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29 Cards in this Set
- Front
- Back
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Foreign Direct Investment
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divestment into production in country by company located in another country, either buy in target land or expand operations of existing business there.
takes advantage of cheap labor, tax ememptions offered by country as incentive. better when market imperfections and loct advantage. they want to protect intangible assets and threfore won't license. More recent FDI has been in manufacturing, less vulnerable and hence less expropriations. Decline thereafter, investments left after expropriations had little value to host government. |
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horizontal integration
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Horizontal FDI: when a MNC produces same product in various lands. Coke is made in over 200 countries.
more vulnerable to expropriation. |
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vertical integration
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vertical MNC, foreign assets and controls different stages of production. EX: Exxon oil takes charge of every stage of its oil trade. form of foreign direct investment when these assets combine with locational advantages. not as vulnerable to exp.
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market imperfections
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-Market imperfections exist when the price mechanism fails to yield mutually beneficial transactions.
-One imperfection is known as “Intangible Assets”: “knowledge” assets that are difficult to price e.g. managerial skills, production processes…even a firm’s reputation. These are valuable but hard for firms to protect: once out there, they can be had by any competitor at no cost |
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locational advantages
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this is what determines if MNC should choose to FDI or export from home/license product out. locational advantage when raw materials are there, large consumer market, cheap labor.
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intra firm trade
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trade that takes place within the same firm but across different branches of that firm, the branches being located in different areas.
mechanism: since many MNCs are vertically integrated they may have one part of production in one country and send it to another factory in another country to continue production - all still within the same company. significance: this type of trade accounts for 1/3rd of all world trade. shows the magnitude of MNCs. |
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intangible assets
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not physical. EX: intellectual property like copyrights, patents, secrets, etc. MNCs have these. Uruguay round in GATT attempted to deal with with this.
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specific assets
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physical and human investments that are special to certain task. For example, producing a certain component of a good might require investment in specialized equipment. As such, a specific asset is dedicated to a specific, particular use, and can’t be easily adapted to another purpose - like a car production factory, which has little use for anything other than making cars.
can lead to hold up problems. explains why MNCs go vertical. MNC must buy supplier out and internalize them if they don't want to be steemrolled. like how GM bough Fisher body. |
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positive externalities
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A positive spillover benefit, or a side effect; a decision made for reasons of self-interest (such as by an individual, a company, or a country) that has a net positive for society in general. An example of could include the gold standard, because different countries stayed on the same standard for different reasons of self-interest.
Example: England and its great banking centers benefited from adopting a gold standard after Isaac Newton overvalued it; that made the pound sterling literally “as good as gold,” which also meant that England would not suffer from unfavorable exchange rates. As England continued setting the international standard, other countries pegged their money to the pound sterling and eventually adopted the gold standard. The positive externality here is that the gold standard, by providing a common means of payment, facilitated international trade and brought stability to financial markets of Europe, at least until it fell apart in WWI. |
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obsolescing bargain
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over time MNC loses power compared to host gov. MNC starts with bargaining power and controls capital and expertise. when host develops the skills needed to run the MNC they MNC power decreases and exp becomes possible.
extractive/raw companies are most vulnerable. MNC are mostly manufactured now so threat of exprop is lower. |
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multilateral agreement on investing MAI
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draft agreement negotiated between members of OECD in 1995–1998. Its purpose was to develop multilateral rules that would ensure international investment was governed in a more systematic and uniform way between states. An attempt to establish a framework for the protection of foreign investments
Due to the provisions in the text there would be a real transfer of decision-making power to unaccountable private corporations, making it more difficult for elected governments to pass and apply laws for their public's interest, with the effect of reducing democracy so that people are locked in to corporate-rights agreements. |
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OPEC
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org of petroleum exporting countries. in 1960. major developing country oil producers. Iran, Iraq, kuwait, saudi, venezuela. wanted to raise oil taxes and royalties.
EX of an intl commodity cartel. group of developing countries that cooperate to artificially reduce supply in order to raise price of commodity. hawks have small oil reserves and doves have large oil reserves. hawks want to keep oil high and doves want to moderate to prevent consumers from going to other sources. saudi owned half of oil reserves and played big role in OPEC if others free ride saudi would flood market with oil so the price would drop. OPEC caused wage price inflationary sprial, as oil roes producers raised prices to compensate and workers demand more wages and then producers need to raise price to deal with labor costs, etc. gave OPEC surplus. deposited it in world banks, who would loan to developing countries, who would buy oil. petrodollar. This lead to the Debt Crisis of the 1980s, or the over-lending of lenders due to the need to recycle OPEC petrodollars. This caused stagflation: or continuous price increases/reduced production. Volker reversed this inflation by raising interest rates. |
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product cycle theory
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Theory suggesting that a firm initially establish itself locally and expand into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors.
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property rights
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Property rights involve multiple aspects. Intellectual property and branding rights make it difficult to license production to third-parties so Multinational Firms prefer to invest directly and set up a factory abroad themselves. But property rights also involve the land-use rights, the machinery, the walls of the factory and so on.... if property rights are not secure the firm is always worried about expropriation
need good institutions in the foreign land. corruption doesnt' do well for your intellectual property. |
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concessional lending
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what what
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interl labor org ILO
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monitors compliance with labor standards/laws. slave labor, child labor, nondiscrim, etc. right to unionize.
