Table of Contents
Case study: Establishing Honda of America ............................................................................... 3
Lecture 1: Introduction ..................................................................................................... 5
Lecture 2: World trade and the international trading system............................................. 8
Article: The Political Economy of the World Trading System (Hoekman & Kostecki, 2001) .......... 8
Article: The World Trade Organization and the Future of Multilateralism (Baldwin, 2016)........ 10
Article: The world trading system: an overview (Bagwell et al., 2016) ...................................... 12
Article: The standard economics of PTAs (WTO, 2011) ............................................................ 14
Lecture 2- World trade and the international trading system .................................................. 17
Tutorial lecture ...................................................................................................................... 32
Lecture 3: Firms and international trade ......................................................................... 40
Article: What you should know about globalization and the World Trade Organization
(Deardorff et al., 2002) ........................................................................................................... 40
Article: Gains from Trade when Firms Matter (Melitz et al., 2012) ........................................... 43
Article: Implications of global value chains for trade policy (OECD, 2013) ................................ 46
Lecture 3 – firms and international trade ................................................................................ 48
Tutorial.................................................................................................................................. 64
Lecture 4: The why of different forms of border-crossing business activities .................... 66
Article: The key literature on IB activities: 1960-2006 (Dunning, 2008)..................................... 66
Article: The eclectic paradigm as an envelope for economic and business theories of MNE
activity (Dunning, 2000) ......................................................................................................... 68
Article: John Dunning’s eclectic model and the beginnings of global strategy (Tallman, 2003) .. 69
Article: Theories of the multinational enterprise (Hennart, 2001) ............................................ 71
L4 – the why of different forms of border crossing business activites (lecture) ......................... 73
Tutorial 3 ....................................................................................................................... 81
L5 – the where and how of foreign direct investment ...................................................... 83
Article: Lincoln Electric’s Harsh Lessons from International Expansion (Hastings, 1999) ............ 83
Article: Location choice research: Proposing new agenda (Jain et al., 2016) ............................. 85
Article: Boundaries of the firm: insights from international entry mode research (Brouthers &
Hennart, 2007) ....................................................................................................................... 88
Article: International establishment mode choice: past, present, and future (Dikova &
Brouthers, 2016) .................................................................................................................... 91
Article: Reshoring manufacturing: coming home (The Economist, 2013) .................................. 94
Lecture 5................................................................................................................................ 95
Paper meeting 1: The (non-) death of distance .............................................................. 105
, Article: Has distance died? Evidence from a panel gravity model (Brun et al., 2005) ............... 105
Article: There goes gravity: eBay and the death of distance (Lendle et al., 2016) .................... 108
Paper meeting 2: Country risks, policy uncertainty, and international
investment/divestment ................................................................................................ 109
Article: Multinationals’ response to major disasters: how does subsidiary investment vary in
response to the type of disaster and the quality of country governance (Oh & Oetzel, 2011) . 109
Article: The impact of EU preferential trade agreements on Foreign Direct Investment
(Cadramone & Scoppola, 2012) ............................................................................................ 111
Paper meeting 3: Exploiting country dissimilarities ....................................................... 114
Article: Stakeholder pressure on MNEs and the transfer of socially irresponsible practices to
subsidiaries (Surroca et al., 2013) ......................................................................................... 114
Article: The determinants of tax haven FDI (Jones & Temouri, 2016) ..................................... 116
,Case study: Establishing Honda of America
Systematic analysis
1. What motivated Honda’s decision to establish HAM?
Honda’s decision to establish Honda of America Manufacturing (HAM) was motivated by the
need to enter the American market more effectively. Honda wanted to reduce its reliance on
exports from Japan to the US and overcome the trade barriers and currency exchange rate risks
associated with international trade. Establishing local manufacturing in the US allowed Honda
to be more responsive to the American market’s demands, reduce costs, and gain competitive
advantage.
2. What role did location play in Honda’s decision?
The choice of Ohio as the location for the manufacturing plant was influenced by factors such
as the availability of a skilled and motivated labor force, access to expressways and railroads,
and a level lot covering the required acreage. Ohio’s central location in the US made it an ideal
hub for producing and distributing Honda’s automobiles. Additionally, the state’s governor,
James Rhodes, provided strong support emphasizing the importance of location in the decision-
making process.
3. What are the specific competencies owned by Honda?
Honda possesses several specific competencies, including:
- Expertise in manufacturing high-quality automobiles and motorcycles.
- Strong commitment to quality control and continuous improvement in production
processes.
- Ability to adapt and transfer its manufacturing philosophy and operational outlook to
foreign operations.
- Effective management of its supply chain and development of relationships with local
parts suppliers.
