BUS exam 3

The Jamaica Agreement

-Floating rates were declared acceptable. -Gold was abandoned as a reserve asset. -Total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion. Since then, they have been increased to $311 billion and membership in the IMF has expanded to 184 countries.

Discipline

A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment. Second, a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.

Flexibility

Although monetary discipline was a central objective of the Bretton Woods agreement, it was recognized that a rigid policy of fixed exchange rates would be too inflexible. The IMF stood ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficit, when a rapid tightening of monetary or fiscal policy would hurt domestic employment.

disadvantage

Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market. Firms doing this must bear full costs and risks of setting up overseas operations.

Disadvantages exporting

Exporting from the firm's home base may not be appropriate if there are lower-cost locations for manufacturing the product abroad. High transport costs can also make exporting uneconomical, as can tariff barriers. Agents in a foreign country may not act in exporter's best interest.

disadvantage

First, by definition, the firm that enters into a turnkey deal will have no long-term interest in the foreign country. Second, the firm that enters into a turnkey project may create a competitor. Third, if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.

disadvantages

First, licensing does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies. Second, competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. Licensing severely limits a firm's ability to do this. A third problem involves the potential loss of proprietary (or intangible) technology or property. One way of reducing the risk of losing proprietary trade secrets is through the use of cross-licensing agreements. Under a cross-licensing agreement, a firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm.

disadvantage

Franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. A more significant disadvantage of franchising is quality control. The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect.

advantage

In the typical international licensing deal, the licensee puts up most of the capital necessary to get the overseas operations going. Thus, a primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market. Licensing is often used when a firm wishes to participate in a foreign market, but is prohibited from doing so by barriers to investment. Licensing is frequently used when a firm possesses some intangible property that might have business applications, but the firm does not want to develop those applications itself.

disadvantage

Joint ventures also have some significant disadvantages. First, as with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. Second, a joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Third, shared ownership arrangements can lead to conflicts and battles for control between the investing firms if their goals and objectives change over time, or if they take different views as to what the venture's strategy should be.

advantage

Joint ventures offer several advantages. First, a firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. Second, when the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner. Third, in many countries, political considerations make joint ventures the only feasible entry mode.

Exporting

Most manufacturing firms begin their global expansion as exporters and only later switch to another mode for servicing a foreign market.

advantage

The advantages of franchising as an entry mode are very similar to those of licensing. Specifically the firm is relieved of many costs and risks of opening up a foreign market, and can quickly build a foreign market presence.

The Role of the IMF

The aim of the Bretton Woods agreement, of which the IMF was the main custodian, was to try to avoid a repetition of the chaos that occurred between the wars through a combination of discipline and flexibility.

wholly owned subsidiary,

The firm can set up a new operation in that country, or it can acquire an established firm and use that firm to promote its products in the country's market.

advantage

The main advantage of turnkey projects is that they are a way of earning great economic returns from the know-how required to assemble and run a technologically complex process. Turnkey projects may also make sense in a country where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk.

The Role of the World Bank

The official name of the World Bank is the International Bank for Reconstruction and Development (IBRD). The bank lends money under two schemes. Under the IBRD scheme, money is raised through bond sales in the international capital market. Borrowers pay what the bank calls a market rate of interest - the bank's cost of funds plus a margin for expenses. A second scheme is overseen by the International Development Agency (IDA), an arm of the bank created in 1960. IDA loans go only to the poorest countries.

advantage

Wholly owned subsidiaries offer three key advantages. First, when a firm's competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode, since it reduces the risk of losing control over that competence. Second, a wholly owned subsidiary gives a firm the tight control over operations in different countries necessary for engaging in global strategic coordination (i.e., using profits from one country to support competitive attacks in another). Third, a wholly owned subsidiary maybe required if a firm is trying to realize location and experience curve economies.

total quality management (TQM).

a management philosophy that takes as its central focus the need to improve the quality of a company's products and services.

licensing agreement

an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.

Make-or-buy decisions

are important factors in many firms' manufacturing strategies.

Advantages Exporting

avoids the often substantial cost of establishing manufacturing operations in the host country. Exporting may also help a firm achieve experience curve and location economies.

Franchising

basically 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.

arbitrage

buying a currency low and selling it high.

Barter

direct exchange of goods and/or services between two parties without a cash transaction.

joint venture

entails establishment of a firm that is jointly owned by two or more otherwise independent firms. Fuji-Xerox, for example, was set up as a joint venture between Xerox and Fuji Photo.

currency speculation

involves the short term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Offset

is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made.

fisher effect

nominal interest rates in each country equal the required real rate of interest and the expected rate of inflation over the period of time for which the funds are to be lent.

buyback

occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant's output as a partial payment for the contract.

gold standard

pegging currencies to gold and guaranteeing convertibility

Counterpurchase

reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made

countertrade

refer to a range of barter like agreement by which goods and service can be traded for other goods and services.

Logistics

refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers.

Switch trading

refers to the use of a specialized third-party trading house in a countertrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm's counterpurchase credits and sells them to another firm that can better use them.

Turnkey Projects

the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation - hence the term turnkey. This is actually a means of exporting process technology to another country.