Exam 2 Flashcards
The business environment in a foreign country is very different from domestic environment, a major factor is
political system
Types of political systems
democracy, totalitarianism (communism)
Political Risk Analysis are used to
predict future business environments in the monitored counties where the MNC is currently doing business, screening device to avoid an investment or divestment and to improve the accuracy of Net Present value calculations for foreign projects.
Political Risk is defined as
the risk of drastic changes in a country’s business environment which is caused by the political instability.
Political Risk Factors:
Confiscation, expropriation, blockage on the fund flow, breach of contract, freezing of assets, operational restrictions and heavy taxes.
Political Risk Macro will
influence all foreign operations in the host countries such as nationalization of all foreign operation in the country.
Political Risk Micro will
influence only some specific firms or specific industry.
Techniques to assess political risk are
checklist approach, Delphi Tech, Quantitative analysis, inspection visits - this method may the best to make a final confirmation made by one of the other methods.
The most severe form of political risk is
host government takeover
There are several strategies to reduce political risk exposure to a host government takeover
Short-Term Horizon: shorten payback period, gradually divest to local government or investors.
Differentiate Technology: Unique technology that can’t be duplicated locally or internationally.
Hire Local Labor and manager:
Maximize local financing:
Purchase Insurance: OPIC
Inverted U-Curve Theory is defined
on a continuum from very low levels of economic development to very high levels of economic development, the pattern of political instability resembles an inverted U with instability peaking in the middle stages of development.
Any political system needs an economic system to solve two major economic problems
how to produce and how to distribute
Two broad economic systems are
Market Economy - Supply & Demand and Command Economy - Government decided
The problems that developed with Socialism and Communism were
insufficient and efficient production, lack of incentives to work hard and low level of output.
The problems that developed with Capitalism were
inequitable distribution. The richer get richer and the poorer get poorer.
Cultural Intelligence is defined as
an ability to deal with the people from different cultures.
Surf Culture is
the visible part such as clothes and food.
Sub Culture is
the invisible part such as attitudes, perceptions and assumptions.
Definition of Culture
Culture is the various aspects of society (such as rituals, symbols, rules, beliefs & artifacts) that distinguish the members of the society from the members of another society.
Hofstede provided the Onion Diagram which categorizes cultural differences in 4 terms
Values, Rituals, Heroes, and Symbols
Symbols…
words, jargon, flags, status symbols, brand names, clothes, hair, colors
Heros…
sports, music, historical people, cartoon heroes, mother, father
Rituals…
small-talks, greetings, agreeing or disagreeing
Values are
the CORE of culture. They are taught in early childhood and most important for one’s decision what is right or wrong.
______ and culture are inseparable. It is the primary means by which a culture transmits its beliefs, values and norms.
Language
The Sapir-Whorf hypothesis proposes that
language not only serves as a mechanism to transmit the perception that people but also influences people’s perceptual process.
Number of sources of inefficient and clear communication
Incompatible language, encoding and decoding, past experiences, communication patterns tone or voice, silence, source of metaphors, preferred topics.
Attitude is a significant element in culture. Some noticeable differences associated with attitude are
Time, Wealth Accumulation, Gender, Giving of Gifts, Age and Group Membership: Ascribed membership is given at birth by religion, region or hereditary social class. Acquired: after birth education and political party.
Some countries may consider gift giving as a way to invest in a relationship for the future, whereas in the US, it is perceived to be an
illegal bribe.
High Context vs. Low Context: Context is
the information that surrounds a communication and helps convey the message.
Define High Context
Messages are highly coded, implicit and indirect. Preferred in collective cultures such as Japan and Arabic countries
Define Low Context
explicit, clear and literal to avoid confusion. Ex: US and Canada
Doing (Dynamic) vs. Being (Static)
Preference to Action vs. Thinking
Ex: Doing - North America take action, react quickly; emphasis is on quantity.
Being - Asia balance, higher understanding, emphasis is on training and personal change.
High Contact vs. Low Contact refers to
the distance in bodies, body orientation, touching, eye contact.
Examples of Low Contact cultures
North Americans, China, India, Japan, Pakistan Northern Europe
Examples of High Contact cultures
Mediterranean, Arabs, and South Americans
Apollonian vs. Dionysian
Expression of Emotions
Apollonian cultures
are trained to control their emotions.
Dionysian cultures
believe that expressing one’s emotions is appropriate and hiding them is inappropriate.
Masculinity vs. Femininity (Hofstede) Define both:
Masculinity - dominant values in society are success, money and things. Ex: Japan
Femininity - dominant values in society are to care for others and quality of life. Ex: Scandinavian
Individualism vs. Collectivism
Collectivism - Keep me in the loop attitude
Individualistic - Leave me alone attitude
The industrialized wealthy countries have higher ____ scores and poorer countries have higher ____ scores.
