Strategic management of a global company requires an understanding and analysis of international business environment in order to assess opportunities and threats. The management has to formulate alternative strategies to exploit the opportunities provided by the environment by using company strengths. Many MNCs having the strength of technology and the environment of developing countries provide the opportunities of high quality and low priced products. Therefore, it is necessary to study the competitiveness of global business. The comparative cost theory concludes that the countries can specialize in producing certain products in which they have the competitive advantage of producing goods at low cost. It means that the customers in all the countries can have the goods at low price. Comparative cost theory also indicates that the countries which have the advantage of raw materials, labor, natural resources in producing particular goods can produce the goods at low cost with good quality. Continue reading
International Economics
Predicting Financial Distress and Corporate Failure
The financial failure of a company can have a devastating effect on all seven users of financial statements e.g. present and potential investors, customers, creditors, employees, lenders, the general public, etc. As a result, users of financial statements as indicated previously are interested in predicting not only whether a company will fail, but also when it will fail e.g. to avoid high profile corporate failures at Enron, Arthur Anderson, and WorldCom, etc. Users of financial statements can predict the financial position of an organization using the Altman Z score model, Argenti A score model, and by looking at the financial statements i.e. balance sheet, income statements, and cash flow statements. Business failure is defined as the unfortunate circumstance of a firm’s inability to stay in the business. Business failure occurs when the total liabilities exceed the total assets of a company, as total assets are considered a measure of the Continue reading
Trading Blocks Concept in International Economics
The post-second World War period has seen a growing interest in integrating national economies at regional levels. The efforts to form regional groupings, trade blocks and treaties have often floundered due to political differences and unforeseen economic hurdles. The motivation arises out of the realization of the limitations imposed by national frontiers and the expected benefits of a wider market, consisting of several national economies. Regional trade agreements represent an attempt by a group of countries to increase the flow of trade and investment by reducing direct and indirect trade barriers between them, as well as implement similar trade policies vis-Ã -vis outsiders. Multinational trade blocks are a major global trend. Most of these blocks are formed by geographically close countries, and revolve around a small group of larger economies. This is further testament to the importance of closeness and proximity in establishing network structures. Proximity in this case refers Continue reading
Gains from International Trade and Investment
The major gain of international trade is that it has brought about increased prosperity by allowing nations to specialize in producing those goods and services at which they are relatively efficient. The relative efficiency of a country in producing a particular product can be described in terms of the amounts of other, alternative products that could be produced by the same inputs. When considered this way, relative efficiencies are described as the comparative advantages. All nations can do simultaneously gain from exploiting their comparative advantages, as well as from the large-scale production and broader choice of products that are made possible by the international trade. Suppose that Japan is relatively more efficient in producing steel than food and the United States is relatively more efficient in producing food than steel. So we can expect food to be cheap relative to steel in United States, and steel to be cheap relative Continue reading
Profit Maximization vs Shareholders Wealth Maximization
Profit is obtained by subtracting total cost (TC) from total revenue (TR). Under the assumption of the neo-classical theory, a firm will aim to produce a level of output where the difference between the total revenue and total cost is the greatest. The maximization of TR-TC is the equilibrium condition for a profit-maximizing firm. This is because once the firm is getting the most profit from a particular level of output and sales, it will not be incentivised to alter the level of output that is giving it the most yields in total investment performance. A firm which strictly follows the primary assumption of the neoclassical theory of the firm will make its decisions on inputs and outputs based on the marginal effects of the components in the profit equation. Thereby leading economists to arrive at the conclusion that the condition for profit maximization to be achieved is when marginal Continue reading
Analysis of Joseph Schumpeter’s ‘Theories of Economic Development’
At the turn of the century, a period of strengthening the role of monopolies, increasing property differentiation of the population and the deepening of cyclical crises appeared the concept of an Austrian economist and sociologist Joseph Schumpeter. Joseph Schumpeter was an economist and sociologist, he came into the history of economic science as a profound scholar of theoretical problems of entrepreneurship and evolution of socio-economic systems, as the historian of economic theory. His broad vision of the evolution of socio-economic processes still has influence on modern economic thought. He presented his understanding of the subject of economics and tried to combine economic theory, economic sociology and the history of economic analysis. He tried to create a coherent system of believes that explains new phenomena and processes. According to his theoretical views, J. Schumpeter does not belong to any known economic schools. He was involved in many issues, focusing on the Continue reading