Global Trade

What is Mercantilism?

Its principle assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. The main tenant of mercantilism was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and increase its national wealth and prestige.

What is zero-sum game?

The term zero sum game may also be extrapolated to economics and the trading practices between two countries. Equal trade is essentially a zero sum game. Both countries gain equal advantage by acquiring something and by giving something up. Lots of trade situations are non-zero sum. One country loses more than it gains in making a trade. Again, this applies to the overall picture. Perhaps the country that trades at a disadvantage gains something non-tangible, like the respect of another nation and better diplomatic relations. As in chess where the loser may profit by his loss, a nation that takes an economic loss in a trading situation may profit in other ways.

How to relation between mercantilism and zero-sum game?

One of the main principles of mercantilism was that global economics was a zero-sum game: if one nation gained, another lost. This meant that it was crucial to minimize the exporting of capital, and to maximize the importing of capital. So nations would eliminate taxes and barriers of trade within their own countries, and raise massive barriers to all exports. It also became imperative to try to extract every ounce of raw resource domestically, and to transform that raw resource into finished products that could be exported at a hefty profit. If raw materials weren’t immediately available, it was acceptable to import them, then finish them in country, and export them at a profit.

What are the Difference between Absolute and Comparative Advantage?

Absolute advantage

Advantage refers to a situation when a person, group or a nation can produce a particular product with more economy than others. Of course this statement is very general as there can be labor advantage (labor could be cheap or inexpensive), or capital advantage. Absolute advantage is a term that is used when one country can produce more number of a particular item with same resources than any other country. If this particular item is produced by only one country, then mutually beneficial trade is impossible.

So, absolute advantage is a situation that occurs when a nation is able to produce some goods at a cost lower to other countries with all other factors being equal. The concept of absolute advantage was propounded by Adam smith when talking about international trade.

Comparative advantage

The concept of comparative advantage is of great significance in international trade. A country is said to have comparative advantage over other countries if it is producing goods and services at a lower opportunity cost. Opportunity cost of a particular item is defined as the amount that is sacrificed to make another unit of that particular item. This theory suggests that if a country has an advantage over other countries in the production of some goods and services, it should confine itself in producing these goods and services only and should import other goods and services in which the country is inefficient. The theory of comparative advantage was first explained by Robert Torrens in 1815.

Summary

§  Absolute advantage is the advantage of one country over another if it can produce higher number of goods with the same resources than other countries. On the other hand, comparative advantage is the ability of a country to make a particular item better than other countries.

§  Under absolute advantage, mutually beneficial trade is not possible, comparative advantage provides for mutually beneficial trade between countries.

§  Opportunity cost is a factor that is taken into consideration when talking about comparative advantage, while it is only cost that is a factor when absolute advantage is talked about.

Heckscher – Ohlin Theory

Heckscher and Ohlin argues that comparative advantage arises not prom the productivity, but from the differences in national factor endowments. By factor endowments they mean the extent to which a country is endowed with resources. The more abundant a factor, the lower its cost.

The Heckscher – Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

Relative, not absolute, endowments are important; a country may have larger absolute amounts of land and labor than another country, but be relatively abundant in one of them.  A key assumption in this theory is that technologies are the same across countries.

Product Life Cycle (PLC) Theory

According to the PLC theory of trade, the production location for many products moves from one country to another depending on the stage in the product’s life cycle.

The Product Life Cycle consists of four stages:

§  Introduction

§  Growth

§  Maturity, and

§  Decline

INTRODUCTION

The Introduction stage is marked by

§  Innovation in response to observed need,

§  Exporting by the innovative country,

§  Evolving Product Characteristics.

GROWTH

The Growth stage is characterized by

§  Increases in exports by the innovating country.

§  More competition

§  Increased capital intensity

§  Some foreign production

MATURITY

The Maturity stage is characterized by

§  Decline in exports from the innovating country

§  More product standardization

§  More capital intensity

§  Increased competitiveness of price

§  Production start-ups in emerging countries

DECLINE

The Decline stage is characterized by

§  Production increased in emerging economies

§  Innovating country becoming net importer

Change in Economic Systems?

