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Chapter 2
International Trade and Foreign Direct Investment
Introduction
Global business is more than just having business interests in each country. There’s a
convergence and sometimes a conflict of interests of the different stakeholders, from
businesses to governments to local citizens. An essential part of international business is to
understand the history of international trade and what motivates countries to encourage or
discourage trade within their borders. Governments often encourage foreign investment in
their own country or in another country by providing loans and incentives to businesses in
their home country as well as businesses in the recipient country in order to pave the way for
investment and trade in the country.
Exercises
2. If you were the head of a Chinese business that was operating in Sudan, how would
you address issues of business ethics and doing business with a repressive regime?
Should businesses care about local government ethics and human rights policies?
Answer: Student answers will vary. Some will say yes, because they believe that
business should care about local government ethics and human rights policies. Some
of the local government ethics of Sudan will be very different from that of China or
other global economies. However, these ethics should be followed when the business
is operating in Sudan. Some students may say no believing that business goals are
more important. However, for these students, they should consider that unethical
governments rarely provide consistent operating business environments, which is
essential to long term business success.
3. If you were a foreign businessperson working for a global oil company that was eager
to get favorable government approval to invest in a local oil refinery in an African
country, how would you handle any demands for paybacks (i.e., bribes)?
Answer: Student answers will vary. It would be ideal to enter into discussions with
the core company management on how to implement ethical business in the company.
The company’s core management then should engage the local government in a
discussion on the potential benefits of investments that the company is making.
Section Outline
Key Takeaways
• Trade is the concept of exchanging goods and services between two people or
entities. International trade is the concept of this exchange between people or
entities in two different countries. While a simplistic definition, the factors
that impact trade are complex, and economists throughout the centuries have
attempted to interpret trends and factors through the evolution of trade
theories.
• There are two main categories of international trade—classical, country-
based and modern, firm-based.
• Porter’s theory states that a nation’s competitiveness in an industry depends
on the capacity of the industry to innovate and upgrade. He identified four
key determinants: (1) local market resources and capabilities (factor
conditions), (2) local market demand conditions, (3) local suppliers and
complementary industries, and (4) local firm characteristics.
Exercises
2. Summarize the classical, country-based international trade theories. What are the
differences between these theories, and how did the theories evolve?
Answer: A classical, country-based international trade theory, states that a
country’s wealth is determined by its holdings of gold and silver.
a. In 1776, Adam Smith developed a new trade theory called absolute
advantage.
4. Describe how a business may use the trade theories to develop its business
strategies. Use Porter’s four determinants in your explanation.
Answer: Firms will encounter global competition in their industries and in order
to prosper, they must develop competitive advantages. Porter’s theory stated that
a nation’s competitiveness in an industry depends on the capacity of the industry
to innovate and upgrade.
a. Local market resources and capabilities (factor conditions)
b. Local market demand conditions
c. Local suppliers and complementary industries
d. Local firm characteristics
Section Outline
Key Takeaways
• There are more than thirteen major types of government and each type
consists of multiple variations. At one end of the political ideology extremes
is anarchism, which contends that individuals should control political
activities and public government is both unnecessary and unwanted. The
other extreme is totalitarianism, which contends that every aspect of an
individual’s life should be controlled and dictated by a strong, central
government. Neither extreme exists in its purest form in the real world.
Instead, most countries have a combination of both. This combination is
called pluralism, which asserts that both public and private groups are
important in a well-functioning political system. Democracy is the most
common form of government today. Democratic governments derive their
power from the people of the country either by direct referendum, called a
direct democracy, or by means of elected representatives of the people,
known as a representative democracy.
• Capitalism is an economic system in which the means of production are
owned and controlled privately. In contrast a planned economy is one in
which the government or state directs and controls the economy.
• There are three main types of legal systems: (1) civil law, (2) common law,
and (3) religious law. In practice, countries use a combination of one or more
of these systems and often adapt them to suit the local values and culture.
Exercises
2. What is capitalism? What is a planned economy? Compare and contrast the two
forms of economic ideology discussed in this section.
Answer: Capitalism is an economic system in which the means of production are
owned and controlled privately. In contrast, a planned economy is one in which
the government or state directs and controls the economy, including the means
and decision making for production. Democratic governments have supported
capitalism and authoritarian regimes have tended to utilize a state-controlled
approach to managing the economy.
3. What are three policy areas in which governments can create rules and regulations
in order to control, manage, and intervene in trade?
Answer: Student answers will vary. Governments intervene in trade for a
combination of political, economic, social, and cultural reasons. Politically, a
country’s government may seek to protect jobs or specific industries. Some
industries may be considered essential for national security purposes such as:
a. Defense
b. Telecommunications
c. Infrastructure
Section Outline
Key Takeaways
Exercises
2. What is the difference between vertical and horizontal FDI? Give one
example of an industry for each type.
Answer: Student answers will vary. Horizontal FDI occurs when a company
is trying to open up a new market.
a. Example: A retailer builds a store in a new country to sell to the local market.
b. Vertical FDI is when a company invests internationally to provide input into
its core operations—usually in its home country.
c. Example: Auto, oil, and infrastructure
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