Int. Business – Chapter 1, 4, 2, 3, 6, 7

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the shift toward a more integrated and interdependent world economy

T/F? The world is not moving away from self-contained national economies.


What are two facets of globalization?

1. Globalization of markets 2. Globalization of production

Globalization of markets

national markets are merging into one huge global marketplace

Characteristics of Globalization of markets

1. Falling barriers to cross border trade 2. Increased instance of free-market economies 3. Reduced regulatory and admin. barriers 4. Convergence of consumer tastes and preferences

Globalization of production

sourcing of goods & services from locations around the globe; take adv of national differences in cost & quality of factors of producftion

Characteristics of Globalization of Production

1. Lower overall costs 2. Improve quality/function of their product 3. Gain competitive adv.


concentrated on manufacturing activities, but service activities are also used

Global Institutions

institutions that help manage, regular, and police the global market place & promotes multinational treaties to govern the global business system

What are the 6 global institutions

1. General Agreement on Tariffs & Trade (GATT) 2. World Trade Organization (WTO) 3. International Monetary Fund (IMF) 4. World Bank 5. Untied Nations (UN) 6. G20

General Agreement on Tariffs & Trade (GATT)

1. Created in 1949

World Trade Organization (WTO)

1. Created in 1995 2. Successor of GATT 3. 2013: 159 nations (98%) are members 4. Policies the world trading system 5. Ensures nations follow rules/treaties made by WTO 6. promotes lower barriers to trade 7. facilitates multinational agreements between WTO members

International Monetary Fund (IMF)

1. Created in 1944 2. maintains order in international monetary system 3. lends money to countries in crisis (as a last resort or in economic turmoil); intervenes with harsher regulations 4. sister organization of World Bank

World Bank

1. Created in 1944 2. promotes economic development via low interest loads for projects 3. "nicer" way of helping to develop; still has regulations, just not as severe. 4. sister organization of International Monetary Fund (IMF)

United Nations (UN)

1. Created in 1945 2. maintains international peace and security 3. develops friendly relations among nations 4. cooperates in solving international problems and promotes human rights 5. center of harmonizing actions of nations


1. Created in 1999 2. made up of finance ministers and central bank governors of the largest 19 economies in the world & has representatives from the EU and European Central Bank 3. established to think of a coordinated response to financial crises in developing nations 4. tried to help the 2008-2009 financial crisis 5. similar to IMF

What is driving the move toward greater globalization?

1. Declining trade & investment barriers 2. Enhanced communication technology

What happens when barriers of trade decline?

Free to flow goods, services, and capital

Advantages of declining trade barriers for businesses

1. tariffs are low = costs are low (globalization of markets) 2. helps with global production (globalization of production) 3. more favorable environment for FDI 4. can view the world as a market place (instead of just one nation) 5. set base in location that is optimal location for the activity

Advantages of Technological Advancement

1. lower transportation costs – help create global markets 2. low cost information processing and communication – help manage globally dispersed production 3. low cost global communications networks – help make an electronic global marketplace 4. global communications networks & global media – create worldwide culture

How does International Business affect the demographics of the global economy?

1. Changes world output & world trade picture – decline of large industrial countries & increase of economic growth of other developing countries 2. Changes Foreign Direct Investment (FDI) – major countries’ stocks declining, developing countries’ stocks increasing 3. Changes nature of the Multinational Enterprises – more businesses have productive activities in two or more countries 4. Changes world order – collapse of communism, world is moving towards a global economic system

What does the shift toward a global economy mean for mangers within an international business?

1. Countries have differences/similarities and that makes companies need to change their practices with each country 2. international companies must work within the limits of governmental intervention & global trading system 3. international transactions involve exposure to currency fluctuations 4. managers face a greater and more complex range of problems


A system of values and norms that are shared among people and that, when taken together, constitute a design for living


– shared assumptions about how things should be – provides context of why society norms are justified – shown in political and economic system of society – shows what is good/beautiful/holy and what legit goals are for life


– social rules and guidelines that prescribe and proscribe appropriate behavior in particular situations – what we should/should not do – governs people’s actions – mores & folkways


– type of norm – cover the routine conventions of everyday life – define the way people are expected to behave – violation is not a serious matter, but may be socially unacceptable – ex) appropriate dress code, time & punctuality


– type of norm – seen as central to the functioning of society and to its social life – violations bring paybacks – ex) drinking laws in US


