CHAPTER 6:

TRADE AND THEORIES

Critical questions:
Mercantilism is a bankrupt theory that has no place in the modern world. Discuss.
In its purest sense, mercantilism is a bankrupt theory that has no place in the modern world.
The principle tenant of mercantilism is that a country should maintain a trade surplus, even if
that means that imports are limited by government intervention. This policy is bankrupt for at
least two reasons. First, it is inconsistent with the general notion of globalization, which is
becoming more and more prevalent in the world. A policy of mercantilism will anger
potential trade partners because it will exclude their goods from free access to the mercantilist
country's market. Eventually, a country will find is difficult to export if it imposes oppressive
quotas and tariffs on its imports. Second, mercantilism is bankrupt because it hurts the
consumers in the mercantilist country. By deny its consumers access to either "cheaper"
goods from other countries or more "sophisticated" goods from other countries; the
mercantilist country's ordinary consumers suffer.
Is free trade fair? Discuss!

 Free trade is a pact which says that the participating nations can import and export goods
without any tariff barriers or other non-tariff barriers to trade. On the other hand, fair
trade is all about fairness in price, working conditions, sustainability and terms of trade,
with the working community.
 Free Trade focuses on lessening the barriers and policies which supports certain countries
or industries. On the other hand, fair trade tends to promote the rights of workers, good
working conditions and works for removing the differences in wages from one country to
another.
 Free Trade aims at boosting the economic growth of the country. As against, the objective
of fair trade is to develop more equitable trade relationships, by empowering those who
are marginalized and improving their living standards. In a free trade, there are only a few
regulations on the exchange of goods and services, in other countries. In contrast, in the
case of fair trade, there are certain regulations to ensure that corporations do not take
advantage of farmers.

