IB Test 2

What are the stated aims of the Association of Southeast Asian Nations (ASEAN)?

-Promote economic, cultural, and social development in the region -Safeguard the region's economic and political stability -Serve as a forum in which differences can be resolved fairly and peacefully

What policy instruments can home countries use to promote F D I?

1. Insurance 2. Loans 3. Tax breaks 4. Political pressure

Around 40 years ago, national capital markets functioned largely as independent markets. But since that time, the amount of debt, equity, and currencies traded internationally has increased dramatically. This rapid growth can be traced to three main factors:

-Information Technology -Deregulation -Financial Instruments

Performance Demands:

-Local content requirements -Export targets -Technology transfer -More common than ownership requirements are performance demands that influence how international companies operate in the host nation.

Decision of the United States to devalue its currency and Britain's decision not to do so:

-Lowered the price of U.S. exports on world markets -Increased the price of imports from Britain (and other countries), lowering its export earnings -Countries devalued their currencies in retaliation

Economic Community of West African states (ECOWAs):

-Progress on market integration is almost nonexistent. - formed in 1975 but its efforts at economic integration were restarted in 1992 because of a lack of early progress. -most important goalsinclude the formation of a customs union, an eventual common market, and a monetary union.

Ownership Restrictions:

-Prohibit investment -Governments can impose ownership restrictions that prohibit nondomestic companies from investing in certain industries or from owning certain types of businesses.

Theft and corruption:

A high incidence of theft and corruption can present obstacles to distribution.

Laws and Regulations:

Companies must often adapt their products to satisfy laws and regulations in a target market.

FOR Regional Integration-Corporate Savings:

Companies that do business throughout this region could save millions of dollars annually from the removal of import tariffs under an eventual agreement. Multinational corporations could also save money by supplying entire regions from just a few regional factories, rather than having a factory in each nation.

Export Management Company (EMC):

Company that exports products on behalf of indirect exporters.

Export Trading Company (ETC):

Company that provides services to indirect exporters in addition to activities related directly to clients' exporting activities.

A joint venture DISADVANTAGES

Conflict is perhaps most common when management is shared equally because neither partner's managers have the final say on decisions. Also, parties may lose all control over the venture's operations if the local government participates in the venture.

Bill of Lading:

Contract between an exporter and a shipper that specifies merchandise destination and shipping costs

Currency Futures Contract:

Contract requiring the exchange of a specified amount of currency on a specified date at a specified exchange rate, with all conditions fixed and not adjustable.

How Exchange Rates Adjust to Inflation

Exchange rates adjust to different rates of inflation in different countries. Necessary to maintain PPP between nations

Role of Inflation

Inflation erodes people's purchasing power.

The principle that an identical item must have an identical price in all countries when price is expressed in a common currency is called what?

Law of One Price

Contractual Entry Modes:

Licensing, Franchising, Management Contract, Turnkey projects

International capital market:

Network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries.

Direct Exporting:

Practice by which a company sells its products directly to buyers in a target market. Uses -Local Sales Representatives and -Distributors

Indirect Exporting:

Practice by which a company sells its products to intermediaries who then resell to buyers in a target market. Uses-Agents -Export Management Companies -Export Trading Companies

What countries belong to the regional trading bloc called CAFTA-DR?

The United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.

regional economic integration (regionalism)

The process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital.

A disadvantage of both management contracts and turnkey projects is what?

They can create another company which may be a competitor in the future.

In terms of channel length, direct marketing is also known as a what?

a zero-level channel

managing franchisees DISADVANTAGES

across several nations can become cumbersome, and such agreements may reduce organizational flexibility for franchisees.

The Louvre Accord:

affirmed that the U.S. dollar was appropriately valued

Portfolio Investment

an investment that does not involve obtaining a degree of control in a company

Eurobond

bond issued outside the country in whose currency it is denominated

A strong brand

can become a company's most valuable asset and primary source of competitive advantage. A consistent worldwide brand image is increasingly important as more consumers and businesspeople travel internationally than ever before.

Low interest rates encourage

consumers and businesses to borrow and spend money, which adds to inflationary pressures.

For these and other reasons, governments have created formal and informal agreements to

control exchange rates.

What is another name for a freely convertible currency?

convertible (hard)currency,

Meeting these economic criteria better aligned

countries' economies and paved the way for smoother policy making under a single European Central Bank.

European Parliament

debates and amends legislation proposed by the European Commission.

A promotional strategy

designed to create buyer demand that will encourage distribution channel members to stock a company's product is called a pull strategy.

Production costs are

important inputs to the FDI decision.

What type of channel grants the right to sell a product to many resellers?

intensive channel

Transfer price

is a product's selling price when it is sold among a company and its subsidiaries. Transfer pricing was used to manage global tax burdens by having subsidiaries in high-tax countries charge low prices for their output exported to affiliated parties.

A foreign bond

is sold outside the borrower's country and denominated in the currency of the country in which it is sold. For example, a yen-denominated bond issued by German carmaker BMW in Japan's bond market is called a foreign bond.

Court of Justice

is the EU court of appeals, which hears cases that member nations bring before it. It consists of one judge from each member nation.

Interbank interest rates include:

lIBOR &LIBID

Today, the international monetary system remains a

managed float system. But some governments achieve more stable exchange rates by tying their currencies to those of other countries.

Because of cultural differences,

managers can be less confident in their ability to manage operations in the host country. Cultural similarity encourages confidence.

Cross licensing

occurs when companies use licensing agreements to exchange intangible property with one another.

Dumping

occurs when the price of a good is lower in export markets than in the domestic market. Charges of dumping can arise when a foreign competitor floods a target market with inexpensive imports to undercut competitors' prices, or can arise when changes in exchange rates cause unintentional dumping.

The Central American common market was never realized, however, because

of a long war between El Salvador and Honduras and guerrilla conflicts in several countries. Yet, renewed peace is creating more business confidence and optimism, which is driving double-digit growth in trade between members. the group has not yet created a customs union.

What does the Eurocurrency market consist of?

of all the world's currencies that are banked outside their countries of origin: Eurodollars, Europounds, Euroyen.

Some well-known international advertising agencies have tried a pan-European advertising approach only to fail because

of national differences.

Booking centers are typically home to

offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information.

A wholly owned subsidiary is a facility owned and controlled by what?

one parent company

Interbank interest rates—

rates that the world's largest banks charge one another for loans—are determined in the free market.

A system in which a product's components are made where the cost of producing a component is lowest is called what?

rationalized production

The current account

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.

The capital account

records transactions involving the purchase or sale of assets. These assets include physical assets such as foreign direct investments in factories and equipment, and financial assets such as shares of stock in a company abroad.

Export/import financing methods designed to

reduce these risks include advance payment, documentary collection, letter of credit, and open account.

The appeal of the Eurocurrency market is its complete absence of

regulation and low transaction costs.

The Single European ACT of 1987

removed remaining trade barriers, increased harmonization of members' policies, and enhanced the competitiveness of EU companies. -strived for lower barriers

exchange-rate risk (foreign exchange risk)

risk of adverse changes in exchange rates

Unbundling and repackaging hard-to-trade financial assets into more marketable financial instruments is called what?

securitization

Operational centers

see a great deal of financial activity. Prominent operational centers include London (which does a good deal of currency trading) and Switzerland (which supplies a great deal of investment capital to other nations).

The stated aim of APEC is to strengthen the multilateral trading system and expand the global economy by

simplifying and liberalizing trade and investment procedures among member nations. In the long term, APEC hopes to have completely free trade and investment throughout the region.

What do we call an exchange rate requiring delivery of a traded currency within two business days?

spot rate

Marketing activities that span time zones and cultures can test the most seasoned marketing managers. When a company decides to "go international," managers have many options at their disposal when it comes to

standardizing or adapting their products.

The international product life cycle theory

states that a company begins by exporting its product and then later undertakes FDI as a product moves through its life cycle.

The free float system of exchange rates that emerged following the collapse of the Bretton Woods Agreement was meant to be

temporary.

The ambitious plan of the FTAA means

that it will likely be many years before such an agreement would be realized.

In 1994, the group changed its name one final time to

the European Union (EU) and reduced barriers further

Political instability in a target market influences

the choice of entry mode. Certain import regulations, such as high tariffs or low quota limits, can encourage investment.

Base Currency

the denominator in a quoted exchange rate, or the currency that is to be purchased with another currency

A product with a low value density tends to have a distribution system that is more what?

the distribution system is more localized

One way a company can achieve market power (or dominance) is through vertical integration—

the extension of company activities into stages of production that provide a firm's inputs (backward integration) or that absorb its output (forward integration).

The EFTA and the EU created the European Economic Area (EEA) to cooperate on matters such as

the free movement of goods, persons, services, and capital among member nations. also in other areas, including the environment, social policy, and education.

There are two components to every quoted exchange rate:

the quoted currency and the base currency.

Two types of knowledge can be transferred through management contracts—

the specialized knowledge of technical managers and the business-management skills of general managers.

The Fisher effect is the principle that the nominal interest rate is

the sum of the real interest rate plus the expected rate of inflation over a specific period.

High rates of employment put

upward pressure on wages. To maintain profit margins with higher labor costs, producers then pass the cost of higher wages on to consumers in the form of higher prices.

Despite its conceptual appeal, the international product life cycle theory is limited in its

power to explain why companies choose FDI over other forms of market entry.

What is the impact on purchasing power when growing demand for products outstrips a stagnant supply?

prices will raise and devour any increase in the amount of money that consumers have to spend- therefor eroding purchasing power

interest arbitrage

profit-motivated purchase and sale of interest-paying securities denominated in different currencies

The combined value of goods traded among the United States and the six other CAFTA-DR countries is around

$50 billion.

FDI to developing Asian nations were nearly_ China attracting more than_ and India attracting nearly _

$541 $136 $44 FDI to Latin America and there Caribbean accounted for about 10 percent of the world total

Companies develop their international distribution strategies based on two related decisions:

(1) how to get goods into a country and (2) how to distribute goods within a country.

The three main objectives of The Association of Southeast Asian Nations alliance are to

(1) promote economic, cultural, and social development in the region; (2) safeguard the region's economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully.

