Chapter 2 -THE Evolution OF International Business PDF

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CHAPTER 2: THE EVOLUTION OF INTERNATIONAL BUSINESS – AUDITED WHY TRADE AND FOREIGN INVESTMENT ARE GOOD FOR SOCIETY INTERNATIONAL BUSINESS – All commercial transactions, both private and public, between nations of the world - Has 2 components : trade & foreign direct investment Trade - the two-way flow of exports and imports of goods and service Foreign Direct Investment - inflows of capital from abroad for investing in domestic plant and equipment for production of goods and or services and for buying domestic firms MNCs – provide investment to chosen countries - provide business culture  E.g. Firms in US Outsourcing – finding lower cost ... like labor cost Mcdonalization – very effecient  Has 4 culture  1. Efficiency  2. Calculability – focused on quantifiable objectives  3. Predictable and Standardization  4. Control THE EVOLUTION 1. SUBSISTENCE ECONOMY – producing what is enough  Based on demand of the community  For survival  People felt shortages leading to BARTER 2. BARTER - during the later part of the barter system, natuto na silang gumamit ng currency - Piloncitos (first coin)

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China and India very active in the earlier years Then US and Japan and other European Union there are also emerging, like the BRICKS

3. CAPITALIST ECONOMY - main goal is to earn high profit - small and local businesses are being harmed (negative impact) - invisible hand (can have equilibrium) - demand and supply of the market - market-driven *Malthusian Theory – population is growing but not the resources BENEFITS OF INTERNATIONAL TRADE  A greater amount of choice in the availability of goods and services  Competition results in lower prices for goods and services consumed  Increase quality of life and higher living standards  Creates dichotomy MAJOR THEORIES AND INTENATIONAL TRADE 1. MERCANTILISM – The premise a nation could only gain from external trading if it had a trade surplus - driver of colonization (before) - Trade surplus = export > import *Trade deficit – the other way around 2. SPECIALIZATION – free trade encourage countries to specialize in the production of those goods and services that they most efficiently produce 3. FACTOR ENDOWMENT – nations primarily export goods and services that intensely use their abundant factors of production

A. WEALTH ACCUMMULATION AS A BASIS OF TRADE THEORY: MERCANTILLISM MERCANTILLISM- trade surplus

 Oldest form of trade theory  Practiced during the 1500-1750 period as Europe moved toward nationalism  Wealth - both personal and national , largely determined by the amount of precious metal owned (i.e. gold and silver) 

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Mercantilist – believed that for a nation to be wealthy, it must export as much as possible and import as little as possible so that the country would have a trade surplus Mercantilist did not want to see the big picture: - if all nations increased exports and decrease imports, there would be a surplus of exports that would lead to an unpleasant result

 hurts the importing economy (creating preferences)  in exporting country – if too much elastic products, the price will lower  Law of Diminishing Marginal Return - Metaphor of the pizza

B. SPECIALIZATION AS A BASIS FOR TRADE THEORY: ABSOLUTE AND COMPARATIVE ADVANTAGE B1. Absolute advantage – ability OF ONE to produce goods or services more efficiently than another - Adam Smith B2. Comparative Advantage – ability of one country that has an absolute advantage in the production of two or more goods to produce one of them relatively more efficiently than the other; lowering opportunity cost - David Ricardo  Magiging mas efficient sa pag produce ng one product - Specialization - Choose 1 product that you produce more efficiently C. FACTOR ENDOWMENT AS A BASIS OF TRADE THEORY - nagtitrade because of the present of many resources C.1. The Hecksher-Ohlin (H-O) theory

- attributes the comparative advantage of nation to its factor endowment  Land  Labor (quantity and skills)  Capital (cost)  Technology (quality)  Entrepreneurship (skills)  Wise usage of factors of production C.2. Factor Price Equalization Theory - factors of production are mobile, except land - superior allocation of production of goods among countries - Free mobility of factors will lead to efficient reallocation of resources until price equilibrium is reached - Trigger points – e.g. US and INDIA - -e.g. in Silicon Valley – IT specialists - will hire Indian Nationals - lowering the wages of Americans PORTER’S DIAMOND MODEL OF NATIONAL COMPETITIVE ADVANTAGE  Focus on firms not countries Must Nurture Forces: (Internal) 1. Factor Conditions – e.g. education and health, depende sa factors present 2. Demand Conditions – firms are creating demands by advocating e.g. through advertisements - demand creation 3. Related and Supporting Industries 4. Firm Strategy, Structure and Rivalry External 1. Chance 2. Government THE PRACTICE OF TRADE POLICY Trade Policy – all government actions that seek to alter the size of merchandise and/or flows from and to a country.

