CHAPTER 5 THEORIES Q PLUS A PDF

International Business: The New Realities, 4e, GE (Cavusgil) Chapter 5 Theories of International Trade and Investment MORE QUESTIONS ON THEORIES 1) Why do nations trade? What would the world be like without international trade? Answer: Trade enables countries to use their national resources more...

International Business: The New Realities, 4e, GE (Cavusgil) Chapter 5 Theories of International Trade and Investment MORE QUESTIONS ON THEORIES 1) Why do nations trade? What would the world be like without international trade? Answer: Trade enables countries to use their national resources more efficiently through specialization. Trade allows industries and workers to be more productive. These outcomes help keep the cost of many everyday products low, which translates into higher living standards. Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Even resource-rich countries like the United States would suffer greatly without trade. Some types of food would become unavailable or very expensive. Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, freight would go undelivered, and people would not be able to heat their homes in winter. In short, not only do nations, companies, and citizens benefit from international trade, modern life would be nearly impossible without it. Diff: 1: Easy Skill: Concept Objective: 5-1: Appreciate why nations trade AACSB: Analytical Thinking; Environments and Reflective Thinking 2) In a short essay, explain the absolute advantage principle. Provide an example of the principle at work. Answer: Smith's absolute advantage principle states that a country benefits by producing primarily those products in which it has an absolute advantage-those that it can produce using fewer resources than any other country. Each country can increase its wealth by specializing in the production of goods in which it has unique advantages, exporting those goods, and then importing other goods in which it has no particular advantage. If every nation follows this practice, each can consume more than it otherwise could, generally at lower cost. A modern example of the principle at work involves the nations of Japan and Saudi Arabia. Japan has no natural holdings of oil, but it manufactures some of the best automobiles in the world. On the other hand, Saudi Arabia produces much oil, but it lacks a substantial car industry. Given the state of their resources, it would be wasteful for each of these countries to attempt to produce both oil and cars. By trading with each other, Japan and Saudi Arabia each employs its respective resources efficiently in a mutually beneficial relationship. Japan gets oil that it refines to power its cars, and Saudi Arabia gets the cars needed by its citizens. Because each country uses its own resources with optimum efficiency and engages in trade, living standards for its citizens are higher than they would be if they had not engaged in trade. Diff: 2: Moderate Skill: Application Objective: 5-1: Appreciate why nations trade AACSB: Analytical Thinking 3) In a short essay, explain the factor proportions theory. How does the theory differ from other theories? Answer: The factor proportions theory suggests that each country should export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production. For example, the United States produces and exports capital-intensive products, such as pharmaceuticals and commercial aircraft. Argentina produces land-intensive products, such as wine and sunflower seeds. This view rests on two premises: Products differ in the types and quantities of factors (labor, natural resources, and capital) required for their production; and Countries differ in the type and quantity of production factors that they possess. Factor proportions theory differs somewhat from earlier theories by emphasizing the importance of each nation's factors of production. The theory states that, in addition to differences in the efficiency of production, differences in the quantity of production factors held by countries also determine international trade patterns. In this way, a country that possesses an abundance of a given production factor (e.g., labor, land) obtains a per-unit-cost advantage in the production of goods that intensively use that factor. Diff: 2: Moderate Skill: Concept Objective: 5-1: Appreciate why nations trade AACSB: Analytical Thinking 4) The ________ is one of the three key modern perspectives that helps explain the development of national competitive advantage. A) factor proportions theory B) absolute advantage principle C) national industrial policy D) comparative advantage of nations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how can nations enhance their competitive advantage AACSB: Analytical Thinking 5) Which of the following statements would be supported by Michael Porter? A) Economic prosperity depends primarily on inherited national advantages. B) The presence of strong competitors in a nation hinders national competitive advantage. C) The presence of highly demanding customers discourages innovation. D) Rivalry among industry competitors spurs innovation. Answer: D Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how can nations enhance their competitive advantage AACSB: Analytical Thinking; Environments and Reflective Thinking 6) Explain the limitations of early trade theories. Discuss born global firms. Answer: While the concepts of absolute advantage and comparative advantage provide the rationale for