international business exam 1

Theories of trade

Factor Proportions Theory International Product Life Cycle Theory New Trade Theory

Four Risks of International Business

1) Cross-Cultural Risk 2) Country Risk 3) Currency Risk 4) Commercial Risk

Value Chain (internationalize it)

1) Research and development 2) procurement 3) Manufacturing 4) Marketing 5) Distribution 6) Sales/Services •Rationale: -cost savings -increase efficiency, productivity, and flexibility of value chain activities -access customers, inputs, labor, or technology -benefit from foreign partner capabilities

Strategy - Global, Home replication

A planned set of actions that managers take to make best use of the firm's resources and core competences, to gain a competitive advantage •When developing strategies, managers examine the firm's strengths and weaknesses, and the opportunities and challenges facing the firm. •They then decide which customers to target, what product lines to offer, how best to contend with competitors, and how generally to configure and coordinate the firm's activities around the world. Global Strategy •Headquarters seeks substantial control over all country operations in order to minimize redundancy, and achieve maximum efficiency, learning, and integration worldwide. •Global strategy asks "why not make the same thing, the same way, everywhere?" Products, marketing, and company practices are relatively standardized. •R & D, manufacturing, marketing and other activities tend to be concentrated at headquarters, where they can be centrally coordinated and controlled. •Management views the world as one large marketplace. home replication strategy home country-based competencies such as production scales, distribution efficiencies, and brand power.

Advanced vs. emerging markets - business implications

Advanced economies: Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure. Typically the richest countries, including Australia, Canada, Japan, United States, and nations of Western Europe •Emerging market economies: Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth. E.g., Indonesia, Mexico, Poland, Turkey.

Factor Proportions Theory

Also known as Factor Endowments Theory. It argues that each country should produce and export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production.

Bretton Woods - International Monetary Fund and World Bank

At war's end, seeking stability in the international monetary and financial systems, 44 countries signed the Bretton Woods agreement •Bretton Woods established a fixed exchange rate system in which the U.S. dollar was pegged to a set value for gold ($35 per ounce), and other major currencies were pegged to the dollar. •For nearly 30 years, the system kept exchange rates of major currencies at a fixed level. •Bretton Woods dissolved in 1971, as the world economy was evolving and governments could no longer maintain fixed exchange rates on the gold standard. Bretton Woods established the: •Concept of international monetary cooperation, especially aimed at minimizing currency risk. •International Monetary Fund (IMF): Agency that promotes exchange rate stability, monitors exchange systems, provides funding to developing economies. •World Bank: Agency that provides loans and technical assistance to combat global poverty around the world.

Why do firms internationalize

internationalization process of the firm born globals and international entrepreneurship

Sources of funds for international operations

Equity Financing •The firm obtains capital by selling shares of stock. •Main advantage is the firm obtains capital without incurring debt and having to repay funds to providers. •Main disadvantage is the firm's ownership is diluted. •The global equity market is the worldwide market of funds for equity financing-the stock exchanges worldwide where investors and firms meet to buy and sell shares of stock. Intracorporate Financing •Intracorporate financing: Obtaining funds from within firm's network of subsidiaries and affiliates. •In firms with extensive international operations, some units at times are cash rich while others are cash poor. •Usually has little effect on the parent's balance sheet because the funds are simply transferred from one area of the firm to another. Minimizes transaction costs of borrowing from banks and avoids the ownership-diluting effects of equity financing Debt Financing The firm borrows money from a creditor in exchange for repayment of principal and interest

Exchange rates and currency risk

Exchange rate: Price of one currency in terms of another •In a free market, the "price" of any currency (the exchange rate) is determined by supply and demand: Currency Risk - currency exposure - asset valuation - Foreign taxation - inflationary and transfer pricing

Advanced economies

Industry- Highly developed Competition- Substantial Trade Barriers- Minimal Trade Volume- High Inward FDI- High

Emerging market

Industry- Poor Competition- Limited Trade Barriers- Moderate to high Trade Volume- Low Inward FDI- Low

High Context vs. Low Context Cultures

Low-context cultures rely on explicit explanations, with emphasis on spoken words. Such cultures emphasize clear, efficient, logical delivery of verbal messages. Communication is direct. Agreements are concluded with specific, legal contracts •High-context cultures emphasize nonverbal or indirect language. Communication aims to promote smooth, harmonious relationships. Such cultures prefer a polite, "face-saving" style that emphasizes a mutual sense of care and respect for others. Care is taken not to embarrass or offend others.

