International Business, 3/E S. Tamer Cavusgil Gary Knight John Riesenberger solutions manual and test bank
CHAPTER 2
GLOBALIZATION OF MARKETS
AND THE INTERNATIONALIZATION OF THE FIRM
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
The Value Chain concept is central to this chapter. To ensure that students understand this concept, you might start the chapter with a basic example. Project the basic value chain model on the screen, and select a simple business. How about shoes, or laptop computers, or automobiles? Suppose you manufacture one of these products. Next, proceed step by step through the model from research & development; to procurement (sourcing raw materials); to manufacturing; to marketing; to distribution; to sales & service. Follow each activity and commensurate value that is added at each step along the way. Now consider locating each one of those activities in a different country, if it is more efficient to do so. If you don’t want to create an example, you can always use the examples in Exhibit 2.10.
Useful tools for introducing the chapter include the following:
Google:
Collaborative Tools: Building a Culture of Knowledge Sharing
http://www.youtube.com/watch?v=Vq4DzmS1shs
Collaborative Tools - Opening Comments
http://www.youtube.com/watch?v=qJuhMC2Suqc
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
In this chapter, you will learn about:
1. Why globalization is not new
2. Market globalization: An organizing framework
3. Dimensions of market globalization
4. Drivers of market globalization
5. Technological advances
5. Societal consequences of market globalization
6. Firm-level consequences of market globalization:
Internationalization of the firm’s value chain
1■
Key Themes
■ Globalization has been around for centuries- the early civilizations in the Mediterranean, Middle East, Asia, Africa, and Europe have all contributed to its growth.
■ Market Globalization means reconfiguration of the value chain so as to capitalize on low-cost locations.
■ The framework used to explain globalization consists of drivers (inputs), dimensions (processes), and consequences – both societal and firm-level (outputs).
■ Dimensions- growing global interconnectedness of buyers, producers, suppliers, and governments. Globalization has fostered the emergence of regional economic integration blocs, growth of global investment and financial flows, the convergence of buyer lifestyles and needs, and the globalization of production.
■ Drivers- falling trade and investment barriers; market liberalization and adoption of free market economics in formerly closed economies; industrialization and economic development (emerging markets); integration of world financial markets; and technological advances.
■ Globalization makes internationalization an imperative, technology provides the means.
■ Consequences- societal- globalization interferes with national sovereignty, is associated with offshoring, tends to decrease poverty, may widen the gap between the rich and the poor, may harm the natural environment, and may promote the loss of national cultural values.
■ Consequences- firm- Firms are compelled to globally reconfigure key value-adding activities such that value-chain activities reduce the costs of R&D and production, or gain closer access to customers.
Teaching Tips
■ Input-Process-Output model: As this chapter is framed with a globalization model consisting of drivers (inputs), dimensions (processes), and consequences – both societal and firm-level (outputs). Make it simple for your students, and start with an explanation of a fundamental input-output model from Systems Theory. This model can be applied to any open system- from biology to business. Once you highlight the essence of the model, you can break your class into four groups, and assign one of the following to each group: (1) drivers (inputs- what drives it), (2) dimensions (processes- what is it), (3) societal consequences (outputs-results), and (4) firm-level consequences (outputs-results). You may want to help them a bit by sharing some of the points under Key Themes (above). Allocate 10 minutes for each group to understand what their component means and how it fits into the overall model. Then, a designated group member from each group must share their findings with the class.
Commentary on the Opening Vignette:
BANGALORE: IT’S GLOBAL DESTINATION
· Key message
■ The globalization of business and the integration of functions across the value chain and across countries is illustrated by companies such as Accenture, AOL, British Airways, Cisco, Philips, and Ernst & Young which have relocated their customer service centers, software development, chip design, computer systems maintenance, X-ray diagnosis, mortgage processing, tax form preparation, and lost luggage tracking to Bangalore, Delhi, Chennai, Hyderabad, and other emerging high-tech centers across India.
· Uniqueness of the situation described
■ The advantages of sourcing to India are unique:
(1) Indians are paid one-quarter of what Westerners expect for similar work, and in many cases, they do it better.
(2) India is home to several million highly educated knowledge workers.
(3) English is widely spoken.
(4) India is located on the other side of the world from Europe and the U.S., allowing Indians to take advantage of time-sharing; knowledge economy is a 24-hour workday.
■ The advantages of IT globalization:
(1) Virtual meetings with global suppliers- U.S. designers can be on the screen speaking with their Indian software writers and their Asian manufacturers, simultaneously.
(2) Intellectual work (e.g. proprietary software) can be chopped up with parts going to Boston, Bangalore, and Beijing; disaggregated, delivered, distributed, produced, and put back together again, making it easy for anyone to do remote development.
(3) Emerging markets like India, Brazil, and China can compete equally for global knowledge work as never before
■ The implications of globalization:
(1) Consumer products/services no longer identify your global position.
(2) Knowledge work can be developed worldwide, and will locate where maximum factor advantages accrue to the firm.
(3) Free trade and global sourcing benefit consumers worldwide to receive maximum quality at minimum price.
(4) Both producer and consumer nations can increase their wealth and quality of life
(5) Commensurate with the increase in the standard of living and influx of workers, comes congestion, pollution, high rents, a raucous nightlife, and Western values.
■ New Airport- Bangalore recently opened a new, $500 million airport to support the city’s rapid growth, even though fewer than 5% of Bangalore residents have ever been inside an airplane.
■ Housing- Government construction projects focus on high-rise apartments for the wealthy, while a shortage of affordable housing has forced long-time residents out of the city or into slums.