international trade, they overlook factors that make contemporary trade complex, including: ∙ Government restrictions such as tariffs (taxes on imports), import barriers, and regulations can hamper international trade. ∙ Just as Japan did after World War II, governments may target and invest in certain industries, build infrastructure, or provide subsidies, all to boost the competitive advantages of home-country firms. ∙ Large-scale production in certain industries may provide economies of scale, and therefore lower prices. Economies of scale tend to compensate for weak national comparative advantages. Similarly, modern communications and the Internet tend to reduce the cost and complexity of cross-border trade. ∙ The main participants in international trade are individual firms that differ in significant ways. Far from being homogenous enterprises, many are highly entrepreneurial and innovative or have access to exceptional human talent, all of which support international business success. ∙ International shipping and insurance, critical for cross-border trade to take place, are relatively costly and make imported goods more expensive. ∙ Traded products are not just commodities anymore, such as milk and beef. Today, most traded goods are relatively complex. They are characterized by strong branding and differentiated features. ∙ Any services, such as banking and retailing, cannot be exported in the usual sense and must be internationalized via foreign direct investment. What we see today is an increasing number of young, entrepreneurial firms that intently pursue customers in foreign markets from an early age. Scholars and management consultants alike referred to this relatively novel breed of companies as born global firms."Born globals" are innovative start-ups that initiate international business soon after their founding. For example, Instagram is a born global. Founded in 2010, the firm soon found a ready market for its photo-sharing services in markets scattered around the world. Today, only about 12 percent of Instagram's customers are located in North America, where the company is based. Born global firms are now found in virtually all economies. This has developed despite the scarcity of financial, human, and tangible resources that characterize most new businesses. Born globals have emerged in large numbers for two main reasons: ∙ Globalization has made doing international business easier than ever before, and ∙ Advances in communication and transportation technologies have reduced the costs of operating internationally The born global phenomenon has given rise to a new academic field: international entrepreneurship. Current trends suggest that early internationalizing firms will become even more common in international business. Diff: 3: Hard Skill: Synthesis Objective: 5-3: Understand why and how firms internationalize AACSB: Analytical Thinking 7) ________ describes the total value of assets that MNEs own abroad via their investment activities. A) Monopolistic advantage B) FDI stock C) Absolute advantage D) Variable capital Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 8) Which of the following explains how firms can use FDI to gain and sustain competitive advantage? A) monopolistic advantage theory B) new trade theory C) Leontief paradox D) factor proportions theory Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 9) A ________ is one or more resources or capabilities a company possesses that few other firms have. A) factor endowment B) country-specific advantage C) comparative advantage D) monopolistic advantage Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 10) ________ theory suggests that firms using FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors. A) Factor proportions B) Monopolistic advantage C) Internalization D) Absolute advantage Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 11) Which of the following refers to an important monopolistic advantage for firms? A) imitable skills B) unskilled labor C) favorable climate D) proprietary technology Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 12) ________ is an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations. A) Internalization theory B) Monopolistic advantage theory C) Absolute advantage theory D) Dunning's eclectic paradigm Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 13) Which of the following is a benefit of internalizing foreign-based value-chain activities? A) The MNE maintains a monopolistic presence in foreign countries. B) The MNE eliminates employee turnover. C) The MNE oversees control of foreign operations and ensures product quality. D) The MNE learns new manufacturing methods from foreign partners. Answer: C Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 14) The eclectic paradigm specifies three conditions that determine whether a company will internationalize via FDI. Which of the following refer(s) to one of those conditions? A) entrepreneurial orientation of national enterprises B) FDI stock C) availability of variable capital in the home country D) location-specific advantages Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 15) Which of the following is an example of an ownership-specific advantage? A) the physical assets owned by a firm B) natural resources of the region where the firm operates C) low-cost labor D) inexpensive capital Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 16) Which of the following is an example of a location-specific advantage? A) managerial