INTB 3354 Fall 2015

Mid-Term Study Guide

In class exam: 40 multiple choice questions

Remember to bring your blue full page scantron, a pencil to exam, and your UH ID
To review for the exam, it is useful respond to the following organizational main
topics on the study guide. Read the textbook thoroughly, focusing on memorization
of key terms in bold, and review your class notes. Any material from the text book,
readings posted on Blackboard, and discussed in class may be presented as
questions in the exam.
The following provides a chapter outline and overview of important points to learn
from the class materials.

Chapter 1: The Challenging World of International Business

1. What is International Business?

2. What is Different about International Business?

3. A Brief History of International Business

4. Growth of International Firms and International Business

5. The Drivers of Globalization

6. Motives for Entering Foreign Markets

Chapter 1
1

What is International Business?

A Definitions of terms used in this text
1 An international business is a business whose activities are carried out
across national borders.
2 A foreign business is the domestic operations within a foreign country.
3 A multidomestic company (MDC) is an organization with multi-country
affiliates, each of which formulates its own business strategy based on
perceived market differences.
4 A global company (GC) is an organization that attempts to standardize
and integrate operations worldwide in all functional areas.
5 An international company (IC) is a global or multidomestic company.
B Additional terminology for international businesses used by UN, academic
writers
1 Transnational company a company that combines the characteristics
of global and multinational firms; responsive to different global
environments
2 Multinational corporation (MNC)

II

What is Different about International Business?

An international firm operates across borders and deals with 3 environments
domestic, foreign, and international.
Influence of External and Internal Environmental Forces
A. The Domestic Environment
Uncontrollable home country factors that surround and influence the firm.
B. The Foreign Environment
Uncontrollable forces originate outside of home country and surround and
influence the firm. The Forces Are Interrelated
C. The International Environments
D. Decision Making is More Complex
E. Self-Reference Criterion

III A Brief History of International Business

A International trade and the international firm are not new aspects of
business.
1 FromPhoenician and Greek merchants were selling abroad before the
time of Christ
2 ToInternational firms have become the objects of much discussion,
especially the increasing globalization of their production and their
markets. What are the reasons for globalization?
IV Growth of International Firms and International Business
There has been explosive growth in the size and number of U. S. and
foreign international concerns. One variable used to measure this growth
is the increase in total foreign direct investment (FDI).
A. Expanding Number of International Companies
B. Foreign Direct Investment and Exporting are Growing Rapidly
C. What is Driving the Globalization of Business?
2

What Is Globalization?
Although there are many definitions of globalization (political, technical,
social), the most common definition in IB is economic globalizationthe
international integration of goods, technology, information, labor, and
capital; or the process of making this integration happen.

VI. The Drivers of Globalization

There are five major kinds of drivers: (1) political, (2) technological, (3)
market, (4) cost, (5) competitive.
1 Political there is a trend toward unification and socialization of the
global community. The reduction of barriers to trade and foreign
investment and the privatization of industry are hastening the
opening of new markets by international firms.
2 Technological advances in computers and communications
technology are permitting an increased flow of ideas and
information across borders. This enables small firms to compete
globally.
3 Market As companies globalize, they also become global
customers.
4 Cost Globalizing product lines help to achieve economies of scale,
which reduce development, production, and inventory costs.
Company can also locate where the costs of factors of production
are lower.
5 Competitive One of the competitive driving forces for globalization
is the fact that companies are defending their home markets from
foreign competitors by entering the competitors home markets to
distract them.
A Arguments Supporting Globalization
1 Free Trade Enhances Socioeconomic Development
2 Free Trade Promotes More and Better Jobs
B Concerns with Globalization
1 Globalization Has Produced Uneven Results Across Nations and
People
2 Globalization Has Had Deleterious Effects on Labor and Labor
Standards
3 Globalization Has Contributed to a Decline in Environmental and
Health Conditions
VII.

