International Business Exam #2

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective Two: Discuss the benefits and drawbacks associated with regional economic integration.

3. EFFECTS OF REGIONAL ECONOMIC INTEGRATION The effects of regional trade agreements on people, jobs, companies, culture, and living standards spark debate. A. Benefits of Regional Integration Nations engage in specialization and trade because of the gains in output and consumption. Higher levels of trade between nations should increase specialization, efficiency, and consumption, and raise standards of living. 1. Trade Creation a. Increase in trade that results from regional economic integration. b. Gives consumers and industrial buyers a wider selection of goods and services not available beforehand. c. Lets buyers can acquire goods and services more cheaply following the lowering of trade barriers such as tariffs. Lower costs lead to higher demand for goods because people have more money after a purchase to buy other products. 2. Greater Consensus Eliminating trade barriers in smaller groups of countries may make it easier to gain consensus as opposed to working in the far larger WTO. 3. Political Cooperation A group of nations can have significantly greater political weight than nations have individually. The group may have more clout in negotiating in a forum like the WTO. Integration involving political cooperation reduces the potential for military conflict among members. 4. Employment Opportunities Regional integration can expand employment by enabling people to move from country to country for work, or to earn a higher wage. B. Drawbacks of Regional Integration 1. Trade Diversion a. Diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after formation of a trading bloc because of the lower tariffs charged between member nations. b. Can result in reduced trade with a more efficient nonmember nation in favor of trade with a less efficient member nation. Unless there is other internal competition, buyers will pay more due to inefficient production methods. 2. Shifts in Employment a. Because trading blocs reduce or eliminate barriers to trade, the producer of a particular good or service will be decided by relative productivity. Industries requiring unskilled labor shift production to low-wage nations within a trading bloc. b. Figures on jobs lost or gained vary with the source. But job dislocation allows a nation to upgrade the economy toward higher-wage-paying industries that can increase competitiveness due to a more educated and skilled workforce. 3. Loss of National Sovereignty a. Successive levels of integration require nations to surrender more sovereignty. Political union requires nations to give up a high degree of sovereignty in foreign policy. b. Because some members have delicate ties with nonmember nations while others have strong ties, the setting of a common foreign policy is difficult.

Chapter Nine: International Financial Markets (Pages 226-244) Objective Two: Describe the international bond, international equity, and Eurocurrency markets.

3. MAIN COMPONENTS OF THE INTERNATIONAL CAPITAL MARKET A. International Bond Market (PPT #7) Consists of all bonds sold by issuing companies, governments, and other organizations outside their own countries. Buyers include medium- to large-size banks, pension funds, mutual funds, and governments. 1. Types of International Bonds a. Eurobond Issued outside the country in whose currency it is denominated (e.g., Issued in Venezuela in U.S. dollars, and sold in Britain, France, and Germany). It accounts for 75-80% of all international bonds. Absence of regulation reduces the cost of issuing a bond but increases its risk. b. Foreign Bond Sold outside borrower's country and denominated in currency of country in which it is sold (e.g., Yen-denominated bond issued by German carmaker BMW in Japan's bond market). It accounts for 20-25% of all international bonds. Issuers must meet certain regulatory requirements and disclose details about company activities, owners, and upper management. 2. Interest Rates: A Driving Force a. Borrowers from newly industrialized and developing countries borrow money from nations where interest rates are lower. b. Investors in developed countries buy bonds in newly industrialized and developing nations to obtain a higher return. c. Many emerging countries see the need to develop their own national markets. Volatility in currency market hurts projects that earn funds in those currencies and pay debts in dollars. B. International Equity Market (PPT #8) Consists of all stocks bought and sold outside the issuer's home country. Companies and governments issue equity and buyers include other companies, banks, mutual funds, pension funds, and individuals. 1. Spread of Privatization a. A single privatization often places billions of dollars of new equity on stock markets. b. Increased privatization in Europe is expanding worldwide equity. European Union integration has made investors willing to invest in stocks from other European nations. 2. Economic Growth in Developing Countries a. Growth in newly industrialized and developing countries contributes to growth in the international equity market. b. Because of a limited supply of funds in emerging economies, the international equity market is a major source of funding. 3. Activity of Investment Banks a. Investment banks facilitate the sale of stock worldwide by bringing together sellers and large potential buyers. b. Becoming more common than listing a company's shares on another country's stock exchange. 4. Advent of Cybermarkets a. Stock markets that have no central geographic location, but consist of online global trading activities that allow listing of stocks worldwide for electronic 24-hour trading. C. Eurocurrency Market (PPT #9) 1. All the world's currencies banked outside their countries of origin are called Eurocurrency and trade on the Eurocurrency market (e.g., U.S. dollars in Tokyo are called Eurodollars. British pounds in New York are called Europounds). Characterized by large transactions involving only the largest companies, banks, and governments. 2. Four Sources of Deposits: • Governments with excess funds from prolonged trade surplus. • Commercial banks with excess currency. • International companies with excess cash. • Extremely wealthy individuals. 3. Eurocurrency market is valued at around $6 trillion, with London accounting for about 20 percent of all deposits. 4. Appeal of the Eurocurrency Market a. Complete absence of regulation lowers costs. Banks charge borrowers less and pay investors more but still earn profit. b. Low transaction costs because transactions are large. c. Interbank interest rates are interest rates that the world's largest banks charge one another for loans. London Interbank Offer Rate (LIBOR) is the interest rate charged by London banks to other large banks borrowing Eurocurrency. London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits. 5. Downside of Eurocurrency market is greater risk due to a lack of government regulation. Still, Eurocurrency transactions are fairly safe because of the size of the banks involved.

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective Three: Describe regional integration in Europe and its pattern of enlargement.

4. INTEGRATION IN EUROPE European efforts at integration began shortly after the Second World War among a small group of countries and involved a few select industries. Regional integration now encompasses practically all of Western Europe and all industries. A. European Union 1. The Early Years • Europe in 1945 faced two challenges: (1) To rebuild itself and avoid further conflict; and (2) To increase its industrial strength to stay competitive with the United States. • Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris in 1951, creating the European Coal and Steel Community to remove barriers to trade in coal, iron, steel, and scrap metal. • Members of the European Coal and Steel Community signed the Treaty of Rome in 1957, creating the European Economic Community (EEC), which outlined a future common market. • In 1967 the Community's scope was broadened to include additional industries, notably atomic energy, and changed its name to the European Community. Enlargement continued and in 1994 the bloc changed its name to the European Union (EU). • Today the 27-member European Union has a population of about 485 million people and a GDP of over $9.5 trillion. a. Single European ACT (SEA) The SEA of 1987 proposed removal of remaining barriers, increased harmonization, and enhanced competitiveness of European companies. M&As swept Europe: Large firms combined their understanding of European needs, capabilities, and cultures with economies of scale. b. Maastricht Treaty The 1991 Maastricht Treaty (effective in 1993): (1) created single, common currency; (2) set monetary and fiscal targets for countries taking part in monetary union; and (3) proposed eventual political union—including a common foreign and defense policy and common citizenship. 2. European Monetary Union Countries opting out of the euro are Britain, Denmark, and Sweden. a. Management Implications of the Euro Eliminates exchange-rate risk for business deals between member nations using the euro. Transparency in prices harmonizes prices across markets. 3. Enlargement of the European Union a. Expanded in 2004 to include ten new countries: Cyprus (south), Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Expanded again in 2007 to include Bulgaria and Romania. b. Candidates for future membership are Croatia and Turkey. c. New members must meet the Copenhagen Criteria: 4. Structure of the European Union a. European Parliament i. More than 700 members who are elected by popular vote within each member nation every five years. ii. Parliament acts as a consultative rather than a legislative body by debating and amending legislation proposed by the European Commission. b. Council of the European Union i. The legislative body of the EU. Council members change depending on the topic under discussion (e.g., For agriculture, the Council is comprised of agriculture ministers of each member). ii. No proposed legislation becomes EU law unless the Council votes it into law. Some legislation today requires only a simple majority to win approval. c. European Commission i. The executive body of the EU whose commissioners are appointed by each country—larger nations get two commissioners, smaller countries one. ii. Drafts legislation, manages and implements policy, and monitors compliance with EU law. d. Court of Justice i. The EU court of appeals includes one justice from each member country. ii. One type of case heard is when a member nation is accused of not meeting its treaty obligations. iii. Justices are required to act in the interest of the EU as a whole, not in the interest of their own countries. e. Court of Auditors i. Composed of 27 members (one from each member nation) appointed for six-year terms. ii. Duty is to audit EU accounts and implement EU budget, improve EU financial management, and report to member nations' citizens on the use of public funds. B. European Free Trade Association (PPT #11) 1. Some nations wanted the benefits of a free-trade area but wary of a full common market. In 1960, they formed the European Free Trade Association (EFTA) to focus on trade in industrial goods. Today members are Iceland, Liechtenstein, Norway, and Switzerland. 2. EFTA has about 12 million people and a combined GDP of $620 billion. 3. The EFTA and EU cooperate on the free movement of goods, persons, services, and capital. They also cooperate in other areas, including the environment, social policy, and education.

Chapter Seven: Foreign Direct Investment (Pages 178-195) Objective Three: Discuss the important management issues in the FDI decision.

