Tutorial 5 Flashcards
Chapter 5
trade in goods (merchandise trade)
Sale of physical goods across national borders.
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trade in services
Sale of intangibles across national borders.
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trade deficit
An economic condition in which a nation imports more than it exports.
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trade surplus
An economic condition in which a nation exports more than it imports.
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balance of trade
The aggregation of importing and exporting that leads to the country-level trade surplus or deficit.
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classic trade theories
The major theories of international trade advanced before the mid-20th century: mercantilism, absolute advantage, comparative advantage and factor endowments.
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Classic theory: theory of mercantilism
A theory that holds that
the wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer
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free trade
Trade uninhibited by trade barriers.
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Classic theory: theory of absolute advantage
A theory that suggests
that under free trade, each nation gains by specializing in economic activities
in which it has absolute advantage.
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absolute advantage
The economic advantage one nation enjoys due to higher productivity in an economic activity
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modern trade theories
The major theories of international trade advanced in the second half of the 20th century: product life cycle, strategic trade and national competitive advantage.
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classic theory: theory of comparative advantage
A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.
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comparative advantage
Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.
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opportunity costs
Given the alternatives (opportunities), the cost of pursuing one activity at the expense of another activity.
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classic theory: factor endowment theory (or Heckscher–Ohlin theory)
A theory that suggests nations will develop comparative advantage based on their locally abundant factors.
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resource(factor) endowents
The extent to which different countries possess various resources (factors), such as labour, land and technology.
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modern theory: product life cycle
A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.
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modern theory: strategic trade theory
A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.
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first mover advantage
Advantages that first entrants enjoy and do not share with late entrants.
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modern theory: theory of national competitive advantage industries (diamond model)
A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a ‘diamond’.
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resource mobility
The ability to move resources from one part of a business to another.
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protectionism
Government policies designed to protect a domestic industry from foreign competition.
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deadweight loss
Net losses that occur in an economy as the result of tariffs
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non tariff barries
Government policies designed to protect a domestic industry from foreign competition
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subsidies
Government payments to (domestic) firms.
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import quotas
Restrictions on the quantity of imports.
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anti dumping duties
Costs levied on imports that have been ‘dumped’ (selling below costs to ‘unfairly’ drive domestic firms out of business).
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public procurement
Units of government buying products or services.
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local content requirements
A requirement that value added is created locally.
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infant industry argument
The argument that temporary protection of young industries may help them to attain international competitiveness in the long run.
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trade embargos
Politically motivated
trade sanctions against foreign countries to signal displeasure
Chapter 6
foreign direct investements (FDI)
Investment in, controlling and managing value-added activities in other countries.
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emerging enconomy MNEs
MNEs that originate from an emerging economy and are headquartered there.
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foreign portfolio investements (FPI)
Investment in a portfolio of foreign securities such as stocks and bonds.
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joint venture
Operations with shared ownership by several domestic or foreign companies
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horizontal FDI
FDI that creates operations abroad at the same position in the value chain as the operation in the home country.
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vertical FDI
FDI in operations in different stages of the value chain, upstream or downstream.
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upstream vertical FDI
FDI in an upstream stage of the value.
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downstream vertical FDI
FDI in a downstream stage of the value chain in two different countries.
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FDI flow
The amount of FDI moving in a given period (usually a year) in a certain direction.
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FDI stock
The total value of inbound FDI in a country or outbound FDI from a country operating at a given point in time.
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OLI paradigm
A theoretical framework positing that ownership (O), location (L) and internalization (I) advantages combine to induce firms to engage in FDI.
- Ownership advantages: What does the firm own that allows it to overcome its liability of foreignness when competing with local firms in their country?
- Locational advantages: What does the host location have to offer that allows the firm to create more value than it would by purely operating in its home country?
- Internalization advantages: What advantages does the firm get from directly owning the operation abroad rather than relying on contracts and markets as means of exchange?
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liability of foreignness
The inherent disadvantage a firm faces when competing with local firms in a foreign country.
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ownership advantage
Resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad.
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location advantage
An advantage enjoyed by firms operating in certain locations.
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agglomeration
The location advantages that arise from the clustering of economic activities in certain locations
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knowledge spillovers
Knowledge diffused from one firm to others among closely located firms
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internalization advantage
Advantages of organizing activities within a multinational firm rather than using a market transaction.
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market failure
Imperfections of the market mechanism that make some transactions prohibitively costly
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intra firm trade
International trade between two subsidiaries in two countries controlled by the same MNE
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licensing
A contract by which a firm allows another firm to use its intellectual property rights in return for a fee.
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franchising
A contract by which a firm allows another firm to
use its branded service or products in return for a fee.
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dissemination risk
The risk associated with unauthorized diffusion of firm-specific know-how.
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local content requirements
Requirement that a certain proportion of the value
of the goods made in a country originates from that country.
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tax avoidance
Reducing tax liability by legally moving profits to jurisdictions where tax rates are lower
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bargaining power
The ability to extract a favourable outcome from negotiations due to one party’s strengths
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obsolescing bargain
Refers to the deal struck
by MNEs and host governments which change their requirements after the initial FDI entry.
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sunk costs
Up-front investments that are non-recoverable if the project is abandoned.
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expropriation
Government confiscation of private (foreign-owned) assets.
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state owned enterprise(SOEs)
Companies with direct ownership by the state.
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soft budget constraint
Phenomenon that SOEs tend to receive extra resources from the state when facing financial difficulties.
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sovereign wealth fund(SWF)
A state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments.