Free trade is fair to businesses seeking to expand but it does not favor the rights of workers or
seek to improve working conditions. Instead, free trade seeks to eliminate pay discrepancies
(imbalances) from country to country. Meanwhile, fair trade promotes fair wages and
working conditions for labourers.
Unions in developed nations often oppose imports from low-wage countries and advocate
trade barriers to protect jobs from what they consider as “unfair” import competition. Is
such competition “unfair?” Do you think that this argument is in the best interests of (a)
the unions, (b) the people they represent, and/or (c) the country as a whole?
It is true that low-wage countries have very less potential incomes they earn so that they would
like to work in less amount of money. Conversely, unions in developed countries often oppose
imports the jobs from low-wage countries and advocate trade barriers to protect the jobs by
thinking it as an unfair competition. As the world is becoming so globalized, it is not fair to
advocate such trade barriers because most of business activities these days are operating under
the policies of free trade areas, economic integrations, and regional economic blocs for reducing
such barriers to achieve a competitive advantage.
In fact, this argument is truly in the best interest of the unions, the people they represent, and the
country as a whole. One of the reasons why unions in developed countries oppose is that they
avoid the competitions in the marketplace. They think that when there are more competitions,
more price wars can take place, unemployment increases and no one can benefits from the trade.
According to the comparative advantage theory- if a country should specialize in producing those
goods that it can produce most efficiently, while buying goods that it can produce relatively less
efficiently from other countries. It also tells that opening a country to free trade stimulates
economic growth in the country. It is believed that if low-wage countries can produce certain
products more efficiently than high wage countries, the low wage countries should produce and
export those products. Though trade barriers are supposed to protect workers and the companies,
they are only for a short-term fix and they are done in order to create a balance in trade activities.
By protecting industries the government is not encouraging companies to be more efficient.
Consumers end up losing on this deal because they have to pay higher prices and have fewer
choices. Thus, there are lots of other factors considered by the government, these three factors-
unions, the people who represent, and countries as a whole- are the best interest of unfair
competitions.
Drawing on the new trade theory and Porter's theory of national competitive advantage,
outline the case for government policies designed to build a national competitive advantage
in biotechnology.  What kind of policies would you recommend the government adopt? Are
these policies at variance with the basic free trade philosophy?
Porter’s theory of national competitive advantage argues that four broad attributes of a nation
shape the environment in which local firms compete, and that these attributes promote or impede
the creation of competitive advantage.  These attributes are: factor endowments, demand
conditions, related and supporting industries, and firm strategy, structure, and rivalry.  Porter
goes on to argue that firms are most likely to succeed in industries in which the diamond (which
are the four attributes collectively) is favorable.  Porter adds two factors to the list of attributes
described above: chance and government policy.  The New Trade theory addresses a separate
issue.  This theory argues that due to the presence of substantial scale economies, world demand
will support only a few firms in many industries.  Underpinning this argument is the notion of
first-mover advantages, which are the economic and strategic advantages that accrue to early
entrants into an industry. One could argue that when the attributes of a nation are conductive to
the production of a product, and when the manufacturers of that product have experienced some
“chance” events that have provided them first-mover advantages, the governmental policies of
that nation should promote the building of national competitive advantage in that particular
area.  This could be accomplished through government R&D grants, policies that favor the
industry in capital markets, policies towards education, the creation of a favorable regulatory
atmosphere, tax abatements, and the like.  Ask your students whether they think this policy is at
variance with the basic free trade philosophy.  One could argue that it is, because the government
intervention is creating the basis for comparative advantage.  Conversely, one could argue that if
a country establishes a comparative advantage in a particular area that is based on a unique set of
attributes (such as Swiss production of watches), world output will be favorably impacted by
letting that country pursue its area of comparative advantage.
CHAOTER 8: FDI
Case: The Rise of Bangladesh’s Textile Trade
1. Why was the shift to a free trade regime in the textile industry good for Bangladesh?
Since Bangladesh is “one of the world’s low-cost producers,” the shift to a free trade made it
an attractive seller. The country’s garment industry was predicted to fail due to this change,
but after the recession of 2008, Bangladesh’s garments remained much cheaper on the market
due to their low labor costs. This led large importers like Walmart to increase their purchases
from Bangladesh, causing the industry to see export growth from $8.9 billion to $10.7 billion
over a two year period.
2. Who benefits when retailers in the United States source textiles from low-wage
countries such as Bangladesh? Who might lose? Do the gains outweigh the losses?
The consumers benefit as the cost of the products are lower in the United States. The
producers also benefit because they are making money from selling their textiles to the
United States. The people of the low-wage country also benefits as they are receiving a living
wage, respective to their country, and they are able to find a job that otherwise would not be
there. Textile producers in the United States or other higher-wage countries lose as the
manufacturing is being done elsewhere. The gains outweigh the losses because the consumers
and low-wage producers are better off with the outsourcing the production of textiles. Only
the high-wage producers of textiles will be worse off, which is a lesser impact than that from
outsourcing textile production
3. What international trade theory, or theories, best explain the rise of Bangladesh as a
textile exporting powerhouse?
Three major international theories best explain the rise of Bangladesh. First, the low hourly
wages made the textile cheaper than other production countries. Second, the locally made
input for the industry made the cost of production much cheaper and made the product more
profitable. Third, the global awareness of their over-dependency on China made Bangladesh
the best option. Thus, with all three factors combined, a powerhouse in textile exportation has
risen.

