Chapter-7

1-I think governments should consider human rights when granting preferential trading rights to countries. In the
world I live in I have strong beliefs that every individual should be granted basic human rights, in whatever country
they reside in. Yes, trading with countries such as China can bring a boost to the economy, but at what cost? I
would rather pay the extra cash in order to ensure the person who was making the item did it in a safe environment
with basic human rights. Countries such as China are frequently a violator of human rights, and trading with the
U.S. is very important to China. This gives the U.S. a kind of leverage when trying to influence China’s human
rights policies, and we have used this leverage in the past, and I feel we should continue to do so showing other
Countries what we are willing to do in order to provide ethical international business. Although, in doing this we
run the risk of China choosing to trade with a country other then the U.S. If we were to forget about human rights,
and were too just trade with China it could also make human rights better without even trying. This could happen
by the income levels increasing due to trade, which in return, could provide greater wealth for the people who will
then be able to mandate, and obtain better treatment.
The stronger economic actor, will only gain from the creation. The drafting of such an agreement is going to be a
long-term process, which developing countries should enter only after careful and intensive preparations. It is good
to consider Human Values and Rights in any deals or negotiations, but it needs To ensure that the interest of both
the parties are taken care Rights can better be taken as a movement to form collective human values and its
implementation. It is not a wise idea to merge it with Trade

2- The interests of consumers should always be the primary concern of governments, but unfortunately consumers
usually are the ones who pay higher prices due to trade policies. The government has the responsibility to ensure
that businesses will get a competitive advantage in the global business world. If the government were too place too
much of its interests in businesses the consumer would suffer immensely, but without the consumer there is no
need for a business. In order to have a successful trade policy the government needs to keep both the consumer,
and the businesses interests in mind, because one does not work without the other.

3- The new trade theory tells us that the increasing returns to concentrations and first mover benefits matter very
much. This theory is founded on the dispute for first mover benefits, when the government uses backings to
increase the changes of becoming first movers in developing industries. Businesses should be urging the
government to focus on new technologies that could be very important in the future, and using subsidies to help
develop this work in order to create these technologies. Governments should help provide export backings until the
local businesses have been able to establish first mover gains in the worlds market.

4- Well, as long as the manufacturing requirements haven’t changed drastically the obvious choice would to be
reviewing Malaysia or Hong King again. Due to the U.S. enforcing the ad valorem tariff on Thailand product
imports, it would be simple to avoid the tariffs by reviewing these other locations, and choosing to produce there
instead.

5- The U.S. producers, and their employees are the prime recipients of the anti-dumping duties. Due to this,
consumers in the U.S. will pay higher prices for magnesium-based products, but it will keep business within our
country allowing jobs to remain. The U.S. does run the risk of retaliatory consequences from China and Russia.

CH7 Closing Case

1- The reason why calls for protectionism are greater during sharp economic contractions than during boom
periods is to keep business within the country. This allows businesses to stay open, keeps employees employed,
and doesn’t let foreign business to come into the…
Chapter-8
Q1. In 2008, inward FDI accounted for some 63.7 percent of gross capital formation in Ireland, but only 4.1
percent in Japan (gross capital formation refers to investments in fixed assets such as factories, warehouses, and
retail stores). What do you think explains this difference in FDI inflows into the two countries?
Ans: Gross capital formation summarizes the total amount of capital invested in factories, stores, office
buildings, and so on. When capital investment is high, a country has more favorable growth prospects. The
difference between the rates of gross capital formation in Ireland and Japan would indicate that FDI is an
important source of investment capital and economic growth in Ireland, but not in Japan. There can be several
reasons for this. For example, companies may perceive that Ireland is more attractive as a destination for their
investments, or that it is easier to establish operations in Ireland than in Japan. Investors may be cautious about
Japan because of its reputation for burdensome regulations. Recently Ireland has become more attractive
because of it low corporate taxes which might have affected this case too.

