International Business Final Exam

Bid/Ask

At any given point in time, a bank's bid (buy) quote for a foreign currency will be less than its ask (sell) quote.

Partner selection

A good partner -helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values -shares the firm's vision for the purpose of the alliance -will not exploit the alliance for its own ends

depreciation.

A decline in a currency's value is often referred to as

Spot Market

A foreign exchange transaction for immediate exchange is said to trade in the spot market

Inventory costs

Costs of maintaining an inventory of a particular currency.

Order costs

Costs of processing orders, including clearing costs and the costs of recording transactions

What is an Organizational Ecosystems?

It is a system formed by the interactions of a community of organizations across traditional industry lines.

Why Choose Joint Ventures?

Joint ventures are attractive because -firms benefit from a local partner's knowledge of local conditions, culture, language, political systems, and business systems -the costs and risks of opening a foreign market are shared -they satisfy political considerations for market entry Joint ventures are unattractive because -the firm risks giving control of its technology to its partner -the firm may not have the tight control to realize experience curve or location economies -shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

What Are The Patterns Of FDI?

Most FDI is targeted towards developed nations - -United States, Japan, and the EU but, other destinations are emerging -South, East, and South East Asia especially China -Latin America

Political Reasons:

Political case for integration has two main points. 1- By linking countries together, making them more dependent on each other, the chance for violent conflict and war decrease. 2- Economic integration gives the bloc of countries greater clout and makes them much stronger politically when dealing with other countries than if they were to act independently. Power in numbers.

The manner in which the alliance is managed

Requires -interpersonal relationships between managers -learning from alliance partners

What Is The Source Of FDI?

Since World War II, the U.S. has been the largest source country for FDI

3- The loss of national sovereignty and autonomy that is often associated with FDI.

Sometimes host governments worry that they may lose some economic independence as a result of FDI. They worry that since foreign companies have no particular commitment to the host country, they won't really worry about the consequences of their decisions on the host country.

Bid/Ask spread of banks

cover their cost of conducting foreign exchange transactions

The Association of Southeast Asian Nations (ASEAN, 1967)

currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia

1- A free trade area

eliminates all barriers to the trade of goods and services among member countries

2- A customs union

eliminates trade barriers between member countries and adopts a common external trade policy

3- A common market

has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production.

small-scale entry

has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm's exposure to that market

4- An economic union

has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy

Investors

include corporations with surplus cash, individuals, and non-bank financial institutions.include corporations with surplus cash, individuals, and non-bank financial institutions.

Borrowers

include individuals, companies, and governments

Cross Exchange Rates

This is when we price the currency not per US dollar but per other currency.

Foreign Direct Investment

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country

Trade diversion

occurs when higher costs suppliers within a free trade area replace lower cost external suppliers.

Trade creation

occurs when low cost producers within a free trade area replace high cost domestic producers,

Exchange rate

specifies the rate at which one currency can be exchanged for another.

Governments can encourage inward FDI by

offering incentives to foreign firms to invest in their countries with the purpose of gaining from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries

Governments can restrict inward FDI by

using ownership restraint

The radical view lacked support by the end of the 1980s because of

•the collapse of communism in Eastern Europe • the poor economic performance of those countries that followed the policy • a growing belief by many of these countries that FDI can be an important source of technology and jobs and can stimulate economic growth • the strong economic performance of developing countries that embraced capitalism rather than ideology

acquisitions or mergers

with existing firms in the foreign country

Why Choose Franchising?

ØFranchising is attractive because Øit avoids the costs and risks of opening up a foreign market Øfirms can quickly build a global presence Ø ØFranchising is unattractive because Øthe geographic distance of the firm from franchisees can make it difficult to detect poor quality

greenfield investments

the establishment of a wholly new operation in a foreign country

Then and now FDI

In 1975, the outflow of FDI was about $25 billion, by 2014 it was over $1.5 trillion!

Competition:

The more intense the competition, the smaller the spread quoted by intermediaries.

The Maastricht Treaty

- committed the EU to adopt a single currency by 1999. -created the second largest currency zone in the world after that of the U.S. dollar -used by 19 of the 28 member states -Britain, Denmark and Sweden opted out

What Is The Global Bond Market?

-Bonds are an important means of financing for many companies -The most common kind is a fixed rate bond which gives investors fixed cash payoffs -The global bond market grew rapidly during the 1980s and 1990s and continues to do in the new century

On What Scale Should A Firm Enter Foreign Markets?

