Global Business Environment

Globalization = worldwide interconnections in products, technology, information, and jobs. It blurs national boundaries and creates shared markets and shared risks. The primary driver of higher globalization is reduced trade barriers — lower tariffs, relaxed import regulations, open border policies, and freely flowing capital. Every other option works in the opposite direction: decreased Foreign Direct Investment (FDI) contracts investment flows, higher business costs push companies to stay domestic, lower cross-border migration restricts the labor movement that globalizes markets.

The key negative political outcome of globalization is the creation of isolationist policies. When workers lose jobs to foreign competition, or citizens feel cultural identity is threatened, the political system responds with inward-looking policy — tariffs rise, immigration restrictions tighten, international agreements get abandoned. "Increase in number of laws" and "increase in taxes" are generic governance effects that happen for many unrelated reasons.

When companies outsource manufacturing to lower-wage countries, the home country primary drawback is loss of manufacturing jobs. The company benefits from lower labor cost; the home workforce loses employment. Higher taxes and increased costs are wrong because outsourcing generally lowers costs.

CAGE analyzes how "distant" two countries are across four types of distance that affect trade, investment, and business difficulty. Greater CAGE distance = harder to do business across those countries.

Administration is NOT "Government" — government is one element inside Administration. Economy is NOT "Environment." Agriculture sounds like it starts with A but is not a CAGE factor. The exam consistently swaps in these three fakes. Identify and eliminate them immediately.

A traditional economy organizes production around custom and subsistence. Poor infrastructure, limited opportunity, no formal markets. Globalization impact = at a disadvantage because the country has a lower standard of living. Not that it causes conflicts — traditional economies aren't aggressive trading partners. Not "unaffected" — low infrastructure is a real constraint on global participation.

A market economy = private ownership + price signals + firms seeking to maximize profits. That exact phrase is the exam identifier. Government regulation being abundant = command economy. Public ownership = command economy. Tradition-based production = traditional economy.

A command economy = government ownership and central planning of production. A mixed economy = blends market and command elements. Most real-world economies today are mixed to varying degrees.

Islamic law has a specific and absolute direct impact on financial transactions: it forbids charging interest (riba). This prohibition shapes the entire Islamic banking and finance sector.

Because interest cannot be charged, Islamic banking uses compliant alternatives: murabaha (cost-plus financing — bank buys the asset and resells at a mark-up), musharaka (profit-sharing partnership between lender and borrower), and ijara (lease-based financing). These allow financing without technically charging interest.

Distractors are deliberate mischaracterizations: "It commercializes the legal system" — opposite, Sharia is a religious framework, not a commercial one. "It prohibits sale-buyback of businesses" — not an accurate characterization of Islamic law. "It limits the globalization of business" — too vague, Islamic law creates specific financial constraints, not a general globalization barrier.

The IMF (International Monetary Fund) maintains global financial stability. Its primary function: help countries experiencing balance of payments problems — when a country imports far more than it exports and runs out of foreign currency reserves. The IMF provides short-term financing to stabilize the situation before it spreads globally.

This is why "which institution maintains global financing to solve trade deficit issues" = IMF, not World Bank. World Bank = long-term development loans for schools, hospitals, infrastructure — not crisis lending. Federal Reserve = U.S. central bank only. International Finance Corporation = World Bank arm for private sector projects, not crisis lending.

The IMF's Special Drawing Right (SDR) = an international reserve asset valued based on a weighted basket of the five most significant members' currencies: U.S. dollar, Euro, Chinese Renminbi, Japanese yen, British pound. Not gold. Not all members. Not the dollar alone.

The World Bank provides long-term development loans to developing countries. Its current focus = improving quality of life — reducing poverty, expanding health access, building education systems, strengthening social safety nets. "Supporting structural development" is the historical early mission framing and a deliberate distractor. "Maximizing profitability" = private firm goal, not a development institution.

The WTO sets and enforces global trade rules, monitors compliance, and resolves trade disputes. Its specific documented criticism = adopting labor standards that protect labor rights. Critics from developing nations argue this is disguised protectionism — wealthy countries use labor rights requirements to block cheaper imports. The WTO's mandate is trade rules, not labor policy, making these provisions seen as an overreach. The other options (tariffs set by developing nations, agricultural tariffs, human trafficking) are real trade topics but not the defining institutional criticism of the WTO.

