4.1 Globalisation Flashcards

Question

How is Foreign Direct Investment defined?

Answer 1

Investing by setting up operations or buying assets in businesses in another country.

Answer 2

Goods and services that are bought into one country from another.

Answer 3

Exporting (selling abroad) and importing (buying from abroad).

Answer 4

A production strategy where a business focuses on a limited scope of products or services. This results in greater efficiency, allowing for goods and services to be produced at a lower cost per unit.

Answer 5

Taxes that are imposed on imports.

Answer 6

- Trade liberalisation, has reduced quotas and tariffs has made exporting easier. Export is the most common route for a firm to expand into the international market. Exporting services is also known as ‘invisible’ exports, e.g. accountants and lawyers. the UK is very competitive in financial services particularly banking and insurance - A business can export directly by hiring someone to be its local agent or indirectly by getting another person or firm to prepare the documents and take on all of the responsibility for selling and distributing the products or services for them - Exports are seen as a less risky way to enter international markets, i.e. by testing the water, however they are not risk free as things like exchange rates can have an impact, as well as quotas.

Answer 7

- Imports are the goods and services that are brought into one country from another - Barriers to limit the amount of imports are called tariffs, which are taxes on imports, these are becoming lower and easier to manage to be fairer, but NTB’s – Non-tariff barriers are more difficult, i.e. giving subsidies to local farmers, putting quotas on the number of imports and how many should actually be made within the country

Answer 8

- At the core of the modern exchange economy, and thus of international trade, is the concept of the division of labour whereby workers specialise in a productive activity. - Specialisation increases the speed and skill at which a task can be done thereby improving efficiency. - as the market becomes larger, the opportunities for specialisation become greater and narrower. - Adam Smith expressed division of labour as the process of making a pin.

Answer 9

- the theory that the country should specialise in products and services that it can produce more efficiently than other countries. - this theory was illustrated by David Ricardo. - he illustrated that if two countries produced what they are they are best at and traded the total output of both products goes up and consumers in both countries are better off. - this theory has limitations, such as it assumes that the world does not change. yet our modern, globalised world changes rapidly and often unpredictably - Nevertheless the theory provides a good base for understanding why two countries, and their consumers, can benefit from specialisation and trade.

Answer 10

- Michael Porter extended the comparative advantage theory that businesses can gain a competitive advantage in international trade just like countries do - the idea that a business should specialise in any area (products, services, management, research, etc) where it can perform better than its competitors. - specialisation in production on a limited scope of products could lead to a lower cost per unit thus can reduce prices or increase profit margins.

Answer 11

- many business out grow their home markets and in order to seek out new growth they expand into new markets. - when the potential competitive advantages like ownership of resources, locations and internal organisation) combine a firm can benefit form becoming a multinational company and investing directly in other countries - a firm may decide to do this because the business: - has a high potential for making a profit if it invests in a new market - needs to maintain control over its subsidiaries in the new market - is trying to acquire direct knowledge of the local market - is attempting to avoid barriers to the market

Answer 12

- investing in setting up operations or buying assets in businesses in another country - most complicated and expensive form of involvement in a country and is the most risky - not only gain capital but contacts managerial and technical knowledge - UN considers FDI to have occurred when a firm takes an equity stake of more than 10% - it is not the same as a foreign portfolio investment such as holding stocks or bonds or tangible assets, the main identifying aspect of FDI is control

Answer 13

- managers want to keep tight control over operations --> the businesses may need to share a common culture or communications system, or they want to make sure agreements are enforced - A firm wants to protect its intellectual property e.g. patents, copyrights, trademarks and management know-how) - It needs to be close to its customers - its products incur high transportation and logistics costs - it face trade barriers or political opposition

Answer 14

- are those in the same industry, such as the Spanish bank Sabadell takeover of British bank TSB

Answer 15

- when seeking to acquire materials or support for its own products or services, put another way the firm is moving into another part of the value chain, such as when a firm is moving into another such as when a firm opens a call centre in another country to deliver customer or staffing support - this should help lower its costs, allowing growth in revenue or profit

Answer 16

- A joint venture - Strategic alliances – when firms agree to share resources/skills/IP, eg Star Alliance - Buying through cross border mergers and acquisitions ( the most common FDI), often buying the majority of the business. - A firm may build ‘greenfield’ facilities (building brand new factories) they are unable to collaborate or to find another firm to buy, or where it is too expensive. - MNC’s normally from developed countries but a growing number are from the BRICS

Answer 17

The growing integration of the world’s economies.

