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90 Cards in this Set
- Front
- Back
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Free trade
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the absence of government-imposed barriers, such a quotas or duties, that impede the free flow of goods and services between countries
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Mercantilism
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the economic philosophy advocating that countries should simultaneously encourage exports and discourage imports
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Zero-Sum game
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a situation in which a gain by one country results in a loss by another
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Absolute Advantage
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When one country is more efficient than any other country in producing a particular product
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Production Possibilities Frontier (PPF)
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the various output possibilities a country can produce from its resource pool
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Factor endowments
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the extent to which a country is endowed with such resources as land, labor, and capital
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Economies of scale
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unit cost reductions associated with a large scale of output
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First-Mover Advantages
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the economic and strategic advantages that accrue to early entrants into an industry
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What are the 4 components that make up country size?
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1. variety of resources
2. transport costs 3. size of economy 4. production scales |
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What is the new trade theory?
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Stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms.
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Within the idea of the new trade theory, what happens when a firm moves into a new industry?
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Firms that enter the market are able to build a competitive advantage (both economically and strategically), or in other words, they reap the benefits of first mover advantages.
Trade with this firm causes economies of scale specialization and lower costs. Additionally, the firm creates a barrier to entry which limits competition and government intervention. |
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What is the international product life cycle theory and who proposed it?
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Proposed by Raymond Vernon, this theory states that countries like the US develop new products and once the demand grows internationally, they begin to export them. Advanced international countries continue to import the product until the demand in their own countries is high enough to produce the product themselves. Then they begin producing it themselves and exporting it to developing countries.
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What are the limitations of the international product life cycle theory?
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1. Definition for the product
2. Simultaneous introduction 3. Demarcation for each stage 4. Time duration of each stage 5. No recommendation for when to export 6. No recommendation for when to FDI |
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What is national competitive advantage?
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International success in particular indutries
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What are the determinants of national competitive advantage? Who were they named by?
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1. Firm strategy, structure and rivalry
2. Factor endowments 3. Demand conditions 4. Related and supporting industries PORTER |
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What are the limitations to Porter's Diamond Theory of Competitive Advantage?
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1. Demand (it does not have to be local. Firms can target foreign markets.)
2. Factors (they can be sourced from overseas locations - labor, technology, capital, etc.) 3. Related and Supporting Industries (supplies can be accessed internationally. Corporations can assemble parts from a variety of countries at various locations.) |
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What is the role of government defined as?
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Playing a partial role in creating an environment for companies to gain their own competitive advantage
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What are the 6 primary roles of government?
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1.Primary and Secondary education
2.National infrastructure 3. Research in areas of national concern - health 4. Specialized apprenticeship - close ties between schools and companies 5. Trade association/promotion (sponsoring trade fairs either abroad or here to advocate "Made in the US.") 6. Enforce strict standards for safety of the product and the environment. (Standards above the norm guarantee long-term profits) |
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What is the company's agenda within Porter's national competitive advantage theory?
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1. Create pressures for innovation
-Seek out the most difficult buyers (bc they will have the highest standards) -Establish standards above the norm -Source from the most advanced suppliers -Treat employees asd valuable assets 2. Seek out the most capable competitor as a motivator 3. Establish early warning systems -Service buyer with the most advanced needs -Investigate the needs of new buyers -Bring in outsiders to the management team -Maintain relationships with research centers |
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Why do Asian and European universities produce more UG science degrees than we do?
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Possibly because they have higher populations
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What is the significance of Boeing outsourcing all over the place?
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Their value chain is global.
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Given the trade theory, give the name of the trade theorist:
1. Absolute Advantage 2. Comparative Advantage 3. Factor proportions 4. Country Similarity 5. New Trade 6. International Product Life Cycle 7. Competitive Advantage |
1. Adam Smith
2. David Ricardo 3. Ohlin and Heckscher 4. Steffan Linder 5. Paul Krugman 6. Raymond Vernon 7. Michael Porter |
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What are the 9 ways government interferes with trade?