Comparative advantage = each country should specialize in goods where it has the lowest opportunity cost relative to other countries. Even if Country A is absolutely better at everything than Country B, both gain from trade through specialization. When two countries open trade, jobs increase in comparative advantage industries — labor flows toward competitive sectors; non-competitive sectors contract because they cannot survive open competition.

NAFTA's economic impact = shift of jobs away from low comparative advantage industries. U.S., Mexico, and Canada each reallocated labor toward their competitive sectors. Not "overall job loss and unemployment" (the macroeconomic consensus is NAFTA was net positive). Not "Gross Domestic Product (GDP) reduction" (all three economies grew). Structural reallocation — some industries lost jobs; others gained.

A country using established technology infrastructure to produce goods creates barriers to entry for other nations — the tech base is hard to replicate quickly, representing years of investment and institutional knowledge that competitors cannot easily copy.

Two countries opening borders to trade without tariffs = developing free trade policies with strategic partners. Does not impose restrictions on third countries. Does not automatically create a trade surplus. Does not provide subsidies.

Tariff types:

When a country imposes a tariff on imports: reasoning = protect its economy and give it opportunity for long-term expansion. Not to help the exporter. Not to divert trade.

When quotas limit imports: domestic prices increase. Quota caps foreign goods entering the market. Less supply + same demand = higher prices. Domestic producers benefit; consumers pay more. The answer is always increases — never decreases, never stays the same.

Protectionism's primary purpose = protect an infant industry. Shield a developing domestic sector from foreign competition until it can compete. Protectionism explicitly reduces competition — the opposite of "increase competition." Not a tool against import subsidies (that's countervailing duties, a separate mechanism).

To encourage foreign investment: provide tax exemptions. Directly reduces investor cost and risk. Tariffs, protectionism, limiting privatization all signal hostility to foreign capital.

Integration levels from lowest to highest:

The key Customs Union feature tested: unified trading policies with non-members — the common external tariff. When Country A and Country B are in a Customs Union, a company from Country C faces the same tariff regardless of which border it crosses. "Removal of all barriers" = Economic/Political Union level, not Customs Union.

Main drawback of regional trade agreements = they shift employment opportunities. Competitive sectors expand; non-competitive sectors lose jobs as production moves to the most efficient location. The broader framing = specialization based on comparative advantage eliminates industries that cannot compete — structural unemployment in those sectors. Lower prices, labor mobility, and internal trade are benefits, so they appear as wrong answers to "what is a drawback."

USMCA replaced NAFTA in 2020. Most specific testable provision: approximately 40-45% of automobile parts must be produced by workers earning minimum $16/hour by 2023. This is a wage floor — designed to prevent automakers from relocating production entirely to lowest-wage locations. Not "100% of parts manufactured within the region" (that's the trap — sounds stricter and more logical). Not dairy. Not member negotiation rights with non-members. Lock in: "almost half" + "$16/hour" + "2023."

CAFTA (Central America Free Trade Agreement) = U.S. + Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Dominican Republic. Costa Rica + U.S. telecom investment = CAFTA. The Free Trade Area of the Americas (FTAA) was proposed but never ratified. Canada-Costa Rica bilateral FTA exists but is narrower. IMF = financial institution, not a trade agreement.

A firm based in Country A manufactures in Country B and pays workers in Country B's currency. Maximum profit when Country A's currency is strong relative to Country B's.

The mechanics: if Country A's currency is strong, each unit of Country A currency buys more of Country B's currency when converting to pay workers. Same workers, same yuan wages — but they cost fewer dollars. Lower labor costs in home-currency terms = higher profit margin. The reverse: if Country A's currency weakens, the same workers cost more dollars. Profit shrinks.

This is the dynamic large multinationals manage constantly. When the U.S. dollar is strong relative to Asian currencies, U.S. companies manufacturing in Asia pay less in dollar terms for the same manufacturing work — profits improve without a change in operations.