4. What (foreign) activities does Honda do internally and what activities are
outsourced?
Internalization: Honda internalizes key manufacturing and quality control activities, such as
the production of automobiles, motorcycles, and engines. These core manufacturing processes
are conducted internally to ensure quality standards are met.
Outsourced: activities related to parts and components supply.
Motives for FDI and the so-called OLI paradigm
5. What could be some motives for a firm to establish foreign operations?
Tariff-jumping: when a firm invests in local production in a foreign market to jump a tariff on
cross-border exports to the market. One motive for Honda’s FDI could be to avoid high import
tariffs and trade barriers imposed on vehicles and components. By producing locally in the US,
Honda could reduce or eliminate the need to pay tariffs on imported vehicles and parts.
Internalize exchange rate risks: Honda’s decision to establish manufacturing in the US can
also be seen as a strategy to internalize exchange rate risks. By producing in the local currency
(USD), Honda reduces its exposure to currency fluctuations when selling its products in the
US market.
6. What are the O’s, L’s, and I’s in the Honda case?
,Ownership: Honda’s ownership advantage lies in its expertise in manufacturing high-quality
automobiles and motorcycles. This advantage allows them to maintain control over their
production processes and product quality.
Location: Honda wanted to gain access to the seize of the US market. not least the surging
demand for emission-friendly and fuel-efficient
cars. The location advantage is represented by Honda’s choice of Ohio as the manufacturing
sited. Ohio’s central location in the US, access to transportation infrastructure, and availability
of a skilled workforce provide location-based advantages.
Internalization: Honda’s decision to establish local manufacturing facilities in the US
represents the internalization of production processes to reduce trade barriers, tariffs, and
exchange rate risks while serving the American market. This internalization allows Honda to
maintain control over its manufacturing operations.
Part 2: FDI Case: Honda America Manufacturing
Air pollution had become a serious social issue in 1970 with the clean air act by US. Auto
manufacturers had to comply with demands. A crash in the Japanese stock market. Protection
of the dollar. Impact was high at Honda, trading with US. New ideas needed. Effortto build a
corporate structure that would allow response to changing situation. Global production
strategy. (NHP)In 1973: new incident, first oil crisis. Japan was heavily relied on oil, and had
growth. Honda saw this as opportunity: decentralizing its manufacturing, becoming more
global. At the same time: long-standing policy to build products in market where they are
sold. Contribute to local community -> start analyzing possibility of local production in the
US. Study tours of american manufacturing plants, and cost comparison between import of
completed cars and local manufacturing. However: question whether products in US would
possess same quality as Japan, and issue of profitability _> ending the NHP (New Honda
Plan).
Export of Honda Civic to the US. Good car, fuel economy test passed firstly. But not yet
ready to charge into competition with other Japanese manufacturers, in terms of sales or
capital. So no domestically competition, opportunity to go to America. To build a factory
there. So there was no second car production line in Japan, but going to manufacturing in US.
Also because sales were going up there.
Conclusion
Honda -> we are going to engage in FDI in America
Observations -> Honda sells in the US as well as producing. So, they went from exporting to
producing locally.
To the extent that they are producing in the USA and exporting to the world, so not only
serving the US market but the whole global Market.
➔ Fruit of teamwork in design, development, manufacturing and sales systems in
America independent from Honda in Japan. New Accord became an American car,
appraised by everyone in USA.
,Lecture 1: Introduction
Learning objectives
1. Describe and explain the working of the international trading system (WTO and
preferential trade)
2. 2. Discuss and explain the effects of (changes in) trade policy on production and
profitability of internationally operating firms
3. 3. Describe and explain the different theoretical logics underlying the
internationalization of business activities
4. 4. Describe and explain the different modalities for the internationalization of
business activities (e.g., trade/export or ownership)
5. 5. Explain the relationship between external factors and the choice for specific forms
of the internationalization of business activities
Overarching topics:
1. MNEs and the international trading system
2. What MNEs do and why they exist
- Micro-macro interaction: macro environment affects behavior of firms that in turn
shapes macro trade and FDI patterns.
Macro -> shapes the behaviour of the firm, which in turn shapes macro trade and FDI
patterns -> international trading system
Micro -> the real world -> MNE environment
Trade has been growing for a long time:
- Most trade is in goods.
- Manufacturing trade : (automobile, electronics, textile = tangible good),
- Smaller part is in services (Banking, insurance, accounting or consulting services
= intangible products).
- Quite some trade in intermediate goods (semi-finished products) an important
component of international business trade
- Primary goods= things that have not been processed e.g. coffee beans
- Consumer goods: screen made here, exported somewhere else for a consumer to
buy and use
- Capital goods = machinery that is used as a capital investment.
