In this case it is called a binding quota. If a quota is set at or above the free trade level of imports then it is referred to as a non-binding quota. Goods that are illegal within a country effectively have a quota set equal to zero. Thus many countries have a zero quota on narcotics and other illicit drugs. Voluntary Export Restraint (USA-Japan, auto) – A voluntary export restraint is a restriction set by a government on the quantity of goods that can be exported out of a country during a specified period of time.
Often the word voluntary is placed in quotes because these restraints are typically implemented upon the insistence of the importing nations. 0 Typically EVER arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. EVER are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.
Example: one of the most famous examples is the limitation on auto exports to the United States enforced by Japanese automobile producer in 1981.
Local Content Requirements (USA) – A local content acquirement is a requirement that some specific fraction of a good be produce domestically. The requirement may be expressed either in physical terms (75% of component parts for this product must be produced locally) or in value terms (75% of the value of this product must be produced locally). It also tends to benefit producers and not customers. They have been used mainly in developing and developed countries.
Administrative Trade Policies Pan) – Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. In addition to the formal instruments of trade policy, gobo. F all types sometimes uses informal or administrative policies to restrict imports & boost exports. Some would agree that the Japanese are the masters of this kind of trade barrier. As with all instruments of trade, administrative instruments benefits producers and hurt consumers, who are derived access to possibly superior foreign products.
Anti-dumping Policies – In the context of international trade, dumping is selling goods in a foreign market at below their “fair” market value. “Fair” market value of a good is normally Judged to be greater than the costs of producing that good. 5. What are the economic and political arguments for regional economic integration? Given these arguments, why don’t we see more substantial examples of integration in the world economy? 1) Based on the theory of integration, the real economic argument is the trade diversion.
That means the third countries which might have lower opportunity cost than the member countries are excluded by the import tariffs. The consumer surplus will decrease because of the integration. But counter argument is that the trade creation will exceed the trade diversion as we have seen in the case of the European integration and NONFAT. The political argument s that it is based mainly on geography. The members countries have to be neighboring countries. But there are many countries which have the main trade partners so far away.
And many neighboring countries have border disputes. SEAN (Association of Southeast Asian Nations) for example, has been integrated because of the political factor. But at the beginning the intra-trade between them was minimal. It has been taken for decades until the PTA(partial trade agreement) could begin. Until now the intra-trade in the SEAN 10 is still less than 50%, compared to in Europe. 2) Politically and economically infeasible. Bilateral free trade agreement is used instead. 6. Is there an inexorable tendency for the world economy to become increasingly more integrated? . What effect is the creation of a single market and a single currency within the EX. likely to have on competition within the ELI? Why? 8. Why do you think so many countries have set up or Joined regional trading arrangements in recent years? Given these arguments, why don’t we see more substantial examples of integration in the world economy? Provide examples for your arguments. 9. Do you think it is correct for the European Commission to restrict mergers teen the American companies operating in Europe? 10. What are the commodity agreements? Describe major types.
Attempts to counteract price instability through: * Exercise of market power through international commodity agreements * Stabilization of producer revenues through risk-management instruments, such as commodities futures * Stabilization of government revenues through precautionary savings funds Whereas many of the original commodity agreements were designed to influence price through a variety of market-interfering mechanisms, most of the existing ones have been established to discuss issues, disseminate information, improve product safety, and so on.
Types: * Producer’s alliances: exclusive membership agreements between producing and Commodity Control Agreements (ICC): agreements between producing and consuming countries (International Cocoa Association, International Sugar Association) 1 1 . Define and briefly outline activities of the five members of the World Bank group. The International Bank for Reconstruction and Development (BIRD) provides loans and development assistance to middle-income countries in Latin America, Asia, Africa and Eastern Europe. BIRD gets most of its funds by selling bonds in international capital markets.
The International Development Association (IDA) is the Group’s arm to reduce poverty. Its support is focused on the poorest countries, to which it provides interest-free loans and grants. IDA depends on contributions from its wealthier member countries (including some developing countries) for most of its financial resources. The International Finance Corporation (AFC) promotes growth in the developing world by financing private-sector investments and providing technical support and advice to governments and businesses.
In partnership with private investors, AFC provides loans and equity finance for business ventures in developing countries. 4. The Multilateral Investment Guarantee Agency (AMIGA) encourages foreign investment in developing countries by providing guarantees to foreign investors against loss caused by non-commercial risks. AMIGA also provides technical support to help developing countries promote investment opportunities and uses its legal services to reduce possible barriers to investment.
