Week 2

Question 1

What is international production?

Answer 1

The spatial production of goods and services across the world.

Question 2

What is international trade?

Answer 2

Integrates global production and consumption through cross country coordination and distribution according to comparative advantage and demand.

Question 3

International investment

Answer 3

International capital movements support international production

Question 4

Now define FDI

Answer 4

Investment in productive assets overseas.

Question 5

FDI

Answer 5

Any involvement by a firm in more than one country

Question 6

What is the key motivation of FDI?

Answer 6

Profit maximisation via the international organisation of the production of goods and/or services

Question 7

Where does FDI come from and where does it go?

Answer 7

FDI comes from home country then is invested in the host country.

Question 8

There are other types of FDI however. Like financing overseas activities with…

Answer 8

-retained profits
-profits from other host countries
-borrowing on host country’s financial markets

Question 9

More FDI could be:

Answer 9

-issuing local equity in host country
-international borrowing

Question 10

What is portfolio investment?

Answer 10

A passive investment in a financial asset. You have no direct control. The idea is to generate profit and minimise risk

Question 11

What are the key differences between FDI and portfolio investment?

Answer 11

• The degree of managerial involvement
• diversification

Question 12

Who is the primary agent in international business?

Answer 12

MNEs

Question 13

What makes an MNE an MNE?

Answer 13

Own or operate businesses in two or more countries. They coordinate production and trade across international boundaries

Question 14

What are some key elements of MNEs?

Answer 14

They have managerial control
- they have a common pool of resources
-they have a common international strategy

Question 15

How did international business grow?

Answer 15

Industrial Revolution raised incomes and demand. Needed more scarce material and more food. Resource based MNEs emerged.

Question 16

What is resource-based vertical FDI?

Answer 16

A firm will invest in resource rich countries and provide capital, tech and labour skills. The natural resources flow to the home country

Question 17

What is indirect vertical FDI?

Answer 17

MNEs don’t own all of the value chain but they coordinate it at an arms length

Think oem, obm, odm

Question 18

What is import substitution/tariff jumping FDI?

Answer 18

To avoid tariffs/trade costs, MNEs undertake FDI to supply foreign market through local production.
Substituting exporting for FDI

Question 19

What do we mean by import substituting horizontal FDI?

Answer 19

MNEs produce replica plants overseas that use same technology, skills and inputs.

Question 20

What do we mean by top-down when talking about horizontal FDI?

Answer 20

Inputs and outputs are the same so we require management and technology to be centralised at HO. Little interaction between individual plants

Question 21

The location of FDI and the pattern of IB has come to get the underlying pattern of what?

Answer 21

Global comparative advantage

Question 22

What is the spaghetti bowl configuration?

Answer 22

Just that MNEs have highly complicated networks of relationships combining vertical and horizontal integration.

Question 23

When we compare exporting with horizontal and vertical MNEs, what assumptions do we have to make?

Answer 23

-setting up a plant is costly and incurs fixed costs
-exporting incurs trade costs
-there are firm specific fixed costs relating to knowledge etc

Question 24

Why would a firm prefer exports?

Answer 24

Production could be cheaper at home
Trade costs are sufficiently low

Question 25

Why would a firm be a horizontal MNE?

Answer 25

Profitability if setting up a new plant abroad promises greater profitability. Eliminating trade costs more than compensates the setup costs

Question 26

Why would a firm be a vertical MNE?

Answer 26

Setting up a plant abroad and replacing the plant at home. Mirror image of exporting case since home market is now supplied by imports

Question 27

What are some critical factors in the growth of IB?

Answer 27

Innovation and technical progress

Spatial and location factors

Organisation and management

Question 28

Explain how innovation and technical progress has increased IB.

Answer 28

Firms have increasing capabilities to deliver new goods, processes and services do customers at national and international level.

Question 29

What did Hymer identify as MNEs characteristics?

Answer 29

Highly concentrated in industries characterised by advanced tech, substantial R&D, high sunk costs and substantial economies of scale.

Question 30

How have spatial factors increased IB?

Answer 30

Low tariffs and reduced transport costs have enabled firms to take advantage of global comparative advantage in IDL.

Question 31

How has organisation and management increased IB?

Answer 31

Improved communications increase speed and efficiency of global managerial coordination.

The nature of info has also changed. Increased advanced data analysis

Question 32

What is the emergence of the global factory?

Answer 32

Large MNEs are restructuring their global value chains and contracting out activities with low rates of return.