Chapter 6 Flashcards
What is country risk?
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and legal environments
Example: Petrobras in Brazil bribed officials, affecting other companies’ opportunities.
What is a political system?
A set of formal institutions that constitute a government, including legislative bodies, political parties, lobbying groups, and trade unions.
Why should we care about a political system?
- Provides protection from external threats
- Establishes stability (laws)
- Governs the allocation of valued resources
- Defines how a society’s members act
What are the three major types of political systems?
- Totalitarianism
- Socialism
- Democracy
What characterizes Totalitarianism?
- Associated with Command Economies
- Government controls all economic activity
- Leadership can be theocratic or secular
- Power sustained via secret police and propaganda
What characterizes Socialism?
- Associated with Mixed Economies
- Capital vested in the state for production
- Group welfare outweighs individual welfare
- Government controls production and distribution
What characterizes Democracy?
- Associated with Market Economies and Capitalism
- Decisions largely left to market forces
- Economic activity occurs freely as per market
What is a limited government?
A government that performs only essential functions serving all citizens, such as national defense and law enforcement.
What are Private property rights?
The ability to own property and assets, encouraging initiative and innovation.
Property includes land, buildings, stocks, and patents.
What does openness mean in a political context?
Lack of regulation and barriers to entry.
What is a legal system?
A framework where rules are clear, publicly disclosed, and enforced fairly.
What are the four types of legal systems?
- Common Law
- Civil Law
- Religious Law
- Mixed system
What characterizes Common Law?
Basis of law is tradition and legal precedents set by courts, allowing for more flexibility.
What characterizes Civil Law?
Based on codified laws that are less subject to interpretation by courts.
What characterizes Religious Law?
Influenced by religious beliefs and ethical codes, often associated with theocratic systems.
What is a Mixed legal system?
Two or more legal systems operating together.
Who are the participants in Political and Legal systems?
- Government
- International Organizations
- Regional Economic Blocs
- Special interest groups
- Local competing Firms
What are the risks arising from political systems?
- Government takeover of corporate assets
- Embargoes and Sanctions
- Boycotts against firms or Nations
- Terrorism
- War, Insurrection, and violence
What are the types of government takeover of corporate assets?
- Confiscation
- Expropriation
- Nationalization
- Creeping expropriation
What is an embargo?
An official ban on exports and imports.
What are sanctions in a trade context?
Restrictions on trade imposed by one or more countries.
What is terrorism?
Threat or use of violence to obtain a political goal.
What are the risks arising from a legal system?
- Host country legal environment
- Home country legal environment
What is extraterritoriality?
The requirement to operate based on home country rules and regulations.
What is the Foreign Corrupt Practices Act?
Makes it illegal to offer bribes to foreign parties.
How do we manage Country Risk?
- Proactive environmental scanning
- Strict adherence to ethical standards
- Alliances with qualified local partners
- Protection through legal contracts
What is Government Intervention?
Government actions in trade and investments to achieve political, social, or economic objectives.
What is protectionism?
National economic policies that restrict free trade to protect domestic industries.
What is a custom in trade?
A checkpoint at national ports of entry where officials inspect imported goods.
How do Governments restrict trade?
- Tariffs
- Nontariff trade barriers
- Quotas
- Investment barriers
- Subsidies
What are the consequences of Protectionism?
- Reduced supply of goods
- Price inflation
- Reduced variety for buyers
- Reduced industrial competitiveness
What is the defensive rationale for government intervention?
- Protection of national economy
- Protection of an infant industry
- National security
- National culture and identity
What is the offensive rationale for government intervention?
- National strategic priorities
- Increase employment
How do firms respond to government intervention?
- Research to gather knowledge
- Choose appropriate entry strategies
- Take advantage of Free Trade Zones
- Lobby for freer trade
What is Regional Economic Integration?
Growing economic interdependence resulting from nations forming alliances to reduce trade barriers.
What are the four levels of regional integration?
- Free Trade Area
- Customs Union
- Common Market
- Economic Union
What is a Free Trade Area?
An arrangement where member countries agree to eliminate trade barriers while maintaining independent trade policies.
What is a Customs Union?
Like a free trade area but with harmonized trade policies toward non-member countries.
What is a Common Market?
Like a customs union but with free movement of products, services, and factors of production among member countries.
What is an Economic Union?
Like a common market but with common physical and monetary policies and standardized regulations.
What are the advantages of regional integration?
- Expands market size
- Achieves scale of economies
- Attracts investment from outside bloc member countries
What is an Economic Union?
