BS3939 – A
International Business Environment
   
School BHMS
Course BA Global Management
Stage  
Academic Year  
Semester  
   
Time (main cohort) 2 Hours
Time (SAA Student) N/A
No. of Pages (including cover sheet) 4

 

Instructions to Candidates 
Please answer ALL the questions
 
 
 
 

 

Special Stationery (if applicable)
 
Use the provided RGU exam booklets
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SECTION A: The Multinational Enterprise
Question1:

  1. Why do firms become MNEs? Provide a list of reasons.
  1. To protect themselves from uncertainities and risks present in local business cylces.
  2. To increase the global market for it its goods and services.
  3. To reduce their operating costs.
  4. To counter foreign competition.
  5. To exploit technological developments and expertise it has by directly manufacturing products in appropriate foreign countries instead of issuing licenses to other manufacturers.

Canon’s Case Study

  1. What are Canon’s FSAs?

Canon has various firm specific advantages (FSA’s) that have enabled it to become one of the leading electronic company. These advantages are as follows

  1. The company has a diversified market base. 27.1 percent of its sales occur in North America, 41.0 percent in Asia, and 30.9 percent in Europe in 2009. The business presence in more than one markets protect it from uncertainities that can occur on one of its trading region.
  2. Canon has diverse products that it sells to its customers. For example, the company makes lenses, photocopiers, and cameras. These many products enables the company to have a huge market. Additionally, it enables the business to spread the risks caused by the failure of one product, or one of its items becoming obsolete due to technological changes.
  3. The company has skilful personnel and appropriate technologies to enable it innovate various products.
  4. Finally, Canon has established alliances with businesses, such as Hewlett and Packard,  that are more competent than it in the computing and networking fields.
  1. What are Canon’s CSAs in its home or host country?

Canon has various country specific advantages (CSA’s) that help it to reduce its operation and logistics costs. The company’s CSA’s are as follows:

  1. Canon manufacturs its products in Taiwan where it is able to enjoy low production costs when compared to other countries such as Japan.
  2. The company’s manufacturing plants in Taiwan are more accessible by the company’s suppliers. The ease of access makes the suppliers efficient.
  1. In what quadrant of the FSA-CSA matrix do you see Canon based on the information provided in the case and your identification of the FSAs and CSAs? Provide arguments for your choice.

 
 
 
 
 
 
 
 
 
Canon Company is in quadrant 4. Generally, firms that are in these quadrant are usually differentiated and have strong FSA. In Canon, the FSAs outweigh the CSAs. Actually, the company prefers to have its products manufactured in Taiwan, which is not its home country. Accordingly, the business can simply relocate its production to areas that will make it more competitive than its rivals. Most of the organization’s sales occur in foreign markets, and not in Taiwan.
 
 
SECTION B: Foreign Direct Investment (FDI), International Politics & Finance
Question 2:
Economic integration is the establishment of transnational rules and regulations that enhance trade and cooperation among countries. Using examples to support your answer, discuss how MNEs can use FDI and strategic alliances to benefit from economic integration.
Economic integration is generally the establishment transnational economic arrangements between or among different states, which is normally characterized with elimination of trade barriers and the partnership in monetory and fiscal policies. Usually, economic integration aims ar increasing trade among member countries by lowering the costs incurred by producers and sellers. The level of economic integration between countries usually varies depending on the level of economic cooperation among members. The levels include, custom union, free trade areas (FTA), preferential trade agreements (PTA), economic and monetary unions, common markets, and political unions.
Largely, economic integration usually leads to increased trade, increased levels of employment, and more political cooperation among member countries. Despite these benefits, the integration can result in some negative performace in some member countries due to trade diversion and erosion of national soverignity.
Multinational enterprises (MNEs) use various tactics to benefit from economic intecgration. The two main methods are strategic alliances and acquisitions, and also the localization of operations. These alliances are typically on cooperation in research marketing, and also through licensing of a product or technology for use by a partner in a specific market region. In the localization of operations mainly focuses on products, profits, production, and management. This methods enables multinationals to increase their market presence, to penetrate integrated regions much easily, and to reduce their operation costs.
Question 3:
In what way can MNEs utilize foreign and international financial markets to finance international operations?
Although MNEs normally utilize local markets to carry out their financial transactions, and hedge their local operations through local borrowing, these businesses can also utilize international financial markets in their operations. Specifically, the international financial markets normally help these organizations in international operations. The following are the main ways that MNEs can raise money for their international operations:

  1. International sources, which is the working capital of the business. (Current assets- Current liabilities)
  2. Borrow money from banks or parent company.
  3. Request the parent company to increase its equity in the business.

