IBUS 300: Trade & FDI Theories

• The following information is a study guide for IBUS 300, intended as guidance only, so study all materials.
• The test format is multiple choice and short answer, so review the cases discussed.
• Terminology from the cases may be on the exam.

Overview and International Trade and FDI Theories (Chapters 1, 6, and 8 - first part)

• Key international trade theories include comparative and absolute advantage.
• Comparative advantage is the ability to produce a good or service at a lower opportunity cost than another producer.
• Absolute advantage is the ability to produce more of a good or service than another producer, using the same amount of resources.
• Trade occurs due to comparative advantage.
• Porter's theory of national competitive advantage (the diamond) explains why some nations are more competitive in certain industries.
• Mercantilism is an economic theory that advocates government regulation of international trade to create a trade surplus.
• Heckscher-Ohlin theory states that countries will export goods that use their abundant factors of production and import goods that use their scarce factors of production.
• Examples of absolute and comparative advantage are in rice and cocoa production, where the advantages should be delineated.
• Tariffs are taxes on imports, whose benefits and costs, and who bears the burden, should be understood.
• Foreign Direct Investment (FDI) involves investing directly in production or business in a country.
• Theories explaining FDI include Dunning's OLI model, oligopolistic reaction (exchange of threats), internalization theory, markets and hierarchies, and international product life cycle.
• Only focus is on the first part of chapter 8 up to the middle of page 223.
• Understand Porter's Diamond and its application to positioning of comparative advantage.

Differences in Political Economic and Legal Systems (Chapter 2)

• Major political systems include collectivism vs. individualism, and democratic vs. totalitarian systems.
• Collectivism prioritizes the needs of society over individual freedoms, and individualism emphasizes individual freedom and self-expression.
• Democratic systems are based on the consent of the governed. Totalitarian systems concentrate power in the hands of a single person or party
• Socialism, communism, and totalitarianism are types of political systems.
• Socialism advocates public or collective ownership and management of the means of production and distribution of goods.
• Communism is a political and economic ideology that advocates a classless society in which private property is abolished and the means of production are owned communally.
• Economic systems include market economies and command economies.
• Market economies allocate resources through the interaction of supply and demand.
• Command economies allocate resources through central planning.
• The relationship between economic systems, innovation, and entrepreneurial behavior should be learned.
• State-owned enterprises and mixed economies should be understood.
• Legal systems include common law, civil law, and theocratic law.
• Common law is based on tradition, precedent, and custom.
• Civil law is based on a comprehensive set of written laws or codes.
• Theocratic law is based on religious teachings.
• Key intellectual property concepts such as trademarks, patents, contracts, and warranties should be understood.

Economic Differences (Chapter 3)

• Political economy and economic progress affects the economy of countries.
• There are economic implications of states in transition.
• Factors for transitions include economic transformation, deregulation, and privatization.
• Emerging markets and policy changes have economic implications.
• There are political, economic and legal risks.
• Key factors that make a country attractive to investors should be understood.

The Cultural Environment of IB (Chapter 4)

• Cultural differences have a significant impact on international business.
• Determinants of these differences should be understood.
• Adaptations needed include those at the institutional, individual, and product levels.
• Hoefstede's "Six Dimensions" study of cultural differences research and implications should be understood.
• Hall's research and its implications should be understood.
• Key considerations for preparing oneself for a foreign assignment should be learned.
• Values, norms, and folkways are important concepts in understanding culture.

The International Monetary System (Chapter 11)

• Understanding the history of the IMS including linkage between trade and the gold standard is important.
• Key factors as to why the gold standard failed, and what replaced it, need to be understood.
• Bretton Woods replaced the gold standard, but ultimately also failed so reasons why should be learned.
• The managed floating system represents the present international monetary system.
• The impossible trinity as well as the Eurozone, the Euro, and Currency Boards should be understood.
• Shorting a currency should be defined and explained.
• Roles of the key institutions the IMF and World Bank should be understood.

The Foreign Exchange Market (Chapter 10)

• Important exchange rate terminology such as spot and forward rates, should be learned.
• Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price.
• Floating rates and the factors that influence exchange rate movements should be understood.
• How to solve simple foreign exchange problems should be learned and practiced.
• Types of forex risk, including transactions risk, translation risk, and economic risk should be understood.
• Purchasing Power Parity (PPP) should be understood.

Other

• Chapter 5 is not on the test.
• When reviewing, create a terminology list.