– a group of people sharing a common set of values and norms – shared and pervasive

Social Structure

Basic social organization of a society

2 types of social structure

1. Individual vs Group 2. Social Stratification


– shown in western societies – ex) individual performances, achievements, entrepreneurship


– two or more individuals who have a shared sense of identity and interact – primary unit of social organization – ex) the village, family, team, lifelong employment – discourages people to move from company to company

Social Stratification

– based on characters such as family, background, job, income – individuals born into a particular social stratum

Social Mobility

the extent to which individuals can move out of the strata into which they are born

2 types of social stratification

1. caste system 2. class system

caste system

– closed system – position is determined by family which the person is born into – change usually not possible in lifetime

class system

– less rigid form, open system – mobility is more likely – can change due to achievements and luck


system of shared beliefs & rituals that are concerned with the realm of the sacred

ethical systems

set of morals, or values that are used to guide and shape behaviour

4 main religions

1. Christianity (2-2.2 billion) 2. Islam (1.6 billion) 3. Hinduism (800-950 mill) 4. Buddhism (400-500 mill)

How does religion play into business?

1. shape attitudes toward work and entrepreneurship 2. affect the costs doing business in a country

T/F? Language is one of the defining characteristics of culture


Spoken Language

– allows people to communicate – how we perceive the world – direct attention towards certain features

T/F? Countries can have only one language spoken


T/F? Slogans always translate well into other languages


Unspoken Language

– nonverbal communication (body language, hand signals, posture, eye contact) – different nonverbal cues could mean an entirely different meaning in another country


the way individuals learn languages, conceptual & mathematical skills of a society

T/F? Values and norms are taught both directly and indirectly


Why is education important in business?

– improves national competitive advantages (skill labor) – location choice of int business – index of local adaptation (sale of books)

Geert Hofstede

– attempted to quantify and evaluate the affects of culture on the workplace – has four dimensions of culture (added a 5th)

5 dimensions of culture

1. individualism vs collectivism 2. power distance 3. masculinity vs femininity 4. uncertainty avoidance 5. Confucian dynamism

Individualism vs Collectivism

– strength of ties people have to others in the community ind: rewards indiv. achievement and freedom col: emphasizes strong ties

power distance

– how a society deals with the fact people are unequal in physical and intellectual capabilities – less power members expect and accept that power is distributed unequally

masculinity vs femininity

– relationship between gender and work roles – mas: achievement, power, & determined cultural ideals – fem: do not differentiate strongly on gender and sex roles

uncertainty avoidance

– how different cultures socialize their members into accepting ambiguous situations & tolerating ambiguity – can be thought of in terms of structure, flexibility & tolerance of change

high uncertainty avoidance

greater importance on job security, career patterns, rules and regulations

lower uncertainty avoidance

greater readiness to take risks and less emotional resistance to change

confucian dynamism

– long term orientation – how much a society values long-standing/short term traditions and values – eastern countries: high – western countries: low

5 criticisms of hofstede’s theory

1. concentrates on the nation-state level of analysis (countries have more than 1 culture) 2. culturally bounded research (narrow sample) 3. organizationally bounded research 4. certain social classes were excluded from the study 5. culture evolve: theory becomes outdate

Cultural Evolution & Change

1. Culture evolves over time (Social turmoil: inevitable outcome of change) 2. Economic Growth & Advancement (countries become economically stronger, culture change is common) 3. MNEs can be agents of cultural change 4. globalization brings culture change & convergence

What should management do?

1. must develop cross-cultural literacy 2. cognizant of the connection between culture and national competitive advantage 3. connection between culture and ethics in decision making

cross-culture literacy

understanding how cultural differences across & within nations can affect the way business is practied

T/F? if companies are ill informed about the practices in another culture, they are likely to succeed



– managers must guard company from this – belief that the superiority of one’s own culture

how can a company not be ill-informed?

