This essay paper seeks to discuss the questions related to the articles posted on the blackboard course page. The contents of the articles are report by UNCTAD and international production and the truth and consequences of off shoring by Biven. Below are the responses to the six questions.
Core business is the main activity that defines the existence of an institution. It is the foundation of the all the activities that an institution engages in. In this context, the core business of TNC is network provision. Every other activity that the company engages in revolves a round network provision. The company therefore formulates strategies to facilitate its core business in the presence of competitors.
For example, formulation of foreign market entry strategies by TNC is to ensure that market penetration is smooth. Global value chain is the process of creating partnerships with various business institutions within an industry. These partnerships can be reshaped to form a concrete business network. The network is built to facilitate trade between local and foreign countries. It therefore, ensures that goods and services are available to consumers in good time. TNC has formed many partnerships with other businesses to strengthen its global connection.
According to the report by UNCTAD, non-equity modes of entry are foreign market entry methods where by, the company seeking to enter into a foreign market uses a method that relieves it of control over the foreign firm. In other words, the operating expenditure incurred by the foreign firm is taken care of by the foreign firm instead of the local firm.
The main reason for partnership formation is to create synergy. Partnerships generate a strong force that creates a turbulent take over of the targeted market. It is also necessary for undertaking a huge task that a single entity cannot manage. The relationship also creates a basis for checks and balances between partners to ensure that the terms and conditions to the contract are observed.
Contract manufacturing and service outsourcing
According to the report by the UNCTAD, multinational firms chose to use this method of foreign direct investment because of its positive contribution to the sales level. It leads to increase in employment opportunities in the host country. The local country enjoys great deal of advantages when it comes to labor costs. The local firm does not incur labor cost but the foreign firm. The local firm also enjoys low tax- associated costs, low raw materials costs and overheads costs. Contract manufacturing reduces the level of political and economic risks to the local firm. It also reduces foreign market entry related barriers.
Contract farming
Multinational firms prefer this foreign market entry strategy because it is attributed to low costs. For example, avoidance of trading costs like tariffs. It is a successful way of avoiding moral hazards related to unfamiliar cultural environments and thus reduces moral-hazard related costs.
Franchising
Multinational companies that resort to using this method as a foreign market entry method chose it because local firms are able to achieve an overseas expansion with a minimum initial investment. A local firm stands a chance of obtaining the franchisees’ skills. The method therefore, facilitates skill borrowing.
Licensing
This method of foreign direct entry offers faster access to foreign market because it fastens foreign market penetration. The method is accompanied with low initial investment. Trade barriers such as tariffs and quotas can be avoided using this method. It presents an opportunity for the local firm to utilize resources in the foreign country. The method also facilitates quick response to customer needs.
According to the article by the UNCTAD, Contract manufacturing generates more local value in comparison to other foreign market entry methods. This is because the local firm incurs no operating costs generated by the host firm. On the other hand, the local firm receives remittance of a fair share of profits generated by the foreign firm. As a result, the local firm will be earning without incurring expenditures of the host firm.
In comparison with other methods, they presents operating costs to the local firm thus reduces total earnings. Contract manufacturing, outsourcing and management contract have the potential to generate high income from export activities. Nevertheless, the level of the income is counterbalanced by increased costs of imports in the form of raw materials and transportation related costs. Therefore, management contract generates significant export earnings.
According to Bivens’ report, terms of trade refers to the price that foreign consumers pay for a country’s export as compared to the prices local consumers pay for imported goods. For example, if products from the US are highly priced in the international market and at the same time, the prices of imports are low, the situation presents improved terms of trade for the United States.
The opposite of the statement is true. This therefore, indicates how loss occurs due to terms of trade. Income distribution is a mechanism that channels the resources among different class of entities in a society. In the offshore trading, it comes about by channeling the amount of savings that have accrued to the U.S. investors or customers to the employees. Bivens reports an offshore savings of 58 cents. The U.S. workers get 47 cents in labor earnings. This indicates a loss of 11 cents for labor from every dollar of production that is offshored. This shows how loss occurs due to income distribution.
According to the research conducted by Bivens on the potential price reduction by offshore trading, he analyzed the report on GI model. The cost reduction concept is a forecast done using GI model on a historical data from pre-existing companies. The companies had already practiced offshore production and benefited. As a result, Biven warned against total reliance on the results. Personally, I concur with Biven. Circumstances do change and reliance on data that is not updated is a wrong strategy.
The GI model indicates an increase in wages by 0.44% and increase in employment by 589,000 by 2008. Conversely, the GI model predicts a reduction in domestic employment rates in the field of IT due to offshore trading. Biven noticed those and that this model predicted employment variations only in one sector. This information points to the direction that GI analysis was done on a narrow scope and should not be relied on. Personally, I concur with him because projection of a single sector is not sufficient to be generalized on a wider population.
After going through the report compiled by Biven, I would suggest for the stakeholders to seek for the maximization of offshore trading benefits for the common good, in both the host and the home country through adoption of models that generate clear macroeconomic –instead of microeconomic- effects of the trading practices they adopt.
For example, the GI model has proven to be beneficial only to the IT Company in question. Stakeholders should also avoid self-interest practices and focus on the common good. The GI model predicted a potential reduction of employment; a matter that should have seen this model disqualified but instead, it was approved.