Discussion Questions
4.1.
Compare and contrast these explanations of foreign direct investment (FDI):
internationalization theory, Vernon’s product life-cycle theory, and
Knickerbocker’s theory of FDI. Which theory do you think offers the best
explanation of the historical pattern of FDI? Why?
Internationalization theory strives to explain whether MNCs use leasing
or licensing methods for selling their products abroad or producing through FDI
by themselves. Simply speaking, it tries to answer the question why a firm
prefers FDI in lieu of producing in the home country and exporting it. In order
to answer that question, it assumes that transportation costs quite high, there
are trade barriers, there will be lack of adequate foreign market information,
and information asymmetries exist between sellers and buyers.
According to Vernon’s theory of product life cycle, an innovation may
take place in the unsatisfied markets where purchasing power and per capita
income are high because the sale of high priced product that contains the
innovation so that the research and development (R&D) costs is possible in
such markets. There is also possible for creating a proper communication
between producers and consumers, and taking feedbacks helps to make product
standardization in the markets. Thus, it can help to differentiate the products
and specializes on particular products. For example, it is possible to shift
from the radio production to table radios, automobile radios and mobile radios.
Knickerbocker's theory of FDI is
based on the idea that FDI flows are a reflection of strategic rivalry between
firms in the global market place (Hill, 2011) .
According to this theory, the action of one firm will lead to competitors
immediately imitating the action. Knickerbocker believes that this similar sort
of imitative behavior characterizes FDI (Hill, 2011) . For instance, such
imitative behaviors can occur in the form of a price decrease by one firm with
a view to improve its market position, others will decrease their prices
accordingly in order not to allow the firm develops a competitive advantage at
their expense. For example, when Japanese firm, i.e. Honda invested its FDI in
the US and Europe in 1980s, and Toyota and Nissan quickly responded by
undertaking their FDI in the US and Europe.
References
Hill, C. W. (2011). International Business: Competing
In the Global Marketplace. New York: McGraw- Hill .
4.2. What are the economic and political
arguments for regional economic integration? Given these arguments, why don’t
we see more substantial examples of integration in the world economy?
Integration is one of the major challenging
tasks for doing an international business. Although integration brings lots of
benefits to the major parties, it may be very costs for the minor parties.
That’s why its concerns over sovereignty often slow or stop integration
attempts.
The economic argument for regional economic integration
(REI) is very simple and straightforward. It allows unrestricted free trade
among the member countries to specialize in the production of goods and
services that they can produce most efficiently. A good example of it is
European Union (EU) where the same currency is used, and many facilities are
provided for trading the goods and services all over the member countries. When
this happens, then it is much easier to trade within the member countries. As a
result, a greater prosperity for the nations of the region can be achieved
without any difficulties. From the
perspective of regional economic integration, it is an attempt to achieve
additional gains from the free flow of business or trade and investment between
countries.
The political argument for regional economic
integration is also significant for doing international business. Cooperating
with neighboring economies and making them increasingly dependent on each other
creates a win-win benefit for the development of member countries. It can be
seen that when it happens, the potential for violent conflict between the
countries are reduced dramatically so that they can create political stability for
international trading. In addition to that, by grouping their economies
together, the member countries can enhance their political weight in the
world.
While it is true that economical and political
arguments for regional economic integration are good for the benefits of all
member countries, it has never been easy to achieve that level. There are three
main reasons why there are no substantial examples of integration in the world
economy. First, it could be good for strong nations or members but it may not
be much fruitful for the weaker countries or members so that it can be
discriminative. Second, there can be concerns over national sovereignty as
well. Third, all countries in the world are not economically and politically
feasible for such integration as a whole so that bilateral free trade agreement
is being used instead.
References
Hill, C. W. (2011). International Business:
Competing In the Global Marketplace. New York: McGraw- Hill .
4.3. Discussion Questions from the Case study “Lakshmi
Mittal and the Growth of Mittal Steel”
Forces
that drove Mittal Steel to start expanding across national borders
There
can be significant forces for Mittal Steel Company to start expanding across
national frontiers. One of the major forces was that there was a range of
restrictive government regulations and tough competitiveness between SAIL (a
state-owned firm) and Tata Steel (large privately owned firm). Another force was that Mittal Steel saw more
opportunities in foreign countries, and predicted the best growth of the
company nationally and globally by applying new method of reducing costs.