Currency risk = possibility that exchange rate changes will make a future transaction more expensive than planned. Companies with multi-country operations face this constantly. The solution is hedging — using financial instruments to lock in or limit exposure.

Currency swap = two firms exchange currencies now and reverse at a pre-agreed future date and rate. Used when each firm genuinely needs the other's currency for ongoing operations. Spot rate = current exchange rate for immediate settlement (within 2 business days). Hedging = overall strategy of using financial instruments to reduce adverse price/rate movements — limits downside without eliminating all risk.

Two global accounting standard frameworks exist. Only two:

GAAP (Generally Accepted Accounting Principles) = U.S. standard. Governed by Financial Accounting Standards Board (FASB) (Financial Accounting Standards Board). More rules-based — detailed specific rules for many situations.

IFRS (International Financial Reporting Standards) = international standard. Governed by International Accounting Standards Board (IASB) (International Accounting Standards Board). More principles-based — general principles requiring professional judgment. Used by EU, most of Asia, Latin America, Africa.

Jurisdiction rule: U.S. company + U.S. transaction = GAAP. International entity or cross-border transaction = IFRS. U.S. company acquiring a California domestic supplier = two U.S. entities + U.S. transaction = GAAP.

The exam includes fabricated options: "Financial Accounting Reporting Standards" and "General International Accounting Principles" — neither exists. If the accounting standard name isn't GAAP or IFRS, eliminate it immediately without reading further.

Banks and investors use financial statements to decide whether to grant access to money. Banks assess creditworthiness, liquidity, debt-to-equity, and cash flow before lending. Investors assess profitability before buying equity or bonds. Not for marketing assessment (not their function). Not for partnership recommendations (that's consulting). Not for growth plan creation (that's management). Financial statements = lending and investment decisions. Period.

Transfer pricing = setting prices on transactions between parent company and foreign subsidiaries to shift income from high-tax to low-tax jurisdictions. Effect on the subsidiary: lowered profit on paper. The subsidiary records less income than it would otherwise earn. The parent's overall tax burden falls, but the subsidiary's books show compressed profitability, creating accounting complexity and regulatory scrutiny.

Macro political risk = political factors affecting the overall stability of the entire country and impacting ANY industry regardless of type. A change in government leadership = macro. Civil war, revolution, widespread instability = macro. These events hit every company operating in that country.

Micro political risk = targets a specific industry or company. Government nationalization of assets = the textbook micro risk example. When a government seizes ownership of a specific company's assets (an oil field, a telecom network, a mine), it directly harms that entity without necessarily destabilizing the whole economy. Loss of Intellectual Property (IP) through government theft = also micro. Targeting = micro.

The trap: nationalization sounds dramatic and economy-wide — it feels like macro. But the definition is precise: micro = targets specific entities. A government nationalizing a foreign company's operations is a targeted action, not a whole-economy destabilizer.

Antitrust laws (competition laws / antimonopoly laws) prevent companies from using unfair practices to dominate markets. They specifically prohibit:

Monopolization = taking actions to illegally gain or maintain monopoly power over a market. Also prohibited. The Sherman Antitrust Act (1890) was the first major U.S. antitrust law, targeting price-controlling cartels like Standard Oil. These laws do not overlap with contract law (binding agreements), production laws (manufacturing standards), or IP law (creative works).

A monopoly is created by control of natural resources. Owning the only viable source of a critical input — a mineral deposit, a water supply, a unique geographic location — creates market control because competitors cannot operate without that input. Strong interest rates, educated employees, and vertical integration alone do not create monopolies. The textbook exam answer is natural resource control.

When two companies from different countries enter a commercial contract without spelling out every term, the CISG (UN Convention on Contracts for the International Sale of Goods) fills those gaps. It provides default rules automatically applying to international commercial sales contracts unless parties explicitly opt out. Covers: offer and acceptance, delivery obligations, risk of loss transfer, and breach remedies.

Jurisdiction distinction: Uniform Commercial Code (UCC) = U.S. domestic commercial contracts. CISG = cross-border commercial contracts between companies from different countries. Common Law = general contracts in common law jurisdictions, doesn't provide CISG's specific gap-filling provisions.

