Concordia COMM 211 Fall 2024 Quiz 1 Prep Booklet PDF

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om l.c ai gm @ 22 el ha ap Concordia ar COMM 211 r r ba ba Fall 2024 Quiz 1 Prep Booklet © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Table of Contents om I. Welcome 2.3. States in Transition 2.3.1. Shift Towards Democracy Chapter 1. Introduction to 2.3.2. Shift Towards Market-Based Systems Globalization l.c 2.4. Implications for International Businesses 1.1. Globalization Defined 2.4.1. Overall Attractiveness of Foreign Markets 1.1.1. What is Globalization? ai 1.1.2. Two Types of Globalization Chapter 3. Country Differences: Cultural gm 1.2. Global Institutions 1.2.1. Institutions Created to Manage Global 3.1. What is Culture? Business 3.1.1. Culture Defined 1.3. Drivers of Globalization 1.3.1. Two Factors That Promoted Greater @ 3.2. Determinants of Culture 3.2.1. 6 Determinants of Culture 22 Globalization 3.3. Culture in the Workplace 1.4. Changes in the Global Economy 3.3.1. Hofstede's 5 Cultural Dimensions el 1.4.1. Global Output and Trade 3.3.2. Cultural Change 1.4.2. Foreign Direct Investment Chapter 4. International Trade ha 1.4.3. Multinational Enterprises 1.4.4. Politics and World Order 4.1. Overview of Trade Theory 4.1.1. Free Trade 1.5. The Globalization Debate ap 1.5.1. The Globalization Debate 4.2. Trade Theories 4.2.1. Mercantilism 1.6. Managing Companies in the Global ar 4.2.2. Absolute Advantage Economy 4.2.3. Comparative Advantage 1.6.1. Managing Global Organizations r 4.2.4. Heckscher-Ohlin Theory ba Chapter 2. Country Differences in 4.2.5. Product Life Cycle Theory 4.2.6. New Trade Theory Political Economy r 4.3. Instruments in Trade Policy 2.1. Political Systems ba 4.3.1. Instruments in Trade Policy 2.1.1. Collectivism and Individualism 2.1.2. Democracy vs. Totalitarianism 4.4. The Case for Government Intervention 4.4.1. Political Arguments for Government 2.2. Economic Systems Intervention 2.2.1. 3 Types of Economic Systems © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.4.2. Economic Arguments for Government 4.5. Implications for Business Intervention 4.5.1. Implications for Business om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com I. Welcome om I l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1. Introduction to Globalization om l.c 1.1 Globalization Defined ai gm 1.1.1 What is Globalization? @ 22 el ha ap Example: A Canadian-made skincare product is made in Canada with products imported from Brazil, Australia, and Uganda, packaged in a bottle imported from Europe, transported across the country in train containers made in the U.S. r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Main Impacts Businesses can expand internationally more easily om Costs are reduced by sourcing cheaper materials Main Criticisms l.c Local jobs being outsourced Environmental damage ai Common Forms gm International Trade: When firms export goods and services to consumers in another country Foreign Direct Investment (FDI): When a firm invests resources in business activities in another country @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.1.2 Two Types of Globalization om Globalization of Markets The merging of historically separate national markets into one huge global marketplace l.c ○ Tastes and preferences of consumers in different nations are converging upon a global norm Example: Fast food, industrial products ai Globalization of Production gm Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor energy, land, and capital) ○ Lower overall cost structure of businesses @ ○ Improves the quality and functionality of products to compete better 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.2 Global Institutions 1.2.1 om Institutions Created to Manage Global Business Create to manage, regulate, and police the global market place l.c Help to promote the establishment of multinational treaties to govern the global business system ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.3 Drivers of Globalization 1.3.1 om Two Factors That Promoted Greater Globalization Declining Trade and Investment Barriers l.c After World War II, countries committed to removing barriers to trade and foreign direct ai investment (FDI), leading to GATT being established gm Outcomes Average tariff rates fell significantly since 1950, now standing at around 4% ○ Exception: agricultural tariffs remain higher at about 40%. @ Foreign Direct Investment (FDI) restrictions have also decreased since the 1990s; 90% of global law changes from 1992–2009 favor FDI. 22 The global financial crisis of 2008–2009 caused a steep drop in world trade, but recovered in 2010 el Resistance ha Although globalization has expanded, protectionism still exists (trying to protect local economies from foreign competition) Further reductions in trade barriers may face political resistance. ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Technological Change om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.4 Changes in the Global Economy 1.4.1 om Global Output and Trade The U.S. was previously the dominant player in the global economy in 1960, but their share of l.c output has declined since then. ○ Not because the U.S. has decreased in economic power, but rather other countries have ai increased ○ The U.S. is still Canada's number 1 trading partner for imports and exports (followed by gm China) Asian economies grew significantly from 1960 to 2018 Developing countries like China, India, Indonesia, South Korea, and Brazil are growing more rapidly than developed countries @ Global enterprises are increasingly coming from smaller markets 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.4.2 Foreign Direct Investment om The U.S. dominated FDI in the 1960s, but European and Japanese firms began increasing investment abroad in the following years and decades ○ European and Japanese firms moved labour-intensive operations to developing nations to l.c lower costs in the 1970s ○ Japanese and South Korean car manufacturers (Toyota, Hyundai) began investing in factories outside of their home countries to avoid trade barriers ai Today, much of the growth in FDI comes from developing nations. Major recipients of FDI include China, Brazil, Mexico, and India gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.4.3 Multinational Enterprises om Multinational Enterprise (MNE): Any business that has production activities in two or more countries ○ In the 1960s, most multinationals were from the U.S. (66%); today, this is no longer the case l.c ○ Small multinationals (mini-multinationals) have risen from all countries ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.4.4 Politics and World Order om Major Shifts Democratic revolutions (1989–1991): Communist governments collapsed in Eastern Europe and l.c the Soviet Union. Former communist nations in Europe and Asia shifted toward democratic politics and policies that promote international business. ○ Despite potential opportunities some countries can be risky for foreign investors ai Reforms in China and Southeast Asia: China grew substantially from $2 billion in 1983 to $60- 100 billion by 2019. China’s firms, along with India’s, pose competitive threats to Western gm businesses. Latin American reforms: Countries like Brazil, Mexico, and Chile have embraced democracy and free markets, making the region more attractive for FDI. @ Global economic integration: Barriers to trade have been falling, leading to more interdependent global economies. Countries like South Korea and Taiwan have become major 22 global players. Emerging markets like Turkey, China, and South Africa show potential for continued success. el Challenges ha Uncertainty: Foreign investment comes with risk. Politics and local realities still matter. Economic Interdependence: Financial crises can affect everyone - when one country goes ap down, the economies of others get impacted r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.5 The Globalization Debate 1.5.1 om The Globalization Debate Summary: Many experts believe that globalization promotes greater prosperity in the global economy, l.c more jobs, and lower prices for goods and services. Others feel that globalization is not beneficial ai Anti-globalization gm Started with the WTO protest in Seattle in 1999, turned violent. Protestors fear globalization has detrimental effects on living standards, wages, and the environment @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com The Issues om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 1.6 Managing Companies in the Global Economy 1.6.1 om Managing Global Organizations l.c Managing an international business comes with different challenges in marketing, human resources, financing, etc. ai Countries differ in their political systems, economic systems, legal systems, and levels of develop Governments intervene at different levels, especially with international companies gm Currency exchange rates have major impacts on costs, pricing What Should International Companies Do? 1. Integrate the supply chain with sustainability in mind @ 2. Put workplace standards in place for employees (health, safety, etc.) 22 3. Evaluate suppliers globally to ensure they maintain your company's standards el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2. Country Differences in Political Economy om l.c 2.1 Political Systems ai gm 2.1.1 Collectivism and Individualism @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Collectivism and Individualism Over Time The Cold War exemplified the struggle between collectivism (represented by the Soviet Union) om and individualism (championed by the United States). From the late 1980s to about 2005, individualism gained dominance globally, as democratic ideals and market economies replaced socialist and communist systems in many countries. Since 2005, a resurgence of collectivist-leaning policies has been observed in several countries, l.c particularly in Latin America (e.g., Venezuela, Bolivia, Paraguay) and Russia. The global financial crisis led to a potential reevaluation of individualism's dominance, with ai growing citizen protests, such as in Chile in 2019, pushing back against individualistic economic policies in favor of more collective-oriented solutions. gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2.1.2 Democracy vs. Totalitarianism