Has regional economic been successful (EU)

Refers to the growing economic interdependence that results when nations within a geographic region form an alliance aimed at reducing barriers to trade and investment. •Cooperating nations obtain: -increased product choices, productivity, living standards, -lower prices, and -more efficient resource use. •27 members. Founders members are Belgium, Italy France, Germany, Luxembourg, and the Netherlands. •New members such as Poland, Hungary, Czech Republic - are low-cost manufacturing sites. -Peugeot, Citroën (France) - factories in Czech Republic -Hyundai (South Korea) - Kia plant in Slovakia -Suzuki (Japan) - factory in Hungary

Why do firms internationalize

Seek opportunities for growth through market diversification. Earn higher margins and profits. Often, foreign markets are more profitable. Gain new ideas about products, services, and business methods. EXAMPLE: GM refined its knowledge for making small, fuel-efficient cars in Europe.

Organizational structure

The reporting relationships inside the firm, "the boxes and lines" that specify the linkages among people, functions, and processes, allowing the firm to carry out its operations. •In large M N E s, these linkages are extensive and include the firm's subsidiaries, affiliates, suppliers, and other partners worldwide. A fundamental issue: How much decision-making should the firm retain at headquarters and how much it should delegate to foreign subsidiaries and affiliates. It is the choice between centralization and decentralization.

Culture

The values, beliefs, customs, arts, and other products of human thought and work that characterize the people of a given society. •Not right or wrong, it is relative. There is no cultural absolute. Different nationalities simply perceive the world differently . •Not about individual behavior, it is about groups. It is a collective phenomenon of shared values and meanings. •Not inherited, it derives from the social environment. We are not born with a shared set of values and beliefs; we acquire them as we grow up.

Ethics

are moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong

Uncertainty avoidance

avoidance refers to the extent to which people can tolerate risk and uncertainty in their lives High uncertainty avoidance societies create institutions to minimize risk and ensure security. Firms emphasize stable careers and regulate worker actions. Decisions are made slowly. Examples: Belgium, France, Japan In low uncertainty avoidance societies, managers are relatively entrepreneurial and comfortable with risk. Firms make decisions quickly. People are comfortable changing jobs. Examples: Ireland, Jamaica, U.S.

Power distance

describes how a society deals with inequalities in power that exist among people. High power distance societies exhibit big gaps between the weak and powerful; in firms, top management tends to be autocratic, giving little autonomy to lower-level employees Low-power distance societies have small gaps between the weak and powerful. Firms tend toward flat organizational structures, with relatively equal relations between managers and workers. For example, Scandinavian countries instituted various systems to ensure socioeconomic equality

Iceberg

people often think of culture as the numerous observable characteristics of a group that we can *see* with our eyes, be it their food, dances, music, arts, or greeting rituals.

International taxation

•A direct tax is imposed on income derived from business profits, intra-corporate transactions, capital gains, and sometimes royalties, interest and dividends. •An indirect tax applies to firms that license or franchise products and services, or who charge interest. The government withholds some percentage of royalty payments or interest charges as tax. •A sales tax is a flat percentage tax on the value of goods or services sold, and paid by the ultimate user. •A value-added tax (VAT) is payable at each stage of processing in the value chain of a product or service. •VAT is calculated as a percentage of the difference between the sale and purchase price of a good.