1. hire local citizens 2. transfer executives to foreign locations on a regular basis = exposes them to global business & cultures

T/F cultural values and norms influence the cost of doing business in that country


T/F? The political, economic and legal system of a country are interdependent


T/F? political, economic, and legal systems, although they interact and influence each other, they do not affect economic well-being


T/F? The system of government in a national does not shape the economic and legal system


If the country is more focused on individualism, the kind of government would likely be…


If the country is more focused on collectivism, the kind of government would likely be…



– idea that individuals should have freedom in economic/political pursuits – individual’s interest > state’s interest – private ownership = good; more productive than communal property & stimulates progress – implies: democratic system & free markets


– idea of collective goals over individual goals – view origins of Karl Marx – society > individual freedom

2 kinds of collectivism

1. socialism 2. communism


– adopting a democratic view to state ownership as the basic means of production, distribution, exchange – strong influence – ex) china, vietnam, cuba, lao


– a more violent approach to achieving collectivism via totalitarian dictatorship – ex) soviet union; eastern europe

many countries after WWII nationalized private companies to run for public good, rather than private (electricity, gas, railway, etc.) Was this a good idea?

No, they experienced that state ownership counters public interest 1. poor performance 2. inefficiency 3. high consumer cost


state own enterprises sold to private investors


– government is by the people, exercised either directly or indirectly through elected representatives – associated with individualism

2 kinds of democracy

1. pure democracy 2. representative democracy

pure democracy

citizens directly involved with decision making

representative democracy

– citizens periodically elect individuals to represent them – reps form gov whose function is to make decisions – if reps fail to do job well, they will be recalled, impeached or voted down next election


one person, or party, takes complete control over all human life and prohibits opposing political parties

4 types of totalitarianism

1. communist totalitarianism 2. theocratic totalitarianism 3. tribal totalitarianism 4. right-wing totalitarianism

communist totalitarianism

found in states where the communist party monopolizes power (ex China, North Korea)

theocratic totalitarianism

found in states where political power is monopolized by a party, group or individual that governs according to religious principles (Iran, Saudi Arabia)

tribal totalitarianism

found in states where a political party that represents the interest of a particular tribe monopolizes power (some african states)

right-wing totalitarianism

permits some individual economic freedom, but restricts individual political freedom (germany & italy 1930s, latin america)

T/F? there is a clear link between political ideology and economic systems


T/F? countries that stress individual goals are not likely to have market based economies


T/F? In countries where state-ownership is common, collective goals are dominant


3 types of economic systems

1. market economy 2. command economy 3. mixed economy

market economy

– productive activities = privately owned (not state owned) – production = interaction of supply and demand (signaled to producers through price system)

characteristics of market economy

– no restrictions on supply – government wants free & fair competition between private producers => economic efficiency – easily access business’s profits; enhances innovation & economic growth – found in larger advanced economies

command economy

– goods and services that a country produces – quantity in which they are produced – prices at which they are sold – ALL PLANED BY GOV

characteristics of command economy

– businesses are state-owned, government allocates resources for "good of the society" – command economies = communism – little incentive to control costs & be efficient = tend to stagnate – dynamism & innovation are absent from command economies

mixed economy

certain sectors of economy are left to private ownership & free market mechanism, while other sectors have significant state ownership & government planning

characteristics of mixed economy

– government tend to own firms that are important to national security/interests – mixed economies were once common, but less so now

legal systems

– rules/laws that regulate behavior – laws are enforced & address grievances

why are legal systems important for int business?

– regulate business practice – define how business transactions are executed – identify the rights and obligations of parties involved in business transactions

3 different legal systems

1. common law 2. civic law 3. theocratic law

common law

– based on tradition, precedent & custom – found in british colonies – tradition = legal history, precedent = cases that have been in courts in the past, custom = ways of which laws are applied to diff. situations – flexible & opened to interpretation

civic law

– detail set of laws organized into codes – 80+ countries use (germany, russia, japan) – less adversarial than common law

theocratic law

– based on religious teachings – govern all aspects of life – islamic law – moral rather than commercial law — have elements of common or civil law


document that specifies the conditions of an exchange that is to occur and details the rights and obligations of parties

contract law

body of law that governs contract enforcement

contract law under common law

tend to be very detailed with all contingencies spelled out

contract law under civil law

must shorter and less specific because many issues are already covered in the civil code

international trade disputes

contract disputes arises in international trade due to confusion of which country’s laws to apply

United Nations Convention on Contracts for the International Sale of Goods (CIGS)

– uniform set of rules that govern the making & performance of everyday commercial contracts between buyers and sellers who have businesses in different nations

International Court of Arbitration of the International Chamber of Commerce in Paris

handles international contract disputes


– a resource over which an individual or business holds a legal title (resource it owns) – land buildings, equipment, etc.

