Chapter 4 Terminology

Question 1

What is the reality of trade?

Answer 1

trade is not between countries but companies

and competition is not perfect (e.g. monopolies, oligopolies)

Question 2

Brander-Spencer Model (1985)

Answer 2

In the event of imperfect competition and sufficiently low transport costs, mutual trade in identical goods can be observed, despite completely identical factor arrangements

Question 3

Game Theoretic Treatment of Brander-Spencer Model

Answer 3

Export subsidies are not advantageous because they are the best answer strategy for both countries => Nash Equilibrium leads to Prisoner‘s Dilemma

Question 4

Prisoner’s Dilemma

Answer 4

A prisoner’s dilemma is a situation where individual decision makers always have an incentive to choose in a way that creates a less than optimal outcome for the individuals as a group. Prisoner’s dilemmas occur in many aspects of the economy.

Question 5

Intra-industry trade

Answer 5

is a trade of products (goods and services) that belong to the same industry; Trade among industrial countries (e.g. Triad); Pure export-/import activities by companies

Question 6

Multinational Companies (MNC)

Answer 6

A corporate organization that owns or controls production of goods or services in at least one country other than its home country. It is considered as a MNC if deriving 25% of revenue from out-of- home-country operations. A MNC is usually a large corporation incorporated in one country which produces or sells goods or services in
various countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies.

Question 7

Typical activities by MNCs

Answer 7

− Importing and exporting goods and services
− Making significant investments in a foreign country
− Buying and selling licenses
in foreign markets
− Engaging in contract manufacturing by permitting a local manufacturer in a foreign country to produce
its products
− Opening manufacturing facilities or assembly operations in foreign countries

Question 8

Export modes

Answer 8

e.g. direct export, indirect export via agents

Question 9

Contractual modes

Answer 9

e.g. licensing, franchising, contract manufacturing

Question 10

Investment entry modes

Answer 10

e.g. joint ventures, wholly-owned subsidiaries

Question 11

The OLI-Decision Tree for Foreign Operation Modes

Answer 11

A model to help companies decide if they should move operations to a foreign country - FDI = foreign direct investment

Question 12

Foreign direct investment (FDI)

Answer 12

is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.

Question 13

Alasdair Smith Model (1987)

Answer 13

Protectionism may lead to direct investment by foreign companies while at the same time making the situation of the domestic companies worse.

Question 14

Intra-firm trade

Answer 14

present multinational companies move goods across countries; Global value chains or supply chains with vertical integration;
Production and/or distribution structures at home and abroad

Question 15

Interplay between Comparative and Competitive Advantage (Kogut, 1985)

Answer 15

Following Kogut (1985), the
design of international strategies is based upon the interplay between comparative advantage of countries and competitive
advantages of firms.
Depending to the extent these comparative and competitive advantages are present (or not), determines trade characteristics and extent of vertical or horizontal integration of firms.