4. MANAGEMENT ISSUES IN THE FDI DECISION A. Control Many companies invest abroad because they wish to control activities in the local market (e.g., to ensure the selling price remains the same across markets). Yet complete ownership does not guarantee control. 1. Partnership Requirements a. Many companies have strict policies regarding how much ownership they take in firms in other nations. b. Yet a nation may demand shared ownership in return for market access. Governments may use such requirements to shield workers and industries from exploitation or domination by large multinationals. 2. Benefits of Cooperation a. Greater harmony exists today between governments and international companies. Developing nations and emerging markets need investment, employment, tax revenues, training, and technology transfers. b. A country with a reputation for overly restricting the operations of multinationals can see its inward investment dry up. c. Cooperation can open communication channels to maintain positive relationships in the host country. B. Purchase-Or-Build Decision 1. The purchase-or-build decision of managers entails deciding whether to purchase an exciting business or build a subsidiary abroad from the ground up—called a greenfield investment. 2. An acquiring firm may benefit from the goodwill the existing company has built over the years and, perhaps, brand recognition of the existing firm. The purchase of an existing business also may allow for alternative methods of financing, such as an exchange of stock ownership. 3. Factors that reduce the appeal of purchasing existing facilities are obsolete equipment, poor labor relations, and an unsuitable location. 4. Adequate facilities are sometimes unavailable and a company must go ahead with a greenfield investment. Greenfield investments have their own drawbacks—obtaining the necessary permits and financing and hiring local personnel can be difficult in some markets. C. Production Costs Labor regulations increase the hourly cost of production, and benefits packages and training programs add to wage costs. Although the cost of land and tax rate on profits can be lower locally, they may not remain constant. 1. Rationalized Production a. Production in which components are produced where the cost of production is lowest. The components are brought together at one central location for assembly into the final product. b. Potential problem is that a work stoppage in one country can halt the entire production process. 2. Focus on the Mexican Maquiladora a. The 130-mile-wide strip along the U.S.-Mexican border. b. Low-wage regional economy next to a prosperous giant is a model for other regions split by wage or technology gaps. c. Yet ethical dilemmas arise over the gap between Mexican and U.S. wages and the loss of U.S. union jobs to maquiladora nonunion jobs. Maquiladoras also do not operate under the stringent environmental regulations that firms in the U.S. do. 3. Cost of Research and Development a. Cost of developing subsequent stages of technology has led to cross-border alliances and acquisitions. b. One indicator of the significance of technology in foreign direct investment is the amount of R&D conducted by affiliates of parent companies in other countries. FDI in R&D appears to be spurred by supply factors such as access to high-quality scientific and technical human capital. D. Customer Knowledge 1. The behavior of buyers is an important issue in the decision of whether to undertake FDI. A local presence can give companies valuable knowledge of customers that is unobtainable in the home market. 2. Some countries have quality reputations in certain product categories (e.g., Italian shoes). These perceptions make it profitable to produce in the country with the quality reputation. E. Following Clients 1. FDI puts companies near those firms they supply. "Following clients" occurs in industries in which component parts are obtained from suppliers with whom a manufacturer has a close working relationship. F. Following Rivals 1. FDI decisions resemble a "follow the leader" scenario in industries with a limited number of large firms. 2. Many firms believe that not making a move parallel to that of the "first mover" might result in being shut out of a lucrative market.

Chapter Ten: International Monetary System (Pages 252-272) Objective Four: Discuss the evolution of the current international monetary system, and explain how it operates.

5. EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM A. Early Years: The Gold Standard (PPT #15) • Gold was internationally accepted for paying for goods and services. Pros: its limited supply caused high demand and it can be traded, stored, and melted into coins or bars making a good medium of exchange. Cons: its weight made transport expensive, and if a ship sank the gold was lost. • Gold standard was an international monetary system in which nations linked the value of their paper currencies to a specific value of gold. The gold standard operated from the early 1700s until 1939. 1. Par Value a. The value of a currency expressed in terms of gold. All nations fixing their currencies to gold also indirectly linked their currencies to one another. Thus the gold standard was a fixed exchange rate system—one in which the exchange rate for converting one currency into another is fixed by international governmental agreement. b. The US dollar was fixed at $20.67/oz of gold, the British pound at £ 4.2474/oz.; exchange rate was $4.87/£ ($20.67 ÷ £ 4.2474). 2. Advantages of the Gold Standard a. Reduced the risk in exchange rates because it locked exchange rates between currencies. Fixed exchange rates reduced the risks and costs of trade and grew as a result. b. Imposed strict monetary policies that required nations to convert paper currency into gold if demanded by holders of the currency. This forced nations to keep adequate gold reserves on hand. A nation could not let paper currency to grow faster than the value of its gold reserves, which controlled inflation. c. Helped correct a nation's trade imbalance. i. If a nation imports more than it exports, gold flowed out to pay for imports. The government must decrease the supply of paper currency in the domestic economy because it could not have paper currency in excess of gold reserves. As the money supply falls, so do prices of goods and services because fewer dollars are chasing the same supply of goods and services. Falling prices make its exports cheaper on world markets and exports rise until the nation's international trade is in balance. ii. In the case of a trade surplus, the inflow of gold supports an increase in the supply of paper currency. This increases the demand for and cost of goods and services; exports fall in reaction to their higher prices until trade is in balance. 3. Collapse of the Gold Standard a. Gold standard was violated when nations in the First World War financed the war by printing paper currency. This caused rapid inflation and caused nations to abandon the gold standard. b. Britain returned to the gold standard in the early 1930's at the same par value that existed before the war. The United States returned to the gold standard at a new, lower par value that reflected the inflation of previous years. c. The U.S. decision in 1934 to devalue its currency and Britain's decision not to do so lowered the price of U.S. exports and increased the price of British goods imported. It now took $8.24 to buy a pound ($35.00 ÷ £4.2474). d. Countries retaliated against one another through "competitive devaluations" to improve their own trade balances. Faith in the gold standard vanished, as it was no longer an accurate indicator of a currency's true value. B. Bretton Woods Agreement (PPT #16) 1944 accord among nations to create a new international monetary system based on the value of the U.S. dollar. Designed to balance strict discipline of the gold standard with flexibility to manage temporary domestic monetary difficulties. 1. Fixed Exchange Rates a. Incorporated fixed exchange rates by tying the value of the U.S. dollar directly to gold, and the value of other currencies to the value of the dollar. b. Fixed U.S. dollar par value at $35/oz of gold; other currencies had par values against the U.S. dollar, not gold. c. Members were to keep their currencies from deviating more than 1.0 percent above or below their par values. Extended the right to exchange gold for dollars only to national governments. 2. Built-In Flexibility a. Ruled out competitive currency devaluation but allowed large devaluation under extreme circumstances called fundamental disequilibrium—an economic condition in which a trade deficit causes a permanent negative shift in the balance of payments. b. Devaluation in such situations was to reflect a permanent economic change in a country, not temporary misalignments. 3. World Bank Created the World Bank (IBRD) to fund national economic development. a. World Bank's immediate purpose was to finance European reconstruction after the Second World War. It later shifted its focus to the general financial needs of developing countries. b. World Bank finances economic development projects in Africa, South America, and Southeast Asia, and offers funds to countries unable to obtain capital for projects considered too risky. It often undertakes projects to develop transportation networks, power facilities, and agricultural and educational programs. 4. International Monetary Fund Established the International Monetary Fund (IMF) to regulate fixed exchange rates and enforce the rules of the international monetary system. Purposes of the IMF are to: • Promote international monetary cooperation. • Facilitate expansion and balanced growth of international trade. • Promote exchange stability with orderly exchange arrangements, and avoid competitive exchange devaluation. • Make resources temporarily available to members. • Shorten the duration and lessen the degree of disequilibrium in the international balance of payments of member nations. 5. Collapse of the Bretton Woods Agreement Bretton Woods faltered in the 1960s because of a U.S. trade and budget deficits. Nations holding U.S. dollars doubted the U.S. government had gold reserves to redeem all its currency held outside the U.S. Demand for gold in exchange for dollars caused a large global sell-off of dollars. a. Smithsonian Agreement In August 1971, the U.S. government held less than one fourth of the amount of gold needed to redeem all U.S. dollars in circulation. The Smithsonian Agreement was designed to restructure and strengthen the international monetary system. The Agreement: (1) lowered the value of the dollar in terms of gold to $38/oz. of gold, (2) required that other countries increase the value of their currencies against the dollar, and (3) increased the 1% floatation band to 2.25 percent. b. Final Days Many nations abandoned the system in 1972 and 1973, and currency values floated freely against the dollar. C. A Managed Float System Emerges (PPT #17) The new system of floating exchange rates was to be a temporary solution. Instead of the emergence of a new international monetary system, there emerged several efforts to manage exchange rates. 1. Jamaica Agreement 1976 accord among IMF members to formalize the existing system of floating exchange rates. Three main provisions included: (1) Endorsement of a managed float system of exchange rates; (2) Elimination of gold as the primary reserve asset of the IMF; and (3) Expansion of the IMF to act as a "lender of last resort" for nations with balance-of-payments difficulties. 2. Later Accords Between 1980 and 1985 the U.S. dollar rose against other currencies, pushing up prices of U.S. exports and adding to a U.S. trade deficit. a. The Plaza Accord (1985) was an agreement among the largest industrialized economies known as the G5 (Britain, France, Germany, Japan, and the United States) to act together in forcing down the value of the U.S. dollar. b. The Louvre Accord (1987) was an agreement among the G7 nations (the G5 plus Italy and Canada) that affirmed the dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value. D. Today's Exchange-Rate Arrangements (PPT #18) Remains a managed float system, but some nations maintain more stable exchange rates by tying their currencies to other currencies 1. Pegged Exchange-Rate Arrangement a. Pegged exchange rate arrangements "peg" a country's currency to a more stable and widely used currency in international trade. b. Many small countries peg their currencies to the dollar, euro, the special drawing right of the IMF, or other individual currency. Others peg their currencies to "baskets" of currencies. 2. Currency Board a. A currency board is a monetary regime based on a commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. The government is legally bound to hold an amount of foreign currency equal to the amount of domestic currency; this helps cap inflation. b. The currency board's survival depends on sound budget policies. E. European Monetary System Following the collapse of Bretton Woods, European Union (EU) nations looked for a system that could stabilize currencies and reduce exchange-rate risk. In 1979, they created the European monetary system (EMS) to stabilize exchange rates. The system ceased to exist in 1999 when the EU adopted a single currency. 1. How The System Worked a. The exchange rate mechanism (ERM) limited the fluctuations of European Union members' currencies within a specified trading range (or target zone). b. The EMS was successful; currency realignments were infrequent and inflation was controlled. Problems arose in 1992 and the EMS was revised in 1993 to allow currencies to fluctuate in a wider band from the midpoint of the target zone. F. Recent Financial Crises (PPT #19) Despite nations' best efforts to head off financial crises within the international monetary system, the world has seen several wrenching crises. 1. Developing Nations' Debt Crisis a. By the early 1980s developing countries (especially in Latin America) had amassed huge debts payable to large international commercial banks, the IMF, and the World Bank. To prevent a meltdown of the entire financial system, international agencies revised repayment schedules. b. In 1989, the Brady Plan called for large-scale reduction of poor nations' debt, exchange of high-interest loans for low-interest loans, and debt instruments tradable on world financial markets. 2. Mexico's Peso Crisis a. Rebellion and political assassination shook investors' faith in Mexico's financial system in 1993-1994. Mexico's government responded slowly to the flight of portfolio investment capital. b. In late 1994, the Mexican peso was devalued, forcing a large loss of purchasing power on ordinary Mexican people. The IMF and private commercial banks in the United States provided about $50 billion in loans to shore up Mexico's economy. c. Mexico repaid the loans ahead of schedule and once again has a sizable reserve of foreign exchange. 3. Southeast Asia's Currency Crisis b. On July 11, 1997, the speculators sold off Thailand's baht on world currency markets; the baht plunged and every other economy in the region was in a slump. c. The shock waves of Asia's crisis could be felt throughout the global economy. Indonesia, South Korea, and Thailand needed IMF and World Bank funding. As incentives to begin economic restructuring, IMF loan packages came with strings attached. d. Crisis likely caused by a combination of: (1) Asian style capitalism (lax regulation, loans to friends and relatives, lack of financial transparency); (2) currency speculators and panicking investors; and (3) persistent current account deficits. 4. Russia's Ruble Crisis a. Russia's problems in the 1990s included: (1) spillover from the Southeast Asia crisis; (2) depressed oil prices; (3) falling hard currency reserves; (4) unworkable tax system; and (4) inflation. b. In 1996 as currency traders dumped the ruble, the Russian government attempted to defend the ruble on currency markets. The government received a $10 billion aid package from the IMF and promised to reduce debt, collect taxes, cease printing sums of currency, and peg its currency to the dollar. c. Things improved for a while, but then in mid-1998 the government found itself once again trying to defend the ruble. By late 1998, the IMF had lent Russia more than $22 billion. 5. Argentina's Peso Crisis a. By late 2001, Argentina had been in recession for nearly 4 years. Argentina's goods remained expensive because its currency was linked to a strong U.S. dollar through a currency board. b. The country finally defaulted on its $155 billion of public debt in early 2002, the largest default by any country ever. c. The government scrapped its currency board that linked the peso to the U.S. dollar and the peso quickly lost about 70 percent of its value on currency markets. d. In April 2002, the IMF was reviewing Argentina's reforms before it would release more cash. The IMF wanted reductions in government spending and was concerned about separate currencies issued by provincial governments. e. The IMF decided to lend Argentina no new money; only what it is due for repayment in order to avoid bad loans. f. Talks between the government and its creditors drag on and Argentina has become a cash economy. G. Future of the International Monetary System 1. Recurring crises are raising calls for a new system designed to meet the challenges of a global economy. 2. Revision of the IMF and its policy prescriptions are likely; transparency on the part of the IMF is being increased to instill greater accountability. The IMF is increasing its surveillance of members' macroeconomic policies and abilities in the area of financial sector analysis. 3. Ways must be found to integrate international financial markets to manage risks. The private sector must become involved in the prevention and resolution of financial crises.

