Global Business Environments MNI 3701 Revision Slides (Part Two)

Contents: Basic overview of Chapters 6 – 8 of the prescribed book - Global Trade and Investments 6 - Global Monetary Systems and Foreign exchange markets 7 – The Political Economy 8 – Foreign direct investment (FDI) and capital markets

Chapter 6 - Monetary systems and foreign exchange markets Key Concepts that you should know: The International Monetary System The Foreign Exchange Market (functioning; structure and participants) Foreign Exchange rates (concepts – foreign exchange; exchange rate and foreign exchange transaction; direct and indirect quotes; bid, ask, spread; spot and forward transactions; currency swaps; cross-rates and arbitrage)

Chapter 6 (contd). Exchange rate determination -Determinants Law of one price; purchasing power parity; Relationships between exchange rates; interest rates and inflation rates – the Fischer effect; the international Fischer effect Behavioral finance Exchange rate forecasting – market efficiency and approaches; International capital markets (money and capital; scope, structure and functions; euro currency; bonds; equity market.

7. The Political Economy Key concepts you should know: Regulating trade - Reasons for barriers: 1 – Protection of local jobs 2 – Import substitution 3 – Protection of infant industries 4 – Reduction of reliance on foreign suppliers 5 – Attraction of local production and foreign investment

Chapter 7 (contd). Reasons for barriers (contd): 6 – Reduction in balance of trade payments or deficits 7 – Promotion of exports 8 – Antidumping remedies 9 – Political objectives or retaliation 10 – Protection of national sovereignty

Chapter 7 (contd). Implications of trade barriers: Generally arbitrary; discriminatory in nature and applied subjectively. Application requires special training; supervision and administration. Administration adds to microeconomic problems. Encourages special-interest privileges. Increase government intervention in trade and economic matters.

Chapter 7 (contd). Instruments of trade policy 1 – Tariffs: definition and types - ad valorem; export and transit; 2 – Subsidies: definition ; discouraging foreign imports and gaining export markets. 3 – Quotas: definition and types – import; voluntary export restraint (VER); local content requirements; ‘buy national’ restrictions; technical barriers

Chapter 7 (contd). Dumping : definition; antidumping policies and countervailing duties.

8. FDI and capital markets Definition of FDI Advantages relative to international portfolio investments: 1 – FDI Does not destabilise domestic capital; 2 – FDI sensitises investors to domestic communities needs; 3 – FDI offers opportunities for firms to internationalise operations beyond licensing and exporting; 4 – Spillover effects of FDI, i.e., transfer of new production technology; 5 – Local firms and governments build absorptive capacity; 6 – FDI aids economic growth where there is a lack of domestic resource capacity

Chapter 8 (contd). Different forms (acquisition; joint venture or merger; greenfield investment) Theories ( International trade and finance theories; industrial organisation theories; transaction cost theories; the eclectic paradigm; the investment development path theory; new trade theory and knowledge capital model.

Chapter 8 (contd). Technology transfer Absorptive capacity – at firm level and at country level Economic growth theories Emerging theoretical framework

Chapter 8 (contd). Government incentives for attracting FDI: (Size, location or industry; relative cost or potential profit; altering the risks); Advantages and disadvantages: lower corporate income tax rates; tax holidays; investment allowances and tax credits; accelerated depreciation; exemptions from indirect taxes and export processing zones; Functions of investment promotion agencies; Types of investment incentives- Financial and fiscal.