Chapter 5 and 6

Principle Functions of a Political System

provide protection from external threats; ensure stability based on laws; govern the allocation of valued resources among the members of a society; define how a society's members interact with each other.

Pre Export Stage

receives unsolicited product orders from abroad. Investigates the feasibility of undertaking international business.

Dodd-Frank Wall Street Reform and COnsumer Protection Act

reduce financial risk-taking restrictions certain banking activities.

competitive advantage

refers to assets and capabilities of a company that are difficult for competitors to imitate. Such as: specific knowledge, competencies, innovativeness, superior strategies, or close relationships with suppliers. AKA: Firm-Specific Advantage

free trade

refers to the relative absence of restrictions to the flow of goods and services between nations

FDI Stock

refers to the total value of assets that mne's invest abroad

private law

relationships between persons and organizations

networks and relational assets

represent the economically beneficial long-term relationships the firm undertakes with other business entities.

Monopolistic Advantage Theory

resources or capabilities a company holds that few other firms have. Suggests firms that use FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors.

equity-based joint ventures

result in new legal entity and non-equity based strategic alliances

confiscation

seizure of assets without compensation

expropriation

seizure with compensation

Which of the following is characteristic of an effective legal system?

systematically enforced laws and regulations

Government takeover of corporate assets

targets of seizure = natural resources, utilities, and manufacturing

Types of sanction

tariffs, trade barriers, import duties, and import/export quotas.

Comparative Advantage

the ability of a specific country to produce a given product or service better or for a lower cost than other countries

extraterritoriality

the application of home-country laws to persons or conduct outside national borders. -intended to prosecute for wrongdoings

mercantilism

the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports. Running a trade surplus called neo-mercantilism which is supported by labor unions, farmers, and certain manufacturers.

location-specific advantage

the comparative advantages available in individual foreign countries that may be translated into firms or inexpensive capital.

transparency

the degree to which firms regularly reveal substantial information about their financial condition and accounting practices

Market Economy

the interaction of supply and demand determines prices. Government intervention is limited. economic decisions are left to firms. - closely associated with capitalism -state establishes a legal system that protects private property and contractual agreements.

Economies of scale

the larger the quantity produced, the lower cost per unit to produce.

Firm Strategy, Structure, and Rivalry

the nature of domestic rivalry and conditions in a nation that determines how firms are created, organized, and managed

demand conditions

the nature of home-market demand for specific products and services

Constituents

the people and organizations that support the political system and receive government resources

related and supporting industries

the presence of clusters of suppliers, competitors, and skilled workforce

Internalization Theory

the process by which firms acquire and retain one or more value-chain activities inside the firm -reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. -gives greater control over its foreign operations. -enables firm to produce needed inputs itself rather than sourcing from independent suppliers. -control propriety knowledge critical to the development, production, and sale of their products and services.

totalitarianism

the state attempts to regulate most aspects of public and private behavior. Seeks to control economics, politics, attitudes, values, and beliefs of the citizenry. -usually theocratic or secular

Active Stage

through systematic exploration of international options and the commitment of resources and managerial time to achieve international success.

why do nations trade?

trade enables countries to use their national resources more efficiently through specialization and thus enables industries and workers to be more productive. Helps keep costs low and living standards high.

sanction

type of trade penalty imposed on one or more countries by one or more other countries. Arise from unresolved trade/policy dispute, such as a disagreement about the fairness of some international trade practice.

contract laws

used in 5 types of business transactions. -sale of goods or services, especially large scale; distribution of the firms products through foreign distributors; licensing and franchising - that is, a contractual relationship that allows a firm to use another company's intellectual property, marketing tools, or other assets for a fee; FDI, especially in collaboration with a foreign entity, to create and operate a foreign subsidiary; joint ventures and other types of cross-border collaborations

Born global firms are ________.

young companies that internationalize early in their evolution

environmental laws

enact laws to preserve resources

Which of the following is a comparative advantage?

entrepreneurial orientation

Economic freedom

extent of government interference in business; the strictness of the regulatory environment, the ease with which commercial activity is carried out according to market forces.

