Read the attached file carefully and finish the case
A2 Text
Assignment 2: Case Problem “Real Estate Development: Select a New Project”
Problem Description
A real estate company is considering the development of one of the following three possible projects: (1) an apartment building; (2) an office building; (3) a warehouse. The amount of payoff (profit) that could be earned by selling the estate depends on the economic conditions, specified as: optimistic, realistic and pessimistic.
The estimated payoffs and probabilities under optimistic, realistic and pessimistic conditions are shown as follows:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
A
B
C
Office Building
D
E
F
Warehouse
G
H
I
Probability
x
y
z
In preparation for a final decision, the company is considering the hiring of a business analyst. If the company hires the analyst, the decision regarding which project to develop will not be made until the analyst presents a survey. However, the analyst is requesting an upfront payment for the survey in the amount of Z. The probabilities of the survey results to be positive or negative are i and k.
Summary tables, in case the company hires a business analyst:
Fee for Survey
Z
Probability of survey results positive
i
Probability of survey results negative
k
(1) If the survey results are positive:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
A – Z
B – Z
C – Z
Office Building
D – Z
E – Z
F – Z
Warehouse
G – Z
H – Z
I – Z
Probability
d
e
f
(2) If the survey results are negative:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
A – Z
B – Z
C – Z
Office Building
D – Z
E – Z
F – Z
Warehouse
G – Z
H – Z
I – Z
Probability
g
h
n
Assignment 2: Starting Conditions
Each student will receive from the instructor an excel file with a different dataset for payoffs (A to I) and probabilities (x,y,z,i,k,d,e,f,g,h,n). You have to prepare and submit a managerial report where you should answer the question: Which one of the development projects should be selected? And based on your estimates, should the company hire the business analyst?
Grading Points Per:
Tasks
Assignment
#
Content per Tasks
10
Task 2-0
Students should structure and present their Assignment 2 in the form of a Managerial Report. The expected length of the main body (tasks 2-1 to 2-4) is up to 3 pages APA format, excluding cover page, table of content, executive summary (task 2-5), and appendices (screenshots of the Payoff Table, EMV Table, Sensitivity Analysis Diagram, TreePlan Diagram of the Decision Tree). Submission requirements: Managerial Report (word file), and excel file with completed worksheets (iii) to (vi).
1
Task 2-1
Prepare payoff tables and develop a decision tree for this problem (without probabilities and EMVs).
2
Task 2-2
Given the probability of all three economic conditions and using expected monetary values (EMVs), calculate EMVs for each node and answer the questions: (1) What’s the EMV for not hiring a business analyst and the EMV for hiring a business analyst? (2) What is your recommendation: to hire or not to hire a business analyst?
2
Task 2-3
Use sensitivity analysis to define the probability range with respect to the survey results which might affect the decision to hire or not to hire a business analyst, draw the sensitivity chart, and find the probability for their cross point.
