International Business Quiz
International Business Quiz
International Business Quiz
Assuming that the term "common markets" refer to the countries with the absence of economic
integration and not one of the level in the economic integration; the major difference of common market
and the ones with economic integration is the restriction on business activities across the countries'
border. Without trade restrictions, many aspects of the countries are affected by the global situation,
mostly the economic growth, which is stimulated through specialization; more efficient production of
goods and services.
First, the home country's balance of payments benefits from the inward flow of foreign earnings.
FDI can also benefit the home country's balance of payments if the foreign subsidiary creates
demands for home-country exports of capital equipment, intermediate goods, complementary
products, and the like.
Second, benefits to the home country from outward FDI arise from employment effects. As with
the balance of payments, positive employment effects arise when the foreign subsidiary creates
demand for home-country exports. Thus, Toyota's investment in auto assembly operations in
Europe has benefited both the Japanese balance-of-payments position and employment in Japan,
because Toyota imports some component parts for its European-based auto assembly operations
directly from Japan.
Third, benefits arise when the home-country MNE learns valuable skills from its exposure to
foreign markets that can subsequently be transferred back to the home country. This amounts to
a reverse resource-transfer effect.
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Balance-of-payments
o The balance of payments suffers from the initial capital outflow required to finance the
FDI. This effect, however, is usually more than offset by the subsequent inflow of foreign
earnings.
o Second, the current account of the balance of payments suffers if the purpose of the
foreign investment is to serve the home market from a low-cost production location.
o Third, the current account of the balance of payments suffers if the FDI is a substitute for
direct exports.
Employment effects of outward FDI
This happens when FDI is seen as a substitute for domestic production, as such, FDI reduces home-
country employment. If the labor market in the home country is already tight, with little
unemployment, this concern may not be that great. However, if the home country is suffering
from unemployment, concern about the export of jobs may arise.
Resource-transfer effects
Foreign direct investment can make a positive contribution to a host economy by supplying
capital, technology, and management resources that would otherwise not be available and thus
boost that country's economic growth rate.
Employment effects
FDI brings jobs to a host country that would otherwise not be created there. The effects of FDI on
employment are both direct and indirect. Direct effects arise when a foreign MNE employs a
number of host-country citizens. Indirect effects arise when jobs are created in local suppliers as
a result of the investment and when jobs are created because of increased local spending by
employees of the MNE.
Balance-of-payments effects
A country's balance-of-payments accounts track both its payments to and its receipts from other
countries.
1. If the FDI is a substitute for imports of goods or services, the effect can be to improve the
current account of the host country's balance of payments.
2. When the MNE uses a foreign subsidiary to export goods and services to other countries.
According to a UN report, inward FDI by foreign multinationals has been a major driver of
export-led economic growth in a number of developing and developed nations
Effects on competition and economic growth
When FDI takes the form of a greenfield investment, the result is to establish a new enterprise,
increasing the number of players in a market and thus consumer choice. In turn, this can increase
the level of competition in a national market, thereby driving down prices and increasing the
economic welfare of consumers. Increased competition tends to stimulate capital investments by
firms in plant, equipment, and R&D as they struggle to gain an edge over their rivals. The long-
term results may include increased productivity growth, product and process innovations, and
greater economic growth.
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Cultural relativism is the belief that ethics are nothing more than the reflection of a culture-all ethics are
culturally determined-and that accordingly, a firm should adopt the ethics of the culture in which it is
operating. Cultural relativism does not stand up to a closer look. At its extreme, cultural relativism
suggests that if a culture supports slavery, it is OK to use slave labor in a country. Cultural relativism
implicitly rejects the idea that universal notions of morality transcend different cultures.
Companies should not use cultural relativism as an argument for justifying behavior that is clearly based
upon suspect ethical grounds, even if that behavior is both legal and routinely accepted in the country
where the company is doing business.
Deregulation involves removing legal restrictions to the free play of markets, the establishment
of private enterprises, and the manner in which private enterprises operate.
Command economy is an economic system where the allocation of resources, including determination of
what goods and services should be produced, and in what quantity, is planned by the government.
Deregulation steps of command economy involved:
removing price controls, thereby allowing prices to be set by the interplay between demand and
supply;
abolishing laws regulating the establishment and operation of private enterprises; and
relaxing or removing restrictions on direct investment by foreign enterprises and international
trade.
6. What are the political reasons for government to intervene in markets? Why the government has to
intervene?
Political arguments for intervention are concerned with protecting the interests of certain groups within
a nation (normally producers), often at the expense of other groups (normally consumers), or with
achieving some political objective that lies outside the sphere of economic relationships.
Political arguments for government intervention cover a range of issues, including preserving jobs,
protecting industries deemed important for national security, retaliating against unfair foreign
competition, protecting consumers from "dangerous" products, furthering the goals of foreign policy, and
advancing the human rights of individuals in exporting countries.