· Classroom discussion
■ Almost everyone in the class will have a personal experience to share regarding sourcing to India, so capitalize on this and make it personal. Some will have a positive story, others less so. What these experiences will illustrate are the tradeoffs that Multinational Enterprises (MNEs) and Small and Medium-sized Enterprises (SMEs) must consider when reconfiguring their value chains globally. Cultural differences will be discussed in Chapter 4, but for now, consider that firms many times do not even reflect upon cultural differences as an issue in deciding the sequencing and location of their value-adding activities. Some of their experiences will be grounded in cultural differences. This introduction serves to underscore the delicate balance of a host of complex variables to be considered when deciding where to configure a firm’s value chain.
III. DETAILED CHAPTER OUTLINE
■ Twin mega trends have altered the international business landscape by enabling both marketing and procurement activities on a global scale: the globalization of markets or economies and technological advances.
■ Globalization of Markets is a broad term referring to the interconnectedness of national economies and the growing interdependence of buyers, producers, suppliers, and governments in different countries, i.e. the gradual integration and growing interdependence of national economies.
■ Market globalization is manifested by the production/marketing of branded products/services worldwide.
■ Economic integration is accelerated by declining trade barriers and the Internet.
■ Globalization enables firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge.
■ Technological advances in information, manufacturing, transportation, and the Internet have facilitated rapid and early internationalization of countless firms.
◘ Example- Neogen (www.neogen.com). Having internationalized quickly with a worldwide clientele, Neogen is a highly successful international firm. Founders developed superior diagnostic kits to:
● Test for pesticide residue (farmers)
● Use with pharmaceuticals, vaccines, and topicals (veterinarians)
● Test for E. coli (government agencies)
■ Market Globalization and Technological Advances- Antecedents and Consequences:
◘ Growing world trade and foreign direct investment
◘ Spread of technology
◘ Global sourcing and sales of products/services
◘ Broad product/service consumer options
◘ Competion and innovation foster product/service price reductions
◘ Job creation – contributing to higher living standards
◘ Global convergence of some products- illustrated by universal demand, e.g. music, entertainment, consumer electronics, food
◘ Transformation of national economies
◘ Dissemination of economic, political, and legal values, e.g. liberalized economies, free trade, and intellectual property rights
WHY GLOBALIZATION IS NOT NEW
Globalization is not new; it has simply accelerated and acquired a more complex character in recent decades.
■ Early civilizations in the Mediterranean, Middle East, Asia, Africa, and Europe have all contributed to the growth of globalization.
■ The word ‘trade’ comes from the Anglo-Saxon term trada, which means to walk in the footsteps of others.
■ Ancient trade routes were the foundation for a high level of cross-cultural exchange of ideas that lead to the development of religion, science, economic activity, and government.
■ The phrase “all roads lead to Rome” is not so much a metaphorical reference to Rome’s dominance of the world 2,000 years ago, but to the fact that Rome’s territorial colonies were constructed as commercial resource centers to serve the needs of the Roman Empire and increase its wealth.
■ In an empire that stretched from England to Israel and from Germany to Africa, the Romans created more than 300,000 kilometers of roads. Roman roads were the life-blood of the state that allowed for trade to flourish.
■ In the middle ages, the Knights Templar acted as guardians for pilgrims making the hazardous journey to pay homage to the birth place of the Christian religion.
■ In addition to protecting tourists, this warrior order created the first international banking system with the use of rudimentary traveler’s checks, eliminating the need for travelers to carry valuables on their person, which could be easily robbed.
■ Genghis Khan in 1100 not only united the Mongols but created an empire beyond the Chinese border, including Korea and Japan in the East, Mesopotamia (modern day Iraq and Syria), Russia, Poland, and Hungary.
■ Genghis Khan instituted common laws and regulations over his domain, most notably the preservation of private property to enhance and protect the trading imperative.
■ Arab merchants traded in spices across land routes reaching from northern Arabia across modern-day Turkey, through Asia Minor, and finally reaching China.
■ By concealing the origins of cinnamon, pepper, cloves, and nutmeg, such traders were able to gain a monopoly and control prices. Europeans came to believe that the spices came from Africa, when they had merely changed hands there.
■ Under the traditional trading system, spices, linen, silk, diamonds, pearls, and opium-based medicines reached Europe via indirect routes over land and sea.
■ Representing one of the earliest systems of international distribution, the products passed through many hands on their long voyage. At every juncture, prices increased several fold (i.e. value chain).
■ Globalization evolved out of an international, common heritage shared by worldwide civilizations to reach out and interact with one another.
■ Exchange with others gave societies the opportunity to expand and grow.
■ Trade through the ages fostered civilization; without it, we would be a world of warring tribes using combat to get what we want.
■ Cross-border trading opened the world to innovations and progress.
Phases of Globalization
■ Exhibit 2.1 summarizes the Phases of Globalization. Since the 1800s, the evolution of market globalization has witnessed four distinct phases, each triggered by global events and technological discoveries:
The First Phase of Globalization
1830 – 1880s
■ The first phase of globalization began about 1830 and peaked around 1880.
■ Cross-border commerce became widespread in this period due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading firms.
■ The inventions of the telegraph and telephone in the 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies’ supply chains.
The Second Phase of Globalization
1900 -1930
■ The second phase of globalization began around 1900 and was correlated with the rise of electricity and steel production.
■ This phase reached its height just before the Great Depression, a worldwide economic downturn that started in 1929.
