Final Exam Flashcards
Reasons companies engage in international business:
- Expand sales
- Spreading costs
- Access to resources
- Diversifying sales
- Dumping
Why is international business growing?
- expansion in tech
- liberalization of cross border movements
- growth in supporting services
- increase in simple global competition
- world politics
- growing consumer pressure
Modes of international business:
- imports/exports
- turn key ops
- FDI
- joint venture
- strategic alliance
Reasons why companies do not actively approach internationalizing their businesses:
Lack of knowledge of how to do it
What weakens a currency?
- relative inflation rate goes up (relative to trading partners)
- our external trade deficit goes up (import more than export)
- our international deficit (budget) goes up (spending more than making)
What strengthens a currency?
- raise interest rates (price of money, less money means ppl buy less)
- reduce external trade deficit
- reduce international deficit
Rising currency exchange rates impacts _____ in a ____ way.
exports ; negative
PPP
Purchasing Power Parity - number of units of a country’s currency required to buy same amount of goods and services in that market, that $1 would buy in the US
Hofstede’s cultural dimensions:
- role or power distance
- individualism vs collectivism
- uncertainty avoidance
- masculinity vs femininity
- future orientation
- pragmatic vs Normative
- Indulgence vs restraint
How did Schein improve upon Hofstede’s work?
- discovers additional cultural dimensions
- made judgements by looking at these dimensions to determine which are best for business
- talks to 500 of the best business people I world, determined patterns and where they fell on the scales.
Best part of cultural dimensions spectrum to be on in business:
Authoritative < pragmatic Evil < good Fixed < mutable Group = individualistic Authoritative = collegial Past < present < near future oriented
Legal concerns in international business that might encourage companies to latch onto an existing one in that market:
- enforcing contracts
- hiring and firing
- bankruptcy laws
- bonuses
- product safety
- liability laws
- IP
Reasons to engage in FDI:
- expand sales
- acquire or economize resources
- minimize risk
How does FDI minimize risk?
- being closer to customers is inherently less risky
- block competitive move
- reduced excessive reliance on any one location
How does FDI help expand sales vs importing and exporting?
- saves on transport costs
- domestic plant capacity
- economies of scale (variability)
- trade restrictions
- preference for domestic goods
- fluctuations in least cost production locations
How does FDI help an organization to acquire or economize resources?
- vertical integration
- rationalize or optimize production
- better access to production resources
- gov investment incentives
When a company’s controlled through ownership by a foreign company or individual.
FDI
Reasons for trade agreements:
- give preferential treatment to members of agreement in order to save money and grow economy
- gets ride of waste, tariffs and quotas, to save time and money
Types of trade agreements:
- EU
- NAFTA
- commodity agreements (stabilize price and supply of world commodities)
Types of collaborative agreements:
- licensing
- franchising
- management contracts
- turnkey ops
- joint ventures
- equity alliances
Management tips for managing collab agreements:
- Monitor arrangements evolution
- Make sure partners are compatible
- Send best negotiators
- Specific and detailed contracts
- Performance assessment agreement
- Learn the culture
Consequences of protectionism:
- band aid approach
- politically-charged
- a crutch which causes a sink in competitiveness and breakthroughs
- robbing Peter to pay Paul
- shortage of workers in US
- lack of vision
- fear
- you’ll make more money doing what you’re good at
- trying to force non-commodities
- for amt of money we spend on taxes/inflation, we could retire early, retrain others, and get a four year degree instead of supporting failing industries
An exchange rate quoted for immediate delivery of foreign currency, usually within two business days.
Spot rate
Exchange of currency three or more days from agreement date.
Forward transactions
One currency is swapped for another, and then back again at a further date.
FX Swaps
Contact to buy or sell a particular currency at a particular rate on a particular date. Forward transaction except the terms of contract are standardized to all those participating.
Futures
Spot rates aren’t the exact rate you’ll be given, they’re driven by _____.
