Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Quick Study - Chapter 7
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Quick Study - Chapter 7
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Quick Study
Quick Study 1
- Q: The purchase of physical assets or significant ownership of a company abroad to gain a measure of management control is called what?
A: Foreign direct investment is the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control. It differs from portfolio investment—an investment that does not involve obtaining a degree of control in a company.
- Q: What are the main drivers of foreign direct investment flows?
A: Three main reasons for the large increases in FDI flows over the past couple of decades are: (1) globalization, (2) mergers and acquisitions, and (3) increasing FDI on the part of entrepreneurs and small businesses.
- Q: Why might a company engage in a cross-border merger or acquisition?
A: Many cross border M&A deals are driven by a desire of companies to: (1) get a foothold in a new geographic market, (2) increase a firm’s global competitiveness, (3) fill gaps in companies’ product lines in a global industry, and (4) to reduce costs of research and development, production, distribution, and so forth.
Quick Study 2
- Q: What imperfections are relevant to the discussion of market imperfections theory?
A: Market imperfections theory states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfection. Two important market imperfections are trade barriers and specialized knowledge, such as technical expertise of engineers or the special marketing abilities of managers. Companies can eliminate the inefficiency of trade barriers (they increase the cost of getting a product to market) by developing production facilities within the market. Sometimes the only way a company can exploit the specialized knowledge of its employees is to engage in FDI—the knowledge simply cannot be licensed to another firm. Firms also can undertake FDI when they want to lessen the risk of giving away a competitive advantage to other companies through licensing agreements.
- Q: Location, ownership, and internationalization advantages combine which FDI theory?
A: The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources but can also be acquired advantages such as a productive workforce. An ownership advantage is the advantage that a company has due to its ownership of some special asset, such as a powerful brand, technical knowledge, or management ability. An internalization advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The theory states that when all these advantages are present, a company will undertake FDI.
- Q: Which FDI theory depicts a firm establishing a dominant market presence in an industry?
A: The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs or the price of its output.
Quick Study 3
- Q: Where adequate facilities are not present in a market, a firm may decide to undertake what?
A: Building a subsidiary abroad from the ground up is called a greenfield investment. This is pursued when adequate facilities in the local market are unavailable.
- Q: A system in which a product’s components are made where cost of producing a component is lowest is called what?
A: Rationalized production is when each of a good’s components is produced where the cost of producing that component is lowest. A potential problem with this production model is that a work stoppage in one country can bring the entire production process to a standstill.
- Q: What do we call the situation in which a company engages in FDI because the firm it supplies has already invested abroad?
A: Firms commonly engage in FDI when the firms they supply have already invested abroad. The practice of “following clients” is common in industries in which producers source component parts from suppliers with who they have close working relationships.
Quick Study 4
- Q: The national accounting system that records all receipts coming in to a nation and all payments to entities in other countries is called what?
A: A country’s balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation. The balance of payments helps a country monitor the flows of goods, services, income, and transfer of assets between itself and other nations.
- Q: Why might a host country intervene in foreign direct investment?
A: One reason host governments intervene in FDI is to control their balance of payments. (1) Countries get a balance-of-payments boost from initial FDI flow into their economies. (2) Local content requirements can lower imports, thereby providing a balance-of-payments boost. (3) Exports generated by production resulting from FDI can help the balance-of-payments position.
Another reason for intervening in FDI is to obtain resources and benefits. (1) They may want access to technology. Nations encourage the import of technology because it tends to increase the productivity and competitiveness of nations. (2) They may want to obtain management skills and increase employment levels. By encouraging FDI, nations can allow in talented managers to train local managers in how to operate the local facilities—particularly important for former communist nations that lack skilled managers. (3) Some of these managers will go on to establish their own businesses, thereby expanding the economy and employment opportunities within the nation.
- Q: Why might a home country intervene in foreign direct investment?
A: There are generally fewer concerns regarding the outflow of FDI among home nations because they tend to be prosperous, industrialized nations. FDI outflows do not drastically affect the domestic economy. Nevertheless, there are reasons why home countries discourage outward FDI. (1) Investing in other nations sends resources out of the home country. (2) Outgoing FDI may ultimately damage a nation’s balance of payments by reducing exports that would otherwise be sent to international markets. (3) Jobs resulting from outgoing investments may replace jobs at home.
Home countries also promote outgoing FDI. (1) They may do so because outward FDI can increase long-run competitiveness. (2) Nations may encourage FDI in industries that they have determined to be “sunset” industries.
Quick Study 5
- Q: What policy instruments can host countries use to promote FDI?
A: Host countries promote FDI by giving tax incentives, low-interest loans, and infrastructure improvements.
- Q: What policy instruments can home countries use to promote FDI?
A: To promote FDI, home countries can offer insurance, low-interest loans, tax breaks, and apply political pressure.
- Q: Ownership restrictions and performance demands are policy instruments used by whom to do what?
A: Host nations restrict FDI through ownership restrictions and performance demands.
- Q: Differential tax rates and sanctions are policy instruments used by whom to do what?
A: Home countries may try to restrict FDI by using differential tax rates and performance demands.
World Class in Dixieland
7-19 Q: What are the pros and cons of Mercedes’ decision to abandon the culture and some of its home country practices?
A: The major advantage of the investment is potential for increased sales and market share. The major drawback is the possible dilution of the brand image that Mercedes’ has in the market place.
7-20 Q: What do you think were the chief factors involved in Mercedes’ decision to undertake FDI in the United States rather than build the M-class in Germany?
A: Mercedes chose the United States over Germany because U.S. labor costs were lower. Alabama offered attractive tax refunds and other incentives to gain jobs that the plant would create in and around Vance, Alabama and, the company chose the U.S. market to develop an ultra-modern plant that would be a model for its future international facilities.
7-21 Q: Why do you think Mercedes decided to build the plant from the ground up in Alabama rather than buying an existing plant in, say, Detroit? List as many reasons as you can and explain your answers.
A: First, Mercedes probably chose to build from the ground up because existing facilities would not supply the cutting-edge environment it wanted for its latest efforts in car-manufacturing technology, organizational design, and HRM techniques. Second, it probably chose Alabama because of the mix of economic factors, including low wages, a rural setting with a strong work ethic, and financial incentives. Third, it wanted to create a unique work setting and environment that reflected the firm’s values.
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International Business: The New Realities, 4th Edition, Cavusgil, Knight & Riesenberger
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