■ At the turn-of-the-century, Western Europe was the most industrialized region, and its colonization of countries worldwide led to the establishment of some of the earliest subsidiaries of multinational enterprises (MNEs).
■ European companies such as BASF, Nestlé, Shell, Siemens, and British Petroleum had established foreign manufacturing plants by 1900.
■ The Italian manufacturer Fiat supplied vehicles to nations on both sides of the war.
The Third Phase of Globalization
1948 - 1970s
■ The third phase of globalization followed World War II.
■ At war’s end in 1945, substantial pent-up demand existed for consumer products, as well as for resources to rebuild Europe and Japan.
■ Among the leading economies, the U.S. was least harmed by the war and became the world’s dominant economy.
■ Substantial government aid helped stimulate economic activity in Europe.
■ Pre-war years had been characterized by high tariffs and strict controls on currency and capital movements.
■ Post-war, leading industrialized countries including Australia, Britain, and the U.S. sought to reduce international trade barriers.
■ The result of this effort was the General Agreement on Tariffs and Trade (GATT) – the precursor to the World Trade Organization (WTO).
■ GATT, emerging from the Bretton Woods Conference of 23 nations in 1947, served as a global negotiating forum for liberalizing trade barriers and marked the beginning of a series of annual meetings aimed at reducing international trade and investment barriers.
■ Participating governments recognized that liberalized trade would stimulate industrialization, modernization, and better living standards.
■ Eventually, many more nations joined the GATT, and their efforts led to the formation of the WTO.
■ WTO- A multilateral governing body empowered to regulate international trade and investment.</glossdef></glossentry></glossary></marginalnote>
■ Some 149 nations are now members of the WTO.
■ Additional global cooperation led to the formation of key international organizations such as the International Monetary Fund, the World Bank, and the United Nations.
■ Early multinationals from this third phase of globalization originated from the U.S., Western Europe, and Japan.
■ Firms like Unilever, Philips, Royal Dutch-Shell, British Petroleum, and Bayer organized their businesses by establishing autonomous subsidiaries in each of the foreign countries where they did business.
■ Numerous companies developed strong brand names, including Nestlé, Kraft, John Deere, Kellogg, Lockheed, Caterpillar, Coca-Cola, Chrysler, Pepsi-Cola, Singer, and Levi’s.
■ U.S. multinationals such as IBM, Boeing, Texas Instruments, Xerox, and McDonnell-Douglas spread out across the globe, leveraging technological competitive advantages.
■ Gradually, MNEs began seeking cost advantages by locating factories in developing countries with low labor costs.
■ 1960s- Growing MNE activities and early efforts at trade liberalization resulted in substantial increases in international trade and investment.
■ 1960s/1970s- Recovered from World War II, MNEs in Europe and Japan began to challenge the global dominance of U.S. multinationals.
■ With the easing of trade barriers and currency controls, capital began to flow freely across national borders, leading to integration of global financial markets.
The Fourth and Current Phase of Globalization 1980s - Present
■ The fourth and current phase of globalization began in the early 1980s.
■ This period witnessed enormous growth in cross-border trade and investment activity. The following innovations caused this phase:
●Commercialization of the personal computer
●Arrival of the Internet and Web browsers
●Advances in communication and manufacturing technologies
●Collapse of the Soviet Union and ensuing market liberalization in central
and Eastern Europe
●Substantial industrialization and modernization efforts of East Asian economies including China
■ Growing global prosperity began to reach emerging markets such as Brazil, India, and Mexico.
■ 1980s - Huge increases in FDI, especially in capital- and technology- intensive sectors
■ Internationalization made feasible for small and medium-sized enterprises (SMEs) - geographically distant yet electronically interconnected- due to technological advances in information, communications, and transportation.
■ These technologies also facilitated the globalization of the service sector in areas such as banking, entertainment, tourism, insurance, and retailing.
■ Growing integration inspired mergers/acquisitions such as GM acquiring Saab in Sweden, Ford taking over Mazda in Japan, and Daimler Benz acquiring Chrysler in the U.S.
■ Globalization and technological advances resulted in the “death of distance”. That is, a shrinking world in terms of geographic and cultural distances that long separated nations.
■ Exhibit 2.2 illustrates the progression of the phases of globalization, shrinking the world into a manageable global marketplace.
MARKET GLOBALIZATION: AN ORGANIZING FRAMEWORK
■ Exhibit 2.3 presents the Drivers and Consequences of Market Globalization.
■ This model distinguishes between:
(1) the drivers or causes of globalization;
(2) the dimensions or manifestations of globalization;
(3a) societal consequences of globalization; and
(3b) firm-level consequences of globalization- factors compelling firms to proactively internationalize.
■ The double arrows illustrate the interactive relationship between market globalization and its consequences.
International Business: The New Realities, 3e (Cavusgil)
Chapter 2 Introduction: What Is International Business?
