1.

Over the last 30 years, there has been a shift away from a world in which national economies
are relatively self-contained entities, isolated by barriers to trade and investment, and
differences in government regulation, culture, and business systems and toward a world where
barriers to trade and investment are declining, cultures are converging, and national economies
are merging into an integrated, interdependent global economic system. As companies from
Japan and emerging markets like China play a more vital role in the world economy, the
dominance of companies from the United States and Western Europe has diminished.
Significant implications for British firms involve their need to look beyond Europe and America
for investment and opportunities. Consumer spending power is growing the most quickly in
developing countries. British firms also face the opportunity (and the threat) of attracting Asian
firms interested in Britain as a launch pad for the European market. For North American firms,
the same holds true, although the importance of the increasing prosperity in Latin America
suggests a potentially huge market in “their backyard.” Hong Kong, while losing its
“independence”, is perceived as the gateway to the immense market of mainland China. While
the free market freedoms Hong Kong firms have enjoyed are now less taken for granted, access
to China is improving along with the move towards a market economy within China.
International businesses based in all three locations are facing new opportunities and threats.
Since 1950, the volume of world merchandise trade has grown faster than the world economy.
In particular, there has been acceleration in world trade since 1980. This trade and investment
pattern implies that firms are dispersing parts of their production to different locations around
the world to drive down production costs and increase product quality, that the economies of
the world's nation states are becoming more intertwined, that foreign direct investment is
playing an increasing role in the global economy as firms increase their cross-border
investments, and that the world has become significantly wealthier over the last 50 years. In
the early1960s, the U.S. was the world's dominant industrial power accounting for over 40
percent of world output. By 2008, the United States accounted for 20.7 percent of world GDP,
still the world's largest industrial power but down significantly in relative size since the 1960s.
Other industrialized countries also saw their relative standing slip. Taking their place as active
exporters are the newly industrializing countries of South Korea and China. Most forecasts

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predict that the share of world output accounted for by developing countries such as China,
India, and Mexico will rise over the next 20 years, while at the same time rich industrialized
countries will continue to see their share of world output decline. The U.S. accounted for about
two-thirds of worldwide foreign direct investment flows in the 1960s, followed by British firms
with about 10 percent of FDI flows, and Japanese firms with 2 percent. As barriers to trade fell,
non-U.S. firms increased their investments around the world in search of optimal production
locations and a direct presence in major markets. During the 1990s, FDI to both developed and
developing nations increased dramatically. China also emerged as an important destination for
FDI.

2. Globalization is changing the world economy. Firms, even small ones, can no longer ignore
events going on outside their borders because what occurs in one country has implications for
the rest of the world. Individuals who believe they can act in isolation by working for a small
firm are not being realistic, but rather myopic and insular. Today, thanks to advances in
technology, many small firms sell and source internationally very early in their evolution, those
that fail to take advantage of international opportunities may not achieve their full potential,
and ultimately may fail as competitors that do recognize the importance of international
business dominate. In the United States, for example, almost 90 percent of firms that export
employ fewer than 100 people. They also account for more than 20 percent of U.S. exports.

3. Technological change has made globalization a reality. Major advances in communication,

information processing, and transportation have brought the world closer together. The
development of the microprocessor is perhaps the single, most important innovation as it
increased the amount of information that could be processed by individuals and firms. The
Internet has facilitated the creation of a 24/7/365 market place where information is available
in real time. Advances in transportation have enabled firms to take advantage of the savings
associated with dispersing production to low cost production locations. Advances in
communications have helped create a global culture of sorts, and the emergence of a global
market for consumer products. Thanks to technological change, firms today can locate facilities

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wherever in the world it makes the most sense, coordinate activities among facilities, and ship
products to customers worldwide more cost effectively than at any time in the past.

4. I believe that this statement is false. While there are many similarities in business practices
from one country to another, there are also many differences that one must be aware of in
order to be successful internationally. There are many different cultures. Not all countries have
the same values and beliefs and it is important to be aware of another countries culture so that
you are not seen as offensive in some way. Political environments also play a part. Not all
countries are democracies with market economies. Not all totalitarians use mixed or planned
economies. Social classes are different in that some countries use a caste system, meaning that
your position is determined by your family’s status. Where as others use a class system that
allows you to change your position through personal achievements. Some may think that
religion has nothing to do with business, but religion is linked to ethics for most and ethics are
an important part of business. Having a separate course for international business is more than
beneficial.

