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Definition
| a tax levied on imports that effectively raises the cost of imported products relative to domestic products |
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| levied as a fixed charge for each unit of a good imported |
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| levied as a proportion of the value of the imported good |
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| a government payment to a domestic producer |
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• ØCompete against low-cost foreign imports
• ØGain export markets
• ¦Consumers typically absorb the costs of subsidies |
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Definition
| • ¦Subsidies help domestic producers: |
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Definition
| A direct restriction on the quantity of some good that may be imported into a country |
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| • Voluntary export restraints |
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Definition
| Quota on trade imposed by the exporting country, typically at the request of the importing country’s government |
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A local content requirement demands that some specific fraction of a good be produced domestically
• ØCan be in physical terms or in value terms
• ¦Local content requirements benefit domestic producers and jobs, but consumers face higher prices |
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Definition
| • Local content requirements- |
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Term
| Administrative trade polices |
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Definition
bureaucratic rules that are designed to make it difficult for imports to enter a country
• ¦These polices hurt consumers by denying access to possibly superior foreign products |
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Definition
| another name for anti dumping policies |
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Term
- •Increase government revenues
•Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods
•Force consumers to pay more for certain imports |
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Definition
Taxes levied on imports (also sometimes on exports)
• Specific tariff: fixed charge for each good imported
• Ad valorem tariff: a % of imported goods value
Who gains and who loses |
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| - Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods for consumers |
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Definition
Import Quotas And Voluntary Export Restraints
- Who gains and who loses |
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Term
A local content requirement demands that some specific fraction of a good be produced domestically
ØCan be in physical terms or in value terms
¦Local content requirements benefit domestic producers and jobs, but consumers face higher prices |
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Definition
| Local Content Requirements: |
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• At below their production costs or
• Below “fair market value”
• ØMay be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out, and later raising prices and earning substantial profits |
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Definition
| Dumping: selling goods in an overseas market |
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Term
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Definition
Bureaucratic rules that make it difficult for imports to enter a country
¦These polices hurt consumers by denying access to possibly superior foreign products |
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Term
ØPreferential trade terms given to countries that a government wants to build strong relations with
• ØRogue states that do not abide by international laws or norms can be punished |
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Definition
| • Furthering foreign policy objectives |
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Term
| • Infant industry protection- |
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Definition
an industry should be protected until it can develop and be viable and competitive internationally
• ØAccepted as a justification for temporary trade restrictions under the WTO
• ¦This argument has been criticized because:
• ØIt is useless unless it makes the industry more efficient
• ØIf a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds |
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Definition
in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages
• ØAlso suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage |
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Term
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Definition
• Governments often do not act in the national interest when they intervene
• Politically important groups influence them |
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| The WTO is currently focusing on: |
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Definition
1.Anti-dumping policies - encouraging members to strengthen the regulations governing the imposition of antidumping duties
2.Protectionism in agriculture - concerned with the high level of tariffs and subsidies in the agricultural sector of many economies
3.Protecting intellectual property - members believe that the protection of intellectual property rights is essential to the international trading system
4. Market access for nonagricultural goods and services - bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates
5. A new round of talks: Doha – focusing on:
ØCutting tariffs on industrial goods and services
ØPhasing out subsidies to agricultural producers
ØReducing barriers to cross-border investment
ØLimiting the use of anti-dumping laws |
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Term
1.The flow of FDI - the amount of FDI undertaken over a given time period
ØOutflows of FDI are the flows of FDI out of a country
ØInflows of FDI are the flows of FDI into a country
2.The stock of FDI - the total accumulated value of foreign-owned assets at a given time |
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Definition
| There are two ways to look at FDI: |
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- ¦Both the flow and stock of FDI in the world economy have increased over the last 35 years
¦FDI has grown more rapidly than world trade and world output because:
ØFirms still fear protectionist policies
ØThe shift toward democratic political institutions and free market economies encourages FDI
ØGlobalization is prompting firms to ensure they have a significant presence in many regions of the world |
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Definition
| Trends in FDI & the Direction of FDI |
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ØThe United States is a favorite target as is the European Union
¦More recently, developing nations have been the recipients of FDI
ØSouth, East, and Southeast Asia, and particularly China have received significant inflows
ØLatin America is also emerging as an important region for FDI |
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Definition
| ¦Historically, most FDI has been directed at the developed nations of the world |
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ØTransportation costs are high