1) International business is primarily carried out by individual companies.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
2) The globalization of markets refers to the growing independence and self-sufficiency of countries worldwide.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
3) International business today is predominantly the domain of large, multinational companies.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
4) Exporting is an entry strategy involving the sale of products or services to customers located abroad.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
5) A country's economic assets are also known as factors of production.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
6) The two primary types of international investment are portfolio investment and foreign direct investment.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
7) Over the last few decades, export activity by nations has grown more quickly than has domestic production.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
8) In the past, international trade and investment activities were mainly conducted by companies that sold services.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
9) Services are the fastest growing sector in international trade.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
10) The level of government intervention in commercial activities is similar across most countries.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Dynamics of the global economy
11) Currency risk refers to the risk posed by adverse fluctuations in exchange rates.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Dynamics of the global economy
12) For internationalizing firms, the consequences of poor business management decisions are usually more costly when mistakes occur abroad than when they occur at home.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Dynamics of the global economy
13) MNEs with extensive international operations tend to focus mainly on downstream activities such as marketing in foreign countries.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
14) International business is primarily the domain of large, resourceful firms.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
15) Exporting is the most common foreign market entry strategy of the SME.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
16) For manufacturing companies, on a per-unit-of-output basis, high volumes of production are correlated with lower per-unit cost.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-5
AACSB: Dynamics of the global economy
17) Since the 1980s, emerging market countries have experienced substantial market liberalization and privatization.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 1-6
AACSB: Dynamics of the global economy
18) Firms that do not export tend to create jobs more quickly than do exporting firms.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 1-6
AACSB: Dynamics of the global economy
19) International business is defined as the performance of ________ activities by firms across national borders.
A) marketing and fiduciary
B) trade and investment
C) finance and operational
D) manufacturing and sales
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
20) International business is also known as which of the following?
A) born global business
B) laissez-faire business
C) cross-border business
D) multi-hub business
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
21) Which of the following best characterizes the development of international business?
A) It has existed in some form for centuries.
B) It first started in Europe.
C) It developed after the year 2000.
D) Its development has slowed in recent years.
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
22) Globalization has helped increase all of the following EXCEPT ________.
A) the variety of capital flows across national borders
B) the economic isolation of developing countries
C) the rate at which products are diffused worldwide
D) the volume of cross-border transactions
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
23) Which of the following is another term for importing?
A) capital investment
B) supply side development
C) global sourcing
D) unilateral procurement
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
24) Which of the following is subject to importing and exporting?
A) both finished products and intermediate goods
B) finished products but not intermediate goods
C) intermediate goods but not raw materials
D) raw materials and components, but not finished products
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
25) ________ refers to the transfer of assets to another country or the acquisition of assets in that country.
A) International investment
B) International trade
C) Importing
D) Exporting
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
26) Each of the following represents a factor of production EXCEPT ________.
A) manufacturing infrastructure
B) technology
C) government regulations
D) managerial talent
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
27) Which of the following would NOT be considered an example of foreign direct investment (FDI)?
A) cross-border purchase of a textile plant
B) cross-border purchase of stocks
C) purchase of capital assets of a foreign company
D) purchase of foreign land for business operations
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
28) ________ is the total value of products and services produced in a country over the course of a year.
A) GDP
B) CAD
C) FDI
D) PPP
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
29) Which of the following best explains why export growth has outpaced the growth of domestic production during the last few decades?
A) Both world exports and domestic production have grown significantly over the past 30 years.
B) The cost to import products is generally higher than the cost to produce domestic products.
C) Growth in gross domestic product in most countries has steadily increased since 1970.
D) Advanced economies now source many of their consumable products from low-cost manufacturing nations.
Answer: D
Difficulty: Hard
Skill: Critical Thinking
Objective: 1-2
AACSB: Dynamics of the global economy; Reflective thinking skills
30) Each of the following has contributed to the rapid integration of world economies EXCEPT ________.
A) the growth of emerging market countries
B) the increase in trade barriers
C) advances in information technology
D) the liberalization of markets
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
31) Which of the following types of risk is also known as political risk?
A) currency risk
B) cross-cultural risk
C) commercial risk
D) country risk
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Dynamics of the global economy
32) Which of the following is NOT an example of a cross-cultural risk factor?
A) negotiation patterns
B) decision-making styles
C) costs of production
D) ethical practices
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 1-3
AACSB: Dynamics of the global economy
33) Fluctuating exchange rates are an example of which of the following?
A) country risk
B) political risk
C) currency risk
D) cross-cultural risk
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 1-3
AACSB: Dynamics of the global economy
34) Businesses that directly initiate and implement international business activity are known as ________.
A) focal firms
B) fiscal enterprises
C) fiduciary trusts
D) business affiliates
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
35) The largest multinational firms are found in each of the following industries EXCEPT ________.
A) retailing
B) health care
C) automobiles
D) oil and gas
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
36) Which of the following countries hosts the greatest number of MNEs?
A) Germany
B) Japan
C) Netherlands
D) United States
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
37) Each of the following types of organizations is active in international business EXCEPT ________.
A) MNE
B) SME
C) RND
D) NGO
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
38) Which of the following is an example of a new global challenger?
A) a firm from Russia that is rapidly growing in the communications industry
B) a U.S. non-profit that focuses on fundraising for children's health care
C) an MNE from France with large-scale operations across the globe
D) an SME from Canada that began international operations early in its development
Answer: A
Difficulty: Moderate
Skill: Application
Objective: 1-4
AACSB: Dynamics of the global economy
39) Calexor is a telecommunications SME that has been highly successful despite its limited resources. Stakeholders attribute Calexor's success to its ability to serve niche markets. Which of the following, if true, would most strongly support the claim that Calexor's growth can be attributed to niche market sales?
A) Calexor developed an interest in serving niche markets through an R & D experiment.
B) Most of Calexor's sales are in specialty markets that larger competitors do not serve.
C) Calexor's sales in mainstream telecommunications markets have always been strong.
D) Calexor's growth soared after it entered its first overseas market and has continued to climb.
Answer: B
Difficulty: Easy
Skill: Critical Thinking
Objective: 1-4
AACSB: Dynamics of the global economy; Reflective thinking skills
40) The process of targeting and serving markets outside the home country is known as ________.