4. How secure is Bangladesh’s textile industry from foreign competition? What factors
could ultimately lead to a decline?
Bangladesh has several key advantages over their competition, such as low wage rates, and a
“vibrant network of supporting industries,” however other factors may cause their decline. As
stated in the article, the disruptions in infrastructure in Bangladesh, including roads, ports and
access to electricity, impedes on their production. This may cause their supply to be
unreliable and may cause the manufacturing to shift to a country with more stable
infrastructure.
Case: Spain’s Telefonica (p. 278)
What changes in the political and economic environment allowed Telefonica to start
expanding globally?
Telefonica was established as a state-owned telecommunications monopoly in the 1920s, it
was not until the 1990s that Spain deregulated the market. This lead to an increase in
shareholder value, allowing them to explore new markets. Latin America was also
in process of deregulation and privatization made it attractive and possible to expand
internationally.
2. Why did Telefonica initially focus on Latin America? Why was it slower to expand in
Europe even though Spain is a member of the European Union?
The market in Latin America was expanding rapidly, which lead to Telefonica wanting to
expand in Latin America. More and more people were using phones in Latin America and
Telefonica saw an opportunity to expand in a market that was growing. The competition in
Europe is greater than that in Latin America, which caused for a slower expansion in Europe.
Being a member of the European Union was not very beneficial for them due to the fact that
there are many other phone companies from other EU members.
3. Telefonica has used acquisitions, rather than Greenfield ventures, as its entry
strategy. Why do you think this has been the case? What are the potential risks
associated with this entry strategy?
Telefonica’s use of acquisitions has allowed them to quickly grow and expand
into other countries. By buying previously established companies in other countries,
Telefonica could expand their reach and network through the networks and chains of these
companies in Latin America and Europe.
Greenfield ventures would be much more-timely and requires a long process of establishing a
company in another country, which is why acquisition was an effective entry strategy. The
potential risks with this strategy, however, is the Telefonica has to cooperate with the
company they are buying into, whereas with a Greenfield venture, they would be free to work
and function on their own terms.
4. What is the value that Telefonica brings to the companies it acquires?
Telefonica is the second largest mobile phone operator in the world, thus gives them
considerable power in the marketplace. Furthermore, they can apply economies of scale,
since they were evolving to be highly efficient working in multiple economies.
5. In your judgement, does inward investment by Telefonica benefit a host nation?
Explain your reasoning.
We believe it to be beneficial. Most companies welcome foreign investment, bring new jobs,
and benefits to growth and prosperity. This is especially beneficial, since Telefonica has
become a reliable and industry evolving corporation, thus setting new standards for the
quality of service internationally. But it can also be detrimental, causing some jobs lost due to
competition
CRITICAL QUESTIONS:
You are the international manager of a US business that has just invented a
revolutionary new personal computer that can perform the same functions as existing
PCs but costs only half as much to manufacture. Several patents protect the unique
design of this computer. Your CEO has asked you to formulate a recommendation for
how to expand into Western Europe. Your options are (a) to export from the US, (b)
to license a European firm to manufacture and market the computer in Europe, and (c)
to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each
alternative and suggest a course of action to your CEO.
In considering expansion into Western Europe, an international manager might
consider three options: FDI, licensing, and export. With export, assuming there are no
trade barriers, the key considerations would likely be transport costs and localization.
While transport costs may be quite low for a relatively light and high value product
like a computer, localization can present some difficulties. Power requirements,
keyboards, and preferences in models all vary from country to country. It may be
difficult to fully address these localization issues from the US, but not impossible.
Since there are many computer manufacturers and distributors in Europe, there are
likely to be a number of potential licensees. But a licensing arrangement implies that
valuable technological information may have to be disclosed and that the firm's
competitive advantage may be lost if the licensees uses or disseminates this
proprietary knowledge improperly. FDI (setting up a wholly owned subsidiary) is
clearly the most costly and time consuming approach, but the one that best guarantees
that critical knowledge will not be disseminated and that localization can be done
effectively. FDI will also place you in the market into which you want to sell and
allow you to be near the consumer. Given the fast pace of change in the personal
computer industry, it is difficult to say how long this revolutionary new computer will
retain its competitive advantage. If the firm can protect its advantage for a period of
time, FDI may pay off and help assure that critical knowledge is not lost. If the
innovation is not core and can be easily copied, then licensing would allow the firm to
get the quickest large scale entry into Europe and make as much as it can before losing
advantage.
Compare and contrast these explanations of FDI: internalization 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?
Knickerbocker's theory suggests that firms imitate other firms in oligopolistic industries, and
will "follow the leader" in undertaking FDI in certain countries, as sort of strategic defensive
moves.  This theory does not explain why the first firm undertakes FDI, and why it chooses
to do this rather than to export or license.  The product life cycle theory suggests that firms
invest in foreign countries when demand in that country will support local production or
when cost pressures make it necessary to locate production in low cost locations.  While this
theory does explain why some FDI takes place, it also does not explain why FDI is preferred
over licensing or exporting.  The market imperfections explanation more directly confronts
these issues, and explains why FDI may be preferable to other alternatives for expanding
business activities.  It identifies the importance and difficulty of transferring know-how and
describes some of the impediments to exporting.  By explaining better exactly why a firm
may undertake FDI, the market imperfections model is probably the best explanation of the
historical pattern of horizontal FDI.
In 2004, inward FDI accounted for some 24% of the gross fixed capital formation in
Ireland, but only .6% in Japan. What do you think explains the difference in FDI
inflows into the two countries?
One approach to this question is to look at government policy: Ireland is FDI-friendly and
Japan has discouraged inward FDI. Both are trade-dependent economies with few natural
resources, but Ireland appears far less mercantilist in attitude than does Japan. Ireland has a
well-educated, relatively low cost workforce and an abundant supply of labor, while Japan's
workforce, also well-educated, is expensive.

