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MSOM 305 Managing in the Global Economy


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The trend toward a more integrated global economic system has been in place for many years is commonly referred to as:
The two main components of globalization are:
the globalization of markets and the globalization of production
The most global of markets are not markets for __________, where national differences in tastes and preferences are still often important enough to act as a break on globalization.
consumer goods
Globalization results in a greater degree of __________ across markets than would be present otherwise.
_______ are the two macro factors that seem to underlie the trend toward greater globalization.
The decline in barriers to the free flow of goods, services, and capital

Technological change
According to former Secretary of Labor Robert Reich, the propensity of firms to outsource many of their productive activities to different suppliers around the world has resulted in the creation of __________ products.
Approximately 95 percent of the changes that countries have made pertaining to foreign direct investment regulations have:
made it easier for foreign companies to enter their markets
According to our textbook, the growing integration of the world economy is:
increasing the intensity of competition in a wide range of manufacturing and service industries
The foreign direct investment by non-U.S. firms was motivated primarily by the following two factors:
the desire to disperse production activities to optimal locations; and the desire to build a direct presence in major foreign markets
What is the total cumulative value of foreign investments is referred to as?
stock of foreign direct investments
What kind of enterprise is any business that has productive activities in two or more countries?
Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise. These two trends have been:
the rise of non-U.S. multinationals and the growth of mini-multinationals
What does NAFTA stand for?
North American Free Trade Agreement
Managing an international business is different from managing a purely domestic business for all of the following reasons except:
the range of problems confronted by a manager in an international business are narrower than those confronted by a manager in a domestic business
Propagated in the 16th and 17th centuries, __________ advocated that countries should simultaneously encourage exports and discourage imports.
Which of the following two theories justify some limited and selective government intervention to support the development of certain export-oriented industries?
The new trade theory and theory of national competitive advantage
According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then:
prohibit the import of these goods from other countries
The Hecksher-Olin theory argues that the pattern of international trade is determined by differences in:
As the market in the U.S. and other advanced nations matures, the product becomes more standardized and price becomes:
the main competitive weapon.
The new trade theorists argue that the United States leads in exports of commercial jet aircraft not because it is better endowed with the factors of production required to manufacture aircraft, but because:
one of the first movers in the industry were U.S. firms
The conditions governing how companies are created, organized, and managed and he nature of domestic rivalry is referred to as
demand conditions.
In his study dealing with the competitive advantage of nations, Porter argued that in regard to demand conditions, a nation's firms' gain competitive advantage if their domestic consumers are __________ and __________.
sophisticated, demanding
_______ theory of international trade suggests that the production of products is likely to switch from advanced countries to developing countries over time.
Product life-cycle
Because of substantial economies of scale, the __________ theory argues that in many industries there are increasing returns to specialization.
new trade
According to the author of the textbook, tariffs benefit the following two groups:
producers and consumers.
The main gains from subsidies accrue to __________, whose international competitiveness is increased as a result of them.
domestic producers
Market screening eliminates:
environmental forces.
One cultural problem a researcher faces when doing primary research is:
the overuse of up-to-date maps.
The most common marketing research technique in developing nations is still:
a combination of cluster analysis and multiple regression analysis.
Is goodwill a basis for the theory of Monopolistic Advantage?
If Westvaco decided to produce paper in Spain, and the Spanish government stipulated that 50% of the component parts that went into Westvaco's paper must be produced locally, that requirement would be an example of a(n)
local content requirement.
Consider the following scenario. The Netherlands exports tulip bulbs to almost every country in the world except Japan. The reason is that Japanese customs inspectors insist on checking every tulip bulb by cutting it down the middle (which destroys the b
administrative trade policy.
An alleged example of __________ occurred in 1997, when two Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips in the U.S. market at below unit delivered cost to market.
Perhaps the most common political argument for government intervention into the free flow of trade is that
it is necessary for protecting jobs and industries from foreign competition.
According to the ______ argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries there cannot initially compete with well-established industries in developed countries. To allow manufac
mature industry
The ______ was created to arbitrate trade disputes and monitor the trade policies of member countries as a result of the Uruguay Round agreement.
World Trade Organization
If General Electric, a U.S. based corporation, purchased a 50% interest in a company in Italy, that purchase would be an example of
foreign direct investment.
The establishment of a wholly new operation in a foreign country is referred to as a(n):
green-field investment.
The __________ of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year). The __________ of foreign direct investment refers to the total accumulated value of foreign-owned assets at any time.
flow, stock
Which of the following two statements accurately reflects the trend in foreign direct investments over the past 20 years?
There has been a rapid increase in the total volume of FDI undertaken and there has been a change in the importance of various countries as sources for FDI
The U.S. has been an attractive target for FDI for all of the following reasons except:
the lack of competition.
The _______ is a theory of foreign direct investment that combines two other perspectives into a single holistic explanation of FDI.
eclectic paradigm promoted by John Dunning... focused on location specific advantages.
According to the textbook, FDI is expensive because
a firm must establish production facilities in a foreign country or acquire a foreign enterprise.
What is International Business:
private or governmental business that involves activities crossing national boundaries
What is Foreign Business?
domestic business operating in foreign countries
What is Comparative Business/Management?
compared business practices/management in various countries that are different enough to justify study and separate treatment in the academic curriculum
What is an MNE?
a firm that operates, to a significant degree, in more than a few countries
What is an MNC?
an incorporated firm that operates, to a significant degree, in more than a few countries
What is a Transnational Corporation?
is a firm that strives to be Global and Multi-domestic! ie: It must strive to achieve economies of scale whilst locally responsive.
What is a multi-domestic firm?
Multi-domestic firm is one that focuses on local responsiveness! Product offerings are customized and a complete set of value creating activities are developed in each country/region, with largely autonomous decentralized organizations.
What is a Global firm?
A globally integrated company that tries to achieve and experience curve economies. Products tend to be largely undifferentiated and location of production is chosen to achieve "Minimized unit delivered cost to Market" with largely centralized operations.
An International Business/Firm is:
A firm that tries to create value by transferring skills and products to markets where indigenous competitors lack them. Production is localized and local responsiveness limited, and R & D., Product Development and organizational activities are very centralized. There is no real effort to rationalize production worldwide, or to customize product offering.
What is a domestic firm?
A firm that has little or no international business activity.
What is the generic definition for globalization?
the trend towards a more integrated and interdependent global Economic systems
What is the market definition for globalization?
the Sourcing of goods/services from different locations around the world to take advantages of nation differences in the cost and quality of factors of production... Leads to minimized unit delivered cost to market.
What is Robert Reich's suggestion about the global economy?
economic national identity is becoming increasingly superfluous, increases in outsourcing is leading to the emergence of Global Products rather than defining products with a "National identity"
What are the three main Globalization Drivers?
i. Declining Trade and Investment Barriers.

