Question 1.

a) Explain the key arguments/reasons for government intervention/protectionism and the

policy instruments available for such interventions

b) Responding to the Covid-19 pandemic, many countries have implemented export-

restrictive measures prohibiting the export of medicines, medical devices and personal
protective equipment (PPE). Discuss the impact of these export-restrictive measures on
different stakeholders (i.e., explain who bene ts and who loses from these measures).

Answer:
a
Governments intervene in trade for various reasons - mainly to protect domestic
industry. Nascent companies need to stand on their feet before they can compete with
larger enterprises. Upstream industries need protection because they sometimes may nd
it dif cult to compete with foreign companies. State inaction may lead to redundancies,
lower GDP and higher supplier costs for downstream industries. Therefore, government
intervention is needed to help rms increase pro ts, which will then save jobs, increase
production and reduce costs for downstream industries. In addition, strategic industries
such as the military need protection because - e.g. China controls the REE industry, and
the US subsidised its own companies to reduce its dependence on Chinese materials and
to prevent supply chain disruptions. In this way, the US also protects its non-renewable
resources, which is another reason for governments to turn inward. Other reasons:
protecting the environment, for example by imposing technical barriers or by placing an
embargo on a rm whose carbon footprint exceeds the norm. Preventing unfair
competition by placing an embargo or by imposing quotas on a rm that has, for example,
stolen a trade secret. Moreover, sometimes foreign companies ood the market, creating a
monopolistic situation, and in order to mitigate this the government may impose anti-
dumping tariffs. Regarding protectionist policy instruments, technical barriers are rules that
must be complied with, such as a certain amount of carbon footprint. An embargo means a
complete ban on trade. The best known instrument is a tariff, which means a tax imposed
on goods, and it is a good way for governments to protect domestic industry and make
money simultaneously. This money can go to rms that need help in the form of subsidies,
relief and/or incentive instruments. Anti-dumping tariffs are taxes on speci c goods that
have been dumped into the market at a low price. There are also instruments such as
'localisation requirements', which mean that in order to sell their goods, a rm must have
some local involvement, e.g. FDI. Finally, quotas are limits on the amount of products that
can be imported. Governments can also manipulate exchange rates to reduce the price for
domestic products. In conclusion, there are many reasons for governments to exercise
trade protectionism and they can use various instruments to do so.
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 b)
Covid-19-related restrictive export measures imposed by many countries could affect
various stakeholders. Firstly, countries and governments that do not have an excessive
amount of PPE and medicines will be at a disadvantage. Conversely, countries and
governments with suf cient medicines and PPE for the entire population would bene t. If
the domestic industry was involved in exporting, it would lose because it would no longer
be able to export medicines, and if it was not, it would gain because the government would
buy medicines. In addition, globally, companies that bought imported medicines will lose
out. If companies in upstream industries have exported components, they will lose, it
depends on the difference between increased demand and export revenues, but if they
have not exported, they will win, again, due to an increased demand. Downstream
industries will win everywhere if they did not export, otherwise they will lose, it depends on
the difference between increased demand and income from exports. Consumers around
the world will be affected either positively or negatively depending on the country, e.g. third
world consumers will lose and rst world consumers will gain because restrictive measures
mean they will have enough supply. Investors in rms that import drugs will lose out.
Conversely, investors in P zer, for example, would bene t because of increased demand,
but if P zer was exporting on a large scale, they could also lose out, depending on the
difference between the increased demand plus revenues from the coronavirus vaccine and
the revenues from exports. Employees of medical companies that have imported drugs
into third world countries will lose out. Workers of companies in rst world countries that
were mainly exporting will lose out. The ports, their owners, their workers and seafarers
will lose because ships with medicines, medical equipment and PPE will not be shipped.
However, trucking companies and logistics companies will win because distribution of
medicines will increase due to increased demand and export restrictions. Private clinics in
poor countries will lose out because of supply shortages, but in rich countries they will gain
because of greater certainty of supply. In conclusion, many stakeholders will be affected by
the export restrictions. Other factors, such as increased demand, may affect the scale of
the negative effects of restrictions.

