ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers

Question #1 :What are the drivers of globalization?
Globalization
: The shift toward a more integrated and interdependent world economy.
Drivers of Globalization
Declining Trade and Investment Barriers
o Many barriers to international trade took the form of high tariffs on imports
ofmanufactured goods. The typical aim of such tariffs was to
protect domestic industries.
O Foreign Direct Investment (FDI): Occurs when a firm invests
resources in businessactivities outside its home country.The Role of Technological Change:
O Microprocessors and Telecommunications: Perhaps the single most
important innovation for globalization. It allowed for the explosive growth of
high-power, low-cost computing, and vastly increasing the amount of
information that can be processed by individuals and firms.
oThe Internet and World Wide Web: The web makes it much easier for
buyers and sellers to find each other, wherever they may be located and
whatever their size.
oTransportation Technology: In economic terms, the most important
development of transportation technology is the use of commercial
jet aircrafts, super-freighters, and the introduction of containerization,
which simplifies transhipment from one mode of transport to another.
Question #2: Why do firms prefer to acquire existing assets/firms
(through Mergers and Acquisitions) than undertake Greenfield
Investments?
Greenfield Investment: Establishing a new operation in a foreign country.
M&A: Acquiring or merging with an existing firm in the foreign country.
Why M&A over Greenfield?
1.M&As are quicker to execute.
2.Foreign firms are acquired because they have valuable strategic assets.
3. The acquiring firms believe they can increased the efficiency of the
acquired unit by transferring capital, technology, and/or management skills.
Question #3: PPP theory states that everything that is the same
product or services should cost the same around the world. This is
not the case, why?

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
Although PPP theory seems to yield relatively accurate predictions in the long
run, it does not appear to be a strong predictor of short run movements in
exchange rates covering time spans of five years or less.This could be a result of :1. PPP theory does not account for
transportation cost and barriers to trade
2.Government intervention: PPP theory states that market rates will
establish exchange rates; however, all countries exert a degree of control
over their exchange rate.
3.Multinational Enterprises have lots of pricing power. Monopoly and
Oligopoly market structures show evidence of corporate competitors
colluding with one another over price.4.
PPP theory does not account for taxes. Taxes influence the prices of goods.
Question #4:Describe and comment on various levels of economic
integration.
Regional Economic Integration: Agreements among countries in
a geographic region to reduce and ultimately remove tariff and non-tariff
barriers to free flow of goods, services, and factors of production between
each other.
Levels of Economic Integration:
1.Free Trade
: No tariffs, quotas, subsidies, or admin. impediments are allowed between
member states. Can impost protection regulations for inward flow.
O No such thing as "free trade." There is merely liberalized trade between
countries.
2.Customs Market: Eliminates trade barriers between members and
common ext. trade policy.
O Extremely rare.
3.Common Market
: No barriers to trade between members, common external trade policy.
Allowed free flow of factors of production.
O This is tough to create and maintain.
4. Economic Union

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
: Free flow of products and factors of productions, common currency,
common monetary and fiscal policy, and tax harmonization.
O EU would not be considered a economic union because they have different
taxes.
5.Political Economy
: All states and provinces combined into a single nation united by democracy.
O Best examples are the US and Canada.

Question #5: What are the advantages and disadvantages of

the different kind of exchange rate systems?
Floating Exchange Rate: A system under which the exchange rate for
converting one currency into another is continuously adjusted depending on
the law of supply and demand.-Advantages: Most likely to go to an international level.- Disadvantages: A lot of volatility, difficult for monetary policies, and
governments can run deficits in response to political pressures.
Pegged Exchange Rate: A system under which the value of a country's
currency is fixed relative to a reference currency, and then the exchange rate
between that currency and other currencies is determined by the reference
currency exchange rate.-Advantages: Keeps inflation for the individual country low.
-Disadvantage: Creates an unfair competitive advantage for countries
that utilize a low peg.
Dirty Float : A system under which a country's currency is nominally
allowed to float freely against other currencies, but in which the government
will intervene if it believes the currency has devalued too far from its value.-Advantages: Central banks can regulate the volatility of exchange
rates.-Disadvantage: Crisis response is very slow, and banks don't
intervene fast enough.
Fixed Exchange Rate: A system under which the exchange rate for
converting one currency into another is set at a constant rate.
-Advantages: Makes business planning much easier and nullifies
monetary policies.