Volume
What is the advantage of spot vs forward?
Forward gives more knowledge
When do people tend to choose spot rate vs contract?
When risk isn’t great and they don’t want to pay for a contract
Percent of all foreign currency transactions involving USD:
89%
Reasons for prolific use of USD:
- investment currency
- reserve currency
- transaction currency
- currency of invoice
- intervention currency
Significance of the us market?
Largest foreign exchange market
What is the term for the currency buy rate?
Bid
What is the term for the sell rate of currency?
Offer
What is the difference of the bid and offer called? (Aka profit margin)
Spread
What are American terms?
Looking at currency as “how many dollars will it take to buy 1 currency or another country?”
Which countries are always looked at in European terms?
Canada dollars, British pounds
Most common way of looking at currency exchange. $1 buys how many of another?
European terms
€1 : $1.28
Direct quote, American terms
$1 : €.78
Indirect quote, European terms
$1.5975/85 = 0.0010
Identify the spread, bid, and sell
Bid: $1.5975
Sell: /85
Spread: 0.0010
Whether a currency is weakening or strengthening against another is rooted in _______________.
The relative (comparative) inflation rates of the respective economies
Which currency weakens?
£1 : $1.65
£1 : $1.70
USD
What are some business implications of fluctuating currencies?
- Unemployment in export business
- Sales could drop
- Prices could increase
How does currency affect sales?
Raises prices, leading to less sales, leading to even higher prices. It could lose you your customer base, but need to decide if it’s a permanent shift you have to accommodate by lowering costs elsewhere, or if it’s a blind that you can afford to ignore for a little.
Compares the price of a Big Mac around the world
Big Mac Index (Implied)
Big Mac Index, how do you find the implied PPP?
Divide both currencies being compared
How to find out which currency is overvalued
Divide implied by the actual, convert to percent
Real vs. nominal rates
Real = All about the calculations Nominal = All about the numbers
How to find nominal interest rate
(decimal of interest rate)(decimal of real inflation rate)-1
Stable, consistently strong, fully convertible form of currency.
Hard Currency
Trading of currencies solely for profit vs. necessity
Arbitrage
Largest and most significant electronic brokerage system in the world.
Reuters
Arbitrage causes ______ swings in market prices and inflation.
More
Rates are determined by market, with intervention aimed at moderating undue fluctuations vs. establishing level for it.
Independent (free) floating rates
Currency artificially “pegged” at a fixed rate to a major currency or basket of currencies.
Pegging
Why is pegging dangerous?
B/c if you’re pegged to another currency, and that country makes a decision that’s bad for yours, you have to drop the pegging system and cause panic.
Pegged currency that adjusts periodically in small amounts
Crawling peg
Explains the relationship between inflation rates and interest rates (real interest rates)
The Fischer Effect
Explains the relationship between interest rates and exchange rates.
International Fischer Effect
Country with the ______ relative nominal inflation rate will see its currency ______ against the currency of a comparison nation
Higher ; Weaken
The nominal interest rate is determined by _______ and the ________.
real interest rate ; inflation rate
Control Mechanisms/Strategies
- Organizational Structure
- Corporate Culture
- Coordination Methods
- Reporting
Types of international organizations
- Separate
- Integrated
- Strategic
- Allows for a critical mass – used to leverage political clout within and without the organization
- Allows for the development of international expertise
- Conducive to expanding or contracting – via “spin-offs” or complete divestitures
- Less operational efficiency
Separate international organizations
- Strategic as well as operational issue
- Separate vs. integrated international organizations
- Organizational structures are dynamic, evolving over time
Organizational Structure
- Implicit, helps enforce explicit objectives
- Influencing behaviors to boost creativity and happiness (i.e. Google)
- Different facettes to work
Corporate Culture
- Formally balanced power
- Form of cross-boundary terms
- Reward systems
- Management rotation to invest in futures
Coordination Methods
- Management reports, not limited to written
- Visits to subsidiaries
- Management performance evals.