2
Task 2-4
Apply a software tool for the construction of a decision tree with payoffs, probabilities, and EMVs. The recommended tool is TreePlan: a Microsoft Excel Add-Ins (it is preinstalled on all V-PCs of the MET V-LABs)
2
Task 2-5
Prepare an executive summary
1
List of Worksheets in the Excel File (it should be used as a reference for different tasks of the managerial report)
(i)
A2 Text
(ii)
Payoff Table – Template
(iii)
Payoff Table – Solution and a sketch of a decision tree (without probability and EMVs) –> Needed for Task 2-1
(iv)
EMV Calculation: use EMV as a decision criterion for each decision nodes and states of nature nodes, calculate the EMV for each node, and recommend whether to hire/not to hire a business analyst –> Needed for Task 2-2
(v)
Sensitivity Analysis Diagram: compute the probability of survey results and define the range of probability values that the real estate company would hire or not hire a business analyst (including the probability of the cross point) –> Needed for Task 2-3
(vi)
TreePlan Diagram of the Decision Tree: use BU MET V-LAB for Excel Add-In TreePlan –> Needed for Task 2-4
Payoff Table Template
Task 2-1 Payoff Table Solution
1. If the company does not hire a business analyst:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2. If the company hires a business analyst:
Fee for Survey
2.1 If the analysis report is positive:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2.2 If the analysis report is negative:
Alternatives
States of Nature
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
3. Sketch of a Decision Tree (without probability and EMVs):
Task 2-2 Solution
1. If the company does not hire a business analyst:
Alternatives
States of Nature
EMV
Node
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2. If the company hires a business analyst:
Fee for Survey
2.1 If the analysis report is positive:
Alternatives
States of Nature
EMV
Node
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
2.2 If the analysis report is negative:
Alternatives
States of Nature
EMV
Node
Optimistic Conditions
Realistic Conditions
Pessimistic Conditions
Apartment Building
Office Building
Warehouse
Probability
3. Final Solution
3.1 EMV (hire a business analyst)
Probability of report results positive
Probability of report results negative
Node
EMV (Report results positive)
EMV (Report results negative)
EMV (Hire a business analyst)
3.2 Final EMV
Node
EMV (Hire a business analyst)
EMV (Do not hire a business analyst)
Final EMV (Hire/Do not hire a business analyst)
Task 2-3 Solution
Task 2-4 Solution
SHOW MORE…
week 7 case study
notes
1. Write a 1 page summary of IPPT chapters 8 and 9
2. Case study 1 page
3. Find the reply question in the case study
Week 7 Case Study: IMF Podcast Reflection
Review ANY of the podcasts created by the IMF by clicking on the link below.
https://www.imf.org/en/News/Podcasts?page=1
(Links to an external site.)
Pick a topic of interest. There are over 80 selections to choose from. Indicate the title of the Podcast.Create a one-page summary/reflection of the contents of the Podcast in a word document (1 page, double-spaced, 12 pt font).
These are very relevant and interesting videos, review a couple and choose the one for you. I look forward to your reflection
Rubric
Week 7 Case Study: IMF Podcast Reflection
Criteria
Ratings
Pts
This criterion is linked to a Learning Outcome Podcast Summary
The student clearly summarizes / briefs the audience on the IMF podcast.
10pts
Full Marks
0pts
No Marks
10pts
This criterion is linked to a Learning Outcome Reflection and the relation of Podcasts to International Business
The student addresses how the podcast is related to themes in International Business and provides her/his reflection.
30pts
Full Marks
0pts
No Marks
30pts
Total Points:40
Q.2 Write a reply/suggestion for this article
MNC – TSMC
TSMC outsources work to OSAT.
TSMC outsources some of the processes of its CoWoS packaging business to OSAT, products in small batch customization products. Some high-performance chips require small-batch production. However, TSMC is more specialized in handling the process at the wafer level. Processing small batch production is less automated and requires more manpower in TSMC’S plants. OSAT has more experience and is more specialized in handling small-batch customization products. By outsourcing this part of the work to OSAT, TSMC would be more productive and could focus on the core function of its business.
Shanghai Metals Market. (2021, November 25).New cooperation model? TSMC outsourced part of the CoWoS process to OSAT. Retrieved October 11, 2022, from
https://news.metal.com/newscontent/101677124/new-cooperation-model-tsmc-outsourced-part-of-the-cowos-process-to-osat McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Chapter 8
Foreign Direct Investment
*
McGraw-Hill Education.
What Is FDI? (1 of 2)
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
the firm becomes a multinational enterprise
FDI can be in the form of
greenfield investments – the establishment of a wholly new operation in a foreign country
acquisitions or mergers with existing firms in the foreign country
*
Greenfield operation:
mostly in developing nations
Mergers and acquisitions:
quicker to execute
foreign firms have valuable strategic assets
believe they can increase the efficiency of the acquired firm
more prevalent in developed nations
The Opening Case: Volkswagen in Russia describes Volkswagens greenfield investment in Russia and the effect of changing oil prices on its profitability.
