ib Flashcards
The Post Bretton Woods System
A system of flexible exchange rate regimes with no official common denominator Strengths: flexibility and diversity
Drawbacks: turbulence and uncertainty
The IMF:
Core responsibility: lending
-an international organization that was established to promote international monetary cooperation, exchange stability and orderly exchange arrangement
-lending
Strategic responses to foreign exchange movement
1. Spot transactions
2.Forward transaction
3. Currency swap
(Financial companies)
1.Single-shot exchange of one currency into another
2.A foreign exchange transaction in which participants buy and sell currencies now for future delivery
–primary benefit: to protect traders & investors from being exposed to the fluctuations of the spot rate
3. The conversion of one currency into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future
-fluctuations of the spot rate
–forward discount:
—forward premium:
=currency hedging
–a condition under which the forward rate of one currency relative to another currency is higher than the spot rate
—a condition under which the forward rate of one currency in terms of another currency is lower than the spot rate
How do banks make money by trading money?
They make money by capturing the difference between their offer rate (price to sell) and their bid rate (price to buy). The bid rate is always lower than the offer rate.
Nonfinancial companies
Currency risk:
2 strategies:
Currency hedging
Strategic hedging
the potential for loss associated with fluctuations in the foreign exchange market
Strategic hedging
Spreading out activities in a number of countries in different currency zones to offset any currency losses in one regions through gains in other regions
Competitor analysis:
3-Collusion: c
4-Tacit collusion:
5-Explicit collusion:
6-Cartel:
Antitrust laws: laws that outlaw cartels
1.
2.the process of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ response
3. collective attempts between competing firms to reduce competition
4.firms indirectly coordinate actions by signalling their intention to reduce output and maintain pricing above competitive levels
5-firms directly negotiate output and pricing and divide markets
6-an output- & pricefixing entity involving multiple competitors
when is collusion possible?
5
Collusion possible
Few firms
Existence of industry price leader
Homogeneous products
High barriers to entry
High market commonality
when is collusion difficult?
-Many firms
-No industry price leader
-Heterogeneous products
-Low barriers to entry
-Lack of market commonality
multimarket competition
engage same rivals in dif industries
Mutual forbearance
multimarket firms respect their rivals’ spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion
Cross-market retaliation:
retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market
antitrust policy:
Competition policy: government policy governing the rules of the game in competition
government policy designed to combat monopolies and cartels
government policy governing the rules of the game in competition
Competition & antitrust policies focus on:
Collusive price setting
Predatory pricing
Price setting by monopolists or collusion parties at a level higher than the competitive level
An attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long rung after eliminating rivals
Dumping: an exporter selling goods below cost
Antidumping laws:
an exporter selling goods below cost
laws that make it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals
Resource similarity:
the extent to which a given competitor possesses strategic
endowment comparable, in terms of both type and amount, to those of the local firm
Three drivers for counterattacks
- Awareness
Blue ocean strategy: strategy that focuses on developing new markets and avoids attacking core markets defended by rivals - Motivation
- Capabilities
Defender strategy:
Extender strategy:
Dodger strategy:
Contender strategy:
Defender strategy: strategy that centers on local assets in areas in which MNEs are weak
Extender strategy: strategy that centers on leveraging homegrown competencies abroad
Dodger strategy: strategy that centers on cooperating through joint ventures with MNEs and sell-offs to MNEs
Contender strategy: strategy that centers on a firm engaging in rapid learning and then expand overseas
International investment takes place in two basic ways:
FDI (direct)
FPI (indirect)
Foreign Portfolio Investment:
investment in a portfolio of foreign sucurities
such as stocks and bonds
Horizontal FDI:
Vertical 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
-a type of FDI in which a firm moves upstream of downstream at different value chain stages in a host county
FDI flow:
FDI inflow:
FDI outflow:
FDI stock:
1.the amount of FDI moving in a given period in a certain direction
2.inbound FDI moving into a country in a year
3.outbound FDI moving out of a country in a year
4.total accumulation of inbound FDI in a country or outbound FDI from a country across a certain period
OLI advantages :
Ownership
Location
Internalization
1.An MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate and organizationally embedded assets overseas in the context of FDI
2.Advantages enjoyed by firms operating in a certain location
3.The replacement of cross-border markets with one firm (the MNE) locating and operating in two or more countries
Why firms prefer FDI to licensing
O advantages
FDI reduces dissemination risks
The risk associated with unauthorized diffusion of firm-specific know-how
FDI provides tight control over foreign operations Without FDI, the foreign firm cannot control its licensee
FDI facilitates the transfer of tacit knowledge through ‘learning by doing Certain know-how may be too difficult to transfer to licensees without FDI tacit knowledge: non codifiable & needs practice
Location advantages
Agglomeration:
advantages
Knowledge spillover:
- clustering of economic activities in certain locations Advantages
Advantages :
Knowledge spillover
Knowledge diffused from one firm to others among closely located firms
Industry demand that creates a skilled labour force whose members may work for different firms without moving out of the region
Industry demaind that facilitates a pool of specialized suppliers and buyers also located in the region
Intrafirm trade:
International transactions between the two firms
Political views on FDI. !!!!
