Ch 1 Flashcards
MNC
Multinational Corporation
Concerns of Multinational Corporations
1) Need the ability to enter the market
2) Currency risk: Change in currency value
3) Political risk: regulation pertaining to operational issues
4) Economic risk: The variation in cash flows caused by changes in macroeconomic conditions
5) Variation in business practices: Global differences in culture, tradition, conventions, and regulations.
US or Anglo-Saxon Governance Model
Characterized by independent boards, incentive contracts for managers and transparency in financial reporting.
Financial trade theories
1) Classical version
2) Neoclassical
3) Imperfect Markets Theory
4) Gravity Theory
5) Product life cycle theory
6) Firm-Level Product Cycle Theory
7) New Trade Theory
8) Industry agglomeration Theory
9) Porter’s Diamond Theory
Classical Version
Theory of comparative advantage
Nations exhibit different levels of productivity. The key input is assumed to be labor but because of various levels of technology, countries have relative advantages in producing only certain products
Neoclassical version of the comparative advantage theory
Productivity differences are explained by the relative abundance of factors of production
Imperfect markets theory
International trade is a consequence of market impediments that restrict the free flow of resources across borders.
Gravity Theory
The quantity of bilateral trade is hypothesized to be positively related to the countries size and negatively related to distance.
Product Life Cycle theory
Relates to competitive advantages arising from innovation.
Firm-Level Product Cycle Theory
States that a firm initially produces and sells in it domestic market. Over time, the firm exports in order to enjoy economies of scale and perhaps to overcome stagnation in its domestic markets
New trade theory
Focuses on other factors affecting international trade such as consumer preferences and economies of scale. Consumers seek variety and producers seek economies of scale.
Industry agglomeration Theory
Explains that industries agglomerate because of positive externalities such as exchange of ideas, labor market pooling, and development of ancillary industries.
Porter’s Diamond Theory
Identifies four factors that explain why certain nations have advantages in producing certain products:
1) Factor conditions: inputs such as skilled labor as well as transportation and other infrastructure are available
2) Demand conditions: The domestic market for the products and services in questions is vibrant
3) Related and supporting industries: suppliers and other ancillaries are available
4) Firm strategy, structure, and rivalry: Rivalry between producers in the home market creates an efficient setting for the industry.
Globalization factors and influences
Trade agreements, WTO, NAFTA, Political Change away from socialist systems, Rise of Asia, Technology, innovation
Globalization definition
Refers to international integration and represents the cross border movement of goods, services, money and people.