2. Compare and contrast these explanations of FDI: internalization theory, Vernon’s product life cycle theory,
and Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical
pattern of horizontal FDI? Why?
Internalization theory seeks to explain why firms often prefer foreign direct investment to licensing as a strategy
for entering foreign markets. According to internationalization theory, licensing has three major drawbacks as a
strategy for exploiting foreign market opportunities: licensing may result in a firm giving away proprietary
technology, licensing does not permit a firm to maintain tight control over its activities, and licensing is not
appropriate when a firm’s competitive advantage is based not so much on its products as on the management,
marketing, and manufacturing capabilities that produce those products.
Vernon’s product life cycle theory argues that firms undertake FDI at particular stages in the life cycle of a
product they have pioneered. They invest in other advanced countries when local demand in those countries
grows large enough to support local production. They subsequently shift production to developing countries
when product standardization and market saturation give rise to price competition and cost pressures.
Investment in developing countries, where labor costs are lower, is seen as the best way to reduce costs.
Finally, Knickerbocker’s theory of FDI suggests that firms follow their domestic competitors overseas. This
theory had been developed with regard to oligopolistic industries. Imitative behavior can take many forms in an
oligopoly, including FDI.
The second part of this question is designed to stimulate classroom discussion and/or force students to think
through these theories and select the one that they feel provides the best explanation for the historic pattern of
FDI.

3. What are the strengths of the eclectic theory of FDI? Can you see any shortcomings? How does the eclectic
theory inform management practice?
Successful foreign investment depends not only on the organization’s possession of internal skills and resources,
but also on how it is able to coordinate them to gain a competitive edge over local firms. These may include a
strong brand name, physical assets, research and development facilities, innovation and patents as well as other
organizational efficiencies such as superior technology based strategic tools or large scale operational
advantages. The multinational company should have a unique competitive advantage, which will overcome the
disadvantages of competing with the local firms in the home country. Location advantages can be twofold. The
organization may benefit from location advantages when it is near the market/customer. This will not only allow
continuous and steady supply, but will enable it to save on costs like transportation and warehousing,
developing cost advantages. Secondly, Firms can also benefit from location advantages when they are nearer to
their suppliers of raw materials. This will enable them to reduce on time taken for transportation and will also
help maintain quality. However, there are times when foreign investments reap
Audreanna Phoutasen Tyrone Jones International Business March 2, 2015 advantages like cheap labor or make
the firm visible to scarce immobile resources only accessible with local firms. This will hence lead to FDI being
adopted. Location advantages will build an advantage if performing activities will be more profitable in the
foreign location as opposed to the organizations home country.
4. Read the Management Focus on Cemex and then answer the following questions:
a) Which theoretical explanation, or explanations, of FDI best explains Cemex's FDI?
b) What is the value that Cemex brings to the host economy? Can you see any potential drawbacks of inward
investment by Cemex in an economy?
c) Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode. Why?
Ans: a) Cemex is a cement company. Consequently, exporting is difficult because of the weight of the product.
If Cemex wants to expand into new markets, the company would either need to license a local company or make
an investment in the market directly. Cemex's success is due in part to its top notch customer service, and
relationship with distributors. Because these advantages could be difficult to transfer, the company will probably
choose to invest directly. Students should reflect on these factors as they consider the various theories to explain
Cemex's FDI.
b) Cemex is the third largest cement company in the world, and a powerhouse in Mexico where it controls 60
percent of the market. Cemex is highly focused on efficient manufacturing and customer service. Distributors
are rewarded for their sales, as are users. The primary benefit Cemex brings to host countries involves these
competitive advantages. Cemex acquires companies and then transfers technological, management, and
marketing know-how to the new units, improving their performance. The company has brought several acquired
companies back to full production, increasing employment opportunities in the host country as well.
c) Cemex has successfully acquired established cement makers in many countries. By acquiring companies
rather than establishing them from the ground up, Cemex can avoid some of the delays that could occur in the
start-up phase, while at the same time, capitalize on the benefits of an established market presence.

Ans. 5: A) Export from the US:

Pros: Little intial cost for the company. Export led growth which is high in return.
Cons:This has problems since we should need a local importer and distributor. We would be dependent on local
partners and might not be able to compete effectively.

(B) to license a european firm to manufacture and market the computer in europe.
Pros: Very low cost. We can quickly enter the market. Leave marketing and manufacturing to another firm.
Cons: Again, we lose control over our export market. Dependent on another company. If the relationship breaks
down for some reason, it can take the whole European business with it.

C) To set up a wholly owned subsidiary in Europe.