property rights

legal rights over the use to which a resource is put and over the use made of any income that may be derived from that reource

2 kinds of violation of property rights

1. private action 2. public action

private action

theft, piracy, blackmail by private individuals or groups

public action

public officials (politicians & government) extort income, resources or property itself from property holders

2 types of public action

1. legal public action 2. illegal public action

legal public action

– levying excessive taxation – expensive licenses or permits on property holders – taking assets into state owner ship without compensating owners – redistributing assets without constipating prior owners

illegal public action

– corruption – demanding bribes from businesses in return for the rights to operate in a country, industry or location

T/F? low levels of corruption reduce FDI, international trade and economic growth in the country


2 acts that attempted to reduce corruption

1. foreign corrupt practices act 2. convention on combating bribery of foreign public official in int. business transactions

Foreign Corrupt Practices Act

1. created 1977 2. illegal to bribe foreign government officials to obtain or maintain business over which that foreign officals have authority 3. all publicly traded companies to keep detail records that provide evidence of whether a violation of the act has occurred

Convention on Combating Bribery of Foreign Public Officials in Int. Business Transactions

1. created in 1997 2. obliges member states to make bribery of foreign public officials a criminal offense 3. adopted by trade and finance ministers from the Organization for Economic Cooperation and Development (OECD)

grease payments

making payments to secure or expedite routine government action

intellectual property

1. property that is the product of intellectual activity 2. increasingly important source of economic value for business 3. reward for innovation or creative work

ownership to property rights is achieved and protected by

1. patents 2. copyrights 3. trademarks


– exclusive rights for a defined period to manufacture, use, or sale of invention – ex) drugs


– exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit


– design and names by which merchants or manufacturers designate and differentiate their products – ex) chanel

T/F? protection of intellectual property rights differs country to country & tend to be quite lax


2 different organizations for protection of intellectual property

1. world intellectual property organization 2. paris convention for the protection of industrial proprety

how to avoid piracy, firms can

– stay away from countries where intellectual property laws are lax (China, Thailand) – file lawsuits – lobby government for international property rights agreements and enforcement

T/F? firms dont need to be alert to ensure that pirated copies of their products produced in countries with weak IP laws don’t end up in their home markers


Product safety laws

set certain standards to which a product must adhere

Product liability

– involves holding a firm and its officers responsible when a product causes injury, death, or damage – tend to be less extensive in less develop nations

2 kinds of product liabilities

1. civil product liability 2. criminal product liability

civil product liability

demands payment and monetary damanges

criminal product liability

results in fines or imprisonment

T/F? The overall attractiveness of a country as a potential market depends on balancing the benefits, costs, and risks associated with doing business in that country


T/F? Other things being equal the less attractive countries have democratic political institutions, market based economies and strong legal systems that protect property rights and limit corruption


T/F? Different countries have dramatically different levels of economic development


Gross National Income (GNI)

– common measure of economic development and measures the total annual income per person received by residents of a nation – can be misleading = does not consider differences in cost of living – need to adjust GNI using purchasing power party

Purchasing power party (PPP)

accounts for living standards in different countries (US is base)

T/F? Official figures tell the whole story


Black market economy

economic activity that is not recorded (via cash transactions or barter agreements)

Gross domestic product (GDP)

– the economic growth rates achieved by a country – China & India are currently ‘poor’ but are growing more rapidly than developed nations

Amartya Sen’s perspective on economic development

1. should be seen as a process of expanding real freedoms people experience (basic health care & education & removal of poverty) 2. requires democratization of political communities to give citizen a voice 3. not just an economic process but political & social

Human Development Index (HDI)

– sen’s ideas helped developed – measures quality of human life in different nations – much broader than economic measures such as GNI – "political freedom" is also included – based on 3 measures

3 measures HDI is based on

1. life expectancy at birth 2. educational attainment 3. whether avg incomes are sufficient to meet the basic needs of life in a country

T/F? A country’s economic development is intrinsically tied to its political and economic systems


5 main arguments that economic development is tied to political & economic systems

1. innovation & entrepreneurship as engines of growth 2. innovation & entrepreneurship requires a market economy 3. innovation & entrepreneurship requires strong property rights 4. one ‘ best’ political system 5. geography, education & economic development

innovation & entrepreneurship = engines of growth because…

help increase economic activity = creates new products & markets that did not exist before


commercialize innovative new products and processes


includes new products, processes, organization, management practices & strategies