Answer 18

Companies that own or control production or service facilities outside the country in which they are based.

Answer 19

An international organisation that promotes free trade by persuading countries to abolish tariffs and other barriers. It polices free trade agreements, settles trade disputes between governments and organises trade negotiations.

Answer 20

- Many markets are global, this simply means that some firms expect to sell their products anywhere in the world. - At the most integrated level, a business could have a head office in UK, borrow money from Japan, manufacture in China, have a call centre in India and sell all over the world.

Answer 21

- Goods and services are traded throughout the world. - Many people are able to live and work abroad, leading to multicultural societies. - There is a high level of interdependence between countries. This means that events in one economy are likely to affect other economies e.g. the Financial Crisis of 2008 - Capital flows freely between countries. - There is an interchange of technology and intellectual property across borders, increasingly patents granted in the US are recognised in other countries. - Globalisation is not complete, some countries have strict immigration rules, e.g. US and Australia, and some high trade barriers including tariffs and quotas.

Answer 22

- Reduction of international trade barriers/trade liberalisation - Political change - Reduced cost of transport and communication - Increased significance of global (transnational) companies - Increased investment flows - Migration - Growth of the global labour force - Structural change

Answer 23

- The WTO helped liberalise trade by negotiating with countries and setting up Free Trade Agreements (FTA) e.g. in 2012 the EU and Singapore signed a free trade agreement to help the exports of cars and financial services from the EU - These FTAs resulted in the volume of international trade increasing as business can sell goods and services in new foreign markets without penalties.

Answer 24

- Some radical changes in the political regimes of certain nations have helped to increase globalisation. - When communist rule ended in the Soviet Union, a number of other countries in eastern Europe sought political and economic reforms as their ties with the old soviet bloc were severed e.g. Berlin wall was removed bring West and East Germany back together as a single nation. - After the death of Chairman Mao in 1976. the communist grip on China was loosened and economic reforms began e.g. handing over plots of lands to farmers in exchange for paying a share to the stated improved efficiency, a large scale privatisation programme began between the mid 1990's-2005 by the government, then China became a member of the WTO allowing China's economy to boom

Answer 25

- people can travel to business meetings more easily - good can be transported more cheaply - international transport networks have improved massively --> more destinations, cheaper and larger carriers of produce - Modern technology means people can transfer complex data across the world meaning more people can work at home or a location of their choosing - The internet allows consumers to gather information and buy goods online from businesses form around the world - Containerisation --> ( shipping yard containers) theft provide a flexible means of transporting good ( they can go by ship, lorries and trains) and has reduced transportation costs significantly. - Furthermore these containers have led to less theft in turn reducing insurance costs

Answer 26

- Multinational companies play a large and growing role in the world economy. - They makes significant contributions to world GDP and represent 2/3 of global exports - as a result developing countries get more money to improve and MNC's will continue to grow and contribute even more to to the world's GDP

Answer 27

- FDI spreads business activity, job creation and wealth all over the globe. - FDI also allows businesses to penetrate markets where trade barriers exist, countries are more likely to welcome foreign business build a factory than one that just wants to sell products

Answer 28

- Migrants often import their cultures, along with this often comes the importation of goods from their home countries e.g. Polish shop in the UK - Migrants often provide a supply of low-cost labour to a nation. as a result businesses can lower their costs and gain a competitive edge in overseas markets, This helps them to sell more overseas. - A significant proportion of the money earned by migrants is sent back to their place of birth, this money is usual spent by families and helps to generate demand in these countries, Transnationals are likely to benefit from this increase in demand so economic activity is spread around the globe by the migrants - Some migrants such as ,lawyers, doctors etc. are highly skilled people, they can help to fill 'skills gaps' and therefore make big contributions to businesses and national income - migration also occurs within a countries - China moved to big cities as their has been major investment in the manufacturing sector, - While migration is helping boost global wealth, some countries are worried that migration might lead to social instability - blaming immigration for domestic problem such as overcrowding and unemployment