McGraw-Hill Education.
What Is FDI? (2 of 2)
The flow of FDI – the amount of FDI undertaken over a given time period
Outflows of FDI are the flows of FDI out of a country
Inflows of FDI are the flows of FDI into a country
The stock of FDI – the total accumulated value of foreign-owned assets at a given time
*
LO 8-1: Recognize current trends regarding foreign direct investment (FDI) in the world economy.
McGraw-Hill Education.
What Are The Patterns Of FDI? (1 of 5)
Both the flow and stock of FDI have increased over the last 35 years
Most FDI is still targeted towards developed nations
United States, Japan, and the EU
but, other destinations are emerging
South, East, and South East Asia especially China
Latin America
*
Country Focus: Foreign Direct Investment in China explores investment opportunities in China. In the late 1970s, China opened its doors to foreign investors. By the mid 2000s, China attracted $60 billion of FDI annually. Chinas large population is a magnet for many companies and because high tariffs make it difficult to export to the Chinese market, firms frequently turn to foreign direct investment. However, many companies have found it difficult to conduct business in China, and in recent years investment rates have slowed. In response, the Chinese government, hoping to continue to attract foreign companies has established a number of incentives for would-be investors.
McGraw-Hill Education.
What Are The Patterns Of FDI? (2 of 5)
FDI Outflows 1982-2012 ($ billions)
*
Source: UNCTAD statistical data set, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx
McGraw-Hill Education.
What Are The Patterns Of FDI? (3 of 5)
FDI Inflows by Region 1995-2013 ($ billion)
*
Source: Calculated by the author from United Nations World Investment Report, various editions.
McGraw-Hill Education.
What Are The Patterns Of FDI? (4 of 5)
The growth of FDI is a result of
a fear of protectionism
want to circumvent trade barriers
political and economic changes
deregulation, privatization, fewer restrictions on FDI
new bilateral investment treaties
designed to facilitate investment
the globalization of the world economy
many companies now view the world as their market
need to be closer to their customers
*
McGraw-Hill Education.
What Are The Patterns Of FDI? (5 of 5)
Gross fixed capital formation – the total amount of capital invested in factories, stores, office buildings, and the like
the greater the capital investment in an economy, the more favorable its future prospects are likely to be
So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy
*
McGraw-Hill Education.
What Is The Source Of FDI? (1 of 2)
Since World War II, the U.S. has been the largest source country for FDI
the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries
together, these countries account for 60% of all FDI outflows from 1998-2011
*
McGraw-Hill Education.
What Is The Source Of FDI? (2 of 2)
Cumulative FDI outflows, 19982012 ($ billions)
*
Source: Calculated by the author from United Nations World Investment Report, various editions.
McGraw-Hill Education.
Why Do Firms Choose Acquisition Versus Greenfield Investments? (1 of 2)
Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments
between 40-80% of all FDI inflows per annum from 1998 to 2011 were in the form of mergers and acquisitions
but in developing countries two-thirds of FDI is greenfield investment
fewer target companies
*
McGraw-Hill Education.
Why Do Firms Choose Acquisition Versus Greenfield Investments? (2 of 2
Firms prefer to acquire existing assets because
mergers and acquisitions are quicker to execute than greenfield investments
it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills
*
McGraw-Hill Education.
Why Choose FDI? (1 of 2)
Question: Why does FDI occur instead of exporting or licensing?
Exporting – producing goods at home and then shipping them to the receiving country for sale
exports can be limited by transportation costs and trade barriers
FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
*
LO 8-2: Explain the different theories of FDI.
Why do firms invest rather than use exporting or licensing to enter foreign markets?
FDI is more attractive when transportation costs or trade barriers make exporting unattractive.
Management Focus: Foreign Direct Investment by Cemex explores why foreign direct investment made more sense for the Mexican cement maker than exporting. For Cemex, exporting is too costly.
McGraw-Hill Education.