5. The Internet and the associated World Wide Web affects international business and the
globalization of the world economy because they have made it easier for firms, large and small,
to conduct international business. The Internet and the web have also made it possible for
some firms to join the world economy. Before these advancements in technology, many small
firms would not be able to conduct business outside of their domestic economy. And if they
were, for whatever the reason may be, it would not have been with the ease and low costs that
are associated with it today. This allows for globalization of the world economy because firms
are able to join in to provide goods and services that are in demand all around the world.
Countries are able to outsource to other countries so that they can lower costs and improve the
quality of their products. With globalization of the world economy, countries work together by
intertwining their resources to create goods and services in order to better the world as a
whole. Benefits of business activity are reaped by multiple countries versus one.

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6. Answer: The world trading system would clearly be affected by such a development.
Currently China enjoys a somewhat privileged status within the World Trade Organization as a
―developing country. Such a rise to eminence, however, would clearly force it to become a full
and equal member, with all the rights and responsibilities. China would also be in a position to
actively affect the terms of trade between many countries. On the monetary front, one would
expect that China would have to have fully convertible and trading currency, and it could
become one of the ―benchmark currencies of the world. From the perspective of Western
global firms, China would represent both a huge market, and potentially the home base of
some very capable competitors. Finally, commodity prices would probably fall. a) The world
trading system The impact of one economy’s growth on the world economy is transmitted
through its impact on the terms of trade - which depends on the bias of its growth. (Hicks 1953,
Corden 1956, Bhagwati, 1958). In China’s case there appears to have been a strong export bias,
so that China’s growth has most likely caused an improvement in the terms of trade for its
trade partners (Amiti and Freund 2008, Harris et al 2010). An extensive literature exists trying
to assess the quantitative implications of these two effects on trade flows, (Ahearne et al. 2003,
Lall and Albaladejo 2004;; Roland-Holst and Weiss 2005, Coxhead 2007, Eichengreen et al.
2007, Athukorala 2010, Hanson, and Robertson 2010). Overall the evidence is mixed. For
example Lall and Albaladejo (2004) find evidence of strong competitive effects but Hanson, and
Robertson (2010) find that, for the countries with the most similar trade patterns to China, its
growth represents only a small negative shock in export demand. Eichengreen et al. (2007) find
positive effect on the exports high income Asian economies that are significant exporters of
capital goods, and a strong negative effect on low income Asian countries that are dependent
on the production and exports of consumer goods. Athukorala (2010), however, argues that
these studies fail to take account of the complex Asian production networks. He finds that
China’s exports to third country markets have had 1 complementary effects on Asian exports
due to the effect of components trade, and that the impact of China’s growth on Asia is
overwhelmingly positive. Another limitation of this gravity literature is that it is focused on
trade flows only. To that end Wood, and Mayer (2011) use on a factor content approach,
familiar from the “trade-wage” literature, to examine at the impact of China’s emergence on

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industry composition in other countries. They argue that an upper estimate of the effect of a
world with China, relative to one without out it, would be to increase the world share of basic
skilled workers by approximately 10%. They find that this would reduce the output shares of
other countries primary and manufacturing sectors by only up to 1-3.5%, with the Asian
economies being the most severely affected. In contrast Autor et al (2012) assess the impact of
China’s import penetration on USA manufacturing, focusing on not just wage effects but also
regional employment effects. They find that the rising exposure to Chinese import competition
explains between 33-55% of the U.S. manufacturing employment decline between 1990 and
2000. This is a dramatic contrast with much of the earlier trade wage literature that found
minimal effects on wages from trade in the USA, though this can be accounted for the fact that
China is now much larger than it was when most of trade-wage studies were undertaken. b)
World monetary China does not allow its currency to float and therefore must make large-scale
purchases of dollars to keep the exchange rate within certain target levels. Although the
renminbi (RMB) has appreciated against the dollar in real terms by about 40% since reforms
were introduced in July 2005, some analysts contend that it remains highly undervalued.
China’s undervalued currency makes its exports less expensive, and its imports more expensive,
than would occur under a floating exchange rate system. In order to maintain its exchange rate
target, the government must purchase foreign currency (such as the dollar) by expanding the
money supply. This makes it much more difficult for the government to use monetary policy to
combat inflation. Many economists argue that China’s industrial policies have sharply limited
competition and the growth of the private sector, caused over-capacity in many industries, and
distorted markets by artificially lowering the costs of various factor costs (such as capital, water,
land, and energy) below market levels in order to promote targeted industrial sectors. Such
policies have come at the expense of other (non-industrial) sectors of the economy, such as
services. c) the business strategy of European and US global corporations China’s rapid
economic growth and emergence as a major economic power have given China’s leadership
increased confidence in its economic model. Many believe the key challenges for the 2 United
States are to convince China that it has a stake in maintaining the international trading system,
which is largely responsible for its economic rise, and to take a more active leadership role in

