International Business Environment Flashcards
What are some economic outcomes of Globalization?
Acceleration in all forms of IB.
Newer forms of IB(Service trade growth)
Growing powers of MNE’s
Proliferation of Global Value Chains; integration of trde, FDI
Intensified technology-based competition
What are the drivers of Globalization
1) Decline in barriers to the free flow of goods, services and capital
2) Technological change, particularly the dramatic developments in communication, information processing and transportation technologies
Mention some important outcomes of globalization
1) Acceleration in all forms of IB
2) Newer forms of IB( Service trade growth)
3) Growing powers of MNE’s
4) Proliferation of Global Value Chains
5) Intensified technology-based competition
What are the dark sides of Globalization?
1) More access to goods and services.. but greater illegal trade in arms, people, drugs, money.
2) More goods transportated across the globe… but they can bring in toxic toys, invasive species, contamined food
3) Movement of capital helps build imbalances and amplify the effect of shocks and transmission across countries.
4) It polarizes the income distribution within countries
What are norms?
Social rules and guidelines that prescribe appropriate behaviour in particular situations
What is a folkway?
A norm.. More specifically: Routine conventions of everyday life.. Generally, folkways are actions of little moral significance. (Apporpriate dress code, good social manner etc.)
What is a more
Norms central to the functioning of society and its social life (theft, adultery, canibalism, incest)
What is a society?
A group of people who share a common culture
What does social structure mean?
Refers to its basic social organizations. In essence, we are talking about how a society is organized in terms of its values, norms, and the relationships that are part of the society’s fabric
What does the Power Distance describe?
- The extent to which hierarchical differences are accepted in society and articulated in terms of deference to higher and lower social and decision levels in an organization
What describe a high PD culture?
High PD cultures: Inequalities accepted, Superiors rather inaccessible, privelege and status are normal, subordinates expect to be told what to do.
What describes a low PD culture?
□ Low PD cultures: Subordinates expect to be consulted, Bosses are accessible, Initiative is expected, Inequalities should be minimised, privelege and status symbols discouraged
What does the Individualism versus Collectivism culture measure focus on?
This dimension focuses on the relationship between the individual and his/her fellows within a culture
What describes a high IND culture?
® Identity is based on the individual
® Task prevails over relationship
® Work relationship - contract of mutual advantage
Self-respect important
What describes a Low IND culture?
® Identity is based on social network ® Relationship prevails over task ® Work relationship - family model ® The face and maintenance of harmony Management of groups, not individuals
What is Uncertaincy Avoidance?
One of the four dimensions of measring culture. This dimensions measures the extent to which a culture pushes its members into accepting ambigious situations and tolerating uncertainty
Describe a high UA culture
Anxious, higher stress levels at work, Risk averse, need for rules and regulations, resistant to change, Low tolerance of deviant, innovative ideas, People can seem busy, emotional, aggressive
Describe a low UA culture
Apparantly relaxed environment, initiative encouraged, relatively few rules and regulations, pragmatic, tolerance of deviant, innovative ideas,
What is a high MAS culture
® Ambition, assertiveness ® Competition and performance important ® Live to work ® Size matters ® Distinct gender roles Managers are expected to be assertive
Describe Low MAS (High FEM) cultures
® Quality of life issues are important ® Equality and solidarity are important ® Work to live ® Small is beautiful ® Overlapping gender roles Managers often strive for consensus
What are the problems with Hofstede Findings (measuring Culture)
- Focuses on national country
- Single company data, with a large multinational enterprise having a strong corporate culture
- Business culture, not values culture, representing a reflection of business culture at IBM and not national culture of the countries IBM operates within
What is Corporate culture?
The culture adopted, developed and disseminated in an organization. Corporate culture can deviate from national norms, but that depends upon the strength of the culture and the values and practices tied to it.
What does a political system include?
Political system includes the structures, processes and activities by which a nation governs itself
To which two dimensions can political systems generally be assesed to?
○ Degree to which they emphasize Individualism vs collectivism
Degree to which they are democratic or totalitarian
Describe a market economy
A free market in which all productive activities are privately owned. Production is determined by supply and demand. If there is an increase in demand, supply will raise autimatically to meet the demand and opposite. If demand exeeds supply, prices will rise, signalling producers to produce less. Consumers are soverign.
What is a command economy?
- An economy in which the governent plans all the goods and services that has to be produced - also they control prices and quantity.
- The main objective is to allocate resources for the good of society.
- Furthermore, all businesses are state owned . The rationale of this being that the government can control their investments and make sure they are in the interests of everyone rather than private individuals.
State owned companies have little incentives to do things more efficiently and control costs as they are not in the danger of going out of business. These economies tend to stagnate
Describe a mixed economy
- A mixed economy is a economy in which certain sectors are left to private ownership while others have significant state ownership.
- In mixed economies, governments also tend to help troubled companies whose further operation is thought to be vital to national interests.
What is common law?
a. Based on tradition, precedent, and custom
b. Has a lot of flexibility as judges are allowed to interpret the law so that it applies to the unique circumstances of an individual case
Civil Law
What is Civil Law?
Based on a detailed set of laws organized into codes.
Less flexibility as the judges are only ably to apply the law - not interpret the law.
What theocratic Law?
Based on Religious teachings
Which laws are impotant to IB
- Contract Laws
- Anti-corruptions laws
- Protection of property rights and intellectual rights
- INvestor protection laws that determine corporate governance and ownership forms
- Criminal/civil liberties
- Employment practices
- Environmental practices
What is the main function of institutions?
Reduce uncertainty
How do insitutions reduce uncertainty?
- Relational contracting - informal. Relationship based, personalized exchanges
- Arm’s length transaction - formal, rule-based, impersonal exchange with third part enforcement
Institutional transitions - fundamental and comprehensive changes to the rules that affect all organizations
- Arm’s length transaction - formal, rule-based, impersonal exchange with third part enforcement
From a companies perspective; what are the advantages of globalizing their products?
- Makes it easier for the company to enter a foreign maret if it already makes business in that specific country (Boeing)
- Disperse component part production to those in the world who are the best at their particular activity
- Unburden risks of getting your own production facilities.
Economic interdependence. What does this mean?
- No nation exists in economic isolation
- All aspects of a nations economy are linked to the economies of it’s trading partners
-
What is GDP and what does it measure?
- Currency value of all final goods and services.
- Total income of a nation
- It measures a nations economic well being
What is included in GDP?
- Consumption by household(goods, groceries, clothes etc)
- Investment by business and household(fixed asset for production, new homes, inventories)
- Governments expenditures by local, state, and federal government(Roads and schools, transfer payments(such as, welfare payments and unemployment benefits)
- Net exports (Value of a country’s exports to other nations, less its imports from other antions. For Denmark, for instance, it is the value by which Danish spending on foreign goods and services exceeds foreign spending on Danish goods and services)
What is not included in GDP?
-Intermediate goods
-Free goods
_Underground production
-Financial transactions (stocks, bonds, CDs etc)
-Household production
- Transfer payments
- Leisure
What does GDP not tell us?
- Does not measure income distribution
- Does not measure non-monetary-output or transactions(e.g. barter, household activities)
What are the possible risks to economic growth sustainability?
Political risk: (Rise of nationalism, populism|Creates uncertainty on the global markets.)
- Increased fragmentation and atomization of the global economy: (Efforts are under way to put up walls, to limit trade, and other cross-border flos of goods and services, capital and people)
- The growing debt overhang (All major economies today have higher levels of borrowing relative to GDP than they did in 2007. ,, Decreased the total amount of money invested)
- Weak productivity growth (Lack of innovation)
What are monetary policy?
The process by which the monetary authority of a country controls the supply of money
What are the goals of monetary policy?
- Price stability
- High unemployment
- Economic growth
- Financial markets stability
- Interest rate stability
- Stability in foreign exchange market
Expansionary monetary policy ….
Increses the total supply of money in the economy more rapidly than usual
Contractionary Monetary policy —-
Expands the money supply more slowly than usual or even shrinks it.
What are the tools of monetary policy?
- Open market operations(The buying and selling government securities/bonds by the central bank). Increases or decreases the supply of money by introducing new money or taking money our of the system
- Setting reserve requirements (affects the amount that the bank has available to lend)
- Setting the discount rate (a decrease in the discount rate makes it cheaper for commercial banks to borrow money, which increases the money supply and opposite)
What is fiscal policy?
-Fiscal policy is the means by which the government
What are two types of fiscal policies and describe them
- Expansionary, which is typically used to combat a recession. This would involve increased government spending or lower taxes
- Contractionary, which is typically used to combat an economy’s overheating. This would involve decreased government spending or increased taxes
How can financing of deficits be done (fiscal policy)?
- Through two ways:
- Borrowing
- Money creation
How can disposing of surplusses be done?
- Through two ways:
- Paying back debt
- Letting the surplus funds remain idle
When is a deficit created(regarding government)
- When government spending exceeds government revenue
If economists are concerned about unmet social needs or infrastructure, they tend to favor ..?
Higher government spending during recessions and higher taxes during inflationary times
When economists think that the government is too large or inefficient, they tend to favor .. ?
-Lower taxes for recession and lower government spending during inflationary periods
What are the problems, critisiscm and complications of fiscal policies?
- Problem of timing (it is a slow process. Recognition lag –> Administrative lag –> Operational lag)
- Political considerations: government has other goals besides economic stability) Election years have been characterized by more expansionary policies regardless of economic conditions
- Crowding out effect(The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending)
What is austerity?
-It is a political-economic term refering to policies that aim to reduce govenrment budget deficits through spending cuts, tax increases, or a combination of both
Why does high government debt/GDP tend to lower growth?
-Large deficits and debt may rise interest rates and crowd out private investment
-High debt and high interest payments may require distortionary taxes.
High debt may eventually lead to a fiscal crisis, which in turn, may trigger a financial crisis and require painful adjustments
What does the Reinhart and Rogoff study tell?
- That high government debt/GDP tends to lower growth
Why does productivity matter?
- An economy’s productivity level affects the populations’s overall purchasing power and standard of living
- Productive economies produce more goods and sevrvices and they also have excess resources with which they can invent and produce new types of goods and services, creating new opoortunities and jobs.
What are the two keys to sustained economic growth?
- Increases in number of workers (A result of growing labor force, falling unemployment rate)
- Increases in workers’ productivity thanks to new skills, processes, or technologies that enable greater efficiency
What is the recent trend of productivity?
- Productivity growth is slowing around the world
- The decline in TFP growth is not limited to the advanced economies.. (Also falling in CHina, Negative in Brazil and Mexico
Why do some reject the “falling productivity” phenomenon?
- Because we are unable to measure productivity gains accurately in a services-driven, increasingly digital economy
- Another more data-driven perspective from amcroeconomists suggests that productivity gains from technology simply may not have been captured yet because of underinvestment
What are drivers of productivity growth ? And how are they performing?