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 Question 3.

One of the small scale domestic automobile manufacturers in the UK that pioneered a new
type (new technology) of electrical car is considering expanding internationally and would
like to enter the Chinese market rst (to manufacture the car in China and sell to Chinese
customers). The automobile manufacturer is now evaluating three options

a) Licensing the technology to a rm in Chin

b) Undertake FDI by acquiring a rm in Chin

c) Undertake FDI by establishing a new rm (green eld investment) in Chin

By comparing and contrasting these three entry modes, discuss which of these entry
modes is the best strategy for entering China

Answer

There are various risks when entering a new market, such as exchange rate risks, political
risks and others. There has recently been an outbreak of the Covid-19 virus in China,
which has not yet been resolved. The British manufacturer will rst have to decide when to
enter the Chinese market and the scale of entry. The different methods of market entry will
now be compared and contrasted, and the best one will be determined. A manufacturer
may license the technology to another rm or undertake FDI by acquiring a rm or creating
a completely new rm. In Mike Peng’s tripod he provides a resource-based view that
states that "knowledge creation capability" can have a positive impact on rm
performance. Indeed, the invention of a new electric car has improved the carmaker's
business, because he/she is looking to expand. A rm-speci c advantage (FSA) in the
form of new technology, such as an electric car will help overcome the Liability for
Foreignness (LOF). Thus, choosing between licensing and green eld investment, the latter
may be a good idea. It would be wise to take the risk when the business has an FSA. The
manufacturer can build a plant from scratch, which will mean that exactly the right plant will
be built, it will match the rms resources in terms of its capacity and a UK-like business
culture will be introduced. However, although the producer has an advantage over Chinese
rms in the form of new technology, he/she still lacks knowledge of the market, its culture
and language. The owner has a small business, so if Green eld FDI is created, it will be
small. In addition, preemptive attacks make Green eld risky and the UK producer may
want to use established distribution channels rather than create his own in an unfamiliar
environment. Consequently, the carmaker may want to license his/her technology. As
licensing has low nancial risk, avoids tariffs and FDI restrictions and is an inexpensive
way to access the large potential of the Chinese market, it would be a good idea for a
small business owner. However, it is dif cult to negotiate the terms of the agreement, and
even if it can be done, the manufacturer will create a future competitor with technological
know-how plus already existing knowledge of the market and language. Also, the licensee
could accidentally share the technology or the Chinese government could force them to do
so for whatever reason. If a carmaker was to own a rm, that could be different. In
addition, the manufacturer cannot prevent or restrict the Chinese licensee from further
upgrading the technology under Chinese law, which is a huge disadvantage because the
Chinese rm can introduce its own technology using the manufacturer's technology.
Moreover, the manufacturer will be dependent on the licensee, and he/she does not know
whether the licensee can even successfully sell his/her car. Obviously, there is little
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 control, low reward (royalties) and low risk. With FSA - licensing is good if one does not
want to participate/work. The manufacturer can also go for an existing rm in China that
already has distribution channels, knows the market and the language. The manufacturer
would be the owner, so would have control over their invention, plus a cultural clash is
unlikely because this is not a merger of two large rms, but rather an acquisition in which
the UK manufacturer would simply appoint someone to oversee and manage the situation
in his/her company and report back home. This person will allow the Chinese rm to
operate in the same way as before, only selling another car. In addition, the Commerce
Department's ling system has recently been phased out, and the new simpli ed reporting
system has greatly reduced the risks associated with M&A deals in China. The acquisition
is fast, so compared to green eld, even if it can be expensive, it does not take long, which
can be of great bene t to the manufacturer if he/she has to pay off a loan, for example.
Since the LOF has been overcome through invention (FSA), the manufacturer can provide
the company with someone to look after it and the Chinese company has its own sales
channels - a high level of sales should be inevitable. One might think that acquisition is the
best option, but it has its limitations. The producer may overpay for the rm, may be too
optimistic about the future and may later be disappointed. These risks and limitations are
low and acceptable, therefore FDI through acquisition of a rm in China is the best option.