Managers consider two overriding concerns when establishing channels of distribution:

(1) the amount of market exposure a product needs and (2) the cost of distributing a product.

Product/Communications Extension (Dual Extension) consists of:

- Can be the simplest and most profitable strategy -Will probably grow more popular -Better suited for brand-conscious teenagers, business executives, and wealthy individuals -Better suited for companies that use a global strategy with their products -Appropriate for global brands that have mass appeal and that cut across all age groups and social classes -Useful to companies that are the low-cost leaders in their industries

Inflation—Key Factors

- Monetary policy -Fiscal policy -High employment raises wages -High interest rates

The main objectives of the the Andean Community group include

- tariff reduction for trade among member nations -a common external tariff -common policies in both transportation and certain industries. - incomplete customs union -ideological conflict -inherent distrust among members makes lower tariffs and more open trade hard to achieve.

Collapse of the Gold Standard

-Aggressive printing of paper currency caused high inflation -Decision of the United States to devalue its currency and Britain's decision not to do so -Competitive devaluations

Product Extension/Communications Adaptation-Level of economic development

-Alternative techniques: Door-to-door personal selling and regional product shows or fairs -Modern telecommunications system: TV, radio, and the World Wide Web -"Localizing Websites" common for companies to adapt their websites to each national market.

Integration in Asia and Elsewhere 6 agreements:

-Association of Southeast Asian Nations (ASEAN)- Asia Pacific Economic Cooperation (APEC) -Closer Economic Relations (CER) -Gulf Cooperation Council (GCC) -Economic Community of West African States (ECOWAS)- African Union (AU)

There are several different types of countertrade:

-Barter -Counterpurchase -Offset -Switch Trading -Buyback

Product Extension/Communications Extension Includes

-Can be costly -Appropriate for differentiated product

Policies for restricting currency convertibility include:

-Central bank approval -Import licenses -Multiple exchange rate system -Import deposit requirements -Quantity restrictions

International Advertising

-Consider Cultural Nuances -Standardizing or Adapting Advertisements -The Elusive Euro-Consumer

Management Issues and Foreign Direct Investment

-Control -Purchase-or-Build Decision -Production Costs -Customer Knowledge -Following Clients -Following Rivals

Why might a host country intervene in foreign direct investment?

-Control the Balance of Payments -Obtain Resources and Benefits

Product Invention

-Develop an entirely new product for the target market. -Many important differences exist between the home and target markets. -Local buyers cannot afford a company's current product because of low purchasing power. -Lack of adequate infrastructure needed to operate certain products.

Most prominent financial crises

-Developing Nations' Debt Crisis -Mexico's Peso Crisis -Southeast Asia's Currency Crisis -Russia's Ruble Crisis -Argentina's Peso Crisis

Whether the push or pull strategy is most appropriate in a given marketing environment depends on several factors:

-Distribution System -Access to Mass Media -Type of Product

Worldwide Flows of F D I

-Driving FDI growth are more than 100,000 multinational companies with more than 900,000 affiliates abroad, roughly half of which are in developing countries. -In 2014, for the first time ever, developing countries attracted greater FDI inflows than did developed countries. - -Developed countries account for 41 percent ($522 billion) of total global FDI inflows (more than $1.28 trillion in 2014). - FDI inflows to developing countries accounted for around 55 percent of world FDI inflows ($699 billion). The remaining roughly four percent of global FDI inflows went to countries across Southeast Europe in various stages of transition from communism to capitalism.

NAFTA: North American Free Trade Agreement

-Effective in January 1994-Comprises a market with 480 million consumers -A GDP of around $21 trillion-Free Trade Agreement

Common reasons for export and import blunders:

-Failure to conduct adequate market research -Failure to obtain adequate export advice

European Free Trade Association (EFTA)

-Feared a loss of national sovereignty -Feared destructive rivalry -Desired free-trade gains -Cooperates with EU

Management Contract Advantages

-Few assets risked -Nations finance projects -Develops local workforce

What policy instruments can host countries use to promote F D I?

-Financial incentives -Infrastructure improvements

The gold standard offered several advantages.

-First, fixed exchange rates between currencies reduced exchange rate risk and, in turn, helped expand world trade. -Second, the gold standard imposed strict monetary policies on nations because they could not let the value of their paper currency grow faster than the value of their gold reserves. -Third, the system could help correct a nation's trade imbalances.

What is the name of a specific type of joint venture?

-Forward Integration Joint Venture -Backward Integration Joint Venture -Buyback Joint Venture -Multistage Joint Venture

Certain government policies are frequently used to restrict currency convertibility Include:

-Governments can require that all foreign exchange transactions be performed at or approved by the country's central bank. -They can also require import licenses for some or all import transactions. These licenses help the government control the amount of foreign currency leaving the country. -Some governments implement systems of multiple exchange rates, specifying a higher exchange rate on the importation of certain goods or on imports from certain countries. -Other governments issue import deposit requirements that require businesses to deposit certain percentages of their foreign exchange funds in special accounts before being granted import licenses. - quantity restrictions limit the amount of foreign currency that residents can take out of the home country when traveling to other countries as tourists, students, or medical patients.

Sources of Eurocurrency deposits include:

-Governments with excess funds generated by a prolonged trade surplus -Commercial banks with large deposits of excess currency -International companies with large amounts of excess cash -Extremely wealthy individuals

Effects of NAFTA:

-Growing trade among the three participating nations -Effect on employment and wages is not as easy to determine -Claims of environmental damage -Environmental protection efforts -Delays in NAFTA expansion

Copenhagen Criteria require each country to demonstrate that it:

-Has stable institutions, which guarantee democracy, the rule of law, human rights, and respect for and protection of minorities. -Has a functioning market economy, capable of coping with competitive pressures and market forces within the EU. -Is able to assume the obligations of membership, including adherence to the aims of economic, monetary, and political union. -Has the ability to adopt the rules and regulations of the community, the rulings of the European Court of Justice, and the treaties.

Home Countries: Restriction

-Higher taxes on foreign income -Sanctions that prohibit investing in certain nations

Several factors may explain why PPP is a better predictor of long-term exchange rates than short-term rates.

-Impact of Added Costs -Impact of Trade Barriers -Impact of Business Confidence and Psychology

On the other hand, to limit the effects of outbound FDI on the national economy, home governments may exercise either of the following restriction:

-Impose differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings.-Impose outright sanctions that prohibit domestic firms from making investments in certain nations.

Joint ventures follow several common configurations.

-In a forward integration joint venture, parties invest together in downstream business activities. -In a backward integration joint venture, parties invest together in upstream business activities. -In a buyback joint venture, each partner provides inputs and absorbs outputs. -And in a multistage joint venture, one partner integrates downstream while the other integrates upstream

Bretton Woods Agreement 4 main features

-Incorporated fixed exchange rates -Incorporated a degree of built-in flexibility -Created the World Bank -Established the International Monetary Fund (IMF)

Home Countries: Promotion

-Insurance on assets abroad -Loans and loan guarantees -Special tax treaties -Tax breaks on profits earned abroad -Persuade other nations to accept F D I

Why might a home country intervene in foreign direct investment?

-Investing in other nations sends resources out of the home country -outgoing FDI may ultimately damage a nation's balance of payments by taking the place of its exports - jobs resulting from outgoing investments may replace jobs at home.

The following are among the most common reasons for home country discouraging outward FDI:

-Investing in other nations sends resources out of the home country and lowers investment at home. -An FDI outflow can damage a nation's balance of payments if the investment abroad eliminates an export market. - jobs created abroad by an FDI outflow may replace jobs in the home country. -Home countries may also promote outward FDI. -FDI outflows can increase long-term competitiveness if partnering abroad provides a learning opportunity. -FDI outflows can eliminate low-wage jobs in industries that use obsolete technology or employ low-skilled workers at home.

Special Distribution problems that can affect a company's international distribution activities:

-Lack of Market Understanding -Theft and Corruption

Nestlé's Global Recipe

-Largest food company in the world: In nearly every country on the planet -Food is integral to cultural fabric: Sensitivity to local dietary traditions -Monitoring regional integration:Trade agreements- can be double-edged swords

Developing Product Strategies

-Laws and Regulations -Cultural Differences -Brand and Product Names -National Image -Counterfeit Goods and Black Markets -Shortened Product Life Cycles

What factors influence a company's international product strategy?

-Laws and Regulations -Cultural Differences -Brand and Product Names -National Image -Counterfeit Goods and Black Markets -Shortened Product Life Cycles

NAFTA Local Content Requirements and Rules of Origin

-Local Content Requirements -NAFTA Certificate of Origin -NAFTA Rules of Origin

Competitive devaluations

-No longer an accurate indicator of a currency's true value -By 1939, gold standard was effectively dead

To encourage outbound FDI, home-country governments can do any of the following to PROMOTE:

-Offer insurance to cover the risks of investments abroad, including, among others, insurance against expropriation of assets and losses from armed conflict, kidnappings, and terrorist attacks. -Grant loans to firms wishing to increase their investments abroad. -Offer tax breaks on profits earned abroad or negotiate special tax treaties. -Apply political pressure on other nations to get them to relax their restrictions on inbound investments.

Offshore financial centers fall into two categories:

-Operational centers -Booking centers

FDI is not always a negative influence on home nations. In fact, countries promote outgoing FDI for the following reasons:

-Outward FDI can increase long-term competitiveness. -Nations may encourage FDI in industries identified as "sunset" industries.

Strategic Alliance Disadvantages

-Partner conflict -Create competitor

Management Contract Disadvantages

-Personnel at risk -Creates competitor

Product/Communications Adaptation (Dual Adaptation) includes

-Product is adapted to match the needs or preferences of local buyers. -Promotional message is adapted to explain how the product meets those needs and preferences. -Can be expensive -Appropriate if a sufficiently large and profitable market segment exists

What makes a worldwide pricing policy difficult to achieve in practice?

-Production costs -Cost of reaching different markets -Purchasing power of buyers in a target market -Fluctuating currency values

3 Approaches companies use to contain production costs are:

-Rationalized production -Mexico's Maquiladora -Cost of research and development

The Gold Standard: Advantages of the Gold Standard

-Reduced the risk in exchange rates -Imposed strict monetary policies -Help correct a nation's trade imbalance

What were the main advantages of the gold standard?

