...Assignment 4 Political Geography and International Economics Oct 18,2012 Question 1 answer： According the theory of external scale economic, it means when abundant companies in the same industry cluster within a small-scale location or specific geographic area, the average cost of their production will decrease, at the same time, the productivity will increase. External scale economic not only reduce the cost, but also force these companies to become more specialization under a competitive environment. Furthermore industry clustering also will attract numerous skilled and unskilled labours, and the transfer of labour in different firms also will promote the whole industry’s technology and knowledge. In addition, clustering helps to promote the development of peripheral industries. When 1898, the first U.S vehicle company Olds has been establish in Detroit. After that, with the development of modern automotive industry, amount of auto companies have been set up there. At the present time, Detroit gradually formed an external scale economic focus mainly on GM, Ford, Chrysler as center, supplemented with peripheral industries, such as auto accessory, auto Research and development. And because of the location of Detroit, which includes the Great Lakes, railways and three international airport terminals, efficient logistic system accelerates the development of external scale economic. In spite of the...
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...International business International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundary. Usually:- Private companies undertake such transactions for profit Governments undertake them for profit and for political reasons. It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc. A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TNC). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets. Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards...
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...Executive summary. The greenfield FDI is a form of direct investment where a parent company starts a new business in a foreign country by setting up new operational facilities. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. In order to decide which country is better for ‘greenfield’ foreign direct investment via sole ownership, the advantages and disadvantages of the countries should be considered. For example, China is a developing country, and during the past 30 years, China’s rapid economic development shows that China has a strong power in developing economic. In recent decades, China stays on one of the leading positions in direct investment and therefore a lot of investments to this country are considered to be profitable for any company or investor. The reasons are simple: the growth of the economy and a large number of different projects. Foreign direct investment in China, due to stable growth potential of the economy and a huge production resources, aimed at both the external and the internal market.The innovative ability is a great attraction for investment managers around the world. In contrast, a lot of foreign investors had chosen China for investment and this resulted in a very big competition. Nevertheless, USA is a successfully developed country. And its economy is the top one in the world. As the most important country in the first world countries, the USA...
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...MFI 442 International Finance-Individual Assignments II Name Institution MFI 442 International Finance-Individual Assignments II Over the years, global businesses are increasing rapidly because most countries are attractive and have lucrative policies that attract foreign direct investments (FDIs). Foreign direct investments are simply business entities operated by a corporation in one country (the home country) but with subsidiaries in the foreign markets (the host countries) (Agarwal, 2009).A perfect example for FDIs is Multinational Corporations (MNCs) which have their parent company located in their home country but with subsidiaries in foreign markets. In most cases, FDIs are operated through joint ventures, franchises or mergers where the parent company of the MNC acquires other businesses in overseas markets (Chaurasia, 2008). The objective of this assignment, therefore, is to discuss and explain further the operations of MNCs and issues surrounding these corporations. Hedging Transaction Exposure Four of the Hedging Techniques Available To MNCs Hedging simply means minimizing or mitigating the effect of the exchange rate exposure. This risk is of three types namely, translation exposure, economic exposure and transaction exposure (Luo, 2001). A transaction exposure is a form of foreign exchange risk which results to loss or gains when operations are carried out or denominated in foreign currency (Hill, 2005). It is a short-term exposure that arises...
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...Chapter 1 Globalization and the Multinational Firm What’s Special about International Finance? Foreign Exchange and Political Risks Market Imperfections Expanded Opportunity Set Goals for International Financial Management Globalization of the World Economy: Major Trends and Developments Emergence of Globalized Financial Markets Emergence of the Euro as a Global Currency Europe’s Sovereign Debt Crisis of 2010 Trade Liberalization and Economic Integration Privatization Global Financial Crisis of 2008–2009 Multinational Corporations APPENDIX 1A: Gain from Trade: The Theory of Comparative Advantage Summary This chapter provided an introduction to International Financial Management. 1. It is essential to study “international” financial management because we are now living in a highly globalized and integrated world economy. Owing to the (a) continuous liberalization of international trade and investment, and (b) rapid advances in telecommunications and transportation technologies, the world economy will become even more integrated. 2. Three major dimensions distinguish international finance from domestic finance. They are (a) foreign exchange and political risks, (b) market imperfections, and (c) an expanded opportunity set. 3. Financial managers of MNCs should learn how to manage foreign exchange and political risks using proper tools and instruments, deal with (and take advantage of) market imperfections, and benefit from the expanded...
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...then M.A. (Econ) and doctorate from the London School of Economics. He is a professor of international finance prior to taking up his present position he was a midland bank member in monetary economics. He had associated with Loughborough University (1982-1984) then got his position as Lecturer and afterward Senior Lecturer then join University of Aberdeen (1984-1989) then University of Dundee (1989-1992) and most recently Professor of International Finance at the University of Strathclyde (1992-2004). REPEC (Research Papers in Economics), the body which provides a ranking of all economists in the world, shows that Ronald MacDonald, Adam Smith Professor of Political Economy, is ranked in the top 5% (at number 29) in the world in the field of International Finance. His main areas of research are applied macroeconomics, financial economics and international finance. He has published over 100 refereed journal articles on topics as diverse as the determination of government expenditure and fiscal deficits, the determination of bond yields and stock prices, and the economics of exchange rates. Most of his recent publications have been in the latter area and have involved modeling exchange rate movements in terms of macroeconomic fundamentals, such as money supplies and interest rates, and producing measures of equilibrium exchange rates. He has acted as a consultant to various international organizations, such as the International Monetary Fund and the European Commission, a variety...
