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International marketing chapter 2
Terms in this set (46)
Trade is based on each country selling what it is best at producing.
Trade can occur between two countries even if one of the countries has no absolute advantage in any product. The theory of comparative advantage is based on the concept of opportunity cost.
(theory of competitive advantage) 1. Factor conditions
The nation's position in factors of production, such as skilled labor or infra-structure, necessary to compete in a given industry.
(theory of competitive advantage) 2. Demand conditions
The nature of home-market demand for the industry's product or service.
(theory of competitive advantage) 3. Related and supporting industries)
The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
(theory of competitive advantage) 4. Firm strategy, Structure, and Rivalry)
The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
Fixed exchange rate currencies
The exchange rate is set by the government of the issuing country. Example: The Chinese Yuan
Floating exchange rate currencies
The exchange rate is determined by forces of supply and demand--The greater the supply of a currency and the lower its demand the lower its value and vice versa
The more a nation exports relative to the amount it imports, the greater the demand for it's currency and the higher it's exchange rate.
(floating) Relative inflation rate
A country suffering relatively higher inflation rates than other major trading partners will experience a depreciation of its currency.
(floating) Economic Growth
If the domestic economy is growing fast relative to major trading partners, the country's imports tend to rise faster than its exports, resulting in a deterioration of trade balance (trade balance = exports-imports) and thus depreciation of its currency.
(floating) Investment from abroad
If domestic economic growth attracts large amount of investment from abroad then it could offset the negative trade effect, thus resulting in an appreciation of a country's currency.
(floating) The differential between international interest rates
Relatively higher real interest rates in a country raises the value of its currency.
intervene in the foreign exchange market from time to time to manage the value of a currency.
do not like strong currencies because it makes their exports to other countries more expensive.
like strong currencies because they can import more from other countries for the same amount of currency.
Convertible/ Hard currencies
-A convertible currency can be freely exchanged into another currency for any purpose, without regulatory restrictions.
-Convertible currencies are generally associated with open and stable economies, and their prices are typically determined through supply and demand forces in the foreign exchange market.
-A currency that does not have favor with foreign exchange dealers as the countries economy very small, weak, and highly fluctuating.
-Smaller, less developed countries that do not export much tend to have soft currencies.
Soft currencies generally tend to be fixed exchange rate currencies.
-Panama adopted the U.S. dollar as its currency in 1904.
-Ecuador adopts U.S. dollar in 2000.
Is adopting the currency of another country a good idea?
-Positive: Monetary stability.
-Negative: Lack of flexibility in monetary policy to respond to economic downturn.
Purpose of the (IBRD) The world bank
To original purpose of the bank was to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by the second world war.
What does the world bank do?
-It helps governments in developing countries reduce poverty by providing them with money and technical expertise they need for a wide range of projects-such as education, health, infrastructure, communications, government reforms and many other purposes.
-The bank makes low interest and no interest loans to developing and poor countries who may not be able to obtain such loans from commercial banks.
From where does the world bank get money to lend?
-World Bank lending to developing countries is primarily financed by:
-Selling AAA-rated bonds in the world's financial markets.
-While bank earns a small margin on the loans it makes, the vast majority of these loans come from its capital base which consists of reserves built up over the years and money paid in from the bank's 185 member country shareholders
International Monetary Fund
does three main types of work
involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis-prevention
The IMF also lends to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems; loans to low-income countries are also aimed especially at poverty reduction
IMF (Techical assistance)
The IMF provides countries with technical assistance and training in its areas of expertise.
General Agreement on Tariffs and Trade (GATT)
-Established in 1947 (succeeded by the World Trade Organization in 1995), GATT was a major forum for liberalization and promotion of nondiscriminatory international trade between member countries.
-Liberalization was promoted through periodic trade rounds or negotiations (a total of seven rounds).
The principles of a world economy embodied in the articles of GATT
Strengths and Weaknesses of GATT
-GATT was relatively more successful in reducing tariff barriers rather than non-tariff barriers.
-GATT was more focused on trade dealing with goods rather than services.
The dispute resolution body of GATT was largely ineffective.