Business investment –> R&D, machinery and plants, employee training
Government investment –> Education, infrastructure, R&D
All the above –> Labor productivity growth, Business model innovation, new technology –> Intra-firm total factor productivity growth –> Aggregate total factor productivity growth
And Intra-firm total factor productivity growth Industry competition, global value chains –> Spillover effects –> Aggregate total factor productivity growth
They are underperforming. Investments (as percentage of GDP) are falling.
How does infrastructure investments support productivity growth?
- First, these investments provide more capital stock for workers to use, thus improving labor productivity growth?
- Second, public infrastructure investments increases productivity through “spillover externalities” that make private capital stocks more efficient as well
- FInally, public infrastructure investments can crowd-in pricate investors to invest to take advantage of new improved infrastructure, thus stimulating within-firm and aggregrate productivity
True or false? Productivity growthis also threatened by declining competition within the business environment
- True. Studies show that reduced dynamism and reduced competitions can cause lower productivity and increase inequality
How is labor force and education related to productivity?
- Aging populations are closely tied to declining labor productivity as workers’ skills decline with age
- Declines in investment in education and training also contributes to decreasing productivity
How does economic integration and openess support productivity growth?
- First, diffusion of technologies and knowledge sharing between firms
- Second, the heightened competition as a result of cross border integration, boosts productivity
- Lastly, internaitional trade creates larger markets, allowing greater levels of specialization in producing certain goods and services
True or false? Productivity growth reflects the technological innovations?
False
Why has competition fallen?
-The digital revolution gives significant and sustained advantages to large firms which are able to colect masive amounts of consumer data and attract top talent
Low rates of entrepreneurship after the crisis.
What is the idea behind mercantilism?
- First trade theory: Nations accumulate financial wealth by encouraging exports and discouraging imports
- Zero-sum vs positive-sum game view of trade
- Government intervenes to achieve a surplus in exports
- Today neo-mercantilists = protectionists
○ Trump doctrine
Some segemnts of society shielded short term
What are Adam Smiths theory Absolute Advantage about?
- Mercantilism weakens country in long rund; enriches only a few
- A country
○ Should specialize in production of and export products for which it has absolute advantage; import other products
Has absolute advantage when it is more productive (produces at lower costs) than another country in producing a particular product
- A country
Describe David Ricardos theory of comparative advantage:
- A Country should specialize in the production of those goods in which it is relatively more productive.. Even if it has absolute advantage in all goods it produces. Do what you do best, import the rest
Absolut advantage is a special case of comparative advantage.
When does a country have a comparative advantage?
- A country has a comparative advantage in producing a goods if the opportunity cost of producing that goods in terms of other goods is lower in that country than it is in other countries
A country’s comparative advantage is dynamic. It might change due to the changes in both domestic adn international markets
What is opportunity costs?
- The opportunity cost of good A in terms of good B is the number of unit of good B that could be produced with the same resources
Opportunity cost is the largest sacrifice made to produce a given good
What are the assumptions and limitations of the trade theories of comparative advantage?
- Nations strive only to maximize production and consumption
- Only two countries produce and consume just two goods
- No transportation costs of trading goods
- Labor is the only ressource used to produce goodsa
- No role for price of recources
- No distributional effects
Full specialization
What does the Heckscher Ohlin theory explain
- It is an economic theory that proposes that countries export what they can most efficiently and plentifully produce
- The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce efficiently.
- It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.
Differences in factor endowments does also determine the patterns of trade - not only the differences in productivity
The fundamental reason why trade potentially benefits a country is that it expands the economy’s choices. What does this mean?
The expansion of choice means that it is always possible to redistribute income in such a way that everyone gains from trade
Describe the Product life cycle theory:
- The cycle describes how a product matures and declines as a result of internalization
- There are three stages contained within the theory:
- New product introduction ( A company in a developed country innovates a new product –> low revenue),
- The maturity stage (At this point, when the product has firmly established demand in developed countries, the manufacturer of the product will need to consider opening production plants locally in each developed country to meet the demand–>increase revenue),
- Product standardization and streamlining of manufacturing (With demand expansion in secondary markets –> Exports to nations with a less developed economy begin. Competitive product offers saturate the market.. Company A loses their competitive edge and moves their production to low production countries.
Product now imported to US and to advanced countries.
What are the theory limitions(Classic theories)?
- Simple world(two countries, two products)
- No transportation costs
- No price differences in resources
- Resources immobile across countries
- Constant returns to scale
- Each country has a fixed stock of resources and no efficiency gains in ressource use from trade
Full employments
What are some different arguments of New Trade theories?
- Increasing returns of specialization due to economies of scale (unit cost of production decrease)
- First mover advantages (economies of scale such that barriers to entry created for second or third company
- Luck - first mover may be simply lucky
Government intervention: strategic trade policy
Who are the key contributors to new trade theories?
- Paul Krugman - How trade is altered when markets are not perfectly competitive
Michael Porter - Examined competitiveness of industries on a global basis.
What does economies of scale refer to?
It refers to the property whereby long-run average total cost falls as the quantity of output increases
What does diseconomies of scale refer to?
It refers to the property whereby long-run average total cost rises as the quantity of output increases
Constant returns to scale refers to?
The propoerty whereby long-run average total cost stays the same as the quantity of output increases
What is perfect competition?
It is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices, ie., all act as price takers. The analysis of percetly competitive markets provides the foundation of the theory of supply and demand
What is imperfect competition?
- Imperfect competition, is the competitive situation in any market ehere the conditions necessary for perfect competition are not satisfied. Forms include(:
- Monopoly,
- Oligopoly(small number of sellers)
- Monopolistic competition(many sellers producing highly differentiated goods, but each has some power to influence prices)
- Monopsony (only one buyer of a good
Oligopsony (small number of buyers)
Classic trade theories based on comparative advantage used the assumption of constant returns to scale and perfect competition: Increasing the amount of all inputs used in the production of any commodity wil increase output of that commodity in the same proportion. However, in practice,,
- Many industries are characterized by economies of scale
Production gets more efficient, the larger the scale at which it takes place
Explain external and internal economies of scale:
- External
○ The cost per unit depends on the size of the industry but not necessarily on the size of any one firm
○ An industry will typically consist of many mall firms and be perfectly competitive- Internal
○ The cost per unit depends on the size of an individual firm but not necessarily on that of the industry
○ The market structure will be imperfectly competitive with large firms having a cost advantage over smalle
Both types of scale economies are important causes of international trade.
- Internal
Monopolistic competition model can be used to show how trade leads to:
- A lower average price due to scale economies
- The availability of a greater variety of goods due to product differentiation
Imports and exports within each industry (intra-industry trade)
- The availability of a greater variety of goods due to product differentiation
What are the main differences between inter-industry and intra industry trade?:
- Inter industry trade reflects comparativve advantage, whereas intra-industry trade does not.
- The pattern of intra-industry trade itself is unpredictable, whereas that of inter-industry trade is determined by underlying differences between countries
The relative importance of intra-industry and inter-industry trade depends on how similar countries are
- The pattern of intra-industry trade itself is unpredictable, whereas that of inter-industry trade is determined by underlying differences between countries
What is factor endowments?
Land, labor, capital, workforce, infrastructure
What is demand conditions?
Large, sophisticated domestic consumer base; offers an inoovation friendly environment and a testing ground.
What is related and supporting industries?
Local suppliers cluster around producers and add to innovation
What is firm strategy, structure, rivalry?
Competition good, national governments can create conditions which facilitate and nurture such conditions.
What is Porters diamond?
- It is a model that is designed to help understand the competitive advantage that nations or groups posses due to certain factors available to them, and to explain how governments can act as catalystst to improve a country’s position in a globally competitive economic environment
The porter diamond suggests that countries can create new factor advantages for themselces, such as a strong technology industry, skilled labor, and government support of a country’s economy.
What is free trade?
Free trade refers to the situation when the government does not attempt to restrict what its citizens can buy from and sell to another country
What does all classical trade theories predict that free trade leads to?
- Static economic gains(higher level of domestic consumption and more efficient utilization of resources) and dynamic economic gains (stimulates economic growth, job creation and wealth accumulation)
- Yet, often government manage trade
○ Restrict imports
○ Promote of exports
Provide various types of overt and covert support to exporters
- Yet, often government manage trade
Draw a model of Trade policy instruments:
Trade Policy instruments:
1. Trade expansion a. --> Price -->import subsidy, export subsidy b. --> Quantity --> Voluntary import expansion 2. Trade contraction a. --> Price --> Tariff, export tax - -> Quantity --> Import quota, voluntary export restraint
What can tariffs be classified as and what are the classifications?
- Specific tariffs
○ Taxes that are levied as a fixed charge for each unit of goods imported- Ad Valorem tariffs
Taxes that are levied as a fraction of the value of the imported goods
- Ad Valorem tariffs
What does a tariff do and what are the effects?
- A tariff raises the price of a good in the importing country and lowers it in the exporting country
- As a result of these price changes:
○ Consumers lose in the importing country
○ Producers gain in the importing country
○ Government imposing the tariff gains revenue
Employees of protected industries gain in terms of keeping their jobs but lose in terms of not developing new skills.
- As a result of these price changes:
Are tarrifs pro/anti-consumer and pro/anti-producer?
Anti-consumer and pro-producer
Does tariffs reduce the overall economic efficiency of the world economy?
Yes. Because the tariff encourages economic domestic producers to produce at home when, theoretically, production could have been taking place more efficiently abroad
What are subsidies and which types of subsidies exist?
- It is government support to domestic producers
○ Cash grants, low-interest loans, tax breaks, equity participation, government purchases
Export subsidies are payments by the governemnt to a firm or individual that ships a good abroad
The aim of subsidies is to lower costs to?:
- Compete against cheaper imports
- Gain export markets
- Increase domestic employment
Help local producers achieve first-mover advantages in emerging industries
What are the effects of subsidies?
- An export subsidy may raise prices in the exporting country while lowering them in the importing country
- Tax individuals… to pay for subsidies
- Consumers buy more expensive goods with lower disposable incomes
Subsidies promote inefficient firms and excess production.
What is an import quota?
- An import quota is a direct restriction of a good that is imported.
The restriction is usually enforced by issuing licenses to some group of individuals or firms
What is the ffect of import quotas?
- An import quota always raises the domestic price of the imported good.
- License holders are able to buy imports and resell them at a higher price in the domestic market
○ The profits received by the holders of import licenses are known as quota rents.
If domestic producers are not able to meet the excess deman, then an import quota can raise prices for both domestically produced and the imported good.
- License holders are able to buy imports and resell them at a higher price in the domestic market
What are the differences between quota and tariffs?
The difference is that with a quota the government receives no revenue.
What is a voluntary export restraint?
- It is an export quota administered by the exporting country
- VER’s are iposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions
- A VER is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country.
