Bus 40 International Business

Global Business Today: Chapter 6- Case Discussion Questions

1. The history of Electrolux has demonstrated that the company has always looked to markets outside its home country of Sweden for sales of its household appliances. In the early 1990’s the company could see that the markets that they had established in Western Europe and North America had matured; meaning that future growth in these same markets would be very limited. However, the company reasoned that demand for household appliances in other parts of the world would surely increase. This would especially be true in areas such as Asia, Eastern Europe and Latin America. General Electric and Whirlpool, also large household appliance manufacturers, made similar plans at this time to expand their markets into these areas.Therefore, in order to stay competitive and to maintain its growth rate, it was necessary for Electrolux to act quickly and aggressively pursue these markets.

2. The goal of Electrolux to expand their market was ambitious. The company realized that to accomplish their goals they must take advantage of different options before them. One option, for example, would be to acquire existing companies that already had manufacturing facilities and a strong consumer presence in a particular area. This was the case when they bought Lehel, Hungary’s largest maker of household appliances. In doing so they were able to quickly establish a consumer base in this country and avoid the costly start-ups those new production facilities would have required. However, Electrolux opted for wholly owned subsidiaries in other countries such as Russia, Poland, and the Czech Republic. Their reasoning could have been that suitable production facilities were not available in these countries, thus making green-field investments the only other reasonable option. 

3. It is likely that given the aggressive approach that Electrolux has taken in market expansion, that the company realizes that globalization is not just a trend, but in reality that will continue to effect world economy. No doubt they view the whole world as a market. This being the case, barriers still exist for them to gain a global market share. For example, tariffs on some foreign products can dramatically increase the cost to consumers in the countries that import these products. Often, these tariffs are designed to protect the jobs of the competitors in the host countries. Transportation costs associated with certain products being exported to other countries can also have similar effects on consumer prices. Research has shown that in many cases it is more economical for a company to have production facilities close to the consumer market in which they desire to expand. These are some likely reasons for the preference that Electrolux has shown in using foreign direct investments, as opposed to exports, in gaining a share in foreign markets.

4. The household appliances that are manufactured by Electrolux find many competitors worldwide. Some of these companies, along with Electrolux, are major players in the global marketplace. Rival companies such as General Electric, Whirlpool, and Bosch-Siemans have also taken an aggressive approach in expanding their market on a global scale. It is likely that these major competitors keep a close watch on the other’s moves, especially when it concerns their foreign direct investment patterns. Accordingly, Electrolux has shown a general tendency to establish its market where these other companies have made, or are in the process of establishing, production facilities.
Electrolux moved quickly to expand its market into other foreign markets when their main rivals announced plans to move into these areas. Though other FDI theories cannot be ruled out, this imitation behavior by Electrolux seems to support the strategic behavior theory.

** Minor mechanical errors/typos have been corrected by the creators of CHARLIE

Bus 40 International Business
Internet Assignment #2 (Chapter 5)

[Instructor comments appear in bold, italic font within brackets below.]

The World Trade Organization (WTO), the International Money Fund (IMF), and the World Bank

1. What is the WTO’s goal and what are the functions of this organization?

The WTO or World Trade Organization is a global international organization that deals with the rules of trade between nations. “The goal of the WTO is to help the trade process to be free, smooth, predictable and as fair as possible. It does this by the following functions:

• Administering trade agreements
• Acting as a forum for trade negotiations
• Setting trade disputes
• Reviewing national trade policies
• Assisting developing countries in trade policy issues, through technical assistance and training programmers
• Cooperating with other international organizations

The WTO is the successor to GATT (General Agreements on Tariffs and Trades). Much like its successor the WTO’s decision-making process is based on consensus from its 130 members. These members represent over 90% of world trade” (www.wto.org). The WTO negotiates agreement between different countries to administer trade agreements. The WTO’s agreement acts as rules, these rules help to ensure the organizations ability to reach its goals of keeping trade smooth flowing, predictable, and fair.

