Chapter 5
True of false: Trade deficit is an economic condition in which a nation exports more than it imports
False: Trade deficit is when a nation imports more than it exports.
What does OLI stand for in the OLI framework?
Ownership, Locational, and Internalization
What does PPP stand for?
Purchasing Power Parity
What is intra-firm trade?
International trade between two subsidiaries in two countries controlled by the same MNE.
Ture or false: According to the mercantilism theory, exports are bad and imports are good
False: Mercantilism: suggests that the wealth of the world (measured in gold and silver at that time) was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer.
→ Exports are good and imports are bad.
What is the difference between the absolute advantage theory and the comparative advantage theory?
Absolute advantage is about the total advantage a nation has, comparative advantage is only the advantage compared to a different nation.
True or false: In an FPI you need to actively manage your business operations
False, in FPI you do NOT entail active management of foreign business operations, this is the case for FDI.
True or false: the exchange rate for immediate payments is called forward exchange rate
False: it is called the spot market rate
What is the name of an international organisation that provides loans for specific projects in developing countries?
The World Bank
True or false: Agglomeration is the clustering of economic activities arising from L-advantages.
True, many investors, especially those seeking innovations, like to locate in clusters of businesses in related industries or from the same country of origin.
Give the explanation for deadweigt loss
As a result of tariffs, the economy occurs net losses known as deadweight loss.
What types of vertical FDI exist and what do they mean?
Upstream FDI: when a firm engages in an upstream stage of the value chain.
Downstream FDI: when a firm engages in a downstream stage of the value chain in two different countries.
What are the strategic ways for a company to reduce their exposure to exchange rate risk?
1. Invoicing in their own currency
2. Strategic hedging
3. Currency risk diversification
What are subsidies?
Government payments to domestic firms
• lower firm’s costs of production, provide additional revenue stream, allow firms to stay in business even when they lack competitive advantages
What is a bandwagon effect?
The result of investors moving as a herd in the same direction at the same time
Give one economic and politcal argument against free trade
Economic arguments:
(1) protection from ‘unfair’ competition, (2) infant industries and (3) unequal distribution of cost and benefits.
Political arguments:
(1) national security, (2) consumer protection, (3) foreign policy and (4) environmental and social responsibility
What kind of risk arises when licensing is used, and what does this mean?
Dissemination risk, which is the risk associated with unauthorized diffusion of firm-specific know-how, in other words, the risk of the licensee or an employee using the know-how knowledge for other purposes.
What is a currency swap?
A currency swap is a currency exchange between two firms in which one currency is covered into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future.
True or false: Local small firms are big fan of FDI from large companies because with more competitors they can analyze different business models and benefit from this.
False: small local firms are more likely to be crowded out by all of the overwhelming competition than being able to benefit from all of the extra competition.
True or false: The Global Standard was a predictable monetary system with low volatility and high stability
True
Name 3 of the 4 components of the Diamond Model
The diamond model: focuses on why certain industries within nations are competitive internationally.
Resource endowment in terms of natural and human resources.
Sophistication and scale of domestic demand
Strategies, structure, and rivalry of domstic competitors.
Availability-related and supporting industries.
Name three reasons for firms to set up their operations close to their markets (Markets as L-advantages P. 158)
Protectionism: tariffs or non-tariff barriers may inhibit exports.
Transportation costs: are a major barrier to trade in some industries.
Direct interaction with the customer: essential in industries where associated services such as just-in-time delivery or after-sales services are an essential part of the product offering.
The production and sale of some services: cannot be physically separated, for example, in hotels, banking, or consultancy.
Marketing assets may be important for a fast-entry strategy. FDI enables MNEs to acquire local firms that control sought-after assets, such as distribution networks and brand names.
What is the difference between pegged and floating exchange rates?
Floating exchange rate is the willingness of a government to let the demand and supply conditions determine exchange rates.
Pegged exchange rate is an exchange rate of a currency attached to that of another country.
Ture or false: foreign policy is an economic argument against free trade
False: is a political argument
Name two forms of O (ownership) - advantages (3 possible answers)
Capabilities that the MNE has created at home and transferred abroad.
Capabilities arising from multinational operations.
Capabilities embedded in the organizational structure and culture of an MNE.