Why Choose FDI? (2 of 2)
Licensing – granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit that the foreign entity sells
Internalization theory (aka market imperfections theory) – compared to FDI licensing is less attractive
firm could give away valuable technological know-how to a potential foreign competitor
does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
the firms competitive advantage may be based on its management, marketing, and manufacturing capabilities
*
A firm will favor FDI over licensing when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firms capabilities are simply not amenable to licensing.
McGraw-Hill Education.
8-16
Foreign direct investment (FDI) in a developing economy, such as Russia or the countries of sub-Saharan Africa, can be extremely profitable for multinational enterprises. It can also result in substantial losses if economic conditions in the host country deteriorate.
If you were the head of a major manufacturer of household goods seeking entry into the market of a country experiencing strong economic growth due to its oil and gas exports, which entry strategy would you pursue: exporting, licensing, or foreign direct investment? If FDI, would you seek to acquire an existing firm, or build entirely new facilities (a greenfield investment)?
*
McGraw-Hill Education.
What Is The Pattern Of FDI? (1 of 2)
Question: Why do firms in the same industry undertake FDI at about the same time and the same locations?
Knickerbocker – FDI flows are a reflection of strategic rivalry between firms in the global marketplace
multipoint competition – when two or more enterprises encounter each other in different regional markets, national markets, or industries
*
With regard to horizontal FDI, market imperfections arise in two circumstances:
when there are impediments to the free flow of products between nations which decrease the profitability of exporting relative to FDI and licensing
when there are impediments to the sale of know-how which increase the profitability of FDI relative to licensing
McGraw-Hill Education.
What Is The Pattern Of FDI? (2 of 2)
Question: Why is it profitable for firms to undertake FDI rather than continuing to export from a home base, or licensing a foreign firm?
Dunnings eclectic paradigm – it is important to consider
location-specific advantages – that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets
externalities – knowledge spillovers that occur when companies in the same industry locate in the same area
*
FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise.
FDI is risky because of the problems associated with doing business in another culture where the rules of the game may be different.
McGraw-Hill Education.
What Are The Theoretical Approaches To FDI? (1 of 2)
The radical view – the multinational enterprise (MNE) is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
in retreat almost everywhere
The free market view – international production should be distributed among countries according to the theory of comparative advantage
embraced by advanced and developing nations including the United States and Britain, but no country has adopted it in its purest form
*
LO 8-3: Understand how political ideology shapes a governments attitudes towards FDI.
The radical view lacked support by the end of the 1980s because of:
the collapse of communism in Eastern Europe
the poor economic performance of those countries that followed the policy
a growing belief by many of these countries that FDI can be an important source of technology and jobs and can stimulate economic growth
the strong economic performance of developing countries that embraced capitalism rather than ideology
McGraw-Hill Education.
What Are The Theoretical Approaches To FDI? (2 of 2)
Pragmatic nationalism – FDI has both benefits (inflows of capital, technology, skills, and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)
FDI should be allowed only if the benefits outweigh the costs
Recently, there has been a strong shift toward the free market stance creating
a surge in FDI worldwide
an increase in the volume of FDI in countries with newly liberalized regimes
*
Management Focus: DP World and the United States explores the reaction to the bid by DP World, a Dubai-based ports operator, to acquire P&O, a British firm that runs a network of global marine terminals. An acquisition of P&O would give DP World management of six U.S. ports. While the Bush administration claimed the acquisition posed no threat to national security, several prominent U.S. Senators raised concerns about the acquisition. Ultimately, DP World pulled out of the deal, but stated that it would look for alternative ways to enter the U.S. market.
McGraw-Hill Education.
How Does FDI Benefit
The Host Country? (1 of 2)
There are four main benefits of inward FDI for a host country
Resource transfer effects – FDI brings capital, technology, and management resources
Employment effects – FDI can bring jobs
*
LO 8-4: Describe the benefits and costs of FDI to home and host countries.
McGraw-Hill Education.
