Geringer - M: International Business - 1e, solutions manual and test bank 0078029376
Chapter 2
International Trade and Investment
Learning Objectives
LO1 Appreciate the magnitude of international trade and how it has grown
LO2 Identify the direction of trade, or who trades with whom, and trends in such trade
LO3 Explain the theories that attempt to explain why certain goods are traded internationally
LO4 Explain the size, growth, and direction of foreign direct investment
LO5 Explain some of the theories of foreign direct investment
NOTE:
International business statistics, data, and facts about countries, regions, governments, and companies can change rapidly and dramatically. We recommend that you update this information regularly.
As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles, videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to the ever-changing topic of international business.
iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and discussion questions. Key concepts for each video are identified to save you time! Visit www.mhhe.com/geringerM, or talk to your McGraw-Hill sales representative for more information about iGlobe or the IB Newsletter.
Overview
This chapter addresses three major concerns, the state of international trade, that of foreign direct investment, and then an exploration of why businesses enter foreign markets.
International trade and foreign direct investment have grown dramatically over the last three decades. Although new trading and investment patterns are emerging, developed nations tend to trade with and invest in other developed nations, not in developing countries.
Trade theories attempt to explain why nations trade with each other. Mercantilists (1550 to 1800) believed that trade should be a vehicle for accumulating gold. Adam Smith, displeased with mercantilist ideas, showed that a nation could acquire what it does not produce by means of free, unregulated trade. A nation could gain most by producing only goods that it could produce with less labor than other nations. Ricardo carried Smith’s argument a step farther by proving that a country that was less efficient in the production of all goods could still gain from trade by exporting those products in which it was less inefficient.
Firms go abroad either to increase profits and sales or protect them from being eroded by competition. To increase profits and sales, they may enter new markets, go to markets that promise to help them obtain greater profits, or enter markets in order to test market. The competitive moves are motivated to protect the home market, to attack competition in their home market, to protect their foreign
markets, to guarantee supply of raw materials, to diversify geographically, and to satisfy management’s desire. Exchange rates and currency devaluations play a key role in the direction trade flows and impact profits from global markets. More contemporary, market-derived theories help explain trade flows as they occur today. Porter’s Diamond Model of Competitive Advantage offers an explanation of why countries are successful in their trade.
The traditional approach to international involvement was to begin with exporting, then set up foreign sales companies and finally, where the sales volume warranted, establish foreign production facilities. Increasingly, because countries have liberalized trade restrictions and IT has made communication instantaneous, companies are becoming involved in trade and FDI for many reasons. Although theories argue for free trade among nations, tariff and non-tariff barriers to trade still exist, as is discussed in Chapter 6.
Some companies follow the industry leader overseas and the tendency for European firms to invest in the United States and for U.S. firms to invest in Europe seems to indicate that this cross investment is done to defend home markets. The internalization theory states that international firms will seek to invest in a foreign subsidiary rather than license their superior knowledge, in order to receive a better return on the investment used to produce the knowledge. Two forms of foreign direct investment are: (1) portfolio investment, and (2) direct investment. There is a brief description of the Eclectic Theory of International Production.
Suggestions and Comments
1. Students often are unaware of the rapid growth of international trade, so you may want to start this discussion with Table 2.1 and Table 2.2. Table 2.2 shows the U.S.’s major trading partners. Most students believe that the major trade direction is between developed and developing nations (exchanging raw materials for finished goods).
2. A short haiku-like summary of comparative advantage might help students get the general idea: Do what you do best and trade the rest.
3. Generally students are surprised to learn that the United States’ share in total foreign investment is still as large as it is. To check quickly to see how many students read the assignment, ask which country has the largest share of foreign direct investment worldwide (U.S.).
4. There is a common misconception that firms have a choice between exporting and foreign production. Note that this choice often is unavailable when we cover the reasons for going abroad.
5. You may be interested in discussing the topic, “Does trade lead to FDI or does FDI lead to trade?” This illustrates how closely trade and FDI are interlinked.