-Entering a market on a significant scale is seen as a strategic commitment to the market - the decision has a long term impact and is difficult to reverse -small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm's exposure to that market

5- Expectations

-Impact of favorable expectations: If investors expect interest rates in one country to rise, they may invest in that country leading to a rise in the demand for foreign currency and an increase in the exchange rate for foreign currency. -Impact of unfavorable expectations: Speculators can place downward pressure on a currency when they expect it to depreciate.

4- Government Controls

-Imposing foreign exchange barriers -Imposing foreign trade barriers -Intervening in foreign exchange markets -Affecting macro variables such as inflation, interest rates, and income levels.

Governments can restrict outward FDI by

-Limiting capital outflows -Manipulating tax rules, or -Just prohibiting FDI

Supporters of NAFTA claimed that

-Mexico would benefit -rom increased jobs as low cost production moves south and will see more rapid economic growth as a result -the U.S. and Canada would benefit from -access to a large and increasingly prosperous market -US: 325 million Mexico: 129 million Canada: ? -the lower prices for consumers from goods produced in Mexico -low cost labor and the ability to be more competitive on world markets

How Do Core Competencies Influence Entry Mode? -When competitive advantage is based on proprietary technological know-how

-avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design

Eurodollars

-dollars banked outside the United States

Exporting limitations:

-exports can be limited by transportation costs and trade barriers -FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas

Strategic alliances are attractive because they

-facilitate entry into a foreign market -allow firms to share the fixed costs and risks of developing new products or processes -bring together complementary skills and assets that neither partner could easily develop on its own -help a firm establish technological standards for the industry that will benefit the firm

The Andean Pact

-formed in 1969 using the EU model -had more or less failed by the mid-1980s -was re-launched in 1990, and now operates as a customs union -signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area

North American Free Trade Area

-includes the United States, Canada, and Mexico -abolished tariffs on 99% of the goods traded between members -removed most barriers on the cross-border flow of services -protects intellectual property rights -removes most restrictions on FDI between the three member countries -allows each country to apply its own environmental standards

eurocurrency

-is any currency banked outside its country of origin

Critics of NAFTA claimed that

-jobs would be lost and wage levels would decline in the U.S. and Canada -Mexican workers would emigrate north -pollution would increase due to Mexico's more lax standards -Mexico would lose its sovereignty

What Is MERCOSUR?

-originated in 1988 as a free trade pact between Brazil and Argentina. It was expanded in 1990 to include Paraguay and Uruguay -some critics have argued that rather than creating trade, MERCOSUR, by establishing high tariffs to outside countries, is actually diverting trade* in some industries, and that companies in these industries would be unable to compete in global markets.

Governments can encourage outward FDI by

-providing "government-backed insurance" programs to cover major types of foreign investment risk

There are two other trade pacts in the Americas

-the Central American Trade Agreement -(CAFTA, 2005) - to lower trade barriers between the U.S. and members -CARICOM (1973) - to establish a customs union

How Do Core Competencies Influence Entry Mode? -When competitive advantage is based on management know-how

-the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant

What Influences The Choice Of Entry Mode? -How attractive each of these entry methods are depends on several factors including:

-transport costs -trade barriers -political risks -economic risks -costs -firms strategy

There are some disadvantages for adopting the euro:

1- A major cost involved in adopting a common currency is that individual countries lose control over monetary policy. 2- The EU is not an optimal currency area, or an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy.

There are 3 main costs of inward FDI.

1- Adverse effects of FDI on competition within the host nation 2- Adverse effects on the balance of payments. 3- The loss of national sovereignty and autonomy that is often associated with FDI.

Why adopt a common currency?

1- Companies and individuals. Instead of having to convert currencies, the same currency is used across the bloc, so companies will save the cost and risks of converting currencies. 2- Consumers to compare prices across Europe. 3- Another benefit of the euro is that it should boost the development of a highly liquid pan-European capital market.

When Should A Firm Enter A Foreign Market? -Once attractive markets are identified, the firm must consider the timing of entry

1.Entry is early when the firm enters a foreign market before other foreign firms 2.Entry is late when the firm enters the market after firms have already established themselves in the market

Licensing limitations:(This is known as Internalization theory)

1- Firm could give away valuable technological know-how to a potential foreign competitor 2- Does not give a firm the control over manufacturing, marketing, and strategy in the foreign country 3- The firm's competitive advantage may be based on its management, marketing, and manufacturing capabilities

There are two types of international bonds

1- Foreign bonds are sold outside the borrower's country and are denominated in the currency of the country in which they are issued A U.S. company can issue bonds in Japanese yen, and sells them in Japan. This would be foreign bonds. 2- Eurobonds are underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated A U.S. company can offer bonds denominated in Japanese yen, that are sold in Germany. This would be eurobonds.