The ________ rests on the premise that countries differ in the type and quantity of production factors they possess.

factor proportions theory

Political Freedom

free and fair elections, the right to form political parties, fair electoral laws, existence of a parliment or other legislative body, freedom from domination by the military, foreign powers, or religious minorities.

Which of the following explains the expansion of born global firms despite the scarcity of financial, human, and tangible resources?

globalization has made doing international business easier than ever before

limited government

government performs essential functions that serve all citizens. National defense, maintenance of law and order, diplomatic relations, and constructing infrastructure. -Greater economic freedom and higher living standards.

nationalization

government seizure of an entire industry with or without compensation

controls on operating firms and practices

governments impose laws and regulations on how firms can conduct production, marketing, and distribution activities

country-specific advantage

include inherited resources, such as labor, climate, arable land, and petroleum reserves. Entrepreneurial orientation, availability of venture capital, and innovative capacity.

Private Property Rights

individuals can own property and assets and increase one's asset base by accumulating private wealth

sukuks

islamic-compliant bonds that offer revenue from an asset, rather than interest

comparative advantage principle

it will be beneficial for two countries to trade with each other as long as one is relatively more efficient at producing goods or services needed by the other.

Openness

lack of regulation or barriers to the entry of firms in foreign markets. The greater the openness, the fewer constraints placed on foreign firms.

conciliation

least adversarial method process negotiation with the objective to resolve differences in a friendly manner. Employ conciliator or mediation committees

common law

legal system originating in England. basis is tradition, previous cases, and legal precedents set by nations courts through interpretation of statuses, legislation, and past rulings. -more flexible bc open to interpretation by courts

laws on income repatriation

limit the amount of net income or dividends that firms can remit to their home-country headquarters

National and Relational Assets Include

manufacturers, distributors, suppliers, retailers, consultants, banks, transportation suppliers, government and other organizations that can provide needed capabilities.

litigation

most adversarial approach. when one party flies a lawsuit against another. Most common in US.

Examples of Civil LAw

most of western europe, latin america, japan, russia, south korea

religious law

much of the middle east and north africa, afghanistan, mauri tonia, pakistan, and sudan

global sourcing

occurs when firms, striving for competitive advantage, capitalize on the comparative advantages of select countries to meet that demand. Resulting in increased imports through global trade.

Examples of Common Law

Australia, Canada, Ireland, New Zealand, UK and US

Examples of limited government

Australia, Canada, Japan, New Zealand, US, Most European and Latin American Countries.

Examples of Mixed Systems

Bangladesh, India, Indonesia, Israel, Kenya, Malaysia, Philippines

Examples of Socialism

Bolivia, China, Egypt, India, Romania, Russia, and Venezuela

FDI-Based Explanations

Preferred entry strategy of MNEs. Conduct business through networks of production facilities, marketing subsides, regional headquarters, and other operations.

Mercantilism Assignment (Scenario)The final assignment for Daniel Parilla's international business class involves taking an in-depth look at one of the six classical perspectives that explain the rationale for international trade. Daniel plans to present an argument in favor of mercantilism. Daniel will be attempting to convince his classmates that mercantilism leads to national prosperity. Daniel's peers will be given the opportunity to counter his argument.Which of the following, if true, weakens Daniel's proposition?

Restricting imports reduces the choice of products consumers can buy.

3 codes of Civil Law

Commercial, Civil, and Criminal

Stages in Internationalization Process

Domestic Focus > Pre-Export Stage > Experimental Involvement > Active Involvement > Committed Involvement

Industrial Industry includes

Fashion Industry in Italy; Pharmaceutical industry in Sweden; Footwear industry in Vietnam

Features of the National Industrial Policy

Tax incentives; monetary and fiscal policies; educational systems; infrastructure; legal and regulatory systems

Which of the following is a typical outcome of free trade?

Unrestricted international trade generally increases the overall prosperity of poor countries.

2015 Country Risk

Venezuela > Zimbabwe > Afghanistan > Iran > Libya > Argentina > Russia > Indonesia > India > Brazil > China > Mexico > Columbia > South Africa > Italy > Poland > Japan > USA > Canada > Singapore

Command Economy

a centrally planned economy. Makes the state a dominant force in the production and distribution of goods and services. -Sizable bureaucracy thrives and central planning tends to be less efficient than market forces.

industrial cluster

a concentration of business, suppliers, and supporting firms in the same industry located at a particular geographic location. Characterized by a critical mass of human talent, capital, or other factor endowments. Most important is knowledge and skills.