The International Centre for the Settlement of Investment Disputes (SIDE) provides facilities for settling investment disputes between foreign investors and their host countries. 2. Assess the role of the World Bank and its policies in dealing with any one project in a developing country. 13. What were the original objectives of the MIFF? Miff’s general purpose was to provide a multilateral framework for avoiding international financial crises by establishing rules for national exchange rate policies and for adjustment to balance of payments of disequilibrium.
It was specifically intended to avoid the disastrous financial contraction occurred during the asses. * Facilitate the balanced growth of international trade. * Promote exchange stability and orderly exchange arrangements * Discourage nominative currency depreciation. * Seek the elimination of exchange restrictions that hinder the growth of world trade. * Make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payment imbalances without resorting to measures destructive to national and international prosperity.
Topic 4 Balance of Payments. The Fore Market, Determination of the Exchange Rate. Arbitrageurs ensures that what is known as the covered interest parity (CHIP) condition holds continually – the covered interest parity is the formula used by banks to lactate their forward exchange quotation and given by the following formula: F = [(r*-r)S]/[S(1+r)] 2. What is the difference between the real and nominal exchange rate. The exchange rate that prevails at a given date is known as the nominal exchange rate, it is the amount of US dollars that will be obtained for one pound in the foreign exchange market.
Similarly, if the dollar-pound quotation is $. 1 50/E, this is again a nominal exchange rate quotation. The real exchange rate is the nominal exchange rate adjusted for relative prices between the countries under consideration. 3. Is APP a good theory of exchange rate determination? Purchasing Power Parity (APP) is one of the earliest and simplest models of exchange determination. An understanding of APP is essential to the study of international finance.
APP theory has been advocated as a satisfactory model of exchange rate determination in its own right and also provides a point of reference for the long run exchange rate in many of the modern exchange rate theories. 4. What does the central bank do to maintain a fixed exchange rate if its currency is under speculative attack? 5 Does the record IIS current account deficit matter? Topic 5: Foreign Direct Investment and Theories of Multinational Enterprise. 1. What is the primary difference between FAD and foreign portfolio investment?
Foreign direct investment differs from foreign portfolio investment that FAD is equity funds invested in other nations, while portfolio investment entails the purchase of financial securities (especially bonds) in other firms for the purpose of realizing a financial gain when these marketable assets are sold. The objective of FAD is to provide the investing company with the opportunity to actively manage and control a foreign rim’s activities, whereas the objective of portfolio investment is to achieve growth in the value of its financial holdings.
The key difference between FAD and PI therefore is that FAD investors not only take both ownership and control positions in the domestic firms, but also are regarded as the managers of the firms under their control. In other words, while PI investors gain ownership positions in the domestic firms, they do not exercise control over domestic firms and must therefore delegate decisions to managers, thereby limiting their freedom to make decisions because the angers’ agenda may not be always consistent with that of the owners. 2. What are some of the reasons for FAD? Increase sales and profits: some of the largest and best-known multinationals (GE, Toyota, BP, Avoidance, etc. ) earn millions of dollars each year through overseas sales. There are also thousands of smaller firms worldwide that earn the bulk of their revenue form international customers. The growth of multinational s leads to a need of local suppliers; if they do well, there is a good chance that the MEN will extend the contract and allow them to supply worldwide locations. So they, too, are interested in FAD because it can help them increase their sales and profits. Enter rapidly growing markets: some international markets are growing much faster than others, and FAD provides Ones with the chance to take advantage of these opportunities. As despite the fact that there are many problems in doing business there; also growing number of companies are using FAD to gain a foothold in Eastern Europe by acquiring local firms or setting up Joint ventures there; India has also become a large recipient of FAD, particularly in the technology sector. -reduce costs: an MEN can sometimes achieve substantially lower costs by going abroad than by producing at home.
If labor expenses are high and represent significant portion of overall costs, an MEN may be well advised to look to other geographic areas where the goods can be produced at a much lower labor price. 3. How does horizontal FAD compare to vertical FAD? There are two main types of FAD: One is horizontal and the other is vertical. Horizontal FAD arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FAD. For example, Ford assembles cars in the United States.
Through horizontal FAD, it does the same thing in different host countries such as the United Kingdom (I-J), France, Taiwan, Saudi Arabia, and Australia. Horizontal FAD therefore refers to producing the same products or offering the same services in a host country as firms do at home. 4. Why are Ones are interested in investing in China? Over the past few years the Chinese economy has grown at an annual rate of around 7-11 percent. These data also suggest that as the country continues to move toward a market-driven economy, Ones are likely to find a huge demand for goods and services that cannot be satisfied by local firms alone.