The grease payment scenario: an employee in an overseas office pays a small unofficial fee to local officials to expedite work. The U.S. manager is upset. Most challenging aspect = ethical behaviors are not standardized across the world. What is a normal facilitation payment in one cultural context is classified as bribery in another (potentially violating the U.S. Foreign Corrupt Practices Act). The challenge is not that the manager has personal opinions, or that unethical practices are "common abroad" (ethnocentric and inaccurate) — it is that no universal ethical standard governs cross-border business.

This connects to ethical relativism (ethics vary by culture — follow local norms) vs. ethical absolutism (some standards are universal regardless of culture). Most Multinational Corporations (MNCs) operate somewhere in between, establishing global baseline standards while acknowledging cultural variation — which is exactly why the grease payment creates a genuine unresolvable dilemma.

A code of ethics = organizational document stating behavioral standards all employees follow consistently regardless of context or location. When a CEO tells employees to follow organizational values and mission "regardless of the situation" = enforcing the code of ethics.

CSR (Corporate Social Responsibility) = a company's obligations to society — employees, communities, environment, stakeholders broadly — beyond what is legally required. Voluntary ethical behavior that goes above compliance.

Company responds to green packaging demands but modifications increase production costs: specific concern = decreased profitability. Meeting the ethical demand is correct — but it costs money. Not reputation damage (responding to consumer demands should improve it). Not environmental damage (green packaging reduces it). Not shareholder dissatisfaction (the long-term CSR frame actually protects shareholders — the short-term cost hit is the specific concern).

Primary CSR goal when entering global markets = increase shareholder trust via high ethical standards. Consistent ethical behavior across new markets builds long-term shareholder confidence. "Improve public trust in low-profit regions" = too geographically narrow. "Enhance shareholder value through social marketing" confuses marketing with CSR.

When expanding CSR initiatives to a global level: strategy = engage stakeholders on the issue of air quality. Air quality crosses national borders, affects all stakeholders globally, and inherently involves multiple stakeholder groups. Improving local manufacturing, funding city charities, and career days = local activities that don't scale globally and don't involve the multi-stakeholder breadth global CSR requires.

Organizational structure = the formal way a company divides labor, groups employees, and assigns decision-making authority.

Departmentalization: Product = by goods/services (washers, dryers, refrigerators — Q37). Market = by customer type. Geographic = by region. Functional = by business function.

Centralization and its result: Decision-making concentrated at highest level = centralized. Result = increased consistency in operations. All subsidiaries follow the same standards because all decisions flow from the same central authority. Economies of scale require volume increases, not centralization. Fairness with suppliers is a relationship metric.

Every entry strategy trades off commitment level (capital, risk) against control level (quality, IP, operations). The spectrum:

Critical distinctions: A company hiring a distributor to manage products in a foreign market = still exporting. Manufactures at home, ships internationally, distributor handles local delivery only. No brand rights transfer, no shared entity. Not franchising, not joint venture.

Q45: "Direct operating presence + highest risk + slowest entry" = subsidiary or greenfield. Buying and running an existing company = subsidiary. Building from scratch with all assets = greenfield.

Hofstede's framework describes how national culture affects organizational values and behavior. Each dimension measures one specific, distinct aspect. Mixing dimensions is the most common failure on this exam section.

Indonesia scenario: A U.S. manager adapts fully to Indonesian workplace harmony culture, learns the language, is perceived as an insider. How do local cultural dimensions influence the evaluation? Answer = very favorable performance evaluation. Indonesian workplace culture reflects high collectivism (group harmony valued over individual achievement) and high power distance. A manager who integrates fully, respects local norms, and builds in-group belonging signals trustworthiness and respect — the highest-valued traits in that cultural context. Refusing to adapt = harsh evaluation. Adapting fully = favorable.

Repatriation = transitioning employees back to their home country after an international assignment. Returning employees often experience reverse culture shock — they've adapted to the foreign culture and now find their home culture feels unfamiliar or frustrating. Cause of disorientation = changes in work culture and customs. Not loss of pay (maintained during repatriation). Not time zones (physical adjustment only). Not consistency (describes organizational processes, not the employee's cultural experience).