Question 5.
South Korea-based LG will open a new $1.2bn battery factory in Bekasi, Indonesia, in
collaboration with the state-owned Indonesia Battery Corporation (Source: Investment
Monitor). Discuss how the host country (Indonesia) can bene t from this FDI.

Answer

The FDI to be opened is part of a larger deal between LG and Indonesia worth almost $10
billion for EV (electric vehicle) production. Indonesia is the world's largest producer of
nickel, which is used in batteries, which is probably one of the reasons that prompted LG
to open facilities there. Low transport costs and the ability to produce everything in one
place if opening other factories to produce EVs. This foreign direct investment will certainly
bene t Indonesia in many ways. Firstly, it will create many jobs. This FDI is a green eld
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 investment, so builders will be needed, and such a project would take years to build, which
would provide long-term job security for the builders. Factory workers will also be needed
later on. Some workers will come from other countries, bring their families with them and
increase Indonesia's working and skilled population. Consequently, the more people
working, the less unemployment in Indonesia and therefore less crime and hunger. Placing
FDI in a poor area can make the whole community richer.
The service sector will expand with workers needing food, hotels and other services.
This FDI will increase the amount of goods and services produced in the country, which
means an increase in GDP as well as in the purchasing power of citizens because the
number of people receiving wages would increase. This means economic growth, which is
essential for any country.
If LG plans to export batteries, it will mean more exports for Indonesia, which means
positive net exports, i.e. money owing into the country rather than out of the country. This
will bene t the population. Moreover, FDI will mean more tax revenue for the government,
which will be able to redistribute this money to sunrise industries in the form of subsidies,
protecting them from foreign competition and promoting their growth, which will therefore
be bene cial to all concerned. Another bene t to the country is that FDI creates a
competitive market because it can ght monopolies in the country. An Indonesian battery
company partnering with LG could dominate the market, so it would not be innovative in
terms of new working methods or new technologies. Ef ciency gains and cost reductions
are not sought because of possible market control. FDI could therefore promote healthy
competition and thereby increase innovativeness.
LG is a multinational successful company. By bringing FDI to Indonesia, they also bring
with them the latest technology that can be spread throughout the country, as LG will be
building other plants in Indonesia. Technology can help strengthen the country's economy
as businesses become more competitive in global markets.
Moreover, depending on the location of the FDI, it can create a new community or breathe
life into a dying community, perhaps preserving a dying language and way of life.
Also, as LG will bring its highly skilled people to supervise and manage the plant,
Indonesian workers will learn from them and then spread the knowledge to other
industries/businesses. Such knowledge transfer will be a factor that will contribute to the
development of Indonesia's human resources. Therefore, if the government prevents brain
drain, the country's population will become more skilled. Consequently, it may mean that
universities will be improved if some workers become business professors in the future,
leading to an in ux of students from nearby countries who will spend their currency in
Indonesia. Moreover, concluding a long-term agreement with LG could have a positive
impact on relations between Indonesia and South Korea, which is a rich developed
country. Moreover, such a deal between LG and Indonesia could mean that Samsung and
other MNEs may see Indonesia as a promising place to open up FDI. In addition,
investment in the state-owned battery manufacturing company may increase due to the
opening of an FDI. The tourism sector is also likely to bene t as opening more services
due to the construction of the plant means more places to eat and sleep, making Indonesia
more welcoming to tourists as their choices increase. If more tourists come, they will need
tour guides, more attractions and activities, so the entertainment industry will only bene t.
There will be a ripple effect as a result of building one plant, which will bene t multiple
stakeholders.
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