Chapter Five: International Trade (Pages 132-151) Objective Three: Explain the theories of absolute advantage and comparative advantage.

B. Absolute Advantage Absolute advantage is the ability of a nation to produce a good more efficiently than any other nation (produce a greater output using the same, or fewer, resources). Adam Smith reasoned that international trade should not be burdened by tariffs and quotas, but should flow according to market forces. A country should produce the goods in which it holds an absolute advantage and trade with others to obtain the goods it needs but does not produce efficiently. 1. Case: Riceland and Tealand In a world of two countries (Riceland and Tealand) with two products (rice and tea) where transport costs nothing, each produces and consumes its own rice and tea. In Riceland, 1 resource unit produces a ton of rice, but 5 units are needed to produce a ton of tea. In Tealand, 6 resource units produce a ton of rice, but 3 units are needed to produce a ton of tea. Thus Riceland has an absolute advantage in rice production and Tealand has an absolute advantage in tea production. a. Gains from Specialization and Trade i. Although each country now specializes and world output increases, both countries face a problem: Riceland consumes only its rice and Tealand consumes only its tea. The problem can be resolved through trade. ii. Although Tealand does not gain as much as Riceland, it gets more rice than it would without trade (Figure 5.2). Note that the gains from trade depend on the total resources of each country and the demand for each good in each country. iii. The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Because both countries gain, international trade is a positive-sum game. iv. The theory argues against restrictive trade policies and for nations to instead open their doors to trade so their people obtain more goods more cheaply in order to raise living standards C. Comparative Advantage Comparative advantage is the inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it does any other good. Thus trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods. 1. Gains from Specialization and Trade a. Suppose that Riceland now holds absolute advantages in the production of both rice and tea. In Riceland, 1 resource unit produces a ton of rice but 2 are needed to produce a ton of tea. In Tealand, 6 resource units still produce a ton of rice, and 3 units are still needed to produce a ton of tea. Thus Riceland has absolute advantages in producing both goods. b. Although Tealand has absolute disadvantages in rice and tea, it has a comparative advantage in tea; Tealand produces tea more efficiently than it produces rice. c. By specializing and trading, Tealand gets double the rice than if it produced the rice itself, and Riceland gets twice as much tea than if it produced the tea itself (Figure 5.3). 2. Assumptions and Limitations a. Assumes countries are only driven by the maximization of production and consumption. Governments get involved in trade for many reasons (e.g., concerns for workers or consumers). b. Assumes only two countries engaged in the production and consumption of two goods. In reality, more than 180 countries and countless products are produced, traded, and consumed. c. Assumes no transportation costs. In reality, transportation costs are a major expense of international trade. d. Assumes labor is the only resource for production and is mobile within each nation but cannot be transferred. Other resources are clearly needed in production and labor is becoming more mobile. e. Assumes specialization does not result in efficiency gains. In fact, specialization results in increased knowledge of a task and future improvements.

Chapter Five: International Trade (Pages 132-151) Objective Four: Explain the factors proportions and international product life cycle theories.

D. Factor Proportions Theory Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. Thus the theory focuses on the productivity of the production process. 1. Labor versus Land and Capital Equipment a. Factor proportions theory breaks resources into two categories: (1) labor, and (2) land and capital equipment. It predicts that a country will specialize in products that require labor if labor cost is low relative to land and capital costs, and vice versa. b. Factor proportions theory is conceptually appealing (e.g., Australia has much land and a small population; its exports consist of products that require much land while imports consist of manufactured and consumer goods). 2. Evidence on Factor Proportions Theory: The Leontief Paradox a. Factor proportions theory is not supported by studies that examine trade flows. b. Wassily Leontief tested whether the U.S., which uses an abundance of capital equipment, exports goods requiring capital intensive production and imports goods requiring labor-intensive production. He found U.S. exports require more labor-intensive production than its imports; called the Leontief Paradox. c. One explanation is that factor proportions theory considers a country's production factors to be homogeneous—particularly labor. But labor skills vary greatly within a country. E. International Product Life Cycle The international product life cycle theory states that a company will begin exporting its product and later undertake foreign direct investment as the product moves through its life cycle (a country's export eventually becomes its import). 1. Stages of the Product Life Cycle a. In new product stage, stage 1, the high purchasing power and demand of spur a company to design and introduce a new product concept (see Figure 5.4). Although initially there is virtually no export market, exports increase late in the new product stage. b. In the maturing product stage, stage 2, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. Near the end of the maturity stage, the product generates sales in developing nations, and manufacturing is established there. c. In the standardized product stage, stage 3, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. An aggressive search for low-cost production bases abroad begins and the home market may begin importing. 2. Limitations of the Theory a. The United States is no longer the sole innovator of products in the world; new products spring up everywhere as the research and development activities globalize. b. Companies today design new products and make product modifications at a very quick pace. c. Companies introduce products in many markets simultaneously to recoup a product's research and development costs before sales decline. d. The theory is challenged by the fact that more companies are operating in international markets from their inception. The Internet has made this easier particularly for small and midsize companies. Also, small companies are more often teaming up with companies in other markets to develop new products or production technologies. e. Yet the theory retains explanatory power when applied to technology-based products that are eventually mass-produced.

Chapter Ten: International Monetary System (Pages 252-272) Objective Two: Identify the factors that help determine exchange rates and their impact on business.

3. WHAT FACTORS DETERMINE EXCHANGE RATES? To understand what determines rates, must know: (1) the law of one price, and (2) purchasing power parity. Each tells the level at which an exchange rate should be. A. Law of One Price (PPT #8-9) 1. Exchange rates do not guarantee or stabilize the buying power of a currency; purchasing power fluctuates. 2. Law of one price says an identical product must have an identical price in all countries when expressed in the same currency. Product must be identical in quality/content and be entirely produced within each country. 4. If price were not identical in each country, an arbitrage opportunity would arise. Traders would buy in the low-priced market and sell in the high-priced market, buying drives up the price in one market and drives down the price in the other. 5. The Economist publishes its "Big MacCurrencies" index using the law of one price to determine the exchange rate between the U.S. dollar and other currencies. Fair predictor of the "direction" rates should move. B. Purchasing Power Parity (PPT #10-13) PPP is the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries. Tells how much of currency "A" a person in nation "A" needs to buy the same amount of products that someone in nation "B" can buy with currency "B." • Considers price levels in adjusting the relative values of the two currencies. • Economic forces will push a market exchange rate toward that calculated by PPP or an arbitrage opportunity arises. • Holds for internationally traded products not restricted by trade barriers and entailing few or no transportation costs. 1. Role of Inflation Inflation erodes purchasing power. If money is injected into an economy not producing greater output, a greater amount of money is spent on a static amount of products. Demand soon outstrips supply and prices rise. a. Impact of Money-Supply Decisions i. Governments manage the supply of and demand for currency with policies that influence the money supply. ii. Monetary policy refers to activities that directly affect a nation's interest rates or money supply. Governments buy or sell government securities on the open market to influence the money supply. iii. Fiscal policy involves using taxes and government spending to influence the money supply indirectly. Governments can increase or lower taxes, or increase or decrease government spending. b. Impact of Unemployment and Interest Rates i. Threat of a company moving abroad for lower wages holds down wages at home. Companies then need not raise prices to pay higher wages, which lowering inflationary pressures. ii. Low unemployment puts upward pressure on wages. To maintain profit margins with higher labor costs, producers pass the cost of higher wages on to consumers in higher prices, causing inflationary pressure. iii. Low interest rates encourage consumers and businesses to borrow and spend, causing inflationary pressure. c. How Exchange Rates Adjust to Inflation i. Exchange rates adjust to different rates of inflation across countries, which is necessary to maintain purchasing power parity between nations. ii. For example, if inflation in Mexico is higher than in the US, the exchange rate adjusts to reflect that a dollar will buy more pesos due to higher inflation in Mexico. iii. US goods become more expensive for Mexican firms, and Mexican goods become cheaper for US companies. 2. Role of Interest Rates Interest rate a bank quotes a borrower is the nominal interest rate. a. Fisher Effect i. The Fisher effect is the principle that the nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period. ii. The real rate of interest should be the same in all countries because of arbitrage. iii. The international Fisher effect is the principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates. iv. Because real interest rates are theoretically equal across countries, any difference in interest rates in two countries is due to inflation. 3. Evaluating Purchasing Power Parity PPP is better at predicting long-term exchange rates than short-term rates. Short-term forecasts, however, are most beneficial to managers. a. Added Costs PPP assumes no transportation costs, and thus overstates the threat of arbitrage. The presence of transport costs can allow unequal prices between markets to persist, causing PPP to fail. b. Trade Barriers PPP assumes no trade barriers. But a high tariff or outright ban on a product can impair price leveling, causing PPP to fail to predict exchange rates accurately. c. Business Confidence and Psychology PPP overlooks business confidence and human psychology. Yet nations try to maintain confidence of investors, businesspeople, and consumers in their economies and currencies.

