C211 Global Economics Final Exam
COMPETENCY: Globalization (Peng Chapters 1, 5, 6, 11)
1- Explain the New, Evolutionary, and Pendulum views of Globaliz... [Show More] ation. How do these differ from one another?
Globalization is the close integration of countries and peoples of the world.
3 views of globalization
-New- a new force sweeping through the world in recent times that it is a new phenomenon beginning in the late 20th century, driven by recent technological innovations and a Western ideology focused on exploiting and dominating the world through Multinational enterprises -Evolutionary – a long run historical evolution since the down of human history. Historians are debating whether globalization started 2,000 or 8,000 years ago. The earliest traces of MNEs have been discovered in Assyrian, Phoenician, and Roman times. International competition from low-cost countries is nothing new. In the first century a.d., the Roman emperor Tiberius was so concerned about the massive quantity of low-cost Chinese silk imports that he imposed the world’s first known import quota of textiles
-Pendulum view of globalization- a pendulum that swings from one extreme to another from time to time. globalization is the ―closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.‖ Globalization is neither recent nor one-directional. It is, more accurately, a process similar to the swing of a pendulum. It’s not new some people are afraid due to it taking jobs from other states. We need risk management and scenario planning.
2- What is Foreign Direct Investment (FDI)? Investment in, controlling and managing value- added activities in other countries. The most frequently discussed foreign entrance is the multinational enterprise (MNE) which is engaged in the foreign direct investment. MNE, by definition, is a firm that engages in FDI when doing business abroad. hat sets MNEs apart from non-MNEs is FDI. An exporter has to undertake FDI in order to become an MNE. In other words, BMW would not be an MNE if it made all its cars in Germany and exported them around the world. BMW became an MNE only when it started to invest abroad directly
3- What different political views exist on FDI?
-In developed economies, backlash against inbound FDI from certain countries is not unusual. In the 1960s, Europeans were concerned about the massive US FDI in Europe. In the 1980s, Americans were alarmed by the significant Japanese inroads into the United States.
Over time, such concerns subsided. In 2006, a controversy erupted when Dubai Ports World
(DP World), a United Arab Emirates (UAE) government-owned company, purchased US
ports from another foreign firm, Britain’s P&O. This entry gave DP World control over terminal operations at the ports of New York/New Jersey, Philadelphia, Baltimore, Miami, and New Orleans. Although the UAE has been a US ally for three decades, many politicians,
journalists, and activists opposed such FDI. In this ―largest political storm over US ports since the Boston Tea Party,‖DP World eventually withdrew.
-In some parts of the developing world, tension over foreign ownership can heat up. There were numerous incidents of nationalization and expropriation against MNE assets throughout the developing world between the 1950s and the 1970s. Given the recent worldwide trend toward more FDI-friendly policies, many people thought that such actions were a thing of the past
While some argue that the recent actions were driven by industry-specific dynamics (oil prices skyrocketed so that governments could not resist the urge of their ―grabbing hand‖), others suggest that these actions represent the swing of a ―pendulum‖ toward more confrontation
4- What 4 benefits exist to a country receiving FDI? Elaborate.
-Capital inflow improve the host country balance of payment. More technology, management, and More jobs in their countries
-Technology, especially more advanced technology from abroad, can create technology spillovers that benefit domestic firms and industries. Local rivals, after observing such technology, may recognize its feasibility and strive to imitate it. This is known as the demonstration effect—sometimes also called the contagion (or imitation) effect.
-Advanced management know-how may be highly valued. It is often difficult for indigenous development of management know-how to reach a world-class level in the absence of FDI. -FDI creates jobs, both directly and indirectly. Direct benefits arise when MNEs employ individuals locally. In Ireland, more than 50% of the Irish manufacturing employees work for
MNEs 5- What costs exist to a country receiving FDI? Elaborate.
three primary costs of FDI to host countries:
1. loss of sovereignty- Because of FDI, decisions to invest, produce, and market products and/or to close plants and lay off workers in a host country are being made by foreigners—or if locals serve as heads of MNE subsidiaries, they represent the interest of foreign firms
2. adverse effects on competition- Having driven domestic firms out of business, MNEs, in theory, may be able to monopolize local markets. While this is a relatively minor concern in developed economies, this is a legitimate concern for less developed economies, where MNEs are of such a magnitude in size and strength and local firms tend to be significantly weaker.