2. What is the IMF and its functions?

The IMF or International Money Fund is an “international organization that was established to promote international monetary cooperation, exchange stability and orderly exchange arrangements” (www.imf.org). Its hope is to establish and promote economic growth. The IMF provides temporary financial assistance to countries that need help. The primary functions of the IMF are to provide Surveillance, Financial, and Technical Assistance. The surveillance of the IMF is a process that is done through monitoring and consultation. This is done as a protection for countries from economical policies of different countries, which could affect their own country. The IMF provides surveillance by monitoring these changes. “Another function of the IMF is providing Financial Assistance to countries that are having problems with the Balance-of-payments. By providing financial assistance the IMF is helping to restore conditions of sustainable economic growth as well as giving these countries the ability to rebuild their international reserves, stabilize currencies and pay for imports without having to impost trade restrictions. Another function of the IMF is providing Technical Assistance by helping countries to strengthen their human and institutional capacity. The IMF contributes to the development of the productive resources of member countries and by enhancing the effectiveness of economic and financial policies” (www.imf.org).

3. To whom does the IMF make loans and what is the mechanism by which these loans are made?

The IMF gives loans to countries that are experiencing Balance-of-Payment problems. By giving these loans, the IMF is providing these countries with the opportunity of not having to impose trade restrictions or capital controls. “The IMF loans also make it possible for these countries to rebuild their international reserves, restore the conditions that are necessary for economic growth and stabilize their currencies” (www.imf.org). The countries that are applying for these loans must meet specific conditions to be applicable for the loans that are specified under the “arrangement” in which they are given. The loan must be approved by the IMF Executive Board in a “letter of intent.” Once the loan has been approved, they are released in installments that are phased as the program is carried out. “The IMF’s loan volume has shown to shift irregularly over time and there have been periods of drastic increase in lending” (www.imf.org).

4. What is the World Bank and what does it do?

The World Bank is an international organization that has the goal of fighting poverty. The World Bank has set up a strategy that includes poverty-focused lending in order to reach these goals. The loans that are issued from the World Bank are used in more than 100 developing economies. The hope of the World Bank is to be able to improve living standards and do away with the most unfortunate forms of poverty. The World Bank has an extensive membership of over 180 member countries. These countries come together to make decisions on behalf of the World Bank. “The World Bank is one of the world’s largest sources of development assistance. It has established effective poverty reduction strategies and poverty-focused lending that are central to achieving the banks objectives. Through its loans, along with its policy advice and technical assistance, the World Bank supports an expansive range of programs. These programs are all geared to the World Bank’s goal of reducing poverty and improving living standards in developing worlds” (www.worldbank.org).

Sources:

The World Trade Organization website, www.wto.org
The International Money Fund website, www.imf.org
The World Bank website, www.worldbank.org

[Instructor end comment: Outstanding report!]

** Minor mechanical errors/typos have been corrected by the creators of CHARLIE

Bus 40 International Business
Homework Assignment

[Instructor comments appear in bold, italic font within brackets below.]

1. Do you think governments should take human rights considerations into account when granting preferential trading rights to countries? What are the arguments before and against taking such a position?

My answer would be yes. Popular consensus has the power to change government opinion as to what policy to pursue. I had to reread the chapters and do a little research into the websites for the United Nations, WTO, human rights watch, etc…

According to Human Rights Watch, the Chinese government stepped up its repression of political dissidents in 1996 after the Clinton Administration removed human rights as a factor in determining trading status. I was surprised to find when looking at the website for the United Nations that China joined on Oct. 24, 1945, the same day as the United States as a member nation.

I am using the case of China to illustrate my arguments for and against whether a country should receive preferential trading rights. In this case, China was seeking MFN status. In the public eyes, China had poor labor laws. The difference in tariffs for non-preferential trading and preferential trading ranged from 8-40% (that’s an enormous difference). We granted them MFN status anyways. The sanctions we have placed on China for human rights abuses have done little to change them, so in this case it didn’t work. In the argument against government consideration, critics felt that by granting China MFN status, their economic status would improve and human rights policies would change as a result of economic progress. WTO members automatically receive MFN status when they join. China didn’t join the WTO until 2001. My point here is that now China has automatic MFN status anyway. I am wondering now if the WTO has sovereignty over our decisions. Also in a way, we would be less competitive if we turned China down on MFN status over a question of human rights. How much control do we have anyways? [Great!]

