FINAL Exam Flashcards
- Three ways of understanding what globalization is:
− A new force sweeping through the world in recent times
− A long-run historical evolution since the dawn of human history
− A pendulum that swings from one extreme to another from time to time
- Identify two types of institutions & supportive pillars:
- Formal Institutions
- Examples: Laws, Regulations, Rules
- Institution represented by laws, regulations, and rules
- Supportive Pillar: Regulatory pillar–> The coercive power of governments - Informal Institutions
- Examples: Norms, Cultures, Ethics
- Institution represented by cultures, ethics, and norms
- Supportive Pillar: Normative Pillar (The mechanism through which norms influence individual and firm behavior) & Cognitive pillar (The internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior)
3.Explain how institutions reduce uncertainty
The key role of institutions is to reduce uncertainty by constraining the range of acceptable actions.
− Uncertainty can lead to transaction costs.
− Transaction costs also rise from opportunism, the act of seeking self-interest with guile.
- Identify the two core propositions underpinning an institution-based view of global business.
A
Proposition 1: Managers and Firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework
Proposition 2: While formal and informal institutions combine to govern firm behaviour, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy managers and firms.
- Different types of formal institutions
- Political Systems (The rules of the game on how a country is governed politically):
- Democracy
- Tolitanarianism: A political system in which one person or party exercises absolute political control over the population (4 Types include Communist: centers on a communist party, Right-Wing: is characterized by its intense hatred against communism, Theocratic: refers to the monopolization of political power in the hands of one religious party or group, Tribal: refers to one tribe or ethnic group monopolizing political power and oppressing other tribes or ethnic groups)
- Authoritarianism: A political system in which political plurality is undermined and concentrated government power is imposed - Economic Systems (Rules of the game on how a country is governed economically):
- Market economy: A pure market economy is characterized by laissez-faire and total control by market forces.
- Command economy: A pure command economy is defined by government ownership and control of all means of production.
- Mixed economy: Most countries operate mixed economies, with a different emphasis on market versus command forces.
Other:
- property rights: The legal right to use an economic property (resource) and to derive income and benefits from it
- intellectual property rights: Right associated with the ownership of intellectual property
- Legal Systems:
- Civil law: uses comprehensive statutes and codes as a primary means to form legal judgments.
- Common law: is shaped by precedents and traditions from previous judicial decisions.
- Theocratic law: is a legal system based on religious teachings.
- Ways to understand cultural differences.
- Context:
- Context: The underlying background upon which social interaction takes place
- Low-context culture: A culture in which communication is usually taken at face value without much reliance on unspoken context
- High-context culture: A culture in which communication relies a lot on the underlying unspoken context, which is as important as the words used - Clsuter
- Cluster: Countries that share similar cultures
- Civilization: The highest cultural grouping of people and the broadest level of cultural identity people have - Dimensions
Power distance: The extent to which less powerful members within a culture expect and accept that power is distributed unequally
Individualism: The idea that an individual’s identity is fundamentally their own
Collectivism: The idea that an individual’s identity is fundamentally tied to the identity of their collective group
Masculinity: A relatively strong form of societal-level gender role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions
Femininity: A relatively weak form of societal-level gender role differentiation whereby more women occupy positions that reward assertiveness and more men work in caring professions
Uncertainty avoidance: The extent to which members in a culture accept or avoid ambiguous situations and uncertainty
Long-term orientation: Dimension of how much emphasis is placed on perseverance and savings for future betterment
- Explain how to use a VRIO framework to understand a firm’s resources and capabilities
A VRIO framework suggests that only resources and capabilities that are valuable (V), rare (R), inimitable (I), and organizationally (O) embedded will generate sustainable competitive advantage.
- Articulate the difference between keeping an activity in-house and outsourcing it
Outsourcing is defined as turning over all or part of an organizational activity to an outside supplier.
* An activity with a high degree of industry commonality and a high degree of commoditization can be outsourced, and an industry-specific and firm-specific (proprietary) activity is better performed in-house.
* On any given activity, the four choices for managers in terms of modes and locations are
A. offshoring,
B. onshoring,
C. captive sourcing/FDI, and
D. domestic in-house activity.
- Why nations trade?
- There are economic gains from trade.
- International trade must be win–win: both sides must share economic gains.
- Both sides must have economic gains
Resource-based view: Firms in one nation generate exports that are valuable, unique, and hard to imitate –> Beneficial for foreign firms to import
Institution-based view: Different rules governing trade are designed to determine how gains are shared or not shared
- Key terms associated with international trade
- Export: Selling abroad
- Import: Buying from abroad
- Merchandise (goods): Tangible products being traded
- Service: Intangible services being traded
- Trade deficit: An economic condition in which a nation imports more than it exports
- Trade surplus: An economic condition in which a nation exports more than it imports
- Balance of trade: The aggregation of importing and exporting that leads to the country-level trade surplus or deficit
- Understand the six theories of international trade
Classical trade theories:
(1) mercantilism,
(2) absolute advantage, and
(3) comparative advantage
Modern trade theories:
(1) product life cycle,
(2) strategic trade, and
(3) national competitive advantage of industries
- Key terms associated with FDI
- Foreign portfolio investment (FPI): Investment in a portfolio of foreign securities such as stocks and bonds
- Sovereign wealth funds (SWF): A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, and other financial instruments
- Management control right: The right to appoint key managers and establish control mechanisms
- Horizontal FDI: A type of FDI in which a firm duplicates its home country-based activities at the same value-chain stage in a host country
- Vertical FDI: A type of FDI in which a firm moves upstream or downstream at different value-chain stages in a host country
- Upstream vertical FDI: A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country (Final Assembly to Components)
- Downstream vertical FDI: A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country (Final Assembly to Marketing)
- FDI flow: The amount of FDI moving in a given period (usually a year) in a certain direction
- FDI inflow: Inward FDI moving into a country in a year
- FDI outflow: Outward FDI moving out of a country in a year
- FDI stock: Total accumulation of inward FDI in a country or outward FDI from a country across a given period
- Why firms choose FDI?
OLI advantages
A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI.
Firms prefer FDI to licensing for 3 reasons:
1) FDI reduces dissemination risks
2) FDI provides tight control over foreign operations
3) FDI facilitates the transfer of tacit knowledge through “learning by doing”
- Explain how FDI results from ownership, location and internalization advantages
- OLI advantage: A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI
- Ownership advantage: An MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI (also called firm-specific advantage, or FSA)
- Location advantage: Advantage enjoyed by firms operating in a certain location
- Internalization advantage: The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries
- Who: RBV (FSAs)
VRIO - Firms who have the ownership advantages (VRIO assets that can bring value to foreign markets)
- Why: strategic motivations; internalization advantages
Motives for Acquisitions:
- Synergistic motives (IB Issues & RB Issues)
- IB: Respond to formal institutional constraints and transitions
- RB:
–> Leverage superior managerial capabilities
–> Enhance market power and scale economies
–> Access to complementary resources - Hubristic motives (IB Issues & RB Issues)
- IB: Herd behavior—following norms and chasing fads of M&As
- RB: Managers’ overconfidence in their capabilities - Managerial motives (IB Issues & RB Issues)
- IB: Self-interested actions such as empire-building guided by informal norms and cognitions
- Where: Location advantages; distance (C.A.G.E.)
Location-specific advantage: The benefits a firm reaps from the features specific to a place
Strategic goals –> Location-specific advantages
- Strategic Goal: Natural resource seeking–> LSA (Possession of natural resources and related transport and communication infrastructure)
- Strategic Goal: Market seeking–> LSA (Abundance of strong market demand and customers willing to pay)
- Strategic Goal: Efficiency seeking –> LSA (Economies of scale and abundance of low-cost factors)
- Strategic Goal: Innovation seeking–> LSA (Abundance of innovative individuals, firms, and universities)
Cultural and institutional distances:
C. cultural
A. administrative
G. geographical
E. economic
- How: entry modes; establishment modes; acquisition vs. alliance
Scale of entry: The amount of resources committed to entering a foreign market
- Entry mode: A form of operation that a firm employs to enter foreign markets
- Non-equity mode: A mode of entry (exports and contractual agreements) that reflects relatively smaller commitments to overseas markets
- Equity mode: A mode of entry (joint ventures and wholly owned subsidiaries) that indicates relatively larger commitments to overseas markets
Types of Contractual Agreements
1. Turnkey project: A project in which clients pay contractors to design and construct new facilities and train personnel
2. Build-operate-transfer (BOT) agreement: A nonequity entry mode used to build a longer-term presence by first constructing and then operating a facility for a period of time before transferring operations to a domestic agency or firm
3. Research-and-development (R&D) contract: An outsourcing agreement in R&D between firms
4. Co-marketing: Efforts among a number of firms to jointly market their products and services
Equity Modes:
1. Joint venture (JV): A new corporate entity jointly created and owned by two or more parent companies
2. Wholly owned subsidiary (WOS)
- A subsidiary located in a foreign country that is entirely owned by the parent multinational
- Means to set up a WOS (establishment mode)
1) Greenfield operations: Building new factories and offices from scratch
2) Acquisitions: Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.
Contractual (nonequity-based) alliance: Alliance between firms that is based on contracts and does not involve the sharing of ownership.
–> Includes co-marketing, research and development (R&D) contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising
Equity-based alliance: Alliance based on ownership or financial interest between the firms
–> Strategic investment: One firm investing in another as a strategic investor
–> Cross-shareholding: Both firms investing in each other to become cross-shareholders
- When: First-mover vs. late-mover; stage model
- First-mover advantage: Benefits that accrue to firms that enter the market first and that late entrants do not enjoy
Examples:
- Proprietary, technological leadership
- Pre-emption of scarce resources
- Establishment of entry barriers for late entrants
- Avoidance of clash with dominant firms at home
- Relationships with key stakeholders such as governments
- Late-mover advantage: Benefits that accrue to firms that enter the market later and that early entrants do not enjoy
Examples:
- Opportunity to free ride on first mover investments
- Resolution of technological and market uncertainty
- First mover’s difficulty to adapt to market changes
- Integration-responsive framework
Integration-responsiveness framework: A framework of MNE management on how to simultaneously deal with the pressures for both global integration and local responsiveness
MNEs’ two sets of pressures:
1. Global integration
2. Local responsiveness
- Four types of international / multinational strategy
- Global standardization strategy: A strategy that focuses on development and distribution of standardized products worldwide in order to reap the maximum benefits from low-cost advantages
- Transnational strategy: A strategy that endeavors to be simultaneously cost efficient, locally responsive, and learning-driven around the world
- Home replication strategy: A strategy that emphasizes the duplication of home country-based competencies in foreign countries
- Localization (multidomestic) strategy: A strategy that focuses on a number of foreign countries/regions, each of which is regarded as a stand-alone local (domestic) market worthy of significant attention and adaptation
- Fit between multinational strategy and structure & knowledge management
Strategic Fit
- Strategy as a link between the firm and its external environment
- For a strategy to be successful, it must be consistent with the firm’s external environment and with its internal environment – its goals and values, resources and capabilities and structure
Center of excellence: An MNE subsidiary explicitly recognized as a source of important capabilities, with the intention that these capabilities be leveraged by, and/or disseminated to, other subsidiaries
Worldwide (global) mandate: A charter to be responsible for one MNE function throughout the world.
4 Different Structures:
International division structure: An organizational structure that is typically set up when firms initially expand abroad, often engaging in a home replication strategy
Geographic area structure: An organizational structure that organizes the MNE according to different geographic areas (countries and regions)
Country (regional) manager: The manager of a geographic area, either a country or a region
Global product division structure: An organizational structure that assigns global responsibilities to each product division
Global matrix structure: An organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures, especially for MNEs adopting a transnational strategy
The relationship between strategy and structure is reciprocal:
- Strategy usually drives structure
- The relationship is not one way
- Neither strategy nor structure is static
Knowledge MGMT:
- Knowledge management: The structures, processes, and systems that actively develop, leverage, and transfer knowledge
- Explicit knowledge: Knowledge that is codifiable (can be written down and transferred with little loss of richness)
- Tacit knowledge: Knowledge that is noncodifiable, whose acquisition and transfer require hands-on practice
- Absorptive capacity: The ability to recognize the value of new information, assimilate it, and apply it
Knowledge Management in Four Types of Multinational Enterprises
Problems in Knowledge Management
- Knowledge acquisition: Failure to share and integrate external knowledge
- Knowledge retention: Employee turnover and knowledge leakage
- Knowledge outflow: “How does it help me?” syndrome and “knowledge is power” mentality
- Knowledge transmission: Inappropriate channels
- Knowledge inflow: “Not invented here” syndrome and absorptive capacity
- Explain how institutions and resources affect strategy, structure, and innovation.
- Externally, MNEs are subject to the formal and informal institutional frameworks erected by various home-country and host-country governments.
- How MNEs are governed internally is determined by various formal (responsibilities defined by an organizational chart) and informal (organizational norms, values, and networks) rules of the game.
- Organizational culture: The collective programming of the mind that distinguishes the members of one organization from another
- Four types of CSR strategies.
Reactive strategy: A strategy that would only respond to CSR causes when required by disasters and outcries - “Not my problem”
Defensive strategy: A strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management - “What’s the point”
Accommodative strategy: A strategy characterized by some support from top managers, who may increasingly view CSR as a worthwhile endeavor - “If it’s easy”
Proactive strategy: A strategy that endeavors to do more than is required in CSR - “Green crusaders”