Religion

•A system of common beliefs or attitudes regarding a being or system of thought that people consider sacred, divine, or the highest truth; also, the associated moral values, traditions, and rituals. •Influences culture, and therefore business and consumer behavior. •Example: The "protestant work ethic" emphasizes hard work, individual achievement, and a sense that people can control their environment - the underpinnings for the development of capitalism.

New Trade Theory

•Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases. Example •The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability.

Economic systems

•Authoritarianism is associated with command economies, wherein the state makes all decisions on what to produce, how much to produce, and what prices to charge. •Democracy is associated with market economies and capitalism, in which decisions are largely left to market forces, that is, supply and demand. •Socialism is associated with mixed economies, which have features of both market and command economies, combining state intervention and market mechanisms (e.g., Sweden, Singapore).

Socialism

•Capital is vested in the state and used primarily as a means of production for use rather than for profit. •Group welfare outweighs individual welfare. •Government's role is to control the basic means of production, distribution, and commercial activity. •Socialism occurs in much of the world as social democracy (e.g., Western Europe, Brazil, India). •Government intervention in the private sector. Corporate income tax rates are higher

Corporate social responsibility

•Corporate social responsibility (C S R): Operating a business to meet or exceed the ethical, legal, commercial, and public expectations of customers, shareholders, employees, and communities. •Helps recruit and keep good employees. •Can help differentiate the firm and enhance its brands. •Cuts costs, as when the firm reduces packaging, recycles, cuts energy usage, and minimizes waste in operations. •Helps the firm avoid increased taxation, regulation, or other legal actions by local government authorities.

Cross-Cultural Risk

•Cultural Differences. Risk arising from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally-valued mindset or behavior. •Negotiation Patterns. Negotiations are required in many types of business transactions. E.g., where Mexicans are friendly and emphasize social relations, Americans are assertive and get down to business quickly. •Decision-Making Styles. Managers make decisions continually on the operations and future direction of the firm. For example, Japanese take considerable time to make important decisions. Canadians tend to be decisive, and "shoot from the hip". •Ethical Practices. Standards of right and wrong vary considerably around the world. For example, bribery is relatively accepted in some countries in Africa, but is generally unacceptable in Sweden.

Currency Risk

•Currency exposure. General risk of unfavorable exchange rate fluctuations. •Asset valuation. Risk that exchange rate fluctuations will adversely affect the value of the firm's assets and liabilities. •Foreign taxation. Income, sales, and other taxes vary widely worldwide, with implications for company performance and profitability. •Inflation. High inflation, common to many countries, complicates business planning, and the pricing of inputs and finished goods. Examples •The Japanese yen has fluctuated a lot since 2000. •The U.S. has relatively high corporate income taxes. •Brazil and Turkey have experienced very high inflation.

Exposure - transaction, translation, economic

•Currency risk concerns exchange rate fluctuations that harm business profits. •Transaction exposure is currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies. •Translation exposure is currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm. •Economic exposure is currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

Strategies for Doing Business in Emerging Markets

•Customize Offerings to Unique Emerging Market needs - Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly. Partner with Family Conglomerates - FCs can provide various advantages, including financing, bank services, local suppliers, and distribution channels. FCs can help reduce risks, time, and capital requirements; develop relationships with governments and other key players; and overcome infrastructure hurdles •Target Governments - Buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. State enterprises operate in areas such as railways, airlines, banking, oil, chemicals and steel. •Skillfully Challenge Emerging Market Competitors - New global challengers and other emerging market firms possess various advantages that require skillful strategies and due diligence to overcome. •Low-cost labor, skilled workforce, government support, and family conglomerates give emerging market firms various advantages. Advanced economy firms must: -Conduct research to understand target markets and the indigenous challengers. -Acquire new capabilities that build competitive advantage (e.g., develop new products, new ways of doing business, local alliances). -Leverage the same advantages in emerging markets enjoyed by local firms (e.g., low-cost labor, skilled workforce, cheap capital, key partnerships).