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1. Raise revenue (by tariffs, income tax, sales tax...)
2. Protect jobs (Pat Buchanan) 3. Development goals (export led development [trade barriers on imports and sibsidize exports], infant industry [we're too weak to compete with multinationals so we need protection; but how to know when to stop protection?], promote FDI [if you want access to a market, you have to engage in FDI], strategic trade policy [diversification, key industries...]) 4. Balance of Payments (we have a deficit right now so we need to export more, limit exports) 5. Health and safety (China, lead in toys) 6. International political goals (economic sanctions against Iran, trade embargo with Cuba) 7. National Security Goals (military products that you see only to certain countries or limit imports so that your national security is not dependent upon another country) 8. Control Prices (interest rates, subsidies, tariffs {in response to dumping}, OPEC {increase export price}) 9. Retaliation (reciprocity, you block my goods, I'll block your's) |
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What are the 5 different kinds of tariffs?
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1. EXPORT taxes
2. IMPORT taxes 3. SPECIFIC tariff levy on some physical unit (like $/bushel) 4. AD VALOREM - value added tariff (% of good) 5. COMPOUND - specific + ad valorem |
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Non-tariff Mechanisms:
1. Subsidies? 2. Exchange rate manipulation? 3. Customs valuation? |
1. non-tariff mechanism which uses government assistance to make it cheaper ore more profitable to export, like direct payment, providing info about business contacts and other things (minimizes company's R&D cost), sponsoring trade expeditions, supporting R&D, special tax programs, and tied foreign aid (USAID) giving economic aid to other countries in our foreign policy national interest (like the Caribbean Basin Initiative)
2. keeping their exchange rate low so that the price of their goods is low 3. A non-tariff mechanism |
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Non-tariff Mechanisms:
1. Special Fees 2. Quotas 3. "Buy local" legislation |
1. to get something cleared at the point of importation
2. Quantitative limits 3. ex: some % of state police cruisers must be made in the US (buying goods for state), minimum domestic content |
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Non-tariff Mechanisms:
1. Standards 2. Licensing Arrangements 3. Foreign exchange controls |
1. labeling food content, testing electrical stuff to keep things safe
2. Countries have to get onerous permission to do business in another country 3. Limiting the amount of foreign exchange available for a particular transaction (you can only use so many pounds) |
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Non-tariff Mechanisms:
1. Administrative delays 2. Reciprocal requirements 3. Restrictions on services |
1. small, inefficient ports can hold you up while you are waiting to unload, and perishable goods can go bad
2. GE deals with countries with small economies and GE wants to be paid in the US dollar. But small countries don't have as much, so they sell something to make dollars. We'll buy your thing if you help us sell our's...bartering in a way. 3. Financial, management, insurance, consulting, transportation...certain countries can favor their own companies with certain kinds of services |
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What are the different kinds of quotas?
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1. Export
2. Import 3. Absolute 4. Tariff 5. Voluntary Export Restraints 6. Embargo |
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What is an export quota?
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Limiting international supply available (like OPEC); drives up prices; keeps us in control of conserving our own natural resource
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What is an import quota?
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Limiting the amount of goods coming in to produce more domestically; allows us to rely more on ourselves; helps businesses, hurts consumers; preserves jobs and the company, but causes price to rise; can be used as a bargaining tool for increasing your exports
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What is an absolute quota?
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Once a specified amount has been imported within a specific amount of time, any more imports are prohibited
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What is a tariff quota?
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It permits a stipulated amount of goods to come in either duty-free or at a lower rate, and once that amount is reached, the higher tariff is applied
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What is a voluntary export restraints quota?