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...on borrowing to funds its operations or lends to others for the same reasons. The objective of this paper is to critically evaluate the current account imbalances of the Kyrgyz Republic, identify the economic contributors to the imbalances and recommend corrective measures through policy development and implementation. The current account deficit can largely be described as a significant percent of a depressed level of the Gross Domestic Product (GDP). Since the deficit emerged early after the country’s transition into an independent state from the Soviet Union, it is largely attributed to the alarming situation where the capital inflows in the country were larger at the beginning of the transition but have since leveled off. In addition, the high demands for imports and exposure of the country to external shocks are among the factors that have caused the country’s foreign exchange reserves and foreign direct investments to declines. These result in a balance of payment crisis that are further exacerbated by the financial sector that requires comprehensive reforms. There have been numerous economic, social and political changes since the country’s independence that have continued to exert pressure on the country’s ability to sustain its populations’ living standards. The economic environment in the country has faced various challenges that has sent the country continue depending on foreign aid and...
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...Global Financial Management FIN630 AIU Abstract This paper will have a comparative advantage of Vernon's product life-cycle theory of FDI. It will discuss green field investments over cross-border acquisitions and political risk of capital budgeting process of foreign investment projects. It will also discuss forward versus backward internalization and currency exchange risk into the capital budgeting process of foreign investment. Global Financial Management Vernon’s Product Life-Cycle Theory Raymond Vernon proposed his Product Life Cycle (PLC) theory in the mid 1960’s, based on product development and international trend observations of the US role at the time. The PLC theory stated that new products would first be developed and introduced in the US. Advanced markets, such as Europe and Japan, had their demand grow which caused the US to export the new product until the demand levels in the foreign country required the production in the advanced markets. Cost factors become significant as the product reached a maturity phase in the life cycle which warrants the production at the most efficient location. That results in advanced markets exporting the product back to the US. The product is produced in plants located in developing countries because these countries hold a relatively low cost production advantage, as competition further increased in the global market place. The product would once again be exported back to the US (Hill, 2009). Firms will commence...
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...International political economy (IPE), also known as global political economy, is an academic discipline within the social sciences that analyzes international relations in combination with political economy. As an interdisciplinary field it draws on many distinct academic schools, most notably political science and economics, but also sociology, history, and cultural studies. The academic boundaries of IPE are flexible, and along with acceptable epistemologies are the subject of robust debate. This debate is essentially framed by the discipline's status as a new and interdisciplinary field of study. Despite such disagreements, most scholars can concur that IPE ultimately is concerned with the ways in which political forces (states, institutions, individual actors, etc.) shape the systems through which economic interactions are expressed, and conversely the effect that economic interactions (including the power of collective markets and individuals acting both within and outside them) have upon political structures and outcomes. IPE scholars are at the center of the debate and research surrounding globalization, both in the popular and academic spheres. Other topics that command substantial attention among IPE scholars are international trade (with particular attention to the politics surrounding trade deals, but also significant work examining the results of trade deals), development, the relationship between democracy and markets, international finance, global markets, multi-state...
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...CAPITAL BUDGETING FOR MULTINATIONALS 13.1 INTRODUCTION Although the original decision to undertake an investment in a particular foreign country may be the outcome of combination of strategic, behavioural and economic considerations, choice of a specific project within a particular product-market posture calls for evaluation of its economic feasibility. For this purpose, capital budgeting exercise has to be done. A firm should deploy funds in a project if the marginal revenue obtained there from exceeds the marginal cost. For an MNC, capital budgeting involves economic analysis of the firm's direct investment opportunities. Whatever be the motive for Direct Foreign Investment (DFI), an MNC's very survival and sustainable competitive position depends on its ability to identify and choose the most profitable investment opportunity. Capital budgeting technique provides the mechanism to identify opportunities and evaluate their economic viability. This is why MNCs evaluate international projects by using capital budgeting techniques. Proper use of capital budgeting techniques can help the firm in identifying the international projects worthy of implementation from those that are not. 13.2 FUNDAMENTALS OF EVALUATING FOREIGN PROJECTS Once a firm has compiled a list of prospective investments, it uses capital budgeting techniques to select from among them that combination of projects that maximizes the firm's value to shareholders. The theoretical framework involved in evaluation...
