International Management - Hub 2

An industry with a limited number of competing firms

Oligopolistic industry

The purchase of stocks and bonds to obtain a return on the funds invested.

Portfolio investment

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

Eclectic theory of international production

The predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases

Economies of scale

The rising scale on which efficiency improves as a result of cumulative experience and learning

Experience curve

Explain the eclectic theory of FDI

Explains an IC's choice of its overseas production facilities. The firm must have locations and ownership advantages to invest in a foreign plant. It will invest where it is most profitable to internalize its monopolistic advantage.

The establishment of new facilities from the ground up

Greenfield investment

Theory that to obtain a higher return on its investment, a firm will transfer its superior knowledge to a foreign subsidiary that it controls, rather than sell it in the open market

Internalization theory

A theory explaining why a product that begins as a nation's export eventually becomes its import

International product life cycle (IPLC)

An economic philosophy based on the belief that (1) a nation's wealth depends on accumulated treasure, usually precious metals such as gold and silver; and (2) to increase wealth, government policies should promote exports and discourage imports.

Mercantilism

Theory that foreign direct investment is made by firms in industries with relatively few competitors, due to their possession of technical and other advantages over indigenous firms

Monopolistic advantage theory

A nation's relative ability to design, produce, distribute, or service products within an international trading context while earning increasing returns on its resources

National competitiveness

A market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogeneous product such that no individual participants has enough power to determine the price of the product, resulting in a marketplace that is efficient in production and allocation of products

Perfect competition

A market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogeneous product, such that no individual participant has enough power to determine the price of the product, resulting in a marketplace that is efficient in production and allocation of products.

Perfect competition

Unique differences producers build into their products with the intent of positively influencing demand.

Product differentiation

The land, labor, capital, and related production factors a nation possesses.

Resource endowment

Explain the internalization theory of FDI

States that firms will seek to invest in foreign subsidiaries, rather than license their superior knowledge, to receive a bette return on the investment used to develop that knowledge.

Theory suggesting that strategic rivalry between firms in an oligopolistic industry will result in firms closely following and imitating each other's international investments in order to keep a competitor from gaining an advantage.

Strategic behavior theory

Explain the monopolistic advantage theory of FDI

Suggests that advantages due to economies of scale, super technology, or superior knowledge in marketing, management, or finance enable the multinational enterprise to operate more profitably in foreign markers than can local competitors.

Explain the dynamic capabilities theory of FDI

Suggests that firms must have not only ownership of specific knowledge or resources but also the ability to dynamically create and exploit capabilities in order to achieve success in FDI

Explain the strategic behavior theory of FDI

Suggests that strategic rivalry between firms in oligopolistic industries will result in imitation by the firms of one another's international investments in order to prevent competitors from gaining an advantage.

Describe the size, growth, and direction of foreign direct investments

The book value of FDI was $30.8 trillion at the beginning of 2018. Although the United States is the largest source of this FDI, the proportion of global foreign direct investment accounted for by the United States has been declining, while the proportion accounted for by the European Union has risen. The proportion of FDI originating from the developing nations has also been increasing. On an annual basis, more than 75 percent of the outstanding stock of FDI at the beginning of 2018 came from developed countries. In terms of destination for outward FDI, an average of nearly half of annual FDI investments have been going into developed countries in recent years, a substantial decline from historical averages, with a majority of this investment occurring in the form of acquisitions of existing companies. The direction of FDI follows the direction of foreign trade; that is, developed nations invest in one another just as they trade with one another.

The amount by which the value of imports into a nation exceeds the value of its exports.

Trade deficit

The amount by which the value of a nation's exports exceeds the value of its imports.

Trade surplus

Comparative advantage

When one nation is less efficient than another nation in the production of each of two goods, the less efficient nation has a comparative advantage in the production of that good for which its absolute disadvantage is less

This exists when a nation can produce more of a good or service than another country for the same or lower cost of inputs

Absolute advantage

A reduction in the value of a country's currency relative to other currencies

Currency devaluation

Identify who participates in trade

Developed countries tend to trade with developed countries and they account for a majority of the exports worldwide. More than half of the exports from developing countries also go to developed countries, although this proportion has been declining. The rise of regional trade agreements, as well as other factors, is transforming the volume and direction of world trade in merchandise and services. More than 70% of world trade now occurs between members of regional trade agreements.

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

Direct investment

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

Dynamic capability theory

Distinguish among the theories that explain why certain goods are trade internationally

The resource endowments theory proposes that a nation tends to export products requiring large amount of a resource that is relatively abundant in that nation. In contrast, the theory of overlapping demand suggests that international trade in manufactured goods will be greater between nations with similar levels of per capita income. The International product life cycle theory states that many products in the United States or other developed countries are eventually produced in less developed nations and become imports to the very countries in which their production began. Porter helped explain how nations can achieve competitive advantage through the emergence of regional clusters, claiming that four classes of variables are critical in this regard: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure, and rivalry. Competitiveness can also be affected by government and by chance.

Describe the magnitude of international trade and how it has grown

The volume of international trade in goods and services measured in current dollars was $23 trillion in 2017, including merchandise exports of $17.5 trillion. Services exports were only $5.4 trillion, but their rate of growth has been faster than that of merchandise exports. The 10 largest exporting and importing countries account for over half the worlds exports and imports, highlighting the fact that international trade continues to be unevenly distributed across countries and regions of the world. Nearly 60% of global output is now destined for international trade, another indication of the extent to which international trade has become a critical factor in the economic activity of many, if not most, of the countries of the world.

Explain foreign direct investment (FDI)

To be successful with their foreign investment activities, firms must possess advantages not available to local firms in order to overcome liabilities associated with being a foreigner, and FDI theories attempt to explain how these advantages might be developed and exploited.

The purchase of an existing business in another nation

cross-border acquisition