There are 5 levels of economic integration:

1- The free trade area 2- The customs union 3- The common market 4- The economic union 5- The political union.

How does a government's attitude affect FDI? There are 3 views that we are going to look at:

1- The radical view that's hostile to all FDI 2- The free Market view that has noninterventionist principles 3- The pragmatic nationalism. (in between).

The shift to services is being driven by 4 main reasons:

1- There is a general trend in developed countries away from manufacturing and toward services. 2- Because services often have to be produced where they are consumed, FDI is required. (You can't ship a hot latte from Seattle to Beijing!) 3- There has been a liberalization of policies governing services. (Brazil for example, opened its telecommunications sector to foreign companies in the 1990s.) 4- Internet-based global telecommunications now allow companies to shift activities like call centers to low cost locations like India.

What Limits Efforts At Integration? 2 key issues limit integration:

1- while a nation as a whole benefits from integration, some groups may actually lose. 2- Countries that integrate their economies lose some degree of national sovereignty. Integration requires that countries give up some control over monetary policy, fiscal policy, and trade policy.

How Can Firms Enter Foreign Markets? -There are six different ways to enter a foreign market

1. Exporting 2.Turnkey projects 3. Licensing 4. Franchising 5. Joint ventures with a host country firm 6. Wholly owned subsidiary

The growth of FDI is a result of

1. a fear of protectionism -want to circumvent trade barriers 2. political and economic changes -deregulation, privatization, fewer restrictions on FDI 3. new bilateral investment treaties -designed to facilitate investment 4.the globalization of the world economy -many companies now view the world as their market -need to be closer to their customers

FDI can be in the form of:

1. greenfield investments 2. acquisitions or mergers

Which Is Better - Greenfield or Acquisition?

1.A greenfield strategy - build a subsidiary from the ground up -greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture 2.An acquisition strategy - acquire an existing company -acquisition may be better when there are well-established competitors or global competitors interested in expanding

Two factors are responsible for the growth of capital markets

1.Advances in information technology the growth of international communications technology and advances in data processing capabilities 2. Deregulation by governments - has facilitated growth in international capital markets -governments have traditionally limited foreign investment in domestic companies, and the amount of foreign investment citizens could make -since the 1980s, these restrictions have been falling -deregulation began in the United States, then moved to other countries - Great Britain, Japan, and France -More recently, some emerging markets began dismantling their barriers, and most experts expect this trend to continue.

The eurobond market is attractive because:

1.It lacks regulatory interference - since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower 2.It has less stringent disclosure requirements than domestic bond markets - it can be cheaper and less time consuming to offer eurobonds than dollar-denominated bonds 3.It is more favorable from a tax perspective - Because of special tax exemptions, eurobonds can be sold directly to foreign investors.

What Makes Strategic Alliances Successful?

1.Partner selection 2.Alliance structure 3.The manner in which the alliance is managed

How Does FDI Benefit The Host Country? -There are 4 main benefits:

1.Resource transfer effects - FDI brings capital, technology, and management resources 2.Employment effects - FDI can bring jobs 3.Balance of payments effects - FDI can help a country to achieve a current account surplus 4.Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers -can lead to increased productivity growth, product and process innovation, and greater economic growth

What Is The Political Structure Of The European Union? ØThe main institutions in the EU include:

1.The European Council - the ultimate controlling authority within the EU 2.The European Commission - responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member state 3. The European Parliament - debates legislation proposed by the commission and forwarded to it by the council 4. The Court of Justice - the supreme appeals court for EU law

Europe has two trade blocs

1.The European Union (EU) with 28 members 2.The European Free Trade Area (EFTA) with 4 members

The benefits of FDI for the home country include:

1.The effect on the capital account of the home country's balance of payments from the inward flow of foreign earnings 2.The employment effects that arise from outward FDI. (Example: Remember that Nissan USA imports a lot of inputs from Japan creating jobs there.) 3.The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

What Are The Costs Of FDI To The Home Country?

1.The home country's balance of payments can suffer -from the initial capital outflow required to finance the FDI -if the purpose of the FDI is to serve the home market from a low cost labor location -if the FDI is a substitute for direct exports 2.Employment may also be negatively affected if the FDI is a substitute for domestic production

What Are The Basic Decisions Firms Make When Expanding Globally?