Chapter Seven: Foreign Direct Investment (Pages 178-195) Objective Four: Explain why governments intervene in the free flow of FDI.

5. GOVERNMENT INTERVENTION IN FDI Nations enact laws, create regulations, or construct administrative hurdles for foreign companies. A bias toward protectionism or openness is rooted in a nation's culture, history, and politics. But FDI tends to raise output and enhance standards of living. Besides philosophical ideals, countries intervene in FDI for practical reasons. A. Balance of Payments (PPT #13) 1. National accounting system that records all payments to entities in other countries and all receipts coming into the nation. 2. International transactions that result in payments (outflows) to entities in other nations are reductions in the balance of payments accounts and recorded with a minus (-) sign (Table 7.2). 3. International transactions that result in receipts (inflows) from other nations are additions to the balance of payments accounts and recorded with a plus (+) sign. 4. Current Account a. National account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. b. A current account surplus occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad. c. A current account deficit occurs when a country imports more goods and services and pays more abroad than it exports and receives from abroad. 5. Capital Account a. National account that records transactions involving the purchase or sale of assets. b. Financial assets such as stocks and bonds and physical assets such as investments in plants and equipment. B. Reasons for Intervention by the Host Nation (PPT #14) 1. Balance of Payments a. Many governments see intervention as the only way to keep their balance of payments under control. b. Host countries get a balance-of-payments boost from initial FDI flows. Local content requirements can lower imports, providing an added balance-of-payments boost. Exports from the FDI can further help the balance-of-payments position. c. When companies repatriate profits, they deplete the foreign exchange reserves of their host countries; these capital outflows decrease the balance of payments. Thus a host nation may prohibit or restrict nondomestic firms from removing profits. d. But host countries conserve their foreign exchange reserves when international companies reinvest their earnings in local manufacturing facilities. This improves the competitiveness of local producers and boosts a host nation's exports—improving its balance-of-payments position. 2. Obtain Resources and Benefits a. Access to Technology Nations encourage FDI in technology because it increases productivity and competitiveness. b. Management Skills and Employment FDI allows talented foreign managers to train local managers in how to operate the local facilities. Some of these managers will also go on to establish their own businesses. C. Reasons for Intervention by the Home Nation (PPT #15) There are fewer concerns regarding the outflow of FDI among home nations because they tend to be prosperous, industrialized nations. 1. Reasons for discouraging outward FDI a. Investing in other nations sends resources out of the home country and can lessen investment at home. b. Outgoing FDI may damage a nation's balance of payments by reducing exports otherwise sent to international markets. c. Jobs resulting from FDI outflows may replace jobs at home. 2. Reasons for promoting outgoing FDI a. Outward FDI can increase long-run competitiveness (e.g., partnering as a learning opportunity). b. Nations may encourage FDI in "sunset" industries, those that use outdated and obsolete technologies or employ low-wage workers with few skills.

Chapter Ten: International Monetary System (Pages 252-272) Objective Three: Describe the primary methods of forecasting exchange rates.

4. FORECASTING EXCHANGE RATES (PPT #14) A. Efficient Market View 1. In an efficient market, prices of financial instruments quickly reflect new public information made available to traders. The efficient market view says prices of financial instruments reflect all publicly available information at any given time. 2. Forward exchange rates are accurate forecasts of future rates, and reflect market expectations about the future values of two currencies. 3. Forward exchange rates are the best possible predictors of exchange rates and worthless to seek out information that may affect future rates. B. Inefficient Market View 1. The inefficient market view says prices of financial instruments do not reflect all publicly available information. Proponents believe that companies can search for information to improve forecasting. 2. This view is more compelling considering private information (e.g., If a currency trader holds privileged information, the trader can act on this information to make a profit). C. Forecasting Techniques 1. Fundamental Analysis Fundamental analysis employs statistical models based on fundamental economic indicators to forecast exchange rates. Economic variables in these models include inflation, interest rates, the money supply, tax rates, government spending, the balance-of-payments situation, and government intervention in foreign exchange markets. 2. Technical Analysis Technical analysis employs past trends in currency prices and other factors to forecast exchange rates. Using statistical models and past data trends, analysts estimate the conditions prevailing during changes in exchange rates and estimate the timing, magnitude, and direction of future changes. D. Difficulties of Forecasting Beyond problems with data used, failings can be traced to human error (e.g., People might miscalculate the importance of certain economic events, placing too much emphasis on some elements and ignoring others).

Chapter Five: International Trade (Pages 132-151) Objective Two: Describe mercantilism and explain its impact on world powers and their colonies.

A. Mercantilism States that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports. Other measures of a nation's well-being, such as living standards or human development, are irrelevant. Practiced from around 1500 to the late 1700s by European nations, including Britain, France, the Netherlands, Portugal, and Spain. 1. How Mercantilism Worked Trade was to benefit mother countries; colonies (in Africa, Asia, and North, South, and Central America) were exploitable resources. a. Trade Surpluses Nations increased wealth through a trade surplus—when the value of a nation's exports exceeds the value of imports. Trade deficits were to be avoided at all costs. b. Government Intervention Governments intervened in international trade to maintain a trade surplus. They banned certain imports, imposed tariffs or quotas, and subsidized home-based industries to expand exports. Removal of gold and silver from the nation was outlawed. c. Colonization Mercantilist nations acquired colonies as sources of inexpensive raw materials and markets for higher-priced finished goods. Trade between mercantilist nations and their colonies expanded wealth and created armies and navies to control colonial empires and protect shipping.

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective One: Define regional economic integration and identify its five levels.

Regional integration is defined and its benefits and drawbacks are identified. 2. WHAT IS REGIONAL ECONOMIC INTEGRATION? • Process whereby countries in a geographic region cooperate with one another to reduce or eliminate barriers to the international flow of products, people, or capital. A regional trading bloc is a group of nations in a geographic region undergoing economic integration. • The goal is to increase cross-border trade and investment and raise living standards. Specialization and trade create real gains in terms of greater choice, lower prices, and increased productivity. Regional trade agreements help nations accomplish these objectives and protect intellectual property rights, the environment, or even eventual political union. A. Levels of Regional Integration There are five levels. Free trade area is the lowest extent of national integration, political union the greatest. Each level of integration incorporates the properties of those levels that precede it. 1. Free Trade Area a. Countries remove all barriers to trade among members, but each country determines its own barriers against nonmembers. b. Policies differ greatly against nonmember countries from one country to another. Countries in a free trade area also establish a process to resolve trade disputes between members. 2. Customs Union a. Countries remove all barriers to trade among members but erect a common trade policy against nonmembers. b. Differs from a free trade area in that members treat all nonmembers similarly. Countries might also negotiate as a single entity with other supranational organizations such as the WTO. 3. Common Market a. Countries remove all barriers to trade and the movement of labor and capital between themselves, but erect a common trade policy against nonmembers. b. Adds the free movement of important factors of production such as people and cross-border investment. Requires cooperation in economic and labor policy, so is very difficult to attain. 4. Economic Union a. Countries remove barriers to trade and the movement of labor and capital, erect a common trade policy against nonmembers, and coordinate their economic policies. b. Requires members to harmonize their tax, monetary, and fiscal policies, create a common currency, and concede a certain amount of sovereignty to the supranational organization. 5. Political Union a. Countries coordinate aspects of economic and political systems. b. Members accept a common stance on economic and political policies regarding nonmember nations. Nations are allowed a degree of freedom in setting certain political and economic policies within their territories.

Chapter Seven: Foreign Direct Investment (Pages 178-195) Objective One: Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

1. INTRODUCTION Foreign direct investment (FDI) is the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control. It differs from portfolio investment—an investment that does not involve obtaining a degree of control in a company. Most governments set the threshold for an investment to be called FDI at anywhere from 10 to 25 percent of stock ownership in a company abroad—the U.S. Commerce Department sets it at 10 percent. 2. PATTERNS OF FOREIGN DIRECT INVESTMENT A. Ups and Downs of Foreign Direct Investment After growing about 20% per year in the first half of the 1990s, FDI inflows grew by about 40% per year in the second half of the decade. Contracting FDI inflows for 2001, 2002, and 2003 reduced FDI to nearly half its peak in 2000. Slight increases since then suggests FDI inflows have bottomed out (Figure 7.1). 1. Globalization a. Companies got around trade barriers in the 1980s through FDI. b. Uruguay Round of GATT further cut trade barriers, letting firms produce in the most efficient locations and export to markets. Set off further FDI into newly industrialized and emerging markets. c. Globalization also lets emerging-market companies use FDI. 2. Mergers and Acquisitions a. Number of M&As and their exploding values are creating longterm growth in FDI. b. Power of largest multinationals seems to multiply each year. c. Many cross-border M&A deals are done to: • Get a foothold in a new geographic market • Increase a firm's global competitiveness • Fill gaps in companies' product lines in a global industry • Reduce costs in R&D, production, or distribution. 3. Role of Entrepreneurs and Small Businesses a. Also engage in FDI and account for more of its growth. b. Entrepreneurs reveal a can-do spirit, ingenuity and bravado.

Chapter Eleven: International Strategy and Organization (278-295) Objective One: Explain the stages of identification and analysis that precede strategy selection.