skills B) skilled labor C) proprietary knowledge D) the ability to reduce buyer uncertainty Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 17) Which of the following refers to a collaborative venture which results in a new legal entity? A) non-equity-based strategic alliances B) sole proprietorships C) equity-based joint ventures D) not-for-profit organizations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 18) Maxdime Inc. is an international automobile manufacturer that has decided to work on low-cost fuel efficient motorbikes. Foray Inc., a domestic automobile company based in China, is willing to partner temporarily with the R&D team of Maxdime to design and launch motorbikes specially for the Chinese market. This is an example of ________. A) product differentiation B) non-equity-based strategic alliance C) sole proprietorship D) entrepreneurial orientation Answer: B Diff: 2: Moderate Skill: Application Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 19) Which of the following is true about networks? A) Networks are neither formal organizations with clearly defined hierarchical structures nor impersonal, decentralized markets. B) In networks, buyers and sellers share no linkages and rarely interact with each other. C) In a network, continued interaction among partners leads to competition and rivalry that bring down productivity. D) Networks represent the economically beneficial short-term relationships the firm undertakes with other business entities. Answer: A Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 20) Relative efficiency of production refers to the total value of assets that MNEs own abroad via their investment activities. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 21) A benefit of the monopolistic advantage theory is that firms can operate foreign subsidiaries more profitably than the local firms that compete in their own markets. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 22) Monopolistic advantage theory is a framework for determining the extent and pattern of foreign-based value-chain operations. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 23) According to the internalization theory, firms must reduce control over foreign operations in order to enhance overall effectiveness. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 24) According to Dunning's eclectic paradigm, proprietary technology, managerial skills, trademarks or brand names, and economies of scale are examples of ownership-specific advantages. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 25) In a short essay, discuss the internalization theory. Provide examples. Answer: Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm. Internalizing value-chain activities (instead of outsourcing them to external suppliers) reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. Internalization also gives the firm greater control over its foreign operations. For example, the MNE might internalize manufacturing by acquiring or establishing its own plant in the foreign market. This enables the firm to produce needed inputs itself rather than sourcing from independent suppliers. Alternatively, it might internalize the marketing function by establishing its own distribution subsidiary abroad, instead of contracting with an independent foreign distributor to handle its marketing in the foreign market. The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself. Procter & Gamble initially considered exporting when it entered Japan. With exporting, P&G would have had to contract with an independent Japanese distributor to handle warehousing and marketing of its soap, diapers, and other products. Instead, P&G chose to enter Japan via FDI for three reasons: (1) trade barriers imposed by the Japanese government, (2) the strong market power of local Japanese firms, and (3) the risk of losing control over its proprietary knowledge. It established its own marketing subsidiary and national headquarters in Tokyo. Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 26) In a short essay, explain mercantilism and the monopolistic advantage theory. Answer: Mercantilism refers to the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports. Mercantilism explains why nations attempt to run a trade surplus-that is, to export more goods than they import. Many people believe that running a trade surplus is beneficial. They subscribe to a view known as neo-mercantilism. Labor unions (which seek to protect home- country jobs), farmers (who want to keep crop prices high), and certain manufacturers (those that rely heavily on exports) all tend to support neo-mercantilism. However, mercantilism tends to harm firms that import, especially those that import raw materials and parts used in the manufacture of finished products. Mercantilism also harms consumers because restricting imports reduces the choice of products they can buy. Product shortages that result from import restrictions may lead to higher prices-that is, inflation. When taken to an extreme, mercantilism may invite "beggar thy neighbor" policies, promoting the benefits of one country at the expense of others. By contrast, free trade is a generally superior approach. Monopolistic advantage refers to resources or capabilities a company holds that few other firms have. Monopolistic advantage theory suggests that firms which use FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors. This gives them a degree of monopoly power over local