Most firm’s do not export, but those who are big firms -> exports are highly concentrated.
Only a few firms that export a lot.
The contribution of services in trade is underestimated (e.g. logistics)
➔ Service important: only measuring in gross terms is too
little. You need to look at value-added as well which is
the services.
Car exporting to Polar and importing back can have a
gross value of 10.000, but maybe the car got painted
there so there is a value adding of for example of 5000
and this is about the service.
Officially, Country A has no relationship with country
C, because they export intermediate goods to B, which
, exports final goods to C. But, indirectly, A adds value for 100 in exports to country C,
and B only 10. Gross trade does not consider this.
Back office of trading firms: Firms have a large supply chain, nestled in different
countries. Inputs, intermediaries and final goods -> how firms organize their GVC.
Global Value Chains have been on the rise:
- Domestic: no border crossing
- Traditional GVC: cross border for consumption
- Simple GVC: intermediates crossing borders once
- Complex GVC: intermediates crossing borders at least twice
You intent to use
something in the UK
and you want to sell
it in north America.
Final assembly takes
place from all over
the world.
Note: when regulations are made, it is more difficult to source production worldwide,
trade becomes more difficult ->consequence that this affects firm’s choices.
International regulation will
affect a firm’ strategic choices
and way of organizing
international production
Backgroud.
1. Am I going to operate
internationally?
2. If internationally, is my
GVC organized within my firm
or am I reaching out to other
firms (outsourcing)
= central figure for IBT – also in the short summary.
1. Outsourcing: using suppliers outside of your firm
, - Domestically: Stay within a country, finding domestic suppliers.
- Internationally: suppliers come from foreign countries
2. Insourcing: Internationally: using domestic suppliers outside of your firm for you
firm abroad -> domestic suppliers are supplying inputs to your subsidiaries abroad
3. Offshoring:
- In firm: relationship between domestic divisions and foreign subsidiaries
- Global sourcing: relationship out of the firm
4. Vertical integration: using foreign suppliers for your firm subsidiary abroad.
As shown above, regulation affects strategic choices. But is also affects the organizations
way of organizing int’l production
1. Snake: Using consecutive suppliers toward assembly ->
from A to B to C -> This will eventually supply demand
2. Spider -> there is a hub that gets all the stuff together ->
together it will supply demand
3. “Hybrid” Sniker -> both snake and spider structure
➔ Depends on tariffs of countries
➔ Thus, trade barriers influence the firm strategically and
organizationally.
The length of the supply chain = the number of border crossings.
Length depend on “ad valorem trade costs as percentage” = costs associated with
international trade that are calculated as a percentage of the value of the traded goods.
“Let's say a country imposes an ad valorem tariff of 10% on the value of imported cars. If a
car is imported with a declared value of $20,000, the ad valorem trade cost would be 10% of
$20,000, which is $2,000. Therefore, the total cost of importing the car would be $20,000
(the declared value) + $2,000 (ad valorem tariff), resulting in a total cost of $22,000”
➔ It is a common form of trade barrier and are often used by governments to protect
domestic industries.
If ad valorem trade is high -> no border crossings, length of supply chain is low
The snake has an accumulative effect (increase), because % over % over % at each border
crossing
For the spider this is lower, because border crossing occurs once to one country from
different countries.
Ad valorem: in proportion to the estimated value of the goods or transaction concerned.
Covid 19 -> trade has gone down, but it is recovering actually
,Lecture 2: World trade and the international trading system
Article: The Political Economy of the World Trading System (Hoekman & Kostecki,
2001)
This article delves into the intricacies of the Multilateral Trading System and its role in
promoting international trade cooperation. It explores the concept of trade liberalization and its
economic underpinnings, with a particular focus on the notion of Opportunity Cost. The article
discusses how these concepts and the Multilateral Trading System impact international
business and trade. It also examines the real-world implications of these ideas, including the
potential benefits and challenges associated with trade liberalization.
The article defines several key concepts:
- Multilateral trading system: an international institution that fosters cooperation
among nations in the context of international trade.
- Trade liberalization: the process of reducing trade barriers to facilitate the flow of
goods and services between countries.
- Opportunity cost: the value of the next best alternative foregone when a choice is
made, which is a fundamental economic concept underpinning trade liberalization.
The article establishes relationships between key concepts:
- The multilateral trading system serves as a platform for trade liberalization, which in
turn is based on the economic concept of opportunity cost.
- Opportunity cost is linked to the idea that liberalizing trade allows countries to allocate
their resources more efficiently, thereby reaping the gains from specialization.
