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BEC I and II > 8. Globalization > Flashcards

8. Globalization Flashcards

1
Q

What is globalization?

A

The movement toward a more integrated and interdependent world economy.

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2
Q

What are the evidence of globalization?

A

Increased mobility of;

goods/services, labor, technology, and capital

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3
Q

What has driven globalization?

A
  • Advent of global institutions (e.g. World Bank, International Monetary Fund, Multinational corporations, etc).
  • Reductions in trade and investment barriers
  • Technological advances
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4
Q

What is the first movement of globalization?

A

Bretton Woods Agreement (1944) which established the framework for increased international commerce and finance following World War II.

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5
Q

What are 2 institutions established by the Bretton Woods Agreement? For what purpose?

A

To oversee the process.

  1. World Bank: To promote general economic development (e.g. lending to developing countries, primarily for infrastructure, agriculture, education, and similar development needs).
  2. International Monetary Fund (IMF): To maintain order in the international monetary system by providing funds to economies in financial crisis (currency crisis, banking crisis, financial debt crisis)
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6
Q

Where is the reduction in worldwide trade barriers originated from?

A

In 1947 with the initial General Agreement on Tariffs and Trade (GATT).

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7
Q

What are the purposes of original GATT and subsequent variations?

A

They are multilateral agreements to:

  • Liberalize and encourage trade by eliminating tariffs, subsidies, import quotas and other barriers
  • Harmonize related laws across nations
  • Reduce transportation and other costs as a group undertaking
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8
Q

Who coordinates GATT accomplishments? When is it established?

A

The World Trade Organization (WTO). in 1995.

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9
Q

What is WTO responsible for?

A
  • Overseeing the implementation, administration and operation of the covered trade agreements
  • Providing a forum for negotiations and for setting international trade disputes
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10
Q

Concurrent with reduction in trade barriers, what has many counties done?

A

Removed restrictions on investment in the county by foreign investors

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11
Q

What is the investment by foreign investors called?

A

Foreign direct investments (FDI)

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12
Q

In which areas significant technological advancement have occurred?

A
  • Communication and info processing: the ability to transmit and process large quantities of voice and data at low costs (Internet and World Wide Web)
  • Transportation advances: the ability to move people and products faster and cheaper (large long-range jet aircraft, FedEx/UPS, large cargo ships, supertankers, containerization)
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13
Q

Which area of understanding must participating business in international business activity have?

A
  • Political system
  • Economic system
  • Legal system
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14
Q

What kind of understanding business must have about legal system?

A

Property rights.
Contract laws.
Intellectual property laws.
Product and safety laws.

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15
Q

What are 3 major areas in which globalization has occurred?

A

Trade, production, and capital markets.

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16
Q

What is FDI?

A

direct investment by an entity in facilities to manufacture and/or market goods and services in a foreign country

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17
Q

Globalization of Trade: What are the reasons for international trade growth?

A
  • Reduction in trade barriers to imports
  • Increased economic integration of countries
  • Regional trade agreements (e.g. NAFTA, EEU)
  • Internet and World Wide Web capabilities
  • Development of financial sector that supports international trade
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18
Q

Globalization of Trade: How much did world economic output grow between 1950-2000? Global trade?

A

6-fold.

17-fold.

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19
Q

Globalization of Trade: How much did world exports grow between 2000-2008? in 2009? In 2010-2011?

A

At average annual rate of 5%.
Declined by 12% due to worldwide economic downturn.
Grew by 14%in 2010 and 5% in 2011.

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20
Q

Globalization of Trade: Is US import or export county historically?

A

Import.

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21
Q

Globalization of Trade: How much % of imports was of GDP in 1960? In 2013? Exports?

A

Imports:
1960: 4%. 2013: 17%.
Exports:
1960: 5%. 2013: 14%.

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22
Q

Globalization of Trade: Who are the top 5 countries by exports in 2014?

A
  1. China: $2,342,000
  2. US: 1,621,000
  3. Germany: 1,508,000
  4. Japan: 683,000
  5. Netherland: 672,000
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23
Q

Globalization of Trade: Who are the top 5 countries by imports in 2014?