T/F? if a country is to sustain long-run economic growth, the business environment must be conducive to the consistent production of product and process innovations & entrepreneurial activiety


innovation & entrepreneurship: a market economy requirement because…

– strong relationship between economic freedom & economic growth – highest rating of economic freedom = highest economic growth – market economy = welcomes innovating = good for economy – planned economy = government has say in product = no room for innovating – mixed economy = stagnation of state-owned monopolies & shift towards privatization

T/F? weak or inadequately enforced property rights reduce incentive for innovation & entrepreneurial activity

True (activity may be stolen and reduce rate of growth)

Hernando de Soto

claims that inadequate property protection in many developing nations limits economic growth

In order to be more conductive to long-term economic growth, the system needs to be..

a democratic regime over a dictatorship (even the benevolent kind)

T/F? subsequent economic growth tends to lead to the establishment of democratic regimes


how does geography lead to economic development?

1. favorable geography = engage in trade = open to market-based economic systems = promote growth 2. slower growth in land-lock countries 3. tropic countries grows slowly

how does education lead to economic development?

1. invest more in education = higher growth rates = education population = productive population 2. offset geographical disadvantages by investing in education

2 trends that changed the nature of political economy

1. the spread of democracy = collapsed totalitarian governments 2. shift towards free market capitalism = move away from centrally planned & mixed economies

spread of democracy

1. totalitarian failed w/ economic progress 2. internet, social networks broken down ability of state to control uncensored info 3. econ adv led to increasingly prosperous middle & working classes = pushed for democratic reform

new world order

1. increased speculation on the future shape of geopolitics 2. fukuyama: characterized by democratic regimes & free market capitalism (convergence & unisersalization 3. huntington: societies are modernizing =/= western

spread of market based systems

1. centrally planned command economies transformed to market-based economies 2. command & mixed economies failed to achieve performance that market-based economies had

steps to move from a command economy to a market-based economic system

1. deregulation 2. privatization 3. legal system

deregulation (of economic transformation)

– removes legal restrictions – allows free play of markets – establishes private enterprises & manner of operation

privatization (of economic transformation)

– transfer of ownership of state property into private investors – must be accompanied by general deregulation & opening of economy

legal system (of economic transformation)

– laws required – safeguard property rights – provide mechanisms for contact enforcements

opportunities of changing political economies

1. markets that were off-limits before to western businesses are now open 2. despite being poor & underdeveloped, some markets = potential

risks of changing political economy

questions of: 1. will democracy thrive in bad times? 2. will totalitarian regimes return? 3. will multi-polar world of different civilizations emerge? 4. China’s financial system be stable?

T/F? the political, economic & legal environments of a country clearly do not influence the attractiveness of the market or investment site


the long term monetary benefits of doing business in a country are because of:

1. the market’s size 2. the purchasing power of its consumers 3. their likely future weatlh

first moves advantage

– identifying & investing early in potential future economic stars – advantages that accrue to early entrants into a market – establish loyalty & experience in a country

3 costs of doing business in another country

1. political system: must pay off political entities to allow it to do business there 2. economic level: presence & sophistication of supporting businesses 3. legal system: costly to do business if standards are poor with bad protection rights

3 risks of doing business in another country

1. political risk: cause drastic changes in country’s business environment = profit will decrease 2. economic risk: mismanagement = cause drastic changes in a country’s business environment & affect profit/goals of company 3. legal risk: trading partner will break a contract or property rights

Trade thory

show benefits for a country to be in int. trade even for products it’s able to produce by itself

3 advs to trading

1. specialize in manufacture & export of products that can be produce more efficiently 2. cost reduce for consumers & allows greater range of goods/services 3. stimulate economic growth & raise living standards

free trade

– government does not attempt to influence through quota/duties – citizens can buy from another country – can also produce & sell to another country

7 primary theories of trade

1. merchantilism 2. smith’s theory of absolute advantage 3. richardo’s theory of comparative adv 4. heckscher-ohlin theory 5. product life-cycle theory 6. krugman’s new trade theory 7. porter’s diamond model

which of the 7 trade theories are part of: traditional trade

1. merchantilism

which of the 7 trade theories are part of: classic theories

1. smith’s theory of absolute advantage 2. richardo’s theory of comparative adv 3. heckscher-ohlin theory

which of the 7 trade theories are part of: new perspectives

1. product life-cycle theory 2. krugman’s new trade theory 3. porter’s diamond model