ii. The role of technological change

iii. Competition
What impact on globalization does the following have?

Declining barriers to free flow of goods, services and factors of production.
Increased Globalization
What impact on globalization does the following have?

Changes in communication technology
Increased Globalization
What impact on globalization does the following have?

Increase in Disposable Income worldwide
Increased Globalization
What impact on globalization does the following have?

More efficient global transportation system worldwide.
Increased Globalization
What impact on globalization does the following have?

Need to customize/differentiate products/services has declined somewhat.
Increased Globalization
Is the U.S. and other Industrialized nations share of the global output increasing or decreasing?
What are the 3 core Classical Trade Theories?
Absolute advantage (natural and acquired)

Comparative advantage (David Ricardo)

Factor Proportions theory ( Heckscher & Ohlin).
Some empirical contradictions (Leontif).
What is "Absolute Advantage?"
A country should specialize in the production goods that it is more efficient than any other country in producing.
What are two types of "Absolute Advantages?"
NATURAL ADVANTAGE (climate, resource availability, eg: abundant labor)

ADVANTAGE (technology or developed skills eg: training).
Ricardo states that a country should specialize in the production of goods that it produces relatively more efficiently and trade for goods that it produced relatively less efficiently
the pattern of international trade is based on differences in factor endowments rather than differences in productivity.

Paul Krugman
many industries where the world market can only support a certain number of firms. Firms which enter the industry at the beginning, capture:
first mover advantages to achieve: economies of scale and scope, benefit from learning curve effects. Firms develop a competitive advantage over any potential rivals. This creates barriers to entry for other prospective firms.
Porter's notion is that 6 sets of variables shape the environment in which firms compete:
-Factor endowments
-Demand conditions
-Related and supporting industries
-Firm's structure, strategy, and rivalry
-Government Actions
What are "Factor Endowments" in Porter's Theory?
- Basic factors ie: natural advantages such as climate, location, natural resource availability, demographics.

