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Transcript
• Chapter 4: – Instruments of Trade – Arguments for Government Intervention • Chapter 5: – – – – – FDI’s role in the World Economy Trends and forms of FDI FDI Theory Benefits and costs of FDI FDI in emerging markets • Chapter 6 – Foreign market entry decisions and considerations – Foreign market entry modes (pros and cons) • Chapter 7 – Nature of Regional economic integration – Levels of regional economic integration – Regional economic integration in Africa – Arguments for and against regional economic integration • Chapter 8 – Functions and nature of foreign exchange market – Impact of Foreign Exchange markets on international business managers Governments intervene in international trade to protect the interests of politically important groups The main instruments of trade policy are: • • • • • • • Tariffs Subsides Import Quotas Voluntary Export Restraints Local Content Requirements Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country Antidumping Policies - designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition Tariffs - taxes levied on imports Subsides - government payments to domestic producers Who gains: • Government • Domestic producers (at least in the short run) • Employees of protected industries keep their jobs Subsidies aim at lower costs to help: • Compete against cheaper imports • Gain export markets • Increase domestic employment • Local producers achieve first-mover advantage in emerging industries Who loses: • Consumers who pay higher prices • The economy which remains inefficient • Employees of protected industries who don’t develop new skills Who loses: • Governments tax individuals… to pay for subsidies • Consumers buy more expensive goods with lower disposable incomes Import Quotas – restrictions on quantity imported Government specifies how much of what product can be imported from which countries Voluntary Export Restraints - quotas on trade imposed by the exporting country officially or unofficially Local Content Requirements demands that some % of a good has to be produced domestically with local raw materials and local labor Used by LDCs to: • Achieve technology transfer, skills transfer • Shift manufacturing base to a higher technological level Similar effects to those of import quotas Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country Antidumping Policies Dumping: selling goods in an overseas market at below their production costs or below “fair market value” Antidumping Policies - designed to • Punish foreign firms that engage in dumping and • Protect domestic producers from “unfair” foreign competition • Political arguments - protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) • Economic arguments - boosting the overall wealth of a nation (benefit both producers and consumers) Political arguments for government intervention include: • Protecting jobs - most common political reason for trade restrictions • Protecting industries deemed important for national security • Retaliating to unfair foreign competition • Protecting consumers from “dangerous” products • Furthering the goals of foreign policy • Protecting the human rights of individuals in exporting countries • Results from political pressures by unions or industries that are "threatened" by more efficient foreign producers Economic arguments for intervention include: • Infant industry argument Protect industry while it develops, until viable and competitive internationally Accepted as a justification for temporary trade restrictions under the WTO However, difficult to gauge when an industry has “grown up” Critics – if country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds without additional support from the government • Strategic trade policy In cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages Governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country and requires an interest of 10% or more in a foreign business entity FDI in the world economy • Flow of FDI – amount of FDI undertaken over a given time period – Two types: • Inflow of FDI – refers to the flow of FDI into a country • Outflow of FDI – refers to the flow of FDI out of a country • Stock of FDI – total accumulated value of foreign owned assets at a given time Reasons for rapid growth: • Means to avoid potential future trade barriers • Political and economic changes • Globalisation of world economy Forms of FDI: • Most FDI takes the form of mergers and acquisitions because: – It is more quickly executed than Greenfield ventures – Acquisition of existing strategic assets are possible – Opportunity to increase efficiency of the acquired firm is possible due to the transferring of technology, capital and management skills Host Country Resource-Transfer Effects (supply of Home Country capital, technology, management) Benefits Costs Balance of Payment Benefits (inward flow of foreign earnings) Employment Effects (job creation) Employment Effects (from outward FDI) Balance of Payment Effects Gains from learning valuable skills from Effect on Competition and Economic foreign markets (transferred to home Growth country) Adverse Effects on Competition Adverse Effects on Balance of Payments National Sovereignty and Autonomy o initial capital outflow to finance FDI (loss of economic independence) o If purpose of FDI is to provide home Adverse Effects on Balance of Payments from: market from low cost labour location o If FDI is a substitute for direct exports Foreign Direct Investment Theories Cluster 1: Cluster 2: Why FDI? Patterns of FDI Limitations of Exporting Limitations of Licensing Strategic Behaviour Product Life Cycle Cluster 3: Eclectic Paradigm FDI in AFRICA • FDI in Africa has been on the increase, although at a slower rate than other developing nations • There are significant variations across African countries in FDI performance. Countries such as South Africa, Egypt and Nigeria have attracted considerable FDI. • FDI in Africa previously came from countries such as the United States, the United Kingdom, Germany and France. However, new investors are emerging and include Canada, Italy, Portugal and Spain. • Inward FDI, originating in other African countries is taking place. South Africa in particular is engaging in FDI in other African Countries. • FDI in Africa has proven profitable, and even more profitable than in other developing countries • This section in very important for exams • STUDY pages 182–184, 193-194 in detail Firms expanding internationally must decide: • which markets to enter • when to enter them and on what scale • which entry mode to use Entry modes include: • exporting • licensing or franchising to a company in the host nation • establishing a joint venture with a local company • establishing a new wholly owned subsidiary • acquiring an established enterprise Several factors affect the choice of entry mode including: • transport costs • trade barriers • political and economic risks • costs • firm strategy Which market to enter? When to enter? On what scale? 1. Depend on long run profit potential 2. Desirable: Politically stable, developed & developing nations with free market systems, relatively low inflation rates and private sector debt, product in question not widely available and satisfies an unmet need 3. Less desirable: politically unstable, developing nations, mixed or command economies, developing nations with excessive levels of borrowing Early or late 1. Firms that enter a market on a significant scale make a strategic commitment to the market (the decision has a long term impact and is difficult to reverse) 1. First mover advantages • Ability to pre-empt rivals & capture demand • Ability to build up sales volume • Gain cost advantage over later entrants • Ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business 2. First mover disadvantages • pioneering costs – foreign business system different from firm’s home market that firm must devote much time, effort and expense to learn the rules of the game 2. Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market Decisions are based on the levels of risk and reward • Agreements among countries in a geographic region to reduce/remove tariff & non-tariff barriers to the free flow of goods, services & factors of production with each other • Comparative advantage – freer trade within regions will produce gains for all • Critics worry that there will be a world where regional trading blocs compete against each other 1. Free trade area • No barriers to trade among member countries, • Members determine own trade policies for nonmembers European Free Trade Association (Norway, Iceland, Liechtenstein, and Switzerland) North American Free Trade Agreement (U.S., Canada, and Mexico) 2. Customs Union • No trade barriers between member countries and adopts a common external trade policy Andean Pact (Bolivia, Columbia, Ecuador and Peru) 3. Common Market • No barriers between member countries, a common external trade policy and free movement of the factors of production MERCOSUR (Brazil, Argentina, Paraguay and Uruguay) aims for common market status 4. Economic Union • Free flow of products and factors of production between members • A common external trade policy, a common currency, a harmonized tax rates and a common monetary and fiscal policy European Union (EU) is an imperfect economic union 5. Political Union • Central political apparatus that coordinates the economic, social and foreign policy of member states United States is an example of even closer political union The EU is headed toward at least partial political union Economic • Unrestricted free trade will allow countries to specialize in the production of goods/services that they can produce most efficiently • Greater world production than is possible with restrictions • Stimulates economic growth creating dynamic gains from trade • FDI can transfer technological, marketing & managerial know-how to host nations Political • Linking economies & making them increasingly dependent on each other creates incentives for political cooperation & reduces potential for violent conflict • By grouping economies, countries can enhance their political weight in the world • Benefits of regional integration have been oversold & the costs have often been ignored • Trade creation (high-cost domestic producers are replaced by low-cost producers within a region) vs. trade diversion (low-cost external suppliers are replaced by higher-cost suppliers within the region) • Regional trading blocs could emerge whose markets are protected by high nontariff barriers (WTO does not cover) • Painful adjustments in certain segments of economy • Threat to national sovereignty • Regional integration was initiated in Africa in the early 1900s with the establishment of the South African Customs Union (SACU) in 1910 and the East African Community (EAC) in 1919. • After the 1970s, further regional economic communities formed across the continent. In 1994 the African Economic Community Treat (or Abuja Treat) came into force, the objective of which was to establish economic cooperation and strengthening the existing regional economic communities • Africa’s lack of progress due to the reluctance of the governments of African countries to: – Surrender sovereignty of macroeconomic policy making to regional authority; – Face potential consumption costs that may arise by importing from a high cost member country; – Accept unequal distribution of gains and losses that may follow an integration agreement; and – Discontinue existing economic ties with non-members • The foreign exchange market as “a market for converting the currency of one country into that of another country”. • The foreign exchange market has no central trading floor where buyers and sellers meet. Rather trades are completed through a network of banks and foreign exchange dealers via telephone and email. • As it is a worldwide market it operates 24 hours a day. • Two main functions: – currency conversion – insuring against foreign exchange risk International companies use the foreign exchange market when: • Payments are received in foreign currencies for exports • Income is received in foreign currencies from foreign investments • Income is received in foreign currencies from licensing agreements with foreign firms • When they must pay a foreign company for its products or services in its country’s currency • When they have spare cash that they wish to invest for short terms in money markets • When they are involved in currency speculation (the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates) Firms need to understand the influence of exchange rates on the profitability of trade and investment deals, also called hedging There are three types of foreign exchange risk: 1. Transaction exposure • Extent which income from individual transactions is affected by fluctuations in foreign exchange values • Includes obligations for purchase or sale of goods and services at previously agreed prices & borrowing or lending of funds in foreign currencies 2. Translation exposure • Impact of currency exchange rate changes on the reported financial statements • Present measurement of past events 3. Economic exposure • Extent to which future international earning power is affected by changes in exchange rates • Economic exposure is concerned with long-term effect of changes in exchange rates on future prices, sales, and costs To fully understand hedging, an understanding of spot exchange rates, forward exchange rates and currency swap is necessary. • Spot Exchange Rate: refers to the “exchange rate for the transaction that requires almost immediate delivery of foreign exchange”. Spot rates change continuously, often on a minute by minute basis, and the value of the currency is determined by the supply and demand of the currency relative to the supply and demand for other currencies • Forward Exchange Rate: refers to “the exchange rate for a transaction that requires delivery of foreign exchange at a specified future date (e.g. 30-day, 90-day)” . Forward exchange rates address the challenges presented by the spot exchange rate, which could potentially make a transaction unprofitable by the time it is executed. Forward exchange rates provide a means for international businesses to hedge (insure) against the risk of exchange rate fluctuations when, for example, importing goods. • Currency Swap: Forward exchanges often take the form of a currency swap which is sophisticated financial instrument involving “the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates”. They are conducted between international businesses and banks, between banks and between governments in instances where it is necessary to “move out of one currency into another for a limited period without incurring foreign exchange rate risk” Foreign Exchange Market present the following challenges for managers within international businesses: • Managers need to understand the impact of foreign exchange rates on the profitability of foreign trade and foreign investment deals. Negative changes in the exchange rate may turn a profitable business deal into an unprofitable one • Managers need to ensure that their businesses are insured against foreign exchange risk. It is best to do this through the employment of multiple tactics which may include: – Exercising centralised oversight over its foreign exchange hedging activities; – Recognising the difference between transaction exposure (the extent to which fluctuations in foreign exchange values affect the income from individual transactions) and economic exposure (the extent to which earning power is affected by exchange rates); – Forecasting future exchange rate movements; – Putting in place good monitoring and reporting systems to identify exposure. • Generating regular foreign exchange exposure reports which can serve as the basis for action