Individualism, Collectivism
High Uncertainty Avoidance vs. Low Uncertainty Avoidance
Level of Anxiety
Uncertainty avoidance is
the extent to which people feel threatened by ambiguous situations, and have created beliefs and institutions that try to avoid these.
What level of uncertainty avoidance place work and career as important things in their life and general attitude. Live to Work
High Certainty Avoidance Ex: Germany, Japan
What societies have less organizational structure settings, fewer written rules, and general attitude is Work to Live
Denmark and Great Britain have Low Certainty Avoidance
High Power Distance vs. Lower Power Distance:
Attitude towards Power
Power Distance is defined by Hostede as
the extent to which less powerful members of institutions and organizations accept that power is distributed unequally.
Organizations in high power-distance countries will tend to be
centralized and have a tall and hierarchical organizational structures.
Inequality is inevitable to maintain the society. The distance between power and non-power holders is high and powerful people are thought to have the right to use their power the way they like.
High Power Distance
There is equality between power and non-power holders and they are considered to be close in terms of status. Those with power must use it legally or they would be challenged.
Low Power Distance
Universalism vs. Particularism:
Obligations
In these cultures, individual is first obliged to society. Social justice is more important than the justice for individual. Law and regulations are followed without exception.
Universalistic
Ex: USA, Germany, Sweden
In these cultures, individuals would consider an exception before following the law.
Particularistic
Ex: Cze, Spain, Japan
Progressive vs. Regressive:
Time Orientation
In these cultures the past is more important than the future in their life and they look to the past for inspiration, motivation, hope, guidance and direction.
Regressive (Past Oriented)
Ex: Russia, Venezuela
Risk-centered and risk-assuming cultures that are more imaginative, creative and have a youth cult are ___ oriented or _____
Future, Progressive
What are the 3 different attitudes people adopt when they face different cultures?
Ethnocentric, Polycentrism, Geocentrism
All people are born to be ____. Most of the countries’ national anthems, flags and their name often reveal this attitude.
ethnocentric
View of things in which one believes that every aspects of a foreign culture is superior to his own cultures and should be respected and observed.
Polycentrism
View of things in which one looks at positive aspects of both his home and host cultures and accepts the differences between them without bias.
Geocentrism
Culturally diverse groups can enhance ____ and ____, lead to better decisions and results in more effective and productive performance.
creativity, innovation
Major benefit of cultural diversity, it can prevent
groupthink
Problems with cultural diversity are _____, _____ and ____.
lack of cohesiveness in the unit, preconceived stereotypes and inaccurate communication
Cultural Diversity can provide more benefits at the ______ and ____ stage of the projects rather than the ____ and ____ stage.
planning, development; action, implementation
What are the 3 ego states?
Child, Parent and Adult
The person who has this type of ego state is characterized as uninhibited release of emotions such as hate, anger or excitement toward other cultures.
Child Ego State
The person holds this ego state is judgmental, critical persuasive and preaching.
Parent Ego State
The person who holds this ego state doesn’t criticize or blame other cultures but is curious and experimental.
Adult Ego State
What are the 4 stages of Cultural Adjustment that makes a W-curve.
Honeymoon, Culture Shock, Feel at Home, Reverse Culture Shock
What is the cultural adjustment stage that you experience pleasantly shocking experiences?
Honeymoon
What is the cultural adjustment stage where you develop a lot of hostility and animosity toward the host culture.
Culture Shock
What is the cultural adjustment stage where you begin to feel comfortable again in the foreign country.
Feel at Home
What is the cultural adjustment stage when you return home country, you feel alienated.
Reverse Culture Shock
What are the 7 reasons for importation restrictions?
Unemployment, Cheap Labor, Infant Industry, Industrialization, National Income, Political, Balance of Payment.
Domestic firms can’t sell much of their product and thereby they may have to shut down their plant - reason for import restriction?
Unemployment Argument
Many human rights activist groups insist that we should not buy the goods produced in the countries where workers and children are exploited - reason for import restriction?
Cheap Labor Argument
Mostly adopted by developing countries who want to impose restrictions to protect small and young domestics firms who have no global competitiveness - reason for import restriction?
Infant Industry Argument
Developing countries try to restructure their economy from agriculture oriented economy to manufacturing oriented economy, they may want to impose import restrictions - reason for import restriction?
Industrialization Argument
A country may minimize imports in an attempt to increase their national income or at least to stop decrease.
National Income Argument = Consumption+Investment+Govt. Spending+(Exports - Imports)
The problem with the National Income Argument is the possible situation where both countries are left worse off when they have trade wars by imposing restriction on each other’s products called
Beggar-thy-neighbor
What are the 7 non-tariff barriers?
Govt Subsidies, Exchange Rate Manipulation, Customs, Quota, Buy Local Policy, Exchange Control, Complicated Import procedures
What barrier helps foreign firms reduce their price and build and artificial competitiveness?
Govt Subsidies - in the form of lower taxes, low interest rate loans, duty drawbacks, or R&D.
What barrier is used when foreign govt delibertely devalues its currency to make its products cheaper and make imported products more expensive.
Exchange Rate Manipulation
What barrier is used when countries particularly where they have chronic balance of payment deficit problems, citizens are not allowed to hold any foreign currency.
Exchange Control
US Trade Act that requires US govt to prepare a list of countries that systematically restrict access to US products to their markets.
Super 301
Safeguard Provision that allows US industries, which are serious injured or threatened by dramatic increase in imports, to petition for import relief such as a quota.
Section 201, Trade Act
What are the 5 various forms of Economic Integration?
Free Trade Area, Customs Union, Common Market, Economic Union, Complete Integration
The most basic form of economic integration, there is no internal tariff charged among members countries, and each affiliated country has its own independent external tariff for non-members.
Free Trade Area
Ex: NAFTA, EFTA, and CARFTA
The economic integration where there is no internal tariff among members and the same common external tariffs for non-members.
Customs Union
Ex: MERCOSUR
The economic integration that has no internal tariff for members, common external tariff for non-members and agree to abolish restrictions on factor (labor and capital) mobility.
Common Market
The economic integration that guarantees the free flow of goods and production factors and cooperates with each other to achieve common economic goals.
Economic Union
The economic integration that strives to achieve unification of economic, social, and political systems.
Complete Integration
One of the major benefits of being the member of any kind of economic integration is
Economy of Scale
One of the major tasks achieved by the European Union was
the creation of the euro.
The economic integration with other industrialized countries whose economic structure and national income level are quite similar is termed
Horizontal Integration
A newly industrialized country with low-tech jobs, lack of environmental concerns would be what type of economic integration
Vertical Integration
The most important international organization deal with the rules of international trade among nations when it replaced its predecessor in 1996 GATT
World Trade Organization
Where member countries should grant each other the most favorable treatment given to their best trading partner not granted to communist countries is
Most-Favored Nation
WTO negotiations aims to lower trade barriers around the world, permitting free trade between countries of varying prosperity is the
Doha Development Round
Established in 1945 in order to bring economic stability and growth to the post war world and begin financial operations is the
International Monetary Fund
Primarily represents the voice of the world’s developed countries and its headquarters is located in Paris, France often called the “rich man’s club” or “the voice of the North”
Organization of Economic Cooperation and Development
U.N. Agency that has been catalytic to improve the relationships between developing and industrial countries regarding international commerce including trade and FDI
UNCTAD
The formula you can use to calculate the % change in a currency value is
(END - BEG) (100) / BEG
To use the % change in FC value you must use the
Direct Rate
The exchange rate between two foreign currencies is
Cross Rate
This is an agreement to deliver or to take delivery of a certain amount of foreign currency immediately, which means within 2 business days.
Spot Market
This is an agreement to deliver or take delivery of a certain amount of foreign currency in the future.
Forward Contract
A forward rate is the exchange rate that will be for a forward contract, usually quoted in
multiples of 30 days
What is a key aspect of a forward contract?
It reduces the risk of exchange rate fluctuation and uncertainty in the future.
With Forward Contracts, rates are
known today
All the future spot rates are
NOT known today
The market’s best estimate of the future spot rate as of today is
Forward Rate
If the forward rate is larger than the spot rate,
the currency is now at premium
If the forward rate is larger than the spot rate,
the currency is now at a discount
The formula to calculate Annualized % Premium/Discount
(Forward Rate - Spot Rate/ Spot Rate) (12/n) (100)
This is a contract for the exchange of a certain amount of foreign currency with the understanding to reverse the original transaction in the future. Used when foreign currency is needed only for a certain period of time.
Currency Swap
A type of derivative that can lock in specific rates for future delivery, deals with standardized size $100,000 units contract size, and offers a delivery date as the last Wednesday of the every third month.
Currency Future
Currency Future is described as impersonal because?
the contract is made between an individual and the Exchange.
This type of derivate acts like options in the stock market, buy the right to buy (call option) or sell (put option) a certain amount of foreign currency for a period of time.
Currency Options
Currency Options exchange rate is called
Strike Price
Means you actually but the right to buy a certain amount of foreign currency at the specific price regardless of the future spot rate.
Call Option
The reason why you buy call option at the strike price is most likely that..
you expect for the future spot rate rises above the strike rate.
The reason why you buy Put option at the strike price is most likely that..
you expect the future rate to fall below the strike price.
Purchasing the right to sell at the specific price regardless of future spot rate.
Put Option
One very important way to use foreign exchange market is the settlement of __ and __ by transferring purchasing power from one currency to another.
international trade, foreign debt
An investment strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.
Currency Carry Trade
The big risk in a carry trade is the uncertainty of
exchange rates
The buying and selling a certain amount of foreign currency almost simultaneously trying to take advantage of temporary disequilibrium in the market.
Arbitrage
To avoid foreign exchange risk and minimize uncertainty, a Forward Market designed to minimize risk from exchange fluctuations.
Hedging