Lean manufacturing = production philosophy centered on eliminating all forms of waste — any activity consuming resources without adding customer value. The Toyota Production System is the foundational model. Lean's seven classic waste categories: overproduction, waiting, transportation, inventory, motion, over-processing, and defects.

When a company headquarters introduces manufacturing process improvements across multiple global factories that dramatically reduce waste = lean manufacturing. The scope (multiple countries), mechanism (process steps reducing waste), and outcome (dramatic waste decrease) all map to lean.

Just-in-time (JIT) = a specific lean technique — receiving materials from suppliers only when needed for production, eliminating excess inventory holding. JIT reduces inventory waste specifically. JIT is a subset of lean, not the same as lean. Lean is broader and encompasses JIT. "Refined logistic network" = improving distribution, not manufacturing waste. "Channel-spanning performance measures" = metrics tracking performance, not a production method.

To minimize distribution shipping costs when choosing a facility location: key factor = value-to-weight ratio.

The logic: shipping costs are driven by weight and volume. Low value-to-weight ratio (heavy relative to value — concrete, bottled water, bulk chemicals) = expensive to ship relative to what the product is worth. Must be produced near the market or freight costs destroy the margin. High value-to-weight ratio (light relative to value — semiconductors, pharmaceuticals, luxury watches) = can absorb shipping costs easily. Can be produced anywhere and shipped economically.

Minimum efficient scale = smallest production volume achieving maximum economies of scale — relevant for capacity planning, not location-to-minimize-shipping decisions. Financial incentives = relevant for location decisions broadly but not specifically for minimizing distribution costs.

The country-of-origin effect = consumer perception of where a product was made influences purchase decisions. A company assembling locally but finding consumers prefer foreign-made versions is experiencing this. Consumers associate countries with quality — "Made in Germany" (engineering), "Made in Switzerland" (precision), "Made in Japan" (reliability) — independently of actual quality. "Quality-of-localization effect" is fabricated. "Value chain effect" and "mass customization effect" describe different phenomena entirely.

A distribution channel = the path goods take from producer to final consumer. Classified by how many intermediary layers stand between producer and consumer.

Direct channel = producer → consumer directly. Zero intermediaries. Q56: a startup wanting to "connect directly with consumers" should use 0 layers of intermediaries. Not 1, not 2, not 3. Zero.

Indirect channel = has one or more intermediaries. Producer → Distributor → Retailer → Consumer = indirect (Q57). Not "complex," not "multi-level" — those are not standard channel classification terms. Only direct and indirect.

Primary advantage of indirect channels = reduces up-front costs by using an existing channel. The intermediary already has warehouses, retailer relationships, logistics infrastructure, and market expertise. Building all that from scratch requires massive investment and years of relationship-building. Using an intermediary bypasses that. The trade-off: loss of control over how the product is represented, priced, and sold.

Direct channel advantages: Full ownership of customer relationships, complete control over pricing and branding, all margin stays in-house, direct customer data access. Companies choose direct channels when control and data outweigh the cost of building the channel themselves.

The digital divide = inequality between groups in access to, use of, and benefit from information and communication technologies. Not one gap but a progression of distinct barriers, each requiring a different solution:

The Empowerment Stage = the highest-order barrier. The community has physical access AND the skills — but does not value it or see a reason to use it. Barrier = attitudinal and motivational, not logistical or financial. Solution = demonstrate value and relevance: show what the technology can accomplish for the community's own goals.

Q64: Community has skills AND internet access but doesn't value technology. Company wants to correct this. Stage = empowerment. Not accessibility (have access). Not usability (have skills). Not economic (access implies affordability). Empowerment = has everything, won't use it.

AI = broad category of computer systems engaging in humanlike activities — pattern recognition, decision-making, language processing.

Machine learning = subset of AI where systems learn automatically from data and improve without being explicitly reprogrammed for each task.

Deep learning = subset of machine learning where computers learn unsupervised from unstructured data (images, audio, video, sensor readings). No human labels training examples — the system develops its own internal feature representations. Q66 example: machines becoming familiar with common product defects over time without being programmed with defect definitions. The machine recognizes defects autonomously through exposure to production data. Fingerprint readers = biometrics (rule-based, not self-learning). Bar code sorting = basic automation, no AI. Orders populating as clients place them = standard Enterprise Resource Planning (ERP)/database.

