FIN 500 – Global Corporate Finance
Case Study 2: The Challenge of Foreign Competition
JUNE 4, 2009
As the title of the case study clearly states, chapter 2, deals with issues relating to challenges of foreign competition. The case begins by describing how a domestically-based television manufacturing company – Stellar Television Company - conducts its operations, and how Japanese competition has begun distorting the company’s performance as time progresses. In the late 1950s Stellar employees earned a solid $50 a week, and a Stellar television was worth $250. Ed Johnson, who was the CEO of Stellar Television Company, measured the success of his company by calculating the amount of work hours needed by his employees to purchase 1 unit; so, in the late ‘50s it took a worker 5 weeks of work to earn a television. That number has been on a decreasing trend since the first year of the company’s operation, showing increasing labor productivity and growth for the firm. In the early 1960s, Ed Johnson came face-to-face with foreign competition as Japanese televisions began coming into America. As a result of the increased competition, Ed Johnson is very close to start laying-off workers, and also on the verge of lowering employee’s wages. Therefore, in order to try and fix the situation he meets with his congressman, Frank Bates, and requests the he passes a bill limiting imports of Japanese televisions. After much argument and conversation Ed convinces Frank to sponsor a trade bill banning foreign televisions. This would gain him favor from the state, which would ultimately increase his chances of running for White House in the near future. However, things don’t go as expected when Congressman Bates speaks about a plan to keep out all foreign products entirely, so that to pass-on the benefits to other industries as well.
In my opinion, the main argument that the case study brings forth is whether increasing protectionism measures would benefit the U.S more than increased free trade and foreign direct investment in the U.S. In other words, would banning all foreign products be better for U.S. domestic firms, or will the increased competition from Japanese companies outweigh the advantages of the trade restrictions? It is evident that both protectionism and free trade share their own advantages and disadvantages, however, the main challenge is to find the perfect balance between the both that maximizes efficiencies for all parties involved. Protectionism is a government set policy that controls or completely restrains trade between countries, and states, by means such as tariffs, quotas, and a variety of other restrictive government regulations. During our 3-week tentative course in global corporate finance, we studied some reasons why countries, and governments, would engage in protectionism; some of these include national security, unfair competition, infant industry argument, domestic employment, and diversification (Kim and Kim, 2006). Advocates for protectionism, often argue that protectionism measures benefit the economy and the country in the following ways: •
National Security - if a country is aiming to be a world power, it must maintain key sectors for national security. By preserving and sustaining factor endowed commodities, it is guaranteed supplies in the event of a war. •
Unfair Competition - may arise in the form of lower wages in foreign countries, and special tax incentives and subsidies from foreign governments. •
Infant Industry argument - states that protectionism measures are sometimes necessary for new firms and industries that have just began to establish themselves in the domestic market. •
Domestic Employment - protectionism upholds domestic employment due to fewer jobs been lost, and increases living standards through higher wages. •
Diversification – highly specialized economies rely on foreign countries for incomes, therefore, if they decide to decrease...
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