Radical view on FDI
Free market view on FDI
Pragmatic nationalism view on FDI
1.A political view that is hostile to FDI
Threats FDI as an instrument of imperialism, a vehicle for exploiting domestic resources
2.Suggests that FDI unrestricted by government intervention is the best
3.Considering both the pros and cons and approving FDI only when its benefits outweigh its costs
Benefits of FDI to HOST countries
Capital inflow
Can improve a country’s balance of payments
Technology
Technology spillovers: technology diffused from foreign firms to domestic firms
Advanced management know-how
Job creation
costs of FDI to host countries
Loss of sovereignty
Adverse effect on competition
May drive some firms out of
business
Capital outflow
Profits made will be send back to home countries
Benefits of FDI to home countries
Repatriated (send back) earnings from profits from FDI
Increased exports of components & services to host countries
Learning from operations abroad
costs of FDI to home countries
Capital outflow Job loss
Liability of foreigness:
Manifested in two ways:
1.the inherent disadvantage foreign firms experience in host countries because of their non-native status
Differences in formal and informal institutions govern the rules of the game in different countries
Foreign firms are often still discriminated against
Strategic goals:
Natural resource seeking
Market seeking
Efficiency seeking
Innovation seeking
a) Possession of natural resources and related transport and communication infrastructure
b) An abundance of strong market demand and customers willing to pay
c) Economies of scale and abundance of low- cost factors
d) Abundance of innovative individuals, firms, and universities
Cultural distance:
Institutional distance:
-the difference between two cultures along identifiable dimensions such as individualism
–the extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries
Two schools of thought on where to enter
1)Stage model
2) The second school of thought argues that
Firms will enter culturally similar countries during their first stage of internationalization and will then gain more confidence to enter culturally distant countries in later stages
The second school of thought argues that it is more important to consider strategic goals rather than culture and institutions
First-mover advantages:
benefits that accrue to firms that enter the market first and that late entrants do not enjoy
Proprietary, technological
Preemption of scarce resources
mover investments
Establishing entry barriers for late entrants
Avoidance of clash with dominant firms at home
market changes
Relationships with key stakeholders such as customers and government
Late-mover advantages: benefits that accrue to firms that enter the market later and that early entrants do not enjoy
Opportunity to free ride on first-
leadership
Resolution of technological and market uncertainty
First-movers difficulty to adapt to
entrants
Mode of entry: method used to enter a foreign market
Nonequity mode:
Licencing/franchising
a mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets
The licensor/franchisor sells the rights to intellectual property such as patents and know-how to the livensee/franchisee for a royalty fee
Nonequity mode:
Turnkey projects
and drawbacks
Clients pay contractors to design and construct new facilities and train personnel
drawbacks:
-Turnkey projects do not allow for a long-term presence
-If foreign clients are competitors, selling them technology through turnkey may boost their competitiveness
Nonequity mode:
Build operate transfer (BOT)
Used to build a longer term presence by building and then operating a facility for
a period of time before transferring operations to domestic agency of firm
Nonequity mode:
R & D contracts
Co-marketing
–Outsourcing agreement in R&D between firms
-Efforts among a number of firms to jointly market their products and services
Equity modes:
Joint venture (JV)
Wholly owned subsidiaries (WOS)
1) A new corporate entity created and jointly owned by two or more companies
2) Equity modes are indicative or relatively larger, harder-to-reverse commitments. An MNE enters foreign markets via equity modes through FDI
Formal institutions: government regulations concerning start-ups
Registrations
Taxation
Inspection
Informal institutions: individualistic and low uncertainty avoidance societies tend to
fester more entrepreneurs
gogo
Direct exports
To reduce transaction risks, banks on both sides can facilitate this transaction by a letter of credit
letter of credit ?
The sale of products made by firms in their home country to customers in other countries.