T/F? There is no clear recommendation for government policy for trading


merchantlist idea of government policy

government involvement = promoting exports & limiting imports

smith, richardo & heckscher-ohlin

unrestricted free trade, but concepts = less powerful

product life cycle, new trade theory, & porter’s theory

– limited & selective government intervention to help develop export-oriented industries


country’s best interest = maintain trade surplus (export > import)

disadv of merchantilism

– zero-sum game: gain of one country, lost of another – seeks to max exports & minimize imports (tariffs) – current adaptation: neo-mercantilist strategy to boost exports and limiting imports (selectively)

absolute advantage

– created by adam smith (1776) – more efficient product of a product than any other country producing it – trade goods efficiently with goods produced by other countries – dont produce goods it can buy from countries @ lower cost (both can benefit)

comparative advantage

– advanced the theory david ricardo (1817) – countries specialize in production of goods produced most efficiently & buy goods they produce less efficiently from other countries – means buying goods from other countries they could produce more efficiently @ home

adv of comparative adv

– encourages free trade – positive sum game: all countries participate in trade realize economic gains

unrealistic assumptions with comparative adv

1. immobile resources 2. diminishing returns 3. dynamic effects & economic growth 4. the samuelson critique

immobile resources

– doesnt move so easily from one eco active to another – friction & human suffering – political opposition (people who’s jobs are at risk)

diminishing returns

– specialization occurs when more units of resources are required to produce each add. unit of good (not all resources are same quality & different goods use resources in different proportions)

dynamic effects & economic growth

– free trade = increase country’s stock of resources as increase labor & capital from abroad become available within country – free trade = increase efficiency with which a country uses its resources

samuelson critique

– dynamic gains may not always be beneficial (result in lower wages in rich country & government payments can cancel out positive effect) – positive relationship between trade & economic growth

heckscher-ohlin theory

– differences in national factor endowments (lands, labor, capital) = comparative advantages – countries export locally abundant goods & import locally scares goods

leontief paradox

– US relatively abundant in capital compared to other nations – US exporter of capital intensive goods & importer of labor-intensive goods

product life-cycle theory

– ray vernon (1960s) – products mature = locations of sales & optimal product location will change affecting flow and direction of trade

products life-cycle theory steps

1. developed, produced & sold in us 2. demand grew = us firms export 3. demand products grow in other adv countries = foreign producers produce for home markets = reduce transport costs 4. us set up places in adv counts = limited us exports 5. market in us & adv nations mature = more standardize = price main competitive weapon

what happened over time with product life cycle theory in the us

product within other advance countries began to limit the potential for exports from the US (switches from exporter to importer

new trade theory

– 1970s when economists pointed out firms can attain economies of scale for int. trade 1. trade can increase variety of goods & decrease avg cost of goods 2. world trade products can be dominated by countries whose firms were first moves in production

economies of scale

unit cost reductions associated with large scale output

According to the new trade theory, without trade…

nations are limited by the size of their market, (may not be enough demand = production is inefficient)

According to the new trade theory, with trade

markets are large enough to support production necessary to achieve economies of scale

According to the new trade theory, trade is mutually beneficial because…

it allows for the specialization of production, the realization of scale economies, and the production of a greater variety of products at lower prices

According to the new trade theory, pattern of trade may be…

the result of economies of scale & first mover advantages

first mover advantages

– gain scale based cost advantage that later entrants find difficult to match – the economic & strategic advantages that accrue to early entrants into an industry

According to the new trade theory, countries may dominate in the export of certain goods because

economies of scale are important in their production & firms located in those countries were the first to capture scale economies

implications of new trade theory

1. may benefit from trade, even though they have the same resources 2. country may predominate in export of a good by having 1st mover adv 3. helpful at explaining trade patterns 4. implies a role for government intervention (must nurture & protect firms)

porter’s diamond of national competitive adv

– seeks to explain why a nation achieves international success in a particular industry – 4 attributes shape the environment – diamond is mutually reinforcing

porter’s diamond of national competitive adv’s four attributes

1. factors endowments 2. demand conditions 3. relating & supporting industries 4. firm strategy, structure & rivalry