1. INTRODUCTION (PPT #3) • Planning is the process of identifying and selecting an organization's objectives and deciding how the organization will achieve those objectives. Strategy is the set of planned actions taken by managers to meet company objectives. Developing an effective strategy requires a clear definition of objectives (or goals) and a plan to achieve them. • An analysis of capabilities and strengths identifies what a company does better than the competition. Assessing the competitive environment, the national, and the international business environments are part of the analysis. • A well-defined strategy coordinates divisions and departments to reach companywide goals effectively and efficiently. A clear, appropriate strategy focuses on the activities performed best to avoid mediocre performance or total failure. 2. INTERNATIONAL STRATEGY Firms must determine what products to produce, where to produce them, and where and how to market them. Whether a site for operations or potential market, each international location has a rich mixture of cultural, political, legal, and economic traditions and processes. All these factors add to the complexity of planning and strategy. A. Strategy Formulation (PPT #4) Strategy formulation permits managers to step back from day-to-day activities and get a fresh perspective on the current and future direction of the company and its industry. B. Identify Company Mission and Goals (PPT #5) Mission statement: written statement of why a company exists and what it plans to accomplish (e.g., Supply the highest level of service in a market segment). 1. Types of Mission Statements a. Mission statements often describe how a company's operations affect stakeholders—all parties, ranging from suppliers and employees to stockholders and consumers, affected by a company's activities. b. The mission statement of an international business depends on the type of business, the stakeholders, and the most important aspect of the business for goal achievement. Companies must be sensitive to the needs of stakeholders in different nations. c. Stockholders' needs for financial returns must be balanced against the public interest in countries where production is located. d. Managers must define global objectives. High-level objectives are stated in general terms, "to be the largest global company in each industry in which we compete." Business-unit objectives are more specific, " to mass produce a zero-pollution emissions automobile by 2010." Department-level objectives often carry numerical performance targets, "to increase market share by 5 percent in each of the next 3 years." C. Identify Core Competency and Value-Creating Activities Before managers formulate effective strategies, they analyze the company, its industry, and the national business environment(s). They should also examine industries and countries being targeted for potential future entry. In-depth analysis helps managers discover core competency and abilities, and the activities that create customer value. 1. Unique Abilities of Companies a. Core competency is a special ability of a company that competitors find extremely difficult or impossible to equal. Refers to multiple skills coordinated to form a single technological outcome. c. Skills are learned through on-the-job training and personal experience, whereas core competencies develop over a long period and are difficult to teach. 2. Value Chain Analysis Value chain analysis is the process of dividing a company's activities into primary and support activities and identifying those that create value for customers. Primary activities include inbound and outbound logistics, manufacturing, marketing and sales, and customer service. Support activities include firm infrastructure, human resource management, technology development, and procurement. Each primary and support activity is a source of strength or weakness for a company. a. Primary Activities When analyzing primary activities, managers look for areas in which the company can increase customer value. b. Support Activities Support activities assist in performing primary activities. A sophisticated infrastructure improves internal communication and supports organizational culture and each primary activity. 3. National and International Business Environments a. National differences in language, religious beliefs, customs, traditions, and climate complicate strategy formulation. b. Manufacturing processes must sometimes be adapted to the supply of local workers, local customs, traditions, and practices. c. Differences in political and legal systems complicate international strategies. d. Different national economic systems complicate strategy formulation. D. Formulate Strategies Strengths and capabilities of international companies and environmental forces play a role in strategy. 1. Two International Strategies (PPT #11-12) a. Multinational Strategy i. Adapts products and marketing strategies in each national market to suit local preferences. ii. Benefit: monitor buyer preferences in each local market and respond quickly and effectively to new buyer preferences. Drawback: cannot exploit scale economies in product development, manufacturing, or marketing. iii. Not suited to industries in which price competitiveness is a key to success. b. Global Strategy i. Offers the same products using the same marketing strategy in all markets. ii. Companies take advantage of scale and location economies by producing entire inventories or components in a few optimal locations. They perform product research and development in one or a few locations and design promotional campaigns and advertising strategies at headquarters. iii. Benefit: cost savings from standardized products and marketing; lessons learned in a market are shared. iv. Yet a global strategy may cause a company to overlook differences in buyer preferences. It does not allow modification except for paint color or small add-on features. Competitors can step in and satisfy unmet local needs creating a niche market. 2. Corporate-Level Strategies (PPT #13-17) Companies in more than one business must formulate a corporate-level strategy by identifying the markets and industries in which to operate. Overall objectives for different business units are developed and the role of each unit in reaching those objectives are determined. a. Growth Strategy i. A growth strategy is designed to increase the scale or scope of a corporation's operations. Scale refers to the size of a corporation's activities; scope to the kinds of activities it performs. ii. Organic growth relies on internally generated growth. iii. Other methods of growth are mergers and acquisitions, joint ventures, and strategic alliances. Partners in pursuing these include competitors, suppliers, and buyers; firms join competitors to reduce competition, expand product lines, or expand geographically. b. Retrenchment Strategy i. Reduces the scale or scope of a corporation's businesses. Corporations cut back the scale of operations when economic conditions worsen or competition increases by closing factories with unused capacity and laying-off employees. Corporations reduce the scope of activities by selling unprofitable business units. c. Stability Strategy i. Guards against change and used to avoid either growth or retrenchment. ii. Corporations have met objectives, are satisfied with accomplishments, and see no opportunities or threats. d. Combination Strategy i. Mixes growth, retrenchment, and stability strategies across a corporation's business units. ii. Common because rarely do international corporations follow identical strategies in each business unit. 3. Business-Level Strategies (PPT #18-21) A company may need only one strategy for its one line of business or others may need many strategies. Key to an effective business-level strategy is a general competitive strategy in the marketplace. a. Low-Cost Leadership Strategy i. Exploits economies of scale to have the lowest cost structure of any competitor in an industry. ii. Companies contain administrative costs and the costs of its various primary activities, including marketing, advertising, and distribution. iii. Low-cost leadership based on efficient production in large quantities guards against attack by competitors because of the large start-up costs. iv. A negative aspect of the low-cost leadership strategy is low customer loyalty—buyers will purchase from the low-cost leader if everything else is equal. A low-cost leadership strategy works best with mass-marketed products aimed at price-sensitive buyers. b. Differentiation Strategy i. Company designs products to be perceived as unique. ii. Tends to force a company into a lower-market-share position because it involves the perception of exclusivity or meeting the needs of a certain group. iii. Companies develop loyal customer bases to offset smaller market shares and higher costs of producing and marketing a unique product. iv. Products can be differentiated on the basis of quality, brand image, and product design. Special features differentiate goods and services in the minds of consumers. Manufacturers combine differentiation factors in formulating their strategies. c. Focus Strategy i. Company focuses on the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. ii. Competition forces more products to be distinguished by price, quality, or design. Greater product range leads to refinement of market segments. iii. Some firms serve the needs of one ethnic or racial group, whereas others focus on a single geographic area. 4. Department-Level Strategies Reaching corporate- and business-level objectives depends on effective departmental strategies that focus on activities that transform resources into products. Department-level strategies rely on capabilities—primary and support activities that create value for customers. a. Primary and Support Activities i. Each department creates customer value through lower costs or differentiated products. ii. For primary activities, manufacturing strategies cut production costs and improve product quality; marketing strategies promote differences in products; and efficient logistics result in cost savings. iii. Support activities create customer value (e.g., R&D identifies market segments with unsatisfied needs and designs products to meet them).

Chapter Ten: International Monetary System (Pages 252-272) Objective One: Explain how exchange rates influence the activities of domestic and international companies.

2. HOW EXCHANGE RATES INFLUENCE BUSINESS ACTIVITIES (PPT #3-7) • Exchange rates affect demand for products. When a country's currency is weak, the price of its exports declines, making the exports more appealing on world markets. • Devaluation is the intentional lowering of the value of a currency by the nation's government. Gives domestic producers an edge on world markets, but also reduces citizens' buying power. • Revaluation is the intentional raising of the value of a nation's currency. Increases the price of exports and reduces the price of imports. • Exchange rates affect profits earned abroad when repatriated by the parent company into the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces earnings, and vice versa. A. Desire for Stability and Predictability 1. Stability makes for accurate financial planning and cash flow forecasts. 2. Predictability reduces odds that a company will be caught off-guard by unexpected rate changes. Reduces the need for costly insurance (currency hedging) against possible adverse exchange rates.

Chapter Eleven: International Strategy and Organization (278-295) Objective Two: Identify the two international strategies and the corporate-level strategies that companies use.

