Final Flashcards
Floating exchange rate
A country allows the foreign exchange market to determine the relative value of the currency
International monetary system
Institutional arrangements that countries adopt to govern exchange rates
Examples of currency that are floating
Pound
US dollar
Euro
Japanese yen
Pegged (fixed) exchange rate
Fixes value of its currency relative to a reference currency
Dirty float
Country ties to hold the value if it’s currency within some range of a reference currency such as US dollar
Fixed exchange rate
Countries fix their currencies against each other at some mutually agreed on exchange rate
Gold standard
System which countries peg currencies to gold and guarantee their convertibility
Balance of trade equilibrium
Income of a country’s residents earn from exports is equal to the money it’s residents pay for imports
Breton woods system agreements
- Fixed exchange rate system was established
- All currencies fixed to gold but only could convert US dollar directly
- Devaluations could not be used for competitive purposes
- A country would not devalue it’s currency more then 10% without IMF approval
What two multinational institutions were formed at Breton woods
IMF
World bank
IMF definition
Maintains order in the international monetary system through a combination of discipline and flexibility
World bank
Promotes general economic development
4 things the IMF did
- Fixed rates stopped competive ness devaluations and brought stability to the WTE
- Fixed rates imposed monetary discipline on countries, limiting price inflation
- In cases if fundamental disequilibrium devaluations were permitted
- IMF lent foreign currency to members during short periods of balance of payments defect when a rapid tightening of the monetary system would hurt domestic employment
2 ways countries can borrow from world bank
- IBRD scheme: money raised through bond sales in international capital market (borrowers lay a market rate of interest)
- International development agency loans (poorest countries)
Why the fixed exchange rate collapsed
Huge increase in welfare programs and the vietnam war were financed by increasing the money supply and caused significant inflation. Other country’s increased the value if their currencies relative to the dollar bc they speculated it would be devalued. Us started to print money, run high trade deficits and experience high inflation it affected the whole system and brought it to it’s breaking pt
Jamaica agreement
New exchange rate system
Floating rates created
Gold abandoned
IMF quota increase
Perks of floating rate
Monetary policy autonomy: remove obligation of government to maintain exchange rage this restoring monetary control to gov
Automatic trade balance adjustments
Perks of fixed rate
Provides monetary discipline: gov can’t expand their money supplies at inflationary rates
Minimizes speculation
Reduces uncertainty
Currency board
Convert their domestic currency on demand into another currency at a fixed rate
IMF today
Focuses on Lending money to countries in financial crisis (currency crisis, banking crisis, & foreign debt crisis)
Currency crisis
Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or authorities are forced to expand large volumes of international currency rates which sharply increase interest rates
Banking crisis
Situation in which a loss of confidence in the banking system leads to a run on the banks ( large amounts of mooney being withdrawn)
Foreign debt crisis
When a country can’t service it’s foreign debts
Causes of Asian currency crisis
Investment boom Excess capacity: expectations based on future demand High debt Expanding imports Speculation against these currencies
What managers need to know about te monetary system
- Currency management
- Business strategy:exchange rate movements can have major impact in the competiveness of a country
- Corporate government relations: businesses can influence gov policy towards the international monetary system
Type of entry modes
Exporting
Licensing & franchising
Establishing a joint venture with a local company
Establishing a new wholly owned subsidary
Acquiring an established enterprise
3 things firms must decide when expanding internationally
- Which markets to enter
- When to enter them and on what scale
- Which entry mode to use
Factors affecting mode of entry
Transport costs Trade barriers Political risks Economic risks Costs Firm strategy
Favorable markets
Politically stable
Free market systems
Low inflation rates
Low private sector debt
Less desirable markets
Politically unstable
Mixed or command economies
Excessive levels of borrowing
First mover advantage
Pre embt rivals by establishing a strong brand name
Cost advantage over later enterants
Switching costs
Build up sales volume
First mover disadvantage
Pioneering costs: money spent learning the game
Might make major mistakes due to not knowing the forgin environment
Cost of promoting and establishing a product/ educating customers
Advantage of entering on a significant scale
Make a strategic commitment to the market
Easy for company to attract customers and suppliers
More Likly to get first mover advantages
Might gain other foreign investors
Disadvantages of entering on a significant scale
Long term impact
Difficult to reverse
Less resources for other places.. Too focused
Advantages of small scale entry
Allows firm to learn about the market while limiting the firms exposure to the market
Disadvantage of small scale entry
Shows less commitment
Won’t capture first mover advantages
Turnkey projects
The contractor handles every detail of project and hands over the key to the owner once a plant is fully ready to operate
Licensing
A licensor grants the rights to intangible priority to the licensee for a period of time and receives a royalty fee from the licensee
Franchising
A specialized form of licensing in which the franchisor sells intangible property to the franchisee and insists that the franchise follows strict rules
Joint ventures with a host country firm
Firm that is owned by two or more otherwise independent firms
Wholly owned subsidiary
Firm owns 100% of stock
New operation
Acquire an established firm
Exporting advantage/disadvantage
A
-avoids cost of establishing local manufacturing operations
-gain experience curve
D
- might be lower cost manufacturing locations
- high tariffs and transport costs
-agents in foreign country might not work in exporters interest
Turnkey advantage/disadvantage
A
-earn economic returns from the know-how required to assemble and run a complex process
-less risky than conventional FDI
D
- no long term interest in foreign company
- May create a competitor
-sell competitive advantage to competitors
Licensing advantage/disadvantage
A
- avoids development costs
-avoids barrier to entry
- can capitalize on market opportunities without developing those applications itself
D
- doesn’t have tight control for realizing experience curve & location economies
- firms ability to coordinate strategic moves across countries is limited
- intangible assets could be lost
Franchising advantage/disadvantage
A
- avoids costs and risks of opening up a foreign market
-firms can quickly build a global presence
D
- inhibits firms ability to take profits out of one country to support competitive attacks on another
- geographic distance is difficult
Joint ventures advantage/disadvantage
A
-firms benefit from a local partners knowledge of local market, culture, etc
-costs and risk of opening a foreign market are shared
- satisfy political considerations for market entry
D
- risks giving control of its technology to partner
- may not have the tight control to realize experience curve or location
Economies
- conflicts and battles for control
Wholly owned subsidiaries advantage/disadvantage
Protection if technology
Ability to engage in global strategic coordination
Ability to realize location and experience economies
D
- high costs and risks
Competive advantage based on technological know how
Avoid licenscing & joint ventures
Greenfield strategy
Build a subsidiary from the ground up.
Better when the firm needs to transfer organizationally embedded competences, skills routines and culture
Acquisition strategy
Acquire an existing company
May be better when there are well established competitors or global competitors interested in expanding
Why choose acquisition
Quick to execute
Enable firms to preempt their competitors
Less risky
Problems with acquisitions
Acquiring firm overlays for the acquired firm
Cultures clash
Anticipated synergies are slow and difficult to achieve
Bad pre scanning process
Why choose greenfield
Greater ability to build the kind of subsidiary a company wants
Disadvantage of greenfield
Slower and more risky
Strategic alliances
Cooperative agreements between potential or actual competitors
Why are strategic alliances attractive
- Facilitate entry into a foreign market
2.allow firms to share the fixed costs and risks if developing new products or processes - Bring together complementary skills and assets that neither company could develop on its own
- Help form establish technological standards
5.
Success of strategic alliance based on
- Partner selection
- Alliance structure
- manner which alliance is managed
Objectives for doing business in Europe
Increase the sales and profits Diversify your business Put pressure in a global competitor 1st step for being global Better understanding of the European customer Improve as a accompany
5 forces model (porter model)
Threat of new entrants Threat if substitute products Bargaining power of buyers (manufacturers & retailers) Bargaining power of suppliers Rivalry amount competitiors
Threat of new entrants (8barriers to entry)
- Economies of scale
- Product of differentiation
- Capital requirements
- Onetime switching cost ( cost to change from one supplier to another)
- Access to distribution channels
- Gov policy
- cost advantage
- Competitor response
Cost leadership
Efficient production and facilities Superior logics Great productivity Efficient service Technological improvements Ex: Walmart & Zara
Product differentiation
Unique product Technological revolution Huge marketing focus Best understanding of customers needs Ex nike & apple
Cost focus
Offer lower prices to a specific segment
Focused differentiation
Unique product in premium price
Competitive advantage of nations
- Factor conditions ex HR physical resources, knowledge, capital
- Demand conditions
- Related and supporting industries
- Firm strategy, structure & rivalry
- Chance
- Government
Marketing mix
The choices the firm offers to its target market
- Product attributes
- Distribution strategy
- Communication strategy
- Pricing strategy
Market segmentation
Identifying distinct groups of consumers whose purchasing behavior differs from others in important ways
Markets can be segmented
Geography
Demography
Socio-cultural factors
Psychological factors
How do product attributes influence market strategy
- Culture
- Level of economic development
- Product and technical standards
How do distribution systems differ
- Retail concentration: concentrated vs. fragmented
- Channel length:
- Channel exclusivity
Channel quality
Barriers to internal communication
- Cultural barriers
- Source & country of origin effects
- Noise levels
Push strategy
Personal selling
Pull strategy
Mass media advertising
When is push strategy better
Industrial product and complex new products
Distribution channels are short
Few print or electronic media are available
When is pull strategy better
Consumer good products
Distribution channels are long
Large media outlets available
Pricing strategy considerations
- Price discrimination
- Strategic pricing
- Regulations that affect pricing decesions
3 aspects of strategic pricing
- Predatory pricing: use profit in one market to support pricing designed to drive out competitors in another
- Multi point pricing: pricing grateful in one area might affect rivals pricing in another region
- Experience curve pricing: price low worldwide in attempt to build global sales volumes
Pricing affected
- Anti dumping regulations
2: competition policy: prevents monpolys