1.Which markets to enter 2.When to enter them and on what scale 3.Which entry mode to use -exporting -licensing or franchising to a company in the host nation -establishing a joint venture with a local company -establishing a new wholly owned subsidiary (FDI) -acquiring an established enterprise (FDI)

Licensing

1.a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee -patents, inventions, formulas, processes, designs, copyrights, trademarks

Exporting

1.common first step for many manufacturing firms -later, firms may switch to another mode

Turnkey projects

1.the contractor handles every detail of the project for a foreign client, including the training of operating personnel -at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation

Joint ventures with a host country firm

4.a firm that is jointly owned by two or more otherwise independent firms -most joint ventures are 50:50 partnerships

Franchising

4.a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business -used primarily by service firms

Wholly owned subsidiary

4.the firm owns 100 percent of the stock -set up a new operation -acquire an established firm

Economic Reasons

As you know by now, free trade has been applied by WTO members and is beneficial to countries, but despite of all the efforts trade barriers still exist. Regional economic integration offers countries a way to achieve the gains from free trade more quickly than would be possible under the WTO process.

Agreement on Fixed Exch. Rates (1944 - 1971

Bretton Woods Agreement (Video) An agreement on having the relationship between currencies fixed. In other words, for example the U.S. dollar and the British pound will always have this rate: ₤1 = $2 or $1 = ₤0.5 Governments would intervene to prevent the fluctuation of its currency by more than 1 percent.

Why do countries agree to integrate their economies?

Countries integrate for both economic and political reasons.

Volume:

Currencies that have a large trading volume are more liquid because there are numerous buyers and sellers at any given time.

Currency risk

Economic or political conditions that cause the demand for and supply of the currency to change abruptly.

Why Choose Exporting?

Exporting is attractive because -it avoids the costs of establishing local manufacturing operations -it helps the firm achieve experience curve and location economies Exporting is unattractive because -high transport costs and tariffs can make it uneconomical -agents in a foreign country may not act in exporter's best interest

Which Foreign Markets Should Firms Enter?

Favorable markets -are politically stable -have free market systems -have relatively low inflation rates -low private sector debt Less desirable markets - are politically unstable -have mixed or command economies -have excessive levels of borrowing

Why Do Firms Choose Acquisition Versus Greenfield Investments?

Firms prefer to acquire existing assets because -mergers and acquisitions are quicker to execute than greenfield investments -it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up -firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

Why Enter A Foreign Market Early?

First mover advantages include: -the ability to pre-empt rivals by establishing a strong brand name -the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants -the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business

Floating Exchange Rate System (1973 - today)

Governments had hard time keeping their currencies fixed, so they allowed it to float or fluctuate by market forces.

1- Adverse effects of FDI on competition within the host nation

Host governments, particularly those of developing countries, worry that the subsidiaries of foreign MNE's might end up having greater economic power and drive local companies out of business.

3- Relative Income Levels:

Increase in U.S. income leads to increased in U.S. demand for foreign goods and increased demand for foreign currency relative to the dollar and an increase in the exchange rate for the foreign currency.

1- Relative Inflation Rates

Increase in U.S. inflation leads to increase in U.S. demand for foreign goods, an increase in U.S. demand for foreign currency, and an increase in the exchange rate for the foreign currency

2- Relative Interest Rates

Increase in U.S. rates leads to increase in demand for U.S. deposits and a decrease in demand for foreign deposits, leading to a increase in demand for dollars and an increased exchange rate for the dollar.

Why Choose Licensing?

Licensing is attractive because -the firm avoids development costs and risks associated with opening a foreign market -the firm avoids barriers to investment -the firm can capitalize on market opportunities without developing those applications itself Licensing is unattractive because -the firm doesn't have the tight control required for realizing experience curve and location economies

Spot market liquidity

More buyers and sellers means more liquidity. The $, Euro, BP, Yen are the most liquid currencies

What are the Inflows and Outflows of FDI?

Outflows of FDI- are the flows of FDI out of a country Inflows of FDI- are the flows of FDI into a country

Smithsonian Agreement (1971 - 1973)

The U.S. printing money to finance the Vietnam war led to inflation. The US dollar appeared overvalued. Representatives from major countries met again and agreed to devalue the dollar and allow it to fluctuate by 2.25%.