International Product Life Cycle Theory

•Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. •In the introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports. Example: the television set. •Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. In the maturity stage, the product's manufacturing becomes relatively standardized, other countries start producing and exporting the product •Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. In the standardization stage, manufacturing ceases in the original innovator country, and it becomes a net importer of the product. Today under globalization, the cycle occurs quickly for many products

Democracy

•Economic activity occurs freely, as per market forces. •Limited government: The government performs only essential functions that serve all citizens, such as national defense, maintaining law & order, foreign relations, and providing basic infrastructure. •Private property rights: The ability to own property and assets and to increase one's asset base by accumulating private wealth. Property includes land, buildings, stocks, contracts, patents. Encourages initiative, ambition, innovation.

Authoritarianism

•Government controls all economic and political matters. •Either theocratic (religion-based) or secular •A state party is led by a dictator. Membership is mandatory for those wanting to advance. •Power is sustained via secret police, propaganda, regulation of free discussion and criticism. •Today: Some countries in the Middle East and Africa; Cuba, North Korea. Ex-authoritarian states tend to have much government intervention and bureaucracy

Country Risk

•Government intervention, protectionism, and barriers to trade and investment. •Bureaucracy, red tape, administrative delays, corruption. •Lack of legal safeguards for intellectual property rights. •Legislation unfavorable to foreign firms. •Economic failures and mismanagement. Social and political unrest and instability

government intervention

•Governments intervene in trade and investment to achieve political, social, or economic objectives. •Governments impose trade and investment barriers that benefit interest groups, such as domestic firms, industries, and labor unions. •Government intervention alters the competitive landscape, by hindering or helping the ability of firms to compete internationally. •Government intervention is an important dimension of country risk.

Hedging

•Hedging refers to efforts to compensate for a possible loss from a bet or investment by making offsetting bets or investments. In international business, it refers to using financial instruments and other measures to reduce or eliminate exposure to currency risk. •If the hedge is perfect, the firm is protected against the risk of adverse changes in the price of a currency. •Banks offer various financial instruments - forward contracts, options, and swap agreements - to facilitate hedging.

Hofstede Typology

•Individualism versus collectivism refers to whether a person primarily functions as an individual or within a group. •In individualistic societies, each person emphasizes his or her own self-interest; competition for resources is the norm; individuals who compete best are rewarded. Examples: Australia, Britain, Canada, and the United States. •In collectivist societies, ties among individuals are important; business is conducted in a group context; life is a fundamentally cooperative experience; conformity and compromise help maintain harmony. Examples: China, Panama, Japan, South Korea.

Long-term vs. short-term orientation

•Long-term vs. short-term orientation describes the degree to which people and organizations defer gratification to achieve long-term success. •Long-term orientation emphasizes the long view in planning and living, focusing on years and decades. Examples: Traditional Asian cultures, such as China, Japan, and Singapore, which base these values on the teachings of the Chinese philosopher Confucius (500 B.C.), who espoused long-term orientation, discipline, hard work, education, and emotional maturity. •Short-term orientation is typical in the United States and most other Western countries.

Key Criteria for Assessing the Attractiveness of Emerging Markets and Developing Economies

•Market Size: The country's population, especially those living in urban areas. •Market Growth Rate: The country's real GDP growth rate. •Market Consumption Capacity: Income of the middle class. •Commercial Infrastructure: Density of telephone lines, number of personal computers, density of paved roads, population per retail outlet, and other such characteristics. •Economic Freedom: The degree to which government intervenes in business activities. •Country Risk: Degree of political and macroeconomic risk.

Sustainability

•Meeting humanity's needs without harming future generations. The sustainable firm pursues three types of interests: -Economic interests refer to the firm's economic impact on the localities where it does business, such as regarding job creation, wages, and public works. -Social interests refer to how the firm performs relative to social justice, such as avoiding the use of child labor, sweatshops, as well as providing employee benefits. -Environmental interests refer to the extent of the firm's impact and harm to the natural environment.

