ib chapter 6
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. What would you like to do?
Identify the four entry modes used by international companies in entering new markets.
exporting, licensing/franchising, joint ventures, and wholly/fully owned subsidiaries.
What are some of the advantages (at least 2) and disadvantages (at least 2) of exporting?
- PROS: small and large companies to tap into a new market with minimal time and effort with minimal risk
- CONS: higher transportation costs and logistical costs
Why and when do international companies use joint ventures?
(1) when the market potential is high and at the same time (2) their own market knowledge is limited, when it wants to (3) limit its financial exposure, (4) to avail of incentives provided by host governments that encourage joint ventures, and to (5) comply with host country laws that restrict wholly owned subsidiaries
M & A
a foreign company acquires a local company that will shorten the set up time and have it operational very quickly and, hence, beat out competitors who might choose other modes of entry
the establishment of a wholly new operation in a foreign country. It is good to begin with a fresh start and can mold the firm into the type it wants.
Compare the four entry modes. Which is the best?
If an international company has limited capital and not sure of the market potential, then it is better for the company to use exports or licensing/franchising. On the other hand, capital is not an issue and the market potential is high, it is better for an international company to enter into a joint venture arrangement or set up a wholly owned subsidiary. The best depends.
List and define six main instruments of trade policy (L)
Tariffs, subsides, Import Quotas, (Voluntary Export Restraints), Local Content Requirements, Administrative Polices, Antidumping Policies
levied as a fixed charge for each unit of a good imported
Ad valorem tariffs
levied as a proportion of the value of the imported good
taxes levied on imports that effectively raise the cost of imported products relative to domestic products, proproducer and anticonsumer
government payments to domestic producers, Consumers typically absorb the costs of subsidies
directly restrict the quantity of some good that may be imported into a country
Tariff rate quotas
a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
Voluntary export restraints
quotas on trade imposed by the exporting country, typically at the request of the importing country’s government
local content requirements
some specific fraction of a good be produced domestically, benefit domestic producers, but consumers face higher prices
bureaucratic rules that are designed to make it difficult for imports to enter a country. These polices hurt consumers by denying access to possibly superior foreign products
punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition
two main economic arguments for intervention (L)
the infant industry argument, strategic trade policy
infant industry argument
industry should be protected until it can develop and be viable and competitive internationally, has been accepted as a justification for temporary trade restrictions under the WTO
strategic trade policy
in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages
What are the two major arguments against “the infant industry argument?”(L)
1. difficult to gauge when an industry has “grown up” 2. if a 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
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