-Reduced the risk in exchange rates -Imposed strict monetary policies -Help correct a nation's trade imbalance

Strategic Factors in Selecting an Entry Mode

-Selecting Partners for Cooperation -Cultural Environment -Political and Legal Environments -Market Size -Production and Shipping Costs -International Experience

Strategic Alliance Advantages

-Share project cost -Tap competitors' strengths -Gain channel access

The EMS was established to:

-Stabilize exchange rates -Promote trade among nations -Keep inflation low through monetary discipline

The Case for Regional Integration

-Trade Creation -Greater Consensus -Political Cooperation -Employment Opportunities -Corporate Savings

The Case Against Regional Integration

-Trade Diversion -Shifts in Employment -Loss of National Sovereignty

Many factors have an important influence on managers' pricing decisions:

-Transfer Price -Arm's Length Price -Price Controls -Dumping

Eurocurrency Market Example:

-U.S. dollars deposited in a bank in Tokyo are called Eurodollars. -British pounds deposited in New York are called Europounds. -Japanese yen deposited in Frankfurt are called Euroyen.

Collapse of the Bretton Woods Agreement

-U.S. trade and budget deficits-Smithsonian Agreement -A weak U.S. dollar -A large sell-off of dollars on world financial markets

Forecasting Difficulties

-Unexpected events -Human error -Regulatory changes -Few, if any, forecasts are ever completely accurate because of unexpected events that occur throughout the forecast period. Beyond the problems associated with the data used by these techniques, failings can be traced to the human element involved in forecasting. Another factor that adds to the difficulty of forecasting exchange rates is changes in government regulation of business.

CAFTA-DR agreement benefits the United States in several ways:

-aims to reduce tariff and nontariff barriers against U.S. exports to the region. -Ensures that U.S. companies are not disadvantaged by Central American nations' trade agreements with Mexico, Canada, and other countries. -The agreement also requires the Central American nations and the Dominican Republic to reform their legal and business environments to encourage competition and investment, protect intellectual property rights, and promote transparency and the rule of law. -Designed to support U.S. national security interests by advancing regional integration, peace, and stability.

Economic Criteria

-consumer price inflation must be below 3.2 percent and must not exceed that of the three best-performing countries by more than 1.5 percent. - the debt of government must be no higher than 60 percent of GDP. An exception is made if the ratio is diminishing and approaching the 60 percent mark. - the general government deficit must be no higher than 3.0 percent of GDP. An exception is made if the deficit is close to 3.0 percent or if the deviation is temporary and unusual. -interest rates on long-term government securities must not exceed, by more than 2.0 percent, those of the three countries with the lowest inflation rates.

The Southern Common Market (in Spanish El Mercado Comun del Sur, or MERCOSUR)

-established in 1988 between Argentina and Brazil but expanded to include Paraguay and Uruguay in 1991 and Venezuela in 2006. -Associate members include Bolivia, Chile, Colombia, Ecuador, and Peru. Mexico has been granted observer status in the bloc.- acts as a customs union and boasts a market of more than 290 million consumers (nearly half of Latin America's total population) and a GDP of around $4 trillion. Its first years of existence were very successful, with trade among members growing nearly fourfold.

Closer Economic Relations (CER) Agreement:

-founded in 1983 to further advance free trade and integrate Australia and New Zealand economies -completely eliminated tariffs and quotas between Australia and New Zealand in 1990, five years ahead of schedule.

What factors influence the power of purchasing power parity to accurately predict exchange rates?

-impact of added costs-impact of trade barriers-impact of business confidence & psychology

NAFTA also calls for Provisions including:

-liberalized rules regarding government procurement practices -granting of subsidies -imposition of countervailing duties -trade in services -intellectual property rights -standards of health, safety, and the environment

Advance Payment method of payment is common when

-two parties are unfamiliar with each other - the transaction is relatively small - or the buyer is unable to obtain credit because of a poor credit rating at banks.

Governments of many newly industrialized and developing countries impose currency restrictions to

1) preserve a country's reserve of hard currencies with which to repay debts owed to other nations; 2) to preserve hard currencies to pay for imports and to finance trade deficits; 3) to protect a currency from speculators; and 4) to keep resident individuals and businesses from investing in other nations.

Three categories of entry modes:

1- Exporting, importing, and countertrade 2- Contractual entry 3-Investment entry

What are the four steps, in order, involved in creating an export strategy?

1- Identify a potential market 2- Match needs to abilities 3-Initiate meetings 4-Commit resources

There are several points to consider when selecting partners for cooperation.

1- each partner must be firmly committed to the stated goals of the cooperative arrangement. Detailing duties and contributions of each party through prior negotiations helps ensure continued cooperation.2- although the importance of locating a trustworthy partner seems obvious, cooperation should nevertheless be approached with caution.3- each party's managers should be at ease working with people of other cultures and be comfortable traveling to, and perhaps living in, other cultures.4- managers should apply the same stringent evaluation criteria to a potential international cooperative arrangement as they would to any other investment opportunity.

Management Implications of the Euro:

1- the euro removes financial obstacles created by the use of multiple currencies.- It completely eliminates exchange-rate risk and reduces transaction costs by eliminating the cost of converting from one currency into another. 2- the euro makes prices among markets more transparent, making it difficult to charge different prices in adjoining markets.

three main reasons why companies begin exporting:

1-Achieve economies of scale 2-Diversify sales 3-Gain international business experience

The spot market assists companies in performing any one of three functions:

1-Converting income generated from sales abroad into their home-country currency 2-Converting funds into the currency of an international supplier 3-Converting funds into the currency of a country in which they wish to invest

Four criteria determine whether a good meets NAFTA rules of origin:

1-Goods wholly produced or obtained in the NAFTA region 2-Goods containing non-originating inputs but meeting Annex 401 origin rules (which covers regional input) 3-Goods produced in the NAFTA region wholly from originating materials 4-Unassembled goods and goods classified in the same harmonized system category as their parts that do not meet Annex 401 rules but that have sufficient North American regional value content

Developing an Export Strategy: A Four-Step Model

1-Identify a potential market 2-Match needs to abilities 3-Initiate meetings 4-Commit resources

The international capital market affects money markets in at least four ways:

1-It expands the money supply for borrowers by providing access to international sources of capital. 2-It reduces the cost of money for borrowers by increasing its supply and forcing down borrowing costs. 3-It reduces risk for lenders by expanding the set of available lending opportunities. 4- And it allows investors to offset losses in some economies with gains in others.

What factors may discourage an investment entry mode?

1-Political and Legal Environments 2-Market Size 3-International Experience

When a company develops its communication strategy for international markets, it either extends or adapts its product and its promotional strategies in five possible ways. Product/promotional methods companies use:

1-Product/ Communications Extension (Dual Extension) 2-Product Extension/Communications Adaptation 3-Product Adaptation/Communications Extension 4-Product/ Communications Adaptation (Dual Adaptation) 5-Product Invention

Why might a company engage in a cross-border merger or acquisition?

1. Get a foothold in a new geographic market 2. Increase a firm's global competitiveness 3. Fill gaps in companies product lines in a global industry 4. Reduce costs of research and development, production, distribution

What is the name of a specific type of investment entry mode?

1. Wholly owned subsidiaries 2. Joint Ventures 3. Strategic Alliance

What is the purpose of the international capital market?

1. expanded supply of capital for borrowers 2. lowers interest rates for borrowers 3. It lowers risk for lenders

Why do governments sometimes engage in currency restriction?

1.Preserve a country's reserve of hard currencies with which to repay debts owned to other nations. 2. to preserve hard currencies in order to pay for imports and to finance trade deficits. 3. Protect a currency from speculators 4.(less common) goal is to keep resident individuals and businesses from investing in other nations.

The population of EFTA is around

13.5 million, and it has a combined GDP of around $800 billion. Despite its relatively small size, members remain committed to free trade principles and raising standards of living for their people.

A "pegged" exchange-rate arrangement

A country that ties its currency to a more stable and widely used currency in international trade

What are the names of the lowest and highest levels of regional economic integration?

A free trade area is the lowest extent of national integration; political union is the greatest.

Nations have banded together to reap the potential gains of international trade in a variety of ways. Shows five potential levels (or degrees) of economic and political integration for regional trading blocs.

A free trade area is the lowest extent of national integration; political union is the greatest. Each level of integration incorporates the properties of those levels that precede it.

African Union (AU):

A group of 55 nations on the African continent joined forces in 2002- Its ambitious goals are to promote peace, security, and stability across Africa and to accelerate economic and political integration while addressing problems compounded by globalization.

FOR Regional Integration-Political Cooperation:

A group of nations can have significantly greater political weight than each nation has individually.

Type of Product

A pull strategy is most appropriate when buyers display a great deal of brand loyalty toward one particular brand name. On the other hand, push strategies tend to be appropriate for inexpensive consumer goods characterized by buyers who are not brand loyal. A push strategy is also suited to industrial products because potential buyers usually need to be informed about a product's special features and benefits.

The McDonald's Big Mac is suitable to test the law of one price because each one is fairly identical in quality and content across national markets and is almost entirely produced within the nation in which it is sold.

A recent Big Mac Index found that the average price of a McDonald's Big Mac was $3.73 in the United States but $1.95 in China. According to the Big Mac Index, China's yuan is undervalued. By contrast, a Big Mac cost $7.20 in Norway and means that Norway's krone is overvalued

Sales Representatives:

A sales representative (whether an individual or an organization) represents only its own company's products, not those of other companies.

A currency board is a monetary regime based on an explicit commitment to exchange domestic currency for what?

A specified foreign currency at a fixed exchange rate

Product/Communications Adaptation (Dual Adaptation)

Adapt both the product and its marketing communication to suit the target market:

Product Extension/Communications Extension

Adapt the product to the requirements of the international market while retaining the product's original marketing communication -Legal requirements in the local market -Local content laws

Shortened Product Life Cycles:

Advances in telecommunications have alerted consumers around the world to the latest product introductions. Consequently, consumers in developing and emerging markets also demand the latest products and are not happy with receiving what is yesterday's fad in the highly developed nations. Also, the rapid pace with which technological innovation occurs today is shortening the life cycles of products.