How Does FDI Benefit
The Host Country? (2 of 2)
Balance of payments effects – FDI can help a country to achieve a current account surplus
Effects on competition and economic growth – greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers
can lead to increased productivity growth, product and process innovation, and greater economic growth
*
McGraw-Hill Education.
What Are The Costs Of
FDI To The Host Country? (1 of 2)
Inward FDI has three main costs:
Adverse effects of FDI on competition within the host nation
subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization
*
McGraw-Hill Education.
What Are The Costs Of
FDI To The Host Country? (2 of 2)
Adverse effects on the balance of payments
when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host countrys balance of payments
Perceived loss of national sovereignty and autonomy
decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host countrys government has no real control
*
McGraw-Hill Education.
How Does FDI Benefit
The Home Country?
The benefits of FDI for the home country include
The effect on the capital account of the home countrys balance of payments from the inward flow of foreign earnings
The employment effects that arise from outward FDI
The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country
*
McGraw-Hill Education.
What Are The Costs Of
FDI To The Home Country? (1 of 2)
The home-countrys balance of payments can suffer
from the initial capital outflow required to finance the FDI
if the purpose of the FDI is to serve the home market from a low cost labor location
if the FDI is a substitute for direct exports
*
McGraw-Hill Education.
What Are The Costs Of
FDI To The Home Country? (2 of 2)
Employment may also be negatively affected if the FDI is a substitute for domestic production
But, international trade theory suggests that home-country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid
may stimulate economic growth and employment in the home country by freeing resources to specialize in activities where the home country has a comparative advantage
*
McGraw-Hill Education.
How Does Government
Influence FDI? (1 of 2)
Governments can encourage outward FDI
government-backed insurance programs to cover major types of foreign investment risk
Governments can restrict outward FDI
limit capital outflows, manipulate tax rules, or outright prohibit FDI
*
LO 8-5: Explain the range of policy instruments that governments use to influence FDI.
The rationale underlying ownership restraints is twofold:
first, foreign firms are often excluded from certain sectors on the grounds of national security or competition
second, ownership restraints seem to be based on a belief that local owners can help to maximize the resource transfer and employment benefits of FDI for the host country
McGraw-Hill Education.
How Does Government
Influence FDI? (2 of 2)
Governments can encourage inward FDI
offer incentives to foreign firms to invest in their countries
gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries
Governments can restrict inward FDI
use ownership restraints and performance requirements
*
McGraw-Hill Education.
How Do International
Institutions Influence FDI?
Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI
Today, the World Trade Organization is changing this by trying to establish a universal set of rules designed to promote the liberalization of FDI
*
McGraw-Hill Education.
What Does FDI
Mean For Managers? (1 of 3)
Managers need to consider what trade theory implies about FDI, and the link between government policy and FDI
The direction of FDI can be explained through the location-specific advantages argument associated with John Dunning
however, it does not explain why FDI is preferable to exporting or licensing, must consider internalization theory
*
LO 8-6: Identify the implications for managers of the theory and government policies associated with FDI.
McGraw-Hill Education.
What Does FDI
Mean For Managers? (2 of 3)
A Decision Framework
* McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Chapter 9
Regional Economic Integration
*
McGraw-Hill Education.
What Is Regional
Economic Integration?
Regional economic integration – agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other
Question: Do regional trade agreements promote free trade?
In theory, yes, but the world may be moving toward a situation in which a number of regional trade blocks compete against each other
*
While the move toward regional economic integration is generally seen as a good thing, some observers worry that it will lead to a world in which regional trade blocs compete against each other.
In this possible future scenario, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.
The specter of the EU and NAFTA turning into economic fortresses that shut out foreign producers with high tariff barriers is worrisome to those who believe in unrestricted free trade. If such a situation were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs.