Read the Management Focus on Cemex and then answer the following questions:
Which theoretical explanation, or explanations, of FDI best explains Cemex's FDI?
Cemex is a cement company. Consequently, exporting is difficult because of the weight of
the product. If Cemex wants to expand into new markets, the company would either need to
license a local company or make an investment in the market directly. Cemex's success is due
in part to its top notch customer service, and relationship with distributors. Because these
advantages could be difficult to transfer, the company will probably choose to invest directly.
Students should reflect on these factors as they consider the various theories to explain
Cemex's FDI.
What is the value that Cemex brings to the host economy? Can you see any potential
drawbacks of inward investment by Cemex in an economy?
Cemex is the third largest cement company in the world, and a powerhouse in Mexico where
it controls 60 percent of the market. Cemex is highly focused on efficient manufacturing and
customer service. Distributors are rewarded for their sales, as are users. The primary benefit
Cemex brings to host countries involves these competitive advantages. Cemex acquires
companies and then transfers technological, management, and marketing know-how to the
new units, improving their performance. The company has brought several acquired
companies back to full production, increasing employment opportunities in the host country
as well.
Cemex has a strong preference for acquisitions over greenfield ventures as an entry
mode. Why?
Cemex has successfully acquired established cement makers in many countries. By acquiring
companies rather than establishing them from the ground up, Cemex can avoid some of the
delays that could occur in the start-up phase, while at the same time, capitalize on the benefits
of an established market presence.
Chapter 15:
CRITICAL QUESTIONS:
Licensing propriety technology to foreign competitors is the best way to give up a firm's
competitive advantage. Discuss.
The statement is basically correct - licensing proprietary technology to foreign competitors
does significantly increase the risk of losing the technology. Therefore licensing should
generally be avoided in these situations. Yet licensing still may be a good choice in some
instances. When a licensing arrangement can be structured in such a way as to reduce the
risks of a firm's technological know-how being expropriated by licensees, then licensing may
be appropriate. A further example is when a firm perceives its technological advantage as
being only transitory, and it considers rapid imitation of its core technology by competitors to
be likely. In such a case, the firm might want to license its technology as rapidly as possible
to foreign firms in order to gain global acceptance for its technology before imitation occurs.
Such a strategy has some advantages. By licensing its technology to competitors, the firm
may deter them from developing their own, possibly superior, technology. And by licensing
its technology the firm may be able to establish its technology as the dominant design in the
industry. In turn, this may ensure a steady stream of royalty payments. Such situations apart,
however, the attractions of licensing are probably outweighed by the risks of losing control
over technology, and licensing should be avoided
Discuss how the need for control over foreign operations varies with firms' strategies
and core competencies. What are the implications of the choice of entry mode?
There is always a need for control over foreign operations but it varies with firms’ strategies
and core competencies, for example if the firms core competencies lies in the proprietary
product, or a unique knowledge of a process, then the firm definitely should avoid any entry
option which could dilute the know-how like joint venture or licencing or franchising, rather
the company should try to directly enter into that country and that too with total control, so
that the risk of losing technology can be minimized. If the company does not have the core
competency in technical know how it can use the model of joint venture or licensing or
franchising. The companies which are more ethical and have formal organisational cultures
have to have more control over the overseas operations.
The implications are though the cost of licensing is low but the chances of losing the
technical knowhow is more which may hamper the performance of the company in future. If
the company don’t want that it can take the help of exporting the product to that country.
The implication of taking a full ownership and total control over management would be very
expensive and it will result in heavy investment which would hamper the liquidity of the
company in long run, since the market is new the company don’t know what would be the
outcome of starting the production in other country, which is risky.
A small Canadian firm that has developed some valuable new medical products using
its unique biotechnology know-how is trying to decide how best to serve the European
Union. Its choices are given below. The cost of investment in manufacturing facilities
will be a major one for the Canadian firm, but it is not outside its reach. If these are the
firm's only options, which one would you advise it to choose? Why?
a. Manufacture the product at home and let foreign sales agents handle marketing.
b. Manufacture the products at home and set up a wholly owned subsidiary in Europe
to handle marketing.
c. Enter into a strategic alliance with a large European pharmaceutical firm. The
product would be manufactured in Europe by the 50/50 joint venture and marketed by
the European firm.
If there were no significant barriers to exporting, then option (c) would seem unnecessarily
risky and expensive. After all, the transportation costs required to ship drugs are small
relative to the value of the product. Both options (a) and (b) would expose the firm to less
risk of technological loss, and would allow the firm to maintain much tighter control over the
quality and costs of the drug. The only other reason to consider option (c) would be if an
existing pharmaceutical firm could also give it much better access to the market and
potentially access to its products and technology, and that this same firm would insist on the
50/50 manufacturing joint venture rather than agreeing to be a foreign sales agent. The choice
between (a) and (b) boils down to a question of which way will be the most effective in
attacking the market. If a foreign sales agent can be found that is already quite familiar with
the market and who will agree to aggressively market the product, the agent may be able to
increase market share more quickly than a wholly owned marketing subsidiary that will take
some time to get going. On the other hand, in the long run the firm will learn a great deal
more about the market and will likely earn greater profits if sets up its own sales force.

