IB 303 Exam 3
Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or by acquiring an established enterprise in the target market (acquisition strategy)?
The number of cross border acquisitions are increasing Over the last decade, 50-80 percent of all FDI inflows have been mergers and acquisitions
What Happened After Bretton Woods?
Under BW, US required to deliver 1oz of gold to any IMF member that gave US Treasury $35.00. 1958 -1971 US ran accumulated deficit of $56 billion. US gold reserves shrank from $34.8 billion to $12.2 billion. Liabilities to foreign central banks increased from $13.6 billion to $62.2 billion
Why do acquisitions fail?
the firm overpays for the assets of the acquired firm there is a clash between the cultures of the acquiring and acquired firm attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast there is inadequate pre-acquisition screening
How can firms reduce the problems associated with acquisitions?
through careful screening of the firm to be acquired by moving rapidly once the firm is acquired to implement an integration plan
The case for floating exchange rates has two main elements:
-monetary policy autonomy -automatic trade balance adjustments
What actions (considerations) can managers take to compete more effectively in a global economy?
-the benefits of expanding into foreign markets -which strategies to pursue in foreign markets -the value of collaboration with global competitors -the advantages of strategic alliances
What are the differences of Global Alliances ?
1. Companies join to attain world leadership 2. Each partner has significant strength to bring to the alliance 3. A true global vision 4. Relationship is horizontal not vertical 5. When competing in markets not part of alliance, they retain their own identity
Firms use four basic strategies in global markets:
1. Global 2. Localization 3. Transnational 4. International
Why Alliances Are Popular ?
1. High cost of technology development 2. Company may not have skill, money or people to go it alone 3. Good way to learn 4. Good way to secure access to foreign markets 5. Host country may require some local ownership
Making alliances work: What Structure?
1. Protect technology/know-how that is not intended to be transferred 2. Draw a solid contract with safeguards against opportunism 3. Achieve equitable gain through agreed swaps of technology the other wants 4. Seek creditable, clearly articulated commitment to partner "behavior" a-priori
The two basic strategies for creating value are
1. differentiation 2. low cost
Which of the following was a reason that led to the collapse of the gold standard in 1939?
A cycle of competitive currency devaluations by various countries
Which of the following is an advantage of exporting as a mode of entry into foreign markets?
A firm does not have to bear the development costs and risks associated with opening a foreign market.
When does a global standardization strategy make sense?
A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies • The goal is to pursue a low-cost strategy on a global scale • Makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
When does a localization strategy make sense?
A localization strategy focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets • Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense
Making alliances work: Which partner?
A suitable partner --Helps achieve strategic goals; brings needed, valuable capabilities --Shares the firm's vision for the alliance's purpose --Is not likely to exploit the alliance to its own ends To select a partner --Do thorough background check from public sources --Collect information from third parties who have personal experience with the likely partner(s) --Spend a lot of face-to-face time with likely partner(s)
When does a transnational strategy make sense?
A transnational strategy tries to simultaneously: • Achieve low costs through location economies, economies of scale, and learning effects • Differentiate the product offering across geographic markets to account for local differences • Foster a multidirectional flow of skills between different subsidiaries ••• Makes sense when there are both high cost pressures and high pressures for local responsiveness
Which of the following statements is true about the various exchange rate systems?
According to the Bretton Woods system, the value of most currencies in terms of U.S. dollars was allowed to change only under a specific set of circumstances.
When does an international strategy make sense?
An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization • Makes sense when there are low cost pressures and low pressures for local responsiveness
In which of the following tasks will the learning effects be most significant?
Assembly process involving 1,000 complex steps
What type of firm benefits from exporting?
Both large and small firms can benefit from exporting The volume of export activity in the world economy is increasing as exporting has become easier thanks to: • Regional economic agreements such as the European Union and the North American Free Trade Agreement • The decline in trade barriers under the WTO
In this city in 1944, at the height of World War II, representatives from 44 countries met to design a new international monetary system.
Brentton Woods
According to the _____ in 1944, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.
Bretton Woods agreement
A(n) _____ occurs when a firm builds a plant in a country and agrees to take a certain percentage of the plant's output as partial payment for the contract.
Buyback
Which of the following is a way in which a wholly owned subsidiary may be established in a foreign market?
By acquiring an established firm in the host nation
How can you increase the profit ?
By adding value to a product so consumers are willing to pay more By lowering the cost of value creation.
_____, a type of countertrade, occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.
Counter purchase
The most comprehensive source of information on export opportunities for U.S. firms is the _____.
Department of Commerce
_____ refers to a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.
Dirty float
What assistance can exporters get from export management companies?