Motives for Entering Foreign Markets

Motives are: (1) desire for increased profits and sales, or (2) protect profits
and sales from competition

VIII. The Seven Dimensions for Globalizing a Business

Products
Markets
Promotion
Added value
Competitive strategy
3

Non-home country personnel

Global ownership in the firm
Other Globalization Concepts and their Measurements
Economic, Social, and Political Globalization
Measurements: Indexes (I.e. KOF index of globalization, CSGR Globalization
index, Kearny index)
Example of KOF index
Economic globalization measured by: actual flows (foreign direct investment,
portfolio investment), restrictions (hidden import barriers, mean tariff rate)
Social globalization measured by: data on personal contact, data on info
flows, data on cultural proximity,
Political globalization measured by: embassies in a country, membership in
international organizations, participation in UN security council missions,
international treaties

Chapter 2: International Trade and Investment

1. International Trade
2. Direction of Trade

3. Major Trading Partners

4. Explaining Trade: International Trade Theories
a. Theory of Absolute Advantage
b. Theory of Comparative Advantage
c. How Money Can Change the Direction of Trade
d. Three Newer Explanations for the Direction of Trade
5. Foreign Investment
a. Portfolio Investment
b. FDI
6. Economic and Social Investment Affected by Trade and Development

I.

International Trade
Volume of International Trade:
A. The volume of international trade in goods and services was $7.9 trillion in
2000, $17 trillion in 2007, and exceeding $19.5 trillion in 2008.
B. One-fourth of everything grown or made in the world is exported.
C. North America, Asia, and the EU proportions of world trade have
increased. With the EU, new members account for some of the growth.
II.
Direction of Trade
A. Developed nations traded primarily with other developed nations after
World War II
B. Developing nations also trade primarily with developed nations, although
this proportion is declining as developing nations trade with developing
nations.
C. Direction of trade frequently changes over time among nations or regions,
given regional trade agreements.
III.
Major Trading Partners: Their Relevance for Managers.
A. Advantages of focusing attention on a nation that is already a sizable
purchaser of goods from the would-be exporters country include:
1. Business climate in the importing nation is relatively favorable.
2. The trading partners government may be applying pressure on
importers to buy from countries that are good customers for that
nations exports.
B. Major Trading Partners of the United States
1. Rankings of Americas trading partners are rapidly changing. Asian
nations, like China, have become increasingly important, yet
challenging, trade partners for both exports and imports.
IV.
Explaining Trade: International Trade Theory
International trade theory attempts to answer the question, Why do
nations trade?
A. Mercantilism
1. One of the initial economic doctrines (1550 to 1800) that
accumulating wealth through trade is associated with political
power.
B. Liberalism Adam Smith (The Wealth of Nations 1776) attacked
mercantilism and said that to trade in order to accumulate gold and
other precious metals was foolish. By means of free, unregulated trade,
a nation could acquire what it did not produce.
1. He stated that a nation should produce only those goods in which it
was most efficient (country specialization for that which it had a
Comparative Advantage). The surplus could be traded to obtain the
products that could not be produced advantageously.
D. Concept of Absolute Advantage
E. Concept of Terms of Trade (Ratio of International Prices)
F. Theory of Comparative Advantage
1. David Ricardo (Principles of Political Economy - 1817) showed that if
a nation were less efficient in the production of two products, it
5

could still gain from international trade if it were not equally less
efficient in the production of both goods.
2. Smiths and Ricardos theories considered labor as the only
important factor in calculating production costs. Capital and land
are other factors of production.
G. How Money Can Change the Direction of Trade.
1. Traders must know a price in domestic currency to
determine if is better to produce locally or import.
2. Exchange Rate is the price of one currency stated in terms
of the other.
3. Countries can regain a competitive position through
currency devaluation.
H. Some Newer Explanations for the Direction of Trade
1. Differences in Resource Endowments
a. Some countries have more abundant resources than others,
which can result in different opportunity cost of producing these
resources and bringing them to market.
b. Difference in resource endowments suggest that developed
countries would more likely trade with developing countries
rather than other developed countries with similar factor
endowments.
2. Overlapping Demand
a. Consumers tastes, preferences, and their nations per capita
income affect market demand in any country.
b. Customers in countries with similar levels of per capita demand
will demand similar goods and services.
3. National Competitive Advantage from Regional Clusters
a. National competitiveness results from a countrys ability to
complete the functions necessary to drive a product/service to
market and while increasing ROI: design, produce, distribute,
and service.
V. Summary of International Trade Theory
International trade occurs primarily because of relative price differences
among nations. Differences stem from differences in production costs
which result from:
1. Differences in the endowment of factors of production
2. Differences in the levels of technology that determine factor
intensities used
3. Differences in the efficiencies with which these factor intensities are
utilized
4. Foreign exchange rates.
Levels of Economic Integration (Look at the slide)
Preferential Trade Agreement
Free Trade Area
Customs Union
Common market
Economic Union