Student Involvement Exercises
1. Ask the students to check The Wall Street Journal, the Financial Times and New York Times for ads in which investment inducements are offered by foreign governments. Similar ads also appear in The Economist, Business Week, and Fortune. Students can also search the web to find such inducements for various countries. What kinds of inducements are offered? Does your city and state offer foreign firms inducements to invest in your area? How successful have they been in attracting foreign FDI into your region?
2. Students typically understand that products are exported and imported because of their tangible nature, and the benefits derived through their consumption are apparent. The import and export of services are more difficult for students to grasp. Have students research this and explain their findings. Have them rank the volume of U.S. service imports and exports, the countries, and the top 10 types of services involved. Have them
3. do the same for an EU and an Asian country and compare their findings. Then, have them answer the question, “Why export services?”
4. This is the output of cigars and calculators for countries A and B.
|
Output/Man/Day |
| ||
| Country: | A | B | |
| Calculators: | 6 | 2 | |
| Cigars: | 20 | 10 |
a. Would it be advantageous for B and A to trade?
b. What would be the trading limits of cigars for calculators? (3 1/3 cigars/calculator to 5 cigars/calculator).
c. Total production costs per day are $30 in A and 120 pesos in B. If the exchange rate is 10 pesos in B = $1 in A, will trade still place in the same direction as for part a?
| Country A: | | ||
| Calculators: | | = | $5/calculator |
| Cigars: | | = | $1.50/cigar |
| Country B: |
| ||
| Calculators: | | = | 60 pesos/calculator |
| Cigars: | | = | 12 pesos/cigar |
Converting to dollars:
| Country: | A | B |
| Calculators: | $5/Calculator | $6/calculator |
| Cigars: | $1.50/cigar | $1.20/cigar |
d. What change must be made in the exchange rate to change the flow of trade?
Answer:
(1) If rate goes to 12 pesos = $1, calculator will cost $5 in B, which is the same price as in A, so based on price alone, B will not import from A. B can still sell cigars to A because their price has improved and gives them a greater price advantage.
(2) If the rate goes to 8 pesos = $1, then B’s cigars will cost A $1.50 and B will lose its price advantage. Calculators in B will cost $7.50 to produce.
e. If rate goes to 8 pesos or even 7 pesos = $1, will B sell any cigars to A?
Answer:
(1) They probably will if their cigars taste better or are handmade, if A’s are machine made. Cigars, like most products, are not bought purely on the basis of price.
Guest Lecturers
Some businesspeople who could contribute to the material in this chapter could be:
1. Someone in the technical department of a multinational to talk about licensing and contract manufacturing arrangements that firm has with overseas licensees.
2. Product manager of the international division of a multinational who would be knowledgeable about licensing and all the means for entering a market. Such a person can also explain why the firm went overseas.
3. Financial person in the international division who can discuss the points mentioned in questions 1 and 2 plus the ROI obtained from these arrangements.
4. Representatives from a foreign-owned subsidiary in your area who could explain their motivation to come to the United States and to your area.
5. Invite a representative form the state economic development department to explain to the class what it does to attract foreign investors and what foreign investors are looking for. The Chamber of Commerce would also be a possibility.
6. If you are in an area with foreign consuls, you might invite a member of the consulate to discuss his or her government’s policy on trade restrictions and economic development, especially as it affects foreign investment in that country. The representative could also be asked about that government’s efforts to promote foreign trade.
Global Gauntlet
The focus of this Global Gauntlet explores “Comparative Advantage and Offshoring of Service Jobs from the United States to India.” It provides a thorough overview of the use of outsourcing as a way for MNC’s to improve profitability through comparative advantage offered by markets where the cost of labor is significantly less than in the home country of an MNC. However, this simple lesson in economics is quite controversial and serves as a starting point for a stimulating class discussion on such topics as:
· What are the profit motives for outsourcing?