1.       Market economy:

In a pure market economy, the goods and services that a country produces, as well as the quantity in which they are produced, is not planned by anyone. Rather price and quantity are determined by supply and demand. For a market economy to work there must be no restrictions on either supply or demand -- no monopolistic sellers or buyers. The recent legal battle with the federal government and Microsoft is an example of an attempt by government to remove from Microsoft what it perceived to be business restrictions that resulted in monopolistic operations.

2.       Command economy:

In a pure command economy, the government plans what goods and services a country produces, the quantity in which they are produced, and the price at which they are sold. Resources are allocated “for the good of society.”  The government owns most, if not all, businesses, including even small businesses like the bread bakery and the local farm. Command economies are found in communist countries where collectivist goals are given priority over individual goals. France and India have both experimented with extensive government planning and state ownership, although in both countries government planning has recently fallen into disfavor. In this system, state owned enterprises show little interest to control costs and be efficient. There is a general lack of dynamism and innovation in command economies are visible, since there is no incentives for individuals to look for better ways of serving customers.

3.       Mixed economy:

A mixed economy includes some elements of each. While most business is privately owned and operated under market principles, health care, electrical power, and liquor distribution are run by state owned enterprises in most provinces.

4.       State-Directed:

In a state-directed economy, the government plays a significant role in directing the investment activities of private enterprises through “industrial policy.” In both situations, the government has played a significant role in directing investment. This direction has helped in the creation of some leading international firms. For a state-directed economy to work well, state bureaucrats must make better decisions than capital markets on the allocation of resources. While state bureaucrats may be able to take a longer-term perspective than capital markets, they may also prove to be intransigent and resistant to making necessary changes.

Difference Between common law, civil law and contract law system?

Contract law 

Contract law is the body of law that enforces a contract Specifies conditions under which an exchange is to occur. It’s a Details rights and obligations of parties. Contract law can differ significantly across countries, and as such it affects the kind of contracts an international business will want to use to safeguard its position should a contract dispute arise.

Common Law

The common law and civil law systems are the products of two fundamentally different approaches to the legal process. In civil law, the main principles and rules are contained in codes and statutes, which are applied by the courts codes. Hence, codes and statutes prevail, while case law constitutes only a secondary source of law. On the other hand, in the common law system, the law has been dominantly created by judicial decisions, while a conceptual structure is often lacking. This difference is the result of different role of legislator in civil law and common law. The civil law is based on the theory of separation of powers, whereby the role of legislator is to legislate, while the courts should apply the law. On the other hand, in common law the courts are given the main task in creating the law.

Civil Law

The civil law is based on codes which contain logically connected concepts and rules, starting with general principles and moving on to specific rules. A civil lawyer usually starts from a legal norm contained in legislation, and by means of deduction makes conclusions regarding the actual case. On the other hand, a lawyer in common law starts with the actual case and compares it with the same or similar legal issues that have been dealt with by courts in previously decided cases, and from these relevant precedents the binding legal rule is determined by means of induction. A consequence of this fundamental difference between the two systems is that lawyers from the civil law countries tend to be more conceptual, while lawyers from the common law countries are considered to be more pragmatic.

What are the factors in Porter’s Diamond theory and how it is relevant of achievement comparative advantage?

Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit.  Factor endowments include land, natural resources, labor, and the size of the local population. Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish f o r their industries.

The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are:

ü  The availability of resources and skills

ü  Information that firms use to decide which opportunities to pursue with those resources and skills

ü  The goals of individuals in companies

ü  The pressure on companies to innovate and invest

I.  Factor Conditions

§  A country creates its own important factors such as skilled resources and technological base.

§  The stock of factors at a given time is less important than the extent that they are upgraded and deployed.

§  Local disadvantages in factors of production force innovation. Adverse conditions force firms to develop new methods, and this innovation often leads to a national competitive advantage.

