Theories Of International Trade

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International Finance
Professor Baruch

Fall, 2013
Home Work Assignment1

This assignment is based on the lecture on Theories of International Trade and
Chapter 1 in B&H.
(1) Define globalization. How has it proceeded in trade in goods and services versus capital markets?
Answer: Globalization refers to the increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities. Because of globalization, multinational corporations dominate the corporate landscape.
(2) Describe fours ways that a company can supply its products to a foreign country. How do they differ?
Answer: An MNC can supply a foreign market through exports, by licensing local firms abroad to manufacture the companys products, by setting up a joint venture with a foreign company, or by foreign direct investment.
(3) What percentage ownership typically defines FDI?
Answer: Foreign direct investment (FDI) occurs when a company from one country makes a significant investment that leads to at least a 10% ownership interest in a firm in another country.
(4) What is agency theory? How does corporate governance the issues raised by agency theory?
Answer: Agency theory explores the problems that arise because the owners of the firm do not typically manage the firm, and it devises ways to resolve these problems. This is often called the separation of ownership and control. A manager of a firm, in particular the chief executive officer (CEO), is viewed as an agent who contracts with various principalsmost importantly the firms shareholders but also the firms creditors, suppliers, clients, and employees. The principals must design contracts that motivate the agent to perform actions and make decisions that are in the best interests of the principals.
(5) Why is ownership more concentrated in developing countries than in developed countries? Answer: In many developed countries, the rule of law is strong enough to discipline managers through legal means, for example by takeovers and proxy contests or through contractual compensation plans. Concentrated ownership is one way in which agency problems are mitigated in developing countries.


A block of stock is held by either a wealthy investor, a family, or a financial intermediary, which might be a bank, a holding company, a hedge fund or a pension fund. The large shareholder clearly has a vested interest in monitoring management and has the power to implement changes in management.
Negative aspects of this approach include possible collusion between the large shareholder and the management to expropriate wealth from smaller shareholders and the fact that the stock may be more difficult to trade on the stock market if a substantial block of shares is withdrawn from the market but is still available to be sold should the large shareholder want to sell.
(6) What is the IMF? What is its role in the world economy?
Answer: The International Monetary Fund (IMF) is an international organization of 187 member countries, based in Washington, DC, which was conceived at a United Nations conference convened in Bretton Woods, New
Hampshire, in 1944. The main goal of the IMF is to ensure the stability of the international monetary and financial systemthe system of international payments and exchange rates among national currencies that enables trade to take place between countries, to help resolve crises when they occur, and to promote growth and alleviate poverty. To meet these objectives, the IMF offers surveillance and technical assistance. Surveillance is the regular dialogue about a countrys economic condition and policy advice that the IMF offers to each of its members. Technical assistance and training are offered to help member countries strengthen their capacity to design and implement effective policies, including fiscal policy, monetary and exchange rate policies, banking and financial system