What is the name of the grouping of 55 nations across the continent of Africa?

African Union (AU)

Step 4 is to commit resources.

After agreements are finalized, this involves employing resources to clearly define the export program's objectives for at least the next 3 to 5 years.

Bretton Woods Agreement

Agreement (1944) among nations to create a new international monetary system based on the value of the U.S. dollar

Offset:

Agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future.

Argentina's Peso Crisis

And after a four-year-long recession, Argentina defaulted on its $155 billion of public debt in 2002. A currency board that linked Argentina's peso to a strong U.S. dollar had made its exports very expensive on world markets. Argentina scrapped its currency board and the peso fell by around 70 percent. The country still experiences the effects of poor economic management.

Purchase-or-Build Decision:

Another important matter for managers is whether to purchase an existing business or to build a subsidiary abroad from the ground up—called a greenfield investment.

Red Bull is identical in every market in which it is sold. Each slender red, blue, and silver can contains caffeine, carbohydrates, vitamins, and the amino acid taurine.

Around the world, Red Bull recruits "brand ambassadors," who hand out free samples at events, and hires "student managers," who spread the word about the beverage and drink it on campuses.Red Bull sponsors top athletes in racing and sporting events, including snowboarding, hang-gliding, skateboarding, and daredevil stunts.

Drivers of FDI flows-Globalization:

As countries lowered their trade barriers, companies realized that they could now produce in the most efficient and productive locations and simply export to their markets worldwide. This set off another wave of FDI flows into low-cost emerging markets. The forces behind globalization are, therefore, part of the reason for long-term growth in FDI.

If additional money is injected into an economy that is not producing greater output, people will have more money to spend on the same amount of products as before.

As growing demand for products soon outstrips stagnant supply, prices will rise, and inflation then erodes purchasing power.

International Equity Market Drivers: Spread of Privatization:

As many countries abandoned central planning and socialist-style economics, the pace of privatization accelerated worldwide. A single privatization often places billions of dollars of new equity on stock markets.

Production costs: Cost of Research and Development

As technology becomes an increasingly powerful competitive factor, the soaring cost of developing subsequent stages of technology has led multinational corporations to engage in cross-border alliances and acquisitions.

The stated aim of which organization is not to build a trading bloc but instead to strengthen the multilateral trading system?

Asia Pacific Economic Cooperation (APEC)

The 19 EU member nations that adopted the single currency are

Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

What is the name of a specific type of countertrade?

Barter, counterpurchase, switch trading, offset

Infrastructure Improvements:

Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements —better seaports suitable for containerized shipping, improved roads, and advanced telecommunications systems.

shows how the value of the U.S. dollar has changed over time. The figure reveals the dollar's periods of instability, which challenged the financial management capabilities of international companies.

Before undertaking any international business activity, managers should forecast future exchange rates and consider the impact of currency values on earnings.

Gold was no longer the primary reserve asset of the IMF. Later accords:

Between 1980 and 1985, the U.S. dollar rose dramatically against other currencies, pushing up prices of U.S. exports and adding once again to a U.S. trade deficit. A solution was devised by the world's five largest industrialized nations, known as the "G5" (Britain, France, Germany, Japan, and the United States). The Plaza Accord was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar. The Plaza Accord caused traders to sell the dollar, and its value fell. By February 1987, the industrialized nations were concerned that the value of the U.S. dollar was in danger of falling too low. Meeting in Paris, leaders of the "G7" nations (the G5 plus Italy and Canada) drew up another agreement. The Louvre Accord was a 1987 agreement among the G7 nations that affirmed that the U.S. dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value. Once again, currency markets responded, and the dollar stabilized.

Obtain Resources and Benefits:

Beyond balance-of-payments reasons, governments might intervene in FDI flows to acquire resources and benefits such as technology, management skills, and employment.

What is the name of the international monetary system that formed in 1944 following the demise of the gold standard?

Bretton Woods Agreement

High inflation and a persistent trade deficit in the United States kept the dollar weak, however, which demonstrated a fundamental flaw in the system.

Britain left the system in the middle of 1972 and allowed the pound to float freely against the dollar. The Swiss abandoned the system in early 1973. In January 1973, the dollar was again devalued, this time to around $42/oz. of gold.

It assumes no trade barriers.

But a high tariff or outright ban on a product can impair price leveling and cause PPP to fail to predict exchange rates accurately.

The vast majority of advertising that occurs in any one nation is produced solely for that domestic audience.

But companies that advertise in multiple markets must determine the aspects of the advertising campaign that can be standardized across markets and those that cannot.

Marketing communication is typically considered a circular process

By ignoring important cultural nuances, companies can inadvertently increase the potential for noise that can cloud the audience's understanding of their promotional message.

Developing Nations' Debt Crisis

By the early 1980s, certain developing nations announced they would default on huge debts owed to global commercial banks, the IMF, and the World Bank. Repayment schedules were revised to prevent a global financial meltdown. The Brady Plan of 1989 called for large reductions in poor nations' debts, new lower-interest loans, and the issuance of marketable debt instruments.

Channel Length and Cost:

Channel length refers to the number of intermediaries between the producer and the buyer.

The decision to admit Cambodia, Laos, and Myanmar was criticized by some Western nations. Companies involved in Asia's developing economies are likely to be doing business with an ASEAN member. This is even a more likely prospect as

China, Japan, and South Korea accelerate their efforts to join ASEAN. China's admission would allow the club to bridge the gap between less advanced and more advanced economies.

Cultural Differences:

Companies also adapt their products to suit local buyers' product preferences, which are rooted in culture. Not all companies need to modify their product to the culture; instead, they may need to identify a different cultural need that it satisfies.

Lack of market understanding:

Companies can experience a great deal of frustration and financial loss simply by not fully understanding the local market in which they operate.

International Equity Market Drivers: Economic Growth in Emerging Markets:

Continued economic growth in emerging markets is contributing to growth in the international equity market.

Forward Contract:

Contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate -are commonly signed for 30, 90, and 180 days into the future. A forward contract requires the exchange to occur on the date specified.

Investors use the foreign exchange market for four main reasons:

Conversion, Hedging, Arbitrage, and Speculation

A country may receive membership in the European Union once it meets what are called the what?

Copenhagen criteria

Counterfeit Goods and Black Markets:

Counterfeit goods can damage buyers' image of a brand when the counterfeits are of inferior quality—which is nearly always the case.

One of the most historic events across Europe in recent memory was the EU enlargement that added 12 new members in 2007.

Croatia was the most recent country to join the EU in 2013. Albania, Montenegro, Serbia, and the Former Yugoslav Republic of Macedonia, and Turkey remain candidates for EU membership and are to become members after they meet certain demands laid down by the EU.

What is it called when companies use agreements to exchange intangible property?

Cross Licensing:

Convertible (Hard) Currency:

Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand.

Bond:

Debt instrument that specifies the timing of principal and interest payments.

Over-the-Counter (OTC) Market:

Decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.

Deregulation:

Deregulation of national capital markets has been instrumental in the expansion of the international capital market. Deregulation increased competition, lowered the cost of financial transactions, and opened many national markets to global investing and borrowing.

Access to Mass Media

Developing and emerging markets typically have fewer available forms of mass media for use in implementing a pull strategy. Accordingly, it is difficult to increase consumer awareness of a product and to generate product demand.

When a company sells its products to intermediaries who then resell to buyers in a target market, it is called what?

Direct Exporting

Distributors:

Distributors take ownership of the merchandise when it enters their country. As owners of the products, distributors accept all the risks associated with generating local sales.

Draft (Bill of Exchange):

Document ordering an importer to pay an exporter a specified sum of money at a specified time

Export/import financing in which a bank acts as an intermediary without financial risk is called what?

Documentary Collection

Among developing countries, _,_,_ account for majority of FDI inflows

EU, US, Japan

Liquidity:

Ease with which bondholders and shareholders may convert their investments into cash.

Location, ownership, and internalization advantages combine in which F D I theory?

Eclectic Theory

Levels of Economic and Political Integration: Customs Union

Economic integration whereby countries remove all barriers to trade among themselves and set a common trade policy against nonmembers.

Levels of Economic and Political Integration: Common Market

Economic integration whereby countries remove all barriers to trade and to the movement of labor and capital among themselves and set a common trade policy against nonmembers.

Levels of Economic and Political Integration: Economic Union

Economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, set a common trade policy against nonmembers, and coordinate their economic policies. -Requires members to harmonize their tax, monetary, and fiscal policies, create a common currency, and concede some sovereignty to the larger organization

Levels of Economic and Political Integration: Free Trade Area

Economic integration whereby countries seek to remove all barriers to trade among themselves but where each country determines its own barriers against nonmembers. A free trade area is the lowest level of economic integration that is possible between two or more countries.

Types of International Bonds:

Eurobond, foreign bond, and Interest rates:

Five institutions play key roles in monitoring and enforcing integration in the European Union

European Parliament, European Commission, Court of Justice, Court of Auditors and Council of the EU

Latin America's large consumer base and its potential as a low-cost production platform for worldwide export appeal to both the

European Union and the United States.

Barter:

Exchange of goods or services directly for other goods or services without the use of money.

Forward Rate:

Exchange rate at which two parties agree to exchange currencies on a specified future date

Cross Rate:

Exchange rate calculated using two other exchange rates

Securities Exchange:

Exchange specializing in currency futures and options transactions.

What is the name given to the risk of adverse changes in exchange rates?

Exchange-rate risk (foreign exchange risk)

Buyback:

Export of industrial equipment in return for products produced by that equipment.

Documentary Collection:

Export/import financing in which a bank acts as an intermediary without accepting financial risk

Advance Payment:

Export/import financing in which an importer pays an exporter for merchandise before it is shipped

Letter of Credit:

Export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document

The purchase of physical assets or significant ownership of a company abroad to gain a measure of management control is called a what?