3. capital outflow- When MNEs make profits in host countries and repatriate (send back) such earnings to headquarters in home countries, host countries experience a net outflow in the capital account in their balance of payments. As a result, some countries have restricted MNEs’ ability to repatriate funds. Another issue arises when MNE subsidiaries spend a lot of money to import components and services abroad, which also results in capital outflow
6- How do resources and capabilities influence the competitive dynamics of a business? competitive dynamics: Actions and responses undertaken by competing firms. Firm resources must create value when engaging rivals. For example, the ability to attack in multiple markets —of the sort Gillette (now part of P&G) possessed when launching its Sensor razors in 23 countries simultaneously—throws rivals off balance, thus adding value. Likewise, the ability to respond rapidly to challenges also adds value.
7- What is resource similarity and how does this impact competitive dynamics?
Resource similarity is defined as ―the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.‖ Firms with a high degree of resource similarity are likely to have similar competitive actions. For instance, Apple and IBM used to have a lot of resource similarity in the 1990s, so they fought a lot. Why have they not been fighting a lot recently? One reason is that their level of resource similarity decreased.
If we put together resource similarity and market commonality (discussed earlier), we can yield a framework of competitor analysis for any pair of rivals (Figure 11.3). In Cell 4, because two firms have a high degree of resource similarity but a low degree of market commonality (little mutual forbearance), the intensity of rivalry is likely to be the highest.
COMPETENCY: International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10) gross domestic products(GDP)
1- Give a description of the classical theory of international trade.
First Three Often Regarded As Classical Trade Theory
Mercantilism: theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer. On the other hand, a nation experiencing a trade deficit would see its gold and silver flowing out and, consequently, would become poorer.
*trade deficit is when a nation imports more and exports less
Absolute Advantage: A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage with free trade market forces are determined with little or no government intervention. Absolute advantage is the economic advantage one nation enjoys that is absolutely superior to other nations. For example, Smith argued that because of better soil, water, and weather, Portugal enjoyed an absolute advantage over England in the production of grapes and wines. And England enjoyed an absolute advantage over Portugal as England produced more wool. If they trade, they would both benefit. international trade is not a zero-sum game as suggested by mercantilism. It is a win- win game. there are net gains from trade based on absolute advantage.
Comparative Advantage, A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. This theory suggests that even though the United States has an absolute advantage over China in both wheat and aircraft, as long as China is not equally less efficient in the production of both goods, China can still choose to specialize in the production of one good (such as wheat) where it has comparative advantage— defined as the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Again, there are net gains from trade; this time from comparative advantage. One crucial concept here is opportunity cost—given the alternatives (other opportunities), the cost of pursuing one activity at the expense of another activity. For the United States, the opportunity cost of concentrating on wheat at point A in Figure 5.3 is tremendous relative to producing aircraft at point D, because it is only 25% more productive in wheat than China but 100% more productive in aircraft. factor endowments the extent to which different countries possess various factors of production such as labor, land, and technology. It proposed that nations will develop comparative advantage based on their locally abundant factors.
2- How would the modern theory compare to the classical theory? this assumption of no change in factor endowments and trade patterns does not always hold in the real world.
three are viewed as Modern Theory product life cycle: A theory that accounts for changes in the patterns of trade over
time by focusing on product life cycles.
1. lead innovation nation (which, according to him, is typically the United States),
2. other developed nations, and 3. developing nations.
every product has three life cycle stages: new, maturing, and standardized he first stage, production of a new product (such as a TV) that commands a price premium will concentrate in the United States, which exports to other developed nations. In the second, maturing stage, demand and ability to produce grow in other developed nations (such as Australia and Italy), so it is now worthwhile to produce there. In the third stage, the previously new product is standardized (or commoditized). Thus, much production will now move to low-cost developing nations, which export to developed nations. In other words, comparative advantage may change over time
strategic trade: Strategic trade theory suggests that strategic intervention by
governments in certain industries can enhance their odds for international success. What are these industries? They tend to be highly capital-intensive, high entry- barrier industries in which domestic firms may have little chance without government assistance. These industries also feature substantial first-mover [Show Less]