A) market diversification
B) competition intensity
C) reactive internationalization
D) trade protectionism
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-5
AACSB: Dynamics of the global economy
41) A U.S. shoe manufacturer is considering internationalizing to promote growth by diversifying its markets. Which of the following, if true, would most strongly support the claim that moving to France would help the company grow through market diversification?
A) Doing business in France would likely expose the company to new ideas for product innovation.
B) French women tend to purchase shoes more frequently than do French men.
C) French consumers represent a sizeable market that could significantly boost the company's sales.
D) Many of the company's U.S. customers have moved overseas to Europe.
Answer: C
Difficulty: Moderate
Skill: Critical Thinking
Objective: 1-5
AACSB: Dynamics of the global economy; Reflective thinking skills
42) Which of the following contributes LEAST to increasing a company's profit margins?
A) increasing demand
B) increasing global competition
C) high-growth markets
D) underserved economies
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
43) Which of the following best explains why the Japanese firm Canon relocated much of its production to China?
A) low-cost financial capital
B) low-cost labor
C) access to raw materials
D) lack of skilled managerial talent in home country
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
44) A restaurant chain based in Hong Kong plans to open a series of restaurants in the United States to gain access to low-cost capital for its expansion efforts. Which of the following, if true, would most strongly support the claim that establishing U.S. operations would NOT be the best choice for providing the chain access to the low-cost capital it seeks?
A) Relocation to the U.S. would involve substantial cross-cultural risk.
B) U.S. funding sources are more expensive than capital sources in many other promising locations.
C) The company has attracted significant interest from American venture capitalists.
D) U.S. funding offered in the hospitality sector tends to be more expensive than funding for health care firms.
Answer: B
Difficulty: Hard
Skill: Critical Thinking
Objective: 1-5
AACSB: Dynamics of the global economy; Reflective thinking skills
45) Increases in international trade and investment are accompanied by increases in all of the following EXCEPT ________.
A) literacy rates
B) individual affluence
C) cross-border conflict
D) national prosperity
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 1-6
AACSB: Dynamics of the global economy
46) Which of the following, if true, would most strongly support the claim that national prosperity is increased by participation in international business?
A) Countries that participate in international trade have higher GDPs than non-participating countries.
B) Individuals in advanced economies tend to set purchasing trends for consumers worldwide.
C) For most countries, levels of international trade have increased significantly in recent decades.
D) National literacy levels are strongly correlated with a country's degree of political freedom.
Answer: A
Difficulty: Hard
Skill: Critical Thinking
Objective: 1-6
AACSB: Dynamics of the global economy; Reflective thinking skills
Freehold Investment Corp. (Scenario)
Dan Freehold and his business partner, Bethany Quinn, are successful investors engaged in a variety of enterprises. Recently Dan and Bethany have decided to expand their foreign investing operations. They hold a meeting for individuals interested in participating in certain overseas ventures.
47) At the meeting, Dan explains to the attendees that Freehold direct investment projects differ from international trade in that ________.
A) the firm itself is crossing international borders to purchase foreign assets
B) the firm is restricting its investments to stocks and does not purchase mutual funds
C) the firm has chosen to focus strictly on the technology sector
D) the firm is engaging in the transfer of products across national borders
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
48) Dan discusses an investment opportunity that involves the purchase of selected securities from the Chinese stock market. This opportunity represents which type of international investment?
A) indirect production
B) international portfolio
C) foreign direct
D) domestic securities
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
49) Bethany presents another opportunity that involves the purchase of a manufacturing plant in South Korea. She explains that this type of strategy will involve ________ ownership on the part of the firm.
A) indirect
B) passive
C) short-term
D) active
Answer: D
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
50) Phillip Hardy, one of the potential investors, expresses the desire to purchase only those types of assets in which he can maintain a relatively short-term interest. Which of the following investment opportunities would be most suited for Mr. Hardy?
A) a venture that gives investors ownership of the equipment used by multiple South African mining companies
B) an initiative to purchase the technology assets of an Indian consulting firm
C) the Freehold Eastern Growth Fund, which purchases Eastern European growth stocks
D) the Freehold World Climb Project, which maintains partial ownership of an Australian hiking equipment production plant
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 1-2
AACSB: Dynamics of the global economy
International Trade Summit (Scenario)
An international trade summit is held in Geneva, Switzerland. The purpose of the summit is to cooperatively develop policies that promote international trade. Representatives from 50 different countries attend the summit.
51) One of the attendees represents a leading nation in the international merchandise trade. This attendee is most likely from which of the following countries?
A) New Zealand
B) Germany
C) Kenya
D) Saudi Arabia
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
52) One of the attendees represents a leading nation in the international services trade. This attendee is most likely from which of the following countries?
A) Brazil
B) Greece
C) Spain
D) South Africa
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
53) One summit attendee pointed out that the total value of her country's products trade typically accounted for more than 100 percent of her nation's GDP. This attendee most likely represents ________.
A) Japan
B) United Kingdom
C) France
D) Netherlands
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
Overseas Expansion (Scenario)
Whittaker Semiconductors has recently decided to expand its operations overseas. Amanda Quan, Vice President of International Business, assigned a team of investigators to analyze the risks faced by the company in making this move. Of particular interest were the risks that might affect the success of a new production plant to be located in one of three potential countries.
54) Philip Baxter reported on the risks associated with establishing the plant in Country A. The most significant risk, in his view, was posed by the government's complex bureaucratic structure. Philip reported the likelihood of significant administrative delays in opening the plant. The risk identified by Philip is an example of which of the following?