Explain through an example. |
*Key for the auto industry
-Toyota exporting less to U.S. because of an expected increase in tariffs that may then remain; gives time for host country to get their industry's act together; better deal, more control. The the Japanese import price increases. But GM ended up matching the price instead of selling at a cheaper price. Americans still ended up buying Toyota because they were better for the same price |
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What is an embargo quota?
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ZERO trade allowed.
-CUBA |
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What are the 3 main global trading organizations?
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1. GATT (General Agreement on Tariffs and Trade)
2. MFN (Most Favored Nation [it's a clause of GATT]) 3. WTO (World Trade Association) |
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What does GATT do?
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1. Sets the rules for trade negotiations
2. Monitors the implementation of the rules |
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What is MFN?
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The Most Favored Nation clause for members of GATT. It states that is a country gives tariff reductions to another country, it must also grant the same concessions to other countries. Member nations, however, can extend MFN to non-members (there are exceptions.)
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What are the exceptions to MFN?
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-GSP (Generalized System of Preferences) for LDCs (Less Developed Countries)
-Regional arrangements such as NAFTA -Countries still use non-tariff barriers |
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What did the WTO expand GATT to cover trade in?
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-Services
-Investment -Intellectual Property |
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Governments bring charges of unfair practices to
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the WTO
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What does it mean that the WTOs rulings are binding?
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If you are in violation, you have to remove whatever is the wrongdoing. If you don't, the abused country is allowed to retaliate.
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What are the problems associated with trade restrictions?
**Don't have to describe them yet |
Net National Loss
Consumer Loss Administrative Costs Protected Industries become less competitive internationally Retaliation |
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What is net national loss?
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When a country can't make use of benefits of comparative advantage. Some certain domestic industries, however, are guarded. The protection for those people doesn't outweigh the costs of limiting comparative advantage such that other domestic industries/consumers have to pay more
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What would administrative costs of trade restrictions be?
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Processing costs of enforcing barriers
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How do protected industries become less competitive internationally as a result of trade restrictions?
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Less motivation for innovation because profit is guaranteed either way (remember Porter's most important point: rivalry)
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What are the ways in which companies can deal with governmental trade influences?
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They can...
1. Move operations to a lower-cost country 2. Concentrate on markets that attract less international competition 3. Adopt internal innovations, like increasing efficiency and superior products 4. Try to get government protection |
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What is FDI?
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Foreign Direct Investment: a firm invests directly in foreign facilities
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A firm that engages in FDI becomes a
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Multinational Enterprise (MNE)
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Factors that influence FDI are related to factors that stimulate...
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trade
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FDI involves ownership of entity abroad for ?
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1. production
2. marketing/service 3. R&D 4. Access of raw materials or other resources (Royal Dutch Shell in Nigeria for oil) |
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What kind of managerial control does the parent company have with FDI?
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-Direct managerial control, depending on its extent of ownership and on other contractual terms of the FDI
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No managerial involvement in FDI=
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portfolio investment
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What percentage constitutes the legal amount necessary to be called FDI? Why does the number seem so low?
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10%
In publicly traded companies, 10% could be the majority shareholder. |
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What are the reasons for control in FDI?
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1. Control to achieve global objectives
2. Control must accompany investment 3. Defining direct investment is arbitrary 4. Comps are reluctant to transfer vital resources to another organization without control, like capital, patents, trademarks, and management know-how |
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What is an example with GM and Shanghai motors that illustrates why control with FDI is vital?
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GM went on a joint venture with Shanghai motors who also had a joint venture with VW, and then Shanghai branched off with its own model and competes with GM and VW; they grabbed technology, know-how, and market
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What is the best way to protect property?
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To have key parts of technology done in different countries so that no ONE shop has the entire formula
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Controls inherent in FDI may decrease what and increase what?
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Decrease operating costs
Increase rate of technology transfer |
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Other ways of exercising control in FDI:
1. In FDI, parent and subsidiary share common corporate _____. 2. Company can use its own ______. 3. Company can avoid ______ _______ with another country. 4. Company can avoid problems of _______ __ _______. |
1. culture
2. managers 3. Protracted negotiations 4. enforcing an agreement |
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What are the 4 motives for FDI?