- A VER is always more costly to the importing country than a tariff tha limits imports by the same amount
The tariff equivalent revenue becomes rents earned by foreigners under the VER
What is a local content requirement?
- A regulation that requires that some specified fraction of a final good be produced domestically
Can be specified in physical units or in value terms
Where (and why there) have local content requirements been widely used?
By developing countries trying to shift their manufacturing base from assembly back into intermediate goods and to achieve technology and skills transfer
Does local content laws produce government revenue or quota rents?
No. Instead, the difference between the prices of imports and domestic goods gets averaged in the final price and is passed on to consumers
What are the effect on customers, firms or governments of Local content requirement?
- Discourages imports of raw materials, parts, and supplies, which harms manufacturers sourcing options.
May result in higher costs and lower product quality for buyers
What are the rationale for government intervention in free trade?
- Protection of the national economy
○ Weak or young economies sometimes need protection from foreign competitors. E.g. India has imposed barriers to shield its huge agricultural sector, which employs millions.- Protection of an infant industry
○ A young industry may need protection, to give it a chance to grow and succeed. E.g., Japan long protected its car industry - National security
○ The United states prohibits exports of plutonium and similar products to North Korea - National Culture and identity
○ Canada restricts foreign investments in its movie and TV industries - National strategic priorities
○ Protection helps ensure the development of industries that bolster the nation’s economy. Countries create better jobs and higher tax revenues when they support high value-adding industries, such as IT, automotive, pharmaceuticals, or financial services - Increase employment
Protection helps preserve domestic jobs, at least in the short term. However, protected indusrtries become less competitive over time, especially in global markets, leading to job loss in the long run
- Protection of an infant industry
What is regulations and technical standards and what are the effect on customers, firms, or governments?
- Safety, health or technical regulations; labeling requirement
May hinder the entry of imported products; and reduce the quantity of available products, resulting in higher costs to importers and buyers
What is protectionism?
Governments favoring local firms
Has there been an increasing tendency of protectionism since 2008?
- From the whole period, no. There has been a decrease in discrimatory measures such as subsidies
There has however, been an increasing uncertainty in the last couple of years
Why does uncertainty matter(trade)
Because it has serious consequences for the economy
What does companies/households due regarding investments in times of high uncertainty?
- They might reduce investment and delay projects. They do so, as it is costly to reverse investment. So, they prefer to “wait and see”
Households reduce consumption and investemnts as well
Rising uncertainty affects all sectors of the economy. How fx?
It can increase the cost of credit to householders and firms
Trade can have both positive and negative effects at the individual/household level - Explain:
- For some groups of people, trade has a negative effect on wages and employment opportunities
- At the same time it has a positive effect via lower consumer prices and increased availability of products
Overall, if we aggregate changes in welfare across households, the net effect is often positive.
- At the same time it has a positive effect via lower consumer prices and increased availability of products
Does trade raise inequality?
- In developed countries, proably yes
- Some emerging and frontier countries exprienced increases, other decreases in inequality after trade reform
- But trade is not the main driver
Technological change is
What does the Global Value Chain describe?
It describes the people and activities involved in the production of a good or service and its supply, distribution and post-sales activite (also known as the supply chain) s when activities must be coordinated across geographies
Participation in GVCs is shaped by…?
What a country is already endowed with and the policy choices it makes.
How can a country remedy the scarcity of endowments such as capital, technology, and management skills?
- By attracting FDI
How can a country overcome the constraints of a small domestic market
By liberalizing trade at home and negotiating trade liberalization abroad
How can the disadvantages of a remote location be addressed?
By improving transport and communication infrastructure and introducing competition in these sectors
How can a country improve its domestic institutions?
By participating in deep integration agreements that help spur both reform as well as technical and financial assistance.
What made the increase in GVC participation possible and why has it stalled?
- Increase:
○ Combination of severel factors
§ The information, communication, and technology revolution
§ Transport costs decreased (made disperse of production possible)
§ Successive rounds of trade liberalization
§ The creation of The EU, integration of China, India and Russia into the global economy –> Huge new product and labor markets- Stallen:
○ Partly cyclical
Absent of any major liberalization
- Stallen:
Mention the different levels of economic integration that are possible in theory
- Free Trade area
- Customs union
- Common market
- Economic union
Political union
What describes free trade area integration?
All barriers to the trade of goods and services among member countries are removed.
What describes free trade area integration?
All barriers to the trade of goods and services among member countries are removed.
What describes a customs union in terms of integration?
Elimination of trade barriers and adoption of a common external trade policy
What is common market integration?
No barriers to free trade, commond external trade policy, and allows factors of production to move freely among member countries
What is an economic union?
Involves the free flow of products and factors of production, adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates and a common monetary and fiscal policy
Poltical union is what?
A union in which a central political apparatus coordinates the economic, social, and foreign policy of member states.
Mention the impediments to integration
- While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups will lose.
Concerns over national sovereignity
What is multilateralism?
Multiple (close to all) countries working in concert on a given issue under certain international relation agreements.
What is Regionalism?
Any agreement that involves two or more countries but much fewer than all possible members.
What is economic integration?
- A process by which economies of seperate countries merge into larger entities. The process is charcterized by discriminatory removal of all
barriers of economic cooperation
What are the arguments against regionalism?
- Discriminatory by nature
- They lead to the “spaghetti-bowl” phenomenon
○ Meaning the overlapping nature of most regional agreements, with, let say, most WTO members holding simultaneous membership in many regional economic agreements at once - Is possible to lessen the tensions between regionalism and multilateralism but probably not possible to eliminate these tensions entirely
- The negotiating energies put into such regional agreements will detract from those put into multilateral agreements under the auspices of the WTO
- They lead to the “spaghetti-bowl” phenomenon
What is unilateral?
Trade policy of countries not part of any multilteral or regional agreement
What are examples of bilaterial trade deals?
An exchange agreement between two nations or trading groups that gives each party favored trade status pertaining to certain goods obtained from the signatories.
Examples of Minilateral (regional)
EU, Mercosur, NAFTA/USMCA (geographically concentraded) or the global system of trade preferences among developing countries /GSTP) that aims of increasing trade between developing countries in the framework of the UNCTAD (Geographically dispersed)
Multilateral? Examples
GATT, GATS –> WTO
What are the fundamental principles of the GATT/WTO system?
- Reciprocity
○ A practice whereby one country offers to reduce a barrier to trade and a second country reciprocates by offering to reduce one of its own trade barriers.
○ The practive of swapping tariff concessions, facilitates the reduction of trade barriers.- Nondiscrimination
○ (Equal treatment) If one GATT member offers a benefit or a tariff concession to another GATT member, it must offer the same tariff reduction to all GATT members.
○ Most favoured nation treatment:
○ National treatment - Freer trade
Lowering trade barriers, gradually through negotiating
- Nondiscrimination
What is the power of the nondiscrimination principle of WTO system?
- Convenience and practicality
- Setting the same tariff policy on imports from all countries ensures that resources are allocated to their most productive use.
- On the import side, nondiscrimination ensures that countries purchase import from the lowest-cost source country
- On the export side, nondiscrimination protects exporting countries from bilateral opportunism. If one country were later to offer a lower tariff rate to a third country, this could erode the value of the original tariff concession to the first trading partner
It prevents re-routing in order to circumvent high tariffs.
What were the objectives of the Doha Development Round in xxxx?
- 2001
- Continue to lower trade barriers around the world
Comitting all countries to negotiating
- Continue to lower trade barriers around the world
Under which circumstances has RTA been allowed by the GATT/WTO?
- Regional trade agreements ○ Free trade areas ○ Customs unions - Administered protection ○ Special tariffs that can be used for particular purposes § Safeguards § Anti-dumping duties Countervailing duties
Is GATT succesful?
- Yes. The volume of trade among GATT members surged: in 2000 the volume of trade among WTO memberss stood at 25 times its volume in 1950
Tariffs on manufactured products fell from a trade-weighted average of roughly 35% before the creation of GATT in 1947, to about 6,4% at the start of the Uruguar round in 1986
What are some of the best known RTAs?
- The European Union
- EFTA
- ThE US, Mexico and Canada agreement(USMCA)
- Mercosur
- Asean
Comesa
What is preferential trade agreements?
-Cover preferential tariffs for a set of products
What is a free trade agreement?
Elimination of all barriers to the trade of goods and/or services among members
What is a custom union?
Elimination of trade barriers between members and adoption of a common external trade policy
What is a common market?
No trade barriers between members, a common external trade policy, and the free movement of the factors of production
What is an economic union?
Free flow of products and factors of production between members, a common external trade policy, a harmonized tax rate, and a common monetary and fiscal policy
What is an economic and monetary union?
- A type of trade bloc which is composed of a common market and custom union, with a monetary union (eurozone)
WTO members who wish to form a FTA or CU may so. Which requirements do they have to follow?
- Trade barriers against non-members cannot be “higher or more restrictive than” those in existence prior to the FTA or CU
- FTA or CU must be formed “within a reasonable length of time
FTA or CU must be eliminate trade barriers on substantially all the trade among the members
- FTA or CU must be formed “within a reasonable length of time
Explain the trade diversion and trade creation phenomenon of RTA’s. Consider three countries A, B, and C:
- A trade bloc between A and B reduces tariffs between them. A and B maintain tariffs with C
- Trade creation: A imports more products from B, while not producing them at home
Trade diversion: Part of the increase in trade between A and B is a result of a decrease in trade between A and C
- Trade creation: A imports more products from B, while not producing them at home
What are the dynamic effects of trade agreements?
- Economies of scale - acces to a larger market allows producers to become more efficient through greater specialization, better equipment, and usage of by-products.
- Greater competition - increased number of producers makes collusion less likely and forces firms to become more efficient
- Economies of scale and competition lead to lower costs and more efficient producers, which subsequently surpresses further imports from the rest of the world
Stimulus of investment - because of increased rate of return an ability to spread R&D costs trade makes greater levels of investment more likely
What types of RTAs stimulate trade in goods the most?
The more integration, the more stimulation of trade in goods
True or false? The major economies have not shifted trade negotiating emphasis toward mega-regional agreements?
- False. They have.
- the Trans-Pacific Partnership (TPP) agreement among Australia, Canada, Japan, Mexico, the United States, and seven other countries
- the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the United States and the European Union (EU)
China’s pursuit of the Regional Comprehensive Economic Partnership (RCEP) negotiations
Which political-economic forces have contributed to the push toward the mega-regional agreements?
- One factor is the interest of multinational firms in global supply chains, which causes the firms to lobby for new types of agreements to adress theri concerns
Second, the rise of China as a major power also triggered geopolitical and national security interest
The aggregate market acces implications arising from traditional tariff cuts under the potential agreements are anticipated to be modest. Why?
- Most countries have already free trade agreements with a lot of others part of the agreements
- Agreements involve economies starting from relatively low applied tariffs
The largest potential gains will come from assumed reductions in nontariff barriers. Nontariff barriers are more challenging to measure; thus, it is also more difficult to accurately predict the effects of their potential reductions
- Agreements involve economies starting from relatively low applied tariffs
New rules on dispute settlement over trade and investment is a likely effect of mega-regional trade agreements?
Yes. The agreements have the potential to substantially affect the process by which countries resolve bilateral frictions over trade and foreign direct investment
What is BRI?
Belt and road initiative - An economic strategy connecting the two ends of Eurasia along two routes - one by sea and six by rail, road, powergrid, It and infrastructural corridors overland.
What are the opportunities of RTA’s for firms?
- Opens new markets
Allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
What are the threats of RTA’s for firms?
- Business environment becomes competitive
- There is a risk of being shut out of the single market by the creation of a “trade fortress”
Growing opposition to free trade areas and agreements
- There is a risk of being shut out of the single market by the creation of a “trade fortress”
What is ethics?
Ethics is the branch of philosophy that focuses on morality and the way in which moral principles are applied to everyday life.
What is business ethics?
- principles and standards that determine acceptable conduct in business
- Focuses on what constitutes rights or wrong behaviours in the world of business.
Business executives have a responsibility to their shareholders and employees to make decisions that will help their business make a profit. But indoing so, they also have a responsibility to the public and themselves to maintain ethical principles
- Focuses on what constitutes rights or wrong behaviours in the world of business.
What is the relationship between law and ethics?
Law and ethics are not the same thing. The question, “Is an act legal?” is different from the question, “Is an act ethical?” The law cannot codify all ethical requirements. Therefore, an action might be unethical, yet not necessarily illegal
What are the four components of moral behaviour?
- The first is moral sensitivity: which is “the ability to see an ethical dilemma, including how our actions will affect others.”
- The second is moral judgment: which is “the ability to reason correctly about what ‘ought’ (have to) to be done in a specific situation.”
- The third is moral motivation: which is “a personal commitment to moral action, accepting responsibility for the outcome.”
- The fourth and final component of moral behavior is moral character: which is a “courageous persistence in spite of fatigue or temptations to take the easy way out.”
What are the 6 components of ethical behaviour?
- Personal ethics(our personal ethical code exerts a profound influence on the way we behave as businesspeople
- Decision-making process(It is too often assumed that individuals in the workplace make ethical decisions in the same way as they would if they were home. Second, too often it is assumed that people from different cultures make ethical decisions following a similar process
- Organizational culture(The term organizational culture refers to the values and norms shared among employees of an organization)
- Unrealistic perfomance goals(Pressure from the parent company to meet unrealistic perfomance goals that can be attained only by cutting corners or acting in an unethical manner
- Leadership(Leaders help establish the organizational culture and they set examples, rules and guidelines that others follow
Societal culture(Using Hofstedes dimension of societal culture, the study found that enterprises headquartered in cultures where individualism and uncertainty avoidance are strong were more likely to emphasize the importance of behaving ethically than firms headquartering in cultures where masculinity adn power distance are important cultural attributes. Scandinavia/russia
What is cultural relativism?
The belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate
What is an utilitarian ethics?
The moral worth of actions of practices is purely determined by their consequences
What is a righteous moralist?
One who claims that a multinational’s home country standards of ethics are the appropriate one to follow in foreign countries as well
What is a naive immoralist?
One who asserts that is a manager of a multinational sees that firms from other nations are not following ethical norms in a specific host nation, that manger shouldn’t either
What is an individualism view of ethical behaviour?
Where moral behaviour is that which is best for long-term self-interest
What is a moral-rights virew of ethical behaviour?
Rights theories recognize fundamental rights and privileges that transcend national borders and cultures. Rights establish a minimum level of morally acceptable behaviour. These fundamental human rights should form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component
What is a justice view of ethical behaviour?
- Focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair an equitable.
Argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyones advantage
What is a straw man view of ethical behaviour?
Driven by mantra like profits above all, cultural relativism, righteous moralis, naive immoralist
What is kanthian ethics?
The belief that people should be treated as ends (goals) and never as means (tools) to the ends of others.
What is an ethical issue?
An ethical issue is a problem or opportunity that requires an individual or group to choose among actions that are evaluated as ethical or unethical
What is an ethic dilemma?
An ethical dilemma is a problem, situation, or opportunity that requires an individual or group to choose among several wrong or unethical actions
In which context does most dilemmas arise?
- Employment practices
- Human rights
- Environmental policy
- Corruption
AN MNE’s perceived moral obligations to society
What are the business challenges for MNE’s seeking to be accepted into an unfamiliar society?
- Two major challenges:
- Achieving corporate legitimacy in an unfamiliar society
Differing philosophies between MNC’s and host countries
- Achieving corporate legitimacy in an unfamiliar society
True or false? The lack of regulation in Least developed countries is a temptation to lower or reject standards used in the firm’s home country
True
What is a sweatshop?
- Characterized by child labor, low pay, poor working conditions, worker exploitation, and health and safety violations
Increased scrutiny of sweatshop practices in recent years
What is corruption?
Attempts to influence the outcomes of decisions wherein the nature and extent of the influence are not made public
What is bribery?
The practice of offering something in order to gain an illicit advantage
What are the arguments for bribery?
- Necessary for profits
- Common practice
- Accepted practice in some parts of the world
Form of commission, tax, or compensation
What are the arguments against bribery?
- Wrong and illegal in most developed nations
- Compromises personal beliefs
- Managers should not deal with corrupt governments
- Once started, it never stops
- One should take a stand for honesty, morality and ethics
- Creates a dependence on corruption
Deceives stockholders and costs customers
Why are global business ethics more complex than domestic?
Complexity arises from the fact that a wide variety of value systems, stakeholders, cultures, forms of government and socio-economic conditions and standards of ethical behaviour exist throughout the world
What is social responsibility regarding CSR?
Business’s obligation to maximize its positive impact and minimize its negative impact on society
What is the stakeholder theory about?
A stakeholder is any group or individual who can affect or is affected by the achievement of an organisation’s purpose. Argues that it is in the company’s strategic interest to respect the interests of all its stakeholders
Who are stakeholders?:
- Primary stakeholders
- Have a direct stake in the organization and its success
- Secondary stakeholders
- Have a public or special interest stake in the organization that is more indirect
Further distinction into social/nonsocial primary and secondary stakeholders
- Have a public or special interest stake in the organization that is more indirect
Mention primary social stakeholders
- Shareholders and investors
- Employees and managers
- Customers
- Local communities
Suppliers and other business partners
Mention secondary social stakeholders:
- Government regulators
- Civic institutions
- Social pressure groups
- Media and academic commentators
- Trade bodies
Competitors
Mention Nonsocial stakeholders:
- Natural environment
- Future generations
Nonhumans species
Mention nonsocial stakeholders:
- Environmental interest groups
Animal welfare organizations
Draw the pyramid of social responsibility:
- At top: Voluntary responsibilities
- Ethical responsibilities
- Legal resposibilities
Economic responsibilities
What are the critics of CSR (BY Milton Freedman)
- The social responsibility of Business is to increase its profits.
- “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increse its profits so long as it stayrs within the rules of the game, which is to sya, engages in open and free competition without deception or fraud.
Social responsibility programs are “hypocritical window-dressing”
What are the arguments for participating in CSR?
- Business helped to create many of the social problems that exist today, so it should play a significant role in solving them, especially in the areas of pollution reduction and cleanup
- Businesses should be more responsible because they have the financial and technical resources to help solve social problems
- Socially responsible decision making by businesses can prevent increased government regulation
Social responsibility is necessary to ensure economic survival: If businesses want educated and healthy employees, customers with money to spend, and suppliers with quality goods and services in years to come, they must take steps to help solve the social and environmental problems that exist today
What are the arguments against participating CSR?
- It sidetracks the managers from the primary goal of business - earning profits. Every dollar donated to social causes or otherwise spent on society’s problems is a dollar less for owners and investors
- Participation in social programs gives businesses greater power, perhaps at the expense of particular segments of society
- Some people question whether business has the expertise needed to assess and make decisions about social problems
Many people believe that social problesm are the responsibility of government agencies and officials, who can be held accountable by voters
Why is there an increased focus on CSR?
- Social responsibility is a normal good. A normal good is one whose demand increases with higher incomes and wealth
- Information about firms has become more accessible and quicker to travel around the world
- MNEs‘ environmental/social externalities in developing/less regulated countries have increased
Awareness of long-run cost of atmospheric pollution (global warming) has risen (at least in the public awareness)
What is CSR?
- Being employee friendly
- Environmentally friendly
- Mindful of ethics
- Respectful of communities where firms produce
- Being investor friendly
- Above is within firms’ immediate realm
- Support the arts, universities
Outside firms’ immediate realm
CSR is:
- Firm sacrificing profits in the social interest
Sacrifice = firm must go beyond legal and contractual obligations on a voluntary basis
What are three views on CSR?
- Win-win (doing well by doing good)
- Positive effect on firm value
- Delegated philanthropy (the firm as a channel for the expression of citizen values)
- Positive effect on firm value
- Insider-initiated corporate philanthropy
- Reflects managements or boards members’ desires to engage in CSR and not stakeholder demands
Negative effect on firm value
- Reflects managements or boards members’ desires to engage in CSR and not stakeholder demands
What is sustainability?
- Meeting our society’s needs in ways that don’t compromise the ability of future generetations to meet theirs.
- At its core, sustainability is about being responsible with resources - people, land, energy, water, materials and capital
- For human beings, sustainability means the long-term maintenance of their capacity that secures their non-declining wealth and reproduction
Securing intergenerational equity
What is code of ethics
A business’s formal statement of ethical priorities
What is meant by sustainable development?
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs
What are sustainable stretegies?
Strategies that helps both create good profits, but also do so without causing harm to the social and natural environment
Which demographic challenges are we facing?
Strong population growth, notably in the developing world
Which ressource challenges are we facing?
- An increasing usage of resources, renewable and nonrenewable alike
• Raw materials
• Energy
Food
What environmental challenges are we facing?
Higher levels of environmental impacts of human activity
What does trade theory suggest that a marginal change in trade will affect emission levels?
- Through major channelse:
• The scale effect
○ Increase in emissions due to a higher level of economic activity, holding other factors constant
• The composition effect
○ Change in emissions because of a change in the relative shares of different goods in production. With increases trade in clean industries, however, trade liberalization will cause a reduction in emission
• The technique effect
○ The impact on emissions due to a change in production methods
The net change in aggregate emissions is determined by the interaction of these three effects
How can trade help climate change mitigation?
- By building climate regime by addressing issues like the following
• Address leakge issues, i.e. emissions to countries not involved in specific transactions
• Generate sanctions against nonparticipation and noncompliance
• Help seperate the abatement location and the bearer of the cost of abatement
• Maintain a free-trade regme that is crucial for technology transfers
Negotiate loc-carbon trade agreements instead of just free trade agreements
How can MNEs contribute to the goals underlying poverty and inewuality?