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...Journal of Finance and Economics, 2014, Vol. 2, No. 3, 58-59 Available online at http://pubs.sciepub.com/jfe/2/3 © Science and Education Publishing DOI:10.12691/jfe-2-3 Rethinking Multinational Enterprises’ Capital Budgeting in the Globalized New Millennium Fabio Pizzutilo* Department of Business and law studies, University of Bari *Corresponding author: fabio.pizzutilo@uniba.it A strict interpretation of the Ricardian assumptions on international trade leads to a conclusion in favour of the impossibility of a firm investing abroad. Even extending the Ricardian model by including capital among the factors of production, it has to be supposed that, from a purely economic and financial perspective, the choice between directly investing abroad and not doing so is totally indifferent. It is the existence of imperfections in the real and/or financial markets that give rise to the convenience for a firm to exploit its competitive advantages through foreign direct investment (FDI). In a broad sense, a multinational enterprise (MNE) can be intended as a company that holds controlled firms, producing branches, divisions, establishments, subsidiaries, etc., in a foreign country. The reasons that can persuade a firm to become multinational are manifold. First of all, it can be the sole action in order to conduct a specific business. Think about the activity of the extraction of raw materials: it cannot be conducted anywhere other than the mine’s location. Many firms are seeking greater...
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...longer period, the realization has grown that the Western Pacific region-which includes Japan, Korea, Taiwan, Hong Kong, the ASEAN countries (the Philippines, Thailand, Malaysia, Singapore, and Indonesia) and China-is one of the most dynamic areas in the world in terms of economic growth and development. "It is true that China and India are certainly very large in size," Neumann added. "At the same time these [PPP] measures shouldn't be the be-all and end-all of international comparisons. When, for example, we measure international purchasing power expressed in dollars, which matters in international trade, the U.S., Europe and Japan continue to be the dominate economies in the world." China's economy grew an annual 7.4 percent in the first quarter of this year, slowing from a 7.7 percent increase in the final quarter of 2013. Still, its economic growth continues to outpace that of developed world economies. China’s economy suffered economic downturns during the leadership of Chairman Mao Zedong, including during the Great Leap Forward from 1958 to 1960 (which led to a massive famine and reportedly the deaths of tens of millions of people) and the Cultural Revolution from 1966 to 1976 (which caused political chaos and greatly disrupted the economy). Since 1979, China’s average annual real GDP has grown by nearly 10%. This has meant that, on average, China has been able to double the size of its economy in real terms every eight years. CHINA’S RISE TO TRADING SUPERPOWER...
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...Comparative & Absolute Advantage There are many different advantages that can be gained when working in the different economic markets. There are two advantages known as a comparative advantage and an absolute advantage. Absolute advantage is known for the capability of a individual or country to produce a good or service with less assets than another country or individual. Comparative advantage is the capacity of an individual or country to manufacture a particular product for a lower opportunity rate than another individual or country. Comparative advantage in the production of cheese can result in a much more constructive balance when it comes to trade for Rodamia. While international trade offers many advantages, there can be several disadvantages as well. The process known as dumping is a limitation of International Trade this occurs when a country elects to sell exported products at a lower cost than it does to its local residents. Romadia was left with two alternatives, whether to impose tariffs, or set a quota on its import products. These alternatives will generate an unfavorable effect since it will cause a shortage and an increase in the cost of the products. The increase in price will lower the demand for the products. As a result, these effects will hinder the company’s growth. Influencing Foreign Exchange Rates Foreign Trade is one of the things that have a strong hold on the way the economy works globally. The one thing that ties the entire world together...
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...GDP growth and inflation rate; secondly, there is a discussion on the foreign exchange risks of Rutitania Crown against international currency; third, the issue of joining the Euro zone will be analyzed in terms of benefits and drawbacks; next, the taxation effect in the investment decision making will be accessed and finally there will be a discussion on the political environment. THE NATIONAL ECONOMY AND THE IMPLICATIONS FOR THE PROJECT 2.1 The Relationship between National Economy and the Foreign Direct Investment (FDI) The economic growth of the host nation has always had a positive relationship with the foreign direct investment decision making. The positive effect of host country economic growth on investment decision making has been supported by various studies (Ericsson and Irandoust, 2000; Dhakal, Kamal and Upadhyaya, 2007; Barrell and Pain, 1996; Grosse and Trevino, 1996; Taylor and Sarno, 1999; Trevino et al., 2002). Traditionally the economic growth of the host nation induces FDI inflow when FDI is seeking consumer markets, or when the economic growth leads to greater economies of scale and, increased cost efficiency of the project. The FDI is more likely to exist in healthy and open economies with steady growth. In addition, an earlier study by McGowan and Moeller (2011) has also argued that the causal relationship between FDI and economic growth of the nation in the long run. 2.2 The Implications for Ruritiania...
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...of Foreign Direct Investment on Capital Flight. We use data from the World Bank on African Development indicators; Kenya 1970:2008. We use econometric technique in our analysis. Our literature survey reveal that key factors that explain capital flight are; net foreign direct investment, current account deficit, change in official reserve, and external debt. We expect our main findings to findings to be as follows: (i) Net foreign direct investment to have a positive effect on capital flight, (ii) Change in eternal debt to have a positive effect on the capital flight, (iii) current account deficit to have a negative effect on the capital flight, (iv) Change in official reserve to have a negative effect on the capital flight. Keywords: Economic growth; capital...
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