International Trade Organizations

GATT and WTO
WTO Areas of agreement
Examples of Regional Agreements
NAFTA, CARICOM, MERCOSUR, ASEAN
VII.
Foreign Investment
Foreign investment is divided into two components: (1) portfolio investment
and (2) direct investment. The distinction between these two has begun to
blur, particularly with growing size and number of international mergers,
acquisitions, and alliances.
A. Portfolio Investment
1. Not directly concerned with the control of a firm but to gain ROI through
financial assets (stock and bonds)
B. Foreign Direct Investment (FDI)
1. The Outstanding Stock of FDI
2. Annual Outflows (Flows) of FDI
a. Outflows hit a historical high in 2000$1.2 trillion, more than
250% of the level in 1997. Outflows subsequently increased,
reaching $2.1 trillion by 2007 before declining to $1.9 trillion
during the economic downturn of 2008.
b. Much of outward FDI is associated with global mergers and
acquisitions, because:
i.
U.S. corporate restructuring put underperforming businesses
and assets on the market
ii.
Foreign companies want rapid access to U.S. advanced
technology
iii.
Foreign firms felt that access to the lucrative U.S. market
would be more successful through acquiring known brand
names rather than promoting unknown foreign brands
iv.
Increased international competition, including pursuit of
economies of scale, led to restructuring and consolidation
of many global industries and acquisition of firms in major
markets like the U.S.
2. Annual Inflows of FDI
a. Industrialized nations invest and trade with one another 70% of
annual FDI goes to developed countries but has dropped to 57% in
2008.
b. Developing countries had a 70% increase in FDI from 1996 to 2000
and an additional 220% increase by 2008.
c. African nations had less than 3% of FDI inflow from 1985 to 2008.
Singapore equaled all of Africa in FDI for the same period. Latin
American inflows fluctuated over the past two decades and
declined from 16.5% in 1996 to 8.5% in 2006. Combined Asian FDI
was 43% from 2006 to 2008.
7

3. Level and Direction of FDI

a. Difficult to accurately determine present value of foreign
investments, but if a nation continues to receive growing amounts
of FDI, its investment climate must be favorable and the political
forces of that country are attractive.
b. If there is political instability and low levels of FDI inflow, little
investment will occur.
VII. Are Economic and Social Development Affected by Trade and
Investment?
1. The introduction from the UNCTAD report says Yes, there is a direct
link between trade and investment and quality of life.
2. External and internal factors affect a nations export performance.
External factors include market access conditions such as
transportation costs, geography, physical infrastructure, trade barriers,
competition and other factors that influence demand. Internal factors
are supply-side conditions within a nation, such as raw materials, cost
of labor and capital, access to technology, economic policy,
institutional environment, and market access.
A. Does Trade Lead to FDI?
1. Historically, FDI followed foreign trade because trade costs less and
has less risk than FDI and business can be expanded in smaller,
controllable increments rather than incurring large investments and
larger risk. A firm would start exporting by using agents and then set
up an export department with foreign sales personnel as business
expanded.
2. However, FDI can now lead to trade. Significant changes in todays
global business environment make FDI a possible first step into
international trade. These changes include:
a. Fewer government trade barriers
b. Increasing global competition
c. New production technologies
d. New communications technologies
e. Greater integration of the global supply chain and production closer
to available resources
f. A growing corporate focus to identify and exploit global business
opportunities
VII. Explaining FDI: Theories of International Investment
Accepted theories to explain FDI: FDI can either be greenfield investment,
where new facilities are built from the ground up, or cross-border acquisition,
the purchase of existing business facilities in another nation. Strategic
motives for FDI include finding new markets, accessing raw materials,
accessing new technologies or managerial expertise, achieving production
efficiencies, enhance political safety of firms operations, or respond to
competition.
A. Monopolistic Advantage Theory - based on the premise that FDI is
made by firms in oligopolistic industries possessing technical and other
advantages over indigenous firms. These advantages could be economies
of scale, superior technology, or superior knowledge of marketing,
management, or finance, giving the MNE competitive advantage over
local firms.
8