FDI Foreign Direct Investment

Following Rivals:

FDI decisions frequently resemble a "follow the leader" scenario in industries that have a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market.

global FDI inflows averaged $548 billion annually between 1994 and 1999. FDI inflows peaked at around $1.4 trillion in 2000 and then slowed.

FDI inflows benefitted from strong economic performance and high corporate profits in many countries between 2004 and 2007, at which point it reached an all-time record of more than $1.9 trillion. Global recession meant declining FDI inflows in 2008 and 2009. FDI inflows climbed again in 2010 and 2011; then dipped in 2012, 2013, and 2014; and then rose to nearly $1.8 trillion in 2015 as the world emerged form recession.

Following Clients:

Firms commonly engage in FDI when the firms they supply have already invested abroad.

The Bretton Woods Agreement has four main features:

First, it fixed the exchange rate between gold and the U.S. dollar, and tied other currencies to the value of the dollar instead of gold. Second, it built flexibility into the system by allowing a nation to devalue its currency if a trade deficit caused a permanent negative shift in its balance of payments, known as fundamental disequilibrium. Third, it created the World Bank to fund national economic development efforts, such as projects to develop transportation networks, power facilities, and agricultural and educational programs.Fourth, it created the International Monetary Fund to regulate exchange rates and enforce the rules of the international monetary system.

What do we call the situation in which a company engages in F D I because the firms it supplies have already invested abroad?

Following Clients

Nestlé is the world's largest food company, earning only 2 percent of its sales at home in Switzerland.

Food and dietary tradition is integral to every culture's social fabric. So, as Nestlé expands abroad, it monitors changing consumer attitudes resulting from greater regional integration. -When Nestlé and Coca-Cola announced a joint venture to develop coffee and tea drinks, they first had to show the European Union (EU) Commission that they would not stifle the competition.-And to abide by EU environmental protection laws, Nestlé works with Europe's governments to develop and manage waste-recovery programs.

Exchange rates do not guarantee or stabilize the buying power of our currency. Thus, we can lose purchasing power in some countries while gaining it in others.

For example, a restaurant meal for you and a friend that costs $60 in New York might cost you 7,000 yen (about $80) in Japan and 400 pesos (about $30) in Mexico. Compared with your meal in New York, you've suffered a loss of purchasing power in Japan but benefited from increased purchasing power in Mexico.

What is the market in which currencies are bought and sold and their prices are determined?

Foreign exchange market

What type of financial instrument is traded in the international bond market?

Forigen Bonds and Eurobonds

Obtain Resources and Benefits: Management Skills and Employment

Former communist nations lack some of the management skills needed to succeed in the global economy. By encouraging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of their domestic companies.

What do we call the arrangement whereby a nation lets its currency float within a margin around the value of another more stable currency?

Free float system

International Equity Market Drivers: Activity of Investment Banks:

Global banks facilitate the sale of a company's stock worldwide by bringing together sellers and large potential buyers. Increasingly, investment banks are searching for investors outside the national market in which a company is headquartered. In fact, this method of raising funds is becoming more common than listing a company's shares on another country's stock exchange.

The two main drivers of FDI flows are

Globalization and Mergers and Acquisitions:

What are the main drivers of foreign direct investment flows?

Globalization and Mergers and aquisitions

Financial Instruments:

Greater competition in the financial industry is creating the need to develop innovative financial instruments.

Price Escalation:

Higher selling price in the target market than in the home market

To avoid committing such blunders

Hire a freight forwarder: a specialist in export-related activities

Differential tax rates and sanctions are policy instruments used by whom to do what?

Home countries to restrict FDI

Ownership restrictions and performance demands are policy instruments used by whom to do what?

Host countries to restrict FDI

Financial Incentives:

Host governments of all nations grant companies financial incentives to invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time—extending as far out as five years or more. A country may also offer low-interest loans to investors.

EFTA today the group consists of only

Iceland, Liechtenstein, Norway, and Switzerland

Why did nations belonging to the European Free Trade Association not want to join the European Union?

Iceland, liechtenstein, norway and switzerland

Distribution System

Implementing a push strategy can be difficult when distribution channel members (such as distributors) wield a great deal of power relative to that of producers. It can also be ineffective when distribution channels are lengthy.

Degree of Exposure:

In promoting its product to the greatest number of potential customers, a marketer must determine the amount of exposure needed.

Agents:

Individuals or organizations that represent one or more indirect exporters in a target market.

Devaluation:

Intentionally lowering the value of a nation's currency

Revaluation:

Intentionally raising the value of a nation's currency

Market Instruments and Institution:

Interbank Market, Securities Exchange, Over-the-Counter (OTC) Market, Convertible (Hard) Currency and Instruments for Restricting Currencies

What factors may encourage an investment entry mode?

International Experience, production and shipping cost.

FOUR Theories of Foreign Direct Investment :

International Product Life Cycle, Market Imperfections (Internalization), Eclectic Theory, Market Power

Obtain Resources and Benefits: Access to Technology

Investment in technology, whether in products or processes, tends to increase productivity and the competitiveness of a nation.

Later of Credit Types:

Irrevocable or Confirmed

Information Technology:

Large investments in information technology over the past two decades have drastically reduced the costs, in both time and money, of communicating around the globe. The introduction of electronic trading that can occur after the daily close of formal exchanges also facilitates faster response times.

Export/import financing in which the importer's bank issues a document stating that the exporter will get paid when it fulfills the terms of the document is called what?

Letter of Credit

Established in 1979 by EU nations: Exchange Rate Mechanism (ERM)

Limited the fluctuations of EU members' currencies within a specified trading range (2.25 percent of the highest- and lowest-valued members' currencies)

What is the name of a specific type of contractual entry mode?

Liscensing, franchising, management contracts, turnkey projects

Debt:

Loan in which the borrower promises to repay the borrowed amount (the principal) plus a predetermined rate of interest.

For a country with a currency that is weakening (valued low relative to other currencies), what will happen to the price of its exports and the price of its imports?

Lowers the price or a countrys export on world market -weak currency

The value of cross-border M&As peaked in 2000 at around $1.2 trillion. After three years of falling FDI, the value of cross-border M&As rose to around $1 trillion by 2007.

M&A activity then cooled in 2008 and then fell significantly in 2009 due to the global recession. The value of cross-border M&A activity then fluctuated for several years before climbing back to $721 billion by 2015.

An exchange rate system in which currencies float against one another with governments intervening to stabilize currencies at target rates is called a what?

Managed float system

Control:

Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Many companies have strict policies regarding how much ownership they take in firms abroad because of the importance of maintaining control. Governments of developing and emerging markets realize the benefits of investment by multinational corporations, including decreased unemployment, increased tax revenues, training to create a more highly skilled workforce, and the transfer of technology

Control Balance of Payments:

Many governments see intervention as the only way to keep their balance of payments under control.

International Bond Market:

Market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries.

International Equity Market:

Market consisting of all stocks bought and sold outside the issuer's home country.

Eurocurrency Market:

Market consisting of all the world's currencies that are banked outside their countries of origin

What instruments are used in the forward market?

Market for currency transactions at forward rates -To insure themselves against unfavorable exchange-rate changes, companies commonly turn to the forward market. Not all nations' currencies trade in the forward market. uses- currency swaps, options, and futures.

Forward Market:

Market for currency transactions at forward rates-To insure themselves against unfavorable exchange-rate changes, companies commonly turn to the forward market. Not all nations' currencies trade in the forward market.

Interbank Market:

Market in which the world's largest banks exchange currencies at spot and forward rates.

The licensing activities of Marvel Enterprises have taken it beyond being just a comics and toy company. Marvel's top comic-book characters—including Iron Man, Spider-Man, and the Hulk—have already made it to the big screen with enormous success.

Marvel also has licensing agreements for placing its characters on all sorts of products. Marvel, then, earns royalties on sales of the products.And Marvel's 50/50 joint venture with Sony oversees global licensing and merchandising activities for the film Spider-Man and the animated TV series titled Spider-Man. Marvel International, based in England, is developing the firm's licensing business in strategic international markets

Currency Board

Monetary regime based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. The government is legally bound to hold a stated amount of foreign currency that is equal to the amount of domestic currency to help cap inflation.

Fisher Effect

Nominal interest rate = real interest rate + inflation rate

Canada, Mexico, and the United States belong to the regional trading bloc called what?

North American Free Trade Agreement (NAFTA)

NAFTA Producers and distributors are responsible for determining whether a product has sufficient

North American content to qualify for tariff-free status.

Export/import financing that presents the most risk for exporters is called what?

Open Account

Equity:

Part ownership of a company in which the equity holder participates with other part owners in the company's financial gains and losses.

Control Includes:

Partnership requirements Benefits of cooperation

distribution

Planning, implementing, and controlling the physical flow of a product from its point of origin to its point of consumption

Dual Pricing

Policy in which a product has a different selling price (typically higher) in export markets than it has in the home market

Dual Pricing:

Policy in which a product has a different selling price (typically higher) in export markets than it has in the home market

Worldwide Pricing

Policy in which one selling price is established for all international markets

Turnkey (Build-Operate- Transfer) Project:

Practice by which one company designs, constructs, and tests a production facility for a client firm

Management Contract:

Practice by which one company supplies another with managerial expertise for a specific period of time

Switch Trading:

Practice in which one company sells to another its obligation to make a purchase in a given country.

Countertrade:

Practice of selling goods or services that are paid for, in whole or in part, with other goods or services.

International Fisher Effect

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

Interbank Market- Clearing:

Process of aggregating the currencies that one bank owes another and then carrying out the transaction.

Marketing Communication:

Process of sending promotional messages about products to target markets.

Worldwide Pricing Can be difficult to implement for several reasons:

Production costs -Cost of reaching different markets -Purchasing power of buyers in a target market -Fluctuating currency values

There are two general promotional strategies that companies can use to get their marketing message across to buyers. Companies can rely completely on just one of these strategies or use them in combination

Pull and push strategy

A unique aspect of purchasing power parity in the context of exchange rates is that it is only useful when applied to what?

Purchasing power parity

When selecting a partner for cooperation, it is important to remember what?

Rather, managers must be certain that they are getting a fair return on their efforts. And they should evaluate the benefits of a potential international arrangement

Role of Interest rates-How do interest rates affect exchange rates between two currencies?

Real interest rates & Nominal interest rates

What is it called when countries in a region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital?

Regional Economic Integration (Regionalism)

FOR Regional Integration-Employment Opportunities:

Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage.

Strategic Alliance:

Relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each

Currency Option:

Right, or option, to exchange a specified amount of a currency on a specified date at a specified rate.

Russia's Ruble Crisis

Russia experienced problems due to spillover from the Southeast Asia crisis, depressed oil prices (Russia's main export), falling hard currency reserves, and high inflation. Currency traders dumped the ruble on currency markets in 1996. By late 1998, the IMF had lent Russia more than $22 billion.

Counterpurchase:

Sale of goods or services to a country by a company that promises to make a future purchase of a specific product from the country.

Step 3 is to initiate meetings.

Schedule meetings with potential distributors, buyers, and others to build trust and cooperation and to lay out the working relationship.

Joint Venture:

Separate company that is created and jointly owned by two or more independent entities to achieve a common business objective

Gulf Cooperation Council (GCC):

Several Middle Eastern nations formed it in 1980 -Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates -Evolved to become as much a political entity as an economic one. -allows citizens of member countries to travel freely in the GCC without visas. It also permits citizens of one member nation to own land, property, and businesses in any other member nation without the need for local sponsors or partners.

Brand and Product Names:

Several issues related to a company's brand name are important concerns for the day-to-day activities of international managers. A brand name is the name of one or more items in a product line that identifies the source or character of the items. Brand names help consumers to select, recommend, or reject products.

Stock:

Shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows.

Currency Swap:

Simultaneous purchase and sale of foreign exchange for two different dates.

But sometimes a product's export price is lower than the price in the home market. Under what circumstances does this occur?

Some companies determine that domestic market sales are intended to cover all product costs. They then require exports to cover only the additional costs associated with exporting and selling in a target market (such as tariffs). In this sense, exports are considered a sort of "bonus."

Southeast Asia's Currency Crisis

Southeast Asia fell into a severe economic slump in 1997 after currency traders sold massive amounts of regional currencies on world markets. In the end, Indonesia, South Korea, and Thailand needed IMF and World Bank funding.

What is the name of Latin America's most powerful regional trading bloc?

Southern Common Market (MERCOSUR)

Four factors are responsible for much of the past growth in the international equity market:

Spread of Privatization, Economic Growth in Emerging Markets, Activity of Investment Banks, Advent of Cybermarkets

Unfavorable movements in exchange rates can be costly for businesses, so managers prefer that exchange rates be what?

Stable exchange rates and predictable

Deciding whether to keep a marketing strategy the same or to modify it abroad is also known as the what?

Standardize-versus-Adapt Decision

AGAINST Regional Integration: Loss of national sovereignty

Successive levels of integration require that nations surrender more of their national sovereignty. A political union requires nations to give up a high degree of sovereignty in foreign policy, which is why political union is so hard to achieve.

Fixed Exchange Rate System

System in which the exchange rate for converting one currency into another is fixed by international agreement

Market imperfections theory- Trade Barriers:

Tariffs are a common form of market imperfection in international business. The presence of a market imperfection (tariffs) might cause companies to undertake FDI.

Technical Analysis

Technique that uses charts of past trends in currency prices and other factors to forecast exchange rates

Fundamental Analysis

Technique that uses statistical models based on fundamental economic indicators to forecast exchange rates

Fixed Exchange Rate Systems include

The Gold Standard & Bretton Woods Agreement

Britain later returned to the gold standard, but at the pound's value that existed prior to the war.

The United States also returned to the gold standard, but at the dollar's lower value that accounted for inflation and a devalued dollar. This reduced world prices of U.S. exports and increased prices of British exports.

International Equity Market Drivers: Advent of Cybermarkets:

The automation of stock exchanges is encouraging growth in the international equity market. The term cybermarkets denotes stock markets that have no central geographic locations. Rather, they consist of global trading activities conducted on the Internet.

Customer Knowledge:

The behavior of buyers is frequently an important issue in the decision of whether to undertake FDI.

FOR Regional Integration-Greater Consensus:

The benefit of trying to eliminate trade barriers in smaller groups of countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 164 countries that comprise the WTO.

Production costs: Mexico's Maquiladora

The combination of a low-wage economy nestled next to a prosperous giant is now becoming a model for other regions that are split by wage or technology gaps.

Case: The Elusive Euro-Consumer:

The continuing integration of nations belonging to the European Union is causing many marketers to dream of a day when they can standardize their advertising to appeal to a so-called Euro-consumer. But the Euro-consumer remains a rare, mythical creature that eludes even the world's most clever advertisers.

Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties.

The documentary collection process can be broken into three main stages and nine smaller steps

AGAINST Regional Integration: Shifts in employment

The formation of a trading bloc promotes efficiency by significantly reducing or eliminating barriers to trade among its members. The surviving producer of a particular good or service is likely to be the bloc's most efficient producer. Industries requiring mostly unskilled labor tend to respond to the formation of a trading bloc by shifting production to a low-wage nation within the bloc.

FOR Regional Integration-Trade Creation:

The increase in the level of trade among nations that results from regional economic integration. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available.

Exchange rates influence demand for a company's products in the global marketplace. Shows exchange rates between the U.S. dollar and several major currencies.

The intentional lowering of the value of a currency by the nation's government is called devaluation. The reverse, the intentional raising of the value of a currency by the nation's government, is called revaluation. These concepts are not to be confused with the terms weak currency and strong currency, although their effects are similar.

Step 2 is to match needs to abilities.

The next step is to determine whether the company is capable of satisfying the needs of the market.

Drivers of FDI flows-International Mergers and Acquisitions:

The number of mergers and acquisitions (M&As) and their rising values over time also underlie long-term growth in FDI. In fact, cross-border M&As are the main vehicle through which companies undertake FDI.

A truly daunting trading bloc would be the creation of a Free Trade Area of the Americas (FTAA)

The objective is to create the largest free trade area on the planet, stretching from the northern tip of Alaska to the southern tip of Tierra del Fuego, in South America. - would comprise 34 nations and 830 million consumers, with Cuba being the only Western Hemisphere nation excluded from participating. -work alongside existing trading blocs throughout the region.

distribution channel

The physical path that a product follows on its way to customers

National Image:

The value customers obtain from a product is heavily influenced by the image of the country in which it is designed, manufactured, or assembled.

value density

The value of a product relative to its weight and volume -is an important variable in formulating distribution strategies. -As a rule, the lower a product's value density, the more localized the distribution system.

Value Density-Products with high value-density ratios include emeralds, semiconductors, and premium perfumes.

These products can be processed or made practically anywhere and then shipped to markets because their transportation costs are small relative to their end values.

Market imperfections theory- Specialized Knowledge:

This knowledge could be the technical expertise of engineers or the special marketing abilities of managers. When a company's specialized knowledge is embodied in its employees, the only way to exploit a market opportunity in another nation may be to undertake FDI. The possibility that a company will create a future competitor by charging others a fee for access to its knowledge is another market imperfection that encourages FDI.

Product/Communications Extension (Dual Extension)

This method extends the same home-market product and marketing promotion into target markets. Under certain conditions, it can be the simplest and most profitable strategy.

Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of non-shipment for importers—importers might pay for goods but never receive them.

Thus, advance payment is the most favorable method for exporters but the least favorable for importers.

At at the beginning of the year the exchange rate between the Mexican peso and the U.S. dollar is 8 pesos/$ (or $0.125/peso). Also suppose that inflation is pushing consumer prices higher in Mexico at an annual rate of 20 percent, whereas prices are rising just 3 percent per year in the United States.

To find the new exchange rate (Ee) at the end of the year, we use the following formula: Ee = Eb(1 + i1)/(1 + i2) where Eb is the exchange rate at the beginning of the period, i1 is the inflation rate in Country 1, and i2 is the inflation rate in Country 2. Plugging the numbers for this example into the formula, we get the following: Ee = 8pesos/$[(1 + 0.20)/(1 + 0.03)] = 9.3pesos/$. It is important to remember that because the numerator of the exchange rate is in pesos, the inflation rate for Mexico must also be placed in the numerator for the ratio of inflation rates.

Step 1 is to identify a potential market.

To identify whether demand exists in a particular market, a company should perform market research and interpret the results.

Interest rates:

Today, low interest rates (the cost of borrowing) fuel growth in the international bond market. A Driving Force

An increase in trade between nations as a result of regional economic integration is called what?

Trade Creation

Trade shifting away from nations not belonging to a trading bloc and toward member nations is called what?

Trade diversion

Nintendo took the global gaming industry by storm when it introduced the Wii game console. Nintendo's marketing and game-design talents are not all that affect its performance—so, too, do exchange rates between the Japanese yen (¥) and other currencies.

Translating subsidiaries' earnings from other currencies into a strong yen decreases Nintendo's stated earnings in yen. Nintendo recently reported an annual net income of ¥ 257.3 billion ($2.6 billion), but it also reported that its income included a foreign exchange loss of ¥ 92.3 billion ($923.5 million). A rise of the yen against foreign currencies prior to the translation of subsidiaries' earnings into yen caused the loss.

Product Extension/Communications Adaptation

Under this method, a company extends the same product into target markets but alters its promotion. -Helps companies contain costs

Where does more than half of all global currency trading take place?

United Kingdom, the United States, and Japan

Central American Common Market (CACM):

Was formed in 1961 to create a common market among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. -comprise a market of 30 million consumers and have a combined GDP of about $200 billion.

Caribbean Community and Common Market (CARICOM):

Was formed in 1973. There are 15 full members, 5 associate members, and 8 observers active in CARICOM - has a combined GDP of nearly $30 billion and a market of almost 16 million people.

Mexico's Peso Crisis

When social unrest struck Mexico in 1993, its government responded slowly to the departure of foreign investment. Mexico devalued its peso in 1994, forcing it to lose purchasing power. The IMF and private U.S. banks needed to lend Mexico about $50 billion.

Investment Entry Modes

Wholly Owned Subsidiary, Joint Venture, Strategic Alliance

It overlooks the role of people's confidence and beliefs ab out a nation's economy and the value of its currency.