Because of these positive factors, in 1975, Mittal Steel began expanding across
national borders by building and creating a steel making plant in Indonesia.
Mittal
Steel’s expansion into different nations through Mergers and Acquisitions
It
can be seen that the global steel industry had been in a difficult situation
for a 25 years due to excess capacity and slow demand as substitute materials
superseded steel in a many applications. At the same time, Lakshmi Mittal, the
CEO of Mittal Company, saw a greater value in buying the assets of such
distressed companies at a cheaper price, and believed that they could be viable
operations through a move towards a greater efficiency and modern technology.
It
is believed that when company goes through a merger and acquisition, it could
be possible to save lots of money that would be invested when Greenfield
investment was used. In a Greenfield investment, the company had to set up all
the necessary things by itself from the ground up phase, and surely that could
be very costly as well as risky. By skipping these risky and costly processes
of setting up from the start, Mittal Steel quickly grabbed the opportunities
that were growing through a merger and acquisition in the foreign countries.
The
benefits and drawbacks that Mittal Steel brings into the foreign countries
It is should be noted that there are
both benefits and drawbacks when a foreign company enters into a different
country. In most cases, there are many advantages than its drawbacks when a
foreign company enters into other countries. For instance, Mittal Steel brings
the benefits such as job opportunities, new technology transfer, and supply of
steel in lower costs in the foreign countries. However, there are some
drawbacks that Mittal Steel brings in the foreign countries such as taking
money out of the county, intense competition for domestic firms, pollution, and
loss of sovereignty.
The
benefits to Mittal Steel from entering different nations
There
are many significant benefits to Mittal Steel from entering different
countries. One of the major advantages is that it can become a global leader
with global expansion so that it can be price setter or monopoly in setting the
price of steel. Another benefit is that it can minimize the risks of trading by
operating its business activities in different countries. For example, when Lakshmi
Mittal was producing steel just in India, there were limited opportunities due
to government restrictions and regulation. However, when it started to expand
into different countries then it got a golden opportunity to manage risks or
costs so that its profit margin could increase substantially after some years.
Last but not the least, the company can lean new culture, management style,
skills and expertise for improving its business activities even in a better
way.
The
objection for the acquisition of Arcelor to many politicians and their
rationale
The
acquisition of Arcelor was bitterly contested, and they thought that it can
create some conflicts in managing the company’s share and management so that
they were objecting to it. I do not think it was reasonable in the sense that
nationalistic behavior could occur. However, it is reasonable in the sense that
when acquisition takes place of course there is monopoly power. By looking its
value, Arcelor’s shareholders agreed to deal with Mittal Steel in late 2006. As
a result, it became a Dutch company, world’s largest steel company,
headquartered in Luxembourg, generated sales of $ 110 billion and net profit of
10.2 billion in 2007.
References
Hill, C. W. (2011). International Business:
Competing In the Global Marketplace. New York: McGraw- Hill .
Lesson 4: Cast Study on NAFTA and the United
States Textile Industry
Introduction
When the effect of The North American Free
Trade Agreement (NAFTA) took place in 1994, many critics believed that a
substantial part of jobs will be moved and lost from the United States to
Mexico. Many people from the US agreed
that this treaty should not be adopted because they thought it will have
negative impact on the US employment. Between 1994 and 2004, the production
fell by 40% and 20% in the textile production in the US. In the same way, the
employment in the textile industry also dropped from 478,000 to 239,000 while
exports from Mexico to the US surged from 1.26 billion to $3.84 billion. It can
be noticed that the critics of NAFTA had a point about the large job losses due
to migrating production from the US to Mexico. However, the effect of NAFTA was
also positive in many ways. For example, due to the NAFTA, the prices of
clothing in the US were reduced since 1994 and it was much beneficial for all
US customers as well. In addition to that, NAFTA has enhanced trading and both
consumers and producers are gaining from it so that its gains outweigh the
losses, however.
In
this paper, I would like to discuss about NAFTA and the United States Textile
industry in detail, and finally strive to come up with a reasonable conclusion.
The reasons for migrating textile jobs out of
the United States after establishment of NAFTA
It is definitely true that when NAFTA took
into effect, the production of apparel and textiles fell by 40% and 20%
respectively over the 10 years. However, Overall demand for apparel grew by
almost 60% at the same time. According to the research, employment in the
textile mills and employment in apparel in the US dropped from 478,000 to 239,000
and 858,000 to 296,000 respectively during this 10 years timeframe. At the same
time, the exports of apparel from Mexico to the US increased from $1.26 billion
to $3.84 billion, and that is due to migrating apparel production from the US
to Mexico.
As textile production migrated from the US to
Mexico, more and more jobs were lost in the US and moved to Mexico. There are
several reasons that must be taken into account. First, NAFTA provided a free
trade area for Mexico as well so that producing and trading didn’t require
paying much taxes or custom duties. Second, more textile mills want to operate
their business activities in cheaper plants abroad, particularly in Mexico. It
means that cheap labor or resources were easily available in Mexico. For
example, average labor rates in Mexico ranged between $10 and $20 per day as
per compared to $10 to $12 an hour for US textile workers. Thus, more and more jobs and production of
textile shifted from the US to Mexico simply because of the advantages offered
by the establishment of NAFTA.
The Winners or losers from the process of
readjustment in the textile industry after NAFTA
It is quite common for both American and
Mexican to take advantages form the establishment of NAFTA. In fact, both
countries could operate their business activities more efficiently and
effectively than ever before. Although it seems that job losses in the US
textile industry negatively affected by the treaty, the overall efficiency of
the economy improved drastically after NAFTA.
For instance, clothing prices in the US fell as textile industry shifted
from high cost US producer to lower cost Mexican producers. Thus, it can be
said that winners are those customers who live in the NAFTA economic region
because they can achieve textile related products at a cheaper price and able to
save lots of money.
In
spite of lower prices, the shift in textile production to Mexico also benefited
the economy of NAFTA region. At that
time, export of yarn makers surged in the US, indicating an increase from $ 293
million to $1.21 billion between 1994 and 2004.
In the given case, it seems that losers are those textile firms or
employees from those textile firms who do not move to Mexico for producing
textile related products because they have to compete with Mexican textile
producers who can produce the products or services at a cheaper cost. Moreover, while the US textile industry has
lost jobs, advocacy of NAFTA is that the US economy has benefited in the form
of lower clothing prices and an increase in exports from the fabric and yarn
producers.
The benefits and costs of protection for
vulnerable industries that follow entering into FTA
Free
Trade Area (FTA) benefits all countries according to the trade theory because it allows
countries to specialize in what they do best and trade for everything else.
However, it does not consider the painful adjustment that may occur before
the benefits of free trade can be fully realized. At the meantime, NAFTA is
probably viewed quite negatively from the perspective of displaced workers. It is sure to say that consumers are
better off with free trade
because they are more likely to choose the options for buying the same goods
and services.
While the US consumers and producers in
certain sectors are gaining from the trade, sometimes it could be better to
protect the vulnerable industry such as textiles because it should be analyzed
from the perspective of economy as a whole. When countries go for free trade
area then they have more opportunities to perform well but they have to figure
out the areas where they can specialize and do better than others. The major
benefit from the costs of protection is that national sovereignty would be
safe. However, there would be higher costs if it doesn’t let to go into free
trade area. Thus, if the economy can improve its efficiency then it is also
better to let it go. However, the benefits of NAFTA always outweigh the losses.
Summary
and Conclusions
As the closing case explores the effect of
NAFTA on the U.S. textile industry, there are
many factors that should be considered before signing of the NAFTA agreement. In the case, it is vividly seen
that when NAFTA took place in the US, the potential challenge for the US was
the loss of jobs
in the American textile industry. However, it is a significant benefit to the entire economy of the US and
Mexico in the sense that many consumers have enjoyed lower clothing prices
and U.S. fabric and yarn makers has seen a boost in their exports to Mexico. I, therefore, believe that the establishment of a free trade area
creates winners in most cases than losers for the transformation of economic
development over the member countries.
References
Hill, C. W. (2011). International Business:
Competing In the Global Marketplace. New York: McGraw- Hill .
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