om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2.2 Economic Systems 2.2.1 om 3 Types of Economic Systems l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2.3 States in Transition 2.3.1 om Shift Towards Democracy Freedom House reported that 44% of countries were classified as free, 30% as partly free, and l.c 26% as not free The total number of democracies rose from 69 in 1987 to 86 in 2019, although this is a decrease ai from the peak of 123 democracies in 2006, indicating a recent decline in democratic governance. New democracies have emerged primarily in Eastern Europe and Latin America, with significant gm gains in Africa. New World Order @ The end of the Cold War (1991) and the “new world order” that followed the collapse of communism, taken together with the collapse of many authoritarian regimes in Latin America 22 started a new age Francis Fukuyama: war of ideas may be at an end and liberal democracy has triumphed el Huntington: The world is split into different civilizations each with its own value systems and ideology ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Why the Shift? om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2.3.2 Shift Towards Market-Based Systems om Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies Command and mixed economies failed to deliver the sustained economic performance achieved l.c by countries that had adopted market-based systems ○ Examples: United States, Switzerland, Hong Kong, Taiwan ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Requirements for Economic Transformation om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 2.4 Implications for International Businesses 2.4.1 om Overall Attractiveness of Foreign Markets l.c The attractiveness of a country for business depends on balancing benefits against costs / risks. Considerations include market size, consumer wealth, and future growth potential. ai 1. Benefits gm Long-term benefits stem from market size, current wealth, and future prospects. Early entry in emerging markets can yield first-mover advantages, while late entry can result in disadvantages. @ Countries with free market economies and strong property rights tend to show better growth potential. 22 2. Costs el Political factors: Costs may increase due to bribery in totalitarian states compared to ha democratic ones. Economic factors: Costs can be higher in underdeveloped economies lacking infrastructure. ○ Example: McDonald’s had to build its own supply chain in Russia. ap Legal factors: Compliance with strict regulations can raise costs. ○ Example: Countries lacking contract law can lead to financial losses due to unaddressed ar disputes. r 3. Risks ba Political risk: Social unrest can lead to drastic changes in the business environment. Economic risk: Poor government management can spark unrest and business environment r shifts. Indicators include inflation rates and debt levels. ba Legal risk: Weak legal systems can result in contract violations and intellectual property theft. © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Overall Assessment Costs and risks are generally lower in stable, developed nations compared to unstable, developing ones. Long-term benefits are influenced by future growth rates, not just current conditions. om The ideal scenario is politically stable nations with free markets and manageable inflation/debt levels. Country differences present ethical dilemmas, particularly regarding human rights and corporate behavior need to always be considered l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 3. Country Differences: Cultural om l.c 3.1 What is Culture? ai gm 3.1.1 Culture Defined @ Culture: A system of values and norms that are shared among a group of people and that when 22 taken together constitute a design for living and distinguishes one human group from another Society: A group of people sharing a common set of values and norms el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Culture and the Nation-State Society reflects people who are bound together by a common culture ○ Nation-states are political creations that can contain a single culture or several cultures ○ Some cultures embrace several nations om Example: French culture in Canada and France ○ Also possible to talk about culture at different levels within societies (subcultures) Example: Quebec culture within Canada l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 3.2 Determinants of Culture 3.2.1 om 6 Determinants of Culture l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Political Philosophy Views on individualism vs. collectivism; democracy vs. totalitarianism om Economic Philosophy Views of market economies vs. mixed economies vs. command economies l.c Social Structure ai Groups: Association of two or more individuals with a shared identity gm ○ Examples: family, work groups, friend groups, recreational groups ○ Can be influenced by views on individualism vs. collectivism ○ Can impact the workplace as well; individualistic views lead to more mobility and ○ In some societies, social status is tied to certain groups @ entrepreneurial spirit, while collectivism can lead to more cooperation and mutual support Social Stratification: Hierarchical