Blockchain = decentralized, distributed ledger technology storing data across a network of computers without central control. Each data block is cryptographically linked to the previous one — tamper-resistant and verifiable by all participants. Q67 application: privately and securely storing personal information (SSNs, credit card numbers) accessible globally. Key properties = secure + decentralized + globally accessible + tamper-resistant. Not AI. Not antivirus (threat protection). Not Virtual Reality (VR) (immersive simulation).

Cloud-based file sharing = Q65 answer for global companies wanting employees to access business information 24/7 from anywhere. Email attachments are not persistently accessible. Social media = public. Desktop publishing = local installation.

Four industrial revolutions mark major technological transitions in economic production:

The Fourth Industrial Revolution (Industry 4.0) = the current era. Characterized by convergence and fusion of digital, physical, and biological technologies. Defining technologies: autonomous vehicles, 3D printing, biometrics, nanotechnology, quantum computing, AI, Internet of Things, robotics, and biotechnology. The key characteristic is not just individual technologies but their integration — physical and digital systems operating together. Q68 = Fourth Industrial Revolution. "Technology Revolution" is not a standard term. "Second" = electricity era. "Market Revolution" = 19th-century U.S. economic history term.

AI adoption — slowest sector = Education. Financial services has deeply integrated AI: fraud detection, algorithmic trading, credit scoring, robo-advisors. Healthcare: diagnostic imaging, drug discovery, clinical decision support. Transportation: route optimization, autonomous vehicles, logistics. Education is significantly slower — institutional inertia from public-sector governance, pedagogical tradition, data privacy concerns about student data, lack of standardized digital infrastructure, and resistance to technology replacing teachers.

ERP (Enterprise Resource Planning) = integrated software platform connecting all major business functions — finance, HR, manufacturing, supply chain, sales, procurement, customer service — into a single unified system with a shared database. All departments share information automatically. Q70: workers struggle because information systems don't communicate across departments → solution = ERP system. A "deep learning system" addresses AI/learning, not cross-departmental integration. "Management information system" is a broad category ERP fits within — but ERP specifically solves the cross-department communication problem described.

These two concepts are related but distinct, and the OA asks about each directly.

Absolute advantage = a country produces a good more efficiently than all other countries in absolute terms — more output per hour of labor, or lower input required per unit. If the U.S. can produce more wheat per acre than any other country, it has an absolute advantage in wheat. The OA phrase: "a country produces goods more efficiently than all other countries in the same industry" = absolute advantage.

Comparative advantage = a country produces a good at a lower opportunity cost relative to other countries. Even if Country A is better at producing everything than Country B, both gain by specializing in what they give up the least to produce. The OA phrase: "which unique condition caused both countries to specialize and trade even though each could produce both products" = comparative advantage (or skill specialization — see below).

Economies of scale = as production volume increases, the per-unit cost of producing each item decreases. Fixed costs (factory, equipment, R&D, management) are spread over more units. Workers and processes become more efficient with repetition. The result: high-volume producers become the cheapest global suppliers.

The OA scenario: a company repeatedly produces the same product and its manufacturing cost becomes cheaper and more competitive internationally than similar products. What approach explains this? Economies of scale.

This connects to the New Trade Theory: countries and companies can create comparative advantages through specialization and scale — they don't need to start with natural resource advantages. A country that specializes in semiconductors long enough builds the expertise and scale that makes it the lowest-cost producer globally, even if it has no natural advantage in silicon or chip-making materials.

The value chain is the full sequence of activities a company performs to create and deliver a product — each step adds value from raw material to final consumer. Michael Porter developed this concept. The chain includes: inbound logistics → operations/production → outbound logistics → marketing and sales → after-sale service. Each activity either adds value or it doesn't.

The OA scenario: an airplane manufacturer outsources the manufacture of parts and subassemblies to suppliers around the world, then ships them to its main plant for final assembly. What term describes this? Value chain. Each supplier is performing part of the value chain. The manufacturer manages which activities happen where globally.