- Advanced factors ie: acquired advantages such as r. & d capability, skills, technology and know-how).
What are "Demand Conditions" in Porter's Theory?
- Domestic consumers are considered to be sophisticated and demanding forcing local firms to produce high quality products.
What are "Related and supporting industries" in Porter's Theory?
Presence of supplier and related industries
What does "Firm's structure, strategy, and rivalry" imply in Porter's Theory?
Different nations are characterized by different management ideologies help or hinder the evolution of national competitiveness.
Competition in an industry also tends to breeds rivalry and innovation, improved quality, cost reduction and investment in upgrading same.
What are "Government Action" in Porter's Theory?
actions by government that could have a positive or negative effect of foreign business...
What are "Chance" in Porter's Theory?
wholly unpredictable occurances that you cannot mitigate
What important policy implications evolve from an understanding of Porter's Diamond of National Advantage?
it is in the best interest of a firm to upgrade its advanced factors of production: eg: employee training and R & D. Equally, firms should lobby the government to urge them to increase investment in education, infrastructure, and R & D, and to promote strong competition in domestic markets.
What is the effect of a "Protectionist policy" on the global economy?
Protectionism is often shortsighted and fails in the long run.
How can firms acheive "first mover advantage?"
Investing in becoming a first mover requires a large allocation of cash.
Where should firms locate their various production facilities?
where they can be performed most efficiently
What are two primary objectives of government intervention in international trade?
1. To help domestic firms achieve first mover advantages.

