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Drivers of global business

Terms in this set (46)

Data might give impression top-ranked countries are far wealthier and more productive than lower-ranked countries

So we need to consider as well:

1. Per Capita Conversion (Umwandlung)
Improving the usefulness of many indicators (e.g. GDP, GNI) by adjusting it for the number of people in a country

2. Purchasing Power Parity (PPP) (Kaufkraft)
GNI per capita does not tell us much about how many goods and services one can buy with a unit of income in one country relative to how much someone can buy with a unit of income in another country

PPP provides a method of measuring the relative purchasing power of different countries' currencies for the same basket of goods (like bread and soap) and services (like telephone and electricity)

3. GDP Growth Rate
shows the increase in value of all final goods and services produced within a nation in a given year
- a country's economic potential: If it grows faster (or slower) than its population, the country's standards of living are rising (or falling)
- business opportunities

4. Human Development
Managers want to measure market potential => Estimating a country's degree of human development, in terms of the physical, intellectual, and social standards that shape a country's overall quality of life, helps them to do so and get a more refined picture of a country's performance

Non-exhaustive list of important "common sense" indicators:
adult literacy, educational attainment, life expectancy, low infant mortality, access to clean water, income measure
- suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade

Two key assumptions:
- consumers prefer a diverse choice of brands (variety) and
- production favours economies of scale

Increasing Product Variety & Reducing Costs
=>Through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods
o without trade, nations might not be able to produce those products where economies of scale are important
o with trade, markets are large enough to support the production necessary to achieve economies of scale

- Trade is mutually beneficial because it allows for the specialisation of production, the realisation of scale economies, and the consumption of a greater variety of products at lower prices

Pattern of trade
World trade pattern:
result of economies of scale and firstmover advantages
- First-mover advantages: the economic and strategic advantages achieved by early entrants into the industry
o first movers can gain a scale-based cost advantage that later entrants find difficult to match

- Countries may dominate in the export of certain goods because of economies of scale in production, and because firms from these countries were the first to capture scale economies ( => first-mover advantage)

Implication of the NTT
- Nations may benefit from trade even when they do not differ in resource endowments or technology
o Trade allows nations to specialise in the production of certain products, attaining economies of scale and lowering the unit production costs
o A country may dominate in the export of a good because it had one or more firms among the first to produce it
- Governments could consider policies that nurture and protect firms and industries where first mover advantages and economies of scale are important
1. Factor Endowments
- A nation's position in factors of production necessary to compete in a given industry
o Basic factors: natural resources, climate, location
o Advanced factors: skilled labour, infrastructure, technological know-how
- Complex relationship between basic and advanced factors
- Basic factors provide initial advantage which might be reinforced by investments in advanced factors
- Disadvantages in basic factors can create pressures to invest in advanced factors (e.g. Japan)

2. Demand conditions
Demand conditions - the nature of home demand for the industry's product or service
o influences the development of capabilities of domestically made products and services
o sophisticated and demanding customers pressure firms to be competitive

3. Relating and Supporting Industries
Relating and supporting industries - the presence or absence of supplier industries and related industries that are internationally competitive
o can spill over and contribute to other industries
o successful industries tend to be grouped in clusters within countries

4. Firm Strategy, Structure, and Rivalry
determining how companies are created, organised, and managed, and the nature of domestic rivalry
o different management ideologies affect the development of competitive advantage
o strong domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors

Government policy can
o affect demand through product standards
o influence rivalry through regulation and antitrust laws*
o impact the availability of highly educated workers and advanced transportation infrastructure.
- The four attributes, government policy, and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage

Pattern of trade
- exporting products from those industries where all four components of the diamond are favourable.
- importing in those areas where the components are not favourable.

Implications of Trade Theories for Manager
- Location implications
a firm should disperse its various productive activities to those countries where they can be performed most efficiently
- First-mover implications
a first-mover advantage can help a firm dominate global trade in that product
- Policy implications
firms should work to encourage governmental policies that support free trad
1. Tariffs
taxes levied on imports that effectively raise the cost of imported products relative to domestic products

- Specific tariffs
o levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil)
- Ad valorem tariffs
o levied as a proportion of the value of the imported good (e.g., a 25% U.S. tariff on imported trucks)
Import tariff is paid by foreign firms selling their good in the importing country

Implications of a tariff:
- increase government revenues
- force consumers to pay more for certain imports
- are pro-producer and anti-consumer
- reduce the overall efficiency of the world economy

2. Import quotas
directly limit the quantity of the good that may be imported
=> Achieved by issuing licenses specifying import quantity to individuals or firms

Effect of an import quota
When imports are limited =>
o immediate result: at the initial price, the demand for the good exceeds domestic supply plus imports
Domestic price of import good increases:
o At world market price, more people want to buy import good than possible → excess demand at this price; Domestic price rises above world market price
An import quota always raises the domestic price of the imported good!

3. Voluntary Export Restraints (VERs)
quotas on trade imposed by the exporting country, typically at request of importing country's government
Welfare effect of VERs on importing country worse than with normal quotas:
- Quota rent accrues to exporting country
- Otherwise identical to quotas analysed earlier

4. Other Non-Tariff Barriers to Trade (NTBs)
- Local Content Requirements - demand that some specific fraction of a good be produced domestically
=> benefit domestic producers
=> consumers face higher prices
=> Antidumping Policies - designed to punish foreign firms that engage in dumping and protect domestic producers from "unfair" foreign competition (Dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their "fair" market value)
=> Administrative Polices - bureaucratic rules designed to make it difficult for imports to enter a country
- Framework for multilateral negotiations aimed at liberalising world trade
- Negotiations brought decreases in tariff rates, constraints on other trade policies (export subsidies, import quotas)
- Created a forum for resolving trade disputes

Eight successive negotiation rounds completed so far:
- Latest successful round, the Uruguay Round, completed in 1994
- Current Doha Round inaugurated in 2001

GATT Principles
- Most favoured nation (MFN) rule: countries must charge the same import tariff on imports from all trade partners
- National treatment rule: once an import good has cleared the border (potentially subject to tariff), further discrimination is not allowed

The Uruguay Round
=>Uruguay Round resulted in trade liberalisation and administrative reform
Important results on trade liberalisation:
- average tariff rate lowered
- dramatic liberalisation of heavily protected sectors agriculture and clothing

Important administrative reform:
- Creation of World Trade Organization (WTO), based in Geneva, in 1995

Innovations Brought About by WTO
- Rules for trade in services (General agreement on trade in services, GATS)
Dispute settlement process:
- formalised process for trade dispute settlement
- More than 500 cases initiated since 1995 (documented on WTO website)
- fast settlement (<15 months) intended, but often not possible

GATT/WTO: Doha Round
- The Doha Round, active since 2001, is at an impasse
- Reason for problems: successes in previous rounds has left only the difficult issues such as agriculture trade
- Aggregate gains from success estimated to be modest
- Failure of Doha Round would not jeopardise earlier successes (status quo is the fall-back option)