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1. Expand sales
2. Acquire resources 3. Minimize risk 4. Political issues/motives: do things that would persuade politicians to make political decisions that benefit shareholders |
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Factors for choosing FDI for Expansion of Sales:
1. Transportation? 2. Lack of domestic capacity 3. Low gains from economies of scale |
1. Comparative advantage has to include cost of transportation of exporting, so engage in FDI instead
2. International market is growing, so do FDI 3. Making a whole lot of a certain good, so if there are low gains, you need more variety. So engage in FDI |
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Factors for choosing FDI for Expansion of Sales:
1. Trade restrictions 2. Country-of-origin effect such as nationalism, fear of non-delivery 3. Lower-production costs abroad |
1. Tariff/non-tariff barriers like subsidies and exchange rate manipulation
2. "Buy America" - but what does it mean to be made in America? Production is global. So then Toyota would make in the US. For fear of non-delivery, you wouldn't hae the problems in terms of shipments, logistics and supply chains with FDI 3. Lower labor costs, because of more available labor and standard of living |
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Subsidy?
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government financial assistance to a domestic producer
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Quota rent?
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the extra profit producers make when supply is artificially initiated by an import quota
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Local content requirement
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a requirement that some specific fraction of a good be produced domestically
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Administrative trade policies
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rules adopted by governments that can be used to restrict imports or boost exports
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Dumping
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selling goods in a foreign market for less than their cost of production or below their fair market value
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Antidumping policies
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rules resigned to punish foregin firms that engage in dumping and this protect domestic producers from unfair foreign competition
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Countervailing duties
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antidumping duties
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Helms Burton Act
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passed in 1996, this law allows Americans to sue foreign firms that use Cuban property confiscated from them during Cuba's 1959 revolution
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D'Amato Act
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Passed in 1996, this law allows Americans to sue foreign firms that use their property in Libya or Iran confiscated from Americans
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Infant Industry Argument
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proposed by Alexander Hamilton in 1792, this oldest economic argument for government intervention states that developing countries have a comparative advantage in manufacturing
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Strategic Trade Policy
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government policy aimed at either helping the country's domestic firms retain first-mover advantages or helping domestic firms find entry into a market; applied when the world market will profitably support only a few firms and certain countries may predominate in the export of certain products simply because they had first-mover firms
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Smoot-Hawley Act
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passed in 1930, this U.S. law erected a wall of tariff barriers against imports
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Greenfield Investment
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Establishing a new operation in a foreign country
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Flow of FDI
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the amount of FDI undertaken over a given time
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Stock of FDI
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the total accumulated value of foreign-owned assets at a given time
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Outflows of FDI
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the flow of FDI out of a countryq
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Inflows of FDI
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the flow of FDI into a country
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Gross Fixed Capital Formation
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the summary of the total amount of capital invested in factories, stores, office buildings, and the like
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Eclectic Paradigm
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the theory that combining location-specific assets or resource endowments and the firms own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located
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Licensing
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occurs when a firm (the licensor) grants a foreign entity (the licenses) the right to produce, use its production processes, or use its brand name or trademark in return for a royalty fee on every unit sold
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Internalization theory
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the argument that firms prefer FDI over licensing in order to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing
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Oligopoly
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an industry composed of a limited number of large firms
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Multipoint Competition
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when two or more enterprises encounter each other in different regional markets, national markets, or industries
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Location-Specific Advantages
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advantages that arise from utilizing 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, such as technological, marketing, or management capabilities.
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Externalities
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knowledge spillovers
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Balance of Payment Accounts
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national accounts that track both payments to receipts from foreigners
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Current Account
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in the balance of payments, this records transactions involving the export or import of goods and services
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Offshore production
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FDI undertaken to serve the home market
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