2. Help domestic firms compete against firms who have first mover advantages.
What is the GAAT?
General Agreement on Tarrifs and Trade. This is a multilateral (many nations) agreement whose objective is to minimize government intervention in trade
What is the WTO?
Responsible primarily for the administration of GATT rules.+
What are two primary ways tha government intervenes in international trade?
Tarrif and Non-Tarrif Barriers
What are tarrif barriers?
taxes imposed on imports by the host nation they can be specific and ad-valorem(percentage of value of the good)
What are non-tarrif barriers?
1. Subsidies
2. Voluntary export restraints (VER’S) and voluntary export agreements (VEA'S).
3. Import Quotas
4. "Buy local" laws
5. Local standards and laws
6. Anti-dumping policies
What are subsidies?
Government payments to domestic producers. They take the form of cash grants, low interest loans, tax breaks, and government equity participation
What are VER's and VEA's?
Voluntary export restraints (VER’S) and voluntary export agreements (VEA'S).
What are import quotas?
Numerical limitations to importing
What are "buy local laws?"
local content requirements i.e. a % value of your good must be produced locally eg Japanese cars.
What are "Local standards and laws?"
administrative instruments or trade policies
What are anti-dumping policies?
The policy against a practice of charging a very low price in a foreign market for such economic purposes as putting rival suppliers out of business.
What is the STRATEGIC TRADE POLICY (also known as (aka) industrial policy?
Policies that make an effort to achieve national competitive advantage, and through this world dominance in this industry, through first mover advantages.
What is retaliation?
A tool that some Governments use to try to force other governments to play by the rules.
What is FDI?
FDI takes place when a firm (MNE) invests in another country ie: obtains a controlling interest by either building (aka a greenfield investment), or acquiring that asset. KEY IS CONTROL???
What is a WOS?
wholly owned subsidiary
What is "Flow of FDI?"
value of FDI undertaken during a specified time period
What is "Outflows of FDI?"
the flow of FDI out of the country
What is "inflow of FDI?"
flow of FDI into a country
What is "Stock of FDI?"
total value of FDI at a given point in time
What is "Horizontal FDI?"
Investing in the same economic activity abroad as one does at home.
What is "Vertical FDI?"
choosing to invest in economic activity upstream (Backward Vertical FDI), or Downstream (Forward Vertical FDI) from the core business activity of the business unit.
What is "Backward Vertical FDI?"
choosing to invest in economic activity upstream from the core business activity of the business unit.
What is "Forward Vertical FDI?"
choosing to invest in economic activity downstream from the core business activity of the business unit.
What is "Conglomerate FDI?"
Investing in business overseas that has no relationship to your core business.
What is "Resource seeking?"
to ensure that a firm can always access resources that are essential to a firm's long run survival.
What is "Market Seeking?"
explore new market opportunities, to circumvent prohibitive protectionist policies and actions such as tariffs and quotas, to establish a local presence to ensure product and customer service availability, to meet buy national requirements, to become more visible locally by hiring many local staff, paying local taxes and to serve a wider range (portfolio) of markets.
What is "Efficiency Seeking?"
Seeking to minimizing unit delivered cost to market, for both production and delivery (transportation, insurance, marketing, tariffs etc), to establish a portfolio of production sources reducing risk, obtaining knowledge including technology and skills.
What is "Responding to Competitive dynamics?"
achieving First Mover Advantages or to responding to a rival's behavior in entering a new geographic market
What are the four primary motives for engaging in FDI?
a. Resource seeking
b. Market Seeking
c. Efficiency Seeking
d. Responding to Competitive dynamics
What are the major theories of FDI?
Monopolistic Advantage theory
Strategic Behavior (Following competitors)
Horizontal FDI (FDI in the same industry abroad as at home)
4. Dunnings Eclectic theory (Location Theory)
What is monopolistic advantage theory?
based on the premise that a firm has obtained a monopolistic advantage through domestic competition that would enable it to be successful internationally.
What is the Dunnings Eclectic theory?
Monopolistic/Ownership Specific Advantage (OSA) explained why firms invested overseas, Internalization explained Which form of entry the firm should take and explained Where the firm should invest through Location Specific Advantage (LSA).
What is Strategic Behavior theory?
In the case of oligopolistic industries, the theory is that if one firm engages in FDI in another country (region), then others should follow.
Groups of Countries come together in order to improve economic conditions in their countries.
What are the five levels of integration of a Trading Group?
a. Free Trade Area
b. Customs Union
c. Common Market
d. Economic Union
e. Political Union
What is a: Free Trade Area
characterized by elimination of trade barriers between member nations.
What is a: Customs Union
characterized by common external tariffs.
What is a: Common Market
Characterized by free movement of factors of production.
What is a: Economic Union
characterized by harmonization of economic policies of member nations, including introducing a common currency.
What is a: Political Union
the evolution of a complete political entity cf: U.S.A. vs
the European Union.
What are development banks?
There are a few multilateral development banks throughout the world. Their purpose is to assist nations in economic development though loans etc.
What is the "Product Life-Cycle Theory?"
Raymond Vernon... Proposed that in the life-cycle of products that their production is moved from more developed to lesser developed countries in order to lower costs.
What is the "New Trade Theory?"
Based on the assumptions that:
1. Trade has an impact on economies of scale which increases variety and average cost.
2. World trade in items that require greater economies of scale on a global scale is beneficial to first movers.
What trade theory did Adam Smith promote?
Absolute advantage: A country has an absolute advantage in the production of a product when it is more efficient than other countries.
What is Merchantilism?
Economic Philosophy that countries should encourage exports while discouraging imports.
What is a zero sum game?
Merchantilism is a zero sum game... a situation where economic gain by one country leads to loss by another.
What is a positive sum game?
A situtation where all countries can benefit from trade.
What trade theory did David Ricardo promote?
Comparitive Advantage: The theory that countries can specialize in the production of goods in which they are more efficient.
What theory did Heckscher and Ohlin promote?
They argued that comparitive advantage comes primarily from factor endowments rather than productivity.
What theory did Leontief promote?
Leontief Paradox: Leontief performed empirical tests on the "factor endowment" idea and found that it does not predict real world scenarios.
What theory did Raymond Vernon promote?
The product life-cycle theory: the idea that products are intially produced in countries with a supporting market size. Then the are filtered down to the developing world after time as costs increase in the originating country.
What theory deals with economies of scale?
New Trade Theory: The idea that obtaining economies of scale through first-mover advantage is what gives companies a competative advantage in the global economy.
What theory did Micheal Porter promote?
National Competative Advantage (Porter's Diamond): Combination of the following give competative advantage in the Global Economy:
1. Factor Endowments
2. Demand Conditions
3. Relating and Supporting Industries
4. Firm Strategy, structure, and rivalry.

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