Instruments of Trade Policy A. Tarif – custom duties – are taxes on imports which generate revenues to the government

 Domestic Content Provision (DCP) – regulations requiring that a certain percentage of the value of import be sourced domestically - part of the materials used is from the importing country

B. Preferential Duties – an especial advantageous or low import tariff established by a nation for all or some goods of certain countries and not applied to the same goods of other countries - Generalized System of Preferences – agreement among countries – e.g. WTO - tarif concession – tariff duties will be removed - in connection with most favoured nation status - 14 countries not yet member of WTO

CURRENT PRACTICE OF MANAGED TRADE 1. SOCIOECONOMIC RATIONALE a. countertrade – modern day barter, with the influence of currency

C. Most Favored Nation Status – agreement among WTO countries in which any tariff concession granted by one member to another country will automatically be extended to all other countries of WTO

c. Protection of Infant Industries – in the long run can be a national champion and can possibly compete internationally - SMEs d. Questionable labor practices – need of government intervention

b. Export cartels - e.g. OPEC – members control prices and production of oil

D. Nontarif Barriers e. Environmental Considerations INTERNATIONAL TRADE ORGANIZATIONS  because of Bretton Woods due to WW2  provide for restructuring ... 1. IMF – overseer of foreign investment 2. GATT to WTO 3. World Bank NONTARIFF BARRIERS  Import Quotas – Quantitative Restrictions (QRs) - Limit the amount or number of units of products that can be imported to a country Rice tariffication law – remove QR but increase duties (increase revenue of government) - Can give subsidies to farmers  Voluntary Export Restraint (VER) – e.g. US and Japan (temporary stoppage of Japan’s exporting) - arrangement under which an efficient exporting nation agrees to limit exports of a product to another country for a temporary period.

f. Health and Safety 2. GEOPOLITICAL RATIONALE protection of boundaries a. National Security

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b. Protection of critical (strategic) industries – already a national champion c. Embargoes – restrictions in trade

CHAPTER 2 PDF TERMS PPP conversion factor is the number of units of a country’s currency that is required to buy the same amount of goods and services in the domestic market that a U.S. dollar would buy in the United States.

factors of production - endowments used to produce goods and services: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality) trade surplus - when the value of exports exceeds the value of imports; the opposite of a trade deficit

international business - all commercial transactions, both private and public between nations of the world

Mercantilists did not want, or care, to see the big picture.

The earliest and simplest form of international business is trade

During the mid-18th century, British economist Adam Smith, who came to be known as the father of free market and open trade systems, recognized the absurdity of mercantilism.

Trade - the two-way flow of exports and imports of goods (mer- chandise trade) and services (service trade)

International trade benefits consumers in three major ways by providing:   

A greater amount of choice in the availability of goods and services. Lower prices for goods and services consumed. Higher living standards.

foreign direct investment - inflows of capital from abroad for investing in domestic plant and equipment for the production of goods and/or services as well as for buying domestic companies Foreign direct investment (FDI) in a country - brings funds and business culture from abroad, creates new well-paying jobs, introduces innovative technologies, and enhances the skills of domestic workers Outsourcing - the corporate practice of acquiring or producing quality goods or services abroad at a lower cost thereby eliminating domestic production

Absolute advantage - the ability of one country to produce a good or service more efficiently than another comparative advantage - the ability of one country that has an absolute advantage in the production of two or more goods (or services) to produce one of them relatively more efficiently than the other

Factor endowment - the quantity and quality of factors of production (land, labor, capital and technology) that a country owns Heckscher–Ohlin (H–O) theory attributes the comparative advantage of a nation to its factor endowments: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality).

factor price equalization theory - states that when Mercantilism - a theory of international trade that supports the premise that a nation could only gain from trade if it had a trade surplus

factors (labor, for example) are allowed to move freely among trading nations, efficiency further increases, which leads to superior allocation of the production of goods and services among countries.

Chance - refers to an external shock or development that could drastically change or hasten the course of economic development. Government policy - could also stifle demand through excessive taxation or perverse incentive programs. trade policy - all government actions that seek to alter the size of merchandise and/or service flows from and to a country tarifs - taxes on imports; also known as custom duties in some countries custom duties - taxes on imports that are collected by a designated government agency responsible for regulating imports specific tarif- an import tax that assigns a fixed dollar amount per physical unit ad valorem tarif - a tax on imports levied as a constant percentage of the monetary value of one unit of the imported good preferential duties - an especially advantageous or low import tariff established by a nation for all or some goods of certain countries and not applied to the same goods of other countries generalized system of preferences (GSP) - an agreement where a large number of developed countries permit duty-free imports of a selected list of products that originate from specific countries export subsidy - a negative tariff or tax break aimed at boosting exports export taxes - taxes meant to raise export cost and divert production for home consumption

most favored nation (MFN) - an agreement among WTO countries in which any tariff concession granted by one member to any other country will automatically be extended to all other countries of WTO import quotas - also known as Quantitative Restrictions (QRs) are regulations that limit the amount or number of units of products that can be imported to a country voluntary export restraint (VER) - a nontariff barrier in which an efficient exporting nation agrees to limit exports of a product to another country for a temporary period Managed trade - refers to agreements, sometimes temporary, between coun-tries (or a group of countries) that aim to achieve certain trade outcomes for the countries involved domestic content provisions - regulations requiring that a certain percentage of the value of imports be sourced domestically managed trade - agreements, sometimes temporary, between countries (or a group of countries) that aim at achieving certain trade outcomes countertrade - agreement in which an exporter of goods or services to another country commits to import goods or services of corresponding value from that country infant industry argument - expects that economies of scale and the comparative advantage of an industry can only be exploited by providing temporary protection.

export cartels - a group of countries that could effectively control export volume to keep their export prices, revenues, and economic growth stable or high infant industry argument - temporary provision of protection to nascent industries that have good prospects of becoming globally competitive in the medium term The geopolitical objective - is to sacrifice some economic efficiency for the greater good of the country in terms of national security, protection of critical industries, and international commerce. embargoes - trade sanctions that are imposed upon a nation to restrict trade with that country...