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expropriation
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under FDI - one of the regulations on MNCs: government can seize all MNC assets
peaked in the mid 1970s. The most vulnerable industries to expropriation were extractive and raw materials industries - like oil and minerals, etc. The problem has mostly disappeared by now, however, because obsolescing bargains results in a negative relationship between MNC “power” over host governments and time. Also, MNCs are more recently investing in manufacturing and services, which are industries not as vulnerable to the obsolescing bargain - so expropriation is unlikely here. |
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OPEC hawks
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iran and iraq the smaller oil reserves but larger populations. if they free ride saudi will put lots of oil on the market to dramatically lower prices. hawks want prices high so they can develop.
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race to the bottom
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• Hurts race to the bottom: countries open to trade and invetment have weaker trade regulations out of fear of loss to competition.
Derived from policy convergence. This is a fear that as the world globalizes that policies will become more and more similar and that issues like the environment, labor rights and health care will be ignored in favor of commerce. |
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European Monetary System EMS
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The EMS was launched in 1979 to help lead to maintain currency stability through fixed exchange rates, following the Bretton Woods System. European policy makers wanted stable exchange rates to set an equal rate for all member states to make trade between the states more efficient. Exchange Rate Mechanism committed all member states’ governments to keep their currency exchange rates within bands, meaning that no country’s exchange rate could fluctuate more than 2.25% from a central point. It created a European Currency Unit - the ECU, a basis for the idea of a single currency, which was realised with the launch of the Euro in 1999. The pros and cons of fixed and floating exchange rates.
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export processing zones EPZs
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area where goods can land, handled, manufactured or reconfigured and re exported without intervention of customs. region where trade barriers are down.
zones are set in underdeveloped host land, rationale zones will attract employers and reduce poverty and unemployment. Type of free trade zone (FTZ), set up generally in developing countries by their governments to promote industrial and commercial exports. In addition to providing the benefits of a FTZ, these zones offer other incentives such as exemptions from certain taxes and business regulations. Also called development economic zone or special economic zone. |
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maastricht treaty
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• Maastricht treat in 1992, EU memebrs agreed to monetary union with a common currency the euro, managed by the European central bank. ECB.
o Transition took 8 years. o Bring inflation down first, reduce BOP deficit within a certain mark and can’t exceed ceiling. o Most countries failed to do so, the ones that did failed later. o Eurozone created in 99. Currency made in 01. attributes to euro crisis |
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intl commodity cartel
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o International commodity cartels were alternative path to development.
• When a group of developing countries cooperate to artificiall reduce supply in order to raise price of commodity such as oil it is a cartel. Attempt by producers to cut production to get higher prices. • Wanted to improve terms of trades by way of control, raise export prices of primary products. • Organization of Petroleum Exporting Countries OPEC is an example of a cartel. • Intl Comodity Cartels, ICC, sought to address terms of trade problem ID by Preisch. Similar to ISI in that way. • OPEC was most successful, other commodities not so much, why? |
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petrodollar recycling
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when opec lowered supply to raise prices they put their surplus in big banks. banks loaned to developing countries who then used that money to buy oil. becuaset needed oil for their manufacturing.
However, the lenders overlent the money, and borrowers overborrowed |
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offshorting
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offshoring once thought to be sending manufacturing jobs overseas but not its a lot of jobs. lower wages. people think this is bad but economists think its good because its intl trade.
winners: US capital owners, US consumers. Losers: US labor |
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paul volcker
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after oil crisis, US had stagflation recession/inflation, volcker wanted to reverse it. he was the inflation hawk, by carter.
plan: break the expectations of wage price spiral by raising interest rates to reduce inflation. led to steepest recession post WWII. |
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debt crisis of 1980s
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was a major threat to borrowers and to the world financial system. If one or more of the major debtors (Mexico/ Brazil) defaulted, it might have taken down world banking system. Major banks were seriously overexposed; why did they take on such risks? à the need to “recycle” OPEC petrodollars. Opec oil wealth was deposited in commercial banks. The banks needed to invest the deposited money and LDCs looked like good bets especially in the case for oil producers like Mexico and Venezuela. These huge profits for banks led to the herd mentality for banks which stimulated a dangerous rush to lend. The borrowers over-borrowed because they needed to finance the BOP deficits caused by ISI. Bias against exports meant htat ISI countries needed capital inflows. LDCs were also wary of MNCs and saw borrowing as an alternative to FDI. The interest rates were so low, even negative, it was practically free.
-Proximate causes: stagflation in the US reduces demand for LDC exports, rise in global interest rates increases LDC debt burden, loans were contracted on variable rate terms, appreciation of US dollars increases LDC burden, protectionism in rich countries lowers earnings of debtors. -Resolution: Phase one: keep loans current ot prevent international financial collapse. Phase 2; Debt reduction (Brady Plan of 1989) and lowered interest rates, return to growth begins. |
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stagflation
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elements of recession and inflation occur. Volcker tried to fix it by raising interest rates.
stag means that econ growth slows and unemployment builds, as do prices of goods. first happened during OPEC oil crisis. in late 70s, they forced prices higher and it led to companies trying to compensate by raising cost of their goods, but then workers needed higher wages to pay for goods, etc. therefore cos reduce production. shows power of special itnerest groups to effect econ. |
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oil crisis of 70s
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OPEC, stagflation in US
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