IBE Flashcards
Globalization
A process of interaction and integration among the people, companies, governments and economies of different nations
Driven by
- international trade and FDI
- Information- and transport technology
Globalization of Markets
Refers to merging of historically distinct & separate markets into one global marketplace
- creating a ‘global market’
With increasingly similar consumer tastes and preferences
Globalization of Production
Refers to the sourcing of goods and services from location around the globe to take advantage of national differences in the cost and quality of ‘factors of production’
Factors such as
- labor, capital, energy, land
PESTLE
Framework for organizing country differences:
Political, Economic, Social, Technological, Legal, Environmental
- Often used to analyze attractiveness of market
Culture
A system of values and practices that are shared among a group of people that when taken together constitute a design for living
Values
Ideas a group believes to be good/desirable and bad
Norms
Social rules and guidelines concerning appropriate behavior
Folkways/Customs
Norms/Social rules for everyday life
- Fx dress code, social manners
Mores
Norms central to a functioning society
Society
A group of people that share a common culture
Sub-culture
A unique group within a larger culture
- Fx language, race, lifestyle
HOFSTEDE
Model used for characterizing a culture (national)
- Power distance:
Hierarchy or equally distributed power - Individualism vs Collectivism:
Focus on the individual or the whole/group - Uncertainty avoidance:
Tolerance of unpredictability (control or let the future happen) - Masculinity vs Femininity:
Preference in society for success - more competitive vs more cooperation and caring for the weak - Long-term orientation:
High: Focus on future and delay short-term success - Indulgence vs Self-restraint:
Allow or restrict free gratification (enjoying life etc)
Political Systems
Includes the structure, processes and activities by which a country govern itself
Individualism vs collectivism
Democratic vs totalitarian
Political System - Democratic
Fair elections, right to vote,
freedom of press and other civil rights
Political System - Totalitarian
Few or no civil rights, State control, Cencorship
Legal Systems
Include the raw and rules that regulate behavior
Common Law
Based on tradition,
Civil law
Codified legal system
Theocratic Law
Based on religion
Mercantalism
Goal of accumulating wealth by encouraging exports and discouraging imports
- Affecting trade balance
- Trade seen as a zero-sum game
Absolute Advantage
Situation where a country is more productive/efficient (lower cost) than another country for a particular product
Theory says: Countries should ‘specialize’ in production and export of products for which it has absolute advantage and import others
Limitation: Does not explain what a country with absolute advantage in all goods should do -> Comparative advantage
Comparative Advantage
Countries should specialize in production of of products in which it is ‘relatively’ more productive, meaning it has ‘lower opportunity cost’ than other countries
- Is dynamic and changes over time
Limitation:
- labor is not the only factor of production
Assumption of:
- Perfect competition and Constant returns to scale (no economies of scale)
Opportunity Cost
How much you sacrifice of one thing to do another thing
- Largest sacrifice made to produce a given good
(When lower than other countries = comparative advantage
Factor Endowments
The amount of land, labor, capital, infrastructure and entrepreneurship a country has and can use for production
- A company exports the good where its production is relatively intensive in the factor of which the country is abundant
- The abundant factor endowments benefit from openness to trade
Economies of Scale (New Trade Theories)
Reduction in unit cost achieved by producing a large volume
- Average cost falls as the quantity of output increases
(Increased rate of Input < Output increase) - unit costs spread out on fixed costs
Diseconomics of Scale (New Trade Theories
Average cost falls as the quantity of output increases
Increased rate of Input > Output increase
Constant returns to Scale (New trade Theories)
Average cost falls/rises on same level as quantity of output increases
Increased rate of input = increased output
Perfect Competition (Market Structure)
Refers to the hypothetical situation where no producer or consumer has the power to influence prices
I.e. All act as ‘price takers’
Monopoly (Market Structure)
In which there is only 1 seller of a good
- Can control prices
Oligopoly (Market Structure)
In which there are few sellers of a good
Monopolistic Competition (Market Structure)
In which there are many sellers of a good
- Producing differentiated products
Monopsony (Market Structure)
In which there is only one buyer of a good
Oligopsony (Market Structure)
In which there is a small number of buyers for a good
Porters Diamond
Model with elements about building competitive advantage
- Factor Endowments:
land, labor, capital, infrastructure etc. - Demand Conditions:
fx a large sophisticated consumer base offers an innovation friendly environment - Related and Supporting Industries:
Local suppliers and other actors can cluster around producers and add to innovation (flow) - Firm Strategy, Structure and Rivalry:
Free Trade (Trade Policies)
Situation where the government does not attempt to restrict buying and selling (import/export)
Leads to:
- Static Economic gains:
More domestic consumption and more efficient utilization of resources
- Dynamic Economic gains:
Stimulates economic growth, Job creation and Wealth accumulation
Protectionism (Trade Policies)
Government policy by restricting imports and promoting exports
- aim to improve trade balance (current account)
Trade Contraction (Trade Policies)
Preventing trade
Price:
- Tariff, and Export Tax: (taxes on imports/exports)
Quantity:
- Import Quota: Limit on amount of a good that can be imported
- Voluntary Export Restraint (VER): Limit on amount of a good that can be exported
(Often a request from importer, accepted to avoid risk of worse terms)
Trade Expansion (Trade Policies)
Boosting trade
Price:
- Import- and Export subsidy: Financial support for imports/exports
Quantity:
- Voluntary Import Expansion (VIE): Agreement to increase amount of imports
(Can include lowering Tariffs / dropping Import Quotas - often result of international pressure
Local Content Requirement (Trade Policies)
Requirement to use certain percentage of good or service
- sometimes a requirement for FDI activities
Anti-dumping Policies (Trade Policies)
Regulations to avoid dumping of goods
- fx by establishing a price floor (minimum price)
Multilateralism (Economic Integration)
Situation where close to all countries in the world work together on a given issue under certain international relation agreements
GATT->WTO, IMF, World Bank, UN
Regionalism (Economic Integration)
Any agreement that involves two or more countries (but much fewer than all possible)
- Typically in same geographic area, but can also be across the globe
EU, G7, G20, NATO
Economic Integration (& the different levels)
A process by which economies of separate countries merge into larger entities
- Levels:
1) Preferiental Agreements
2) Free Trade Agreements
3) Custom Union
4) Common Market
5) Economic Union
6) Economic & Monetary Union
7) Political Union
Unilateral (Economic Integration)
Trade policy of of countries not part of any multilateral or regional agreement
Bilateral (Economic Integration)
Trade policy between 2 countries
- Can both be geographically concentrated OR dispersed
Minilateral (Economic Integration)
Trade policy between a group of countries
Can be geographically concentrated (EU, NAFTA) or dispersed
GATT (Economic Integration)
General Agreement on Trade and Tariffs
- signed after WW2
- 1986: The Uruguay Round, new round of negotiations launched. Culminates in 1994 with treaty that establishes WTO (World Trade Organization)
WTO (Economic Integration)
World Trade Organization
-Entity that regulates international trade
Formally created at the end of the Uruguay Round, replacing GATT
WTO now included aspects of trade in Services and rules on Intellectual Property
- 123 participating countries
Principles:
- Reciprocity: one county offers to reduce a barrier to trade and a second country “reciprocates”
- Nondiscrimination: Equal treatment
(However FTAs and Custom unions are allowed)
- Freer trade
RTAs (Economic Integration)
Regional Trade Agreements
- Examples: UN, EFTA
Effects:
Are positive if if Trade Creation dominates Trade Diversion
Statistics show that deeper level of economic integration = more economic growth
Mega-Regional Trade Blocs (Economic Integration)
TPP (Trans-Pacific Partnership) - Not in effect
TTIP (Transatlantic Trade and Investment Partnership)
- Both of which are still frozen
CPTPP (Comprehensive and Progressive Agreement for Trans-pacific Partnership): In effect for 7/11 partners (US waithdrew)
- BRI (China’s Belt and Road Initiative): Set of bilateral agreements between China and other countries
- USMCA (United States-Mexico-Canada Agreement): Successor to NAFTA, also called NAFTA 2.0
- AfCFTA (African Continental Free Trade Agreement): 30 members - Not in effect before 2021
GDP
Gross Domestic Product
- value of all final goods and services produced within a country in a given period
Monetary Policy
The process by which the monetary authority of a country controls the supply of money
Expansionary monetary policy: Increase total supply of money more rapidly
Contractionary monetary policy: Expand money supply more slowly or decrease
Tools:
- Open Market Operations
Buying and selling of government securities/bonds - Manipulates interest rate and money supply
- Setting reserve requirements
Certain fraction of deposits that banks are required to reserve - affect available amount to lend
- Setting the discount rate
Interest rate charged by Central banks to banks on loans - Increase/decrease borrowing from banks affecting money supply
- Print money
Increase money supply. Quantitative easing
The International Monetary System
Comprises the set of rules and institutions that facilitate exchange of goods, services and movement of capital among countries.
