Global Business Theories and Trade Barriers

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Questions and Answers

What percentage of all international firms do Small and Medium International Enterprises (SMIEs) account for?

85%

65%

94% (correct)

75%

Which of the following obstacles do SMIEs face in internalization?

Access to Infrastructure

Excessive Market Power

High Employee Turnover

Lack of Knowledge (correct)

How does culture affect international business practice?

It has no impact on decision making.

It influences nearly all business functions. (correct)

It is irrelevant to management styles.

It serves only as a background aspect.

Which feature correctly describes culture?

Culture is confirmed by others. Signup and view all the answers

What is a key impact of culture on international business?

It is a key ingredient in the 'liability of foreign-ness'. Signup and view all the answers

What determined the exchange rate during the Classical Gold Standard period?

Gold and silver content of the currencies Signup and view all the answers

What significant event occurred during the Bretton Woods System?

The US Dollar was pegged to gold Signup and view all the answers

What characterized the Interwar Period?

Economic nationalism and political instability Signup and view all the answers

During the Flexible Exchange Rate Regime, which of the following was abandoned?

Gold as an international reserve asset Signup and view all the answers

What is represented by an account deficit in the balance of payments?

More goods purchased from abroad than sold Signup and view all the answers

What was the primary goal of the Latin American Integration Association (LAIA)?

To increase bilateral trade among member nations Signup and view all the answers

Which organization was established in 1995 to promote trade in South America?

MERCOSUR Signup and view all the answers

What type of system allows for reliance on governmental control to maintain exchange rates?

Managed Float System Signup and view all the answers

Which of the following describes the major players in international foreign exchange markets?

Individuals, businesses, governments, and banks Signup and view all the answers

What is a Commodity Cartel primarily used for?

To control prices through production quotas Signup and view all the answers

What was one of the functions of the International Monetary System?

Facilitating trade by mobilizing capital across nations Signup and view all the answers

What system allows currencies to fluctuate but still have a set intervention strategy?

Managed Float System Signup and view all the answers

What system regulates the valuations and exchange of money across countries?

International Monetary System Signup and view all the answers

During which period was the Classical Gold Standard in effect?

1875-1914 Signup and view all the answers

Which of the following is a characteristic of Defensive Export Substituting?

Defending previously achieved market share Signup and view all the answers

What was recognized during the period of Bimetallism?

Gold and silver served as international means of payment Signup and view all the answers

What is the main focus of Global Strategic Rivalry Theory?

Gaining competitive advantage against global firms. Signup and view all the answers

Which factor is NOT considered part of Porter’s National Competitive Theory?

Availability of raw materials. Signup and view all the answers

What are tariffs primarily used for in international trade?

To increase the price of imported goods. Signup and view all the answers

Which of the following is an example of a non-tariff barrier?

Import quotas. Signup and view all the answers

What is one of the benefits of Foreign Direct Investment (FDI)?

Stimulation of economic development. Signup and view all the answers

Which type of trade barrier might require additional documentation like a Certificate of Origin?

Non-tariff barriers. Signup and view all the answers

What primarily distinguishes Foreign Direct Investment (FDI) from other types of investments?

It requires a significant interest in a foreign company. Signup and view all the answers

Which of the following is an example of a trade barrier that directly affects import quantities?

Quality conditions imposed by the importing country. Signup and view all the answers

What is the primary function of currency exchange markets in international trade?

To transfer purchasing power between currencies Signup and view all the answers

Which of the following best defines a vehicle currency?

A currency used for trade transactions not involving the national currencies of the parties Signup and view all the answers

Which component of FX quotations is known as the base currency?

The first currency in a currency pair Signup and view all the answers

Which option represents a typical characteristic of Forward FX transactions?

Involves delivery at a future date beyond two working days Signup and view all the answers

What is a key difference between FX Options and Futures?

Options provide a right without obligation; Futures are mandatory agreements Signup and view all the answers

In the context of foreign exchange, which statement accurately describes a parallel market?

It emerges due to unfulfilled demand and supply in the official market Signup and view all the answers

What is the correct definition of Spot FX transactions?

Immediate conversion of currencies, typically within two working days Signup and view all the answers

What is the primary role of the Central Bank in foreign exchange markets?

To control the supply and demand of currencies Signup and view all the answers

Study Notes

Global Strategic Rivalry Theory

Developed in the 1980s by economists Paul Krugman and Kevin Lancaster.
Focuses on how companies gain competitive advantage against global firms in the same industry.

Porter’s National Competitive Theory

Developed by Harvard Business School Professor Michael Porter.
Argues that national competitiveness is driven by factors like infrastructure quality, skilled labor availability, government support, and strong institutions.

Trade Barriers

Government-imposed restrictions on international trade.
Examples include:
- Tariffs
- Non-tariff barriers: Import bans, quotas, complex rules of origin, quality conditions, additional trade documents, occupational safety regulations, export subsidies, and quota shares.