Absolute advantage principle

a country benefits by producing only those products it can produce using fewer resources. Resources include: intangibles such as knowledge and work ethic and capabilities such as design or zero defect production.

international collaborative ventures

a form of cooperation between 2+ firms. -share risk of joint efforts, which reduces vulnerability for 1 partner

Dunning's Eclectic Paradigm

a framework to explain the extent and pattern of the value chain operations that companies should own abroad. -3 conditions: ownership-specific advantage, location-specific advantages, and internalization advantages.

rule of law

a legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government

arbitration

a neutral 3rd party hears both sides of a case and decides in favor of one party or the other, based on facts. Saves time and expenses,

National Industrial Policy

a proactive economic development plan a government initiates to build or strengthen a particular industry. Used to support high value industries.

Political System

a set of formal institutions that constitutes a government. -legislative bodies, political parties, lobbying groups, and trade unions.

"creeping expropriation"

a subtle form of country risk in which government modify laws and regulations after foreign MNE's have made substantial local investments in property and plants. -abrupt terminations and creation of new laws that favor local firms

legal system

a system for interpreting and enforcing laws. - Ensure order; resolve disputes in civil and commercial activities; tax economic output; provide protections for private property, including intellectual property and other company assets.

boycott

a voluntary refusal to engage in commercial dealings with a nation or a company

foreign investment laws

affect the type of entry strategy firms choose as well as their operations and performance

scanning

allows the firm to improve practices in ways that conform to local laws and political realities and to create a positive environment. Alliances with qualified local partners.

ownership-specific advantage

an MNE should hold knowledge, skills, capabilities, key relationships, and other advantages that it owns and allow it to compete effectively in foreign markets

embargo

an official ban on exports to or imports from a particular country

Laws are effective and legitimate because they

applied to all citizens equally; issued through formal procedures by recognized government authorities; enforced systematically and fairly by police forces and formally organized judicial bodies.

Common law can best be described as a system ________.

based on legal precedents set by the nation's courts

Socialism

capital and wealth should be vested in the state and used primarily as a means of production rather than for profit. A collectivist ideology. -Social Democracy

nation-level theories

classical theories. Asks: Why do nations trade? How can nations enhance their competitive advantage?

Mixed Economy

combines command and market combines state intervention and market mechanisms for organizing production and distribution. -government controls pension programs, labor regulation, minimum wage levels, environmental regulation

The ________ states that it can be beneficial for two countries to trade without barriers as long as one is relatively more efficient at producing goods or services needed by the other.

comparative advantage principle

Which of the following is the LEAST adversarial method of resolving a contractual dispute?

conciliation

securities and exchange act

confidence in transactions by requiring public companies to disclose financial indicators to investors

Free trade produces

consumers and firms can more readily buy the products they want; imported products may be cheaper than domestically produced products (if the exporting country benefits from some national advantages such as abundant resources); lower cost imports can help reduce company expenses, thereby raising their profits (which may be passed on to workers in the form of higher wages); lower cost imports help consumers save money, thereby increasing living standards; unrestricted international trade generally increases the overall prosperity of poor countries

Firm-Level Theories

contemporary theories of how firms can create and sustain superior organizational performance. Asks: Why and how do firms internationalize? How can internationalizing firms gain and sustain competitive advantage?

Leontief Paradox

(1950s) suggests that because the US has abundant capital, it should be an exporter of capital-intensive products. Exported labor-intensive goods and imported more capital-intensive goods than the theory would predict.

International Product Life Cycle Theory (IPLC)

(1966) each product and its manufacturing technologies go through 3 stages of evolution: introduction, maturity, and standardization.