A
  1. US: $2,413,000
  2. China: 1,959,468 - export surplus
  3. Germany: 1,216,000 - export surplus
  4. Japan: 822,000
  5. United Kingdom: 684,000
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24
Q

Globalization of Trade: What are the US export/import composition? Which item is export more? Which item does it import significantly more than export**?

A 
*Capital goods/equipment: E(24%), I(21)
Industrial/natural resources: E(22), I(24)
***Consumer: E(9), I(20)
Automotive: E(7), I(11)
*Agriculture/food: E(6), I(4)
Other goods: E(2), I(3)
*Service: E(30), I(17)
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25
Q

Globalization of trade “Take Aways”?

A
  • International trade had grown dramatically over recent years
  • US trade also has grown dramatically over recent years since the 1990s especially imports
  • US is the world’s largest import country
  • China has experienced greatest export growth - the world largest export country
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26
Q

Globalization of Production: What are 2 general means of sourcing?

A
  • Outsourcing of goods and services

* Foreign Direct Investment (FDI)

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27
Q

Globalization of Production: what is outsourcing?

A

Acquiring goods or services from a separate external provider under contractual terms

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28
Q

Globalization of Production: What are reasons for outsourcing?

A
  • Cost savings
  • Improved quality
  • Reduced delivery time
  • Enable entity to focus on core business
  • Scalability
  • Access knowledge, talent, and best practices of foreign provider
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29
Q

Globalization of Production: What are 5 outsourcing risks?

A
  • Quality
  • Security: Misappropriation of intellectual property, trade process, data
  • Export/import: Home country or source country restricts the transfer of goods
  • Current exchange: COG and services in domestic currency increases
  • Legal: Possible violation of a country’s laws
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30
Q

Globalization of Production: What are 6 ways to mitigate outsourcing risks?

A
  • Use due process in selecting foreign providers
  • Use qualified lawyer in foreign country
  • Determine legal requirements before entering into contracts
  • Execute thorough contracts with arbitration clause
  • Negotiate for pmts in home currency
  • Strict policies concerning legal compliance
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31
Q

Globalization of Production: What is foreign direct investment?

A

Establish owned or controlled facilities in a foreign location to produce goods/services by;
acquiring property, plant, equipment and other assets in foreign county to carry out production or service functions

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32
Q

Globalization of Production: What are 4 major objectives of FDI?

A
  • Lower cost structure
  • Improved quality
  • Expand markets
  • Increase growth potential
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33
Q

Globalization of Capital Markets: What is capital market?

A

Bring together providers of capital (investors) and users of capital (borrowers).

34
Q

Globalization of Capital Markets: What are common examples of capital market?

A
  • Stock market
  • Bond market
  • Commodities market
  • Money market
35
Q

Globalization of Capital Markets: Historically, who served as intermediary between providers and users of capital?

A

Only domestic capital market.

36
Q

Globalization of Capital Markets: What are limitations of domestic capital markets?

A
  • Limited size and wealth of domestic residents
  • Limited supply of domestic capital - increase cost
  • Limited domestic investment opportunities
37
Q

Globalization of Capital Markets: what is it?

A

Interconnected set of financial institutions and national markets that permit the trading of financial securities and other financial assets between and among investors and borrowers world-wide.

38
Q

Globalization of Capital Markets: what are 2 formal international financial markets that should be noted?

A
  • Eurodollar Market (Euromarket)

* Eurobond Market (International Bond Market)

39
Q

Globalization of Capital Markets: What does Eurodollar market provide?

A

Short and intermediate-term loans world-wide denominated in US dollars.

40
Q

Globalization of Capital Markets: what is international bond market?

A

Long-term loans outside borrower’s home country.
Offered in most major currencies
Avoids most government regulation

41
Q

Globalization of Capital Markets: How much has cross-border loans increased between 1990 and 2006? International equity offerings?

A

Loans: $3,600 billion to 17,875 billion (+500%)

Equity offering: 18 billion to 377 billion (+2,100%)

42
Q

Globalization of Capital Markets: what happened to cross-border financial flows starting in 2007? 2010?

A

2007: Declined significantly
2010: Leveled off after rebounding in 2009.

43
Q

Globalization of Capital Markets: what are 2 major reasons for global growth in capital market?

