Question

justify the following statements with appropriate examples.

Max Marks 10

a. WTO favors the trend in global business towards deregulation.

b. U.S. corporations build plants abroad when they could build them at home

c. FDI in a host country is far more risky and complicated than exporting.

d. According to the product life-cycle theory, by the time a product matures on the life-cycle a producer country also eventually becomes an importing country.

e. If the value of Rupee depreciates against the Dollar, exporters in Pakistan will have greater profits.

f. Greenfield investment is far more risky and complicated than export and/or franchising.

Answer 1

Part (A)

A key driver of globalization has been economic policy, which resulted in deregulation and the reduction or elimination of restrictions on international trade and financial transactions. Currencies became convertible and balance-of-payments restrictions were relaxed. In effect, for many years after the end of second World war, it was currency and payments restrictions rather than tariffs that limited trade the most. The birth of the Eurodollar market was a major step towards increasing the availability of international liquidity and promoting cross-border transactions in western Europe. Beginning in the 1970s, many governments deregulated major service industries such as transport and telecommunications. Deregulation involved a range of actions, from removal, reduction and simplification of government restrictions, to privatization of state-owned enterprises and to liberalization of these industries so as to increase competition.

Part (B)

The reasons for establishment of plants in foreign countries by US firms are as follows:

• Expansion in foreign markets
• for better availability of raw materials
• Avoidance of strict business regulations and rules
• Optimisation of tax structure

Part (C)

FDI may differ from local investment because the locus of decisionmaking and sources of competitiveness in the former lie abroad, because TNCs pursue regional or global competitiveness-enhancing strategies, or because foreign investors are less committed to host economies and are relatively mobile. Thus, the case for intervening with FDI policies may have a sound economic basis. In addition, countries consider that foreign ownership has to be controlled on non-economic grounds — for instance, to keep cultural or strategic activities in national hands.

While most FDI regimes are converging on a similar set of rules and incentives, there remain large differences in how these rules are implemented. The FDI approval process can take several times longer, and entail costs many times greater in one country than in another with similar policies. After approval, the costs of setting up facilities, operating them, importing and exporting goods, paying taxes and generally dealing with the authorities can differ enormously.

However, foreign investors have a much wider set of options before them, and are able to compare transaction costs in different countries. Thus, attracting transnational firms requires not just that transaction costs be lowered, but also, increasingly, that they be benchmarked against those of competing host countries. One important measure that many countries take to ensure that international investors face minimal costs is to set up one-stop promotion agencies able to guide and assist them in getting necessary approvals. However, unless the agencies have the authority needed to provide truly one-stop services, and unless the rules themselves are clear and straightforward, this may not help.

Transnational firms face market failures in information. Their information base is far from perfect, and the decision-making process can be subjective and biased. Taking economic fundamentals as given, it may be worthwhile for a country that receives lower FDI than desired to invest in establishing a distinct image of its own and, if necessary, attempt to alter the perception of potential investors by providing more and better information.

Part (D)

At the maturity stage,when the product has solidly settled interest in developed nations, the maker of the item should consider opening up creation plants locally in each developed nation to fulfill the need. As the item is being delivered locally, work expenses and fare and costs will diminish in this way decreasing the unit cost and expanding income. Product development can in any case happen now as there is still space to adjust and alter the item if necessary. Appetites for the product in developed countries will keep on expanding in this stage.

In spite of the fact that the unit costs have diminished because of the choice to deliver the product locally, the assembling of the product will even now require a profoundly gifted work power. Nearby rivalry to offer options begin to frame. The expanded item presentation starts to arrive at the nations that have a less evolved economy, and request from these countries begin to develop

Part (E)

A fluctuation in the exchange rate affects both the value and volume of trade. If the real exchange rate rises for the home country (Pakistan) i.e. if there is a real depreciation, the households in the domestic country can get less foreign goods and services in exchange for a unit of domestic goods and services. Thereby a unit of foreign good would give more of domestic goods, resulting in domestic households buying less foreign goods and foreign households wanting to purchase relatively more domestic goods. The higher the real exchange rate the more surplus in the net exports the country will obtain

Part (F)

The proess of establishing of a new, wholly owned subsidiary (also called a greenfield venture) is often complex and potentially costly, but it affords the firm maximum control and has the most potential to provide above-average returns. The costs and risks are high given the costs of establishing a new business operation in a new country. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals—possibly from competitive firms—or costly consultants. An advantage is that the firm retains control of all its operations.