New Trade Theory

(1970s) argues increasing returns to scale, especially economies of scale, are important for superior international performance in industries that succeed best at their production volume increases. Observed trade was growing fastest among industrialized countries with similar factors of production. Beneficial even for countries that produce only a limited variety of products

Internationalization Process Model

(1970s) describes how countries expand abroad takes place over incremental stages. The more they learn the more they move towards FDI. Slowness usually comes from managers uncertainty of how to proceed.

foreign corrupt practices act (FCPA)

1977. banned firms from offering bribes to foreign parties to secure or retain business. in 1998, strengthened to cover foreign firms and managers who act in furtherance of corrupt payments while in US

mixed systems

2+ legal systems together

In which of the following stages of the internationalization process is a firm preoccupied with business in its home market?

domestic focus

Civil Laws

AKA code law based on an all inclusive system of laws that have been codified; laws are clearly written and accessible. -primarily judicial and based on court decisions

Which of the following characterizes country risk?

Country risk is always present, but its nature and intensity vary over time and from country to country.

Which of the following pairs of nations are on opposite ends of the political freedom scale?

Cuba and Sweden

Examples of Totalitarianism

Cuba, North Korea, Eritrea, Sudan, Equatorial Guinea, Zimbabwe

Mercantilism Assignment (Scenario)The final assignment for Daniel Parilla's international business class involves taking an in-depth look at one of the six classical perspectives that explain the rationale for international trade. Daniel plans to present an argument in favor of mercantilism. Daniel will be attempting to convince his classmates that mercantilism leads to national prosperity. Daniel's peers will be given the opportunity to counter his argument.Which of the following statements strengthens the proposition that free trade is beneficial to nations?

Free trade increases the standard of living by reducing consumer expenses.

Internalization advantage

Gains from internalizing foreign based manufacturing, distribution, or other value chain activities. -when profitable, the firm transfers ownership-specific advantage across national borders within its own organization rather than dissipating them to independent foreign entities.

Committed Stage

Genuine interest and commitment of resources to making international business a key part of the firms profit-making and value chain activities. Not really valid today.

Factors that are often overlooked

Government restrictions. only investing in certain industries. large scale productions in certain industries may provide economies of scale. international shipping and insurance. complexity of trade goods. services such as banking and retail, cannot be exported in the usual sense and must be internationalized through FDI.

Participants of Mixed Systems

Government, International organizations, regional trade organizations, special interest groups, competing firms

Which of the following countries is considered primarily socialist?

India

Experimental Stage

Initiated limited international activity, typically through basic exporting.

Born Global Firms

Innovative start-ups that initiate international business soon after their founding. Globalization has made doing international business easier than ever before. Advances in communication and transportation technologies have reduced the costs of operating internationally. International Entrepreneurship.

Which of the following is true about national industrial policy?

It is designed to create monetary and fiscal policies, such as low-interest loans, that provide a stable supply of capital for company investment needs.

Which of the following is true with regard to mercantilism?

Mercantilism tends to harm firms that import.

Classical Theories

Mercantilism, absolute advantage principle, comparative advantage principle, factors proportions theory and the Leontief Paradox, international product life cycle theory, new trade theory.

________ argues that increasing returns to scale, especially economies of scale, are important for superior international performance in industries that succeed best as their production volume increases.

New trade theory

Domestic Focus

Not sure if ready to expand. Stay at home.

Common and Civil Law (Scenario)Zane Computer Corporation is considering the possibility of building a new manufacturing facility in a foreign country in order to lower labor and production costs. The legal department of Zane has raised some issues regarding two countries that are the top contenders for the new facility. The legal system of Country A is based on civil law, while the legal system of Country B is based on common law. Other than the legal systems of the two countries, all other aspects are virtually identical. Zane's legal experts must determine which system would be the most beneficial to Zane in the long-term.Which of the following supports Country A over Country B?

contractual noncompliance provisions are broader in scope

commercial law

covers business transactions

Country Risk/ Political Risk

defined as exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political/legal environments

Factor Conditions

describe the nations resources such as labor, natural resources and advanced factors such as capital, technology, entrepreneurship, advanced work force skills and the know-how

comparative advantage

describes superior features of a nation that provide unique benefits in global competition. Features are derived from either natural endowments or deliberate national policies.

marketing and distribution laws

determine which practices are allowed in advertising, promotion, and distribution

Factor Proportions Theory

developed in the 1920s. rests on 2 principles: -products differ in the types and quantities of factors required for their production. -countries differ in the type and quantity of production factors that they possess

A(n) ________ is an official ban on exports to or imports from a particular country, in order to isolate it and punish its government.

embargo