Yet, nations try to maintain the confidence of investors, businesspeople, and consumers in their economies and their currencies.

The gold standard is an example of what type of international monetary system?

a fixed exchange-rate system

International product life cycle theory: the new product stage

a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product.

In 1976, the Jamaica Agreement formalized

a managed float system of exchange rates in which governments were to stabilize their currencies around target exchange rates. This is in contrast to a free float system

Banks and foreign exchange brokers dealing in small transactions, such as with vacationers, add

a mark-up to the quoted exchange rate to cover costs and generate a profit on the transaction.

The Gold Standard Example

a nation experiencing a trade deficit would experience a declining supply of gold and thus a fall in the value of its paper currency in circulation. A declining money supply would lower prices for products as fewer dollars would be available to purchase a static supply of products. Falling domestic prices would make the nation's exports cheaper on world markets. Exports would then increase until the nation's trade was again balanced.

Recurring crises in the international monetary system are raising calls for

a new system that is designed to meet the challenges of a global economy.

A group of nations in a geographic region undergoing economic integration is called

a regional trading bloc.

free float system

a system in which currencies float freely against one another without governments intervening in currency markets.

Production costs: rationalized production

a system of production in which each of a product's components is produced where the cost of producing that component is lowest.

International transactions between two currencies other than the U.S. dollar often use the dollar as

a vehicle currency.

As a free trade agreement, NAFTA has eliminated

all tariffs and nontariff trade barriers on goods originating within North America.

An irrevocable letter of credit

allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer.

Fourth, fluctuating currency values

also must be taken into account. When the value of the currency in a country where production takes place rises against a target market's currency, the product will become more expensive in the target market.

Smithsonian Agreement (1971)

among IMF members to restructure and strengthen the international monetary system created at Bretton Woods.

Low-cost production and shipping can give a company

an advantage.

The producer or distributor must also provide a NAFTA "certificate of origin" to an importer to claim

an exemption from tariffs.

Wholly owned subsidiaries

are entirely owned and controlled by a single parent company. A subsidiary's planned operations largely determine whether a company purchases an existing company or builds new from the ground up. The benefits of building new must outweigh the time and resources required for construction, hiring and training employees, and launching production.

Spot rates

are exchange rates requiring delivery of the traded currency within two business days.

Sunset industries

are those that use outdated and obsolete technologies or those that employ low-wage workers with few skills.

Booking centers

are usually located on small island nations or territories with favorable tax and/or secrecy laws. Little financial activity takes place here. Rather, funds simply pass through on their way to large operational centers.

A vehicle currency is used

as an intermediary to convert funds between two other currencies.

Court of Auditors

audits the EU accounts and implements its budget.

The national accounting system that records all receipts coming into a nation and all payments to entities in other countries is called what?

balance of payments

Communications require adaptation

because the product satisfies a different need, serves a different function, or appeals to a different type of buyer.

Since NAFTA came into effect, trade among the three participating nations has increased markedly, with the greatest gains occurring

between Mexico and the United States.

foreign bond

bond sold outside the borrower's country and denominated in the currency of the country in which it is sold

What product characteristic is more likely than others to offend people in another culture?

brand and product names

Purchasing Power Parity (PPP)

can be interpreted as the exchange rate between two nations' currencies that is equal to the ratio of their price levels.

AGAINST Regional Integration: Trade diversion

can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can result in increased trade with a less-efficient producer within the trading bloc and in reduced trade with a more efficient, nonmember producer.

A joint venture ADVANTAGES

can reduce risk by sharing the investment with other parties, help penetrate international markets that are otherwise off-limits, and provide access to another party's distribution channels.

The Plaza Accord:

caused traders to sell the dollar, and its value fell

Companies along the distribution channel that work together in delivering products to customers are called

channel members or intermediaries.

Gain international business experience

companies can use exporting as a low-cost, low-risk way to gain international business experience. Owners and managers of small companies, which typically have little or no knowledge of how to conduct business in other cultures, use exporting to gain valuable international experience.

The main appeal of the Eurocurrency market is the

complete absence of regulation, which lowers the cost of banking. The large size of transactions in this market further reduces transaction costs. Thus, banks can charge borrowers less, pay investors more, and still earn healthy profits.

Promotion mix

comprises a company's efforts to reach distribution channels and target customers through communications, such as personal selling, advertising, public relations, and direct marketing.

Product Extension/Communications Adaptation:This approach helps companies contain

costs because the good itself requires no alteration.

What is a characteristic of an offshore financial center?

country financial sector features very few regulations and few if any taxes has two categories: Operational centers & Booking centers

The Maastricht Treaty of 1991

created a common currency, set monetary and fiscal targets for countries in the monetary union, and proposed an eventual political union. -Set single currency targets -outlined eventual political union

What do we call the instantaneous purchase and sale of a currency in different markets to make a profit?

currency arbitrage

Insuring against potential losses that may result from adverse changes in exchange rates is called what?

currency hedging. purpose: lessen the risk associated with international transfers of funds.-To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment

In addition to forward contracts, three other types of currency instruments are used in the forward market:

currency swaps, options, and futures.

Whereas an EMC is restricted to export-related activities, an ETC assists its clients by providing import, export, and countertrade services;

developing and expanding distribution channels; providing storage facilities; financing trading and investment projects; and even manufacturing products.

First, production costs

differ from nation to nation and selling prices may adjust to these different costs.

International advertising

differs a great deal from advertising in domestic markets. Managers must rely on their knowledge of a market to decide whether an ad is suitable for the company's international promotional efforts.

Two basic forms of export involvement—

direct exporting and indirect exporting.

Countries commonly peg their currencies to the

dollar, the euro, or to a "basket" of several currencies.

A great deal of debate revolves around the issue of whether markets themselves are

efficient or inefficient when it comes to forecasting exchange rates.

The U.S. and Mexican federal governments have invested several billion dollars in

environmental protection efforts since the creation of NAFTA.

What is the name of the official single currency of the European Union?

euro

The Economist magazine publishes what it calls its "Big Mac Index" of exchange rates. This index uses the law of one price to determine the

exchange rate that should exist between the U.S. dollar and other major currencies.

Diversify sales

exporting permits companies to diversify sales. In other words, they can offset slow sales in one national market (perhaps due to a recession) with increased sales in another. Diversified sales can level off a company's cash flow, making it easier to coordinate payments to creditors with receipts from customers.

Licensing ADVANTAGES can allow a company to

finance an international expansion, reduce international expansion risks, reduce the likelihood of counterfeit production, and help licensees upgrade their production technologies.

Government Policy Instruments and F D I: Host countries offer a variety of incentives to encourage FDI inflows. PROMOTION take two general forms

financial incentives and infrastructure improvements.

Continued ambivalence among union leaders and environmental watchdogs regarding the long-term effects of NAFTA are partly responsible

for delays in its expansion.

A company can use intermediaries to deliver its products to

foreign markets or perform the export activities itself.

The Association of Southeast Asian Nations (ASEAN)

formed in 1967 -10 countries: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia --comprise a market of nearly 600 million consumers -a GDP of nearly $2.4 trillion.

When a company knows it will need a certain amount of foreign currency on a certain future date, it can exchange currencies using a

forward rate - an exchange rate at which two parties agree to exchange currencies on a specified future date.

Formed in 1969, the Andean Community (in Spanish Comunidad Andina de Naciones, or CAN) includes

four South American countries located in the Andes mountain range—Bolivia, Colombia, Ecuador, and Peru . -Today, comprises a market of around 100 million consumers -a combined GDP of about $600 billion.

The term turnkey project is derived

from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply "turn a key" to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.

There are two main forecasting techniques based on this belief in the value of added information—

fundamental analysis and technical analysis.

A wholly owned subsidiary ADVANTAGES

gives a company total control over day-to-day local operations and valuable technologies, processes, and other intangibles. It also lets a firm coordinate activities of all its various national subsidiaries.

An unappealing feature of the Eurocurrency market is greater risk;

government regulations that protect depositors in national markets are nonexistent here. Despite the greater risk of default, however, Eurocurrency transactions are fairly safe because the banks involved are large, with well-established reputations.

The benefit of market power is

greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

As companies gain international experience, they tend to select entry modes that require deeper involvement but involve

greater risk and greater control.

The downside of this Eurocurrency market is its

greater risk due to a lack of government regulation.

When adequate facilities are not present in a market, a firm may decide to undertake a what?

greenfield investment.

Currency conversion

helps facilitate international transactions, investments abroad, and the repatriation of profits back to the home country.

Currency hedging

helps insure against potential losses from adverse changes in exchange rates.

London dominates the foreign exchange market for

historic and geographic reasons.

A market is efficient

if prices of financial instruments quickly reflect new public information made available to traders.

Stable exchange rates

improve the accuracy of forecasts and financial planning.

The Community broadened its scope in 1967 and changed its name to the European Community

includes expanding to additional industries, including atomic energy

International product life cycle theory: the final standardized product stage

increased competition creates pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world.

The view that prices of financial instruments reflect all publicly available information at any given time is called what?

inefficient market view

Companies can adjust their marketing communication to

inform potential buyers that the product either satisfies their needs or serves a distinct function.

Levels of Economic and Political Integration: Political Union

integration whereby countries coordinate aspects of their economic and political systems. -Requires members to coordinate their economic and political policies against nonmembers, with a few exceptions

The market of all stocks bought and sold outside the issuer's home country is called what?

international equity market

Rising incomes in a market encourage

investment entry modes

Monetary policy

involves buying or selling government securities on the open market to influence the money supply and, therefore, the rate of inflation.

Fiscal policy

involves using taxes and government spending to influence the money supply indirectly.

The eclectic theory-An ownership advantage

is a company advantage that arises from ownership of some special asset, such as a powerful brand, technical knowledge, or management ability.

Franchising

is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period.

Franchising ADVANTAGES

is a low-cost and low-risk entry mode into new markets, allows for rapid geographic expansion, and makes use of local managers' cultural knowledge.