International sources of capital normally occur when the business has more current assets than liabilities. This situation can occur where the company’s foreign customers have more debt than what the business owes its suppliers. Just like a normally business, the business can borrow money either from banks or its parent company. In this case, the business always repays this cash with an interest. In cases where the MNE requests its parent company to increase its equity stake, the organization usually pays it dividends on the new shares.
SECTION C: International Trade
Question 4:
Outline the following trade theories and discuss their strengths and limitations:
 

  1. Theory of absolute advantage

Adam Smith established the theory of absolute advantage, in his book the Wealth of Nations. This theory simply means the ability of a country or an organization to produce a unit of a commodity or a service at a lower cost than other entities. In this case, entities with absolute advantage are more efficient than their counterparts since they are able to use fewer inputs in the production of similar goods or services. The strength of this theory is that a country with an absolute advantage has high potential for engaging in trade. Additionally, specialization in the production of one good or a service enables it to become more efficient. The main limitations of absolute theory is that it only considers labor as the only factor of production. Also, there are no absolute advantaes in many countries.

  1. Theory of comparative advantage

The theory of comparative advantage is based on the work gains from trade of firms, individuals, or nations due to the differences in factors of production or technological progress. In this case, a country that has a lower relative opportunity cost of producing goods over others is said to have a comparative advantage. Therefore, under free trade, an agent produces more of what he/she has comparative advantage and consume less of these good or service. The strength of this theory, is that countries that specialize in what theyr have more comparative advantage are able to gain more efficieny and export their excess products. One main limitation of this theory is that terms of trade normallty change over time, which can affect a country’s comparative advantage position. Similarly, technological progresses and business changes can make a country to have comparative advantages that it initially lacked.

  1. Factor endowment theory (Heckscher-Ohlin theory)

Factor endowment theory asserts that countries have an abundance of different resources. In this theory, it is believed that a country will have a comparative advantage when it produces goods that use resources that it has in abundance. This theory is important in extending the concept of comparative advantage by factoring the costs of production factors and their availability. One of the main limitations of this theory is that it assumes countries have similar technology. It ignores branding, and the aspect of differentiation in trade. Finally, this model appears wrong since the decrease in comparative advantages has been shown not to reduce the trade levels between countries. In the United States and China for example, the increase in wealth of the latter has led to a reduction in comparative advantages between these countries. Although this model predicts that trade levels should decrease, they have infact increased.

  1. International product life cycle theory (IPLC)

The international product life cycle (IPLC) asserts that new products are usually initiated by parent companies. These innovations are later transferred to subsidiaries, and then to the rest of the world.
Question 5:
What kind of trade barriers exist and what kind of effect to they cause?
 
Question 6:
 
Exchange rate risk is the probability that a company will be unable to adjust prices and costs to offset changes in the exchange rate. Evaluate the advantages and disadvantages of the strategies an MNE could adopt for managing currency risks.
 
 
 
 
 

 
BS3939 – A
International Business Environment
   
School BHMS
Course BA Global Management
Stage  
Academic Year  
Semester  
   
Time (main cohort) 2 Hours
Time (SAA Student) N/A
No. of Pages (including cover sheet) 4

 

Instructions to Candidates 
Please answer ALL the questions
 
 
 
 

 

Special Stationery (if applicable)
 
Use the provided RGU exam booklets
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SECTION A: The Multinational Enterprise
Question1:

  1. Why do firms become MNEs? Provide a list of reasons.
  1. To protect themselves from uncertainities and risks present in local business cylces.
  2. To increase the global market for it its goods and services.
  3. To reduce their operating costs.
  4. To counter foreign competition.
  5. To exploit technological developments and expertise it has by directly manufacturing products in appropriate foreign countries instead of issuing licenses to other manufacturers.

Canon’s Case Study

  1. What are Canon’s FSAs?

Canon has various firm specific advantages (FSA’s) that have enabled it to become one of the leading electronic company. These advantages are as follows

  1. The company has a diversified market base. 27.1 percent of its sales occur in North America, 41.0 percent in Asia, and 30.9 percent in Europe in 2009. The business presence in more than one markets protect it from uncertainities that can occur on one of its trading region.
  2. Canon has diverse products that it sells to its customers. For example, the company makes lenses, photocopiers, and cameras. These many products enables the company to have a huge market. Additionally, it enables the business to spread the risks caused by the failure of one product, or one of its items becoming obsolete due to technological changes.
  3. The company has skilful personnel and appropriate technologies to enable it innovate various products.
  4. Finally, Canon has established alliances with businesses, such as Hewlett and Packard,  that are more competent than it in the computing and networking fields.
  1. What are Canon’s CSAs in its home or host country?

Canon has various country specific advantages (CSA’s) that help it to reduce its operation and logistics costs. The company’s CSA’s are as follows:

  1. Canon manufacturs its products in Taiwan where it is able to enjoy low production costs when compared to other countries such as Japan.
  2. The company’s manufacturing plants in Taiwan are more accessible by the company’s suppliers. The ease of access makes the suppliers efficient.
  1. In what quadrant of the FSA-CSA matrix do you see Canon based on the information provided in the case and your identification of the FSAs and CSAs? Provide arguments for your choice.