· What advantages other than profit can be gained by outsourcing?
· How should a company manage outsourcing?
· What are the ethical considerations a company faces in making a decision to outsource?
· How can outsourcing impact (help or hurt) a company’s corporate image?
· Is there a potential for an “upward creep” where low level, low skill tasks start to move upward into higher skilled, higher level jobs being outsourced? What impact can this shift have on home country jobs? On host country jobs?
· Is there a risk of a country losing its innovative edge if higher skilled jobs are outsourced?
· Will outsourcing cause a shift in the home country’s workforce by creating new job opportunities to replace those being outsourced?
Lecture Outline
I. The Opening Section
In this chapter, two topics are examined that relate directly to exporting and production in foreign countries: (1) international trade, which includes exports and imports, and (2) foreign direct investment. Foreign sourcing is discussed later in the text.
II. International Trade
Volume of International Trade:
A. The volume of international trade in goods and services was $7.9 trillion in 2000, $17 trillion in 2007, and exceeding $19.5 trillion in 2008.
B. While smaller in absolute terms, trade in services has grown faster since 1990 than has merchandise trade and is 10 times what it was in 1980.
C. One-fourth of everything grown or made in the world is exported.
D. African trade has increased in value, but decreased in its proportion of world trade by 50%.
E. Fig. 2.1 shows the percentage of trade for countries around the world.
F. The proportion of exports from Latin America, Africa and the Middle East has decreased.
G. North America, Asia, and the EU proportions of world trade have increased. With the EU, new members account for some of the growth.
H. Table 2.1 shows the ranking of the world’s 10 leading exporters and importers of merchandise and services.
III. Direction of Trade
A. Developed nations trade primarily with other developed nations (Table 2.1).
B. Developing nations also trade primarily with developed nations, although this proportion is declining.
C. Direction of trade frequently changes over time among nations or regions. Regional trading blocks (NAFTA, EU, ASEAN) have been trading more within themselves.
IV. Major Trading Partners: Their Relevance for Managers. (Table 2.2)
A. Advantages of focusing attention on a nation that is already a sizable purchaser of goods from the would-be exporter’s country include:
1. Business climate in the importing nation is relatively favorable.
2. Export and import regulations are not insurmountable.
3. There should be no strong cultural objections to buying that nation’s goods.
4. Satisfactory transportation facilities have already been established.
5. Import channel members are experienced in handling import shipments from the exporter’s area.
6. Foreign exchange to pay for the exports is available.
7. The trading partner’s government may be applying pressure on importers to buy from countries that are good customers for that nation’s exports.
B. Major Trading Partners of the United States
1. Table 2.2 shows the major trading partners of the United States. Canada and Mexico are major trading partners because of their geographic proximity, as well as other factors. As members of NAFTA, their importance is growing.
2. Rankings of America’s trading partners are rapidly changing. Asian nations, like China, have become increasingly important, yet challenging, trade partners for both exports and imports.
3. Many Asian countries are becoming major importers of American goods because (1) their rising standards of living enable their people to afford more imported products, and export earnings provide foreign exchange to pay for imports, (2) they are purchasing large amounts of capital goods to further their industrial expansion, (3) they are importing raw materials and components to assemble into subassemblies or finished goods to subsequently export, often to the U.S., and (4) their governments, sometimes under pressure from the U.S. government, have sent buying missions to the U.S. to seek products to import.
4. New international business opportunities are identified by (1) studying the general growth and direction of trade and (2) analyzing major trading partners to identify where the trading activity is. Understanding economics of specific market areas gives insight into future government actions impacting trade.
IV. Explaining Trade: International Trade Theory
International trade theory attempts to answer the question, “Why do nations trade?”
Mercantilism
1. One of the first economic doctrines (1550 to 1800).
2. Central idea–countries having no sources for precious metals could accumulate these precious metals by exporting more goods than they import.
3. Governments should control foreign trade because individuals might trade precious metals for imports. Only the government was in a position to assure that only local products were purchased.