3. INTERNATIONAL ORGANIZATIONAL STRUCTURE Organizational structure is the way in which a company divides its activities among separate units and coordinates activities between those units. An appropriate organizational structure for a firm's strategic plans will help it achieve its goals. A. Centralization versus Decentralization (PPT #22) • Centralized decision making occurs at a high level in one location such as headquarters. Decentralized decision making occurs at lower levels, such as in international subsidiaries. • Managers cannot get involved in every hiring decision or task assignment, but overall corporate strategy cannot be delegated to subsidiaries since only top management has the appropriate perspective. • Companies rarely centralize or decentralize all decision making, but seek the approach that creates the greatest efficiency and effectiveness. International companies may centralize decision making in certain geographic markets, but decentralize it in others. 1. When to Centralize a. Centralization helps coordinate international subsidiaries; important when one subsidiary's output is another's input. b. Companies maintain strong central control over financial resources by channeling all subsidiary profits back to the parent for redistribution to subsidiaries. c. Others companies centrally design policies, procedures, and standards to stimulate a single global organizational culture. 2. When to Decentralize a. Decentralized decision making is beneficial when fast changing business environments require local responsiveness. b. Because subsidiary managers are in contact with local culture, politics, laws, and economies, decentralized decisions result in products suited to the needs and preferences of local buyers. c. Delayed response and misinterpreted events results in lost orders, stalled production, and weakened competitiveness. d. Participative Management and Accountability i. Decentralization fosters participative management practices. Employee morale is higher if subsidiary managers and subordinates are involved in decisions. ii. If delegated to subsidiaries, decisions about production, promotion, distribution, and pricing can generate greater commitment from managers and workers. iii. Decentralization improves personal accountability for business decisions. When local managers are rewarded (or punished) for their decisions, they invest more effort in making and executing them. B. Coordination and Flexibility Key questions: What is the most efficient way to link divisions? Who should coordinate the divisions? How should the company process and deliver information? How should it use corrective measures? 1. Structure and Coordination a. Companies need structure to define responsibility and chains of command—lines of authority that run from top management to each employee and specify internal reporting relationships. b. Companies need structures to bind areas requiring cooperation, such as linking R&D and manufacturing to avoid product designs that complicate manufacturing. 2. Structure and Flexibility a. Organizational structure is not permanent, but is modified to suit changes within a company and in its external environment. b. Changes in strategy and in the business environment force modifications in organizational structure; some countries are characterized by rapidly shifting business environments. C. Types of Organizational Structure (PPT #23-26) Four organizational structures are common for most international companies— division structure, area structure, product structure, and matrix structure. 1. International Division Structure a. An international division with its own manager keeps domestic and international activities separate. A general manager for each nation in which a company operates then controls product manufacturing and marketing within that market. b. Concentrates international expertise in one division where the manager becomes a specialist in foreign exchange, exporting, etc. Firm reduces costs, increases efficiency, and prevents international activities from disrupting home operations. c. Potential problems with this structure are: (1) poor coordination between the international division and the rest of the company can hurt performance; and (2) destructive rivalries may arise between different country managers within the division. 2. International Area Structure a. Organizes a company's global operations into countries or regions. The more countries in which a company operates, the greater the likelihood it will organize into regions, not countries. b. Each geographic division operates as a self-contained unit, with decision making decentralized to country or regional managers. c. Useful structure when there are vast cultural, political, or economic differences among nations or regions. d. By controlling activities in their environments, general managers become experts on the unique needs of their buyers. But because units act independently, resources may overlap, and crossfertilization of knowledge across units can be limited. 3. Global Product Structure a. Divides worldwide operations according to a company's product areas. Suitable when a firm has a diverse set of products. b. Because the primary focus is on the product, domestic and international managers for each product division must coordinate their activities so they do not conflict. 4. Global Matrix Structure a. Splits the chain of command between product and area divisions. Each manager reports to two bosses—the president of the product division and the president of the geographic area. b. Brings together geographic area managers and product area managers in joint decision making. c. Bringing specialists together creates a team-type organization. Increases local responsiveness, reduces costs, and coordinates worldwide operations, and can increase coordination while improving agility and local responsiveness. d. Two major shortcomings: (1) The matrix form can be quite cumbersome as the need for complex coordination tends to make decision making time consuming and slows the reaction time. (2) Individual responsibility and accountability are blurred in the matrix organization structure; because of shared responsibility, managers may attribute poor performance to the other manager.

Chapter Nine: International Financial Markets (Pages 226-244) Objective One: Discuss the purposes, development, and financial centers of the international capital market.

The two interrelated systems that comprise the international financial markets are the international capital market and the foreign exchange market. 2. INTERNATIONAL CAPITAL MARKET A capital market is a system that allocates financial resources in the form of debt and equity according to their most efficient uses. Its main purpose is to provide a mechanism to borrow or invest money efficiently. A. Purposes of National Capital Markets (PPT #3) Help individuals and institutions borrow money from lenders; intermediaries exist to facilitate financial exchanges. 1. Role of Debt a. Loans in which borrower repays borrowed amount (the principal) plus interest. Company debt normally takes the form of bonds—debt instruments specifying the timing of principal and interest payments. b. Holder of a bond (the lender) can force the borrower into bankruptcy if payment is not made on a timely basis. Bonds to fund investments are issued by private-sector companies and by municipal, regional, and national governments. 2. Role of Equity a. Equity is part ownership of a company in which the equity holder participates with other part owners in the company's financial gains and losses. Equity normally takes the form of stock—shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows. b. Shareholders may be rewarded with dividends—payments made out of surplus funds—or by increases in the value of their shares. They may also suffer losses due to poor company performance— and thus decreases in the value of their shares. Dividend payments are not guaranteed, but decided by the company's board of directors and based on financial performance. c. Shareholders can sell one stock and buy another or liquidate exchange stock for cash. Liquidity refers to the ease with which bondholders and shareholders convert investments into cash. B. Purposes of the International Capital Market (PPT #4) The international capital market is a network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. Large international banks gather excess cash of investors and savers around the world and then channel it to global borrowers. 1. Expanding the Money Supply for Borrowers a. Companies unable to obtain funds from investors in the domestic market seek financing in the international capital market. b. Essential for firms in countries with small or developing capital markets or emerging stock markets. c. An expanded supply of money benefits small companies that might not get financing under intense competition for capital. 2. Reducing the Cost of Money for Borrowers a. 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. b. Projects regarded as infeasible because of low expected returns might be viable at a lower financing cost. 3. Reducing Risk for Lenders a. The international capital market expands the available set of lending opportunities. Investors reduce portfolio risk by spreading their money over many debt and equity instruments. b. Investing in international securities benefits investors because some economies are growing while others are in decline. C. Forces Expanding the International Capital Market 1. Information Technology Reduces time and money needed to communicate globally. Electronic trading after close of formal exchanges facilitates fast response times. 2. Deregulation Increases competition, lowers cost of financial transactions, and opens many national markets to global investing and borrowing. Continued growth depends on further deregulation. 3. Financial Instruments Increased competition is creating the need to develop innovative financial instruments. Securitization is the unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments, or securities. D. World Financial Centers (PPT #6) Three most important financial centers are London, New York, and Tokyo. 1. Offshore Financial Centers Country or territory where financial sector features few regulations and few, if any, taxes. They: (1) are economically and politically stable; (2) are advanced in telecommunications; (3) offer large amounts of funding in many currencies; and (4) provide a less costly source of financing. a. Operational Centers see a great deal of financial activity (e.g., London for currencies; Switzerland for investment capital). b. Booking Centers are usually located on a small, island nation or territory with favorable tax and/or secrecy laws. Funds pass through on their way to large operational centers. Typically are offshore branches of domestic banks used to record tax and currency exchange information.

Chapter Seven: Foreign Direct Investment (Pages 178-195) Objective Two: Describe each of the theories that attempt to explain why FDI occurs.

3. EXPLANATIONS FOR FOREIGN DIRECT INVESTMENT A. International Product Life Cycle 1. States a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. 2. In the new product stage a good is produced entirely in the home market. In the maturing product stage a good is produced in the home market and in markets abroad that are large enough to warrant production facilities. In the standardized product stage, a company builds production capacity in low-cost developing nations to serve its markets around the world. 3. Yet the international product life cycle theory does not explain why companies choose FDI over other forms of market entry. B. Market Imperfections (Internalization) Theory States that when an imperfection in the market makes a transaction less efficient, a company will undertake FDI to internalize the transaction and remove the imperfection. In a perfect market, prices are as low as possible and goods are easily available. Flaws in the efficient operation of an industry are called market imperfections. 1. Trade Barriers a. A trade barrier such as a tariff is a common market imperfection. b. Firms undertake FDI when market imperfections are present. 2. Specialized Knowledge a. A unique competitive advantage may consist of specialized knowledge, technical expertise, or special marketing abilities. b. Companies charge fees for product knowledge, but when a company's specialized knowledge is embodied in its employees, the only way to exploit an opportunity may be FDI. c. A company may FDI if charging another company for access to its knowledge might create a future competitor. C. Eclectic Theory 1. States that firms undertake foreign direct investment when the features of a location combine with ownership and internalization advantages to make a location appealing for investment. When each advantage is present, a company will undertake FDI. 2. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of the location. 3. An ownership advantage is the advantage that a company has due to its ownership of some special asset, such as a powerful brand, technical knowledge, or management ability. 4. An internalization advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. D. Market Power 1. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. 2. The benefit of market power is greater profit because the firm is better able to dictate the cost of its inputs and/or the price of its output. 3. Companies can gain market power through vertical integration—the extension of activities into production that provide a firm's inputs (backward integration) or absorb its output (forward integration).

Chapter Nine: International Financial Markets (Pages 226-244) Objective Three: Discuss the four primary functions of the foreign exchange market.

4. FOREIGN EXCHANGE MARKET • Market in which currencies are bought and sold and in which currency prices are determined. Exchange rates reflect the size of the transaction, the trader conducting it, general economic conditions, and sometimes, government mandate. • If the British pound is quoted in U.S. dollars at $1.6296, the bank may bid $1.6294 to buy British pounds and offer to sell them at $1.6298. The difference is the bid-ask spread; banks buy low and sell high, earning profits from the bid-ask spread. A. Functions of the Foreign Exchange Market (PPT #10) 1. Currency Conversion Companies use the foreign exchange market to convert currencies. 2. Currency Hedging Insuring against potential losses that result from adverse changes in exchange rates. Companies use it to: (1) lessen the risk of international transfers; and (2) reduce exposure in transactions where a time lag exists between billing and receipt of payment. 3. Currency Arbitrage Instantaneous purchase and sale of a currency in different markets for profit. Common among experienced foreign exchange traders, large investors, and firms in arbitrage business. a. Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies. Companies use interest arbitrage to find higher interest rates abroad in government treasury bills, corporate and government bonds, and even bank deposits. 4. Currency Speculation Purchase or sale of a currency with the expectation that its value will change and generate a profit. Much riskier than arbitrage because the value, or price, of currencies is quite volatile.

Chapter Nine: International Financial Markets (Pages 226-244) Objective Four: Explain how currencies are quoted and the different rates given.