International value chain management = deciding where each value-adding activity is most efficiently performed globally. Low-value, labor-intensive steps go to low-cost countries. High-value, expertise-intensive steps (design, final assembly, R&D) stay in the home country or near key markets.

Foreign Direct Investment (FDI) = investing in or acquiring foreign assets with the intent to control and manage them. The critical distinction from portfolio investment: FDI gives you operational control. Buying a factory = FDI. Buying foreign stocks = portfolio investment (no control).

Brownfield FDI = purchasing or leasing existing facilities and repurposing them. Faster and cheaper than greenfield because infrastructure exists. Example: buying an old steel mill and converting it to office space.

Benefits of FDI: creates jobs in host country, brings capital, introduces technology and management practices, increases tax revenue. The inflow of capital benefits BOTH global and local economies.

Costs/risks of FDI (host perspective): foreign investors may extract natural resources and leave; may dominate strategically important industries undermining national sovereignty; may use transfer pricing to minimize local tax payments.

Government limits on FDI: creating foreign ownership restrictions — laws capping the % of a domestic company that foreign investors can own. Common in defense, telecoms, aviation, media.

MNC (Multinational Corporation) = a company that operates in two or more countries but retains a clear national identity. It is essentially a home-country company with foreign subsidiaries. Apple is a U.S. company with operations worldwide.

TNC (Transnational Corporation) = operates globally without identifying with any single national home. Management, ownership, and operations are distributed across multiple countries with no dominant national identity. Shell (Anglo-Dutch), ABB (Swedish-Swiss) are examples. A TNC does not identify itself with one national home — this is the precise OA distinction.

MNCs improve international relations because they create mutual economic dependency. Countries don't go to war with nations where they have major investments — both sides have too much to lose economically. This is why MNCs act as an informal diplomatic stabilizing force.

MNCs drive economic integration among countries — interconnected supply chains, cross-border investment flows, and technology transfers bind economies together. This is the result of multinational business existence the OA tests.

MNC benefits of moving production overseas: primarily saves labor costs. In a highly unionized home country, moving offshore also improves negotiating leverage with unions — the threat of relocation becomes credible.

Consumer surplus = the difference between what consumers are willing to pay and what they actually pay. When tariffs and quotas are removed, import prices fall, consumer surplus increases. Free trade = lower prices = more consumer surplus. This is the primary economic argument for free trade from a consumer perspective.

Government subsidies = financial assistance to domestic producers (tax credits, direct payments, low-interest loans) that lower their costs and enable below-market international pricing. When a country's farmers receive generous tax credits enabling them to undercut foreign competitors — that is government subsidies. Distinct from dumping (company-level, not government-level) and countervailing duties (the response, not the practice).

Countervailing duties = tariffs imposed specifically to offset the benefit of foreign government subsidies. If Country A subsidizes its steel so it sells below cost, Country B imposes countervailing duties to level the playing field. Countervailing duties = response to subsidies. Anti-dumping duties = response to company-level below-cost pricing.

Contract manufacturing = hiring a third-party manufacturer overseas to produce your products to your specifications. You don't own the factory — you own the design and brand. Advantages: lower labor costs, lower material costs, reduced capital investment, access to specialized manufacturing. NOT an advantage: PR benefits — contract manufacturing creates PR risk (labor conditions, environmental practices). This is the OA trap question on this topic.

Opportunity cost = what you give up by choosing one option over another. It is the correct framework for all trade specialization decisions. A farmer deciding what to plant uses opportunity cost — what soy am I giving up to plant corn? Countries use opportunity cost to determine comparative advantage: produce what costs you the least in terms of what you forgo. "Which type of cost should a farmer use to decide what to plant?" = opportunity cost.

FTAs vs Treaties (U.S.): Free Trade Agreements require a simple majority vote of both the House and Senate. International treaties require a two-thirds Senate supermajority. FTAs face a lower political bar — which is why most modern U.S. trade deals (NAFTA, CAFTA, USMCA) are structured as FTAs rather than treaties. The strategic implication: trade deals are more achievable than full treaties in the polarized U.S. political environment.