Foreign Direct Investment (FDI)

Involves an investor acquiring a significant interest in a company in another country.
Benefits include:
- Stimulating economic development
- Increased employment
- Resource development
- Reduced costs
- Increased productivity
- Increased national income.

SME Internationalization Features

SMIEs account for about 94% of international firms.
Internalization patterns, exporter profile, demographics, and Foreign Investment profiles differentiate SMIEs.
SMIEs often prioritize developed markets, implement selective globalization strategies, and emphasize strategic expansion.

SME Obstacles in Internalization
- Scale and transaction constraints
- Limited access to capital
- Lack of knowledge and market power
- Vulnerability to intellectual property violations.

Culture and International Business

Culture plays a crucial role in International Business, influencing management, decision-making, and negotiations.
Culture impacts business functions, from accounting and finance to production and service delivery, including contributing to the “liability of foreign-ness”.
Culture can both divide and unite businesses.

Correlates of Culture

Culture is linked to other variables that vary across nations, such as language and religion.
Culture can transcend or overlap with religious, linguistic, and national boundaries.

Regional Integration

Latin America:
- Latin American Free Trade Association (LAFTA) focused on boosting bilateral trade among member nations.
- Mercosur was established in 1995 to promote trade in South America.
Africa and the Middle East:
- Economic Community of West African States (ECOWAS): Established in 1975.
- Central African Economic and Customs Union: Founded in 1966.
- Preferential Trade Area (PTA): Established in 1981.
- Gulf Cooperation Council (GCC): A Middle East free trade area founded in 1981.

Commodity-Level Cooperation Among Nations

Commodity cartels are groups of producing countries who manage the prices of globally traded commodities.
They control prices through production quotas and limiting overall output.

Strategic Responses of MNEs

Defensive Export Substituting: Firms defend their export market share.
Offensive Export Substituting: Firms leverage direct investment for market penetration before trade integration.
Rationalized Foreign Direct Investment: MNEs enhance resource commitment to operations to achieve economies of scale in the wake of regionalization.

International Monetary System (IMS)

Regulates the valuing and exchange of money between countries.
Oversees cross-border payments, exchange rates, and capital mobility through a set of rules and regulations.
Facilitates capital movement between nations.

Evolution of the International Monetary System

Bimetallism: Before 1875 (used gold and silver for international payments).
Classical Gold Standard: 1875-1914 (exchange rates based on relative gold content, fostering international trade and investment stability).
Interwar Period: 1915-1944 (economic nationalism, failed attempts to restore the gold standard, instability).
Bretton Woods System: 1945-1972 (created the IMF and World Bank, US dollar pegged to gold, other currencies pegged to the US dollar).
Flexible Exchange Rate Regime: 1973 to Present (flexible exchange rates adopted, gold abandoned as a reserve asset).

Contemporary Exchange Rate Systems

Fixed Rate System: Exchange rate fixed at a specific level.
Crawling Peg System: Exchange rate adjusted periodically.
Target Zone Arrangement: Exchange rate allowed to fluctuate within a specific band.
Managed Float System: Exchange rate allowed to fluctuate, but with central bank intervention.

The Balance of Payments

An accounting statement summarizing all economic transactions between residents of a home country and residents of other countries.
A deficit indicates more money flowing out than in.
A surplus reflects the opposite.

International Foreign Exchange (FX) Markets

Where individuals, businesses, governments, and banks buy and sell foreign currencies.
Major players include commercial banks, international corporations, non-bank financial institutions, and central banks.

Functions of International Foreign Exchange (FX) Markets

Transfer of Purchasing Power: Facilitates currency conversion for imports and exports.
Credit Function: Provides credit for importers and exporters in international trade.
Hedging Function: Manages exchange rate uncertainty in future transactions.

Vehicle Currency

A currency used for trade transactions, even if it's not the national currency of the importer or exporter.
The US dollar is a dominant vehicle currency.

Types of Foreign Exchange (FX) Transactions

Spot FX transactions: Immediate delivery (typically within two business days).
Forward FX transactions: Future delivery (more than two business days).
Foreign Exchange Swaps: Simultaneous exchange of currencies, with an agreement to reverse the transaction later.
Options: Contracts granting the right to buy or sell foreign exchange within a specific period or on a particular date.
Futures: Contracts for future delivery of currency for specific amounts at specific maturity dates.

Foreign Exchange (FX) Quotations

Currency pairs: A quotation of two currencies for FX trading.
Base currency: The first currency in a pair.
Quote currency (counter or terms currency): The second currency in a pair.

Black Market vs. Parallel Market

The black market (also called the parallel market) is where currencies are bought and sold informally.
It emerges to meet demand and supply needs not fully satisfied by the official market.

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Description

Explore key concepts in global business strategies with this quiz. Covering Global Strategic Rivalry Theory, Porter's National Competitive Theory, trade barriers, and Foreign Direct Investment, this quiz aims to test your understanding of competitive advantages and economic development. Perfect for students and professionals interested in global commerce.