Module 4 Relationships, Foreign Investment, and Trade PDF

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Module 4: Relationships, Foreign Investment, and Trade (Lesson 14-20) Define foreign direct investment (FDI). 1. Define and compare portfolio investment and foreign direct investment. Foreign Direct Investment: control organizational assets in another country  Benefits: increasing jobs, inflow of capital that benefits the global and local economy.  Costs: Govts must protect local resources, culture, independence, and economic growth. A foreign direct investment (FDI) is an investment made by a firm or an individual in one country into business interests located in another country and can be in at least two categories: FDI and foreign portfolio investment. Firms engage in FDI for proximity to natural resources or an affordable labor source, to avoid tariffs, to expand their markets, and to learn more about local markets. Foreign direct investment (FDI) refers to an investment in or the acquisition of foreign assets with the intent to control and manage them. Companies can make FDIs in several ways by purchasing the assets of an international company; investing in the company or new property, plants, or equipment; or participating in a joint venture with a foreign company, which typically involves an investment of capital or know-how. FDI is primarily a long-term strategy.  

Economies in which FDI is in decline usually suffer adverse macroeconomic side effects. FDI benefits both developing and developed nations by increasing jobs and bringing capital to the most successful companies

Describe methods and outcomes of foreign direct investment (FDI). 2.

Identify the reasons and strategies that governments promote FDI. (Hint: Link reasons to the benefits of FDI) Governments seek to promote FDI when they are eager to expand their domestic economy and attract new technologies, business knowledge, and capital to their country. 3.

Identify the reasons and strategies that governments restrict FDI. (Hint: Link reasons to the costs of FDI) governments seek to limit or control FDI to protect local industries and critical resources (oil, minerals, etc.), preserve the national and local culture, protect segments of the domestic population, maintain political and economic independence, and manage or control economic growth. Many countries restrict the percentage of ownership by foreign investors.

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4. Define horizontal FDI and vertical FDI. Give an example for each. - Horizontal FDI occurs when a company is trying to open a new market—a retailer, for example, that builds a store in a new country to sell to the local market. - Vertical FDI is when a company invests internationally to provide input into its core operations—usually in its home country. A firm may invest in production facilities in another country. When a firm brings the goods or components back to its home country (i.e., acting as a supplier), this is referred to as backward vertical FDI. When a firm sells the goods into the local or regional market (i.e., acting as a distributor), this is termed forward vertical FDI. 5. Define and differentiate backward vertical FDI and forward vertical FDI? - Backward Vertical FDI: invest in production/facilities in a country to supply products to their home country - Forward Vertical FDI: providing products to newly emerging local or regional markets 6. Define greenfield and brownfield FDIs. Give an example for each. - Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores. - A brownfield FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity. Examine the relationship between international relations and multinational businesses. 7.

Define multinational companies. Identify benefits of being a multinational company. Identify impacts of multinational companies. MNC is a company that operates in two or more countries, leveraging the global environment to enter new markets to increase revenue. One of the results of the existence of multinational businesses is economic integration among countries. This works to promote economic development and trade between home and host countries of multinational businesses. An MNC improves relations between countries since they need to cooperate to trade. The relationships between an MNC and the host country can be both good and bad depending on a number of factors including economic development, resource distribution, and employment. Multinational corporations are more mobile than firms in one location or governmental agencies. This mobility allows multinational firms to take advantage of the comparative advantages of many countries. FDI in multinational corporations brings money into countries and provides jobs for its citizens. The countries left behind lose this investment and these jobs; however, the cheaper prices of goods allow citizens to buy other products increasing jobs in other sectors.    

The relationships between government leaders and CEOs of multinational corporations with citizens of a country are complex and ever-changing. This changing environment can complicate a decision for an MNC to enter a particular market. Many MNCs have a higher value than many small countries. Multinational corporations, because they can quickly move capital, are frequently described as highly influential or catalysts for action in countries. Governments compete with each other to attract multinational corporations.

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Define regional economic integration

Regional economic integration is an agreement among a geographical region of nations to reduce or eliminate trade barriers among the nations at a minimum and to have a single political, economic, and trade policy identity at its maximum. 9. Identify the features of the 5 stages of regional economic integration and relate an example to each stage. free trade area: most basic form of economic cooperation. Member countries remove all barriers to trade between themselves but are free to determine trade policies with nonmember nations independently. The key characteristic is no internal tariffs. (NAFTA). North American Free Trade Agreement Customs unions: economic cooperation as in a free-trade zone. Barriers to trade are removed between member countries. Its primary difference from the free trade area is that members agree to treat trade with nonmember countries similarly, which means they share a common external tariff. (Mercosur)

