaborate?
- political benefits:
peace
more political weight - economic benefits:
more trade
income growth
access to resources
consistent rules for trade
what economic integration groups do you reckon?
- Free trade area: removal of intragroup tariffs
- Customs union: removal of intragroup tarifs and common external tariff
- Common market: removal of intragroup tariffs, common external tariff, and free movement of goods, people, and capital
- Economic union: removal of intragroup tariffs, common external tariff, free movement of good/people/capital, and common economic policies
- Political union: removal of intragroup tariffs, common external tariff, free movement of goods/people/capital, common economic policies, and integration of political and economic affairs (policymaking regulations etc)
What are the disadvantages of economic integration?
- Political
discrimination against firms outside a region undermine global integration - Economic
chance of loss of sovereignty and increased dependency on other countries
How would you define economic integration?
Efforts to reduce trade and investment barriers within one region / around the globe
What is the GATT?
Multilateral agreement covering international trade (just look a t the name)
What is the WTO
The body overseeing multilateral trading systems
What does the GATT-WTO system prohibit the imposition of?
1. export subsidies (excluding agricultural products)
- Import quotas
- Tariffs
- Dispute settlement mechanisms (it is GATT and WTO who decides on disputes)
what is a trade round?
when a group of countries gets together to negotiate tariff reductions and other measures to liberalize trade
What is the debate on WTO?
Supporters give the example of China, which became a leading economy since joining the WTO
Critics point out that there is no compelling evidence that the WTO has had a significant positive influence on trade
What is the NAFTA?
North America Free Trade Agreement, between CANADA, US, and MEXICO.
it:
1. decreased tariffs, but did not lift regulations
2. increased wages
3. boosted industrial and trade integration
3. created more jobs in the US (mexicans benefited less than expected)
what did NAFTA become?
USMCA in 2018
the main difference is the introduction of stricter intellectual property regulations
how many countries are there in europe? how many in the eurozone?
27 in europe, 18 in the eurozone
What is the single (or common) market?
free movement of goods, capital, and labour
What is the principle of harmonization?
- mutual recognition: products recognized as legal in one country may be sold throughout the market
- harmonized sector: sectors have common rules
- subsidiarity: market takes action only if it is more effective
what are the opportunities and treaths for a manager wanting to go international?
pros:
new markets
ability to leverage economies of scale and economies of scope
natural resources quest (oil)
innovation quest (silicon valley and bangalore)
cons:
competiton
trade barriers, regulatory and political risks
What is foreign direct investment?
when a firm invests directly in new facilities to produce and/or market in a foreign country.
residents of one country acquire ownership of assets for the purpose of controlling the production and distribution
FDI is NOT foreign portfolio investment
which forms can FDI take?
- Greenfield investment: establishment of a wholly new operation in a foreign country
- brownfield investment: acquisition or merging with an existing firm in the foreign country
More specifically
vertical FDI: moving upstream or downstream in a foreign country
horizontal FDI: firm duplicates activities in a foreign country
what are the advantages and disadvantages of FDI?
pros:
1. high profit potential
- control over operations
- acquire knowledge of local markets
- avoid tariffs and NTBs
cons:
1. high financial and managerial investments
- high exposure to political risk
- vulnerability to restrictions on FDI
- greater managerial complexity
when is FDI favoured over exporting?
when there are:
1. high transportation costs
- high trade barriers
when is FDI favoured over licensing?
when:
1. firm wants control
- firms wants to gate keep its technological know how
- it is difficult to license
what is the difference between FDI flow and FDI stock?
FDI flow: amount moving in a given period
FDI stock: total accumulation of inbound FDI in a country or outbound FDI across several years
Why has FDI grown more rapidly than world trafe and world output?
Firms still fear the threat of protectionism
Globalizationas firms undertake FDI to ensure they have significant presence in many regions of the world
What is the difference between OEM and ODM?
Original Equipment Manufacturer control components and final assembly, but not R&D and design
Where do developed and undedeveloped countries concentrate their activities?
Developed: concentrate in high value activities (R&D, Design, Marketing)
Underdeveloped: concentrate in lower value activities (production)
Why are acquisitions an attractive form of FDI?
they are quicker to execute than greenfield investments, and it is easier and less risky for a firm to acquire desired assets rather than building them from the ground up
Which political views on FDI are you aware of?
- radical view: hostile
- free market view: suggests that FDI unrestricted by government intervention is best
- pragmatic view: only approves FDI when benefits outweigh costs
How can governments encourage or restrict FDI?
Encourage:
government backed insurance programs
tax incentives
exemtpion of import duties
land ownership rights
work permit and visa facilitation for management and experts
Restrict:
control over some outward FDI (almost all countries do it to some extent)
How can a company develop an international strategy while still staying in domestic markets?
- indirect exporting through intermediaries (ETC), the seller sees the transaction as a domestic sale, the buyer sees the transaction as a domestic purchase.
- supplying foreign firms
- licensing or franchising:
- become local partners of FDInvestors
what is the process for evaluating new markets?
- producing an initial list of potential new markets
- eliminating less attractive markets
- selecting most attractive markets
when would you advise an ETC?
when the company doesn’t have a lot of international expertise and has short term goals
what is piggy banking?
when a large company brings along its suppliers when it build a factory abroad
what is the difference between licensing and franchising?
Licensing: owner of intangible preoperty grants the right of use for a specified time (risks lending strategic property to future competitors)
Franchising: the franchisor gives the franchisee the legal right to undertake business in a specified manner
describe the modes of market entry alon investment and control criteria
exporting (low investment low control)
strategic alliances: JV, licensing & franchising (mid investment mid control)
sibsidiary: acquisition and greenfielding (high investment high control)