Cases:
Case: Coca-Cola (p. 518)
Case Overview: This case examines the history of Coca-Cola’s CEOs and their strategies. It
compares Roberto Goizueta’s strategy in the 1980s, to Douglas Ivester’s in the 1990s,
Douglas Draft’s in the early 2000s, and Neville Is dell’s until 2008. The case discusses each
CEOs approach to expanding the company globally, and the levels of success each strategy
brought about.
Connection to Class Material:
Coca-Cola went through multiple strategies as new CEOs came in. Their strategic choices in
shifting decision making from headquarters to local management were sometimes beneficial
but also many times unsuccessful. There seemed to be a lot of trial and error, since each
CEO tried something a little different than the one before, and we saw how Is dell’s strategy
was combination of the previous ones. The company also faced some challenges with going
global, as not all countries demanded the coke products like in the United States. Coca-Cola
had to adapt to local tastes.
1. Why do you think that Roberto Goitzueta switched from a strategy that emphasized
localization toward one that empthized global standardization? What were the benefits
of such a strategy?
Localization allowed the local operations too much independence, which caused a lower level
of penetration of the brand. His main reason was to cut costs, and ensure that management
was more uniform throughout the coca-cola operations worldwide. By using a global
standardization strategy he was able to use economies of scale to his advantage, such as using
the same advertisement message for all countries to cut costs. He was also able to focus on
core brands of the company and take equity stakes in foreign bottlers to have greater strategic
control over them.
2. What were the limitations of Guizueta’s strategy that persuaded his successor, Daft,
to shift away from it? What was Daft trying to achieve? Daft’s strategy also did not
produce the desired results. Why do you think this was the case?
The one size fits all strategy that Guizueta had implemented did not work against nimble
local competitors marketing local beverages. Draft believed that they needed to put more
power back in the hands of local country managers and that products should be tailored to
local needs. Draft’s strategy did not produce desired results because his implementation was
too dramatic of a change and the strong focus on localization lost the need for the company’s
structure and coherence in ideology. With a coherent strategy from market to market, it is a
much better form of marketing of Coca Cola products
3. How would you characterize the strategy pursued by Coca-Cola under Isdell’s
leadership? What is the enterprise trying to do? How is this different from the strategies
of both Goizueta and Daft? What are the benefits? What are the potential costs and
risk?
Isdell’s strategy was centered around the idea that “strategy, including pricing, product
offerings, and marketing message, should be varied from market to market to match local
conditions.” He emphasized the “importance of leveraging good ideas across nations.” THe
previous CEOs, like Roberto Goizueta, (CEO from 1980s-1990s) pushed Coca-Cola to
become amore global company, and centralized management and marketing in corporate
headquarters, where as Douglas Daft (CEO from 2000-2004) “instituted a 180 degree shift
and put power back in the hands of the local country managers.” Isdell’s strategy, however,
“represented a midpoint between the strategy of Goizueta and Daft.” The benefits of Is dell’s
strategy is that Coca-cola has been able to appeal to global markets by creating different
drinks based on the tastes of certain countries, like a carbonated coffee drink in Japan or
“low-cost non carbonated orange-based drink that...has been a huge hit in Thailand.” The
potential costs and risks of this is that having strategy varied from market to market may lead
back into a localization strategy similar to Goizueta’s. Also, Coca-cola must remain up-to-
date with the what types of drinks are in demand with local populations, and be prepared to
adjust their production to maintain success.
4. What does the evolution of Coca-Cola’s strategy tell you about the convergence of
consumer tastes and preference in today’s global economy?
In today’s global economy, it is very important for Coca-Cola to be able to adapt to specific
consumer expectations on a local level. Coca-Cola’s strategy evolution showed the
importance of understanding customer tastes and how they differ or have similarities in
different geographic regions. Having switched multiple times between localization and
centralized strategies, they benefited the most when they were able to accurately target
specific local consumer markets and then expand upon them. One of Coca-Cola’s most
successful strategies is to test adapted products locally in Japan and depending on its success,
grow it internationally, as was seen with coke’s canned cold coffee. Because it achieved
tremendous success in the Japanese markets, Coca-Cola became invested in expanding this
consumer basis. This goes to show how a localization strategy can lead to a global success, if
implemented and nurtured correctly.
DIEBOLD:

1. Before 1997, Diebold manufactured its ATM machines in the United States, and sold
them internationally via distribution agreements, first with Philips NV and then
with IBM. Why do you think Diebold chose this mode of expanding internationally?
What were the advantages and disadvantages of this arrangement?
ANS: Before 1997, Diebold manufactured its ATM machines in the United States, and sold
them internationally via distribution agreements, first with Philips NV and then with IBM.
Dieboldshifted from Philips to IBM because it had more worldwide recognition compare to
IBM. Furthermore Diebold was driven by
by a believe that IBM would pursue ATM sales more aggressively.
Advantages;
 Sell the product more aggressively in the market
 Worldwide recognition.
 To attract large number of customers.
Disadvantages;

 Difficult to control the attention its products received from Philips and IBM.

2. What do you think promoted Diebold to alter its international expansion strategy in
1997 and start setting up wholly owned subsidiaries in most markets? Why do you
think the company favoured acquisition as an entry mode?
ANS: The sales in the United States started decreasing due to a saturated domestic market
and Diebold was seeking rapid growth in demand for ATMs in a wide range of developed
and developing markets such as China, India, and Brazil where banking system in large
numbers were starting. So, it alter its international expansion strategy in 1997 and started
setting up wholly owned subsidiaries in most markets since the foreign demand was in
increasing trend. The company favoured acquisition as an entry mode because it could get a
running start in these developing markets.

3. Diebold entered China via joint venture, as opposed to a wholly owned subsidiary.
Why do you think the company did this?

ANS: Diebold entered china via joint venture in which it took a majority ownership position
because in china there were no possible acquisitions and substantial indigenous competitors
from other foreign companies. Also Diebold wanted to access the local knowledge in order to
expand its business in the foreign market and gain competitive advantage over its
competitors.

4. Is Diebold pursuing a global standardization strategy or a localization strategy? Do

you think this choice of strategy has affected its choice of entry mode? How?

ANS: Diebold is pursuing a localization strategy as it is focusing more on the local markets
in different developing countries such as China, India and many others. The use of ATMs
varies considerably by location. Therefore, it is adopting localization strategy as the
competitors are very few in the local market. Yes, this choice of strategy has affected its
choice of entry mode as the need for local knowledge was met by their acquisitions of
partners.
IKEA: