Exam 2 Flashcards
Sale of state-owned enterprises to privative non-gov sector. Availability of large amounts of capital.
Privatization
The key to privatization:
The availability of large amounts of capital
This is a current event with enormous impact on politics, economics and international business
Transitioning to a market economy
Strategic implications of transitioning to a market economy are
- Far reaching impacting exports / imports
- Acquisitions
- Joint ventures
- Strategic alliances
Transitioning to a market economy is influenced by…
- Distinctive identities under “cloak” of communism
- History – level of commercial activity, etc.
- Skills and knowledge bases
- Geography – land-locked or gateway country
- Culture
- Expatriate populations
- Regional alignments
Objectives of transitioning to a market economy…
- Macroeconomic stabilization
- Microeconomic liberalization
- Institutional reform
Reforms of a transitioning marketing economy…
- Tight monetary policy
- Liberalization of prices
- Trade liberalization
- Privatization of state-owned enterprises
- Removal of barriers to FDI
- Tax reform
- Creation of central bank
- Legal reform
Tax reforms in a transitioning market economy…
- Lack of profitable businesses
- Ingrained tax evasion
- Cannot obtain critical mass
- Massive and sophisticated underground or black market
Legal reforms in a transitioning market economy…
- Property rights
- Rule of law – court system
- Business body of law – laws of incorporation, etc.
Challenges of transitioning to a market economy
- Dominance of state sector
- Heavy price distortion
- Absence of market institutions
- Weak public administration
- Large social welfare system
- Lack of infrastructure necessary for business – legal, physical, financial
Problems with transitioning to a market economy
- Opportunism
- Corruption
- Tax collection
- Environmental damage
- Human capital
Countries transitioning to a market economy
- Russia - Not faring as well
- Eastern Europe - Slow, approaches vary by country
- China - Doing well, 100 year plan
International Trade Theory
- Mercantilism
- Absolute Advantage
- National Advantage
- Acquired Advantage
- Country Similarity Theory
- Comparative Advantage
Absolute Advantage
- Adam Smith
- Some countries produce some goods more efficiently than others.
- Free trade leads to global efficiency and more for all who partake.
- ONLY MAKE WHAT YOU MAKE BEST, THEN SELL IT.
Comparative Advantage
- David Ricardo
- Even if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves.
Product Life Cycle Theory of Trade
- Production locations for many products moves from one country to another depending on the stage in the product’s life cycle
- Innovating countries receive a premium – as profitability declines, product moves on
The Porter Diamond
- Michael Porter, Yale, Global Ethics Report
- Model for understanding competition at the industry-level
- Going international is VIP force for competition and survival
- Intense rivalry is best for an industry
Anything a country does that helps domestic companies, but not their foreign. Gives domestic companies a leg up.
Protectionism
Subsidies, tax treatments, aid, and loans are all…
Tariffs
Quotas, government procurements, licenses, admin delays, reciprocal requests, sanctions, and imposed standards are all…
Quantity controls
Arguments for protectionism
- Fight unemployment
- To protect infant industries
- Promote industrialization
- Improve global position
Economy Scale
- Cheaper on a per widget basis to make one million than 100
- Fixed costs spread across
Non-economic rationales for protectionism
- Maintain essential industries
- Prevention of shipments to unfriendly countries
- Extension of spheres of influence
- Preservation of a national identity
How is protectionism is a band aid approach?
- Once given, used as a crutch
- Drain of resources to force dying industries afloat
- Lobbying
Why is there a shortage of US workers?
B/C workers tied up in unprofitable industries
For the amount of money we overpay in tax/inflation, we could…
- Retire early
- Retrain others
- Get 4-year-degrees instead of supporting dying industries
Problems with protectionism:
- Lack of vision
- Fear
- You’ll make more money doing what you’re good at
- Trying to force non-commodities
Regional and Economic Trade Agreements
- Give preferential treatment to members of the agreement, and are reciprocal Ex. NAFTA, EU, EFTA, etc.
The objective of economic integration:
Economic growth by getting rid of waste (quotas and tariffs) and reinvesting in your company.
The most ambitious and largest of all regional trade groups:
EU
The Maastricht Treaty’s objective and success:
- Political and monetary union
- Established single currency, the Euro, and European Central Bank
- Sets inflation targets and long-term interest rate targets for all EU countries
- Sets similar targets for budget deficits
North American Free Trade Agreement (NAFTA) includes…
- US, Canada, Mexico
NAFTA Rules of Origin
- Product origin requirement of 50% (of net cost) or greater made in NAFTA countries
- There are a few exceptions, e.g., automobiles, etc.
- Purpose is to guard against products “passing through” and getting a free-ride
NAFTA Trade Rules
- Anti-dumping
- health and safety standards
- environmental
- IP protection
- sound corporate governance
Commodity Agreements
Purpose are to stabilize price and supply of the world’s most important commodities.
- Ex. Producer’s Alliance
Strategic implications of a single currency:
- Increased price transparency
- Decrease in foreign-exchange costs, risks, complexities
- Migration costs incurred in moving to the Euro
Which country is the #1 foreign investor in the world?
China
What are some key insights into Chinese culture?
- Colors mean things (red = luck, white = death, green = cheating)
- Gift-givers but nothing that could be considered a bribe, no knives, clocks, sandals, personal items, etc
- Wrapping etiquette and gifting based on person’s rank
- Numbers matter, 4 is bad
- Use titles and last names
- Business cards are a must. Accept with as many hands as given (one vs two). Don’t write on it and don’t sit on it. Bi-lingual layout.
- Guan XI (networking/relationship building)
- Face (respect - embarrassed)
How does the EU differ from NAFTA?
Broadness
Ex. NAFTA cares abt how to do business, EU cares abt human rights as well.
Anything produced that looks the same unit-by-unit
Commodity
OPEC (Organization of Petroleum Exporting Countries)
- Producer’s Alliance or “Cartel”
- Agree on total output, then divide production an sales among members to stabilize price
- Fragile and requires full participation and honesty
Global Competitiveness Report
- Published by World Economic Forum
- Created by top intellectuals, CEOs, journalists, and political leaders
Competitiveness of the GCR
High level of current economic performance and potential to sustainably improve it.
The GCR has…
- Rankings (nations attractive to business)
- Rankings of global companies
How do the GCR rankings work?
Created by different levels, i.e. first tier uses 40 factors, top ranked move onto the next tier, etc.
How is the GCR built?
Quantitative data – interviews with CEOs, and best business people.
Qualitative data
Different levels of the GCR
- Macro (national level)
- Mezzo (regional level)
- Micro (company level)
GCI (Growth) in the Global Competitiveness Report
- Quality Public Institution
- Macro economic index
- Tech Index
Subindexes of the GCR
- Innovation
- Credit
- Macroeconomics
- Corruption
- Public Institutions
- In-home Internet connection
- Technology
- GCI
- Companies
Global Competitive Index
Super Indexes, 12 pillars
12 Pillars of the GCI
- Institutions
- Infrastructure
- Microeconomic stability
- Health + primary education
- Higher education
- Goods markets efficiency
- Labor markets efficiency
- Financial market sophistication
- Tech readiness
- Market size
- Business sophistication
- Innovation
US opportunities within GCI
- Weakening confidence, soundness of banks. Ranked #40 in financial sector
- Public institutions, gov. can’t keep arms length with the private sector. Too much involvement in businesses, ranked #40.
- Ranked #66 in perception of wasting money
- High business cost of crime, security violence and terrorism
- Ranked #102 macroeconomic imbalances, greatest weakness! 60-100% GDP debt
US stengths in GCI
- Innovation
- Labor Markets
- Goods Markets
- Financial Market Efficiency
Alpha Industrial Group
- Mexico’s largest private company, publicly traded.
- 1894-1974 it was family-owned
- Leverage all opportunities that come their way
- ## Steel, banking, beer
Why does Alpha Industrial specialize in steel, banking, and beer?
They’re protected industries, so they have a leg up.
What happened with Alpha Industries in 1973-1974?
- Mexican government decides to restrict foreign investment (foreign equity) for new and existing companies.
- i.e. all foreign companies need a Mexican partner
- Alpha goes public to increase attraction and avoid family-owned stigma
- Free energy (protectionism) with discovery of gas stores
- Cheap labor
- Gov. didn’t make them pay taxes on money reinvested in company
What happened with Alpha 1974-1980?
- Assets go from 315 million to 1.9 billion due to acquisitions and partners
- Interest in exporting
Hired builders and contractors “turn key” to start
Turnkey Operation
Direct Reduction Steel Production and Alpha Industries
- Allows steel industry to bypass blast furnaces (saves money)
- Building steel worldwide, license out process
Why is Alpha still attractive to partner with even though the foreign equity limits was rolled back in the 1990s?
- Know the Mexican bureaucracy
- Proven track record
- Can handle multiple partners
General motives for collaborative strategy
- Spread and reduce costs
- Remain focused on core competencies
- Concentrate competitive forces
- Vertical integration (supply chain)
- Horizontal integration (side-by-side supply chains)
- Gain market knowledge
Reasons to spread and reduce costs
- Might have small volume, so might mix with another’s
- Reduce startup time
- Expertise of regulations and labor of location
- Lack resources
International motives for collaborative strategy
- Location-specific assets
- Access to distribution channels
- Overcome legal constraints
- Diversify
- Government moves against company
Types of collaboration agreements
- Licensing
- Franchising
- Management contracts
- Turnkey OPs
- Joint ventures
- Equity alliances
Common management problems
- Different degrees of importance placed on agreements among partners
- Different objectives amongst partners
- Control problems, including quality
- Comparative contribution and appropriation
- Differences in culture
What is comparative contribution?
Different levels of contributions
What is appropriation?
Whoever the rightful owner is, should get 100% of the benefits and value.
ex. a warm insurance company ad should lead to more sales for them, but can sometimes lead to more sales for the industry as a whole not necessarily just their company.
Management pointers for increasing a firm’s chances of success
- Monitor arrangement’s evolution
- Make sure partners are compatible
- Send best negotiators
- Specific and detailed contracts
- Performance assessment agreement
- Learn the culture
A company controlled through ownership by a foreign company or individual
Foreign Direct Investment
What is the difference between FDI and an international investment?
Control
i.e. investing in GE vs. owning GE and making decisions
What is the average percent for ownership control?
10-15%
FDI is ____ important than trade in international business bc it _____.
More; strategic and creates more
FDI perceived risk
People are more comfortable with what they know. Think business in their own country is less risky, but not always the case.
FDI real risks
- Far-flung, harder to manage and get info
- Exchange rate fluctuation, imports and exports
- Repatriation, return of profits
Actions the governments of perspective FDI recipient nations can take that would impact success of firm’s FDI
- Repatriation of risks
- Can tell you what you can sell, make, who you can hire, fire, define majority and minority share, etc.
Warning for first-time FDI undertakers to protect personal interest
You’re possibly creating a competitor, appropriability concerns (person leaves company with the best part)
Questions related to FDI business concepts
- What do you know about primary reasons as to why a firm would want to engage in FDI?
- Why not just import/export to expand sales?
- How can engaging in FDI help an organization to acquire or economize resources?
- How can engaging in FDI help an organization to minimize risk?
What do you know about primary reasons as to why a firm would want to engage in FDI?
- Expand sales
- Acquire or economize resources
- Minimize risk
Why not just import/export to expand sales?
- Saving transport costs - allows keeping prices low. Tires, soft drinks, refrigeration, perishables, unstable products
- Lack of domestic plant capacity - buying a new location in a different country might be best option
- Economies of scale - where to expand to, efficiency of production
- Trade restrictions - Won’t have to pay import tariffs, some products not exportable, almost always needed for China
- Preference for domestically-produced goods
- Fluctuations in least cost production locations
How can engaging in FDI help an organization to acquire or economize resources?
- Vertical integration - investing, cutting out middle man, control of supply
- Rationalize or optimize production, making something as efficiently as possible
- BETTER ACCESS TO PRODUCTION RESOURCES
- Government investment incentives, they want us to go there make stuff and see products to make them money
How can engaging in FDI help an organization to minimize risk?
- Being closer to customers is inherently less risky
- Block competitive movement - fire up production in best locations and shut down in worst
- Reduces excessive reliance on any one location
Factors that influence patterns of investment for FDI
Industrialized nations + China, recipients (71% of world FDI), owners w/out China (90% of world FDI)