Simply put, China is a market where most multinationals want to have a presence despite the fact that there are many problems in doing business there, and few Ones have been able to extract an adequate return on their investment. 5. Give a critical assessment of oligopoly theories as an explanation of international business. Oligopolies Reaction Theories (Knickerbockers, 1973) companies imitate each other such as to reduce risks of being different: * follow-the-leader’ investment (clustering by US firms in foreign countries) * US firms in the forefront of international expansion inhabited legalistically structured industries 6.
Give a critical assessment of Dunning eclectic paradigm of international business. “O” owner-specific (competitive advantage in the home market that can be transferred abroad) (the Why of MEN activity) “L” location-specific (specific characteristics of the foreign market allow the firm to exploit its competitive advantage) (the Where’ of production) “l” initialization (maintenance of its competitive position by attempting to control the entire value chain in its industry) (the ‘how of involvement) 7.
Briefly explain how FAD can be used to overcome high transaction costs and prevent market failure. 8. Describe two benefits and two costs of FAD on a host country. Foreign direct investment (FAD) has benefits for the host country as well as for the country that is investing. First, we study the benefits accruing to host country due to FAD: Resource-transfer effects Employment effects There are three things to be studied in this context?management, money and machinery. The three Ms mnemonic can be studied in a different order according to their relative importance.
Any foreign direct investment directly leads to Jobs. These are created directly or indirectly because of the multiplier effect that an investor many would follow. Most examples of FAD that have led to employment can show that the indirect effects on employment are equal (or often exceed) the direct effects. DUD eliminates some Jobs through the relocation of local businesses, but the net effect is usually more Jobs in the host economy. Apart from generating employment, FAD can also raise the existing scale of competition between producers.
This kind of competition would lead to capital investment and a rise in choices for the consumer. Direct fallout of this situation would be lowering of prices that would also benefit the customer eventually. Costs to Host Country There are three primary ways in which one can study potential costs to a host country of FAD: Adverse effect on home manufacturers Adverse effects on BOP National sovereignty is at stake With the inflow of international trade and international companies, development of the host company can be hampered. The manufacturers of that country are affected by competition.
This includes new management practices and technological advances that might make foreign countries winners and therefore effect their bottom line. The nation is also besieged by international companies that might give a ewe twist to the ethics and functioning of a country. 9. As a firm evolves from purely domestic into a true multinational enterprise, it must consider a) its competitive advantages, b) where it wants to locate production, c) the type of control it wants to have over any foreign operations, and d) how much monetary capital to invest abroad.
Explain how each of these four considerations is important to the success of foreign operations. If a firm lacks sufficient competitive advantage to compete effectively in its home market, it is unlikely to have sufficient advantages of any type to be successful in a foreign market. This is because the competitive advantages of the home market must be enduring, transferable, and sufficiently powerful to enable the firm to overcome the assorted difficulties of operating in a foreign environment.
Foreign operations must be located where market imperfections are such that the firm can take advantage of its competitive advantages to the degree necessary to earn a risk-adjusted rate of return above the firm’s cost of capital. The firm must decided upon the degree of control it will need over the foreign operation, recognizing that greater control usually involves both rater risk and a greater investment.
Viewing a spectrum of degrees of control, licensing and management contracts provide a low level of control (along with a low level of financial investment); Joint ventures necessitate a somewhat higher level of control; and Greenfield direct investments and/or acquisition of an existing foreign firm require the highest degree of control (along with a higher level of financial contracts, Joint ventures, and direct investment) require in that order ever increasing investment of more monetary capital.
The firm must decide if the benefits of greater investment (presumably greater profits, plus possibly acquiring market share or forestalling competitors from gaining a greater market share) are worth the differing amounts of monetary capital needed. 10. In deciding whether to invest abroad, management must first determine whether the firm has a sustainable competitive advantage that enables it to compete effectively in the home market.
What are the necessary characteristics of this competitive advantage? In deciding whether to invest abroad, management must first determine whether the firm has a sustainable nominative advantage that enables it to compete effectively in the home market. The competitive advantage must be firm-specific, transferable, and powerful enough to compensate the firm for the potential disadvantages of operating abroad (foreign exchange risks, political risks, and increased agency costs).
Based on observations of firms that have successfully invested abroad, we can conclude that some of the competitive advantages enjoyed by Ones are (1) economies of scale and scope arising from their large size; (2) managerial and marketing expertise; (3) superior genealogy owing to their heavy emphasis on research; (4) financial strength; (5) differentiated products; and sometimes; (6) competitiveness of their home markets. 1 1 . Why does Toyota choose to invest in the USA? Toyota manufacturers locally over two-thirds of the cars it sells in the United States.
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