World Trade Organization (WTO)
Established in 1995, WTO succeeded GATT and continues to pursue the goals of GATT.
The WTO is a permanent standing body headquartered in Geneva, Switzerland
The WTO had tried to improve upon GATT.
-WTO has an increased focus on trade in services.
-WTO has a dispute resolution body whose rulings are timely and binding for member countries.
The Principles of World Trade Organization
-Freer - with barriers coming down through negotiation;
-Predictable- foreign companies, investors and governments should be confident that trade barriers (including tariffs, non-tariff barriers and other measures) should not be raised arbitrarily;
-More competitive - by discouraging "unfair" practices such as export subsidies and dumping products at below fair market value to gain market share.
Some Issues facing the WTO
-Focus on liberalization of trade of goods, agricultural products, services, and information technology.
-Agricultural subsidies provided by rich nations to their farmers are substantial: For example by one estimate agricultural subsidies paid by rich nations amount to over $ 350 billion per year.
-Focus on protection of intellectual property rights.
-Set standards regarding (1) labor and the (2) environment.
Group of Seven (G7)
-The world's leading industrial nations (USA, UK, France, Germany, Italy, Canada, Japan) meet regularly to discuss the world economic situation
-The members work together informally to help stabilize the world economy and reduce extreme disruptions.
Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States of America.
The formation of the G20 reflects the changing economic environment of the world.
The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.
Lack of competent managers.
Orderly marketing arrangements (voluntary export restrictions)
Capital controls/Exchange controls
-Duties or taxes levied on products as they cross national boundaries.
-If tariffs are too high they make imported products too expensive.
Ways to Overcome Tariffs
-Ship unassembled products [e.g., Completely Knocked Down (CKD's) products].
Produce in the local market.
-a physical limit on the amount of product that can be imported into a country.
-Quotas are usually computed as a percentage of the overall market in the country.
-Example: No more than 20% of the overall market for product x can consist of imports.
Ways companies deal with quotas:
Produce inside the country
Voluntary export restrictions (VER's)
-an agreement between countries in which one country agrees to limit its exports to the other.
-initiated by the importing country and are usually not voluntary in that they are based on implicit threats that unless concessions are made stronger unilateral sanctions will be made.
-There are approximately three hundred VER's worldwide, most protecting United States and Europe.
-VER's are used in textile, clothing, steel, automobiles, shoes, machinery and consumer electronics.
Nontariff Trade Barriers
are all nonmonetary restrictions on trade
Buy national laws (Usually applies to government purchases)
Health and safety standards
Arbitrary product standards
120 vs. 220 volt appliances
Artificial stimulants of trade (subsidies or tax incentives)
-Regulations to control the flow of money/investments across borders.
-Money and capital controls determine who can move funds and under what conditions.
-Limits placed on the amount of foreign exchange that may be purchased.
-Restrictions on who can purchase foreign exchange.
-Restrictions on repatriation of profits by foreign corporations.
-Restrictions on conversion of a country's currency for another, imposed by it's government in an attempt to improve it's balance of payment position.
-Residents are required to sell foreign exchange coming into their possession to the designated exchange-control authority (usually the central bank or specialized government agency) at rates set by the authority.
-Typically, countries that employ exchange controls are those with weaker economies. By limiting the amount of foreign exchange a resident can purchase, the government can limit imports and thus prevent a decline in its foreign currency balances.
Reasons for Using Capital Controls and Exchange Controls
-Preserve valuable foreign exchange. Use foreign exchange only for those products that are deemed essential.
-Prevent flight of capital.
-Isolate the economy from outsiders.
-Manage the exchange rate to affect export and imports to and from the country.
Some Common Reasons Given for Restriction of Free Trade
-Generation of revenue (via tariffs)
-Protection of domestic workers
-Protection of "infant industries"
-Protecting industries vital to national defense
-Protection of international value of the currency and maintenance of international reserves.
-Punishment of objectionable behavior by foreign countries or companies.
Critics of globalization charge that
-Globalization exploits the labor in poor nations.
-Globalization is detrimental to the environment.
-Globalization destroys local cultures by homogenizing them.
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