ØTrade barriers are high |
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Definition
| FDI will be favored over exporting when: |
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Term
- an exporting strategy can be limited by transportation costs and trade barriers
ØWhen transportation costs are high, exporting can be unprofitable
ØForeign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas |
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Definition
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ØThe firm wants control over its technological know-how
ØThe firm wants control over its operations and business strategy
ØThe firm’s capabilities are not amenable to licensing |
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Definition
| FDI will be favored over licensing when |
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Term
. Limitations of Licensing - internalization theory (also known as market imperfections) suggests
1.Licensing could result in a firm’s giving away valuable technological know-how to a potential foreign competitor
2.Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability
3.Licensing may be difficult if the firm’s competitive advantage is not amendable to it |
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Definition
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Term
Vernon - firms undertake FDI at particular stages in the life cycle of a product they have pioneered
ØFirms invest in other advanced countries when local demand in those countries grows large enough to support local production
ØFirms shift production to low-cost developing countries when product standardization and market saturation create price competition and cost pressures |
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Definition
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Term
| Location-specific advantages |
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Definition
| arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets |
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Term
Resource-Transfer Effects - ¦FDI can bring capital, technology, and management resources that would otherwise not be available
Employment Effects - ¦FDI can bring jobs that would otherwise not be created there
Balance-of-payments account & current account
- ¦The balance-of-payments account records a country’s payments to and receipts from other countries
¦The current account records a country’s export and import of goods and services
ØA surplus is usually favored over a deficit
¦FDI can help achieve a current account surplus:
ØIf it is a substitute for imports of goods and services
ØIf the MNE uses a foreign subsidiary to export goods and services to other countries
Effect on Competition and Economic Growth - ¦FDI in the form of greenfield investment:
ØIncreases the level of competition in a market
ØDrives down prices
ØImproves the welfare of consumers
¦Increased competition can lead to:
ØIncreased productivity growth
ØProduct and process innovation
ØGreater economic growth |
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Definition
BENEFITS AND COSTS OF FDI
Host Country Benefits |
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Adverse Effects on Competition - ¦The subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization
ØThe MNE could draw on funds generated elsewhere to subsidize costs in the local market
ØDoing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position |
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Definition
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¦There are two possible adverse effects of FDI on a host country’s balance-of-payments:
1.The capital outflows as foreign subsidiaries repatriate earnings to the parent country
2.There is a debit on the current account of the host country’s balance of payments associated with imports of input products by the foreign subsidiary |
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Definition
| Adverse Effects on the Balance of Payments |
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Term
¦FDI can mean some loss of economic independence
ØKey decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control |
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Definition
| National Sovereignty and Autonomy |
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Term
Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time
ØCountries manipulate tax rules to make it more favorable for firms to invest at home
ØCountries may restrict firms from investing in certain nations for political reasons |
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Definition
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Term
• ¦Governments offer incentives to foreign firms to invest in their countries
• ØMotivated by a desire to gain from the resource-transfer and employment effects of FDI, and to capture FDI away from other potential host countries |
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Definition
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Term
• Ownership extent restrictions (national security; local nationals can safeguard host country’s interests
2.Restricting Inward FDI |
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Definition
| - Inward FDI restrictions |
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Term
exclude foreign firms from certain sectors on the grounds of national security or competition
ØLocal owners can help to maximize the resource transfer and employment benefits of FDI
¦Performance requirements - used to maximize the benefits and minimize the costs of FDI for the host country |
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Definition
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Term
ØIn industries producing commodity type products that fill universal needs - needs that exist when the tastes and preferences of consumers in different nations are similar if not identical
ØWhen major competitors are based in low cost locations
ØWhere there is persistent excess capacity
ØWhere consumers are powerful and face low switching costs
¦To respond to these pressures, firms need to lower the costs of value creation |
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Definition
| - ¦Pressures for cost reductions are greatest: |
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Term
- consumer tastes/preferences- ØWhen consumer tastes and preferences differ significantly between countries, firms face strong pressures for local responsiveness
- infrastructure/practices- ØWhen there are differences in infrastructure and/or traditional practices between countries, pressures for local responsiveness emerge
- distribution channels- ØA firm’s marketing strategies may be influenced by differences in distribution channels between countries
- host government needs/requirements |
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Definition
Pressures for local responsiveness:
Differences in |
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Term
localization
International
Global
Transnational |
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Definition
| Strategic Choice: four basic strategies to compete in the international environment |
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Term
| Multidomestic MNC(localization) |
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Definition
focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets
•Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense |
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Term
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Definition
involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization
•Makes sense when there are low cost pressures and low pressures for local responsiveness |
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A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies
•The goal is to pursue a low-cost strategy on a global scale
•Makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal |
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Definition
| Global MNC- Question: When does a global standardization strategy make sense? |
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Term
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Definition
tries to simultaneously:
•Achieve low costs through location economies, economies of scale, and learning effects
•Differentiate the product offering across geographic markets to account for local differences
•Foster a multidirectional flow of skills between different subsidiaries
Makes sense when there are both high cost pressures and high pressures for local responsiveness |
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Term
•As competition increases, international and localization strategies become less viable
•To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors |
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Definition
| Question: Is the choice of strategy static? |
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Term
•Facilitate entry into a foreign market
•Allow firms to share the fixed costs and risks of developing new products or processes
•Bring together complementary skills and assets that neither partner could easily develop on its own
•Can help establish technological standards for the industry that will benefit the firm |
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Definition
| Strategic alliances are attractive because they: |
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Term
- •Strategic alliances can give competitors low-cost routes to new technology and markets
•Unless a firm is careful, it can give away more in a strategic alliance than it receives |
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Definition
| The Disadvantages of Strategic Alliances |
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- Helps achieve strategic goals
- Shares the firm’s vision for purpose of the alliance
- Is not likely to exploit the alliance to its own ends |
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Definition
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• Protect technology/know-how that is not intended to be transferred
• Draw a solid contract with safeguards against opportunism
• Achieve equitable gain through agreed swaps of technology the other wants
• Seek creditable, clearly articulated commitment to partner “behavior” a-priori |
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Definition
| Structure to reduce the risk strategic alliance |
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• Show sensitivity to cultural differences that explain different managerial styles
• Build trust: Relational capital
• Learn from partners |
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Definition
| How to manage a strategic alliance |
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ØThe ability to pre-empt rivals and capture demand by establishing a strong brand name
ØThe ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
ØThe ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business |
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- ØEntry is early when a firm enters a foreign market before other foreign firms
ØEntry is late when a firm enters after other firms have already established themselves in the market |
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Definition
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• Level of resources
- 1st mover advantages and large scale linked
- Small scale entry allows learning at low risk
• A strategic commitment is difficult to reverse
- Has a long-term impact
- Means that the resources cannot be used elsewhere |
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Definition
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• ØIt is relatively low cost
• ØFirms may achieve experience curve economies
• ¦Exporting is not attractive when:
• ØLower-cost manufacturing locations exist
• ØTransport costs are high
• ØTariff barriers are high
• ØForeign agents fail to act in the exporter’s best interest |
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Definition
| • Exports are most attractive when |
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• ØThey allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process
• ØThey are less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk |
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Definition
| Turnkey projects are attractive because: |
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Term
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Definition
an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee
• ØIntangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks |
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• ØThe firm does not have to bear the development costs and risks associated with opening a foreign market
• ØThe firm avoids barriers to investment
• ØIt allows a firm with intangible property that might have business applications, but which doesn’t want to develop those applications itself, to capitalize on market opportunities |
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Definition
| • ¦Licensing is attractive when: |
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• ØThe firm doesn’t have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies
• ØThe firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised
• ØThere is the potential for loss of proprietary (or intangible) technology or property
• ØTo reduce this risk, firms can use cross-licensing agreements or link the agreement with the decision to form a joint venture |
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Definition
| Licensing is unattractive when: |
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Term
| It can avoid costs and risks of opening up a foreign market |
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Definition
| Franchising is attractive because: |
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Term
• ØIt may inhibit the firm's ability to take profits out of one country to support competitive attacks in another
• ØThe geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect |
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Definition
| Franchising is unattractive because: |
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Term
• ØA firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems
• ØThe costs and risks of opening a foreign market are shared with the partner
• ØThey can help firms avoid the risk of nationalization or other adverse government interference
• ØThe firm risks giving control of its technology to its partner
• ØThe firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies
• ØShared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time |
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Definition
| Joint ventures are attractive because: |
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