II. Demand Conditions

§  When the market for a particular product is larger locally than in foreign markets, the local firms devote more attention to that product than do foreign firms, leading to a competitive advantage when the local firms begin exporting the product.

§  A more demanding local market leads to national advantage.

§  A strong, trend-setting local market helps local firms anticipate global trends. 

§  Political decision by foreign governments; and

§  Wars.

How Economic Transformation?

Deregulation

Deregulation involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. In mixed economies, deregulation has involved abolishing laws that either prohibited private enterprises from competing in certain sectors of the economy or regulated the manner in which they operated.

Privatization

Privatization transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction. Privatization is seen as a way to unlock gains in economic efficiency by giving new private owners a powerful incentive--the reward of greater profits--to search for increases in productivity, to enter new markets, and to exit losing ones.

Implications

The global changes in political and economic systems discussed above have several implications for international business. The free market ideology of the West has won the Cold War and has never been more widespread than it was at the beginning of the millennium. Although command economies still remain and totalitarian dictatorships can still be found around the world, the tide is running in favor of free markets and democracy.

High-context and Low-context Culture

ü  High-context cultures (including much of the Middle East, Asia, Africa, and South America) are relational, collectivist, intuitive, and contemplative.  This means that people in these cultures emphasize interpersonal relationships.  Developing trust is an important first step to any business transaction.  According to Hall, these cultures are collectivist, preferring group harmony and consensus to individual achievement.  And people in these cultures are less governed by reason than by intuition or feelings.  Words are not so important as context, which might include the speaker’s tone of voice, facial expression, gestures, posture—and even the person’s family history and status.  A Japanese manager explained his culture’s communication style to an American:  “We are a homogeneous people and don’t have to speak as much as you do here.  When we say one word, we understand ten, but here you have to say ten to understand one.”  High-context communication tends to be more indirect and more formal.  Flowery language, humility, and elaborate apologies are typical.

ü  Low-context cultures (including North America and much of Western Europe) are logical, linear, individualistic, and action-oriented.  People from low-context cultures value logic, facts, and directness.  Solving a problem means lining up the facts and evaluating one after another.  Decisions are based on fact rather than intuition.  Discussions end with actions.  And communicators are expected to be straightforward, concise, and efficient in telling what action is expected.  To be absolutely clear, they strive to use precise words and intend them to be taken literally.  Explicit contracts conclude negotiations.  This is very different from communicators in high-context cultures who depend less on language precision and legal documents.  High-context business people may even distrust contracts and be offended by the lack of trust they suggest.

Market orientation

1. ETHNOCENTRIC ORIENTATION:

The ethnocentric orientation of a firm considers that the products, marketing strategies and techniques applicable in the home market are equally so in the overseas market as well. In such a firm, all foreign marketing operations are planned and carried out from home base, with little or no difference in product formulation and specifications, pricing strategy, distribution and promotion measures between home and overseas markets. The firm generally depends on its foreign agents and export-import merchants for its export sales.

2. REGIOCENTRIC ORIENTATION:

In regiocentric approach, the firm accepts a regional marketing policy covering a group of countries which have comparable market characteristics. The operational strategies are formulated on the basis of the entire region rather than individual countries. The production and distribution facilities are created to serve the whole region with effective economy on operation, close control and co-ordination.

3. GEOCENTRIC ORIENTATION:

In geocentric orientation, the firms accept a worldwide approach to marketing and its operations become global. In global enterprise, the management establishes manufacturing and processing facilities around the world in order to serve the various regional and national markets through a complicated but well co-ordinated system of distribution network. There are similarities between geocentric and regiocentric approaches in the international market except that the geocentric approach calls for a much greater scale of operation.

4. POLYCENTRIC OPERATION:

When a firm adopts polycentric approach to overseas markets, it attempts to organize its international marketing activities on a country to country basis. Each country is treated as a separate entity and individual strategies are worked out accordingly. Local assembly or production facilities and marketing organizations are created for serving market needs in each country. Polycentric orientation could be most suitable for firms seriously committed to international marketing and have its resources for investing abroad for fuller and long-term penetration into chosen markets. Polycentric approach works better among countries which have significant economic, political and cultural differences and performance of these tasks is free from the problems created primarily by the environmental factors.