Theory of Absolute Advantage
1. Dissatisfaction with excessive government controls prompted many writers to advocate less government control of foreign trade.
2. Adam Smith (The Wealth of Nations – 1776) attacked mercantilism and said that to trade in order to accumulate gold and other precious metals was foolish. By means of free, unregulated trade, a nation could acquire what it did not produce.
3. He stated that a nation should produce only those goods in which it was most efficient (Country Specialization). The surplus could be traded to obtain the products that could not be produced advantageously.
4. Ask: “What are the limits within which both countries are willing to trade?” Discuss these topics: Terms of Trade (Ratio of International Prices) and Gains from Specialization and Trade to further explain Absolute Advantage Theory.
5. Use the examples in the text to explain Absolute Advantage Theory in depth.
Theory of Comparative Advantage
1. Ricardo (1817) showed that if a nation were less efficient in the production of two products, it could still gain from international trade if it were not equally less efficient in the production of both goods.
2. Smith’s and Ricardo’s theories considered labor as the only important factor in calculating production costs and no thought was given to the possibility of producing the same goods with different combinations of factors.
How Money Can Change the Direction of Trade.
1. Traders must know a price in domestic currency to determine if is better to produce locally or import.
2. Exchange Rate is the price of one currency stated in terms of the other.
3. Countries can regain a competitive position through currency devaluation.
4. Use examples from the text to explain Exchange Rates.
Some Newer Explanations for the Direction of Trade
1. Differences in Resource Endowments
a. Some countries have more abundant resources than others, which can result in different opportunity cost of producing these resources and bringing them to market.
b. Difference in resource endowments suggest that developed countries would more likely trade with developing countries rather than other developed countries with similar factor endowments.
2. Overlapping Demand
a. Consumers’ tastes, preferences, and their nation’s per capita income affect market demand in any country.
b. Customers in countries with similar levels of per capita demand will demand similar goods and services.
3. National Competitive Advantage from Regional Clusters
a. National competitiveness results from a country’s ability to complete the functions necessary to drive a product/service to market and while increasing ROI: design, produce, distribute, and service.
b. Alfred Marshall explained that many industries or firms cluster together geographically because of three reasons: 1) Advantages are gained from pooling a common labor force, 2) gains are attained from the development and pooling of specialized labor which can be coordinated with the needs of buyers, and 3) benefits are gained from the sharing of technological information and corresponding enhancement of the rate of innovation.
c. Porter’s Diamond Model of National Advantage (Fig. 2.2) identifies four variables that will have an impact on local firms’ abilities to use a country’s resources to gain competitive advantage: 1) Demand conditions, the nature of domestic demand within the country, 2) Factor conditions, the level and makeup of production infrastructure, 3) availability of Related and supporting industries such as suppliers and support services, and, 4) the Firm’s strategy, structure and strategic rivalry, including the organization and management style of the firm, level of domestic competition and barriers to market entry. In addition to these four variables, Porter claimed that competitiveness could be affected by government and chance.
Summary of International Trade Theory
International trade occurs primarily because of relative price differences among nations. Differences stem from differences in production costs which result from:
1. Differences in the endowment of factors of production
2. Differences in the levels of technology that determine factor intensities used
3. Differences in the efficiencies with which these factor intensities are utilized
4. Foreign exchange rates.
The demand variable of taste differences can reverse the direction of trade predicted by the theory.
IV. Foreign Investment
Foreign investment is divided into two components: (1) portfolio investment and (2) direct investment. The distinction between these two has begun to blur, particularly with growing size and number of international mergers, acquisitions, and alliances.
A. Portfolio Investment
1. Not directly concerned with the control of a firm but to gain ROI
2. Nonresidents owned American stock and bonds with a value of $6.2 billion in 2007. Americans owned $6.8 billion in foreign securities in 2007.