A) country risk
B) commercial risk
C) currency risk
D) cross-cultural risk
Answer: A
Difficulty: Moderate
Skill: Application
Objective: 1-3
AACSB: Dynamics of the global economy
55) LeShaun Golding researched the risks linked to establishing the plant in Country B. He cited government intervention, lack of local managerial talent, and unethical business practices as the most prominent risks for this location. LeShaun noted all of the following types of risks EXCEPT ________.
A) currency risk
B) political risk
C) country risk
D) cross-cultural risk
Answer: A
Difficulty: Moderate
Skill: Application
Objective: 1-3
AACSB: Dynamics of the global economy
56) Rosa Suarez reported on her analysis of cross-cultural risks involved with establishing the plant in Country C. Each of the following was most likely discussed in her report EXCEPT ________.
A) language barriers
B) lifestyle differences
C) religious beliefs
D) the level of national debt
Answer: D
Difficulty: Moderate
Skill: Application
Objective: 1-3
AACSB: Dynamics of the global economy
Sterling Auto International (Scenario)
Sterling Auto International is a successful car manufacturing company headquartered in Detroit, Michigan. Over the past year, the company implemented multiple efforts to expand its overseas operations. At a recent shareholder's meeting, attendees questioned the CEO's motivations for authorizing certain aspects of the expansion efforts.
57) One shareholder questioned the CEO's rationale for beginning an exploratory effort to establish a new manufacturing plant in India. The CEO responded by explaining that India was an untapped market with a high demand for products such as those produced by Sterling. His rationale represented an example of which of the following reasons for international expansion?
A) investing in a potentially rewarding relationship with a foreign partner
B) gaining access to lower-cost or better-value factors of production
C) seeking opportunities for growth through market diversification
D) better serving key customers that have relocated abroad
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
58) The CEO introduced another overseas effort by noting that it represented an attempt to confront an international competitor. The CEO was most likely referring to which of the following efforts?
A) a new plant established in Vietnam to benefit from low-cost labor
B) a sales outlet established in Indonesia, where Sterling could charge more for its products
C) a marketing and advertising partnership established with a successful French car retailer
D) a distribution center established in London to preempt the growth of a British car manufacturer
Answer: D
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
59) One shareholder wanted clarification about a research effort that investigated the possibility of setting up a plant in China. The CEO explained that serving China's rapidly growing middle class population would enable Sterling to increase the size of its customer base dramatically. In China, the CEO was most likely interested in ________.
A) avoiding government intervention
B) challenging Chinese competitors
C) gaining access to innovative ideas
D) developing economies of scale
Answer: D
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
60) The CEO justified one of the company's moves by pointing out that it not only enabled Sterling to benefit from global sourcing advantages, but it also provided access to new ideas about business methods. The shareholders viewed this justification positively most likely because they understood which of the following?
A) Sourcing advantages are usually more important to growth than obtaining new business ideas.
B) International firms may have more than one motive for international expansion.
C) The most compelling motive for international expansion is to gain new ideas from other markets.
D) This expansion strategy would enable the company to better manage cross-cultural risk.
Answer: B
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
61) In discussing the expansion effort to India, the CEO reminded shareholders of Black and Decker's move to partner with the Indian auto retailer Bajaj. The CEO was most likely attempting to justify which of the following?
A) a joint venture that would position Sterling for long-term sales in India
B) a marketing effort targeted to American citizens living in India
C) a price drop to ward off competition from an emerging Indian auto retailer
D) a new manufacturing protocol based on an efficient Indian production method
Answer: A
Difficulty: Moderate
Skill: Application
Objective: 1-5
AACSB: Dynamics of the global economy
62) What is international business, and how has it transformed the world economy?
Answer: International business refers to the performance of trade and investment activities by firms across national borders. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners.
International business is transforming the world as never before. In the last 50 years, international trade and investment have experienced unprecedented growth. Since the 1980s, emerging markets have provided new impetus to worldwide economic interconnectedness. These fast-growth developing economies—some thirty countries including Brazil, Russia, India, and China, the so-called BRICs—are experiencing substantial market liberalization, privatization, and industrialization, which are fueling global economic transformation. Located on every continent, they are gradually breaking away from the stagnation typical of developing economies. The emerging markets are home to the largest proportion of world population and participate increasingly in foreign trade.
Along with market globalization, advances in technology is another megatrend helping to transform the global economy. The rise of information and communication technologies, as well as production and process technologies, has dramatically reduced the cost of conducting business with customers located around the world. E-commerce makes international business increasingly imperative for firms of all sizes and resource levels. Technological advances are allowing globalization to progress more rapidly. Globalization, in turn, is accelerating the development of the latest technologies.
Difficulty: Hard
Skill: Synthesis
Objective: 1-1, 1-6
AACSB: Dynamics of the global economy
63) In a short essay, explain the four trends that provide evidence for the globalization of markets. Provide an example to illustrate one of the trends.
Answer: In practical terms, the globalization of markets is evident in several related trends. First is the unprecedented growth of international trade. For example, in 1960, cross-border trade was modest — about $100 billion per year. Today, it accounts for a substantial proportion of the world economy, amounting to some $13 trillion annually — that is, $13,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge. The third trend is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge. Fourth, globalization has brought about a greater degree of collaboration among nations through such organizations as the World Trade Organization and the International Monetary Fund.
Difficulty: Moderate
Skill: Concept
Objective: 1-1
AACSB: Dynamics of the global economy
64) In a short essay, explain the main differences between international portfolio investment and foreign direct investment.