social categories based on family background, occupation, 22 and income. ○ Social Mobility: The extent to which individuals can move from one group to the next el Example: You are born into a specific caste in Indian culture, whereas the class system in North America allows you to go from lower to upper class based on your work, ha achievements, and luck. ○ Class Consciousness in Business: Tendency for individuals to perceive themselves in terms of ap their class background. Can lead to us versus them mentality, especially between management and front-line employees. r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Religion Religion: a system of shared beliefs and rituals that are concerned with the realm of the sacred om Ethical system: a set of moral principles, or values, that are used to guide and shape behavior l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com om l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Education Formal education is the medium through which individuals learn many of the language, om conceptual, and technical skills that are indispensable in a modern society The knowledge base, training, and educational opportunities available to a country's citizens can also give it a competitive advantage in the market and make it a more or less attractive place for expanding business l.c The general education level of a country is a good indicator of the types of products that might sell in that location or the type of promotional materials that might be successful ai Language gm There are two forms language: ○ Spoken: Includes official and non-official languages ○ Unspoken: Gestures, facial expressions, personal space @ Some countries have multiple official languages, understanding of English varies 22 Many nonverbal cues are culturally bound and because they may be interpreted differently, can result in misunderstandings el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 3.3 Culture in the Workplace 3.3.1 om Hofstede's 5 Cultural Dimensions Geert Hofstede collected data from 1967-1973 about employee attitudes and values from more l.c than 100,000 individuals across 40 countries. Created 5 dimensions that summarize cultural differences (the 5th was added on later) ai The first 4 dimensions are ranked from 1-100. gm Power Distance: How society deals with inequality in physical and intellectual ability. High power distance cultures allow for inequality and power and wealth while low power @ distance cultures down play the inequalities as much as possible Example: Views towards your manager 22 el ha Individualism vs. Collectivism: Relationship between the individual and his/her peers. ap Individualist cultures cause looser connections with a high importance placed on individual achievement while collectivist cultures look after the interests of everyone in their family ar Example: Views towards overtime r r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Uncertainty Avoidance: Extent to which cultures socialize members to accept ambiguous situations. High uncertainty avoidance cultures care about job security, patterns, rules while low om uncertainty avoidance cultures are more willing to take risks and have less emotional resistance to change Example: Views towards new products l.c ai gm Masculinity vs. Femininity: Relationship between gender and work roles. @ In masculine cultures, there is a larger divide between roles for men vs. women & traditional "masculine values" like achievement and power determine cultural ideals 22 In feminine cultures, there is less differentiation between roles for men vs. women & traditional "feminine values" such as caring, quality of life determine cultural ideals Example: Views towards hours in a work week el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Long-Term vs. Short-Term Orientation: Attitudes towards time, patience, persistence, respect for tradition and reciprocation of gifts and favours. Also referred to as Confucian dynamism om Long-term orientation cultures care about thrift, sparing resources, working hard and slower results while short-term orientation cultures value spending now, truth, and bottom-line now Example: Impulse purchases vs. saving l.c ai gm Considerations Research may be culturally bound @ Assumes a one-to-one relationship between culture and nation-state 22 Informants only worked within a single industry – computers – and within one company – IBM. Certain social classes excluded from research el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 3.3.2 Cultural Change om Culture evolves over time, although changes in value systems can be slow and painful for a society Social turmoil is an inevitable outcome of cultural change Cultural change is particularly common as countries become economically stronger l.c As countries get richer, there is a shift from “traditional values” to “secular rational” values and from “survival values” to “well-being values” ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4. International Trade om 4.1 Overview of Trade Theory l.c ai 4.1.1 Free Trade gm Free trade: A situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. @ ○ Absence of barriers that allow for a free flow of goods and services between countries 22 Free trade is believed to boost the economic growth of ALL nations that participate. However, there have been long-standing debates over whether or not this is true; who is benefitting and el who isn't. ha Benefits of Free Trade ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Trade Theorists Overview Many theorists have tried to explain why free trade is beneficial, sometimes even making more om sense than buying certain products locally Only Mercantilism below supports government intervention in trade New Trade Theory suggests some limited government intervention l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2 Trade Theories 4.2.1 om Mercantilism Mercantilism: Philosophy that countries should encourage exports and discourage imports l.c ○ The government should intervene to make sure we are exporting more than importing (referred to as a trade surplus) ai Main Flaw gm Viewed trade as a zero-sum game: one in which a gain by one country results in a loss by another @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2.2 Absolute Advantage om Absolute Advantage: A country has an absolute advantage in the production of a product when it is more efficient than other countries at producing it ○ Proposed by Adam Smith, attacking the zero-sum game logic of Mercantilism l.c ○ Argues that trade is a positive-sum game: all parties benefit ○ Countries differ in their ability to produce goods efficiently ○ Example: Canada can produce maple syrup efficiently, while Mexico produces blue agave ai more efficiently gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2.3 Comparative Advantage om Comparative Advantage: Theory that countries should specialize in producing goods and services it can product most efficiently and buy the goods that it produces less efficiently from other countries. l.c ○ Ricardo took Adam Smith's theory a step further in 1817 to explain what happens when a country has an absolute advantage in all goods If that were the case Absolute Advantage suggests you should produce it all! ai ○ Example: I can use my land in Canada to produce apples or peaches. The same is true in the US. However, if we focus on what we can each produce well, we get more goods overall. gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com The Gain from Free Trade The theory of comparative advantage makes trade a positive sum game in which all gain (even om more than with just absolute advantage) Potential world production is greater with unrestricted free trade than it is with restricted trade Provides a strong rationale for encouraging free trade l.c Assumptions ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Critique of Comparative Advantage Immobile Resources: Resources do not always move freely from one economic activity to om another ○ Governments may need to help retrain displaced workers ○ Can cause suffering, challenges when resources are switched to new areas of production l.c Diminishing Returns: As we produce more, we get lower returns for each additional unit ○ An assumption of diminishing returns is more realistic than constant returns since: ai Not all resources are of the same quality (Example: some land is more fertile) Different goods use resources in different proportions (Example: some products require gm more labour) Jobs, Wages, and the Dynamic Effects of Trade: Free trade tends to have impacts across a country's economy, including on jobs and income. @ ○ Referred to as the Samuelson critique; he argues that richer countries tend to lose out 22 because the savings from cheaper goods do not offset things like job losses ○ However, he also notes that free trade has historically benefitted rich countries el Trade and Country Growth ha Countries that are open to trade have higher growth rates than countries that close their economies to trade ap Higher growth rates raise income levels and living standards r ar r ba ba © Wizedemy Inc. 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No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2.4 Heckscher-Ohlin Theory om Heckscher and Ohlin Theory: Comparative advantage reflects differences in national factor endowments. ○ Factor Endowments: resources such as land, labor, and capital that it can use in l.c manufacturing This theory has commonsense appeal with fewer assumptions and remains popular today ai Export goods that make intensive use of those factors that are locally abundant Import goods that make intensive use of factors that are locally scarce gm Critique: The Leontiff Paradox @ If this is true, a country like the U.S. that has a lot of capital (money, facilities, land) should produce & export a lot of capital-intensive products and import labour-intensive products 22 instead However, Leontiff found this wasn't true... ○ Example: a lot of products are imported to China, whereas labour-intensive goods & services el like technology, consulting are exported ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2.5 Product Life Cycle Theory om Product Life Cycle Theory: As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade ○ At the time, the wealth and size of the U.S. market gave a strong incentive to U.S. firms to l.c develop new products. Not so true anymore. ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.2.6 New Trade Theory om New Trade Theory: Trade can increase the variety of goods available and decrease the average cost of those goods because of economies of scale: unit cost reductions associated with a large scale of output l.c Firms with first mover advantages (the economic and strategic advantages gained by the first companies to offer something in an industry) will develop economies of scale and create barriers to entry for other firms ai ○ The pattern of trade we observe in the world economy may be the result of first mover advantages and economies of scale gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Implications of New Trade Theory Nations may benefit from trade even when they do not differ in resource endowments or om technology ○ A country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good ○ New trade theory thus clarifies some of the critiques of the Heckscher-Ohlin theory (Leontiff) l.c New trade theory provides an economic rationale for a proactive free trade policy ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.3 Instruments in Trade Policy 4.3.1 om Instruments in Trade Policy Tariffs l.c A tax on imports ai ○ Specific Tariffs: A fixed charge per unit imports Example: $3 per barrel of oil gm ○ Ad Valorem Tariffs: A percentage of the value imported Example: 5% of the value of your shipment With tariffs, the government and domestic producers gain. Consumers lose because they pay more. @ Rarely, export tariffs are used to discourage exporting certain goods or political reasons 22 Subsidies el Government payment to a domestic producer ○ Examples: cash grants, low-interest loans, tax breaks ha Used to make local producers more competitive compared to foreign companies (Example: agriculture) ap Import Quotas ar Restriction on the quantity of certain goods that can be imported into a country ○ Tariff Rate Quota: tariffs that apply only after a certain amount of imports r ○ Voluntary Export Restraint (VER): An agreement from an exporter to limit the amount of ba goods that can flow to an importer's country r ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com Export Ban Policy that partially or entirely restricts the export of a good om Local Content Requirement (LCR) Requirement for a specific portion of goods to be produced locally l.c Administrative Trade Policies ai Bureaucratic rules adopted by governments to restrict imports or boost exports (red tape) gm Anti-Dumping Policies Dumping: Selling goods in a foreign market below their costs of production or below their "fair market" value @ ○ Anti-Dumping Policies: Policy that punishes foreign firms for dumping 22 ○ Countervailing Duties: Special tariffs on goods from a country that has been found guilty of dumping el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.4 The Case for Government Intervention 4.4.1 om Political Arguments for Government Intervention l.c ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.4.2 Economic Arguments for Government Intervention om 1. Infant Industry Argument: Countries should support newer industries 2. Strategic Trade Policy: Governments can help raise national income if it can create first-mover companies OR to support firms in industries that are trying to compete against foreign firms l.c that already have first-mover advantages. ai gm @ 22 el ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  wizeprep.com 4.5 Implications for Business 4.5.1 om What Does Government Intervention in Trade Mean For Businesses? l.c Trade barriers increase costs, limit production dispersion, and create competitive disadvantages. Firms may respond to tariffs and quotas by relocating production to avoid trade barriers, as seen ai with Japanese automakers expanding in the U.S. Local content regulations can force firms to raise costs by concentrating production in specific gm markets. Anti-dumping actions limit aggressive pricing strategies and are used strategically by firms to counter low-cost foreign competitors. @ Firms try to influence government trade policies, potentially promoting either protectionism or free trade, which impacts global competition. 22 Businesses benefit more from promoting freer trade (e.g., supporting the WTO) than from encouraging protectionist measures, as globally dispersed production systems offer long-term competitive advantages. el Protectionism can lead to retaliation ha ap r ar r ba ba © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a data base or retrieval system, without the prior written permission of Wizedemy Inc.  om l.c ai gm Thanks for Studying With Us Good Luck! @ 22 el ha Find this, and much, much more on Wizeprep.com ap r ar r ba Bite-Sized Video Lessons Solutions to Problems 24/7 Instructor Q&A ba Each section corresponds to a See the solutions to the Need help clarifying a concept? minutes-long video explanation practice problems as well as a You have direct access to your by your expert instructors. step-by-step breakdown of the instructor. answers. © Wizedemy Inc. All Rights Reserved. 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