A
  • Government deregulation of international financial services
  • Advances in communication and data processing
44
Q

Globalization of Capital Markets: how does it move compared to global trade?

A

Similar pattern, but declined much more significantly for the recession.

45
Q

Globalization of Capital Markets: Which one larger: US owned assets abroad or foreign owned asset in Us?

A

More investment in US. The difference has been growing last 20 yrs.

46
Q

Globalization of Capital Markets: what are the benefits?

A

For investor: Greater range of investment opportunities

  • Chance for greater returns
  • Diversification of investments

For capital users: Greater funds availability

  • More source of capital
  • Chance for lower cost of capital
47
Q

Globalization of Capital Markets: what are risks? How can it be mitigated?

A

The currency exchange risks.

By hedging.

48
Q

Globalization of Capital Markets: which one is greater: the value of international borrowing or equity issues?

A

Borrowing.

49
Q

Power Shift: What has growth of globalization resulted in?

A

Shifts in economic importance among nations.

50
Q

Power Shift: In which areas has it occurred?

A
  • Output
  • Trade
  • Services
  • FDI
  • Home country of multinational entities
51
Q

Power Shift: What happened to World output (measured by real GDP) between 1969-2009?

A

More than tripled.

52
Q

Power Shift: How has the US share of world output shifted in mid 1960s to current?

A 
Mid 1960s: US - 40% of world output
1969: US - 30%
1969 to 2007: 25-35%
After 2007: Less than 25%
2012: about 22%
2013-forward: projected to continue to decline
53
Q

Power Shift: What is the trend for the share of world GDP (output) by country?

A
  • Decline in the share for US, Europe, and Japan
  • Increase for China, India, Brazil
  • Decline for US, Europe, Japan was not caused by absolute decline in their output, but caused by great economic growth of China, India, Brazil
  • Decline in US and increase in China are expected to continue
  • If the trend continues, China will be the leader
54
Q

Power Shift: what has been the trend for the world exports (trade) by country?

A
  • Exports has declined for US, Germany, Japan, France, UK in 1995, but significantly increasing for China (2% to 12%)
  • US has lost from 13% to 9%
  • Japan has the steepest loss of 10% to 6%
  • In 2009, China has become the world’s largest exporter
55
Q

Power Shift: What are 2 major reasons for movement of service world-wide?

A
  1. Internet and global communications - enables entities to relocate value-adding services to low-cost locations (call center, help desk, programming)
  2. Relocation of services necessary to support foreign trade and production
56
Q

Power Shift: How has the US share of world-wide accumulated foreign direct investment changed in 1980 and 2005?

A

1980=40%

2005=20%

57
Q

Power Shift: FDI for US in 2010?

A

US was one of the 3 largest FDI investing countries and one of the 3 largest FDI receiving countries.

58
Q

Power Shift: How has the developing countries’ share of world-wide accumulated FDI changed in 1980 to 2005?

A

1980=5%

2005=15% Trend is expected to continue

59
Q

Power Shift: How has the US share of world-wide multinational companies changed from 1973 to 2015?

A

1973: 50% of largest 260 multinational
2005: 30% of 100
2009: 28% of 500
2015: 25% of 500

60
Q

Power Shift: How has the share of top 6 export countries in the world-wide export changed last 25 yrs?

A

Remained in the range of 40-45%.

61
Q

Becoming global: what are ways entities can engage in international business?

A
  • Importing/exporting
  • Foreign licensing
  • Foreign franchising
  • Foreign joint venture
  • Foreign subsidiary
62
Q

Becoming global: what is the most basic form of international business?

A

Importing/exporting

63
Q

Becoming global: what are the advantages of exporting?

A
  • Increase domestic scales and output - achieve economies of scale domestically
  • Avoids cost of establishing foreign production capabilities
  • Providers experiences in international business at low risk
64
Q

Becoming global: what are advantages of importing?

A
  • Obtaining goods not otherwise available
  • Obtaining goods at lower cost
  • Obtaining goods of better quality than similar goods produced in the home country
65
Q

Becoming global: what are disadvantages of exporting/importing?