Identify the different types of ethical theories?

	Consequentialism	Deontology	Virtue Theory
example	Mill's utilitarianism	Kantian ethics	Aristotle's moral theory
abstract description	An action is right if it promotes the best consequences.	An action is right if it is in accordance with a moral rule or principle.	An action is right if it is what a virtuous agent would do in the circumstances.
more concrete specification	The best consequences are those in which happiness is maximized.	A moral rule is one that is required by rationality.	A virtuous agent is one who acts virtuously, that is, one who has and exercises the virtues.  A virtue is a character trait a human being needs to flourish or live well.

State: A state is a sovereign political institution which governs over civil society, which is made up of individuals. The political institution combined with its civil society can also be referred to as the state.

Civil society: This is an organized collection of individuals who participate in various groups which make up the society. The civil society is governed by the state, but is not a part of the political institution.

Power: Power, by the classical sociological definition, is the use or threat of force in order to influence other people's actions.

Sovereignty: This is the legitimate use of power in order to govern a body of individuals. An institution that is sovereign answers to no higher power and is therefore autonomous.

Individual: Individuals are people who live and function within civil society and are governed by the state. However, throughout history, who is regarded as an individual has been debated since different groups of people (and animals) have gained or lost rights that have been attributed to legitimate individuals.

Virtue: Virtue is the moral excellence of an individual. In other words, virtue is the measure of "goodness" in a person.

Private property: Private property has been defined in different ways across the theories, but it can be generalized; private property is property that individuals can appropriate for themselves, and which society and the state have sanctioned the individual's right to use it in whatever way he or she sees fit.

Capital: Capital is wealth used to make more wealth. It can be accumulated, spent, and exchanged. Its second definition is the money which is used as an input along with the means of production and labor for the goal of making profit.

Means of production: The means of production are those inputs that are not capital or labor. In other words, these are the technical tools used to produce commodities.

Labor: Labor is work produced by humans in order to change raw materials into commodities.

Commodity: A commodity is an end product, with the inputs of capital, labor, and means of production. Commodities are sold to consumers in order to satisfy their demands and to provide the producer with revenue (and hopefully profit).

Nation: A nation is a collection of individuals based on some sort of commonality, whether that be a common language, ethnicity, culture, or all of the above. A nation is different from a state because it does not necessarily have a formal political institution that governs the people that belong in it.

Mercantilism: Mercantilism is a political economic system based on the central belief that there is only a fixed amount of wealth in the world and that the state should take precedence over the individual in order to effectively maximize its wealth. The power of the state increases its wealth and vice versa.

Liberalism: Liberalism is a political economic system based on the central belief that wealth comes from labor and that there is a flexible amount of wealth in the world. The individual is virtuous and can govern himself even with a limited government.

Marxism: Marxism is a political economic system based on the central belief that wealth and private property is detrimental and at times dangerous for individuals. Marxists strive to control the factors of production in a socialist system in order to gain enough infrastructures to support a communist utopia, where private property and a government do not exist. Marxism is divided into two polar camps of thought; one which does not believe in the possibility of a Communist Utopia (as Marx never did) and another which believes that a classless society can be created not only in relation to the means of production but in inter-class relations as well. This divide is labeled as a schism between Marxists and Communists.

Monarchy: A system of government with a king or queen as the leader.

Democracy: A system of government wherein each individual of the society has a direct influence over the development of both domestic and foreign policy. Such a society has never been achieved as of yet; and in its place has existed a bureaucratic representative system of governing.

Socialism: A system of government where the state controls the factors of production with the goal that institutions will one day be able to support the communist utopia (and the elimination of both state and private property).

Polyarchy: The most widely embraced system of government in contemporary society, Polyarchy is a system in which a vast majority of citizens are ruled over by a small cadre of the obscenely wealthy in a system of representative democracy.