- Information Systems Data
Reporting
Remember services are also important when discussing ________.
Exports
_____ is the largest exporter of services in the world
US
Services account for ______ of world trade
22%
Indirect selling
- Export management companies (third-party intermediary)
- Operate on a contractual basis, as an agent of the exporter
- Important role, obtain orders through selection of markets, distribution channels and promotion campaigns
Export financing methods of payment
- Draft/bill of exchange
- Letters of credit
From a bank, obligates them to honor a demand for payment of goods.
Letter of credit
Exporting can mean ______ concerns. Banks are often ______ to finance.
Cash flow ; reluctant
Exporters sell their foreign accounts receivable (companies that owe) and seller receives 80-85% of what is owed upfront. Leaves headache to the next buyer.
Factoring
What does the US Export Import Bank do?
Gives advice
Avoids foreign currency issues by trading products and services instead of a price tag.
Countertrade
Global manufacturing involves:
- Supply chain management
- Quality standards
- Supplier Networks
- Inventory management
A key to making the global supply chain work is a good ______________.
Information system
ERP
- Enterprise Research Planning
- Specific software and integrated packages
EDI
- Electronic Data Interchange
- Old and general term
a European based (Geneva, Switz.) set of quality standards applying to a whole range of industries and accepted around the world.
ISO 9000 (certificate)
Three major network supplier configurations:
- Vertically integrated
- Arm’s Length
- Japanese “keiretsu”
Sourcing model where company owns different strategies in production processes, or supply chain.
Vertically Integrated
Sourcing model where companies purchase from outside suppliers via negotiations for tax reasons.
Arm’s Length
Sourcing model using tightly integrated groups of independent companies that work together to manage flow of goods and services along entire supply chain.
Japanese “keiretsu”
ex. Foreign Trade Zones don’t pay duties on inventory until either used in the production process or until is is sold, as in the case of finished goods inventory.
Inventory Management
____ spends more money on marketing than any other country.
US
Highlights of the Avon case study:
- US market saturated for cosmetics, Avon decides to try other markets with high PPP (mostly transitioning economies)
- Good rural model
- Sometimes customize for regions (i.e. sunscreen makeup in Brazil)
- Some places uses French name
- Different objectives and approaches in different markets
- Door-to-door model, can’t do that in some places like Russia and Argentina
- Distribute themselves in extreme circumstances (i.e. canoes in Venice)
Shows relationship between income and number of product
Product Map
Primary determinants of total market potential:
- Income levels
- Population
Breaking down the market potential internationally:
- Obsolescence/leapfrogging of product (i.e. landlines)
- Cost of essential goods/products (vs. disposable)
- Availability of substitutes
- Income inequality
- Cultural factors and tastes
Reasons for product alterations:
- Legal restrictions
- Cultural reasons (ex. veggie burger McD)
- Economic reasons (ex. bulk packages)
- Role of cost-benefit analysis
Legal restrictions resulting in alterations:
- safety and health
- packaging
- indirect legal (ex. material and taxes might effect cost to make and therefore sell)
Different degrees of government intervention on pricing:
- National
- State
- Town
WTO
- Rules and laws of trade all participants agree to
- Dumping
Dumping laws:
- Export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.
- Exceptions
Exceptions to dumping laws:
- short-term
- legit and provable reason i.e. draining inventory
- price testing
- proven competitive market forces you to cut prices
These affect pricing:
- Government intervention
- WTO
- Greater diversity of markets (ex. item delicacy somewhere but can’t give it away elsewhere)
- Country-of-origin expectations (ex. Belgian chocolates)
- Changing values of currency (i.e. imports and inflation)
- Lengthening of supply chain process (ex. middlemen, transport, tariffs, etc.)