B. Internalization Theory - to obtain a higher ROI, a firm will transfer its

superior knowledge to a foreign subsidiary and not sell it in the open
market. Firms transfer knowledge across borders without it leaving the
firm.
C. Dynamic Capabilities - ownership of specific knowledge or resources is
necessary but not sufficient enough for success in FDI, but firm must also
develop distinctive competitive advantages to complement their
knowledge or resources.
D. Eclectic Theory of International Production states that for a firm to
invest overseas, it must possess 3 types of advantages:
(1) Ownership specific tangible and intangible assets not available to
competitors but can be transferred abroad (e.g., a recognizable
brand name).
(2) Location specific foreign market offers economic, social or political
advantages which will let the firm exploit its ownership specific
advantages (market size, tariff or nontariff barriers, or
transportation cost advantages)
(3) Internalization firms have choice as to the way to enter foreign
markets, ranging from arms length market transactions to
hierarchy via a wholly owned subsidiary. It is in the firms interest to
exploit ownership specific advantages through internalization in
those situations where either the market does not exist or it
functions inefficiently.
Eclectic Theory (also referred to as OLI Model) explains MNCs choice of
foreign production facilities. The common factor for all three of these
theories is that FDI is typically made by large, research-intensive firms in
oligopolistic industries and is the reason why these companies find it
profitable to invest overseas.

Chapter 9: Labor Forces

1.

Worldwide labor conditions and trends

Overall Size of the Workfoce

Unemployment rate (Global, in the US, and US state)
Aging of Populations
Vulnerable Workforce
Urbanization of Workforce
Immigration Labor
Child Labor
Forced Labor
9

Brain Drain
Guest Workers
2. Considerations in Employment Policies
Social Status
Sexism
Racism
Minorities
Labor in Developing Nations
3. Employer-Employee Relationships
a. Labor Unions
b. Multinational Labor Activities
.

I. Worldwide Labor Conditions and Trends

A. Overall Size of the Workforce
1. Aging of population, concentration of younger workers in
developing countries, and trend to work longer is developing globally
2. Urbanization--Rural to urban shift starting in developing countries
C. Unemployment
D. Vulnerable Workforce
E. Aging Populations
F. Urbanization of Workforce
G. Immigrant Labor
1. Labor mobility regardless of socioeconomic level
2. Ranges from 3-D jobs through highly skilled in IT and medicine
3. U.S. had 5% of world population and 20% of migrants
4. ILO: In 2008, workers sent $338 billion in remittances
H. Child Labor
1. Exists globally in developed and developing countries
3. UNICEFs Convention on the Rights of the Child (CRC) advocates for
childrens rights world-wide and sets these standards:
a. nondiscrimination
b. devotion to the best interests of the child
c. the right to life, survival, and development
d. respect for the views of the child
I. Forced Labor
J. Brain Drain and Reverse Brain Drain
1. Loss of a nations best minds (skilled professionals) who migrate to
other countries
10

2. Reverse brain drain trend is beginning in India, China, and Russia as

workers return home
K. Guest Workers
1. Legal immigrants attracted by countries with low birth rates and
labor shortages
for work in service, factory, or construction jobs
II. Considerations in Employment Policies
A Social Status
B. Sexism: denial of equal status and participation for women
C. Racism exists worldwide
D. Minorities in Traditional Societies
1. Outside minorities are better educated, more experienced; speak
multiple languages, and a good source of labor in some economies
2. Disadvantage: prejudice against their success
E. Labor in Developing Nations
1. Shortages due to low education levels, poverty, social unrest
2. Challenges of HIV/AIDS, poor health contribute to inadequate labor
pools
3. Up-skilling the local workforce to minimal standards is a primary
challenge to employers
III. Employer-Employee Relations
A Importance of Proper Labor Preparation When Entering a Market
1 Firms must study labor market prior to investment but be ready to
accept what is available
2 Government and NGO data and reports are readily available data
sources
B. Labor Unions: Europe, United States, and Japan
1. EU unions identified with political parties and socialist ideology
2. US unions more pragmatic collective bargaining represents
everyone in a bargaining unit
3. Japanese enterprise-based; identify with interests of company
4. Trends: membership trends are downward.
C. Multinational Labor Activities expanding since 1950s
1. Examples of national unions include:
a. successful multinational unionism in EU
b. European Trade Union Confederation (ETUC)
c. Union Network International (UNI)
d. American Federation of Labor and Congress of Industrial
Organizations
(AFL-CIO) in U.S.
e. International Confederation of Trade Unions (ICFTU)
2. International labor standards include treaties and recommendations
on:
a. minimum standards for basic labor rights
b. freedom of association
c. the right to organize
d. collective bargaining
11

e. abolition of forced labor

f. equality of opportunity and treatment
g. other standards regulating working conditions

12