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
-Disadvantages: Not practical and countries don't want to give up
exchange rates.
Question #6:ADM 3318 IB Consultants have been asked by a
Canadian firm to provide a brief report on how it should select a
foreign country to product its new biodegradable toilets. How would
you suggest a good location?
Country Factors: Other things being equal, a firm should locate its various
manufacturing activities where the economic, political, and cultural
conditions are conducive to the performance of those activities.
-Formal and informal trade barriers obviously influence location
decisions.
-Another factor is expected future movements in the country's
exchange rate.
Technological Factors:
-Fixed Cost: In some cases, the fixed costs of setting up a production plant
are really high. In this situation, it would make sense to serve the world
market from one location.-Minimum Efficient Scale: The level of output at which most plant-level
scale economies are exhausted. (Economies of Scale plays no affect). High
MES = centralize production to one place
-Flexible Manufacturing and Mass Customization
:1. Flexible Manufacturing: Technology designed to reduce setup
time, improve job scheduling, and improve quality control.
:2.Mass Customization: The ability of companies to use flexible
manufacturing technology to achieve product customization at low cost.
Product Factors:
-Value-to-Weight Ratio: This ratio influences transportation decisions.
Many electronic components and pharmaceuticals have high value-to-weight
ratios because they are expensive and weigh very little. A high ratio
= multiple production locations.
-Universal Needs: Needs are not the same all over the world. If the product
does not meet
universal needs, it should be kept to where it does.
Locating Production Facilities: Two basic strategies.
1.Concentrating them in a centralized location and serving the world market
from there.

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
oMakes Sense When : (1) High variance in country factors and low
trade barriers; (2)exchange rates are stable; (3) High fixed costs and high
MES; (4) High value-to-weigh tratio and it meets universal needs
2.Decentralizing them in various regional or national locations that are close
to major markets.
oMakes Sense When: Opposite of above.

Question #7:ADM 3318 IB Consultants have been asked by a Chinese

auto firm to advise it on how to decide on making or buying a
special battery it will need for the cars to be made in its Canadian
factories. Make or Buy Decision?
Advantages of Make:
-Lowering Costs: If the firm is more efficient at producing the component
than any other firm, they should continue to produce it in-house.Facilitating Specialized Investment: An asset whose value is contingent
upon a particular persisting relationship. When substantial investment in
specialized assets are required to manufacture a component, the firm will
prefer to make the component internally.
-Protecting Proprietary Product Technology: Firms do not want to get
the technology that makes their product superior.Improving Scheduling: Planning, coordination, and scheduling of adjacent
processes much easier and, in some cases, easier.
The Advantages of Buy:
-Strategic Flexibility: The firm can maintain its flexibility by switching
orders between suppliers as circumstances dictate. The aim is to get the best
deal.
-Lower Costs: In-house production requires a lot of coordination and
supervision and there is a smaller incentive to reduce cost. The benefits of
making all or part of a product in-house seem to be greatest when (1) highly
specializedassets are involved; (2) vertical integration is necessary
for protecting proprietary technical knowledge;(3) and the firm is most
efficient.If these conditions are not met, it is better to buy the product or the
components.

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
Question #8: What impacts would trade barriers have on a Canadian
business owner operating a subsidiary within the European Union.
-Trade barriers would have very little impact on the Canadian business owner
because the subsidiary within the European Union is not acting in trade (that
is to say importing and exporting goods). The Subsidiary is taking the form of
Foreign Direct Investment.Foreign Direct Investment (FDI): Occurs when a firm invests directly
in facilities to produce or market a product in a foreign country.The European does not exhibit restrictions on FDI like it does for imports.
There are no transportation costs, tariffs, or quotas.
Question #9 An MBA student says: "We have several hundreds of
free trade agreements. There are yet others to come and virtually
every country is engaged in one or more of them. I conclude that we
have achieved DOHA. DOHA isn't dead. It's here already!" So how do
you respond to this student?
-Doha: Capital city in Qatar where the WTO is looking to conduct free trade
negotiations concerning tariffs, barriers, FDI, etc.
-The goal was to make free trade easier by taking away tariffs, bring down
other trade barriers, and regulate antidumping.
-The MBA students is arguing that there is no need for additional Doha
debates because the
world already has so many free trade agreements: NAFTA, APEC, EFTA, TPP,
etc.
-The problem with the current situations of free trade agreements is that they
are centralized to certain regions. For example, NAFTA only applies to
North America (Canada, USA, and Mexico).My response to the MBA student: Although there are existing free trade
agreements between nations, there is no free trade agreement for the world.
It is for this reason that there is a need for the continuation of the Doha
Negotiations