Common market: creation of economically integrated markets between member countries. Trade barriers are removed, as are any restrictions on the movement of labor, technology, and capital between member countries. Like customs unions, there is a common trade policy for trade with nonmember nations. The primary advantage for workers is that they no longer need a visa or work permit to work in another member country of a common market. free movement of labor and capital. (COMESA)

Economic union: countries enter into an economic agreement to remove barriers to trade and adopt common economic policies, use a common currency, harmonized taxes, monetary, and fiscal policy (Eurozone) Political union: ingle nation is formed and a mutual organization confederates all policies. (UAE)

Identify the benefits and drawbacks of regional economic integration. drawbacks When a regional agreement is made between countries, those members will trade more with each other and trade less with nonmember countries. Regional agreements may create trade barriers with nonmember countries, which lowers global free trade. benefits Trade agreements create more growth opportunities for countries to trade among themselves as barriers to trade and investment are removed. Economic integration often removes labor movement restrictions, which help increase job opportunities. 10. List and Elaborate on the benefits and costs of regional economic integration. The goal of regional economic integration is to help all participating nations attain a higher living standard by encouraging specialization, lowering prices, providing more choices on goods and services, increasing productivity, and allowing for more efficient use of natural resources.

Identify major regional integration blocs and their objectives.  Trading blocs create free trade among geographically close regions, which can lead to lower prices, higher growth, increased competition, and increased export potential.  Some domestic firms may lose to multinationals.  Less developed regions can attract more FDI and therefore catch up to more developed countries.  If one country in the trading bloc has economic difficulties, all of the countries may be affected. 11. Identify features of each major real-world regional integration bloc and differentiate them.  North American Free Trade Agreement (NAFTA) The goal of NAFTA has been to encourage trade between Canada, the United States, and Mexico. By reducing tariffs and trade barriers, the countries hope to create a free-trade zone where companies can benefit from the transfer of goods. 

United States-Mexico-Canada Agreement or USMCA

 Central America Free Trade Agreement (CAFTA-DR) The CAFTA-DR includes the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. The goal of the agreement is the creation of a free trade area similar to NAFTA.  Common Market of the South, Mercado Común del Sur or Mercosur Mercosur is both an economic and political agreement with the goals of keeping peace in the Southern cone and promoting economic growth in the region. Caribbean Community and Common Market (CARICOM)  European Union, European Economic Area The EU was initially established to prevent any future wars. The EU faces many challenges but has its long history and shared governance to help the EU countries overcome their differences.  Association of Southeast Asian Nations (ASEAN) The ASEAN includes Malaysia, Thailand, Indonesia, Singapore, the Philippines, Myanmar (Burma), Vietnam, Cambodia, Laos, and Brunei. ASEAN's primary focus is on economic, social, cultural, and technical cooperation as well as on promoting regional peace and stability. Although less emphasized today, one of the early primary missions of ASEAN was to prevent the domination of Southeast Asia by external powers—specifically China, Japan, India, and the United States.

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Cooperation Council for the Arab States of the Gulf, also known as the Gulf Cooperation Council (GCC) African Economic Community (AEC)

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Asia-Pacific Economic Cooperation (APEC)

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Describe the dynamics of currency exchange. 12. Define supply and demand of a currency. In foreign exchange markets, demand and supply become closely interrelated, because a person or firm who demands one currency must at the same time supply another currency—and vice versa. 13. Identify the reasoning behind strengthening and weakening currency. How does it impact international trade? When the exchange rate for a currency rises so the currency exchanges for more of other currencies, this is referred to as appreciating or strengthening. When the exchange rate for currency falls so a currency trades for less of other currencies, this is referred to as depreciating or weakening.

The stability of a currency, the macroeconomic indicators, and the relative ratio of the strength of the domestic currency versus the foreign currency all determine return on investment. Weaker : A U.S. investor abroad invests money in another country by first converting U.S. dollars to a foreign currency, making the investment, then later converting+ it back to U.S. dollars. As the U.S. dollar becomes weaker, the rate of return on the investment is larger as the investor gets more U.S. dollars from converting back from the foreign currency. Strengthening: eThe firm earns U.S. dollars through export sales, then converts it back into their home currency. A stronger U.S. dollar would mean they can buy more of the home currency.

14. Define 3 exchange rate policies and give an example of each. - A free-floating exchange rate fluctuates based on supply and demand. Many country's central banks intervene in a free-floating economy by buying and selling their currency to keep its value within a specific range. This is called a managed float. - A fixed exchange rate can be pegged or fixed against gold, or frequently small countries will peg their currency against a large country with which it does the majority of its trade. - Pegged floating currencies are pegged to some band or value, which is either fixed or periodically adjusted. They are a hybrid of fixed and floating regimes.

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