A
  • Possible high cost of transportation (especially for low value-to-weight ratio goods: heavy relative to value)
  • Existence or possibility of trade barriers (quotas/tariffs)
66
Q

Becoming global: what is foreign licensing?

A

Granting a foreign entity the right to use an asset;
Patent, trademark, formula, etc
and receives royalty pmts

67
Q

Becoming global: what are advantages/disadvantages of foreign licensing?

A

Ad:

  • Increased revenue through royalties
  • Avoids trade barriers concerns
  • Avoids costs and risks of opening a foreign operation

Dis:

  • Licensee may misuse patens, technology processes, and other proprietary info
  • Licensor may not be able to control Licensee sufficiently to assure standards are met
  • Licensee may not have management or technical capabilities to fully realize benefits of the license
68
Q

Becoming global: what is foreign franchising? In which areas is it used primarily?

A

Special form of licensing in which the franchisor typically mandates strict operating procedures.
In foreign retail and service market.
Franchisor frequently provides on-going assistance.

69
Q

Becoming global: what are the advantages and disadvantages?

A

Ad:

  • Provide increased revenue from royalties
  • Avoids costs and risks of opening foreign facilities

Dis:

  • Franchisee may misuse proprietary info
  • Franchisee quality control my not meet franchisor’s stds
70
Q

Becoming global: what is foreign joint venture?

A

Establishing an entity in a foreign location and jointly owned by 2 or more otherwise unrelated entities.

71
Q

Becoming global: what are advantages/disadvantages of foreign joint venture?

A

Ad:

  • Host country co-owner has knowledge of local environment
  • Costs and risks of undertaking are shared with 1 or more other venture partners
  • Foreign local resistance from government, labor, and other business may be less with a local stakeholder

Dis:

  • Foreign co-owner may misuse partner’s patents, technology, proprietary information
  • Home country co-owner does not have absolute control
  • Shared ownership can lead to differences in goals, objectives, strategy
72
Q

Becoming global: what is foreign subsidiary?

A

Entity acquired or establish a foreign subsidiary - a controlled, but legally separate entity.

73
Q

Becoming global: what are advantages and disadvantages of foreign subsidiary?

A

Ad:

  • Quick entry into the foreign market - don’t have to develop a new entity
  • Known level of operating results and related historical information
  • May block or preempt competitors from entering the market

Dis:

  • Possible lack of understanding of acquired firm’s values, culture, operating processes
  • Pre-existing corporate culture may be difficult to integrate with parent
  • Synergies or other expected benefits may not materialize
74
Q

Becoming global: what is an alternative to acquiring preexisting subsidiary? What is it also called?

A

Establishing a new foreign subsidiary.

Also called Greenfield Venture (founding entity is “breaking new ground”).

75
Q

Becoming global: what are advantages and disadvantages of establishing foreign subsidiary?

A

Ad:

  • Foreign subsidiary can be built from “ground up” to have desired culture, operating style and procedures
  • Parent better able to transfer organizational competencies, skills, routines, and culture

Dis:

  • Time consuming
  • More costly than acquisition
  • Greater risk associated unknown revenues, costs, and other operating aspects
76
Q

Becoming global: what are advantages and disadvantages of foreign subsidiary acquired or established?

A

Ad:

  • Parent maintains control over assets and operations
  • Parent is able to coordinate strategy with other operations and adapt as needed

Dis:

  • Capital investment most costly of alternatives for engaging in international business
  • Greater unknowns about outcomes and risks
  • Costs and risks burden of single parent
77
Q

Becoming global: what is a summary conclusion about most low cost, low risk means of engaging in international business?

A

Importing/exporting.

78
Q

Becoming global: what is a summary conclusion about protection of patents, technology process or other proprietary information?

A

If these are important, don’t engage in foreign licensing or joint venture.

79
Q

Becoming global: what is a summary conclusion about how to overcome foreign oppositions to establishing foreign operations?

A

Use joint ventures?

80
Q

Becoming global: what is a summary conclusion about getting complete control and facilitating global strategy?

A

Use wholly-owned foreign subsidiary.

81
Q

What is repatriation restrictions?

A

Restriction on the movement of funds from a foreign country to the home country of an entity.

BEC I and II (12 decks)

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