Questions on Globalisation and International Trade

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Chapter 1: Globalization

1. Describe the shifts in the world economy over the last 30 years.  What are the implications of these shifts for international businesses based in Great Britain? North America? Hong Kong?

Answer: The world economy has shifted dramatically over the past 30 years.  As late as the 1960s, four stylized facts described the demographics of the global economy.  The first was U.S. dominance in the world economy and world trade.  The second was U.S. dominance in the world foreign direct investment picture. Related to this, the third fact was the dominance of large, multinational U.S. firms in the international business scene.  The fourth was that roughly half of the globe - the centrally planned economies of the Communist world - was off-limits to Western international businesses. All of these demographic facts have changed.  Although the U.S. remains the world's dominant economic power, its share of world output and world exports have declined significantly since the 1960s.  This trend does not reflect trouble in the U.S. economy, but rather reflects the growing industrialization of developing countries such as China, India, Indonesia, and South Korea.  This trend is also reflected in the world foreign direct investment picture. As depicted in Figure 1.2 in the textbook, the share of world output (or the stock of foreign direct investment) generated by developing countries has been on a steady increase since the 1960s, while the share of world output generated by rich industrial countries has been on a steady decline.  Shifts in the world economy can also be seen through the shifting power of multinational enterprises.  Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise.  The first has been the rise of non-U.S. multinationals, particularly Japanese multinationals.  The second has been the emergence of a growing number of small and medium-sized multinationals, called mini-multinationals.  The fall of Communism in Eastern Europe and the republics of the former Soviet Union have brought about the final shift in the world economy.  Many of the former Communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economies.  Similar developments are being observed in Latin America.  If these trends continue, the opportunities for international business may be enormous.  The implications of these shifts are similar for North America and Britain.  The United States and Britain once had the luxury of being the dominant players in the world arena, with little substantive competition from the developing nations of the world.  That has changed.  Today, U.S. and British manufacturers must compete with competitors from across the world to win orders.  The changing demographics of the world economy favor a city like Hong Kong.  Hong Kong (which is now under Chinese rule) is well located with easy access to markets in Japan, South Korea, Indonesia, and other Asian markets.  Hong Kong has a vibrant labor force that can compete on par with the industrialized nations of the world.  The decline in the influence of the U.S. and Britain on the global economy provides opportunities for companies in Hong Kong to aggressively pursue export markets.

2. "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in smaller firms."  Evaluate this statement.

Answer:  People who believe in this view, and the firms that they work for, may find that they do not achieve their full potential (at best) and may ultimately fail because of their myopia.  As barriers to trade decrease and state of the art technological developments take place throughout the world, new opportunities and threats exist on a worldwide basis.  The rise of the mini-multinationals suggests there are global opportunities even for small firms.  But staying attuned to international markets is not only important from the perspective of seeking profitable opportunities for small firms; it can also be critical for long-term competitive survival.  Firms from other countries may be developing products that, if sold internationally, may wipe out small domestic competitors.  Scanning international markets for the best suppliers is also important for small firms, for if a domestic competitor is able to tap into a superior supplier from a foreign country, it may be able to seriously erode a small firm's competitive position before the small firm understands the source of its competitor's competitive advantage and can take appropriate counter actions.

3. How have changes in technology contributed to the globalization of markets and of production?  Would the globalization of production and markets have been possible without these technological changes?

Answer:  Changes in technology have contributed to the globalization of markets and of production in a very substantive manner.  For instance, improvements in transportation technology have paved the way for companies like Coca-Cola, Levi Strauss, Sony and McDonalds to make their products available worldwide.  Similarly, improvements in communications technology have had a major impact.  The ability to negotiate across continents has been facilitated by improved communications technology, and the rapidly decreasing cost of communications has lowered the expense of coordinating and controlling a global corporation.  Finally, the impact of information technology has been far reaching.  Companies can now gain worldwide exposure simply by setting up a homepage on the Internet.  This technology was not available just a few short years ago. The globalization of production and markets may have been possible without improvements in technology, but the pace of globalization would have been much slower.  The falling cost of technology has made it affordable for many developing nations, which has been instrumental in helping these nations improve their share of world output and world exports.  The inclusion of these nations, such as China, India, Thailand, and South Korea, has been instrumental in the globalization of markets and production.  In addition, improvements in global transportation and communication have made it relatively easy for business executives from different countries to converse with one another.  If these forms of technology, including air-travel, fax capability, e-mail, and overnight delivery of packages were not available, it would be much more difficult for businesses to conduct international trade.