Answer:
a. Types of assets purchased—The first main difference between the two types of investments concerns the types of assets purchased. Portfolio investment involves the purchase of securities or other financial assets. Foreign direct investment involves the purchase of productive assets, such as capital, technology, labor, land, plants, and equipment.
b. Types of ownership—The second main difference concerns the level or type of ownership. Portfolio investment refers to passive ownership, with no active management of or control over the assets purchased. Foreign direct investment, on the other hand, involves a more active type of ownership over a productive enterprise.
c. Interest timeline—The third main difference between the two types of strategies involves the length of interest maintained by investors. In international portfolio investment, investors have a relatively short-term interest in the ownership of their assets. In foreign direct investment, firms usually have a long-term investing interest.
Difficulty: Moderate
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
65) What is meant by the term "entrepôt economies?" In a short essay, explain the concept and provide an example.
Answer: Entrepôt economies are those that import a large volume of products. Some of these products may be processed into higher value-added products, and some are simply re-exported to other destinations. For entrepôt economies, merchandise trade is a large component of economic activity. The countries are very dependent on international trade relative to domestic value-adding activity.
Singapore is a major entrepôt, or depot, for petroleum products received from the Middle East, which it then exports to China and other destinations in Asia. Other examples of entrepôt economies include Belgium, the Netherlands, Hong Kong, South Korea, and Malaysia. In all of these countries, trade accounts for more than 100 percent of GDP.
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
66) In a short essay, describe the major trends in the growth of foreign direct investment (FDI) since the 1980s.
Answer: Since the 1980s, foreign direct investment (FDI) has undergone dramatic growth into various world regions. The dollar volume of FDI has grown immensely, especially into advanced (or developed) economies such as Japan, Europe, and North America. FDI inflows were interrupted in 2001 with the worldwide panic that ensued following the September 11 terrorist attacks in the United States, but the trend remains strong and is growing over time.
Of particular significance is the growth of FDI into developing economies, nations with lower incomes, less developed industrial base, and shortage of investment capital. Most of the developing economies are located in parts of Africa, Asia, and Latin America. Despite poor income levels, developing economies collectively comprise a substantial and growing proportion of international trade and investment activities.
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
67) What are the main differences between products and services? In a short essay, explain the difference between the two and provide three examples of each. Which sector has seen the greatest growth in international trade in recent years?
Answer: Products are defined as tangible merchandise, such as clothing, computers, and cars. Services, by contrast, are intangible deeds, performances, or efforts performed directly by people working in firms in the services sector. Some examples of services are creating advertising campaigns, underwriting mortgages, and managing restaurant operations. In recent years, services trade has been growing faster than products trade. International trade in services now accounts for about one quarter of all international trade and is growing rapidly.
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
68) In a short essay, identify three sectors in the service industry that are internationalizing rapidly. Explain the types of activities conducted within each sector, and provide examples of three companies that operate in each.
Answer:
a. Architectural, construction, and engineering–Activities within this sector include construction, electric power utilities, design, and engineering services for airports, hospitals, and dams. Companies within this sector include ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, and Skanska AB.
b. Banking, finance, and insurance–Activities within this sector include banking services, insurance provision, risk evaluation, and financial management. Companies within this sector include CIGNA, Barclays, HSBC, and Ernst & Young.
c. Education, training, and publication–Activities within this sector include management training, technical training, and English language training. Companies within this sector include Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, and Elsevier.
Difficulty: Easy
Skill: Concept
Objective: 1-2
AACSB: Dynamics of the global economy
69) In a short essay, explain the cross-cultural risk faced by internationalizing firms. What causes this type of risk? Why might it pose a problem for internationalizing firms?
Answer: Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mindset and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market.
Language is a critical dimension of culture. In addition to facilitating communication, language is a window on people's value systems and living conditions. When translating from one language to another, it is often difficult to find words that convey the same meanings. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers.
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Communication abilities; Dynamics of the global economy; Multicultural and diversity understanding
70) In a short essay, discuss how international firms manage the four types of international business risk. Provide an example that illustrates the process of risk management.
Answer: International business risks cannot be avoided, but they can be anticipated and managed. Experienced international firms conduct research to forecast potential risks, understand their implications, and take proactive action to reduce their effects.
Some international risks are extremely challenging. A recent example is the global financial crisis that emerged in the fall of 2008. The crisis spread to banks and insurance firms in Asia, Europe, and elsewhere. Many countries experienced deflation and severe declines in consumer confidence and spending power. The year 2009 saw sharp reductions in international commerce and shipping. Central banks worldwide sought to rally national economies by injecting billions of dollars into their financial systems.
Difficulty: Easy
Skill: Concept
Objective: 1-3
AACSB: Dynamics of the global economy
71) What distinguishes an MNE from an SME? In a short essay, describe the major differences between the two types of firms.
Answer: A multinational enterprise (MNE) is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. One of the hallmarks of MNEs is that they tend to carry out R&D, procurement, manufacturing, and marketing activities wherever in the world it makes most economic sense. In addition to a home office or headquarters, the typical MNE owns a worldwide network of subsidiaries. It collaborates with numerous suppliers and independent business partners abroad (sometimes termed affiliates).
Typical MNEs include Caterpillar, Samsung, Unilever, Vodafone, Four Seasons Hotels, Disney, DHL, and Nippon Life Insurance.
A small and medium-sized enterprise (SMEs) is a company with less than 500 employees in the United States and Canada, and less than 250 employees in Europe. In addition to being smaller players in their respective economies, SMEs tend to have limited managerial and other resources and primarily use exporting to expand internationally.