In the case of South Africa Sanctions and Embargoes did much to bring about change and caused Apartheid to end, although investment led boycotts against Cuba and Iran have failed to have a similar impact.

2. Whose interests should be the paramount concern of government trade policy-the interests of producers (business and their employees) or of the consumers?

I believe policy needs to look after the interests of both business and consumers. The government, in representing the interests of producers, has a responsibility to have policy that will ensure that our producers will have a competitive advantage in the world market. The theories outlined in strategic trade policy are designed to help business capture first mover advantages. We, as a nation, have made many mistakes, such as in the steel industry, where we protected the market tool manufacturers and developed too many protectionist policies. This resulted in local tool machine manufacturers creating more expensive machine tool parts, which caused manufacturing costs to go up and output to fail. Everyone lost in the long run, the machine tool manufacturers, the manufacturing industry and the consumer. This does not mean we do not learn from out mistakes. We need to evolve in policy-making development. The case studies outlined are only chosen examples. Small business firms are a very important growing sector, and represent growing income for our economies. They will have an entirely different influence on building policy.

In the eyes of the book, government intervention can be self-defeating, as it sometimes protects the inefficient, or triggers trade wars. The European Cap pertaining to agriculture was a fiasco for both business and consumers. On the other hand, if the government doesn’t set policy to protect the interests of business, then global firms may take an unfair advantage, as in the case of the steelmakers. The steel industry has been very aggressive in bringing antidumping actions against foreign steelmakers. They went to the International Trade Commission and filed complaints. The ITC agreed and levied tariffs ranging from 18% to 67% on imports of certain steel products from Japan.

In the previous chapter looking at Porter’s theory, he argued that a nation’s firms gain competitive advantage if their domestic consumers are sophisticated and demanding. Such consumers pressure local firms to meet high standards of product quality and to produce innovative products. In this case, a free trade policy will benefit the long-term interests of consumers and business.

3. Given the argument relating to new trade theory and strategic trade policy, what kind of trade policy should business be pressuring government to adopt?

The objective of Chapter Five is to understand how the reality of international trade deviates from the theoretical ideal of unrestricted free trade. New trade theory tells us that the increasing returns to specializations and first mover advantages matter. This theory is principally based on the argument for first mover advantages, where the government uses subsidies to increase the changes of becoming first movers in emerging industries.

From everything I’ve read in Chapter Five, its conclusion points towards book feels, the business community encouraging governments to promote greater free trade and strengthen the WTO. They feel in the long term that business has more to gain from government efforts to open protected markets to imports, and FDI, than from government efforts to support certain domestic industries, and utilized strategic trade policy. [But to obtain first mover advantages, the governments should provide benefits, subsidies, etc.]

4. You are an employee of a US firm that produces personal computers in Thailand and then exports them to the United States and other countries for sale. The personal computers were originally produced in Thailand, to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at the time were Malaysia and Hong Kong. The US government decides to impose punitive 100% ad valorem tariffs on imports of computers from Thailand to punish the country for administrative trade barriers that restrict US exports to Thailand. How do you think your firm should respond? What does this tell you about the use of targeted trade barriers?

In the case study of one of the largest clothing manufacturers in the world “Esquel” found it’s growth opportunities limited by Hong Kong’s quota rights. Esquel soon switched production to mainland China. When China’s textiles began to grab marketshare, European producers lobbied and got import quotas on China. Esquel moved to Malaysia where the same thing caught up with them…then Malaysia, then Mauritius, and so on.

Flexibility in location of production would be key here for this company, and many other global companies. The first would also be able to lobby the government and WTO, to listen to their needs. As I said earlier, we learn from our mistakes or perish.

The first should maintain a forward looking approach, and continue to create ongoing research as to what countries have the best conditions for their manufacturing base, in case the situation changes suddenly.

** Minor mechanical errors/typos have been corrected by the creators of CHARLIE