15.4) How do you
explain the continued existence of counter trade? Under what scenarios might its popularity
increase still further by the year 2010?
Under what scenarios might its popularity decline?
Countertrade becomes popular when foreign exchange markets
are limited or importers don’t have access to foreign exchange (low reserves)
they need to fund their purchases.
Currency crises and monetary instability are two conditions that lead to
countertrade. As long as countries lack hard currencies and foreign exchange
reserves, yet have an interest in trade, countertrade is likely. If countries erect trade barriers that
decrease world trade, or, on the positive side, the monetary systems of many countries
strengthen significantly, then countertrade may decrease.
16.2) A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs approximately $20million to construct and requires a moderately skilled workforce. The total value of the world market for this product over the next 10 years is estimated to be between $20billion and $30 billion range. The tariffs prevailing in this industry are moderate. Should the firm favor concentrated manufacturing or decentralized manufacturing? What kind of location(s) should the firm seek for its plant(s)?
This question is a tougher call than the scenario depicted
in Question #1. The firm should probably
pursue a limited decentralized manufacturing strategy (meaning that the firm
should not set up a plant in every country that it sells to, but should set up
plants in several "regions" of the world). This strategy makes sense because (1) The
tariffs prevailing in the industry are moderate (rather than low), (2) the cost
of constructing a facility is relatively modest ($20 million), and (3) only a
moderately skilled work force is needed (which is probably available in many
low-cost regions of the world). The firm
should select its location based on country factors, technology factors and
product factors. In terms of country
factors, the firm should find locations where semi-skilled labor is
inexpensive. In terms of technology
factors, the firm is not constrained by high fixed costs, so technology is not
a pervasive issue. Finally, product
factors favor the firm locating in several locations throughout the world. The company's product has a low value-weight
ratio, making it unattractive to produce the product in a central location and
export it across the world.
16.4) A firm must decide whether to make a component part in-house, or to contract it out to an independent supplier. Manufacturing the part requires a non-recoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house, and (b) outsourcing manufacture to an independent supplier? Which option would you recommend? Why?
Manufacturing in-house would reduce the risk of currency
appreciation and rising costs from independent suppliers. Specialized asset
investment would make firm dependent on specific suppliers, however,
technological know-how would be protected, and improved scheduling would be
available. Out-sourcing would be
beneficial if the product using the component fails in the market because the
supplier will bear the cost of the non-recoverable investment, and flexibility
in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational
and coordination costs. Based on what we know, manufacturing in house may be
slightly preferred, but other information could tip the decision the other way.
17.4) Price discrimination is indistinguishable from dumping. Discuss the accuracy of this statement?
In some specific instances this statement is correct, but as a general rule it is not. When a firm is pricing lower in a foreign country than it is in its domestic market, it can be difficult to distinguish dumping from price discrimination unless it is clear that the firm is selling at below cost in the foreign market. Yet when costs are reasonably well known and all prices are above these, or if the firm is pricing lower in its domestic market than in foreign markets, it can be reasonably concluded that price discrimination rather than dumping is occurring.