- Through the role and impact of a good reputation for MNEs when operating in developing countries, employee compensation, recruitment of local talent, the development of basic infrastructure, ecces to drugs and utilization of micro-entrepreneurs as partners
MNEs can also contribute through development of networkds, implementation of sustainable supply chain measures, support for development of microfinance institutions, and overal value creation in these environments.
How can MNEs contribute to the goals underlying Energy and climate change?
- Important envrionmental issues can give MNEs the opportunity to develop green firm specific advantages and reconfigure them for profit and survival
- Envrionmental considerations must become a central part of business planning. Four essential elements to be included in the economics of sutainability in the context of climate change, the diference between natural and reproducable capital and the management of global commons
When decribing their corporate citizenship initiatives to tackle climate change, MNEs must deal with the tension between standardization versus local adoption of strategies on energy and climate change.
What is Carry trade?
A kind of speculation that involves borrowing in one currency with low interest rates and then investing in another currency with high interest rates.
What is currency hedging?
The act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates.
Currency swap:
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
Arbitrage:
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.
The Fisher effect:
Nominal interest rate (i) in each country is equal to the required real rate of interest ® and the expected rate fo inflation over the period of time for which the funds are to be lent(l), i=r+l
IFE: International Fischer effect:
For any two countries, the spot exchange rate should change in an equal amount, but in the opposite direction, to the difference in nominal interest rates between countries
Efficient market:
A market where prices reflect all available public information
Ineffient market:
A market where prices do not reflect all available public information
Translation exposure is an results from:
- The extent to which the reported consolidatd results and balance sheets of a corporation are affected by fluctuations in foreign exchange values
- Translation exposure results from the need of a multinational firm to consolidate its financial statements to include results from foreign operations
○ Consolidation involves “translating# subsidiary financial statements from local countries to the home currency of the firm
Consolidation can result in either translation gains or translation losses
- Translation exposure results from the need of a multinational firm to consolidate its financial statements to include results from foreign operations
Economic exposure is and results from:
- The extent to which a firm’s future internation earning power is affected by changes in exchange rates
- The physical entry (and on-going presence) of a multinational firm into a foreign market
○ This is a long term foreign exchange exposure resulting from a previos FDI location decision
§ Over time the firm will acquire currency denominated assets and liabilities in the foreign country.
§ The firm will also have operating income and operating costs in the foreign country
○ Economic exposure impacts the firm through contracts and transactions which have yet to occur, but ill, in the future, because of the firm’s location
These are really future transaction exposures which are unknown today.
- The physical entry (and on-going presence) of a multinational firm into a foreign market
What is the key to reducing economic exposure?
To distribute the firms productive assets to various locations so the firms long-term financial well-being is not severely affected by adverse changes in exchange rates.
What is a lead strategy?
A lead strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate
What is a lag stategy?
A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate
What is an exchange rate?
- Prices of one currency in terms of another
The demand and supply relative to the supply and demand of other currencies
What is The International Monetary System?
International monetary system comprises the set of arrangements, rules, conventions and supporting institutions that regulate key aspects of economic activity
What is the essentiel purpose of the International monetary system?
Its essentiel purpose is to facilitate the exchange of goods, services and movement of capital among countries
______ is the institution required to exercise oversight of the international monetary system, and to ensure its stability and effective operation..
The international Monetary Fund
International Monetary system consists of four elements. These are?
- Exchange arrangements and exchange rates
- International payments and transfers relating to current international transactions
- International Capital movements
- International reserves
The international Monetary fund is the _____ required to exercise _____ of the international Monetary sytem, and to ensure its _____________
Institution, oversight, stability and effective operation
What were the key points of the Bretton Woods and which institutions were created?
- IMF, World Bank and Trade organization
- Pegging the U.S. dollar to gold at 35 USD per ounce (with the USD currency the only currency convertible
- All other countries peg their currencies to the U.s dollar
Countries agreed to “support” their exchange rates within +- 1 percent.
What are the trends in the international monetary system since the collapse of Bretton Woods in 1973?
- The major currencies of the world have operated under a floating exchange rate system
A growing number of other developing currencies have also moved to a floating rate system
What has the adoption of a floating exchange rate system in many currencies done to the volatility of them?
It has made them much more volatile, nd perhaps, less predictable.
How are currencies valued in a floating exchange rate system?
A currency of a nation is set by the forex market based on supply and demand relative to other currencies
How are the currencies valued in a fixed exchange rate system?
The government determines the rate
What are the advantages of fixed rates?
- Monetary discipline
○ The need to maintain fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates- Lower exchange risk –> Which encourages trade and investment
- Avoid speculative bubbles that can afflict floating
Avoid competitive devaluation of a country’s currency for competitive purposes.
What are the advantages of floating rates?
- Monetary independence
- Automatic adjustments to trade shocks
- Crisis recovery?
When a currency is hit, it will automatically stabilize on the long run when export to other countries become attractive due to the lower prices. Also, their purchasing diminshes and thereby their imports decrease. This combinating stabilizes the balance of payment.
What is the definition of a Optimum Currency Area (OPC
- A region that is neither so small and open that it would be better off pegging its currency to a neighbour, nor so large that it would be better off splitting into sub-regions with different currencies.
A optimum currency area is a region that should have it’s own currency and own monetary policy.
What are the OPA criterias for fixing exchange rate:
What are the OPA criterias for fixing exchange rate:
- Small size and openness
○ Because then advantages of fixing are large
- Symmetry of shocks
○ Because then giving up monetary independence is a small loss
- Labor mobilty
○ Because then it is possible to adjust shocks even without ability to expand moey, cut interest rates or devalue
- Fiscal transfers in a federal system
Because then consumption is cushioned in a downturn
Why would a conutry consider adopting a currency board or union?
- A desperate need to import monetary stability, due to:
○ History of hyperinflation
○ Absence of credible public institutions
○ Location in a dangerous neighbourhood- A desire for integration with a specific nieghbour or trading partner
- An already high level of private dollarization/euro-ization
Acess to an adequate level of resources
Which levels of financial development is fixed rates better for?
- Countries at low levels of financial development because markets are thin
When financial markets develop, exchange flexibility becomes more attractive
How can the monetary approach explain changes of the exchange rate?:
- Because the supply and demand for currency stocks, as well as the expected growht rates of currency stocks, will determine the price level or the inflation rate
This approach acknowledges that changes in interest rates, an economy’s growth rates and money supply all affect exchange rates.
What is foreign exchange exposure?
It is the risk associated with activities that involve an international firm in currencies other than its home currencies
What are the specific risks to amultinational firm from foreign sxchange exposure?
- Cash inflows and outflows, as measure in home currency equivalents, associated with foreign operations can be adversly affected
○ Revenues (profits) and costs- Settlement value of foreign currency denominated contracts, in home currency equivalents, can be adversly affected:
○ Loans in foreign currencies - The global competitive position of the firm can be affected by adverse changes in exchange rates
○ Influence on required return
End result: The value of the firm can be adversely affected
- Settlement value of foreign currency denominated contracts, in home currency equivalents, can be adversly affected:
Describe the two channels of economic exposure:
Exchange rate fluctuation:
1 Foreign currency denominated asset and liability exposure –> Impact on the home currency value of foreign assets and liabilities –> MNCs competitive position and value
2 Operating exposure (revenues and costs) –> Impact on home currency amount of future operating cash flows –> MNCs competitive position and value
How do firms hedge?
1: Financial contracts
- Forward contracts
- Options contracts
- Borrowing or investing in local markets
2: Operational techniques
Geographic diversification (spreading the risk)
What are the purposes of the international financial markets?
• Access to funds for borrowers
• Companies unable to obtain funds from investors in domestic market seek financing in the international market
• Essential for firms in countries with small or developing capital markets or emerging stock markets
• An expended supply of money benefits small companies that might not get financing under intense competition for capital
• Reducing the cost of financing for borrowers
• An expanded money supply reduces the cost of borrowing. The “price” reflects supply and demand. Excess funds create a buyer’s market, forcing interest rates lower
• Projects regarded as infeasible because of low expected returns might be viable at a lower financing cost
• Reducing risk for lenders
- The international capital market expands the available set of lending opportunities. Investors reduce portfolio risk by spreading their money over many debt and equity insurances
- Investing in international securities benefits investors because some economies are growing while others are in decline
Which forces are expanding the financial market?
- Information and commucation technology
○ Reduces time and money needed to communicate globally. Electronic trade after close of formal exchanges facilitates fast response times- Deregulation
- Increased competition, which lowers cost of financial transactions, and opens many national markets to global investing and borrowing. Continued growth often depends on further deregulation
New financial instruments. Increased competition is creating the need to develop inovative financial instruments. Securitization is the unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments, or securities
What does a company try to accomplish by cross-listign and selling its shares on a foreign stock exchange?
- Improve liquidity of its existing shares and support a liquid secondary market for new equity issues in the foreign market
- Increase its share price by overcoming mispricing in a segmented and illiquid home market
- Increase the firms visibility an political acceptance to its customers, suppliers, creditors and host governments
- Establish a secondary market for shares used for acquisitions in foreign countries
Create a secondary market for shares that can be used to compensate local managememtn and employees in foreign subsidiaries.
What is IMF?:
International Monetary Fund. An international institution set up to maintain order in the international monetary systems
What is WTO?
World trade organisation. The organization behind GATT
What is opportunism?
- The practice of taking advantage of circumstances - with little regard for principles or with what the consequences are for others.
Opportunist actions are expedient actions guided primarily by self-interested motives.
What is opportunity cost + example?
When economists refer to the opportunity cost of a ressource, they mean the value of the next-highest-valued alternative use of that ressource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend that money on something else.
Forms of internatinal businesses: Contractual:
- Exporting: producing goods at home and shipping them
- Licensing/franchising: granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee.
Other non equity based arrangements (e.g., outsourcing.
- Licensing/franchising: granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee.
Forms of internatinal business: FDI
- Greenfield: establishing a new operation in a foreign country
Mergers and Acquisitions: merging or acquiring an existing firm in a foreign country
What is the difference between contracting and outsourcing?
What is the difference between contracting and outsourcing?
- Contracting refers to the practice to hire an outside company for perfoming an outside company for performing specific tasks of concrete business projects or contract. Mostly yhose tasks are the ones that cannot be handled internally. In contracting relationship the contractor has a reasonable amount of control over the project
Outsourcing is more about the tasks that can be perfomed by company internal stuff, but due to various reasons - cost, somplexity, time consuming are outsourced to other company. If the technical part is outsourced, the internal stuff can be focused more on sales and marketing.
What is FDI?
- It is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.
We refer to FDI when firms own or control production or service facilities/resources outside the country in which they are based.
What is affiliates and subsidiaries?