firms in foreign markets. This monopolistic advantage should be specific to the MNE itself, such as a proprietary technology or a brand name, rather than to the locations where it does business. Monopolistic advantage theory argues that at least two conditions should be present for a firm to target a foreign market over its home market. First, returns accessible in the foreign market should be superior to those available in the home market. This would provide the firm with incentives to expand abroad to take advantage of its monopoly power. Second, returns achievable in the foreign market should be superior to those earned by existing domestic competitors in the foreign market. This would give the firm an opportunity to earn monopoly profits that domestic firms in the foreign market cannot imitate. Diff: 3: Hard Skill: Synthesis Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 27) What is a collaborative venture? In a short essay, describe the two major types of international collaborative ventures. Answer: A collaborative venture is a form of cooperation between two or more firms. There are two major types: Equity-based joint ventures that result in a new legal entity; and non- equity-based (project-based) strategic alliances in which firms' partner, for a finite duration, to collaborate on projects related to R&D, design, manufacturing, or any other value-adding activity. In both cases, collaborating firms pool resources and capabilities and generate synergy. In other words, collaboration allows the partners to carry out activities that each might be unable to perform on its own. Collaborating firms share the risk of their joint efforts, which reduces vulnerability for any one partner. Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage AACSB: Analytical Thinking 28) In a short essay, explain DUNNING Eclectic Paradigm What is the Eclectic Paradigm? Based on the internalization theory of British economist J.H Dunning, the eclectic paradigm is an economic and business method for analyzing the attractiveness of making a foreign direct investment (FDI). The eclectic paradigm model follows the OLI framework. The framework follows three tiers – ownership, location, and internalization. The eclectic paradigm assumes that companies are not likely to follow through with a foreign direct investment if they can get the service or product provided internally and at lower costs. Ownership Advantage The ownership advantage can also be seen as the competitive advantage that comes with the FDI. Ownership, in this instance, can be defined as the proprietorship of a unique and valuable resource that cannot easily be imitated, thereby creating a competitive advantage against potential foreign competitors. The intrinsic disadvantages or challenges associated with FDIs, in terms of ownership, circle around the liabilities that come with foreignness since the potential investor is a non-native in the country that the FDI will be made. The challenges can include (but are not limited to) possible language barriers or lack of knowledge of the demand trends that are common among the local consumer markets. Companies and their management teams normally need to consider the possibilities of transference of the competitive advantage to other foreign markets in order to counterbalance the liabilities mentioned above. Ideally, an attractive investment should include notable economies of scale, a sound reputation, and a well-known brand name, advanced technology, etc. Location Advantage The potential business host countries being considered for FDIs must present numerous competitive advantages; location is one of them. The location advantage focuses more on the geographic advantages of the host country or countries. An example of a geographic advantage can be access to the ocean (for sea freight or other purposes) versus a land-locked country. Other location advantages can include low-cost labor and raw materials, lower taxes and other tariffs, a well-trained labor force, etc. Normally, the Porter’s diamond model can be used to evaluate location advantages. Companies and their management teams normally need to consider whether any location advantages, as mentioned above, exist in the market they wish to enter. Should the advantages exist, the companies can consider taking on the investment through an FDI or other pathways (e.g., franchising or licensing) provided that there is a demand in the foreign markets. Internalization Advantage In order for companies to choose which investment pathway or method is best suited for their needs, their management team must analyze the internalization advantage. They normally need to consider whether it would be more sensible to get the value chain activity performed locally with their own team or outsource it to a foreign country. The advantages of outsourcing from different countries can include (but are not limited to) lower costs and better skills to perform the value chain activities and/or better knowledge of the local markets. In such a case, management can choose between two options on how to proceed. It can either outsource its production to an original equipment manufacturer (OEM) or license its product design to an independent foreign company If the company does so, however, it should keep control over its activities and engage in FDI. It can be done by starting from scratch through a greenfield investment, entering into joint ventures with local partners, or purchasing existing local companies.