A country's balance of payments

is a national accounting system that records all receipts coming into the nation and all payments to entities in other countries.

push strategy

is a promotional strategy designed to pressure distribution channel members to carry a product and promote it to final users.

freight forwarder

is a specialist in export-related activities such as customs clearing, tariff schedules, shipping fees, and insurance. A freight forwarder can also pack merchandise for export and will accept responsibility for getting a shipment from the port of export to the port of import.

A capital market

is a system that allocates financial resources in the form of debt and equity according to their most efficient uses.

A price control

is an upper or lower limit placed on the price of a product within a country. Upper-limit price controls provide price stability when inflation is driving up prices. Lower-limit price controls can be used to help local companies compete against the less expensive imports of international companies or be used to ward off price wars.

A confirmed letter of credit

is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

A Eurobond

is issued outside the country in whose currency it is denominated. An example is a bond that is issued in Venezuela in U.S. dollars and sold in Britain, France, and Germany.

A strategic alliance is similar to a joint venture except that it doesn't involve what?

is less involved and less permanent

Open Account payment method

is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company.

Degree of Exposure:An exclusive channel

is one in which a manufacturer grants the right to sell its product to only one or a limited number of resellers.

The eclectic theory-A location advantage

is the advantage of locating a particular economic activity in a specific location because of its natural or acquired characteristics.

The eclectic theory-an internalization advantage

is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

The present-day international monetary system

is the collection of agreements and institutions that govern exchange rates.

European Commission

is the executive body (comprised of one commissioner from each member country) that can draft legislation. It manages and implements policy and monitors compliance with EU law.

An arm's-length price

is the free-market price that unrelated parties charge one another. Many governments now regulate internal company pricing practices by assigning products approximate transfer prices based on their free-market price.

An entry mode

is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market. Companies seeking entry into new markets for manufacturing and/or marketing purposes have many potential entry modes at their disposal.

The London Interbank Bid Rate (LIBID)

is the interest rate offered by London banks to large investors for Eurocurrency deposits.

Council of the EU

is the legislative body that votes proposed legislation into law or rejects it with a no vote.

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.

Licensing

is when a company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specific period of time. Licensors receive royalty payments based on a percentage of revenue generated by property such as patents, copyrights, designs, formulas, trademarks, and brand names.

A wholly owned subsidiary DISADVANTAGES

it can be an expensive entry mode and involve high risk exposure for a firm's assets.

European monetary union is the EU plan that established

its own central bank and currency in January, 1999.

To apply dual pricing successfully, how must a firm treat its domestic and international buyers?

keep them separate

The EMS was quite successful in its early years But in

late 1992, Britain and Italy were forced to leave the ERM. Phased out when the EU adopted a single currency

Predictable exchange rates

lessen the odds for surprises, and reduce the need for costly currency hedging practices.

Turnkey projects ADVANTAGES

let a firm specialize in its core competency and exploit international opportunities, and allow a government to obtain the latest infrastructure from the world's leading companies.

Currency arbitrage

lets investors seek profits by conducting an instantaneous purchase and sale of a currency in different markets.

And currency speculation

lets traders purchase or sell a currency with the expectation that its value will change over time and generate a profit.

Third, a company may decide to

lower or raise a selling price to match the purchasing power of buyers in a target market.

Achieve economies of scale

many large companies use exporting to expand total sales when domestic markets become saturated. A greater sales volume lets a firm spread fixed production costs over a greater number of manufactured products, thereby lowering the cost of producing each unit of output. In short, this is a way to achieve economies of scale.

Which F D I theory depicts a firm establishing a dominant market presence in an industry?

market power theory

The process of sending promotional messages about products to target markets is called what?

marketing communication

turnkey projects DISADVANTAGES

may be awarded for political reasons rather than for technological know-how, and can create future international competitors.

licensing DISADVANTAGES

may restrict a licensor's future activities, reduce the global consistency of a product's quality and marketing, and amount to "lending" strategically important property to future competitors.

The main difficulty CARICOM will continue to face is that most members trade more with nonmembers than they do with one another simply because

members do not have the imports each other needs.

The spot rate is available only for trades worth

millions of dollars.

Attempts at economic integration in Central American countries and throughout the Caribbean basin have been much more

modest than efforts elsewhere in the Americas.

The Bretton Woods system faltered in the 1960s when

nations holding paper dollars doubted that the U.S. had enough gold to redeem all of its currency held abroad.

Because the law of one price is being violated in our example, an arbitrage opportunity arises—that is, an opportunity to buy a product in one country and sell it in a country where it has a higher value. For example,

one could earn a profit by buying U.S. coal at $1 per pound and selling it in Germany for $1.25 (€1.5) per pound.

Degree of Exposure: an intensive channel

one in which a producer grants the right to sell its product to many resellers. Preferred when producer wants its product to be made available through as many distribution outlets as possible

Second, producing in one location does not guarantee

one selling price in all target markets because the cost of reaching different markets varies.

Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called

open account.

The gold standard was a fixed exchange-rate system that linked the

paper currencies of nations to specific values of gold and, indirectly, to one another.

The Maastricht Treaty stated the economic criteria with which member nations must comply in order to

partake in the single currency, the euro.

The foreign exchange market today is a collection of

physical locations and an electronic network of traders, banks, and investment firms.

Channel Length and Cost: A one-level channel

places only one intermediary between the producer and the buyer. Two intermediaries make up a two-level channel, and so forth. In general, the greater the number of intermediaries in a channel, the more costly it becomes.

A strategy that pressures channel members to carry and promote a product is called a what?

push strategy

The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased, is called a what?

quoted currency

exchange rate

rate at which the currency of one nation can be exchanged for the currency of another nation

Because some receivables may not be collected, exporters should

reserve shipping on open account only for their most trusted customers.

The market power theory

states that a firm tries to establish a dominant market presence in an industry by undertaking FDI.

The inefficient market view

states that prices of financial instruments do not reflect all publicly available information. Proponents of this view believe that companies can search for new pieces of information to improve forecasting.

Market imperfections theory

states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfection.

The law of one price

stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

It assumes no added costs,

such as transportation costs between nations. This can overstate the presence of arbitrage opportunities. Such costs between markets can allow unequal prices to persist and PPP to fail.

The pricing strategy

that a company adopts must match its overall international strategy

The eclectic theory 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.

Certain nations in Europe were reluctant to join in the ambitious goals of the EU, fearing destructive rivalries and a loss of national sovereignty. Some of these nations did not want to be part of a common market but instead wanted the benefits of a free trade area. In 1960, several countries banded together and formed

the European Free Trade Association (EFTA) to focus on trade in industrial, not consumer, goods.

The most popular vehicle currencies include

the U.S. dollar, British pound, Japanese yen, and the European Union euro.

Because real interest rates are theoretically equal across countries, inflation must be

the cause of any difference in interest rates between two countries.

International product life cycle theory: the maturing product stage

the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities.

Shows the balance of payments accounts for the United States, which has two major components—

the current account and the capital account. The balances of the current and capital accounts should be equal

Firms that standardize international advertising often control campaigns from where?

the home office.

The most commonly quoted rate of this type in the Eurocurrency market is the London Interbank Offer Rate (LIBOR)

the interest rate that London banks charge other large banks that borrow Eurocurrency.

When companies extend their marketing efforts internationally, they develop communication strategies that blend product and promotional strategies. A company's communication strategy for a particular market takes into account

the nature of the product being marketed and the promotion mix to market it.

quoted currency

the numerator in a quoted exchange rate, or the currency with which another currency is to be purchased

By the same token, the open account method increases

the risk of nonpayment for the exporter. Thus, open account is the least favorable for exporters but the most favorable for importers.

One result of the need for new types of financial instruments is securitization

the unbundling and repackaging of hard-to-trade securities.

showcases the top 10 exporters to the United States in terms of

the value of goods sold.

Companies based in the United States dominate

the world of international franchising

identifies the members of every regional trading bloc

this table for a quick summary of each bloc's members.

Europe's many languages certainly create

thorny translation issues for marketers.

In 1957, the European Economic Community

those same countries expanded their cooperation and Outlined and took initial steps toward creating a common marke

There are a number of reasons why governments intervene in FDI. The two main reasonsare:

to control the balance of payments and to obtain resources and benefits.

In 1951, six countries created the European Coal and Steel Community

to remove barriers to trade in coal, iron, and steel.

Setting up production in a market is desirable when the

total cost of production there is lower than in the home market.

MERCOSUR is progressing on

trade and investment liberalization and is emerging as the most powerful trading bloc in all of Latin America.

What imperfections are relevant to the discussion of market imperfections theory?

trade barriers and specialized knowledge

There are two market imperfections that are relevant to this discussion

trade barriers and specialized knowledge.

The main problem was that the United States was experiencing a

trade deficit (imports were exceeding exports) and a budget deficit (expenses were outstripping revenues).

Parent firms and subsidiaries often transfer products among themselves at a price called what?

transfer price

A currency used as an intermediary to convert funds between two other currencies is called a what?

vehicle currency

The Central American Free Trade Agreement (CAFTA-DR)

was established in 2006 to include 7 countries:United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and, later, the Dominican Republic.

The organization for Asia Pacific Economic Cooperation (APEC)

was formed in 1989 -Begun as an informal forum among 12 trading partners, now has 21 members. -account for more than 44 percent of world trade -a combined GDP of about $36 trillion.

A letter of credit is typically used when an importer's credit rating is questionable,

when the exporter needs a letter of credit to obtain financing, and when a market's regulations require it.

Channel Length and Cost: In a zero-level channel—

which is also called direct marketing—producers sell directly to final buyers.

Advanced Payment normally takes the form of a

wire transfer of money from the bank account of the importer directly to that of the exporter.

Government Policy Instruments and F D I: Host countries also have a variety of methods to restrict incoming FDI. RESTRICTION take two general forms

—ownership restrictions and performance demands.

Attempts at integration among Latin American countries had a rocky beginning. The first try, the Latin American Free Trade Association (LAFTA), was formed in 1961. Disappointment with LAFTA led to the creation of two other regional trading blocs

—the Andean Community and the Latin American Integration Association.

One way to get around national restrictions on currency convertibility is countertrade

—the practice of selling goods or services that are paid for, in whole or in part, with other goods or services.