IMS 3310-502 Module 2

Oligopolistic Industry

A few firms producing either a differentiated or a homogeneous product. Oligopolistic industries are characterized by: a few dominant firms and substantial entry barriers.

International Product Life Cycle (IPLC)

A theory explaining why a product that begins as a nation's exports eventually becomes its imports -- the international product life cycle is a theoretical model describing how an industry evolves over time and across national borders

Trade Deficit

An excess of imports over exports, the amount by which the cost of a country's imports exceeds the value of its exports.

Direct Investment

Direct investment, more commonly referred to as foreign direct investment, refers to an investment in a business enterprise in a country other than the investor's country designed to acquire a controlling interest in the foreign business enterprise. DI = 10%+

Diseconomies of scale

Diseconomies of scale is an economic concept referring to a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased. Diseconomies of scale can occur for various of reasons, but the root cause usually comes from the difficulty of managing an increasingly large workforce.

Absolute advantage

Exists when a country can produce a good or service at a lower cost than other countries

Strategic Behavior Theory

FDI flows reflect strategic rivalry between firms in global marketplace

Economies of scale

Factors that cause a producer's average cost per unit to fall as output rises. Cost advantage associated with large-scale production

Currency devaluation

In modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket.

Perfect competition

Perfect competition is a market structure in which the following five criteria are met: 1) All firms sell an identical product; 2) All firms are price takers - they cannot control the market price of their product; 3) All firms have a relatively small market share; 4) Buyers have complete information about the product being sold and the prices charged by each firm; and 5) The industry is characterized by freedom of entry and exit. Perfect competition is sometimes referred to as "pure competition".

Porter's Five Forces Model

Porter's Five Forces model, named after Michael E. Porter, identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. **Frequently used to identify an industry's structure to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness.

Overlapping demand - Linder Theory

The Linder theory of overlapping demand states that because customers' tastes are strongly affected by income levels, a nation's income level per capita determines the kind of goods they will demand. The kinds of goods produced to meet this demand reflect the country's income per capita level.

Porter's Diamond

The Porter Diamond, properly referred to as the Porter Diamond Theory of National Advantage, is a model that is designed to help understand the competitive advantage nations or groups possess due to certain factors available to them, and to explain how governments can act as catalysts to improve a country's position in a globally competitive economic environment.

Comparative advantage

The ability of a country to produce a good at a lower cost than another country can.

Product differentiation

The characteristic that separates monopolistic competition from pure competition

Experience curve

The concept behind the Experience Curve is that the more experience a business has in producing a particular product, the lower its costs. The Experience Curve concept was devised by the Boston Consulting Group. From BCG's research into a major manufacturer of semiconductors, they found that the unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced.

Greenfield investment

The establishment of a wholly new operation in a foreign country. A green field investment is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.

Michael Porter

The model was created by Michael Porter, a recognized authority on corporate strategy and economic competition, and founder of The Institute for Strategy and Competitiveness at the Harvard Business School. It is a proactive economic theory, rather than one that simply quantifies comparative advantages that a country or region may have.

Exchange rate

The price of a nation's currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.

Direct Investment

The purchase of sufficient stock in a firm to obtain significant management control

Mercantilism

The theory that a country should sell more goods to other countries than it buys

Eclectic theory of international production

Theory proposing that for a firm to invest in facilities overseas, it must have three kinds of advantages; ownership specific, location specific, and internalization

Monopolistic advantage theory

Theory that FDI is made by firms in industries with relatively few competitors. Examples: Smartphones - Apple & Samsung; MRI Machines - GE, Philips & Hitachi and commercial aircraft manufactureres - Boeing & Airbus

Resource endowment

Theory that development depends on the human and natural resources the country can exploit

Dynamic capability theory

Theory that for a firm to successfully invest overseas. It must have not only ownership of unique knowledge or resources, but also the ability to dynamically create, sustain, and exploit these capabilities over time.

Trade surplus

When a nation exports more goods and services than it imports

Trade deficit

When a nation imports more goods and services than it exports

Portfolio investment

investment that does not involve obtaining a degree of control in a company. PI = -10%

Cross-border acquisition

the purchase of an existing business in another nation