Answer 29

- In 1980 the total number of people employed in the world was 1.7 billion by 2010 this has growth to 2.9 billion --> due to more women entering the workplace, people living and working longer as well as the effects of migration - bigger global labour market helps drive demand, more people employed means more people earning money which can be spent on goods and services. Some of this extra demand will be directed as imports sold by MNC's and other exporters - Dragged on labour costs, especially in developed countries, this is because the rising supply of labour forces wages down, this has helped to keep costs down and encouraged businesses to expand their activities more widely. - some of the moving into the labour market will set up their own businesses once they have gained work experience, This will boost the number of businesses globally some of which might grow and develop their activities around the world adds to globalisation

Answer 30

- developed countries have a lot more tertiary sector industry, this leads to globalisation as more money is available for investment as usually service-based jobs grant a higher return. - the best workers from around the world are needed at these top companies. - in addition to selling these services abroad, these industries are likely to set up operations in different countries.

Answer 31

Rules and regulations (such as trading standards and strict specifications) that make it difficult for importers to penetrate an overseas market.

Answer 32

Where an overseas firm sells large quantities of a product below cost in the domestic market.

Answer 33

A complete ban on international trade – usually for political reasons.

Answer 34

A physical limit on the quantity of imports allowed into a country.

Answer 35

New industries that have yet to establish themselves.

Answer 36

An approach used by a government to protect domestic producers.

Answer 37

Financial support given to a domestic producer to help compete with overseas firms.

Answer 38

A tax on imports to make them more expensive.

Answer 39

Measures designed to restrict trade

Answer 40

Most economists argue free trade will benefit the global economy but individual governments think its necessary to protect their domestic producers because: - Protect jobs – Unemployment is undesirable so governments will be questioned if jobs are being lost due to cheap imports. - Protect infant industries – it is argued that these need protecting from overseas rivals in order to establish themselves and benefit from Economies Of Scale, although it’s argued governments have a poor record of identifying these markets. - Prevent dumping – a government may use barriers if it feels an overseas business is dumping its products, ie selling goods to that country at a particularly low cost, making it unfair competition. - Raise revenue – by charging tariffs on imports it raises income for the government. - Prevent the entry of harmful or undesirable goods - Improve the balance of payments – Balance of payments deficit – where spending on imports exceeds income on exports, so the government will look to improve this.

Answer 41

- A tariff is a trade barrier. It is a tax on imports also known as custom duties. - If the cost to import a product is more expensive, you are more likely to purchase domestic products. - If imports are still purchased, the tariff will increase revenue for the government. - However the imposition of a tariff may only have limited impact if demand for the import is price inelastic. - In 2014 the US imposed tariffs on solar products coming in from China and Taiwan, seen as anti-dumping duties, 165% on China, 27% on Taiwan. China argued they contravened WTO rules and the US reduced rates in 2015. - In 2014, some African countries imposed 50% taxes on importing European fruit and vegetables to encourage domestic production.

Answer 42

- Putting a physical limit on the amount allowed into a country. - This means less competition, but can mean higher prices on the imports as there are fewer available. - An extreme form is an embargo, where the imports are completely banned from a country. Most embargos are more for political reasons, e.g. Libya arms embargo to prevent military goods being exported to the country. - There are a number of embargos existing between Russia and the EU as a result of Russia's involvement in the war between the Ukraine and the Russian speaking rebels. - quotas help to prevent domestic or imported goods from overpowering the market improving consumer choice. - In 2014 China reimposed its foreign film quota of 34 foreign films per year. Their industry is second only to US, worth £2.1bn in 2013.