factors endowments

– a nation’s factors of production necessary to compete in a given industry – can lead to compet. adv – basic (natural resources, climate, location) – adv (skilled labor, infrastructure, tech know-how

demand conditions

role of home demand for the industry’s product or service – close customers influence development & upgrading of capabilities – sophisticated & demanding customers pressure firms to be competitive

relating & supporting industries

presence of internationally competitive suppliers & related industries – can spill over & contribute to other industries – successful industries tend to be grouped into clusters in countries

firm strategy, structure & rivalry

the conditions governing how companies are created, organized & managed, and the nature of domestic rivalry – different management ideologies affect the development of national competitive advantage – rivalry creates pressure to innovate = improve quality & efficiency, reduce costs & invest in adv features

two additional variables in porter’s diamond of nat. competitive adv.

1. government 2. chance

according to porter’s diamond, government…

can detract or improve national adv (by choice of policies

according to porter’s diamond, chance…

can reshape industry structure & provide the opportunity for a nation’s firm to supplant another’s (by major innovations or other chance events)

according to porter’s diamond goverment policy can

1. factor endowments can be influenced by internvention 2. affect domestic demand through product standards 3. influence supporting & related industries through regulation & anti-trust laws 4. generate firm rivalry through capital market regulation, tax policy & anti-trust laws

managerial implication of location

firm should spread out various productive activities to countries where they can be performed most efficiently

managerial implication of first-mover advantages

first mover adv can help firm dominate global trade in that product

managerial implication of government policy

firms should work to encourage government policies that support free trade – want policies that have a favorable impact on each component of the diamond

balance of payment accounts

keep track of the payments to & receipts from other countries for a particular time period – sum of current account balance, capital account and financial account = 0

current account

records transactions of goods, services & income receipts & payments

current account deficit

country imports > exports

current account surplus

country exports > imports

capital account

records one time changes in the stock of assets

financial account

records transactions that involve the purchase or sale of assets – net change in US assets owned abroad – foreign owned assets in the US

when government intervene…

1. restrict imports of goods & services into nation 2. adopt policies that promote domestic production & exports

T/F? Free trade occurs when governments attempt to restrict what citizens can buy from another country or what they can sell to another country


7 instruments of government intervention

1. tariffs 2. subsidies 3. import quotas 4. voluntary export restraints 5. local content requirements 6. administrative polices 7. anti-dumping policies


taxes on imports that raise the cost of imports relative to domestic prices

2 kinds of tariffs

1. specific tariffs 2. ad valorem tariffs

specific tariffs

levied as a fixed charge for each unit of a good imported

ad valorem tariffs

levied as a proportion of the value of the imported good

characteristics of tariffs

– pro-domestic producer & anti-consumer – import tariffs reduce overall efficiency of the world economy

export tariffs

levied on exports of a product from a country – less common than import tariffs – raise revenue for government – reduce export in particular sector


government payments to domestic producers, (cash grants, low-interest loans, tax breaks)

characteristics of subsidies

– enhance domestic production – help domestic producers: compete against low imports, gain export markets & int. competitiveness, help first mover advantages & economies of scale – consumers absorb cost of subsidies

agriculture subsidies

largest beneficiaries of subsidies in most countries

import quotas

a direct restriction on the quantity of some goods that may be imported into a country

tariff rate quotas

a combo of a quota & tariff – lower tariff is applied to imports within the quota than those over the quota – common in agriculture

quota rent

extra profit made when supply is artificially limited by an import quota – amt foreign producers can sell in domestic market is controlled – more profit for domestic producers

voluntary export restraints (VER)

import quota on trade imposed by the exporting country (at request of the importing country’s government) – variant of import quota – foreign produces agree to VER b/c they fear more damaging tariffs/import quotas if they dont follow

both import quotas & VER’s…

1. benefit domestic producers 2. do not benefit consumers = always raise the price of domestic goods

local content requirements

some specific fraction of a good be produced domestically

2 terms of local content requirements

1. physical terms (component parts produced locally) 2. value terms (value of the product is produced locally)

"buy america act"

– gov agencies give preference to american products when putting contracts for equipment to bid – unless product has signi. price adv – if product = 51% american, input materials are produced domestically & value of the good is domestically held

T/F? As with all trade policies, local content regulations tend to benefit producers, but not consumers


administrative policies

bureaucratic rules designed to make it difficult for imports to enter a country – benefit producers: increase share to the domestic market – hurt consumers: limiting choices to foreign products