5. HOW THE FOREIGN EXCHANGE MARKET WORKS A. Quoting Currencies (PPT #11-14) Two components to every quoted exchange rate: the quoted currency and the base currency. In (¥/$), the yen is the quoted currency, the dollar is the base currency. The quoted currency is always the numerator, and the base currency is always the denominator. 1. Direct and Indirect Rate Quotes a. In ¥ 117/$, the yen is the quoted currency; this is called a direct quote on the yen and an indirect quote on the dollar. b. In $0.0085/¥, the dollar is the quoted currency; this is called a direct quote on the dollar and an indirect quote on the yen. c. This formula derives a direct quote from an indirect quote: Direct Quote = ____1_____ Indirect Quote And, for deriving an indirect quote from a direct quote, use: Indirect Quote = ____1____ Direct Quote 2. Calculating Percent Change a. Exchange rate risk can jeopardize profits from current and future international transactions. Managers minimize this risk by tracking percent changes in exchange rates. b. Take Pn as the exchange rate at the end of a period (a currency's new price), and Po as the exchange rate at the beginning of that period (a currency's old price). Percent change in the value of the currency is calculated with the following formula: Percent change (%) = Pn - Po x 100 Po c. Suppose on February 1, the exchange rate between the Polish zloty (PLZ) and the U.S. dollar was PLZ 5/$. On March 1, the exchange rate stood at PLZ 4/$. What is the change in the value of the base currency—the dollar? Percent change (%) = 4 - 5 x 100 = -20% 3. Cross Rate Exchange rate calculated using two other exchange rates. Used when no access to the exchange rate between two nation's currencies, but have exchange rates for each nation's currency with that of a third nation. Cross rates between two currencies can be calculated using either currency's indirect or direct exchange rates with another currency. B. Spot Rate (PPT #15) Exchange rate that requires delivery of a traded currency within two business days. The spot market helps companies to: • Convert income from sales abroad into the home-country currency. • Convert funds into the currency of an international supplier. • Convert funds into the currency of a country in which it will invest. 1. Buy and Sell Rates The spot rate is available only to banks and foreign exchange brokers. Small businesspeople exchanging currencies at their local bank receive a buy rate (the bank's rate to buy a currency) and an ask rate (the bank's rate to sell a currency). For example, if a bank quotes you an exchange rate between Mexican pesos and US dollars of Peso 5.6789/95 per $, it will buy dollars at Peso 5.6785/$ and sell them at Peso 5.6795/$. C. Forward Rate (PPT #16) Exchange rate at which two parties agree to exchange currencies on a specified future date. Represent traders' and bankers' expectations of a currency's future spot rate. Used to insure against unfavorable changes in exchange rates. 1. Forward Contract a. Requires exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. Belong to a family of financial instruments known as derivatives. b. Commonly signed for 30, 90, and 180 days into the future, but customized contracts are also possible. c. A currency is trading at a premium when its forward rate is higher than its spot rate, and is trading at a discount when its forward rate is lower than its spot rate. D. Swaps, Options and Futures (PPT #17) Three other types of currency instruments are used in the forward market. 1. Currency Swap Simultaneous purchase and sale of foreign exchange for two different dates. Used to reduce exchange-rate risk and lock in a future exchange rate. Can be viewed as a complex forward contract. 2. Currency Option Right, or option, to exchange a specific amount of a currency on a specific date at a specific rate. Used to hedge against exchange-rate risk or obtain foreign currency at a favorable rate. 3. Currency Futures Contract Contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective Four: Discuss regional integration in the Americas and analyze its future prospects.

5. INTEGRATION IN THE AMERICAS Latin American countries began forming regional trading arrangements in the early 1960s but made substantial progress only in the 1980s and 1990s. North America is taking major steps toward economic integration. A. North American Free Trade Agreement (PPT #12-13) • NAFTA (January 1994) seeks to eliminate most tariffs and non-tariff trade barriers on most goods originating from North America. • Calls for liberalized rules regarding government procurement practices, the granting of subsidies, and the imposition of countervailing duties. • Other provisions deal with trade in services, intellectual property rights, and standards of health, safety, and the environment. 1. Local Content Requirements and Rules of Origin a. Producers and distributors must determine if their products meet NAFTA rules to qualify for tariff-free status. The producer or distributor must also provide a NAFTA "certificate of origin" to an importer to claim an exemption from tariffs. b. Four criteria to meet NAFTA rules of origin: (1) goods wholly produced or obtained in the NAFTA region; (2) goods containing nonoriginating inputs but meeting origin rules; (3) goods produced in the NAFTA region wholly from originating materials; and (4) unassembled goods with sufficient North American regional value content. 2. Effects of NAFTA a. Mexico's exports to the United States jumped an astonishing 275%, from under $40 billion to more than $150 billion. b. Canada's exports to the United States more than doubled, from almost $117 billion to $287 billion, while US exports to Canada grew 76%, from $100 billion to $176 billion. c. Canada's exports to Mexico grew more than threefold from $640 million to nearly $2.7 billion. d. The agreement's effect on employment and wages is not easy to determine. The US Trade Representative Office and the AFLCIO group of unions debate NAFTA's effect on jobs. 3. Expansion of NAFTA a. Continued ambivalence about NAFTA delays its expansion. b. A boost would be if the US Congress grants trade promotion authority to successive U.S. presidents. c. The Americas will experience further integration and North American economies could even adopt a single currency. B. Central American Free Trade Agreement (PPT #14) 1. Established in 2006 between U.S. and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. 2. CAFTA nations represent a U.S. export market larger than India, Indonesia, and Russia combined. And nearly 80 percent of exports from the Central American nations and the Dominican Republic already enter the United States tariff-free. 3. In 2003, the combined value of goods traded between the United States and the six CAFTA countries was around $32 billion. 4. Benefits to U.S.: (1) Lower tariff and non-tariff barriers; (2) Ensures U.S. companies are not disadvantaged by Central American nations' trade agreements with other countries; (3) Requires Central American nations and Dominican Republic to encourage competition and investment, protect intellectual property rights, and promote transparency and the rule of law; (4) Supports U.S. national security interests by advancing regional integration, peace, and stability. C. Andean Community (PPT #15) 1. Formed in 1969 and today includes Bolivia, Columbia, Ecuador, and Peru. It comprises a market of more than 97 million consumers and a combined GDP of about $216 billion. 2. Objectives include tariff reduction, a common external tariff, and common policies in both transportation and certain industries. 3. But each member is given exceptions in the common tariff structure for trade with nonmembers. The group has yet to create a customs union. D. Latin American Integration Association 1. Formed in 1980, called for preferential tariff agreements between pairs of members (reflecting their economic development levels). 2. ALADI did not significantly increase cross-border trade despite 24 bilateral agreements and 5 subregional pacts. E. Southern Common Market (PPT #16) 1. MERCOSUR members: Argentina, Brazil, Paraguay, Uruguay, and Venezuela (Bolivia, Chile, and Peru are associate members). 2. Acts as customs union and liberalizing trade and investment—emerging as the most powerful trading bloc throughout Latin America. 3. May incorporate all of South America into a South American Free Trade Agreement and link up with NAFTA. 4. Different trade agendas, various macroeconomic policy frameworks, and economic problems of Argentina and Brazil hamper integration. F. Central America and the Caribbean (PPT #17) Integration efforts here have been modest. 1. Caribbean Community and Common Market (CARICOM) a. Formed in 1973. Bahamas is a member of the Community but does not belong to the Common Market. Has combined GDP of nearly $30 billion and a market of almost 6 million people. b. In 2000, CARICOM members called for the establishment of a single market, but the problem is that members trade more with nonmembers than with each other. 2. Central American Common Market (CACM) a. Intended to create a common market between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Progress was constrained by civil wars and wars among members. Comprises a market of 33 million and combined GDP of $120 billion. b. Not yet a customs union, but officials say goal is integration, closer political ties, and a single currency—likely the dollar. El Salvador adopted the dollar as its official currency in 2000. G. Free Trade Area of the Americas (PPT #18) 1. Intends to create a trading bloc stretching from Alaska to Tierra del Fuego in South America. Would comprise 34 nations and 800 million consumers and have a collective GDP of more than $12 trillion. Cuba is the only Western Hemisphere nation excluded. 2. Would remove tariffs and non-tariff barriers between members, but continues to face opposition from labor organizations, environmentalists, and others against globalization.

Chapter Nine: International Financial Markets (Pages 226-244) Objective Five: Identify the main instruments and institutions of the foreign exchange market.

6. FOREIGN EXCHANGE MARKET TODAY Electronic network of foreign exchange traders, currency trading banks, and investment firms among major financial centers. Single-day trading volume on the foreign exchange market (currency swaps and spot and forward contracts) is more than $1.2 trillion—roughly the yearly gross domestic product of Italy. A. Trading Centers (PPT #18) UK, US, and Japan account for half of all global currency trading. London dominates the foreign exchange market for historic and geographic reasons. B. Important Currencies A vehicle currency is used as an intermediary to convert funds between two other currencies. Currencies most often involved in currency transactions are the U.S. dollar, British pound, Japanese yen, and European Union euro. C. Institutions of the Foreign Exchange Market (PPT #19) 1. Interbank Market Market where the world's largest banks exchange currencies at spot and forward rates. Banks act as agents for clients and turn to foreign exchange brokers, who maintain networks to obtain seldom traded currencies. 2. Securities Exchanges Specialize in currency futures and options transactions. Securities brokers facilitate currency transactions on securities exchanges. Transactions on securities exchanges are much smaller than those in the interbank market and vary with each currency. 3. Over-the-Counter (OTC) Market Consists of a global computer network of foreign exchange traders and other market participants, but with no central trading location. Major players in the OTC market are large financial institutions and investment banks. The OTC market has grown because of several benefits: • Business people search for the institution that provides the best (lowest) price for transactions. • It offers greater opportunities for designing customized transactions.

Chapter Seven: Foreign Direct Investment (Pages 178-195) Objective Five: Discuss the policy instruments that governments use to promote and restrict FDI.

6. GOVERNMENT POLICY INSTRUMENTS AND FDI A. Host Countries: Promotion (PPT #16) 1. Financial Incentives a. Host governments commonly offer tax incentives and/or low interest loans to attract investment. b. But incentives can create bidding wars between locations vying for investment; the cost to taxpayers of snaring FDI can be more than what the actual jobs pay. 2. Infrastructure Improvements a. Lasting benefits for communities surrounding the investment location can result from local infrastructure improvements—better seaports for containerized shipping, improved roads, and increased telecommunications systems. B. Host Countries: Restriction (PPT #17) 1. Ownership Restrictions a. Governments impose ownership restrictions that prohibit nondomestic companies from investing in certain industries or owning certain types of business. b. Another restriction is a requirement that non-domestic investors hold less than a 50% stake in local firms. Nations are eliminating such restrictions because companies can choose another location. 2. Performance Demands a. Some performance demands dictate the portion of a product's content that originates locally, stipulates the portion of output that must be exported, or requires that certain technologies be transferred to local businesses. C. Home Countries: Promotion (PPT #18) 1. Offer insurance to cover the risks of investments abroad. 2. Grant loans to firms wishing to increase their investments abroad. 3. Offer tax breaks on profits earned abroad or negotiate special tax treaties. 4. Apply political pressure on other nations to get them to relax their restrictions on inbound investments. D. Home Countries: Restriction (PPT #19) 1. Impose differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings. 2. Impose sanctions that prohibit domestic firms from making investments in certain nations.