Answer 43

- Some countries may retaliate when barriers are imposed, this tit-for-tat behaviour could escalate into a trade war where trade between countries eventually stops - Tariffs might be ineffective if demand for imports is inelastic - people will still buy it even with a high tax rate - In general governments see tariffs as the more efficient method, rather than import quotas.

Answer 44

- Government legislation --> An alternative method to reducing imports by having strict regulations and specifications which products must meet. - Goods that fail to reach cultural or environmental standards may also face administrative barriers, meaning that they may not be allowed to import certain good in. - for example in 2011 The Food Standards Agency declared a ban on feed and food coming from Japan into the EU due to possible contamination of radiation following the earthquake and tsunami causing damage to the nuclear power station.

Answer 45

- Where as Quotas and Tariffs aim to reduce imports. Another form of protectionism is to give subsidy to domestic producers - this could be giving financial support, such as grants, interest-free loans or tax breaks, to exporters or domestic producers that face fierce competition, so the business can charge lower prices as the subsidy reduces production costs and increases supply - This force equilibrium prices down which makes it easier for home businesses to break into foreign markets. - for example In 2012 India handed over $375m to help boost exports of textiles and engineering goods to help improve their export industry and to help improve the balance of payments. - However this may contravene (conflict with) Free Trade Agreements.

Answer 46

A market where goods, labour and capital can move freely across the member states; tariffs are generally removed and non-tariff barriers eliminated at least reduced.

Answer 47

A union where member states remove all trade barriers between themselves and members adopt a common set of barriers against non-members.

Answer 48

An economic union that uses a common currency.

Answer 49

A type of trade bloc involving both a customs union and a common market.

Answer 50

A region where member states remove all trade barriers between themselves, but each member state nevertheless keeps different barriers against non-member states.

Answer 51

A type of trading bloc where certain types of products from participating countries receive a reduced tariff rate.

Answer 52

Agreement made between two or more countries within a geographical region, which is designed to facilitate trade by bringing down barriers

Answer 53

A system of allocating certificate whereby a defined amount of product or service must be certified as being created within that region

Answer 54

A market where almost all trade barriers between members ave been removed and common laws or policies aim to make the movement of goods and services, labour and capital between countries as easy as the movement within each countries

Answer 55

A group of countries that has signed a regional trade agreement to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves.

Answer 56

- Countries prefer trading locally as they know the markets better and its cheaper on transport costs. Due to this there are many RTA’s (regional trade agreements). - WTO and also GATT (General Agreement on Tariffs and Trade) try to promote more global trade. - RTA’s between geographical countries are designed to reduce trade barriers. - A trading bloc are a group of countries that have signed a RTA to reduce or eliminate tariffs, quotas and other protectionist barriers between them

Answer 57

- PTA’s allow certain types of product from participating countries to receive a reduced tariff rate. - This is the beginning of economic integration and can lead to free trade, which is a goal of GATT. - The Association of Southeast Asian Nations (ASEAN) has a PTA with China.

Answer 58

- FTA’s exist where member states remove all barriers between agreed countries, but each member state keeps different barriers against non-member states - However, within FTAs, taxes and excise duties may be different - eg NAFTA – North American Free Trade Agreement (Mexico, US and Canada). - It is essentially a PTA, but with much greater depth and scope in its tariff reductions. - In order to protect the region, countries may use a system of allocating certificates, known as rules of origin, whereby a defined amount of a product or service must be certified as being created within that region. Eg products going from US to Canada, must come with an invoice clearly certifying where it came from. The FTA must also come with requirements of minimum standards.

Answer 59

- Similar to an FTA except members adopt a common set if barriers against non-members. - So when a product from outside is shipped into the union it only has one set of rules and can then move freely within the union. Eg CARICOM – Caribbean Community, 15 nations, trying to co-ordinate economic policies like the EU.

Answer 60

- This is much more integrated than FTA or customs union since goods, labour and capital can move freely across the member states. Tariffs are generally removed and non-tariff barriers eliminated or reduced. - Members in the common market must work together on economic and political policies that affect the market. - Eg ASEAN and Southern Common Market (Mercosur) in South America.