The Opening Case: Regional Trade Pacts Give the Mexican Auto Industry an Edge describes the growth of the Mexican auto industry due to a wave of foreign direct investment spurred by regional trade agreements. Beginning with the establishment of the North American Free Trade Agreement (NAFTA) in 1994, Mexico has established over 40 different free trade agreements that provide Mexican automakers duty-free access to markets throughout the world. These agreements, along with Mexicos relatively low labors costs, have attracted investments from many of the worlds largest car companies and auto parts suppliers, making Mexico the sixth-largest car producer in the world.
McGraw-Hill Education.
What Are The Levels Of
Regional Economic Integration? (1 of 4)
A free trade area eliminates all barriers to the trade of goods and services among member countries
European Free Trade Association (EFTA) – Norway, Iceland, Liechtenstein, and Switzerland
North American Free Trade Agreement (NAFTA) – U.S., Canada, and Mexico
*
LO 9-1: Describe the different levels of regional economic integration.
McGraw-Hill Education.
What Are The Levels Of
Regional Economic Integration? (2 of 4)
A customs union eliminates trade barriers between member countries and adopts a common external trade policy
Andean Community (Bolivia, Colombia, Ecuador, and Peru)
A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production
Mercosur (Brazil, Argentina, Paraguay, and Uruguay)
*
McGraw-Hill Education.
What Are The Levels Of
Regional Economic Integration? (3 of 4)
An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy
European Union (EU)
A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states
the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union
*
The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, and differences in tax rates across countries still remain.
McGraw-Hill Education.
What Are The Levels Of
Regional Economic Integration? (4 of 4)
Levels of Economic Integration
*
McGraw-Hill Education.
Why Should Countries
Integrate Their Economies?
All countries gain from free trade and investment
regional economic integration is an attempt to exploit the gains from free trade and investment
Linking countries together, making them more dependent on each other
creates incentives for political cooperation and reduces the likelihood of violent conflict
gives countries greater political clout when dealing with other nations
*
LO 9-2: Understand the economic and political arguments for regional economic integration.
McGraw-Hill Education.
What Limits Efforts At Integration?
Economic integration can be difficult because
while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose
it implies a loss of national sovereignty
Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts
trade creation occurs when low cost producers within the free trade area replace high cost domestic producers
trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers
*
LO 9-3: Understand the economic and political arguments against regional economic integration.
McGraw-Hill Education.
What Is The Status Of Regional Economic Integration In Europe?
Europe has two trade blocs
The European Union (EU) with 27 members
The European Free Trade Area (EFTA) with 4 members
The EU is seen as the worlds next economic and political superpower
*
LO 9-4: Explain the history, current scope, and future prospects of the worlds most important regional economic agreements.
McGraw-Hill Education.
What Is The Status Of Regional Economic Integration In Europe?
Member States of The European Union in 2013
*
Source: Copyright European Union, 19952013.
McGraw-Hill Education.
What Is The European Union? (1 of 2)
The devastation of two world wars on Western Europe prompted the formation of the EU
Members wanted lasting peace and to hold their own on the worlds political and economic stage
Forerunner was the European Coal and Steel Community (1951)
The European Economic Community (1957) was formed at the Treaty of Rome with the goal of becoming a common market
*
McGraw-Hill Education.
What Is The European Union? (2 of 2)
The Single European Act (1987)
committed the EC countries to work toward establishment of a single market by December 31, 1992
was born out of frustration among EC members that the community was not living up to its promise
provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case
*
McGraw-Hill Education.
What Is The Political Structure
Of The European Union?
The main institutions in the EU include:
The European Council – the ultimate controlling authority within the EU
The European Commission – responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states
The European Parliament – debates legislation proposed by the commission and forwarded to it by the council
The Court of Justice – the supreme appeals court for EU law
*
Management Focus: The European Commission and Intel explores the record fine ($1.45 billion) handed down to Intel for anticompetitive behavior. According to the European Commission, Intel illegally used its market power to ensure that its rival, AMD, was at a competitive disadvantage, thereby harming millions of European consumers.
McGraw-Hill Education.