Alliance structure

The alliance should -make it difficult to transfer technology not meant to be transferred -have contractual safeguards to guard against the risk of opportunism by a partner -allow for skills and technology swaps with equitable gains -minimize the risk of opportunism by an alliance partner

What Makes The Eurocurrency Market Attractive?

The eurocurrency market is attractive because it is not regulated by the government -banks can offer higher interest rates on eurocurrency deposits than on deposits made in the home currency -banks can charge lower interest rates to eurocurrency borrowers than to those who borrow the home currency

What Is The Global Equity Market?

The global equity market allows firms to: 1.Attract capital from international investors -many investors invest in foreign equities to diversify their portfolios 2.List their stock on multiple exchanges -this type of trend may result in an internationalization of corporate ownership (companies will be owned by investors from around the world.) 3.Raise funds by issuing debt or equity around the world -by issuing stock in other countries, firms open the door to raising capital in the foreign market, and give the firm the option of compensating local managers and employees with stock

appreciation.

The increase in a currency value is often referred to as

Why Choose FDI?

There are limitations to exporting and licensing.

Why Choose A Turnkey Arrangement?

Turnkey projects are attractive because -they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process Turnkey projects are unattractive because -the firm has no long-term interest in the foreign country -the firm may create a competitor -if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors

Foreign Exchange: Quotations

Value of peso = $0.07 Value of Canadian dollar = $0.70 Value of peso in C$ = Value of peso in $ Value of C$ in $ = $0.07 = C$ 0.10 $0.70

2- Adverse effects on the balance of payments.

When it comes to the balance of payments, host countries worry that along with the capital inflows that come with the FDI, will be the capital outflows that occur when the subsidiary repatriates profits to the parent company. Some countries actually limit the amount of profits that can be repatriated to limit the negative effects of this. Host countries are also concerned that some subsidiaries import a substantial number of their inputs. These imports will show up in the current account of the balance of payments.

Why Choose A Wholly Owned Subsidiary?

Wholly owned subsidiaries are attractive because -they reduce the risk of losing control over core competencies -they give a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination -they may be required in order to realize location and experience curve economies Wholly owned subsidiaries are unattractive because -the firm bears the full cost and risk of setting up overseas operations

Regional Economic Integration

agreements between countries in a geographic region to: - Reduce tariff and nontariff barriers - Allow the free flow of goods, services, and factors of production.

Markets makers

are the financial service companies that connect investors and borrowers, either directly or indirectly.

The pragmatic nationalism

argues that FDI has both benefits and costs. -Benefits include things like inflows of capital, technology, skills, and jobs, while costs include the repatriation of profits and negative balance of payments effects.

The free Market view

argues that international production should be distributed among countries according to the theory of comparative advantage. -This perspective suggests that countries specialize in the production of the goods they can produce most efficiently and trade for everything else. It then follows, that FDI will actually increase the overall efficiency of the global economy.

The radical view

argues that the MNE is an instrument of imperialist domination and a means of exploiting host countries for the benefit of their capitalist-imperialist home countries. -The believe is that the MNE will fill all important jobs with home country citizens, and so control key technology leaving the host nation dependent on the capitalist country for investment, jobs, and technology.

pioneering costs

arise when the foreign business system is so different from that in a firm's home market that the firm must devote considerable time, effort and expense to learning the rules of the game

ASEAN Free Trade Area (AFTA)

between the six original members of ASEAN came into effect in 2003

5- In a political union,

independent states are combined into a single union where the economic, social, and foreign policy of members is coordinated.

Licensing

involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells.

Exporting

involves producing goods at home and then shipping it to the receiving country for sale.

exchange rate

is the rate at which one currency can be exchanged for another. It represents the price of a currency

First mover disadvantages include

pioneering costs - arise when the foreign business system is so different from that in a firm's home market that the firm must devote considerable time, effort and expense to learning the rules of the game -the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes -the costs of promoting and establishing a product offering, including the cost of educating customers

gold standard

refers to a system in which countries peg currencies to gold and guarantee their convertibility

International monetary system

refers to the institutional arrangements that countries adopt to govern exchange rates.

Indirect quotation

represents the number of units of a foreign currency per dollar. Example: €0.7143 per dollar

Direct Quotation

represents the value of a foreign currency in dollars (number of dollars per currency). Example: $1.40 per euro

strategic commitment

the decision has a long term impact and is difficult to reverse

Gross fixed capital formation

the total amount of capital invested in factories, stores, office buildings, and the like