B. Foreign Direct Investment (FDI)
1. The Outstanding Stock of FDI (Fig. 2.3).
a. The book value of all FDI worldwide was nearly $16.2 trillion at the end of 2008.
b. The U.S. is one of the largest investor nations, with $3.2 trillion invested abroad, which was 2 times the FDI of the next-largest investor, the United Kingdom.
c. The proportion of FDI accounted for by the United States declined by over 46% between 1980 and 2008, however, from 36% to less than 20%. The proportion of FDI accounted for by the EU increased from 36% to 50% in 2008. Japan’ FDI declined from 12% in 1990 to 4% in 2008. Developing countries increased their proportion of FDI, from 1% in 1980 to 15% in 2008.
2. Annual Outflows of FDI
a. Outflows hit a historical high in 2000—$1.2 trillion, more than 250% of the level in 1997. Global economic slowdown in late 2000 resulted in subsequent decline in overall level of annual FDI flows. By 2002, total was only $647 billion, only about 54% of the 2000 figure but still the fifth-highest annual level of FDI to that point in history. Outflows subsequently increased, reaching $2.1 trillion by 2007 before declining to $1.9 trillion during the economic downturn of 2008.
b. Much of outward FDI is associated with global mergers and acquisitions, because:
i. U.S. corporate restructuring put underperforming businesses and assets on the market
ii. Foreign companies want rapid access to U.S. advanced technology
iii. Foreign firms felt that access to the lucrative U.S. market would be more successful through acquiring known brand names rather than promoting unknown foreign brands
iv. Increased international competition, including pursuit of economies of scale, led to restructuring and consolidation of many global industries and acquisition of firms in major markets like the U.S.
2. Annual Inflows of FDI
a. Industrialized nations invest and trade with one another – 70% of annual FDI goes to developed countries but has dropped to 57% in 2008.
b. Developing countries had a 70% increase in FDI from 1996 to 2000 and an additional 220% increase by 2008.
c. African nations had less than 3% of FDI inflow from 1985 to 2008. Singapore equaled all of Africa in FDI for the same period. Latin American inflows fluctuated over the past two decades and declined from 16.5% in 1996 to 8.5% in 2006. Combined Asian FDI was 43% from 2006 to 2008.
3. Level and Direction of FDI
a. Difficult to accurately determine present value of foreign investments, but if a nation continues to receive growing amounts of FDI, its investment climate must be favorable and the political forces of that country are attractive.
b. If there is political instability and low levels of FDI inflow, little investment will occur.
V. Are Economic and Social Development Affected by Trade and Investment?
1. The introduction from the UNCTAD report says “Yes,” there is a direct link between trade and investment and quality of life.
2. UNCTAD created the Trade and Development Index (TDI) that systematically monitors the trade and development performance of developing countries to facilitate world policies and strategies to ensure that trade is a key instrument in development. A total of 123 countries were evaluated and their TDI scores were ranked. The ranking for the Top 20 is shown in Table 2.3. Developing countries showed a lag in physical infrastructure, human capital, financial intermediation, institutional quality, economic and social wellbeing, and trade performance. All of these factors are needed to attract trade and FDI. Trade liberalization is critical for a high TDI score.
3. External and internal factors affect a nation’s export performance. External factors include market access conditions such as transportation costs, geography, physical infrastructure, trade barriers, competition and other factors that influence demand. Internal factors are supply-side conditions within a nation, such as raw materials, cost of labor and capital, access to technology, economic policy, institutional environment, and market access.
A. Does Trade Lead to FDI?
1. Historically, FDI followed foreign trade because trade costs less and has less risk than FDI and business can be expanded in smaller, controllable increments rather than incurring large investments and larger risk. A firm would start exporting by using agents and then set up an export department with foreign sales personnel as business expanded.