- A foreign affiliate is an enterprise in which an investor, who is resident in another country, owns a stake that permits a lasting interest in the management of that enterprise
- An affiliate must have at least 10% foreign ownership.
To be called a subsidiary, the foreign parent must have at least 50% ownership)
- An affiliate must have at least 10% foreign ownership.
A firm will favor FDI over exporting as an entry strategy when … ?
Transportation costs or trade barriers make exporting unattractive
A firm will favor FDI over licensing (or franchising) when ..?
it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amendable to licensing, as may often be the case.
What induces the costs of using the market?
- Imitation
- Reputation
- Codification
Spezialized assets
Explain about the costs related to imitation:
- Consider the transfer of know how:
○ Know-how developed in one country is often useful in another, so the firm wants the foreign unit to “imitate” it
○ However, it is difficult to transfer for the following reasons:
§ Information asymmetry requires to care for property rights (a firm wants to protect the information it has)
□ Information asymmetry makes it difficult to explain know-how without losing property rights (and a very specific contract)
® Costs of imitation increase, difficult to find a buyer
§ Imperfect enforcement of patent rights
□ A patent might exist but there is imperfect enforcement (e.g. high level of counterfeit sophistication
® Local incumbents can imitate valuable design elements or production features
§ Complementary know-how ceating competition
□ The buyer might have complementart know how that combined with licensed knowledge can originate into competitive innovation
® Costs of imitation and risk to create a competitor
Transfer of know-how within a firm can be more efficient (i.e., minimize risk/cost of imitation) than using the market
Describe the costs related to reputation
- Consider transactions involving brands:
○ Franchises can behave opportunistically: reduce quality of goods to maximize profits(free-riding)
§ Verifying a business’ partner’s behaviour can be costly if quality can be hardly defined and tasks/output ill structured (fast food vs. Management consulting)
§ Obtaining information about business’ partner effort might not be fully observable (e.g. international context with different languages and communication barriers- Under conditions of high potential reputation loss, a firm will exploit its source of competitive advantage withing its boundaries than using the market
Explain what is meant by costs of codification in regards of using the market:
○ Buyer and seller must have eprfect knowledge of what is being sold but:
§ Tacit and complex knowledge is more difficult to describe
§ Drafting tacit knowledge into an agreement is difficult –> Contract related costs increase (contract may be incomplete, unforeseeable circumstances)
§ The source of competitive advantage is embedded in the organization (e.g. resides in organizational routines developed over time that cannot be seperated into “stand-alone” assets) –> difficult to transfer to an outside firm
Pricing of the competitive advantage is not possible and/or its transfer within the firm can be more efficient (i.e., minimize codification costs) than using the market.
Explain costs of asset specificty:
Main point:
- Specific/specialized assets are not easily redeployable (e.g. requires inveting in a specific type of machinery or material)
- Once specialized assets are in place, trading partners will try to expropriate part of the associated rents
Under conditions of high asset specificity, a firm wil internalize the production of the specific component
Why do hierarchical control become costly?:
For example:
- Costly monitoring due to geographic distance
- Communication, and hence the use of rules, is more difficult due to cultural distance
- Subsidiaries are more knowledgable than HQs about local conditions
- Complexity of managing a huge global operation
Hence, international expansion is not a quick fix for companies. Costs of market transactions must be balanced against costs of hierachies
What is the OLI eclectic paradigm?
The OLI is a conceptual framework for analyzing the determinants of international production undertaken by MNE’s
The OLI framework tackles thee key questions. Which questions?
1 Why are foreign investments possible
2 Where do firms choose to localize their foreign activities?
3 How do firms enter a foreign market?
The OLI paradigm indicates that the extent and pattern of a firm’s foreign activities will be determined by the configuration of three advantages: Describe these advatages:
advatages:
1 Ownership-specific advantages
- Resources of the firm that are transferable across borders, and enable the firm to attain competitive advantages abroad.
- What a firm does better thn its competitors
2 Locational-specific advantage
- Advantages enjoyed by firms using their ownership advantages in certain locations
3 Internalization specific advantages:
Advantages of organizing activities within the firm rather than using the market
Describe the radical view of MNE’s
The MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive beenfit of their capitalist-imperialist home countries
Describe the free market view:
International production should be distributed among countries according to the theory of comparative advantage
What are the host country benefits from FDIs?
- Ressource transfer
- Employment creation though greenfield investments
- Technology transfer
Increase competition and growth, lower prices for consumers
What are the perceived host country threats from an fdi driven growth strategy?
- Host countries in general, and LDCs with little industrial development in particular fear that FDIs may produce:
- Adverse effects on competitiveness of indigenous firms
- Negative impact on the balance of payments
Loss of national sovereignty and autonomy
What are the dangers posed to indigenous firms by FDI?
- Take over of infant industries: If the investing company is a subsidiary of a large MNE, due to greater economic power, it could bring in funds from operations elsewhere to subisidize costs in the host market and run the local companies out of business. Once monopoly control of the market is achieved, the foreign MNE could greater harm by rasing prices for local consumers
Acquisition of several firms by global MNEs in LDCs may reduce competitiveness, resulting in monopoly control and price increases for local consumers, but evidence suggests that this is not a widespread phenomenon
What are the benefits of FDIs for investing countries?
- Increase of inward flow of revenues (repatriation of profits to parent company) from investments abroad
- Expansion of demand for home country inputs (e.g. Capital equipment, intermediate and complimentary goods)
- Job creation
- Increase export earnings
- Produce surplus in balance of payments
Acquire valuable skills (management and production skills)
What are the potential harms to home countries from FDI?
- Balance of paymeny may be adversely affect by intial outflow of capital investment. This is often an unwarranted fear, as the inflow of foreign earnings make up for initial loss
- Export earnings may deterioriate (e.g., japanese relocation of firms to the us), and thus negatively affect the current account of OFDI country
- Negative employment affect when FDI is seen as substitute for domestic production
Reality however is the offshoring production may free up employment from inefficient production to be absorbed in areas where the country has a comparative advantage. Consumers in the home market may also benefit frm lower priced goods as a result of FDI
How can countries compete with others for FDIs and why would they?
- By offering incentives such as tax concessions, low interest loans, free land and other forms of grants and subisdies to foreign firms
To acquire ressource/technology transfer and employment generating opportunities (e.g. Kentucky offered incentive package to Toyota, worth 147 million usd to set up a production plant there.
How can host countries control FDI?
- Restriction on ownership restraints/and majority control(e.g., fore security reasons and/or to allow local firms to become competitive
Perfomance requirement: As a goal to promote local content, commit to technology transfer and local participation in top management
What is organizational architecture?
- The totality of a firms organization, formal structure, control and incentives, processes, culture and people
The components of the architecture (people, structure, processes, culture, incentives and controls)
What is organizational structure?
- The formal division: organizations into subunits such as product diviosn, national operation and function
- The location of the decision making within the structure (centralized or decentralized)
Integrating mechanisms to coordinate the activities of subunits
- The location of the decision making within the structure (centralized or decentralized)
Why is organization architecture and structure important?
- To succeed:
○ The elements of the organizational architecture must be internally consitent
○ The organizational architecture must fit the strategy
The stratetgy and architecture must be consistent with each other, and consistent with competitive conditions
What is vertical differentiation?
The location of decision-making responsibilities within a structure.
Why would it make sense to make vertical decentralization?
- Facilitates coordination
- Ensures decisions are consistent with the organization’s objectives
- Gives managers the means to bring about organizational change
Avoids duplication of activities
Why would it make sense to make vertical centralization?
- Relieves the burden of centralized decision making
- Has been shown to motivate individuals
- Perits greater flexbility
- Can result in better decisions
Can increase control
What is bounded rationality?
- Bounded rationality is the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision
Chess is a good example
What is horizontal differentiation?
The formal division of the organization into subunits
Put some words on the functional structure:
Decision making tends to be centralized
Put some words on the product divisional structure:
- When there are different business area managed
- Going from fuctional product divisional structure when coordination and control are too problemativ
Each product divisional structure is responsible for a distinct product line
- Going from fuctional product divisional structure when coordination and control are too problemativ
Put some words to the international division structure:
- Tends to expand into international division when a firm is organized on the basis of functions and for firms organized on the basis of product division
- The international division tends to be organized on geography
- Exporting the product manufactured at home to foreign subsidiaries
- The dual structure tends to create conflict and coordination problems between domestic and foreign operations
○ The subsidiaries are not given a voice
Lac of coordination
Describe the worldwide product division structure:
- Firms that are reasonably diversified and originally had domestic structure based on product division
- Headquarter retain responsibility for the overall strategic development and financial control
Limited voice of area/country managers - they are seen as subservient to product division managers –> can lead to lack of local resposiveness
- Headquarter retain responsibility for the overall strategic development and financial control
Describe the worldwide area structure:
- Low degree of diversification and a domestic structure based on functions
- Area may be country or group of countries
- Self-contained
○ Own production, r&d, HR and finance functions
○ Decentralized to each area with headquarters have overall strategic direction of the firm and financial control
○ Can be hard to transfer core competencies
Localization strategy
Describe the global matric structure:
- Horizontal differentiation proceeds along two dimensions: product divisions and areas
- The products produced by division a, are determined by conciliation between division a and area 1 management
- The dual decision making responsibility should enable the firm to simultaneously achieve its particular objectives
- Individual managers belong to two hierarchies and have two bosses (a divisional and area)
- Doesn’t work as well in real life as in theory
○ It requires many meetings
○ Slow decision making and produce inflexible organization - no quick response to market shifts of innovation - “flexible” matric based on enterprise wide management knowledge networks: shared vision and culture
What is integrating mechanism?
The mechanisms for coordinating subunits
Describe the formal integration mechanisms:
- Varies from simple direct contact to teams to matrix structures
- The greater the need for coordination, the more complex the formal integrating mechanism needs to be
- Direct contact between employee and manager
- Liaison roles: a person in each subunit is responsible for coordinating with another subunit on a regular basis
- Temporary or permanent teams of individuals from the subunits that need to achieve coordination: product development and introduction, useful also when strategy and aspect of operations requires the cooperation if two or more subunits
Need for integration is very high, where all roles are viewed as integrating roles
What is an informal integrating mechanism?:
Networks that are supported by an organizational culture that values teamwork and cross unit cooperation. Informal contacts between managers within an enterprise
What is the CAGE framwork?:
It is a framwork that identifies cultural, administrative, geographic and economic differences or distances between countries that companies should adress when crafting international strategies.
What is personal controls?:
- Personal contact with subordinates
Most widely used in small firms
What is bureaucratic controls?
- A system of rules and procedures that directs the actions of subunits
Budget and capital spending rules
What is output controls?
- Setting goals for subunits to achieve and expressing those goals in terms of objective perfomance metrics
Compare actual perfomance against targets and intervene selectively to take corrective action
Cultural controls
- Exist when employees “buy into” the norms and value systems of the firm
Strong culture implies less need for other forms of control
What are incentives and what should it?