– selling goods in foreign market below their costs of production/fair market value

characteristics of dumping

– lets firms unload excess production in foreign markets – may be predatory behavior

predatory behavior

producers use profits from home markets to subsidize prices in a foreign market = drives competitors out of that market = raises prices

antidumping policies

– also known as countervailing duties 1. punish foreign firms that engage in dumping 2. product domestic producers from "unfair" foreign competition

motives for government invention

1. political arguments: protecting interests of certain groups within nation, at expense of other groups, or achieving a political objective 2. economic arguments: boosting the overall wealth of a nation to benefit producers & consumers

6 political arguments for government intervention

1. producing jobs & industries 2. national security 3. retaliation 4. protecting consumers 5. furthering foreign policy objectives 6. protecting human rights

2 economic arguments for government intervention

1. infant industry argument 2. strategic trade policy

protecting jobs

– most common – political pressures by unions or industries that feel "threatened" by efficient foreign producers

national security

– industries protected b/c deemed important for nat. security – defense related industries (aerospace)

retaliation for unfair foreign competition

– government take specific actions, other countries may remove trade barriers – trade policy used to bargain to open markets – if threatened government do not back down = higher barriers

protecting consumer from "dangerous" products

limit "unsafe" products

furthering the goals of foreign policy

pref. trade terms can be granted to a country with which the government wants to build stronger relations – can also punish ‘rogue states’

helms-burton act & d’amato act were passed to…

protect american companies from building stronger relations (?)

protecting the human rights of individuals in exporting countries

through trade policy actions – western gov used trade sanctions against South Africa to increase pressure to drop policies

protecting the environment

int. trade = decline in environmental quality – concern over global warning – enforcement of environmental regulations

infant industry agrument

– 1972 – industry should receive government protection until it can develop and be viable to compete internationally

2 criticisms of infant industry agruments

1. tend to foster development of inefficient industry = shelters them from international competition markets 2. assumes firms are unable to make efficient long term investment by borrowing money from the domestic or international capital market

strategic trade policy

first mover advantages can be import to success – market will profitably support only a few firms & countries that predominate in the export do so because they have firms which capture first-movers advantage

characteristics of strategic trade policy

1. gov can help firms from countries attain adv by providing supportive subsidies 2. gov can help domestic firms overcome barriers to entry into industries where foreign firms have reaped 1st movers adv

T/F? the strategic trade policy does not support government intervention & highlight that a combo of home-market protection & export promoting subsidies may be needed



– strategic trade policy – aimed at establishing domestic firms in a dominant global position – boosts national income @ expense of other countries

influence of interest groups

special interest groups can influence governments and potentially distort policies

origins of world trading system

1. until 1930’s, most countries had some degree of protectionism – smooth-hawley tariff: an enormous wall of tariff barriers resulting in beggar-thy neighbor 2. after wwii, nations realized value of free trade – established GATT

evolution of world trade systems

3. protectionist trend emerged (1980-1983) – Japanese neo-mercantilism created political pressures, increase protectionism, GATT avoidance regulations 4. Uruguay round of GATT negotiations (1986) – service & intellectual property – WTO – reduced tariffs on industrial goods & lower agricultural subsidies


encompased GATT & sister organizations 1. general agreement on trade services (GATS): extend free trade agreements to services 2. trade related aspects of intellectual property rights (TRIPS): develop common international rules for intellectual property rights

current WTO focuses on…

1. rise of anti-dumping policies, ‘loophole’ 2. high lvl of protectionism in agriculture 3. lack of strong protection for intellectual property rights in many nations 4. continued high tariffs on non-agricultural goods & services in many nations

WTO: the doha round of talks

aim to further liberalize the global trade & investment framework – cutting tariffs on industrial goods & services – phasing out subsidies to agricultural producers – reducing barriers to cross-border investment – limiting the use of anti-dumping laws

managerial implications of trade barriers and firm strategy…

constrain firm’s ability to disperse its productive activtiies internationally – tariff raise costs of exports – quotas limit firms ability to serve a country from locations outside – conform to local content requirements = more productive activities in a given market = RAISE FIRMS COSTS

managerial implications of policy implications

have a strong influence on government policy towards trade 1. intervention can be self-defeating 2. can retaliate & trade wars influence by special interest groups

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