2. However, FDI can now lead to trade. Significant changes in today’s global business environment make FDI a possible first step into international trade. These changes include:
a. Fewer government trade barriers
b. Increasing global competition
c. New production technologies
d. New communications technologies
e. Greater integration of the global supply chain and production closer to available resources
f. A growing corporate focus to identify and exploit global business opportunities
VI. Explaining FDI: Theories of International Investment
Accepted theories to explain FDI: FDI can either be greenfield investment, where new facilities are built from the ground up, or cross-border acquisition, the purchase of existing business facilities in another nation. Strategic motives for FDI include finding new markets, accessing raw materials, accessing new technologies or managerial expertise, achieving production efficiencies, enhance political safety of firm’s operations, or respond to competition.
A. Monopolistic Advantage Theory - based on the premise that FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms. These advantages could be economies of scale, superior technology, or superior knowledge of marketing, management, or finance, giving the MNE competitive advantage over local firms.
B. Internationalization Theory - to obtain a higher ROI, a firm will transfer its superior knowledge to a foreign subsidiary and not sell it in the open market. Firms transfer knowledge across borders without it leaving the firm.
C. Dynamic Capabilities - ownership of specific knowledge or resources is necessary but not sufficient enough for success in FDI, but firm must also develop distinctive competitive advantages to complement their knowledge or resources.
D. Eclectic Theory of International Production states that for a firm to invest overseas, it must possess 3 types of advantages:
(1) Ownership specific – tangible and intangible assets not available to competitors but can be transferred abroad (e.g., a recognizable brand name).
(2) Location specific – foreign market offers economic, social or political advantages which will let the firm exploit its ownership specific advantages (market size, tariff or nontariff barriers, or transportation cost advantages)
(3) Internalization – firms have choice as to the way to enter foreign markets, ranging from arm’s length market transactions to hierarchy via a wholly owned subsidiary. It is in the firm’s interest to exploit ownership specific advantages through internalization in those situations where either the market does not exist or it functions inefficiently.
Eclectic Theory (also referred to as OLI Model) explains MNEs’ choice of foreign production facilities. The common factor for all three of these theories is that FDI is typically made by large, research-intensive firms in oligopolistic industries and is the reason why these companies find it profitable to invest overseas.
ch2 Key
| 1. | International trade includes exports, imports, and foreign direct investment. International trade includes exports and imports, not foreign direct investment. |
| AACSB: Reflective thinking |
| 2. | Importing and foreign direct investment are two approaches to meeting overseas demand. Exporting and foreign direct investment are two approaches to meeting overseas demand. |
| AACSB: Reflective thinking |
| 3. | International firms must export their products or services in order to establish and expand their overseas operations. ICs can engage in foreign direct investment to establish and expand their overseas operations. |
| AACSB: Reflective thinking |
| 4. | The dollar value of total world exports in 2007 was greater than the gross national product of every nation in the world except Japan. The dollar value of total world exports in 2008 was greater than the gross national product of every nation in the world except the U.S. |
| AACSB: Reflective thinking |
| 5. | The magnitude of international trade and how it has grown are reflected in that one-fourth of everything grown or made in the world is now exported. As stated directly in the text. |
| AACSB: Reflective thinking |
| 6. | The proportion of manufacturing value added that is located in developed countries has been roughly stable since 1995. The proportion of manufacturing value added that is located in developed countries has been declining since 1995. |
| AACSB: Reflective thinking |
| 7. | South and East Asia's share of the world's manufacturing value added has nearly tripled since 1980. South and East Asia's share of the world's manufacturing value added has quadrupled since 1980. |
| AACSB: Reflective thinking |
| 8. | In 2009, the top 10 exporting and importing nations collectively accounted for over half of all exports and imports of merchandise and services worldwide. As stated directly in the text. |
| AACSB: Reflective thinking |
| 9. | Both developed nations and developing nations tend to trade more with developed nations. As stated directly in the text. |