What Is The Euro?
The Maastricht Treaty committed the EU to adopt a single currency
created the second largest currency zone in the world after that of the U.S. dollar
used by 17 of the 27 member states
Britain, Denmark, and Sweden opted out
since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar
*
Country Focus: Creating a Single European Market in Financial Services explores the European Unions progress towards creating a single financial market. The quest, started in 1999, was to have been completed by 2005, however, progress has been slowed by various factors related to the member countries tradition of operating autonomously. So, while 41 measures designed to create a single market are in place, how to enforce the rules is still to be determined. In fact, some experts believe that it will be at least another decade before the benefits of the new rules become apparent.
McGraw-Hill Education.
Is The Euro A Good Thing?
Benefits of the euro
savings from having to handle one currency, rather than many
it is easier to compare prices across Europe, so firms are forced to be more competitive
gives a strong boost to the development of highly liquid pan-European capital market
increases the range of investment options open both to individuals and institutions
Costs of the euro
loss of control over national monetary policy
EU is not an optimal currency area
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Country Focus: The Greek Sovereign Debt Crisis explores concerns over the long-term viability and survival of the euro and the Euro Zone, with particular emphasis on the continuing debt crisis in Greece and the loans provided to the country by the Euro Zone and the IMF.
McGraw-Hill Education.
Should The EU Continue To Expand?
Many countries have applied for EU membership
Ten countries joined in 2004 expanding the EU to 25 states
In 2007, Bulgaria and Romania joined bringing membership to 27 countries
Turkey has been denied full membership because of concerns over human rights
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In July 2013, Croatia entered the European Union becoming the 28th member nation.
McGraw-Hill Education.
What Is The Status Of Economic Integration In The Americas? (1 of 2)
There is a move toward greater regional economic integration in the Americas
The biggest effort is the North American Free Trade Area (NAFTA)
Other efforts include the Andean Community and Mercosur
A hemisphere-wide Free Trade of the Americas is under discussion
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LO 9-4: Explain the history, current scope, and future prospects of the worlds most important regional economic agreements.
McGraw-Hill Education.
What Is The Status Of Economic Integration In The Americas? (2 of 2)
Economic Integration in the Americas
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McGraw-Hill Education.
9-24
Copyright 2017 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The establishment of the North American Free Trade Agreement (NAFTA) in 1994 was an important, if controversial, moment in the economic histories of Canada, the United States, and Mexico.
As the head of a major industrial machinery manufacturer in the United States, would you have welcomed economic integration with Canada and Mexico? What advantages or disadvantages would you expect to experience? How might your business operations be different today if NAFTA had not been passed?
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McGraw-Hill Education.
What Does Economic
Integration Mean For Managers?
Regional economic integration
opens new markets
allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
But
within each grouping, the business environment becomes competitive
there is a risk of being shut out of the single market by the creation of a trade fortress
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LO 9-5: Understand the implications for businesses that are inherent in regional economic integration agreements.
The Closing Case: Tomato Wars explores the battle between Mexican tomato growers and Florida tomato growers and how NAFTA allowed lower-priced tomatoes into the United States. When the Commerce Department was going to scrap the minimum price per pound rule, several prominent agriculture growers protested because of the amount of business they do with Mexico. Recently, an agreement was reached with Mexican growers to raise the minimum floor price for a pound of tomatoes, as well as higher prices for specialty tomatoes from Mexicoacknowledging the billions of dollars invested by Mexican growers in controlled greenhouse environments.
McGraw-Hill Education.
US EU Trade War?
Harley Davidson exposed to EU Tariffs
https://www.bnnbloomberg.ca/economics/video/trump-threatens-to-reciprocate-against-eu-tariffs-on-harley-davidson~1666188
Brexit deal explained: what the UK and EU agreed | FT
Brexit trade deal: Win-win or lose-lose for EU & UK? | DW News
McGraw-Hill Education.
Final Course Project-Section IV
Look at your MNC home country,