4. "Ultimately, the study of international business is no different from the study of domestic business.  Thus, there is no point in having a separate course on international business."  Evaluate this statement.

Answer: This statement reflects a poor understanding of the unique challenges involved in international business. Managing an international business is different from managing a purely domestic business for at least four reasons. These are: (1) countries are different; (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business; (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system; and (4) international transactions involve converting money into different currencies.  As a result of these differences, there are ample reasons for studying international business as a specific field of study or discipline.

5. How might the Internet and the associated World Wide Web impact international business activity and the globalization of the world economy?

Answer:  According to the text, the Internet and World Wide Web (WWW) promise to develop into the information background of tomorrow's global economy.  This improved technology will not only make it easier for individuals and companies in different countries to conduct business with one another, but will also further decrease the cost of communications.  These improvements will undoubtedly hasten the already rapid pace of globalization. Another distinct attribute of the Internet and the WWW is that they act as an equalizer between large (resource rich) and small (resource poor) firms.  For instance, it does not cost any more for a small software firm to gain visibility via the WWW than it does for a large software company like Microsoft.  As a result, the WWW helps small companies reach the size of audience that was previously only within the reach of large, resource rich firms.

6. If current trends continue, China may emerge as the world's largest economy by 2020.  Discuss the possible implications of such a development for(1) The world trading system.(2)The world monetary system.(3)The business strategy of today's European and U.S. based global corporations.

(4)Global commodity prices.

Answer: The world trading system would clearly be affected by such a development.  Currently China enjoys a somewhat privileged status within the World Trade Organization as a “developing” country.  Such a rise to eminence, however, would clearly force it to become a full and equal member, with all the rights and responsibilities.  China would also be in a position to actively affect the terms of trade between many countries.  On the monetary front, one would expect that China would have to have fully convertible and trading currency, and it could become one of the “benchmark” currencies of the world.  From the perspective of Western global firms, China would represent both a huge market, and potentially the home base of some very capable competitors.  Finally, commodity prices would probably fall.

7. Read the Country Focus in this chapter on the Ecuadorian rose industry, the answer the following questions:  

a) How has participation in the international rose trade helped Ecuadors economy and its people?  How has the rise of Ecuador as a center for rose growing benefited consumers in developed nations who purchase the roses?  What do the answers to these questions tell you about the benefits of international trade?

b) Why do you think that Ecuadors rose industry only began to take of 20 years ago?  Why do you think it has grown so rapidly?  

c) To what extent can the alleged health problems among workers in Ecuadors rose industry be laid at the feet of consumers in the developed world and their desire for perfect Valentines Day roses?

d) Do you think governments in the developed world should place trade sanctions on Ecuador roses if reports of health issues among Ecuadorian rose workers are verified?  What else might they do to improve the situation in Ecuador?

a) Ecuador is the world’s fourth largest producer of roses.  In fact, roses represent the country’s fifth largest export.  The industry is vital to Ecuador’s economy, creating tens of thousands of jobs, jobs that pay significantly above the country’s minimum wage.  Taxes and revenues from the rose growers have also helped to pave roads, build schools, and construct sophisticated irrigation systems.  For Ecuador’s consumers, the success of the industry means bigger, more vibrant flowers than were previously available.  Most students will recognize that the conditions in Ecuador give the country a distinct advantage in rose growing, and that by focusing on the industry, Ecuador has been able to benefit from international trade.  Consumers in other countries also benefit from Ecuador’s flower exports with better products.

b) Ecuador’s rose industry began some 20 years ago, and has been expanding rapidly ever since then.  Most students will probably focus advances in technology as a key to the industry’s success.  Roses are a very fragile, perishable product.  Modern technology enables growers to used refrigerated air transport to get the product to markets around the globe.  Without that ability, the growers would be limited to the market immediately surrounding the country.