| AACSB: Reflective thinking |
| 10. | Approximately 70 percent of the exports from developed countries go to developed countries. As stated directly in the text. |
| AACSB: Reflective thinking |
| 11. | The development of expanded regional trade agreements, such as the Association of Southeast Asian Nations, Mercosur, and the EU, can substantially alter the level and proportion of trade flows within and across regions. As stated directly in the text. |
| AACSB: Reflective thinking |
| 12. | There are a number of advantages in focusing attention on a nation that is already a sizable purchaser of goods coming from the would-be exporter's country. As stated directly in the text. |
| AACSB: Reflective thinking |
| 13. | China, Mexico, and Japan are the three largest trading partners of the U.S., in terms of the total volume of imports and exports. China, Mexico and Canada are the three largest trading partners of the U.S. |
| AACSB: Reflective thinking |
| 14. | The first formulation of international trade theory, by Adam Smith, was motivated by political considerations. As stated directly in the text. |
| AACSB: Reflective thinking |
| 15. | The central idea of mercantilism is there should be an export surplus so a nation can accumulate precious metals. As stated directly in the text. |
| AACSB: Reflective thinking |
| 16. | Arguments in support of mercantilism largely disappeared after the end of the mercantilist era in the late 1700s. Mercantilist sentiments are still cited for explaining or criticizing behavior of countries such as China, and when arguing that exports are "good" for a country or that imports are "bad". |
| AACSB: Reflective thinking |
| 17. | The theory of absolute advantage suggests that under free, unregulated trade, each nation should specialize in producing those goods it can produce most efficiently, based on naturally occurring endowments such as minerals. Specialization should be based on market forces. |
| AACSB: Reflective thinking |
| 18. | Adam Smith explained how countries can benefit from international trade, even if they lack any absolute advantage over their trade partners. Ricardo developed an explanation of how countries can benefit from international trade, even if they lack any absolute advantage over their trade partners. |
| AACSB: Reflective thinking |
| 19. | According to the theory of comparative advantage, a nation can gain from trade if it is not equally less efficient in producing two goods. As stated directly in the text. |
| AACSB: Reflective thinking |
| 20. | If a Chinese worker earns $1.00 a day, then goods produced by this worker will cost less than the same goods produced by an American earning $18.00 an hour. Wage costs are neither all of the production costs nor all of the labor costs, and labor can also exhibit differences in productivity. |
| AACSB: Reflective thinking |
| 21. | The price of one currency stated in terms of another currency is the exchange rate. As stated directly in the text. |
| AACSB: Reflective thinking |
| 22. | Currency devaluation helps a nation avoid losing markets and regain competitiveness in world markets. As stated directly in the text. |
| AACSB: Reflective thinking |
| 23. | Linder's theory of overlapping demand explains the direction of trade for minerals and agricultural products. Linder's theory attempted to explain how demand for products was affected by income levels, and therefore a nation's income per capita, and therefore exports will be influenced by similarity in income levels across countries. |
| AACSB: Reflective thinking |
| 24. | Michael Porter claims that demand conditions, factor conditions, related and supporting industries, and firm strategy, structure, and rivalry, rather than government and chance, are factors that affect national competitiveness. Porter's theorizing about his Diamond Model of national advantage also acknowledged that competitiveness could be affected by government and chance. |
| AACSB: Reflective thinking |
| 25. | A nation's relative ability to design, produce, distribute, or service products within an international trading context, while earning increasing returns on its resources, is known as national competitiveness. As stated directly in the text. |
| AACSB: Reflective thinking |
| 26. | The primary reasons for international trade is a lack of natural resources in the developed nations. International trade occurs primarily because of relative price differences across nations, which stem from differences in production costs. |
| AACSB: Reflective thinking |
| 27. | According to the text, differences in taste, a demand variable, can reverse the direction of trade predicted by the theory. As stated directly in the text. |
| AACSB: Reflective thinking |
| 28. | International trade theory shows that nations will attain a higher level of living by specializing in goods for which they possess a comparative advantage and importing those for which they have a comparative disadvantage. As stated directly in the text. |