 
 
 
 
 
 
 
 
 
Canon Company is in quadrant 4. Generally, firms that are in these quadrant are usually differentiated and have strong FSA. In Canon, the FSAs outweigh the CSAs. Actually, the company prefers to have its products manufactured in Taiwan, which is not its home country. Accordingly, the business can simply relocate its production to areas that will make it more competitive than its rivals. Most of the organization’s sales occur in foreign markets, and not in Taiwan.
 
 
SECTION B: Foreign Direct Investment (FDI), International Politics & Finance
Question 2:
Economic integration is the establishment of transnational rules and regulations that enhance trade and cooperation among countries. Using examples to support your answer, discuss how MNEs can use FDI and strategic alliances to benefit from economic integration.
Economic integration is generally the establishment transnational economic arrangements between or among different states, which is normally characterized with elimination of trade barriers and the partnership in monetory and fiscal policies. Usually, economic integration aims ar increasing trade among member countries by lowering the costs incurred by producers and sellers. The level of economic integration between countries usually varies depending on the level of economic cooperation among members. The levels include, custom union, free trade areas (FTA), preferential trade agreements (PTA), economic and monetary unions, common markets, and political unions.
Largely, economic integration usually leads to increased trade, increased levels of employment, and more political cooperation among member countries. Despite these benefits, the integration can result in some negative performace in some member countries due to trade diversion and erosion of national soverignity.
Multinational enterprises (MNEs) use various tactics to benefit from economic intecgration. The two main methods are strategic alliances and acquisitions, and also the localization of operations. These alliances are typically on cooperation in research marketing, and also through licensing of a product or technology for use by a partner in a specific market region. In the localization of operations mainly focuses on products, profits, production, and management. This methods enables multinationals to increase their market presence, to penetrate integrated regions much easily, and to reduce their operation costs.
Question 3:
In what way can MNEs utilize foreign and international financial markets to finance international operations?
Although MNEs normally utilize local markets to carry out their financial transactions, and hedge their local operations through local borrowing, these businesses can also utilize international financial markets in their operations. Specifically, the international financial markets normally help these organizations in international operations. The following are the main ways that MNEs can raise money for their international operations:

  1. International sources, which is the working capital of the business. (Current assets- Current liabilities)
  2. Borrow money from banks or parent company.
  3. Request the parent company to increase its equity in the business.

International sources of capital normally occur when the business has more current assets than liabilities. This situation can occur where the company’s foreign customers have more debt than what the business owes its suppliers. Just like a normally business, the business can borrow money either from banks or its parent company. In this case, the business always repays this cash with an interest. In cases where the MNE requests its parent company to increase its equity stake, the organization usually pays it dividends on the new shares.
SECTION C: International Trade
Question 4:
Outline the following trade theories and discuss their strengths and limitations:
 

  1. Theory of absolute advantage

Adam Smith established the theory of absolute advantage, in his book the Wealth of Nations. This theory simply means the ability of a country or an organization to produce a unit of a commodity or a service at a lower cost than other entities. In this case, entities with absolute advantage are more efficient than their counterparts since they are able to use fewer inputs in the production of similar goods or services. The strength of this theory is that a country with an absolute advantage has high potential for engaging in trade. Additionally, specialization in the production of one good or a service enables it to become more efficient. The main limitations of absolute theory is that it only considers labor as the only factor of production. Also, there are no absolute advantaes in many countries.

  1. Theory of comparative advantage

The theory of comparative advantage is based on the work gains from trade of firms, individuals, or nations due to the differences in factors of production or technological progress. In this case, a country that has a lower relative opportunity cost of producing goods over others is said to have a comparative advantage. Therefore, under free trade, an agent produces more of what he/she has comparative advantage and consume less of these good or service. The strength of this theory, is that countries that specialize in what theyr have more comparative advantage are able to gain more efficieny and export their excess products. One main limitation of this theory is that terms of trade normallty change over time, which can affect a country’s comparative advantage position. Similarly, technological progresses and business changes can make a country to have comparative advantages that it initially lacked.

  1. Factor endowment theory (Heckscher-Ohlin theory)

Factor endowment theory asserts that countries have an abundance of different resources. In this theory, it is believed that a country will have a comparative advantage when it produces goods that use resources that it has in abundance. This theory is important in extending the concept of comparative advantage by factoring the costs of production factors and their availability. One of the main limitations of this theory is that it assumes countries have similar technology. It ignores branding, and the aspect of differentiation in trade. Finally, this model appears wrong since the decrease in comparative advantages has been shown not to reduce the trade levels between countries. In the United States and China for example, the increase in wealth of the latter has led to a reduction in comparative advantages between these countries. Although this model predicts that trade levels should decrease, they have infact increased.

  1. International product life cycle theory (IPLC)

The international product life cycle (IPLC) asserts that new products are usually initiated by parent companies. These innovations are later transferred to subsidiaries, and then to the rest of the world.
Question 5:
What kind of trade barriers exist and what kind of effect to they cause?
 
Question 6:
 
Exchange rate risk is the probability that a company will be unable to adjust prices and costs to offset changes in the exchange rate. Evaluate the advantages and disadvantages of the strategies an MNE could adopt for managing currency risks.