Globalization

Question 1

What is Globalization?

Answer 1

The movement toward a more integrated and interdependent world economy. It is evidenced by increased mobility of goods and services, labor, technology, and capital.

Question 2

Describe the primary objective of the World Bank.

Answer 2

The primary objective of the World Bank is to promote general economic development world-wide, focusing on lending to developing countries for infrastructure, agricultural, educational and similar projects.

Question 3

Describe the primary objective of the International Monetary Fund (IMF)

Answer 3

The primary objective of the IMF is to maintain order in the international monetary system, primarily by providing funds to economies in financial crisis, including:

1. Currency crisis - dramatic decreases in the value of a country’s currency;
2. Banking crisis - dramatic levels of withdrawals from a country’s banks (a “run on banks”);
3. Financial debt crisis - country unable to satisfy its foreign debt obligations.

Question 4

Identify the primary purposes of the General Agreement on Tariffs and Trade (GATT).

Answer 4

1. Liberalizing and encouraging trade by eliminating trade barriers;
2. Harmonizing certain business-related laws;
3. Reducing transportation and other costs of doing international business.

Question 5

Identify factors that have facilitated or enabled an increased in global trade.

Answer 5

1. Reductions in trade barriers;
2. Increased economic integration between nations;
3. Regional trade agreements (NAFTA, EEU);
4. Development in communications (e.g., internet);
5. Development in the financial sector.

Question 6

Describe changes in U.S. international trade over the past 50 years.

Answer 6

Both U.S. imports and exports have grown dramatically over the past 50 years. The U.S. is by far the world’s largest importer and one of the top three exporters. Imports and exports each account for about 15% of purchases and output, respectively. The U.S. exports only more agricultural products and services than it imports.

Question 7

Identify special costs associated with international trade that often are critical in determining the viability of such trade.

Answer 7

1. Transaction costs, including costs of using letters of credit and costs of mitigating currency exchange risk;
2. Transportation costs, the extra costs of shipping goods long distances and/or using more costly transportation methods;
3. Tariff and other compliance costs, including the direct costs of tariffs and complying with other requirements;
4. Time costs, the costs associated with the extra time due to distance and other requirements.

Question 8

Identify and describe the two major ways goods may be acquired internationally.

Answer 8

1. Foreign outsourcing - acquiring goods from foreign suppliers;
2. Foreign direct investment - producing goods in facilities owned or controlled by U.S. companies but located in foreign countries.

Question 9

Identify risk encountered when engaging in foreign outsourcing.

Answer 9

1. Quality risk - goods/services so not meet buyer’s standards;
2. Security risk - foreign provider misappropriates
3. Export/Import risk - trade barriers prevent transfer of goods/services;
4. Currency exchange risk - Exchange rates change unfavorably;
5. Legal risk - Home country or foreign country laws are violated.

Question 10

Identify the potential benefits of international capital markets (as compared with domestic markets) to both lenders and borrowers.

Answer 10

For investors, a greater range of investments is available and an increase in portfolio diversification is possible. For borrowers, a larger number of funding sources, increased levels of funding, and lower cost of borrowing are possible.

Question 11

Describe the Eurodollar market (Euromarket).

Answer 11

Eurodollars are U.S. dollars maintained outside the U.S. Investors holding these Eurodollars offer short-term and intermediate-term loans denominated in the U.S. dollar. These loans are outside the normal banking systems and, therefore, generally carry a lower cost of borrowing than conventional bank loans.

Question 12

Briefly describe the shifts in the share of world-wide trade over the past 50 years or so.

Answer 12

The total level of world-wide trade has grown dramatically in the past 50 years. During that time the four largest export countries have been the U.S., Germany, Japan and China. The share of world-wide exports attributable (in total) to the four countries has remained fairly constant, around 30%. But, among those countries the share has changed significantly. The U.S. has lost share, from about 18% to 8%. Germany has maintained about a 9% share. Japan has increased share from about 3% to about 5% and China has increased share from about 2% to about 9%.

Question 13

Briefly describe the shifts in the share of world-wide GDP (output) over the past 50 years or so.

Answer 13

GDP (output) over the past 50 years or so. While total world-wide output has more than tripled over the last 50 years, the growth has not been uniform among countries/regions. The most dramatic changes have been in the decline of European share of output and the increase in the Asian share of output. The European share of world-wide output has declined from about 36% to about 27% and the Asian share has increased from about 15% to about 25%. The share of output held by the U.S., Latin America and Africa/Middle East has remained fairly constant.

Question 14

Approximately how much of worldwide output (GDP) and exports does the US share, respectively?

Answer 14

Output (GDP) = 25%

Exports = 10%

Question 15

Identify the primary way an entity may engage in international business activity.

Answer 15

The alternative ways of engaging in international business activity include:

1. Importing/Exporting;
2. Foreign licensing;
3. Foreign franchising;
4. Forming a foreign joint venture;
5. Creating or acquiring a foreign subsidiary.

Question 16

Identify the advantages and disadvantages of a wholly-owned (100%) foreign subsidiary.

Answer 16

Advantages: Gives the parent entity security of assets and proprietary information, and ability to control and coordinate activities of the subsidiary entity.

Disadvantages: A costly means of undertaking international business and parent has entire cost and risk of the undertaking.

Question 17

Define a “greenfield venture”.

Answer 17

A Greenfield venture is a new, wholly-owned subsidiary established in a foreign country.