Consists of 4 elements:
- Exchange arrangements and exchange rates
- International payments and transfers
- International capital movements
- International reserves
The key institution: IMF (International Monetary Fund)
IMF
International Monetary Fund
- “ Lender of last resort” - goal: economic stability
- formed after WW
Periodically depending on the World Bank for resources to carry out its activities, such as:
-Managing balance of payment issues and financial crises
Exposure to foreign exchange risk
Risk that a foreign currency that a firm is dealing with moves in a direction which has a negative economic effect
3 types: - Transaction exposure Results from cash flows from foreign denominated currency (receivable/revenue, payable/costs, loans) - Economic exposure “Future” transaction exposures - Translation exposure Results from having to consolidate financial statements to include results from foreign operations (Can result in gains or losses)
Hubris Hypothesis
Theory that says top managers often are too optimistic about the value that can be created via an acquisition, and then paying a premium
The World Bank
Similiar to IMF, its goal is economic stability
Compared to IMF it has a more long-term approach, aiming to reduce poverty by funding specific project (infrastructure etc)
Debt Financing vs Equity Financing - pros and cons
Debt financing:
Pros - Fast turnaround, and a variety of products and payment structures for short or long-term use
Cons - Has to be paid back with interests, and may require collateral
Equity financing:
Pros - Large amounts of capital, no interest
Cons - Slow proces, Loss of ownership stakes, and Control
How to hedge agains Exposure to Foreign Exchange Risk
Financial Contracts:
- Forward Contracts: agreement to exchange 2 currencies at a specific time in the future
- Option Contracts: paying premium for the “right” to buy a currency at a specified rate in the future
Operational techniques:
- Geographic diversification (spread out operations/risks)
UN
United Nations
Aim to maintain Political Stability and peace
- also has a peacekeeping force (100k soldiers)
Big goals, such as fighting global warming, human rights etc.
Business Ethics (CSR)
Moral principles or actions. Has to do with ‘what is fair/right and wrong’
4 components of moral behavior / ethical decision making:
1) Moral sensitivity: ability to see an ethical dilemma 2) Moral judgement: ability to reason correctly (what has to be done) 3) Moral motivation: a personal commitment to moral action 4) Moral character: courageous persistence instead of taking the easy way out
OECD
Organisation for Economic Cooperation and Development
- 1961
Countries working together to promote economic growth and sustainable developments
- They continue to update guidelines/recommendations for how to conduct business in foreign markets in a fair and sustainable way
CSR
Corporate Social Responsibility refers to ones obligation to maximize positive impact and minimize negative impact on society
Stakeholder Theory: argues that it is in the companys strategic interest to respect the interests of all its stakeholders - any group or individual who can affect or is affected by the company
Sustainability
Ability to sustain, or The capacity to adapt/sustain to meets societies needs in ways that do not compromise future generations
- responsible with resources (land, people, energy, water, materials, capital)
Exporting (Internationalization Mode)
Manufacture at home and serve foreign markets by exporting
-often with support from local or foreign agents
Why not export:
- Products may have a low value to weight ratio making transportation costs too high - Trade barriers maymake export unattractive - Export can limit understanding of tastes and preferences in the export market
Licensing (Internationalization Mode)
An arrangement in which the owner of intellectual property grants another firm the right to use that property in exchange for royalties or other compensation
- Less investment needed / less risk
- Not good if the technology is a core competency and can be stolen
Franchising (Internationalization Mode)
An arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation
- Typical for service industry
- Low investment / risk
- But difficult to control
FDI (Internationalization Mode)
We refer to FDIs when firms own or control production or service facilities/resources outside the country in which they are based
- A firm will have an advantage to internalize foreign activities when the cost of using the market for conducting those activities is perceived to be too high due to market imperfections
- Greenfield investment
refer to a company establishing operations in a foreign country by constructing own facilities - Cross-border Acquisitions
refer to the purchasing of assets (part of or all) of a foreign firm that result in operational control
OLI - Framowork (FDI)
Internationalization Theory proposes that FDI is the most appropriate form of IB if three conditions are met:
- Ownership Advantages:
Firm must have some competitive advantage which can be transferred across borders
No: No International activity - Yes: Where/how - Location Advantages:
Location needs to leverage a firms competitive advantage and ability to increase its value
No: Produce at home and export - Yes: Go to market, but what entry mode? - Internationalization Advantages:
Advantages firms experience when they organize their foreign activities within the boundaries of the firm (hierarchy) rather than using the market
No: License/Franchise - Yes: FDI
the Liability of Foreigness (LOF)
The natural disadvantage foreigners experience in new environment
Costs associated to: - Cultural distance
cost arising due to unfamiliarity with environment
- Administrative distance. costs arising due to trade barriers and other restrictions
- Geographical distance
costs arising due to travel, transportation and coordination over long distance
- Economic distance
costs arising due to differences in the quality of the labor market and availability of natural resources
Knickerbockers Theory
2 types of FDI:
- Aggressive investment: establishment of first foreign subsidiary in given industry & country
To gain first-mover advantage (best suppliers, locations and stronger relations and loyalty)
- Defensive investment: establishment of subsequent foreign subsidiaries
To avoid losing market share in foreign markets - to prevent first-mover advantages
Benefits: They can free-ride and avoid costly activities such as analyzing market opportunities
Differentiation strategy
developing products that customers value and thus are willing to pay a premium price
Cost leadership strategy
perfecting processes and products to do things more efficiently thus lowering costs
Value Chain
set of activities that a firm performs to design, produce, market, distribute and service a product
Separated into primary and support activities - Primary activities: core business functions - Support activities: firm infrastructure and activities that support primary activities
Learning effects
Cost savings that come from learning by doing
Global innovation and learning
able to transfer knowledge gained in foreign market
I-R - Framework
- Pressures for global integration: force the firm to lower unit costs - Pressures for local responsiveness: require the firm to adapt its product to meet local demands in each market (Global learning third dimension)
Firm strategy being a function of the different pressures:
- Global Standardization Strategy - Transnational Strategy
- International Strategy - Localization Strategy
Organizational Architecture
- Structure
- Processes
- People
- Incentives and Controls
- Culture
Elements must be consistent and fit with the firms strategy
Vertical Differentiation (Organizational Structure)
the location of decision-making responsibilities within a firms structure
- Centralized:
Consistent decision, but less flexible and burden on top management - Decentralized:
Flexible, relieves burden on top management, but less flexible and difficult to enforce change
Horizontal Differentiation (Organizational Structure)
the formal division of the organization into subunits
- Functional structure
- Product division structure
- International division structure
- Worldwide product division structure
- Worldwide area structure
- Global Matrix structure
Integrating mechanisms
the mechanisms for coordinating subunits
- Formal integration mechanisms:
Direct contact, teams etc - Control Systems:
Personal controls, Bureaucratic controls (budget/spending), Output controls, Cultural Controls - Incentives
Implementing organizational change
- Unfreeze:
through shock therapy, taking bold actions- Move to new state: through proactive change in architecture so it matches new strategy - Refreeze
Emerging economies
former developing economies that have achieved substantial industrialization and growth through economic liberalization
- Typically point to BRICS (Brazil, Russia, India, China, South Africa)
Timing of entry
- Early:
pros: Gain first-mover advantages, brand loyalty, learning effects
cons: Pioneering costs (investing and learning), overall risk
Late:
pros: less risky, can copy early entrants
cons: might miss out on market, and competitor has first-mover advantage
Turnkey projects
contractor handles every detail of the project for foreign client, including training personnel
Wholly owned subsidiary (FDI)
- Greenfield operation: Set up own operations
- Cross-border acquisition: Aquire existing firm
Strategic alliances
similar to joint ventures - is a cooperative agreement between competitors
Onshoring
locate activities in home country
Domestic in-house Domestic outsourcing
Offshoring
global relocation of activities typically from home country to foreign markets with location-specific advantages
Captive offshoring (in-house) Offshore outsourcing
(Companies should generally control the most value adding activities in-house)
Exchange rates, types, pros/cons
- Fixed (pegged/tied to another):
Pros: Greater certainty for importers/exporters -> facilitates trade & investment
Cons: Prevents currency adjustments (over- or undervalued), Limits central banks ability to adjust interest rates for economic growth
-Floating:
Pros: Automatic adjustment (trade deficit=depreciation->exports cheaper), and freeing monetary policy
Cons: More uncertainty