Pros: Can develop the whole company in our own vision. Can apply for and defend patents better. Understand
the local market and adapt to it.
Cons: It is very expensive with high costs of investment and operations.
Chapter-9
1. NAFTA has produced significant net benefits for the Canadian, Mexican, and U.S economies. Discuss.
The North America Free Trade Agreement (NAFTA) was passed in 1994. Starting with eliminating the majority
of taxes on products traded between the three countries fallowed with a gradual phase-out of other tariffs. The
Agreement contributed to more exports. The two way trade between Mexico and the U.S has more than
quadruple since the agreement was implemented. Another direct effect is more investments. The U.S is the
largest foreign direct investment in Mexico. Investments in Mexico have helped increase the efficiency of U.S
domestic production. Also more jobs were created. Even thou some jobs were lost, more and better jobs were
created. In conclusion this agreement has benefited all three countries from more free trade.
2. What are the economic and political arguments for regional economic integration? Given these arguments,
why don’t we see more substantial examples of integration in the world economy?
The economic argument for regional integration is mostly positive. It’s based on the presence of extra gains
from the free flow of trade and investment between the countries involved in the agreement. The political
argument is that it is mainly based on geography. The participating countries have to be neighboring countries,
and many neighboring countries have border disputes lessing the possibilities for regional integration.
3. What in general was the effect of the creation of a single market and a single currency within the EU on
competition within the EU? Why?
One effect the single market and single currency on competition within the EU is an increase in competition
between companies from the EU countries. As trade barriers are eliminated, it makes it easier for companies to
get involved in business.
Increase in competition, more effectiveness, no barriers, NO LOSS IN MONEY EXCHANGE, makes
SHOPPING easy
By creating a single market and currency, member countries can expect significant gains from the free flow of
trade and investment. This will result from the ability of the countries within the EU to specialize in the
production of the product that they manufacture the most efficiently, and the freedom to trade those products
with other EU countries without being encumbered by tariffs and other trade barriers. In terms of competition,
the competition between European firms will increase. Some of the most inefficient firms may go out of
business because they will no longer be protected from other European companies by high tariffs, quotas, or
administrative trade barriers. Companies from those countries that have not adopted the euro may find that their
costs are higher as they deal with currency exchanges. In addition, because it will be easier to compare prices
across markets, firms in the euro zone will be pushed to lower prices and become more efficient.
The benefits of the euro are diverse and are felt on different scales, from individuals and businesses to whole
economies. They include:
More choice and stable prices for consumers and citizens || Greater security and more opportunities for
businesses and markets || Improved economic stability and growth || More integrated financial markets ||A
stronger presence for the EU in the global economy || A tangible sign of a European identity
Many of these benefits are interconnected. For example, economic stability is good for a Member State’s
economy as it allows the government to plan for the future. But economic stability also benefits businesses
because it reduces uncertainty and encourages companies to invest. This, in turn, benefits citizens who see more
employment and better-quality jobs.

Q How should an Australian firm that currently exports to only ASEAN countries respond to the creation of a
single market in this regional grouping? Disadvantage as an outsider.
CAREFUL CONSIDERATION An Australian business firm that is currently exporting to only ASEAN
countries should seriously consider opening a facility somewhere in this grouping, as the economics of a
common market suggest that outsiders can be at a disadvantage to insiders. The opening of borders within the
ASEAN bloc also has the potential to increase the size of the market for the firm. Of course it is possible, after
careful consideration, that exporting may still be the most appropriate means of serving the market.

Chapter-11
Why did the gold standard collapse? Is there a case for returning to some type of gold standard? What is it?

The gold standard worked reasonably well from the 1870s until the start of World War I in 1914, when it was
abandoned. During the war several governments financed their massive military expenditures by printing
money. This resulted in inflation, and by the war's end in 1918, price levels were higher everywhere. Several
countries returned to the gold standard after World War I. However, the period that ensued saw so many
countries devalue their currencies that it became impossible to be certain how much gold a currency could buy.
Instead of holding onto another country's currency, people often tried to exchange it into gold immediately, lest
the country devalue its currency in the intervening period. This put pressure on the gold reserves of various
countries, forcing them to suspend gold convertibility. As a result, by the start of World War II, the gold
standard was dead. The great strength of the gold standard was that it contained a powerful mechanism for
simultaneously achieving balance-of-trade equilibrium by all countries, as explained in the example provided in
the textbook. This strength is the reason for reconsidering the gold standard as a basis for international
monetary policy.

2. What opportunities might current IMF lending policies to developing nations create for international
businesses? What threats might they create?
Answer: Current IMF lending policies require recipient countries to implement governmental reforms to
stabilize monetary policy and encourage economic growth. One of the principal ways for a developing nation to
spur economic growth is to solicit foreign direct investment and to provide a hospitable environment for the
foreign investors. These characteristics of IMF lending policies work to the advantage of international
businesses that are looking for investment opportunities in developing countries.

3. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced government
spending are always appropriate for developing nations experiencing a currency crisis? How might the IMF
change its approach? What would the implications be for international businesses?
Answer: Critics argue that the tight macroeconomic policies imposed by the IMF in the recent Asian crisis were
not well suited to countries that were not suffering from excessive government spending and inflation, but
instead from a private-sector debt crisis with inflationary undertones. Anti-inflationary monetary policies and
reductions in government spending usually result in a sharp contraction of demand, at least in the short run. In
the longer term, the policies can promote economic growth and expansion of demand, which creates
opportunities for international business.

4. Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of an
international business, what are the most important criteria in a choice between the systems? Which system is
the more desirable for an international business?
Answer: The case for fixed exchange rates rests on arguments about monetary discipline, speculation,
uncertainty, and the lack of connection between the trade balance and exchange rates. In terms of monetary
discipline, the need to maintain fixed exchange rate parity ensures that governments do not expand their money
supplies at inflationary rates. In terms of speculation, a fixed exchange rate regime precludes the possibility of
speculation. In terms of uncertainty, a fixed rate regime introduces a degree of certainty in the international
monetary system by reducing volatility in exchange rates. Finally, in terms of trade balance adjustments, critics
question the closeness of the link between the exchange rate and the trade balance. The case for floating
exchange rates has two main elements: monetary policy autonomy and automatic trade balance adjustments. In
terms of the former, it is argued that a floating exchange rate regime gives countries monetary policy autonomy.
Under a fixed rate system, a country’s ability to expand or contract its money supply as it sees fit is limited by
the need to maintain exchange rate parity. In terms of the later, under the Bretton Woods system, if a country
developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, the IMF
would agree to a currency devaluation. Critics of this system argue that the adjustment mechanism works much
more smoothly under a floating exchange rate regime. They argue that if a country is running a trade deficit, the
imbalance between the supply and demand of that country’s currency in the foreign exchange markets will lead
to depreciation in its exchange rate. An exchange rate depreciation should correct the trade deficit by making
the country’s exports cheaper and its imports more expensive. It is a matter of personal opinion in regard to
which system is better for an international business. We do know, however, that a fixed exchange rate regime
modeled along the lines of the Bretton Woods system will not work. Nevertheless, a different kind of fixed
exchange rate system might be more enduring and might foster the kind of stability that would facilitate more
rapid growth in international trade and investment.

5. Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate system. What
would be the likely consequences of such a system for (a) international businesses and (b) the flow of trade and
investment among the three countries?
Answer: In theory, a fixed exchange rate system similar to the ERM of the European Monetary System should
impose monetary discipline, remove uncertainty, limit speculation, and promote trade and investment among
member countries. Therefore, for international businesses, such a system should be positive, and the three
countries should see increased trade and investment.

6. Reread the Country Focus on the U.S. dollar, oil prices, and recycling petrodollars, then answer the following
questions:
a) What will happen to the value of the U.S. dollar if oil producers decide to invest most of their earnings from
oil sales in domestic infrastructure projects?
b) What factors determine the relative attractiveness of dollar, euro, and yen denominated assets to oil producers
flush with petrodollars? What might lead them to direct more funds towards non-dollar denominated assets?
c) What will happen to the value of the dollar if OPEC members decide to invest more of their petrodollars
towards non-dollar assets, such as euro denominated stocks and bonds?
d) In addition to oil producers, China is also accumulating a large stock of dollars, currently estimated to total
$1.4 trillion. What would happen to the value of the dollar if China and oil producing nations all shifted out of
dollar denominated assets at the same time? What would be the consequence for the United States economy?
Answer:
a) If oil producers decide to invest their earnings in domestic infrastructure projects, it would be expected that
the countries involved would see a boost in economic growth, and an increase in imports. This would put
downward pressure on the dollar as the petrodollars are sold, or are invested in the local community, however
the expected increase in imports that should result from greater economic growth would increase the demand for
dollars.
b) The relative attractiveness of an investment whether it is denominated in dollars, euro, or yen depends on
expected returns and the degree of risk associated with the investment. When considering different currencies,
it would be important to consider expected shifts in the exchange rate. So, for example, if the dollar was
expected to depreciate relative to the euro or yen, non-dollar denominated assets might be more attractive all
else being equal.
c) Oil producers have significantly increased their holdings of dollars as a result of higher oil prices. Should
OPEC members decide to sell their dollars to invest in non-dollar denominated assets such as euro denominated
stocks or bonds, we would expect to see downward pressure on the dollar.
d) If China and the oil producers simultaneously decide to sell off their dollars, there would be significant
downward pressure on the dollar. This downward pressure would probably cause considerable pessimism
among investors, and the U.S. economy, and the world economy in general, would likely suffer.