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maintaining that system; and that further economy and trade reforms are the surest way for
China to grow and modernize its economy. For example, by boosting domestic spending and
allowing its currency to appreciate, China would import more, which would help speed
economic recovery in other countries, promote more stable and balanced economic growth in
China, and lessen trade protectionist pressures around the world. Lowering trade barriers on
imports would boost competition in China, lower costs for consumers, and increase economic
efficiency. However, many U.S. stakeholders are concerned that China’s efforts to boost the
development of indigenous innovation and technology could result in greater intervention by
the state (such as subsidies, trade and investment barriers, and discriminatory policies), which
could negatively affect U.S. IP-intensive firms. Failure by China to take meaningful steps to
rebalance its economy could increase tensions with its trading partners, especially if China’s
share of global exports continues to increase rapidly, and if that increase is viewed as being the
result of nonmarket policies that give Chinese exports an unfair competitive advantage. Some
economists contend that some economic rebalancing by China appears to have taken place in
recent years, noting that China’s current account surplus as a percent of GDP declined from a
historical high of 10.1% in 2007 to 2.5% in 2013. In addition, private consumption as a percent
of GDP has risen annually from 2011 to 2013. However, many economists contend that much of
the reduction in China’s current account surplus may largely the result of sluggish global
demand for Chinese products, rather than a significant change in Chinese economic policies. In
July 2012, the IMF stated that, although the fall of China’s current account surplus was a
welcome sign, the external rebalancing was achieved at the cost of rising internal imbalances—
namely the high rate of investment spending, which, the IMF assessed, would be difficult to
sustain.In addition, gross fixed investment as a percent of GDP grew each year from 2011 to
2013, and continues to be the dominant source of China’s GDP growth. d) Global commodity
prices China’s unusually fast growing commodity intensity likely reflects the rapid expansion in
the tradable export sector and large-scale fixed asset investment—particularly since 2000 (Yu,
2011). Both activities are commodity intensive. For example, Ye (2008) estimates that just over
½ of China’s copper usage is accounted for by infrastructure investment and construction, with
⅓ accounted for by consumer and industrial goods. It is beyond the scope of this paper to

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assess the root causes of China’s structure of economic growth and the high commodity
intensity that results, but previous studies have highlighted the role of structural factors and
domestic policy distortions (IMF, 2011a). China’s role in international commodity trade only
matters to the extent that it affects the relative distribution of supply and demand of different
commodities across countries. For example, China’s strategic policy decision to strive for self-
sufficiency in key grains but rely on imports of oilseeds has likely had major implications for
global agricultural trade patterns. In terms of broad commodity groups, China has come to play
a dominant role in base metals markets and, to a somewhat lesser extent, agricultural raw
material markets. In contrast, China has not yet assumed a large role in global food and energy
markets although its share of world imports is rising gradually. 3 At higher frequencies, China’s
influence on commodity markets will mainly reflect the business cycle, seasonality, and
unanticipated transitory changes in its supply-demand balance. In general, we should expect
unanticipated shocks to have a larger impact (all else equal), since market participants may be
able to adjust commodity inventories to smooth out the effects of anticipated fluctuations in
supply and demand. As a result, this paper considers the effect of unanticipated demand shocks
and also leaves aside supply-side spillovers which may be important in some cases.