Export management companies (EMC) - export specialists that act as the export marketing department or international department for client firms 1. Start exporting operations for a firm with the understanding that the firm will take over operations after they are well established 2. Start services with the understanding that the EMC will have continuing responsibility for selling the firm's products
Which of the following is true of exporting?
Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors
The gold standard was a ______ exchange rate system.
Fixed
When the foreign exchange market determines the relative value of a currency, a ________ exchange rate system exists.
Floating
This is an international agency established in New Hampshire to watch over the economic activity of member countries.
IMF
Which of the following refers to the institutional arrangements that govern exchange rates?
International monetary system
Mayer Life Systems, a manufacturer of surgical and medical appliances, invented and patented a new dialysis machine that radically reduced maintenance and operational issues. Responding to a global demand, it decided to sell the machines manufactured at its plant in the U.S. to various markets across the globe. Since the product features provided by Mayer were not provided by any other competitor, Mayer did not feel any pressure for cost reductions. Which of the following strategies is most likely being pursued by Mayer?
International strategy
Which of the following is a great strength of the gold standard?
It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.
Which of the following is most likely to be the advantage of locating a value creation activity in the optimal location for that activity?
It enables a firm to differentiate its product offering from those of competitors.
Which of the following statements is true about the role of the International Monetary Fund?
It helped deficit-laden countries bring down inflation rates by providing short term foreign currency loans.
Which of the following is an advantage of turnkey projects as a mode of entry into foreign markets?
It is a useful strategy to earn great returns from the know-how of a technologically complex process.
Which of the following is an advantage of exporting?
It provides large revenue and profit opportunities.
Which of the following is true of a firm that pursues a global standardization strategy?
It reaps maximum benefits from economies of scale and learning effects.
Which of the following is true of an export management company (EMC)?
It specializes in serving firms in particular industries and in particular areas of the world.
Axiom International wants to expand its operations to a country that is politically, culturally, and economically different from its home country. The firm needs to select a mode of entry which would give it access to local knowledge, allow sharing of development costs and risks, and also be politically acceptable. Which of the following modes of entry into foreign markets is most suitable for Axiom International?
Joint venture
Which of the following is a drawback of licensing as a mode of entry into foreign markets?
Licensing does not give a firm tight control over manufacturing, marketing, and strategy.
Which of the following strategies focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets?
Localization strategy
____ are the economies that arise from performing a value creation activity in the optimal place for that activity, wherever in the world that might be.
Location economies
Who ended the U.S. dollar's gold convertibility and devalued U.S. dollars in 1971?
Nixon
A(n) _____ refers to a buying agreement similar to counter purchase, but the exporting country can then fulfill the agreement with any firm in the country to which the sale is being made.
Offset
Which of the following refers to the gold standard?
Pegging currencies to gold and guaranteeing convertibility
Which of the following is a disadvantage of franchising as a mode of entry into foreign markets?
Poor quality standards of a foreign franchisee can cause a decline in the franchising firm's worldwide reputation.
Making alliances work: How to manage?
Show sensitivity to cultural differences that explain different managerial styles Build trust --Set up the framework for formal and informal face-to-face meetings to create the opportunity for a common value system to emerge --Build an informal network of personal relationships Learn from partners --Apply the knowledge within your own organization --Brief your employees on partner strengths
Why form a strategic alliance?
Strategic alliances are attractive because they: • Facilitate entry into a foreign market • Allow firms to share the fixed costs and risks of developing new products or processes • Bring together complementary skills and assets that neither partner could easily develop on its own • Can help establish technological standards for the industry that will benefit the firm
What role does the international monetary system play in determining exchange rates?
The IMF was responsible for avoiding a repetition of the chaos that occurred between the wars through a combination of: 1. Discipline 2. Flexibility
Floating exchange rates were deemed acceptable under
The Jamaica Agreement
Which of the following is an advantage of joint ventures as a mode of entry into foreign markets?
The foreign firm benefits from a local partner's knowledge of the host country.
Which of the following is an advantage of a letter of credit for an importer?
The importer does not have to pay for the merchandise until the documents have arrived.
What is the Gold Standard?
The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value • To facilitate trade, a system was developed so that payment could be made in paper currency that could then be converted to gold at a fixed rate of exchange
Under a fixed exchange rate regime, what would be the result if a country rapidly increased its money supply by printing currency?
The prices of imports would become more attractive in the country.
How do you increase the profitability of a firm?
To increase profitability, value must be created for the consumer
Which of the following strategies is a firm most likely to pursue when it simultaneously faces both strong cost pressures and strong pressures for local responsiveness?
Transnational strategy
Many of the world's developing nations peg their currencies, primarily to the _____.