Push advertising technique
Direct selling (ex. door to door)
Pull advertising technique
Mass media ads
How do you decide on push vs. pull vs. combo?
- What’s traditional/customary?
- Media resources: reliability and price
Issues with not customizing ads:
- Varying message needs (ex. uses vs. color to appeal)
- Translation issues (ex. Bepsi and Pepsi)
- Legality varies (ex. direct competitor call out)
Issues with Branding Internationally:
- Language
- Color
- Acquisitions
- Country of origin images (ex. US uses Germany beer names)
Distribution set backs:
- Infrastructure conditions (ex. unnumbered houses)
- Number of levels in distribution system (more levels = more money = higher cost)
- Retail inefficiencies ( ex. tech., package sizes, store sizes, taxes, retail laws, salesman)
First two key functions of multi-national finance:
- Capital structure
2. Capital Budgeting
- Determine proper mix of debt (bank) and equity (stock) ratio
- Owe too much and it makes you look risky
- Cheapest option for companies to borrow
Capital Structure
- Analyzing investment
- Investment decisions or expansion decisions
Capital Budgeting
Complexities of global environment:
- Foreign exchange risk
- Currency flow
Global Capital Markets
- Leverage (debt/equity ratio)
- Acceptable levels vary by industry and country)
- Country factors (local availability, dividend tax returns, exchange controls, dividend prep)
Most cost-efficient form of capitalization
Debt bc interest is tax deductible
MNE Alternatives:
- Local domestic capital markets
- Eurocurrencies
- International bonds
- Equity securities and euro equity market
Types of international bonds:
- Foreign
- Eurobonds
Bond sold outside of home country, denominated in currency of the country of issue. Ex. Sold by America in Britain, denominated by British pounds
Foreign Bonds
Bond sold outside of home country, denominated in currency of the country of origin. Ex. Sold by America in Britain, denominated by English USD
Eurobonds
Any currency banked outside of its country of origin
Eurocurrencies
London inter-bank offered rate, interest rate banks charge each other on Eurocurrency loans.
Libor
A market for selling stock outside country of origin
Euroequity Market
Wealthy individuals or groups of investors.
Venture Capitalists
What do venture capitalists look for in an investment?
- High risk
- New ideas
- No track record
- Not accepted by the banks
What do venture capitalists do for people?
- Take the risk
- Provide a structured plan with milestones
- Give financial knowledge
- Help figure out next steps
Less stringent regulations than other banks, leads to lower costs and less expensive sources of funding. Also sometimes lower taxes.
Offshore Financial Centers
Two types of centers:
Booking and Operational
Offshore Financial Center that conducts extensive banking activities.
Operational centers
Offshore Financial Center that do very little banking and mainly used to take advantage of record secrecy.
Booking centers
Changes in exchange rates created three different types of exposures for international firms.
- Translation exposure
- Transaction exposure
- Economic exposure
Exposure that consolidates financial statements, values translated at the going exchange rate at the time of translation.
Translation exposure
Exposure where the value of receivables and payables at time of settlement change, as exchange rate changes.
Transaction exposure
Operating exposure, cash flows (think pricing changes),
sourcing of parts and components (think pricing changes), investments
Economic exposure
Two approaches to hedging (covering) strategies:
- Operational
- Contractural
Matching capital sources/demand within a local market ex. borrow locally for local currency needs, buy in Euros pay in Euros.
Matching capital sources within a local market (hedging)
Collecting foreign currency before due if expecting a currency decline.
Lead (hedging)
Collecting foreign currency after due if expecting a currency strengthening.
Lag (hedging)
If you have subsidiaries in different country from the HQ, sub. has to buy from HQ. Net out back and forth and ask for the difference at the end of the quarter/term.
Multilateral Netting
Operational Hedging Strategies:
- Matching capital sources within a local market
- Lead and Lag
- Multilateral Netting
Contractural Hedging Strategy:
Derivative instruments, ex. forward contracts, options…