- Devices used to reward behaviour
- (usually closely tied to perfomance metrics used for output controls)
- Should vary depending on the employee and the nature of the work being perfomed
- Should promote cooperation between managers in sub-units
- Should reflect national differences in institutions and culture
Can have unintended consequences
How can you implement organization change according to the book?:
- Unfreeze the organization through shock therapy
a. Requires taking bold actions like plant closures or dramatic reorganizations- Move the organization to a new state through proactive change in architecture
a. Requires a substantial and quick change in organizational architecture so that it matches the desired new strategic posture - Refreeze the organization in its new state
Requires that employees be socialized into the new way of doing things
- Move the organization to a new state through proactive change in architecture
Why can organizations be difficult to change?
- Because of
○ The existing distribution of power and influence
○ The current culture
○ Managers’ preconceptions about the appropriate business model or paradigm
Institutional constraints
What is management by objectives and what is the purpose of it?:
MBO is a strategic management model that aims to improve the perfomance of an organization by clearly defining objectives that are agreed to by both management and employees.
Describe the 5 step MBO process:
- Set or review organizational objectives
a. If the organization isn’t clear where it’s going, no one working there will be either- Cascading objectives down to employees
a. SMART: specific, measurable, agreed, realistic, time related - Monitor progress
a. Create a monitoring system that signals when things are off track - Evaluate
a. Employees should be given feedback on the progress of fulfillinf the objectives - Reward Perfomance
Rewards/bonuses based on employees fulfillment of objectives
- Cascading objectives down to employees
Describe an alternative: Goals Setting: + examples
- Focus attention on the activities that matter
- Clarify expectations
- Motivate
- Hold individuals and groups accountable
- Examples
a. Operating profits
b. Sales growth
c. Market share
d. r&d activities
e. Cost reduction
Personnel development …
What are favorable markets?
- Poitically stable
- Have free market systems
- Have relatively low inflation rates
Have low private sector debt
What are less desirable markets?
- Politically unstable
- Have mixed or command economies
Have excessive levels of borrowing
- Have mixed or command economies
Describe the FDI inflwos in developed economies and developing economises
- FDI inflows decrease in developed economies
FDI inflows increase in developing countries
Which is BRICS?
- Former developing economies that achieved substantial industrialization, modernization and remarkable economic growth; e.g., Indonesia, Mexico, Poland, Turkey, and Brazil, Russia, India, China
- They occupy a middle group between advanced economies and developing economies
- Perhaps their most distinguishin characteristics are rapidly improving living standards and a growing middle class with rising economic aspirations
What is an emerging economy?:
“low-income, rapid growth countries using economic liberalization as their primary engine of growth
What is an advanced economy?
“low-income, rapid growth countries using economic liberalization as their primary engine of growth
What are some country level advantages?:
- Cheap mass labour
- High-growth domestic markets
Vast available natural resources
- High-growth domestic markets
Mention country level differences:
- Infrastructure (legal, physical,…)
- Labour cost and skills
- Natural resources
- State interventionism/privatization
- Law enforcement
Political stability
What is an early entry into a market?:
Entry is early when the firms enters a foreign market before other foreign firms
When is an entry late?
Entry is late when the firm enters the market after firms have already established themselves in the market.
Describe first-mover advatages:
- The ability to preempt rivals by establishing a strong brand name
- The ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
The ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business
- The ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
Mention the first-mover disadvantages:
- Pioneering costs - arise when the foreign business system is so different from that in the home market that the firm must devote considerable time, effort and expense to learning the rules of the game
- The costs of businesss failure if the firm, due to its ignorance of the foreign environment makes some major mistakes
The costs of promoting and establishing a product offering, including the cost of educating customers
- The costs of businesss failure if the firm, due to its ignorance of the foreign environment makes some major mistakes
After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry. Describe when firms make a significant scale entru:
- Firms that enter a market on a significant scale make a strategic commitment to the market
The decision has a long term impact and is diffucult to reverse
After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry. Describe when firms make a small scale entry:
Small-scale entry has the advantage of allowing a firm to learn about foreign market while simultaneously limiting the firm’s exposure to that market
Modes of entry: what is exporting?:
- A common first ste for many firms
Later, firms may swith to another mode
Modes of entry: Turnkey projects: What is that?
- The contractor handles every detail of the project for a foreign client, including the training of operating personnel
At the completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation.
Modes of entry: Contracting. Tell me spmething:
Modes of entry: Contracting. Tell me spmething:
- Licensing
○ A licensor grants the rights of intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee
§ Patents, inventions, formulas, processes, design, copyrights, trademarks
- Franchising
○ A specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business
§ Used primarily by service firms
- Joint venture with a host country firm
○ A firm that is jointly owned by two or more otherwise independent firms
§ Mostly joint ventures are 50-50 partnerships
- Wholly owned subsidiary
○ The firm owns 100 percent of the stock
§ Set up a new operation
Acquire an established firm
What are the advantages and disadvantages of exporting?
- A ○ Scale economies ○ Consistent with pure global strategy - D ○ No low-cost sites ○ High transportation costs Tariff barriers
Advantages and disadvantages of licensing?:
- Lower development costs
- Lower political risks
- D
Loss of control over technology
A and D of franchising?
- A ○ Lower development costs ○ Lower political risks - D Loss of control over quality
A and D of Joint venture:
- A ○ Local knowledge ○ Shared costs and risks - D ○ Loss of control of technology Conflict between partners
Wholly owned subsidiary A and D?
- Maintains control over technology
- Maintains control over operations
- Maintains control over quality
- D
○ High costs
High risk
The OLI paradigm indicates that the extent and pattern of a firm’s foreign activities will be determined by the configuration of three advantages: Describe these advatages:
1 Ownership-specific advantages
1 Ownership-specific advantages
- Resources of the firm that are transferable across borders, and enable the firm to attain competitive advantages abroad.
- What a firm does better thn its competitors
- Exmple: Size, experience, sales, knowledge
2 Locational-specific advantage
- Advantages enjoyed by firms using their ownership advantages in certain locations
- Exmples: Market access, cluster access, opportunities for efficiency
3 Internalization specific advantages:
- Advantages of organizing activities within the firm rather than using the market
Examples: Risk of opportunistic behaviour, transaction costs, moral hazard
Set form of market entry up to categories of advantages in the OLI framework:
O-yes, L-no, I-no = export
O-yes, L-yes, I-no = Licensing
O-yes, L-yes, I-no = FDI
What is a greenfield strategy?:
- Build a subsidiary up from the ground
A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture
What is an acquisition strategy?:
- Acquire an existing company:
Acquisition may be better when there are well-establishe competitors or global competitors interested in expanding
What is a strategic alliance?:
- Strategic alliances refer to cooperative agreements between potential or actual competitors
○ Range from formal joint ventures to short-term contractual agreements
The number of strategic alliances has exploded in recent decades
How do a company achieve alliance success?:
- By partner selection:
○ A good partner
§ Helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values
§ Shares the firm’s purpose of the alliance
§ Will not exploit the alliance for its own ends.- By Alliance structure:
○ The alliance shoudl
§ Make it difficult to transfer technology not meant to be transferred
§ Have contractual safeguards to guard against the risk of opportunism by a partner
§ Allow for skills and technology swaps with equiyable gains
§ Minimize the risk of opportunism by an alliance partner - By the manner in which the alliance is managed
○ Requires:
§ Interpersonal relationships between managers
□ Cultural sensitivity is important
§ Learning from alliance partners
Knowledge must then be diffused through the organization
- By Alliance structure:
Screening of the foreign firm to be acquired should include detailed auditing of which aspects of the business:
- Operations
- Financial position
Management culture
- Financial position
What are the four advantages associated with a strategic alliance?
- Helps a firm establish technological standards that will benefit the firm
- May facilitate entry into a foreign market
- Brings together complementary skills that neither company could easily develop on their own
Allow firms to share the fixed costs of developing new products
What are benefits associated with entering a market on a large scale?
- Easier to attract costumers
Puts limitations on other institutions considering entry
What is supply chain management:
The integration and coordination of logistics, purchasing, operations and market channels activities from raw materials to the end customer. Linked closely to produciton
What is upstream:
The portion of the supply chain from raw materials to the production facilities
What is downstream?
- From the production facility to the end-costumer
To secure a finished product with no defects and perfoms well, this should be embedded in both the upstream and downstream potions of global supply chain.
What is a push strategy?
Personal selling, rather than mass media advertising
What is a pull strategy?
Mass media advertising to communicate to potential consumers
Push strategies tend to be emphasized for/when:
- For industrial products or complex new products
- When distribution channels are short
When few print or electronic media are available
- When distribution channels are short
Pull strategies tend to be emphasized for/when:
- For consumer goods
- When distribution channels are long
When sufficient print and electronic media are available to carry the marketing message
- When distribution channels are long
Demand is elastic when:
Changes in price, causes an a large change in demand
Demand is inelastic when:
- Changes in price does not cause a large change in demand
What is Local resonsiveness?:
It is the degree to which the company must customize their products and methods to meet conditions in other countries
Lean production aims to:
Cut costs by making the business more efficient and responsive to market needs
What is lean production?:
It is an approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business - from design, through production to distribution. Lean production aims to cut costs by making the business more efficient and responsive to market needs.
What is offshoring?
- The global relocation of firm tasks and activities supporting domestic or global operations/markets.
- From home country to foreign location offering attractive location-specific advantages
Both in-house and outsourced, depedending on internalization advantages
- From home country to foreign location offering attractive location-specific advantages
Make a diagram displaying when a firm should make/buy and onshore/offshore:
- When foreign location specific advantage is high, the company should offshore, and when it is low it should onshore.
- When internalization advantages are high, the firm should make, when low they should buy:
- High IA, High L = captive offshoring (make, offshore)
- High IA, Low L = Domestic in-house (onshore, make)
- Low IA, High L = Offshore outsourcing (offshore, buy=
Low IA, Low L = Domestic outsourcing (onshore, buy)
Firms should locate production so that ..?
- Production and logistics can be locally responsive
Production and logistics can respons quickly to shifts in customer demands
Firms should consider ..? In relation to location of production..
- Country factors
- Technological factors
Product factors
- Technological factors
What should firms consider in regards of country factors?
- the availability of skilled labor and supporting industries
- formal and informal trade barriers
- expectations about future exchange rate changes
- transportation costs
regulations affecting FDI
What should firms consider in regards of technological factors?
