Explain foreign direct investment:
1. Identify and briefly explain three costs of foreign direct investment (FDI) for a country such as China (the home country) and two benefits of such investment for a country such as Canada (the host country)?
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Case I
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Case II
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Case III
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Case IV
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Korea
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Japan
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Korea
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Japan
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Korea
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Japan
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Korea
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Japan
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Corn (bushels)
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4
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1
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4
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1
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4
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1
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4
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2
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Wine (bottles)
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1
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2
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3
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2
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2
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2
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2
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1
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2. The table shows the bushels of corn and the bottles of wine that Japan and Korea can produce from one day of labor under four different hypothetical situations. For each case identify the commodity in which Japan and Korea have an absolute advantage or disadvantage.
(a) From the table, indicate for each case the commodity in which each country has a com- parative advantage or disadvantage.
(b) Indicate for each case whether or not trade is possible and the basis for trade.
(c) Suppose that in Case II, Japan exchanges 4 bushels of corn for 4 bottles of wine with Korea
I) How much does Japan gain?
II) How much does Korea gain?
III) What is the range for the terms of trade for mutually beneficial trade?
IV) How much would each country gain if they exchanged 4 bushels of corn for 6 bottles ?of wine?
3) Compare the advantages and disadvantages of various modes of entering foreign markets.
4) You manufacture wine goblets. In mid-December, 2012 you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid-June, 2013. You expect the yen to rise from its present rate of $1 = ¥82 to $1 = ¥57 by June. You can borrow yen at 3 percent per annum. What should you do?
5) Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate sys- tem. What would be the likely consequences of such a system for (a) international businesses and (b) the flow of trade and investment among the three countries?