| AACSB: Reflective thinking |
| 29. | Portfolio investment is the purchase of sufficient stock in a firm to obtain significant management control. Portfolio investment is the purchase of stocks and bonds to obtain a return on the funds invested. Direct investment is the purchase of sufficient stock in a firm to obtain significant management control. |
| AACSB: Reflective thinking |
| 30. | Direct investment refers to overseas purchases of stocks and bonds to gain a return on the funds invested. Portfolio investment refers to overseas purchases of stocks and bonds to gain a return on the funds invested. |
| AACSB: Reflective thinking |
| 31. | The book value, or the value of the total outstanding stock, of all foreign direct investment worldwide was $16.2 trillion at the end of 2008. As stated directly in the text. |
| AACSB: Reflective thinking |
| 32. | The proportion of the outstanding stock of foreign direct investment accounted for by the United States declined by two-thirds between 1980 and 2008. The proportion of the outstanding stock of foreign direct investment accounted for by the United States declined by nearly 46 percent between 1980 and 2008. |
| AACSB: Reflective thinking |
| 33. | Reflecting their continued economic development, developing countries have dramatically increased their share of FDI stock, from 1 percent in 1980 to nearly 15 percent in 2008. As stated directly in the text. |
| AACSB: Reflective thinking |
| 34. | An important development in the level of worldwide FDI is the emergence of what has been called the "bamboo network" of ethnic Chinese family businesses based outside of China. As stated directly in the text. |
| AACSB: Reflective thinking |
| 35. | An arrangement where one or more activities that could be provided in-house are instead provided by another company is offshoring. An arrangement where one or more activities that could be provided in-house are instead provided by another company is outsourcing. |
| AACSB: Reflective thinking |
| 36. | Some observers have argued American industry and the American economy as a whole will be strengthened by offshoring activities to workers in India or other nations that have comparative advantages in areas such as labor costs. As stated directly in the text. |
| AACSB: Reflective thinking |
| 37. | Industrialized nations invest primarily in one another just as they trade more with one another. As stated directly in the text. |
| AACSB: Reflective thinking |
| 38. | Historically, approximately two-thirds of the value of corporate investments made in the United States from abroad have been spent to acquire going companies rather than to establish new ones. As stated directly in the text. |
| AACSB: Reflective thinking |
| 39. | Developed by the United Nations Conference on Trade and Development, the Trade and Development Index is a tool whose goal is to assist efforts "to systematically monitor the trade and development performance of developing countries with a view to facilitating national and international policies and strategies that would ensure that trade serves as a key instrument of development." As stated directly in the text. |
| AACSB: Reflective thinking |
| 40. | If a nation is continuing to receive appreciable amounts of foreign investment, its investment climate must be favorable. As stated directly in the text. |
| AACSB: Reflective thinking |
| 41. | Historically, foreign direct investment has followed foreign trade, and one reason is that foreign trade is typically less costly and less risky than making a direct investment into foreign markets. As stated directly in the text. |
| AACSB: Reflective thinking |
| 42. | Foreign direct investment may be an attempt by foreign companies to establish competitive advantage over potential competitors in other markets, due to possession of advantages not available to local firms. Such advantages possessed by foreign companies over their local competitors include knowledge about local market conditions and cost efficiencies from operating at a distance. Lack of knowledge about local market conditions and increased costs of operating at a distance are usually liabilities, rather than advantages, for ICs. |
| AACSB: Reflective thinking |
| 43. | Internalization theory suggests that what an organization is good at should not be outsourced without very careful consideration. As stated directly in the text. |
| AACSB: Reflective thinking |
| 44. | The dynamic capability theory states that for a firm to invest overseas, it must have three kinds of advantages: ownership specific, internalization, and location specific. Ownership specific, internalization, and location specific advantages are part of Dunning's Eclectic Theory of International Production. |
| AACSB: Reflective thinking |
| 45. | Dunning's Eclectic Theory of International Production provides an explanation for the choice by the international firm of its overseas production facilities. As stated directly in the text. |
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