U.S. dollar
The collapse of the fixed exchange rate system has been traced to the:
U.S. macroeconomic policy package of 1965-1968.
How can firms deal with the lack of trust that exists in export transactions?
Various mechanisms for financing exports and imports have evolved in response to the lack of trust that exists in export transactions
The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the _____.
World Bank
Firms engaged in international trade deal with people they may have never seen, who live in different countries, who speak different languages, and who abide by different legal systems. These factors result in:
a lack of trust between the parties.
Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by an increase in the money supply. This resulted in _____.
a rise in price inflation
The direct exchange of goods and/or services between two parties without a cash transaction is referred to as _____.
barter
Why are greenfield ventures attractive?
because they allow the firm to build the kind of subsidiary company that it wants However, they are slower to establish are risky because they have no proven track record can be problematic if a competitor enters via acquisition and quickly builds market share
In terms of using a third party in international trade, title to the products is given to a bank by the exporter in the form of a document known as a _____.
bill of lading
Firms that compete in the global marketplace typically face two types of competitive pressure: pressures for _____ and pressures to _____.
cost reductions; be locally responsive
The principle of _____ is to trade goods and services for other goods and services when they cannot be traded for money.
countertrade
A ______ float occurs when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency.
dirty
In international commerce, a _____ refers to an order written by an exporter instructing an importer to pay a specified amount of money at a specified time.
draft
A(n) _____ refers to an export specialist that acts as an export marketing department for client firms.
export management company
The 1944 Bretton Woods system called for _____ exchange rates against the U.S. dollar.
fixed
When the foreign exchange market determines the relative value of a currency, the country is adhering to a ______ system.
floating
In a floating exchange rate, the relative value of a currency:
is determined by market forces.
The two phenomena that help explain the experience
learning effects and economies of scale.
Which of the following stands at the center of international commercial transactions and is issued by a bank at the request of an importer?
letter of credit
A ______ exchange rate means that the value of a currency is fixed to a reference country; the exchange rate between that currency and other currencies is determined by the reference rate.
pegged
A _____ means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
pegged exchange rate
The sogo shosha of Japan:
proactively and continuously seek export opportunities for their affiliated companies.
The objective of establishing the World Bank was to:
promote general economic development.
This metal was used for international transactions prior to the implementation of the gold standard in 1875.
silver
A _____ allows two or more firms to share the fixed costs (and associated risks) of developing new products or processes.
strategic alliance
The use of a specialized third-party trading house in a countertrade arrangement is known as _____.
switch trading
What is strategy?
the actions taken by managers to attain the goals of the firm
Exporting is nearly always a way to increase the revenue and profit base of a company because:
the international market is much larger than the domestic market.
Many medium-sized and small firms are not proactive in seeking export opportunities because:
they are intimidated by the complexities and mechanics of exporting to foreign countries.
How can exporters improve their performance?
• Acquire more knowledge of foreign market opportunities • Consider using an export management company • Adopt a successful export strategy
How should a firm choose a specific entry mode?
• All entry modes have advantages and disadvantages • The optimal choice of entry mode involves tradeoffs
Is the choice of strategy static?
• As competition increases, international and localization strategies become less viable • To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors
What steps should exporters take to increase their chances of success?
• Can hire an EMC to help identify opportunities and navigate paperwork and regulations • Start by focusing initially on just one or a few markets • Enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failures
What do firms that want to export need to do?
• Identify export opportunities • Avoid a host of unanticipated problems associated with doing business in a foreign market • Become familiar with the mechanics of export and import financing • Learn where to get financing and export credit insurance • Learn how to deal with foreign exchange risk
How can firms increase the success of their alliances?
• Many international strategic alliances run into problems • The success of an alliance is a function of: 1. Partner selection 2. Alliance structure 3. The manner in which the alliance is managed
What are the pitfalls facing exporters?
• Poor market analysis • Poor understanding of competitive conditions • A lack of customization for local markets, poor distribution arrangements, bad promotional campaigns • A general underestimation of the differences and expertise required for foreign market penetration • Difficulty dealing with the tremendous paperwork and formalities involved
What are the drawbacks of strategic alliances?
• Strategic alliances can give competitors low-cost routes to new technology and markets • Unless a firm is careful, it can give away more in a strategic alliance than it receives
What are strategic alliances?
• Strategic alliances: cooperative agreements between potential or actual competitors • Examples include formal joint ventures and short term contractual arrangements • The number of international strategic alliances has risen significantly in recent decades
What are the benefits of exporting?
• The benefits from exporting can be great--the rest of the world is a much larger market than the domestic market • Larger firms may be proactive in seeking out new export opportunities, but many smaller firms take a reactive approach to exporting • Many novice exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities
