MGCR 382 Midterm study guide
solution (MGCR 382 International
Business) McGill University
Modern Firm-Based Theories - Focus on the firm's role in promoting international trade -Useful in
describing patterns of trade in differentiated goods-Brand Name is an important component of the
customer's purchase decision
Relative Factor Endowmennts - Heckscher-Ohlin Theory - A country will have a comparative advantage
in producing products that intensively use resources (factors of production) it has in abundanc\
Pattern of Comparative Advantage-Export products that use relatively abundant factors of production-
Import products that need relatively scarce factors of production
Leontief paradox - U.S. imports were nearly 30 percent more capital-intensive than were U.S. exports
Firm-based theories have developed for several reaso - s: -Growing importance of MNCs in the postwar
international economy-Inability of the country-based theories to explain and predict the existence and
growth of intra-industry trade-Failure of Leontief and other researchers to empirically validate
Heckscher-Ohlin theory
SteffanLinder sought to explain the phenomenon of intraindustrytrade - Country similarity theory -
international trade in manufactured goods results from similarities of preferences among consumers in
countries that are at the same stage of economic development\
particularly useful in explaining trade in differentiated goods such as automobile
New trade theory - according to this theory, economies of scale occur if a firm's average costs of
producing a good decrease as output of that good increases •Like Linder's approach, the new trade
theory predicts that intraindustrytrade will be commonplacEa
,Two main political factors for FDI decisions - avoide trade barriers Firms often build foreign facilities to
avoid trade barriers, such as high tariffs on imported consumer electronics good
Economic Development Incentives
Protectionism -policies that: - affect the ability of foreign producers to compete in your home market-
limit or enhance your company's ability to sell abroad or acquire needed foreign supplies-
Governments intervene in trade t0: - to achieve economic, social, and political goals-While free trade is
beneficial, in reality all countries regulate the flow of goods and services across their borders-Officials
enact those trade policies they feel will best protect their nations and citizens—and perhaps their
personal political longevity
Policymakers are challenged b - conflicting objectives
interest groups
The Role of Stakeholder - Proposed policies on trade spark debate •Stakeholders include -Workers-
Owners-Suppliers-Local politicians•Those who are most directly affected tend to be loudest in voicing
their concerns
Economic Rationales of why governments intervene in trade - Fighting unemployment
Protecting infant industries
Developing an industrial base
Economic relationships with other countries
Non economic rationales - Maintaining essential industries
Promoting acceptable practices abroad
Maintaining or extending spheres of influence
preserving national culture
, Countries promote industrialization because it - brings faster growth than agriculture-brings in
investment funds-diversifies the economy-creates growth in manufactured goods-reduces imports and
promotes exports-helps the nation-building proces
Tariffs may be levied: - -on goods entering, leaving, or passing through a country -for protection or
revenue-on a per unit basis or a value basis•export tariffs•transit tariffs•import tariffs
Specific duty - When a country assesses a tariff on a per unit basis
Other direct price influencers - - subsidies, tariffs, aid and loans, tied, untied, customs valuation, special
fees and requirements
Quotas - Voluntary export restraint (VER) and Embargoes
Other direct quantity limiters - quotas, "Buy local"legislation-Standards and labels-Specific permission
requirements•import or export license -Administrative delays-Reciprocal requirements•Countertrade or
offsets-Restrictions on services
Trade restrictions affect services - Countries deciding whether to restrict trade in services consider
essentiality, not-for-profit-preference, standards, and immigration
Companies facing import competition can - Move abroad-Seek other market niches-Create greater
efficiency or superior products -Try to get governmental protection
Tactics for dealing with import competition include - Convince decision makers of the merits of
particular policies-Involve the industry and stakeholders-Prepare for changes in the competitive
environmen
solution (MGCR 382 International
Business) McGill University
Modern Firm-Based Theories - Focus on the firm's role in promoting international trade -Useful in
describing patterns of trade in differentiated goods-Brand Name is an important component of the
customer's purchase decision
Relative Factor Endowmennts - Heckscher-Ohlin Theory - A country will have a comparative advantage
in producing products that intensively use resources (factors of production) it has in abundanc\
Pattern of Comparative Advantage-Export products that use relatively abundant factors of production-
Import products that need relatively scarce factors of production
Leontief paradox - U.S. imports were nearly 30 percent more capital-intensive than were U.S. exports
Firm-based theories have developed for several reaso - s: -Growing importance of MNCs in the postwar
international economy-Inability of the country-based theories to explain and predict the existence and
growth of intra-industry trade-Failure of Leontief and other researchers to empirically validate
Heckscher-Ohlin theory
SteffanLinder sought to explain the phenomenon of intraindustrytrade - Country similarity theory -
international trade in manufactured goods results from similarities of preferences among consumers in
countries that are at the same stage of economic development\
particularly useful in explaining trade in differentiated goods such as automobile
New trade theory - according to this theory, economies of scale occur if a firm's average costs of
producing a good decrease as output of that good increases •Like Linder's approach, the new trade
theory predicts that intraindustrytrade will be commonplacEa
,Two main political factors for FDI decisions - avoide trade barriers Firms often build foreign facilities to
avoid trade barriers, such as high tariffs on imported consumer electronics good
Economic Development Incentives
Protectionism -policies that: - affect the ability of foreign producers to compete in your home market-
limit or enhance your company's ability to sell abroad or acquire needed foreign supplies-
Governments intervene in trade t0: - to achieve economic, social, and political goals-While free trade is
beneficial, in reality all countries regulate the flow of goods and services across their borders-Officials
enact those trade policies they feel will best protect their nations and citizens—and perhaps their
personal political longevity
Policymakers are challenged b - conflicting objectives
interest groups
The Role of Stakeholder - Proposed policies on trade spark debate •Stakeholders include -Workers-
Owners-Suppliers-Local politicians•Those who are most directly affected tend to be loudest in voicing
their concerns
Economic Rationales of why governments intervene in trade - Fighting unemployment
Protecting infant industries
Developing an industrial base
Economic relationships with other countries
Non economic rationales - Maintaining essential industries
Promoting acceptable practices abroad
Maintaining or extending spheres of influence
preserving national culture
, Countries promote industrialization because it - brings faster growth than agriculture-brings in
investment funds-diversifies the economy-creates growth in manufactured goods-reduces imports and
promotes exports-helps the nation-building proces
Tariffs may be levied: - -on goods entering, leaving, or passing through a country -for protection or
revenue-on a per unit basis or a value basis•export tariffs•transit tariffs•import tariffs
Specific duty - When a country assesses a tariff on a per unit basis
Other direct price influencers - - subsidies, tariffs, aid and loans, tied, untied, customs valuation, special
fees and requirements
Quotas - Voluntary export restraint (VER) and Embargoes
Other direct quantity limiters - quotas, "Buy local"legislation-Standards and labels-Specific permission
requirements•import or export license -Administrative delays-Reciprocal requirements•Countertrade or
offsets-Restrictions on services
Trade restrictions affect services - Countries deciding whether to restrict trade in services consider
essentiality, not-for-profit-preference, standards, and immigration
Companies facing import competition can - Move abroad-Seek other market niches-Create greater
efficiency or superior products -Try to get governmental protection
Tactics for dealing with import competition include - Convince decision makers of the merits of
particular policies-Involve the industry and stakeholders-Prepare for changes in the competitive
environmen