Answer 61

- Almost all trade barriers are removed and common laws or policies work to make the movement of goods and services, labour and capital between countries as easy as the movement within each country. - Borders, standards and taxes are harmonised as much as possible. - The EU is a single market, but it is also an economic and monetary union.

Answer 62

- A type of trade bloc involving both a customs union and a common market. Its aim is normally closer economic, political and cultural ties. Where an economic union has a common currency its called an economic and monetary union. - The EU is one of the few fully functional, but Mercosur and ECOWAS (Economic Community of West African States) are considering becoming one.

Answer 63

The most powerful trading bloc in the world. Founded in 1993, consists of 28 countries. Guarantees the free movement of people, goods, services and capital. Once goods are in the EU they can not face any taxes or quotas when moving through the countries. In Europe but not the EU – Iceland, Norway, Liechtenstein and Switzerland. In the EU but not in the Euro – UK, Denmark and Sweden.

Answer 64

- Established in 1967, designed to promote growth, but also bring peace and stability. - Covers a population 500m+ - It has also completed trade agreements with China, Korea, Japan, Australia, India and New Zealand. - The plan is to become a COMMON MARKET, known as AEC (ASEAN Economic Community), with free labour and goods - areas of cooperation include macro-economic and financial policy, infrastructure communications etc. - As of 2015 countries like Singapore and Thailand were ready, Myanmar and Vietnam were lagging.

Answer 65

- North America Free Trade Agreement (US, Canada and Mexico) - Started 1994 – the agreement includes trade, investment, labour, financial, environment and intellectual property (IP) – applicable to MOST manufactured goods. - Arguments over how good its been, US and Canada can import cheaper goods. US subsidise their corn farmers, which has put Mexican farmers out of business. - since joining NAFTA Mexico's overall economic growth has not increased significantly, real wages have declined and unemployment has increased - may be to of with external factors apart for NAFTA

Answer 66

1 - Where to Produce --> A company may be able to locate in a neighbouring country where the costs of land, labour or capital are most favourable to it, and then ship goods and services to other members. 2- Where to Sell --> Companies may view trading bloc as one big market for their goods and services. This can present opportunities, but also threats. e.g. NAFTA drove many Mexico retailers out of buisnesses 3 - How to enter Market --> The market entry strategy may be adapted according to the opportunities presented by the free trade areas or common market, and can range from new investments through to join venture and mergers. 4 - Business Strategy --> A business may not have been able to export to a neighbouring country because of the existence of trade barriers. Once these barriers are negotiated away as part of a trade agreement, they may be able to do do.

Answer 67

- Freeing regional trade can aid in a country's comparative advantage - market for firm's goods and services should increase --> improve capital flows, streamline regulations improve competition - as volume of trade increases, producers benefit from Economies of Scale --> reduce costs and may reduce prices - resources and labour easier to come by, while production and transport costs fall - as trade increases it may result in greater competition thereby more efficiency in the market - Trading Blocs provide a counter-balance against globalisation, protecting industries in an area against predatory competition. Plus being part of an RTA may give regions the power to negotiate for better deals

Answer 68

- Trade blocs may actually harm overall trade because countries outside the region may be better placed to specialise or develop a competitive advantage, and yet they are closed outside the market. leading to trade diversion - inefficient producers may be protected from competition thereby diverting trade away from more efficient producers and potentially harming consumers e.g. less efficient producers may lobby for protection, so that they do not have to reform and compete - overall all benefit may turn out to be small if the agreement limits the goods/services traded - Locally, some of the benefits may be distribute unequally causing political and social tension within the region - Globally, the benefits accrued inside the bloc may lead to tension with other regions, leading to possible retaliation, further harming global trade - Members in RTAs especially in FTAs may have differing levels of economic power, causing long-term economic and political imbalance and potential conflict - for small organisations, this can result in more competition --> effecting their pricing strategies as larger firms can produce more cheaper and sell in better locations

4.1 Globalisation Flashcards

(92 cards)