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective Five: Characterize regional integration in Asia, and discuss how it differs from integration elsewhere.

6. INTEGRATION IN ASIA A. Association of Southeast Asian Nations (PPT #19) 1. Market of 500 million consumers and a GDP of $740 billion. 2. Objectives: (1) promote economic, cultural, and social development; (2) safeguard economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully. 3. Adding Cambodia, Laos, and Myanmar, may help counter China's strength and resources of cheap labor and abundant raw materials. B. Asian Pacific Economic Cooperation (PPT #20) 1. Comprise over half of world trade and a GDP of over $16 trillion. 2. Aims to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade/investment procedures. 3. Hopes to have free trade and investment throughout the region by 2010 for developed nations, 2020 for developing ones. 4. Record of APEC a. Succeeded in halving members' tariff rates from an average of 15 to 7.5%. Liberalization hampered more recently. b. Is a political body as much as it is a movement toward free trade. Open dialogue and cooperation should encourage progress toward APEC goals, however slowly. c. Grants region-wide business visas without requiring multiple visas, and recommends regional recognition of national qualifications for professionals.

Chapter Nine: International Financial Markets (Pages 226-244) Objective Six: Explain why and how governments restrict currency convertibility.

7. CURRENCY CONVERTIBILITY A convertible (hard) currency is one that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand. But some countries do not permit the free convertibility of their currencies. A. Goals of Currency Restriction (PPT #20) 1. Preserve nation's hard currencies to repay debts owed to other nations. 2. Preserve hard currencies to pay for imports and finance trade deficits. 3. Protect a currency from speculators. 4. Keep individuals and businesses from investing in other nations. B. Policies for Restricting Currencies (PPT #21) • Nation's central bank must perform all foreign exchange transactions. • Government controls amount of foreign currency leaving the country by requiring importers to obtain import licenses. • Implement systems of multiple exchange rates that specify higher rates on the imports of certain goods or on the imports from certain nations. • Issue import deposit requirements that require businesses to deposit certain percentages of their foreign exchange holdings in special accounts before being granted import licenses. • Issue quantity restrictions that limit the amount of foreign currency that individuals can take out of the country when traveling abroad. 1. Countertrade Exchange of goods or services between two parties without the use of money. International companies can circumvent currency convertibility restrictions and yet conduct business.

Chapter Eight: Regional Economic Integration (Pages 200-221) Objective Six: Describe regional integration in the Middle East and Africa, and explain why progress there has been slow.

7. INTEGRATION IN THE MIDDLE EAST AND AFRICA (PPT #21) A. Gulf Cooperation Council (GCC) 1. Members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Formed to cooperate with the increasingly powerful trading blocs in Europe. 2. Main achievements: allowing citizens to travel freely among member nations, and allowing citizens to own land, businesses, and other property in fellow member nations without the need for local partners. B. Economic Community of West African States (ECOWAS) 1. Intends to form a customs union and an eventual common market and monetary union among its members. The ECOWAS nations comprise a large portion of the economic activity in sub-Saharan Africa. 2. Progress on market integration is almost nonexistent, but ECOWAS has made progress in the free movement of people, construction of international roads, and development of telecommunication links. 3. Problems for ECOWAS arise because of political instability, poor governance, weak national economies, poor infrastructure, and poor economic policies. C. African Union (AU) 1. Group of 53 nations joined forces in 2002 to create the African Union. 2. Aims: (1) rid vestiges of colonialism and apartheid; (2) promote unity and solidarity; (3) coordinate and intensify cooperation for development; (4) safeguard members' sovereignty and territorial integrity; (5) promote international cooperation within the United Nations. 3. But problems abound (e.g., ethnic violence in Darfur region of Sudan despite heavy AU involvement).

Chapter Eleven: International Strategy and Organization (278-295) Objective Five: Describe each type of international organizational structure and explain the importance of work teams.

D. Work Teams (PPT #27) Work teams can be useful in improving responsiveness by cutting across functional boundaries (between production and marketing) that slow decision making in an organization. Work teams coordinate their efforts to arrive at solutions and implement corrective action. 1. Self-Managed Teams a. Employees from a single department accept responsibilities of former supervisors. In production settings, self-managed teams reduce the need for direct supervisors and increase productivity, product quality, customer satisfaction, employee morale, and company loyalty. b. Quality-improvement teams are the most common type of self-managed team in many manufacturing companies because they reduce production waste and cut costs. c. Cultural differences can cause resistance to the concept of self-management and the use of teams. Experts suggest that international managers use caution when implementing them. d. Certain cultures are less individualistic and more collectivist; some harbor greater respect for differences in status. In cultures in which people are hard working, teams will be productive if given greater autonomy. 2. Cross-Functional Teams a. Composed of employees who work at similar levels in different functional departments. Such teams can help improve interdepartmental coordination and help boost product quality. b. Break down inter-departmental barriers and reorganize operations around processes, not functional departments. 3. Global Teams a. Group of top managers from both headquarters and subsidiaries who meet to develop solutions to company-wide problems. b. Large distances between team members, lengthy travel times to meetings, and the inconvenience of working across several time zones can hamper global teams. 4. A FINAL WORD Managers have the important and complicated task of formulating international strategies at the levels of the corporation, business unit, and department. International managers must identify the company's mission and goals. Managers often analyze the company's operations by performing a value-chain analysis. This process lets managers identify and implement strategies suited to a company's unique capabilities. The strategies managers select then determine a firm's organizational structure. Business environments can affect managers' strategy and structure decisions, including whether to alter their products (standardization or adaptation), where to locate facilities (centralized or decentralized production), and what type of decision making to implement (centralized or decentralized decision making).

Chapter Five: International Trade (Pages 132-151) Objective Five: Explain the new trade and national competitive advantage theories.

F. New Trade Theory (PPT #19) New trade theory argues: (1) There are gains to be made from specialization and increasing economies of scale; (2) Companies first to market can create barriers to entry; and (3) Government may play a role in assisting its home-based companies. It emphasizes productivity rather than resources. 1. First-Mover Advantage a. As specialization and output increase, companies realize economies of scale, and unit production costs decline. Then companies expand, lower prices, and force competitors to produce at a similar level of output to be competitive. b. A first-mover advantage is the economic and strategic advantage gained by being the first company to enter an industry. It creates 7 a barrier to entry for potential rivals and may allow a country to dominate in a product. c. Some make a case for government assistance; by working together to target new industries, a government and its homebased companies can be the first mover in an industry. G. National Competitive Advantage (PPT #20-25) National competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. This theory attempts to explain why some nations are more competitive in certain industries. The Porter Diamond (the basis of national competitiveness) consists of: (1) factor conditions; (2) demand conditions; (3) related and supporting industries; and (4) firm strategy, structure, and rivalry. 1. Factor Conditions Porter acknowledges the importance of basic factors (such as labor, natural resources, climate, and surface features) in what a country produces and exports, but adds the significance of advanced factors. a. Advanced Factors Include skill levels of the workforce and quality of the technological infrastructure. Account for the sustained competitive advantage that a country enjoys in a product. 2. Demand Conditions a. Sophisticated buyers in the home market are important to national competitive advantage in a product area. A sophisticated domestic market drives companies to modify existing products to include new design features and develop new products and technologies. 3. Related and Supporting Industries a. Companies in internationally competitive industries do not exist in isolation. Supporting industries provide inputs, forming clusters of related activities in the same region that reinforce productivity and competitiveness. b. Exporting clusters are those that export products or make investments to compete outside the local area and can lead to long-term prosperity. 4. Firm Strategy, Structure, and Rivalry a. Strategic decisions of firms have lasting effects on future competitiveness, but equally important is industry structure and rivalry between companies. b. The more intense the struggle to survive between domestic companies, the greater is their competitiveness. This heightened competitiveness helps them to compete against imports and against companies that might develop a production presence in the home market. 5. Government and Chance a. Government policies toward industry and export and import regulations can hurt or help competitiveness. b. Chance events also can influence national competitiveness; it can help competitiveness or threaten it. c. Porter's theory holds promise but has just begun to be subjected to research using actual data on each of the factors involved and national competitiveness.

Chapter Five: International Trade (Pages 132-151) Objective One: Describe the relationship between international trade volume and world output, and identify overall trade patterns.

International Trade is the purchase, sale, or exchange of goods and services across national borders. One way to measure the importance of trade is to examine the volume of an economy's trade relative to total output (see Map 5.1). A. Benefits of International Trade --Creates new entrepreneurial opportunities, expands the choice of goods and services, and creates jobs. The U.S. Department of Commerce estimates that for every $1 billion increase in exports, 22,800 U.S. jobs are created. B. Volume of International Trade --World merchandise exports are $9.2 trillion and service exports are approaching $2.1 trillion. Trade in merchandise is around 80% of total trade; services 20%. 1. Trade and World Output --Slower world economic output slows international trade; higher output spurs trade. Trade slows in a recession as people are uncertain about the future and buy less. Also, when an economy is in recession the currency is weak; slowing imports because they are more expensive. C. International Trade Patterns --Trade volume and world output provide insight into the international trade environment but do not disclose trading partners. 1. Who trades with whom? a. Trade between the world's high-income economies accounts for roughly 60 percent of total world merchandise trade. b. Two-way trade between high-income countries and low- and middle-income nations accounts for about 34 percent of world merchandise trade. c. Intra-regional trade accounts for over 74 percent of Europe's exports, 22 percent of Asia's exports, and 54 percent of North America's exports. 2. Some economists call this century the "Pacific century," referring to the expected future growth of Asian economies and the expected shift in trade flows from the Atlantic to the Pacific Ocean. D. Trade Dependence and Independence --Countries fall on a continuum with total trade dependence at one end, and total independence at the other. Complete independence was considered desirable from the sixteenth through eighteenth centuries, but is not desirable today. 1. Effect on Developing and Transition Nations Developing and transition nations often depend on their developed neighbors with whom they share borders. Germany is the single most important trading partner of central and eastern European nations. 2. Dangers of Trade Dependency If a nation experiences economic recession or political turmoil, the dependent nation can experience economic problems. 3. Balance Between Dependence and Independence Trade today is characterized by a certain degree of interdependency, which often reflects trade between a company's subsidiaries. 3. THEORIES OF INTERNATIONAL TRADE --It was not until the fifteenth century that people tried to explain why trade occurs. Efforts continue to refine existing trade theories and develop new ones.