Transcript Chapter 5

Chapter Five
Linkages Among Countries
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Chapter Objectives
 To understand why nations choose to cooperate
with each other
 To interpret a nation’s incentive to trade goods
and services with other nations
 To discern the scale and scope of capital links
among nations
 To realize how the movement of people among
nations creates and fortifies links
 To appreciate the fragility of links among
nations and the institutions that monitor them
 To grasp the idea of the Internet in promoting
links among nations
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Introduction
 The world economy during the past 50 years
has become much more international
• Many more trades
• Much higher direct investment flows
• More people moving across national borders
 Globalization depends on cross-national links
• Links: a convergence of interest or strengthening
of relationships that spurs people, companies, or
institutions of one nation to deal with those of
another
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Introduction
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Trade Links Among Nations
Since 1950, the volume of global trade has
grown 16-fold
In 1999, total worldwide cross-border exports
exceeded $5,460 billion for physical goods
produced in agriculture, mining, and
manufacturing and $1,340 billion for services
such as transportation, tourism, and
entertainment
Balance of payments: statistical record of a
country’s international transactions for a given
time period
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Trade Links Among Nations
The service sector is the largest component of the
U.S. economy
• Forecasters see U.S. service exports hitting
$650 billion by 2010
Trade in goods and services is perhaps the most
visible way countries create links
Incentives that move nations to trade with other
nations:
• Mercantilism: encourages a nation to form
links with two sorts of other nations
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Trade Links Among Nations
Absolute and comparative advantage
• Key question of absolute advantage is
figuring out what products a country should
specialize in making for exports
• Natural advantage: occurs because of innate
features of a nation such as climate
conditions
• Acquired advantage: occurs when a nation
develops specialized skills and technologies
• Factor proportions
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Trade Links Among Nations
National competitive advantage
• Four country-specific attributes that make up the
national or Porter diamond:
Factor endowments, demand conditions, related
and supporting industries, and firm strategy,
structure, and rivalry
• The theory of national competitive advantage holds that
the degree to which a country can achieve international
success in a certain industry is a function of its national
diamond
• Chance and government can significantly affect the
character of a national diamond
Strategic trade theory: suggests that a country may
predominate in the export of a good or service simply
because it was fortunate enough to have one or more of its
firms among the first to produce it
First-mover advantage
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Trade Links Among Nations
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Capital Links Among Nations
Bretton Woods Agreement:
governed world
monetary markets from the end of WW II through
the early 1970s
• Collapsed due to pressure from persistent U.S.
trade deficits, emergence of growing stocks of
Eurodollars, and accelerating inflation
Floating exchange rates:
let governments,
MNEs, entrepreneurs, traders, and people begin
building capital links
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Capital Links Among Nations
 Financial liberalization has tremendous effects in three
areas:
• Foreign direct investment: a form of international
involvement that involves a company’s significant
equity stake in or effective management control of a
foreign company
• World Trade Organization (WTO)
United Nations Conference on Trade and Development
•
•
(UNCTAD)
International bond market: made up of all bonds
sold by governments, issuing companies, and
organizations outside their home nation
International Monetary Fund (IMF)
International equity market: made up of all stocks
bought and sold outside the home country
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People Links Among Nations
 A vibrant source of links among nations is the many


people who leave one nation for another
• International immigrant: a person who takes up
residence or who remains for an extended stay in a
foreign country
Voluntary migrants
Forced migrants
Current trends:
• The wealthier nations continuing to attract and
exchange highly skilled labor, the tech nomads
The reality of globalization in business means that few
nations can philosophically or practically close their
borders to voluntary or forced international
immigration
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Regional Integration
 The freer movements of products, capital, and people are
powerful tools to build links among countries
 Virtually all active alliances today are made up of
integration agreements among the neighboring countries
in a particular region of the world
 North American Free Trade Agreement (NAFTA)
• European Union (EU)
• Andean Pact
• Association of South East Asian Nations
 Regional integration: refers to the formal agreement
among a set of nations to reduce and eventually eliminate
all tariff and nontariff barriers that impede the free flow
of goods, services, and factors of production among each
other
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Breaking Links
Links among nations and regions are not
easily achieved or sustained
Integration creates enormous economic
benefits but can also impose high costs
• Sacrifice of national sovereignty
• Sacrifice of cultural heritage
• Environmental preservation
Nongovernmental organizations
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Protecting Links Among Nations
 The globalization of business depends on
maintaining and broadening the existing web of
links among nations and regions
• World Trade Organization: important to the trade and
capital links
 Currently, the EU and NAFTA are the key
regional groups expanding their web of links
 The integrity of the links that support
globalization ultimately depends on an informed
global society that sees the virtue and accepts the
responsibility of the freer movement of products,
people, and capital
 Worldwide role of the Internet
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