Article findings
Functions of the multilateral trading system: multilateral cooperation among nations often
leads to the creation of international institutions. The multilateral trading system is highlighted
as one such institution that promotes cooperation in the realm of international trade.
The system as a forum for exchange: it is emphasized that the multilateral trading system
acts as a forum for the exchange of information and communication regarding national trade
policies. It serves as a platform where member countries can engage in negotiations and
discussions to facilitate trade liberalization.
The economic rationale for trade liberalization: the article explains that small countries
often benefit from reducing trade barriers because they lack the market power to influence
prices on the world stage. On the other hand, large countries may face a prisoners’ dilemma
situation where restricting trade could be detrimental in the long run.
Why liberalize trade? Liberalizing trade is grounded in the concept of opportunity cost and
the gains from specialization. It is highlighted that by reducing trade barriers, countries can
make more efficient use of their resources, reallocate them to their comparative advantage
sectors, and ultimately increase consumption opportunities.
A code of conduct for trade policy: the multilateral trading system is described as creating a
code of conduct for trade policy. This code is embodied in specific legal obligations that
regulate how member countries should conduct their trade policies. The World Trade
Organization (WTO) and its rules play a key role in shaping this code of conduct.
,Principles of the multilateral trading system: fundamental principles
- Nondiscrimination: based on the Most-Favored-Nation (MFN) rule and national
treatment, ensuring that countries do not discriminate between trading partners.
- Reciprocity: trade negotiations involve a give-and-take process to minimize free-
riding and encourage cooperation.
- Enforceable commitments: members commit to specific trade policies, including
bound tariff levels, which are subject to dispute settlement procedures.
- Transparency: member countries are required to publish their trade regulations and
notify changes, promoting openness and predictability in trade.
The multilateral trading system is vital for promoting international trade cooperation. It is
grounded in economic principles, creates a code of conduct for trade policy, and is guided by
key principles that encourage nondiscrimination, reciprocity, enforceable commitments, and
transparency among member countries. These elements collectively contribute to the system’s
effectiveness in reducing trade barriers and facilitating global trade.
The paper’s argument implies:
- It suggests that the multilateral trading system, as an international institution, plays a
crucial role in fostering cooperation among nations in the realm of international trade.
- The promotion of trade liberation, with a focus on reducing trade barriers, can lead to
increased international trade and economic growth.
- By understanding the concept of opportunity cost and its relationship to trade
liberalization, countries can make informed decisions about resource allocation and
trade policy.
Evidence and contradictions
- Evidence includes empirical data on the positive effects on trade liberalization, such as
increased trade volumes, economic growth, and reduced poverty in nations that have
embraced liberal trade policies.
- Evidence that shows trade liberalization causing negative effects would contradict the
paper’s argument, such as job displacement, environmental degradation, or income
inequality.
, Article: The World Trade Organization and the Future of Multilateralism (Baldwin,
2016)
This article delves into the evolving landscape of international business trade governance,
focusing on the World Trade Organization (WTO) and its challenge in adapting to a changing
global economy. It explores the coexistence of multilateralism and regionalism in trade
governance and the implications of this complex dynamic. The article identifies key factors
affecting the WTO’s effectiveness.
Key concepts of this article:
- Multilateralism: the practice of countries working together through international
organizations or agreements to address global trade and economic issues.
- Regionalism: the formation of trade agreements and economic partnerships among
countries in a specific geographic region.
- WTO (World Trade Organization): international organization responsible for
regulating and facilitating global trade and resolving trade disputes.
- Bilateral investment treaties: agreements between two countries that govern
investment and related disputes
- Deep regional trade agreements: trade agreements that go beyond tariff reductions
and include provisions related to investment, intellectual property, and other aspects of
trade.
Relevant relationships between key concepts:
The article underscores the interplay between multilateralism and regionalism in the realm of
international trade governance. It explores how regional trade agreements have emerged
alongside the traditional multilateral approach, leading to a complex landscape in global trade
regulation.
The paper discusses the historical context and principles of the General Agreement on Tariffs
and Trade (GATT) and the WTO. It outlines five specific principles governing international
trade:
1. Nondiscrimination
2. Transparency
3. Reciprocity
4. Flexibility for safety valves
5. Consensus decision-making
Historical overview of tariff reduction under the GATT
Developed nations significantly reduced their tariffs, while low-income nations began to do so
in the 1980s. The momentum for trade liberalization was driven by interactions among these
principles and regional trade agreements, but changes in the 1990s had an impact on this
momentum.
General Agreement on Tariffs and Trade (GATT): was an international treaty aimed at
promoting cooperation in global trade. GATT’s primary mission was to reduce trade barriers,
particularly tariffs, and establish rules to govern international trade.