c) Students will probably be divided on this issue with some students arguing that consumers are to blame for the problems, and others placing the blame on the growers.  Students taking the first perspective will probably suggest that most consumers purchase their roses with little consideration for how they are grown.  Rather, most consumers simply focus on their beauty and price.  Students blaming the growers might argue that growers, because they feel the effect of less-than-perfect roses in the form of smaller profits, will be motivated to find ways to produce ever more perfect flowers.  Certainly, the use of pesticides and other products can produce a better crop.  In the end, there is probably blame on both sides.  If more consumers were aware of the health problems resulting from the improper use of pesticides, they would probably demand some changes.  Similarly, if pressure were put on the growers to use pesticides safely, health problems could be reduced.

d) Trade sanctions are a tool that is often employed by governments that are making a statement against a specific action or actions.  In the case of Ecuador, trade sanctions certainly would be an option, as would publicizing the situation so that more consumers were aware of the conditions.  In the end though, it is important to consider the effect of the sanctions or other measures on people like Maria who might lose their livelihood as a result.

Chapter 2: National Differences

1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth!  Discuss.

Answer: In a market economy, private individuals and corporations are allowed to own property and other assets.  This right of ownership provides a powerful incentive for people to work hard, introduce new products, develop better advertising campaigns, invent new products, etc., all in the hopes of accumulating additional personal capital and wealth.  In turn, the constant search on the part of individuals and corporation to accumulate wealth enriches the entire economy and creates economic growth.  In contrast, in a command economy, private individuals and corporations are not allowed to own substantial quantities of property and other assets.  The objective of a command economy is for everyone to work for “the good of the society.”  Although this sounds like a noble ideal, a system that asks individuals to work for the good of society rather than allowing individuals to build personal wealth does not provide a great incentive for people to invent new products, develop better advertising campaigns, find ways to be more efficient, etc.  As a result, command economies typically generate less innovation and are less efficient than market economies.

2. A democratic political system is an essential condition for sustained economic progress.  Discuss.

Answer: This question has no clear-cut answer.  In the West, we tend to argue that democracy is good for economic progress.  This argument is largely predicted upon the idea that innovation is the engine of economic growth, and a democratic political system encourages rather than stifles innovation.  However, there are examples of totalitarian regimes that have fostered a market economy and strong property rights protection and experienced rapid economic growth.  The examples include four of the fastest growing economies of the past 30 years – South Korea, Taiwan, Singapore, and Hong Kong – all of which have grown faster than Western economies.  However, while it is possible to argue that democracy is not a necessary precondition for the establishment of a free market economy, it seems evident that subsequent economic growth leads to establishment of democratic regimes.  Several of the fastest-growing Asian economies have recently adopted more democratic governments.

3. What is the relationship between corruption (i.e., bribe taking by government officials) in a country and economic growth?  Is corruption always bad?

Answer: Economic evidence suggests that high levels of corruption significantly reduce the economic growth rate in a country.  By siphoning off profits, corrupt politicians and bureaucrats reduce the returns to business investment, and hence, reduce the incentive that both domestic and foreign businesses have to invest in that country.  The lower level of investment that results has a negative impact on economic growth. However, while most students will probably agree that corruption is bad, some may point out that the U.S., despite its Foreign Corrupt Practices Act, does allow “grease payments” to expedite or secure the performance of a routine governmental action. According to Congress, “grease payments” while technically bribes are not being used to obtain or maintain business, but rather are simply made to facilitate performance of duties that the recipients are already obligated to perform.

4. The Nobel prize-winning economist Amartya Sen argues that the concept of development should be broadened to include more than just economic development.  What other factors does Sen think should be included in an assessment of development?  How might adoption of Sens views influence government policy?  Do you think Sen is correct that development is about more than just economic development?  Explain.

Answer: Sen has argued that development be assessed less by material output measures such as GNP per capita, and more by the capabilities and opportunities that people enjoy.  Sen suggests that development be seen as a process of expanding real freedoms that people experience, and as such, that development requires the removal of major impediments to freedom.  Governments influenced by Sen might ensure that basic health care and education programs are available especially for women.  Many students will agree with Sen and the notion that development is not just an economic process, but a political one too, and that to succeed citizens must be given a voice in the important decisions made for the country.

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5. You are the CEO of a company that has to choose between making a $100 million investment in either Russia or the Czech Republic.  Both investments promise the same long-run return, so your choice of which investment to make is driven by considerations of risk.  Assess the various risks of doing business in each of these nations.  Which investment would you favor and why?

Answer: When assessing the risks of investment, one should consider the political, economic, and legal risks of doing business in either Russia or the Czech Republic.  At this time (Fall 2002), the risk in ...

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