Like a common market, but members also aim for common physical and monetary policies and standardized commercial regulations
The EU is moving toward an economic Union by forming a monetary union with a single currency, the euro.
What are the advantages of regional integration?
- Expands market size
- Achieve scale of economies and enhance productivity
- Attract investment from outside bloc member countries
- Acquire stronger defensive and political structure
What are the disadvantages of regional integration?
- Pressure to internationalize within bloc
- Restructuring of operation
- Regional products and marketing
- Internationalization from outside the bloc
What is an advanced economy?
Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure
Typically includes countries like Australia, Canada, Japan, United States, and nations of Western Europe.
What is a developing economy?
Low-income countries characterized by limited industrialization and stagnant economies
Examples include Bangladesh, Bolivia, Zaire.
What is an emerging economy?
Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth
Examples include Indonesia, Mexico, Poland, Turkey.
What is a transition economy?
A subset of emerging markets that evolved from centrally planned economies into liberalized markets.
What is privatization?
Transfer of state-owned industries to private concerns.
What are new global challenges?
Leading firms from emerging markets that are fast becoming key contenders in world markets.
What makes Emerging markets attractive?
- Good target markets
- Good for Manufacturing Bases
- Good Sourcing Markets
What is Outsourcing?
Finding someone in another country to produce your product for a lower cost.
What is global sourcing?
Accessing products and services from independent suppliers.
What are some market potential indicators?
- GDP growth rate
- Income distribution
- Commercial infrastructure
- Unemployment rate
- Consumer expenditures for discretionary items.
What do you look for when assessing market attractiveness of emerging markets?
- Market Size
- Market Growth Rate
- Market Consumption Capacity
- Commercial Infrastructure
- Economic Freedom
- Country Risk
What are the challenges of doing business in emerging markets?
- Political Instability
- Weak intellectual property protection
- Bureaucracy
- Poor physical infrastructure
- Partner availability and qualifications
- Resistance from family conglomerates
What are some strategies for doing business in emerging markets?
- Customize offerings to unique emerging market needs
- Partner with family conglomerates
- Target governments/state enterprises
- Skillfully challenge emerging market competitors
What is corporate social responsibility?
Operating a business to meet or exceed the ethical, legal, commercial, and public expectations of stakeholders.
What are the three types of interests a sustainable firm pursues?
- Economic interests
- Social interests
- Environmental interests
What is microfinancing?
Provides small-scale financial services, including small loans for purchasing goods.
What is an exchange rate?
Price of one currency in terms of another.
How do exchange rates affect the fortunes of a firm?
Affect cost of inputs, sales performance, and market entry strategy.
What are the three things international managers need to keep in mind regarding exchange rates?
- Pricing in firm’s or customer’s currency
- Fluctuations during order placement and delivery
- Using current or agreed exchange rates for transactions
What is foreign exchange?
All forms of internationally traded monies, including foreign currencies and electronic transfers.
What is the foreign exchange market?
The global marketplace for buying and selling national currencies.
How are exchange rates determined?
- Supply and demand
- Economic growth
- Inflation and interest rates
- Market psychology
- Government action
How do you determine the value of currency in an advanced economy?
By market forces, supply and demand.
How do you determine the value of currency in developing and emerging economies?
They are typically fixed currencies tied to another currency.
What is currency like in a fixed regime?
The value is pegged to another currency at a specified rate.
What is the international monetary system?
The rules and procedures for monetary and foreign exchange transactions among nations.
What is the Global Financial System?
Collection of financial institutions that facilitate and regulate the flow of investment worldwide.
Who are the key players in the Global Financial System?
- Central Banks
- Commercial Banks
- National stock exchanges and bond markets
What is a currency risk?
Concerns exchange rate fluctuations that can harm business profits.
What is Transaction Exposure?
Currency risk from outstanding accounts receivable or payable in foreign currencies.
What is Translation Exposure?
Currency risk from translating financial statements denominated in foreign currency into the parent firm’s currency.
What is Economic Exposure?
Currency risk affecting the price of products, cost of inputs, and value of foreign investments.
What is foreign exchange trading?
The trading of currency.
What is exchange rate forecasting?
Predicting fluctuations based on events like elections or supply shocks.
What is hedging?
Using financial instruments to reduce or eliminate currency exposure.
What can firms do to minimize currency risk?
- Seek expert advice
- Centralize currency management
- Decide on risk tolerance
- Measure exchange rate movements
- Monitor key currencies
What is a spot rate?
Exchange rate based on the current exchange rate.
What is a forward rate?
Exchange rate applicable at a future date, specified at the time of transaction.
What are the types of currency managers?
- Hedgers
- Speculators
- Arbitragers