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
#6.
RABIDD MANGA INC. a multinational corporation has just invented a
marvelous new product called rapidly biodegradable disposable diaper.
Suppose the company has already decided to have the product produced in
Indonesia, it then hires a consulting firm ADM3318 to help it decide whether
to make it itself or have it produced under contract by an Indonesian firm.
Provide a brief report to this question. (pg. 496-502)International businesses
frequently fac sourcing decisions, decisions about whether they should make
or buy the component parts that go into their final product. Make-or-buy
decisions are important factors in many firms manufacturing strategies.
Make-or-buy decisions pose plenty of problems for purely domestic
businesses but even more problems for international business. These
decisions in the international arena are complicated by the volatility of
countries political economies, exchange rate movements, changes in
relative factor costs, and the like.
-Advantages of making the product: The advantages that support
making component parts may be associated with lowering costs, facilitating
investments in highly specialized assets, protecting proprietary product
technology, and facilitating the schedule of adjacent processes
.Lower costs: It may pay a firm to continue manufacturing a product or
component in-house if the firm is more efficient at that production activity
than any other enterprise. Therefore, if it a lower cost to produce the
biodegradable disposable diapers in Rabidd, they will make it themselves,
but, if it lowers the cost of production, they will outsource its production to
Indonesia.
Facilitate specialized investments: When one firm must invest in specialized
assets to supply another, mutual dependency is created. In such
circumstances, each party fears the other will abuse the relationship by
seeking more favorable terms. Neither party completely trusts the other to
play fair. In general, we can predict that when substantial investments in
specialized assets are required to manufacture a component, the firm will
prefer to make the component internally rather than contract it out to a
supplier.
Protect Proprietary Product Technology: Proprietary Product Technology is
technology unique to a firm. If is enables the firm to produce a product

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
containing superior features, propriety technology can give the firm a
competitive advantage. The firm would not want this technology to fall into
the hands of its competitors. If the firm contracts out the manufacture of
components containing proprietary technology, it runs the risk that those
suppliers will expropriate the technology for their own use or that they will
sell it to the firms competitors. Thus, to maintain control over its technology,
the firm might prefer to make such component parts in-house.
Improve Scheduling: The weakest argument to vertical integration is that
production cost savings results from it because it makes planning,
coordination, and scheduling of adjacent processes easier. For international
businesses that source worldwide, scheduling problems can be intensified by
the time and distance between the firm and its suppliers. This is true
whether the firms use their own subunits as suppliers or use independent
suppliers.

Advantages of buying the product: The advantages that support buying

component parts may be associated with strategic flexibility, lower costs,
and offsets in the form of trade-offs and strategic alliance with suppliers
.Strategic Flexibility:The greatest advantage of buying components parts
from independent suppliers is that the firm can maintain its flexibility,
switching orders between suppliers as circumstances dictate. This is
particularly important internationally, where changes in exchange rates and
trade barriers can alter the attractiveness of supply sources. Sourcing
component parts from independent suppliers can also be advantageous
when the optimal location for manufacturing a product is beset by political
risks. The firm can avoid many risks by buying from an independent supplier
in that country, thereby maintaining the flexibility to switch sourcing to
another country if a war, revolution, or other political change alters the
countrys attractiveness as a supply source. However, maintaining strategic
flexibility has its downside. If a supplier perceives the firm will change
suppliers in response to changes in exchange rates, trade barriers, or
general political circumstances, that supplier might not be willing to make
specialized investments in plant and equipment that would ultimately benefit
the firm.

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers
-Lower Costs: Although vertical integration is often undertaken to lower
costs, it may have the opposite effect. When this is the case, outsourcing
may lower the firms cost structure. Vertical integration into the manufacture
of component parts increase an organizations scope, and the resulting
increase in organizational complexity can raise a firms cost structure for the
three following reason:
The greater the number of subunits in an organization, the greater are the
problems of coordinating and controlling those units.
The firm that vertically integrates into component part manufacture may
find that because its internal suppliers have a captive customer in the firm,
they lack an incentive to reduce costs.
Vertically integrated firms have to determine appropriate prices of goods
transferred to subunits within the firm.

Offsets: Another reason for outsourcing some manufacturing to independent

suppliers based in other countries is that it may help the firm capture more
orders from that country.
Trade-offs: Trade-offs are involved in make-or-buy decisions. The benefits
of manufacturing components in-house seem to be greatest when highly
specialized assets are involved, when vertical integration is necessary for
protecting proprietary technology, or when the firm is simply more efficient
than external suppliers at performing a particular activity. When these
conditions are not present, the risk of strategic inflexibility and organizational
problems suggest it may be better to contract out component part
manufacturing to independent suppliers. Some outsourcing in the form of
offsets may help a firm gain larger orders in the future.
Strategic alliance with suppliers: Several international businesses have
tried to reap some benefits of vertical integration without the associated
organizational problems by entering strategic alliances with essential
suppliers. Strategic alliances build trust between the firms and its suppliers.
Trust is built when a firm makes credible commitment to continue purchasing
from a supplier on reasonable terms.

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers

ADM 3318 International Business December 12, 2010

Possible Final Exam Questions and Answers