- The level of fixed costs
• if fixed costs are high, produce in a single location or a few locations
• when fixed costs are low, multiple production plants may be possible
○ allows firms to respond to local demands - The minimum efficient scale
• the level of output at which most plant-level scale economies are exhausted
○ when minimum efficient scale is high, choose centralized production in a single location or a limited number of locations
○ when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations - The flexibility of the technology
• flexible manufacturing technology or lean production
○ reduces set up times for complex equipment
○ increases the utilization of individual machines
○ improves quality control
• allows firms to produce a wide variety of end products at a relatively low unit cost
□ mass customization
flexible machine cells
What should firms consider in regards of product factors?
- The product’s value-to-weight ratio
• if the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world
• if the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world - Whether the product serves universal needs
when products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense
Why should companies make/vertically integrate?
- Lowers costs
○ If a firm is more efficient at that production than any other enterprise, manufacturing in-house makes sense- Facilitates investments in highly specialized assets
○ Internal production makes sense when substantial investments in specialized assets are required - Protects proprietary technology
○ In-house production makes sense when component parts contain proprietary technology - Facilitates the scheduling of adjacent processes
Planning, coordination, and scheduling of adjacent processes can be easier with in-house production.
- Facilitates investments in highly specialized assets
Why should companies buy/externalize instead of make
- Gives the firm greater flexibility
○ Important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time- Helps dirve down the firm’s cost structure
○ Avoids challenges of coordination and control of additional subunits
○ Avoids the lack of incentive associated with internal suppliers
○ Avoids the difficulties with setting appropriate transfer prices - Helps the firm capture orders from international customers
Can help firms gain orders from suplliers’ countries.
- Helps dirve down the firm’s cost structure
Why business transactions take place within a firm rather than between independent firms in a market?
- 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
- Information asymmetry (one part holds more information than the other e.g. a car sale) and uncertainty
- Opportunistic behaviour (self-interest seeking, not following the contract, delivering late)
Asset specificity (assets that are used only for a certain prupose)
What is almost always true about the costs of offshoring?:
- The realized costs are always higher than the estimated costs.
The gap between the two are described as hidden costs.
What are the three layers of complexity in offshoring?.
- Structural complexity (number of countries)
- Operational complexity (number of activities)
Social complexity (number of people)
- Operational complexity (number of activities)
How to manage a globally dispersed organization?:
- Modularity
○ Decompose a system of activities into subunits such that activities within a module are highly interdependent with one another, but there are few dependencies between activities that are part of different modules. Standardize/reduce interdependencies between onshore and offshore unit- Ongoing communication
○ Talk together you fucking idiots (mail, phone and so on=
○ Manage need for coordinatino - Tacit communication
○ Coordination relying on common ground - knowledge that is shared and known to be shared - formed by means other than ongoing communication (e.g. preproject familarity, shared knowledge of each others’s work procedures, visibility of information across locations)
Manage need for coordination
- Ongoing communication
What is an ethnocentric staffing approach?
It is one of the methods of international recruitment wherein, the HR recruits the right person for the right job for the international businesses, on the basis of the skills required and the willingness of the candidate to mix with the organization’s culture
What are the strategic appropriateness, advantages and disadvantages of an ethnocentric staffing approach?
- SA: International
- A:
○ Overcomes lack of qualified managers in host nation
○ Unifield culture
○ Helps transfer core competencies - D:
○ Produces resentment in host country
Can lead to cultural myopia
- A:
What is a polycentric staffing approach?:
In polycentric approach, the nationals of the host country are recruited for the managerial positions to carry out the operations of the subsidiary company
What are the strategic appropriateness, advantages and disadvantages of a polycentric staffing approach?:
- SA: Localization
- A
○ Allevietes cultural myopia
○ Inexpensive to implement - D:
○ Limits career mobility
Isolates headquarters from foreign subsidiaries
- A
What is a geocentric staffing approach?
It is a method of international recruitment where the MNCs hire the most suitable person for the job irrespective of their nationality
What are the strategic appropriateness, advantages and disadvantages of a geocentric approach
- SA: Global standardization and transnational
- A
○ Uses human resources efficiently
○ Helps build strong culture and informal management networks - D
○ National immigration policies may limit implementation
Expensive
- A
Multinationals will farm out only low-skilled jobs to foreign plants making it easier to
Switch production locations
Multinationals will import employment practices and contractual agreements from their home countries and
Reduce the influence of unions
Multinational can counter union bargaining power by
Threatening to move production to another country
Describe the pessimistic view of MNEs:
A world in which consumerism is equatd with economic policy, where corporate interest reign, where corporations spew their jargon on to the airwaves and stifle nations with their imperial rule. Corporations have become behemoths, huge global giants that wield immense political power. […] Business is in the driver’s seat, corporations determine the rules of the game, and govenrments have become referees, enforcing rules laid down by others.
Descibe the optimistic view of MNEs:
MNEs are […] increasingly eing evaluated by both home and host countries in terms of their contribution towards upgrading the quality of indigenous resources and capabilities, and advancing long term comparative advantage. This cahnge in philosophy is leading to a less adversarial and more symbiotic relationship between many governments and MNEs”
Describe the diverging effects of MNE’s
- Agents of change and creative destruction
- Increase competitive pressures
- Demonstrates and diffuse new technologies
- Necessary agents of globalization
- -
- Negative impact on environment, labor and human rights
- Profit maximizing goals in violation with economic development
Footloose firms in constant pursuit of cheapest resources - a race to the bottom
What is strategy?
- The actions that managers take to attain the goals of the firms –> Creating value
- Business strategy involves identifying and exploiting the resources and capabilities of the firm in the marketplace for the purpose of gaining competitive advatage and superiors financial perfomance
Strategy is the direction of an organization over the long term, which achieves advantages through its configuration of resources with the aim of fulfilling stakeholder expectations
- Business strategy involves identifying and exploiting the resources and capabilities of the firm in the marketplace for the purpose of gaining competitive advatage and superiors financial perfomance
Managers can increase the profitability of the firm by..?
- Pursuing stategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices.
Expanding internationally can help managers boost the firm’s profitability and increase the rate of profit growth over time
Managers can increase the rate at which the firm’s profits grow over time by …
- Pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets.
Expanding internationaly can help managers boost the firm’s profitability and increase the rate of profit for growth over time
What is value? Describe the model from the book:
- V= Value of product to an average costumer
- P = price per unit
- C = cost of production per unit
- P-C = profit per unit sold
V-C = Value created per unit
How can you create value?
There are two main strategies to pursue: - 1: Low cost/efficiency-based ○ Goal: Reducing costs - 2: Differentiation: Goal: increase attractiveness of the product
To create value, firms need to:
- Choose their position on the “efficiency frontier” (=what is their balance between low cost and differentiation?)
- Configurate operations to support that position
Ensure that the right organization structure is in place to execute the strategy
- Configurate operations to support that position
Every firm is composed of a series of distinct value creating activities. What are these?
- Primary activities ○ R&D ○ Production ○ Marketing and sales ○ Service ○ CSR?? - Support activities ○ Materials management or logistics ○ Human resources ○ Information systems Company infrastructure
What is market expansion?:
- Enter new markets
- Selling goods/services internationally
- Better return if the host market lacks the comparable product
Success depends also on the core competencies: the skills that are not easy to imitate by competitors.
What is location economies?
- Choose locations where activities can be performed efficiently and effectively
- Certain countries have a comparative advantage in the production of certain products (e.g., Japan - cars)
- Need to account for transportation and trade barriers costs
Location economies = economies that arise from performing an activity in the optimal location for that activity
What is experience effects?
- Reduce the costs of outputs due to the gain of experience
- The unit cost of a product declines with the quantity produced
○ Learning effects
Economies of scale
- The unit cost of a product declines with the quantity produced
What is meant by leveraging subsidiary skills?
Leverage skills developed in foreign operations
Configuration decisions are influenced by two competitive pressures. What are these?
- 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
- Pressures for local responsiveness
What is meant by universal need:
Needs that exist when the tastes and preferences of consumers in different nations are similar if not identical
What are the pressures for global integration and what is global integration
- Force the firm to lower unit costs
- 1, Market globalization drivers:
○ When customer needs are standardized (e.g. sugar) - 2, Cost drivers: Presence of economies of scale, experience and learning effects
3, Competitive drivers: when the firm’s competitor is present in foreign markets
- 1, Market globalization drivers:
What are the pressures for local responsiveness and what is it?
- Require the firm to adopt its product to meet local demands in each market
- 1, Consumer tases and preferences
- 2, Cultural differences
- 3, National infrastructure and distribution channels
- 4, Host government demands
- Local competitors
Don¨t forget regional differences too
Differentiation strategy relates to which competitive pressure?
- Local responsiveness as you differentiate your strategy to different markets
The ability to remain attuned to specific national market demands, responding adequately and timely to unique characteristics
Efficiency-based strategy relates to which competitive pressure?
- Global integration
The ability to create value by leveraging scale economies, integrating activities and aligning product offerings across two or more countries
Set the “global strategy” in relation to the I-R framework and describe the strategy:
- High pressure for global integration, low pressure for local responsiveness
- Focus on increasing profitability by reaping the cost reductions that come from economies of scale, learning effects, and location economies
- Development and distribution of standardized product to reap the maximum benefits from low-cost advantages
- Activities of the value chain are concentrated in a few favorable locations in order to optimize efficiency goals
- Treats the world as a single integrated strategic unit
Suitable for: industries that emphazise efficient operations such as commodities (gasoline, memory, chip, sugar)
Set the multidomestic(localization) strategy in relation to the I-R framework and describe what it is?
- Low pressure for global integration(cost reduction), high pressure for local responsiveness
- Treats the world as a portfolio of national opportunities
- Focuses on increasing profitability by customizing the firm’s goods or services so that they provide a goods match to tastes and preferences in different national markets
- Several value chain activities are present in the same local market
- Firms pursuing a localization strategy still need to be efficient and, whenever possible, to capture some scale economies from their global reach.
On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption
Set the home replication(international) strategy in relation to the I-r framework and describe the strategy:
- Low pressure for global integration, Low pressure for local responsiveness
- Treats overseas units as offshoots of domestic strategy
- Focus: Products and services are developed for the home market and sold internationally within minimal adoption
- Suited for:
○ Smaller firms may pursue this as a first internationalization step
Firms selling “universal needs” products which don’t require adaption but with low competition
Put the transnational strategy in perspective of the I-R framework and describe the strategy:
- High pressure for global integration, high pressure for local responsiveness
- An embodiment of the “think global, act local” injuction
- Focus: To configure a value chain that can respond to local pressures by adapting and ensure efficiency by reaping the benefit of integration and promote global learning
- Relies on flows of knowledge and skills between its units of the global network operations: global learning is a uniwue aspect of the transnational strategy
- Easy? No: beacuse local adaption creates costs while the competitive goal is to reduce costs
- The MNE tries to simultaneously
○ Differentiate its product across geographic marekts to account for local differences
○ Achieve low costs through location economies, economies of scale, and learning effects
Foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations (gloal learning)
The configuration of the global value chain is influenced by:
by:
- Global integration
Local responsiveness
