WGU C211 - Global Economics for Managers, Brian Final

WGU C211 - Global Economics for Managers, Brian Final

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PRE-ASSESSMENT: GLOBAL ECON...

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• views on globalizationGlobalization is when you do business internationally

New, Evolutionary, and Pendulum "New" view on globalizationA force sweeping through the world in recent times.Which view claims that the phenomenon of globalization was initially driven by the desire of Western economies to exploit their power through multinational enterprises?"Evolutionary" view on globalizationA long-run historical evolution since the dawn of human history "Pendulum" view on globalizationOne that swings from one extreme to another from time to time.Most popular Foreign Direct Investment (FDI)Foreign direct investments (FDI) are investments made by one company into another company that is located in another country.

• Different political views on FDIRadical - radical view is hostile to FDI

Free market - free market view calls for minimum or unrestricted government restriction in FDI. Leads to a win-win situation for both home and host countries.Pragmatic nationalism - most countries practice pragmatic nationalism, weighing the benefits and costs of FDI and only using it when benefits outweigh the costs.

What are the benefits to a country receiving Foreign Direct Investment?Capital Inflow Technology Spillover Advanced Management Know-How Job creation What costs exist in a country when they receive Foreign Direct Investment?

• Loss of Sovereignty (power),
• Adverse effects on competition (drives domestic firms out of business)
• Capital outflow

How do resources and capabilities influence the competitive dynamics of a business?A firm's resources and capabilities must create value compared to its competition.

A firms resources need to bring:

Value, company resources must create value, patents are an example.Rarity, the rarer, and more desired the more of an advantage it has.Imitability, how easy is it to imitate your competition?Organization, some companies are better at answering challenges from competitors.Classical theories of international trade*The major theories of international trade that were advanced before the 20th

century, they consist of:

• Mercantilism,
• Absolute advantage
• Comparative advantage

Classic Theory says things don't change, they are static.How does resource similarity impact competitive dynamics?Firms with a high degree of similarity are likely to make similar competitive decisions.(Starbuck's instant coffee & McDonald's iced coffee, if one increases the price because of a coffee shortage the other will likely also) What are modern trade theories of international trade? Modern theories account for changes in patterns over time whereas classical theories are static.Modern theories include (1) Product life cycles, (2) Strategic trade (3) National competitive advantage or "Diamond" What is the classical theory view of international trade regarding change?Static, not changing

What is absolute advantage?The economic advantage one nation enjoys that is superior to other nations, which nation is best at producing a particular good?Trade can be a win/win Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time.For example, Smith argued that because of better soil, water, and weather, Portugal enjoyed an absolute advantage over England in the production of grapes and wines. And England enjoyed an absolute advantage over Portugal as England produced more wool. If they trade, they would both benefit. international trade is not a zero-sum game as suggested by mercantilism. It is a win-win game.there are net gains from trade based on absolute advantage.Comparative advantageThe ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.Hypothetically, say that Michael Jordan could paint his house in eight hours. In those same eight hours, though, he could also take part in the filming of a television commercial which would earn him $50,000. By contrast, Jordan's neighbor Joe could paint the house in 10 hours. In that same period of time, he could work at a fast-food restaurant and earn $100.In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit.What is mercantilism?It is the first recorded theory.A theory that suggests that the wealth of the world (gold/sliver) is fixed and that a nation that exports more and imports less will be richer.Mercantilism trade theory states that viewed international trade as a zero-sum game. A nation becomes richer by exporting more than it imports.

Features of the product life cycle?The first dynamic theory.

New: production of a new product (such as a TV) that commands a price premium

will concentrate in the United States, which exports to other developed nations.

Maturing Stage: demand and ability to produce growth in other developed

nations (such as Australia and Italy), so it is now worthwhile to produce there.

Standardized: (or commoditized). Thus, much production will now move to low-

cost developing nations, which export to developed nations. In other words, the comparative advantage may change over time What is strategic trade theory?Strategic intervention by governments in certain industries can enhance their odds for international success.When a government helps an infant industry until it is large enough to compete on its own.They do NOT believe that unrestricted free trade is in the best interest of all countries.What are these industries? They tend to be highly capital-intensive, high entry- barrier industries in which domestic firms may have little chance without government assistance.How are supply and demand related to the exchange rate of a country?A country's currency is determined by its supply and demand.Strong demand leads to price hikes; oversupply results in price drops.Which theory came first mercantilism or modern-day protectionism?Mercantilism, both state that governments should protect domestic industries from imports If a company seeks to limit foreign exchange rate fluctuation in the forward direction (they are exporting the product), what is the most effective way to do this?Currency hedging What is an international transaction risk?The exchange rate risk associated with the time delay between entering into a contract and settling it.The potential for loss associated with fluctuations in the foreign exchange market.What is hedging?A transaction, such as forward transactions, that protects traders and investors from exposure to the fluctuations of the spot rate.What is strategic hedging?When you spread out your business activities in different currency zones to offset any currency losses that could occur if you were only in one spot (currency diversification)