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
72) In a short essay, explain why non-profit organizations might conduct cross-border activities.
Answer: In addition to profit-seeking focal firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). Nonprofit organizations pursue special causes through their international activities. They may serve as advocates for the arts, education, politics, religion, or research. They operate internationally either to conduct their activities or raise funds.
Examples of non-profit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, which support health and educational initiatives. CARE is an international non-profit organization dedicated to reducing poverty.
Difficulty: Easy
Skill: Concept
Objective: 1-4
AACSB: Dynamics of the global economy
73) Why might firms choose to pursue internationalization strategies? In a short essay, identify five major motivations for expanding overseas. Classify these motivations as strategic or reactive and provide an example of each.
Answer: Strategic Motivations
a. One reason why firms might expand internationally is to seek opportunities for growth through market diversification. Firms expand to tap into the market potential that exists outside the home country. One example is the expansion of automatic teller machines (ATMs) throughout the world.
b. Firms expand to earn higher margins and profits. Foreign markets are often underserved or not served at all. Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their respective home markets, bathroom fixtures manufacturers American Standard and Toto (of Japan) have found a more favorable competitive environment in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam.
c. Firms internationalize to gain new ideas about products, services, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, just-in-time inventory techniques were refined by Toyota and then adopted by other manufacturers all over the world.
d. Firms might internationalize to be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies often establish international operations in countries where needed raw materials are located, or where raw materials and labor can be more flexibly accessed. One example is the aluminum producer Alcoa, which locates mining operations abroad to extract aluminum's base mineral bauxite, from mines in Brazil, Guinea, Jamaica, and elsewhere.
e. Firms expand to gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher-quality, or better overall value at locations worldwide. For example, some Taiwanese computer manufacturers have established subsidiaries in the United States to access low-cost capital.
f. Firms internationalize to develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale refers to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per-unit cost of making just 100 cameras. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of products that it manufactures.
g. Firms might expand to invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or project-based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term profit-making opportunities. For example, Black and Decker entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long-term sales in the huge Indian market.
Reactive Motivations
Firms expand to better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto-parts suppliers followed, establishing their own operations there.
Strategic or Reactive Motivations
Firms might also internationalize to confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitor's home markets to destabilize and curb its growth. If the firm acts to confront an existing competitor, it would be responding reactively. If the firm acts to preempt a competitor, it would be responding proactively.
One example of a proactive response is Caterpillar's preemptive entry into Japan just as its main rival in the earthmoving equipment industry, Komatsu, was getting started in the early 1970s. Caterpillar's preemptive move hindered Komatsu's international expansion for at least a decade. Had it not moved proactively to stifle Komatsu's growth in Japan, Komatsu's home market, Caterpillar would certainly have to face a more potent rival sooner.
Difficulty: Moderate
Skill: Concept
Objective: 1-5
AACSB: Dynamics of the global economy
74) What is a born global firm? Explain one strategic or reactive reason why an SME might choose to start as a born global.
Answer: A born global firm is a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Born globals are found in advanced economies, such as Australia and Japan, and emerging markets, such as China and India.
An SME might start as a born global to lower its production costs by establishing manufacturing bases in foreign countries. Alternatively, the company might benefit from establishing international operations as a way to confront its industry competitors.
Difficulty: Moderate
Skill: Synthesis
Objective: 1-4, 1-5
AACSB: Dynamics of the global economy
75) In a short essay, explain the meaning of international trade. Describe the two major forms through which international trade takes place. Explain the relationship between international trade and national prosperity and provide examples to illustrate this relationship.
Answer: International trade refers to exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). Exchange is carried out through two main forms:
a. exporting–an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country; and
b. importing or global sourcing–activities that involve the procurement of products or services from suppliers located abroad, for consumption in the home country or a third country.
Exporting is an outbound activity, while importing is an inbound flow of products and services. Both finished products and intermediate goods, such as raw materials and components, are subject to importing and exporting.
There is a strong relationship between national prosperity and participation in international trade and investment. Nations once suffering from economic stagnation are now increasingly prosperous. For example, China, India, and Eastern European nations are active international traders. The proportion of affluent citizens in these countries is rapidly growing. In terms of material gain, households in many developing economies have recently experienced huge increases in the ownership of televisions, refrigerators, and other mass-produced products. While these gains are attributable to various causes, the benefits of free exchange of products, services, capital, and technology among nations are paramount.
Rising prosperity associated with international trade and investment helps improve literacy rates, nutrition, and health care in nations around the world. Trade and investment promote freedom and democracy and may reduce the likelihood of cross-border conflict. In an era of economic turmoil and strained global relations, international business is helping decrease such tensions, by reducing world poverty and increasing interactions that help soothe relations among nations. Cross-border business also helps integrate world economies. Development of the European Union (EU) is transforming Europe into a new powerhouse in global trade. The North American Free Trade Agreement (NAFTA), launched in 1994, has integrated the economies of Canada, Mexico, and the United States into a giant market of roughly 450 million consumers. Following NAFTA's launch, the volume of trade among the three countries jumped dramatically. In Mexico, NAFTA led to substantially higher wages and higher employment rates. Recently, a new accord was launched between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. Known as the Dominican Republic Central American Free Trade Agreement (DR-CAFTA), it is invigorating the economies of the member countries.
Difficulty: Hard
Skill: Synthesis
Objective: 1-2, 1-6
AACSB: Dynamics of the global economy
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