Week 2 Flashcards
What is international production?
The spatial production of goods and services across the world.
What is international trade?
Integrates global production and consumption through cross country coordination and distribution according to comparative advantage and demand.
International investment
International capital movements support international production
Now define FDI
Investment in productive assets overseas.
FDI
Any involvement by a firm in more than one country
What is the key motivation of FDI?
Profit maximisation via the international organisation of the production of goods and/or services
Where does FDI come from and where does it go?
FDI comes from home country then is invested in the host country.
There are other types of FDI however. Like financing overseas activities with…
-retained profits
-profits from other host countries
-borrowing on host country’s financial markets
More FDI could be:
-issuing local equity in host country
-international borrowing
What is portfolio investment?
A passive investment in a financial asset. You have no direct control. The idea is to generate profit and minimise risk
What are the key differences between FDI and portfolio investment?
- The degree of managerial involvement
- diversification
Who is the primary agent in international business?
MNEs
What makes an MNE an MNE?
Own or operate businesses in two or more countries. They coordinate production and trade across international boundaries
What are some key elements of MNEs?
They have managerial control
- they have a common pool of resources
-they have a common international strategy
How did international business grow?
Industrial Revolution raised incomes and demand. Needed more scarce material and more food. Resource based MNEs emerged.
What is resource-based vertical FDI?
A firm will invest in resource rich countries and provide capital, tech and labour skills. The natural resources flow to the home country
What is indirect vertical FDI?
MNEs don’t own all of the value chain but they coordinate it at an arms length
Think oem, obm, odm
What is import substitution/tariff jumping FDI?
To avoid tariffs/trade costs, MNEs undertake FDI to supply foreign market through local production.
Substituting exporting for FDI
What do we mean by import substituting horizontal FDI?
MNEs produce replica plants overseas that use same technology, skills and inputs.
What do we mean by top-down when talking about horizontal FDI?
Inputs and outputs are the same so we require management and technology to be centralised at HO. Little interaction between individual plants
The location of FDI and the pattern of IB has come to get the underlying pattern of what?
Global comparative advantage
What is the spaghetti bowl configuration?
Just that MNEs have highly complicated networks of relationships combining vertical and horizontal integration.
When we compare exporting with horizontal and vertical MNEs, what assumptions do we have to make?
-setting up a plant is costly and incurs fixed costs
-exporting incurs trade costs
-there are firm specific fixed costs relating to knowledge etc
Why would a firm prefer exports?
Production could be cheaper at home
Trade costs are sufficiently low