a financial contract that states that the importer’s bank will pay a specific sum of money to the exporter upon delivery of the merchandise
Licensing:
Franchising:
firm A’s agreement to give firm B the rights to use A’s proprietary technology or trademark for a fee paid to A by B
firm A’s agreement to give firm B the rights to use A’s proprietary assets for a royalty fee paid to A by B (servie industries)
FDI
Advantages:
o disadvantages
1)–Becoming more committed to foreign markets
–A firm is better able to control how its technology and brand name are used
2) -Costs
o Complexityrequires a significant managerial commitment
International strategies for staying in domestic markets:
- Indirect exports
A way to reach overseas customers by exporting through domestic based export
intermediaries - Become suppliers for foreign firms
- Become licensees/franchisees of foreign brands
- Become alliance partners of foreign direct investors
- Harvest and exit through sell-offs
Strategic alliance:
a voluntary agreement between firms involving exchange, sharing, or co-developing of products, technologies or services
Contractual (non-equity-based) alliances:
alliances between firms that are based on
contracts and do not involve the sharing of ownership
Equity-based alliances:
alliances based on ownership or financial interest between firms
Acquisition:
Merger:
-transfer of the control of operations and management from one firm (target) to another firm (acquirer), the former becoming a unit of the latter
-the combination of operations and management of two firms to establish a new legal entity
The impact of formal institutions on alliances and acquisitions can be found along two dimensions:
- Antitrust concerns
- Entry mode requirements
Antitrust authorities suspect at least some tacit collusion when competitors cooperate. However, because integration within alliances is usually not as tight as acquisitions, antitrust authorities are more likely to approve alliances than acquisitions
In many countries, governments discourage or ban acquisitions to establish wholly-owned subsidiaries
Four factors that may influence alliance performance
1. Equity
- Learning and experience
- Nationality
- Relational capabilities
- A greater equity stake may indicate a higher-lever commitment, which is likely to
result in higher performance - Learning from partners is important in assessing alliance performance. Since
learning is abstract, experience is often used to measure
3.Dissimilarities in national culture may create strains in alliances. International
alliances tend to have more problems than domestic ones
- The art of relational capabilities which are firm-specific and difficult to codify and transfer, may make or break alliances
Hubris: over-confidence in one’s capabilities
Managerial motives: manager’s desire for power/money, which may lead to decisions that do not benefit the firm overall in the long run
yes- this are motives for acquisition
Integration-responsiveness framework:
a framework of MNE management on how simultaneously deal with two sets of pressures for global integration and local responsiveness
Cost reduction
Local responsiveness
Strategic choices
1. Home replication
- Localization
- Global standardization
- Transnational
1) A strategy that emphasizes the replication of home coutry-based competences in foreign countries
Manufacturing: manifested in export strategy
Services: done through licensing/franchising
2) A strategy that focuses on a number of foreign countries/regions, each of which is
regarded as a stand-alone local market worthy significant attention and adaption
3) A strategy that focuses on development and distribution of standardized products worldwide in order to reap the maximum benefits from low-cost advantages
4) A strategy that endeavors to be cost efficient, locally responsive and learning driven simultaneously around the world
Home replication strategy:
-advantages
-disadvantages
1) Leverages home country-based advantages
Relatively easy to implement
2) Lack of local responsiveness
May result in foreign consumer alientation
Localization strategy:
-advantages
-disadvantages
1) Maximizes local responsiveness
2) High costs due to duplication of
efforts in multiple countries
Global standardization strategy:
-advantages
-disadvantages
1) Leverages low-cost advantages
2) Lack of local responsiveness
Too much centralized control
Transnational strategy:
-advantages
-disadvantages
1)Cost efficient while being locally responsive
- Engages in global learning and diffusion of
innovations
2) Organizationally complex
Difficult to implement
Knowledge management:
the structures, processes, and systems that actively develop, leverage and transfer knowledge
Cross-listing:
listing shares on a foreign stock exchange, high costs, but the benefits outweigh the costs
Concentrated versus diffused ownership
Concentrated ownership & control:
Diffused ownership:
founders start up firms and completely own and control them on an individual or family basis
publicly traded corporations owned by numerous small shareholders but non with a dominant level of control. Separation of ownership and control
Family ownership
Advantages:
o Better incentives to focus on the long-run performance
o May minimize the conflicts between owners and managers Disadvantages
o May lead to selection of less qualified managers
o Destruction of value because of family conflicts
o Expropriation (onteigening) of minority shareholders
State ownership
SOEs: state-owned enterprises
Owned and controlled by government agencies and officials far removed from ordinairy citizens and employees
Little motivation for SOE managers and employees to improve performance, because it could hardly benefit them personally
Stakeholders:
any group or individual who can affect or is affected by the achievements of the organization’s activities
Corporate social responsibility (CSR):
consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks
A key goal for CSR is global sustainability:
the ability to meet the needs of the present without compromising the ability of future generations to meet theirs.
Primary stakeholder groups:
constituents on which the firm relies for its continuous survival and prosperity
Shareholders
Managers
Employees
Suppliers
Customers
Governments & communities (laws, regulations, taxes)
Secundary stakeholder groups:
those who influence or affect, or are influenced or affected by, the corporation but are not engaged in transactions with the firm and are not essential for its survival
Environmental groups
Labor practice groups
Institutions & CSR
The strategic response framework consists of:
1. Reactive strategy
- Defensive strategy
- Accommodative strategy
- Proactive strategy
- Reactive strategy
A strategy that would only respond to CSR causes when required by disasters and
outcries - Defensive strategy
A strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management - Accommodative strategy
A strategy characterized by some support from top managers, who may
increasingly view CSR as a worthwhile endeavor - Proactive strategy
A strategy that endeavors to do more than is required in CSR