Convertible vs. nonconvertible currency

•Most currencies are not very convertible. The dollar, yen, pound, and euro are hard currencies - universally accepted and preferred in international transactions.

Political and legal systems

•Political system: A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other. •Three major types of political systems: -Authoritarianism -Socialism -Democracy Legal system: A system for interpreting and enforcing laws. The laws, regulations, and rules establish norms for conduct. It incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as protecting intellectual property and taxing economic output. •Four major types of legal systems: -Common Law -Civil Law -Religious Law -Mixed Systems

Functions of Political Systems

•Provide protection from external threats. •Ensure stability based on laws. •Govern the allocation of valued resources among the members of a society. •Define how society's members interact with each other.

Currency Risk

•Seek expert advice •Centralize currency management within the M N E •Decide on the level of risk the firm can tolerate •Devise a system to measure exchange-rate movements and currency risk •Monitor changes in key currencies •Be wary of unstable currencies or those subject to exchange controls •Monitor long-term economic and regulatory trends •Distinguish economic exposure from transaction and translation exposures •Emphasize flexibility in international operations

Managerial Guidelines for Minimizing Currency Risk

•Seek expert advice •Centralize currency management within the M N E •Decide on the level of risk the firm can tolerate •Devise a system to measure exchange-rate movements and currency risk •Monitor changes in key currencies •Be wary of unstable currencies or those subject to exchange controls •Monitor long-term economic and regulatory trends •Distinguish economic exposure from transaction and translation exposures •Emphasize flexibility in international operations

government intervention (types)

•Tariff - A tax on imports (e.g., Citrus, textiles). •Nontariff trade barrier - Government policy, regulation, or procedure that impedes trade. •Quota - Quantitative restriction on imports of a specific product (e.g., Imports of Japanese cars). •Investment barriers - Rules or laws that hinder foreign direct investment (e.g., Mexico's restrictions in its oil industry). Local content requirements- Requirement that firms include a minimum percent of locally sourced inputs in the production of given products or services Regulations and technical standards- Safety, health, or technical regulations; labeling requirements. Administrative and bureaucratic procedures- Complex procedures or requirements imposed on importers or foreign investors that hinder trade and investment. FDI and ownership restrictions- Rules that limit the ability of foreign firms to invest in certain industries or acquire local firms. Subsidy- Financing or other resources that a government grants to a firm or group of firms, to ensure their survival or success.

Equity vs. Debt financing

•The firm obtains capital by selling shares of stock. •Main advantage is the firm obtains capital without incurring debt and having to repay funds to providers. •Main disadvantage is the firm's ownership is diluted. •The global equity market is the worldwide market of funds for equity financing-the stock exchanges worldwide where investors and firms meet to buy and sell shares of stock. •The firm borrows money from a creditor in exchange for repayment of principal and interest. •The main advantage over equity financing is the firm does not sacrifice any ownership interests. •Debt financing is obtained from two sources: loans (usually from banks) and the sale of bonds. •The firm may borrow money from banks in its home market or in foreign markets. •Borrowing internationally is complicated by differences in banking laws and infrastructure, lack of loanable funds, and fluctuating exchange rates.

Transfering money with a MNC

•Through a trade credit, a subsidiary defers payment for goods received from the parent firm. •Dividend remittances are commonly used to transfer funds from foreign subsidiaries to the parent, but vary depending on tax levels, currency risks, and other factors. •Royalty payments are compensation paid to owners of intellectual property. Assuming the subsidiary has licensed technology, trademarks, or other assets from the parent or other subsidiaries, royalties can be an efficient way to transfer funds. •In a fronting loan, the parent deposits a large sum in a foreign bank, which then transfers the funds to the subsidiary in the form of a loan. •Fronting allows the parent to circumvent restrictions that foreign governments impose on direct intra-corporate loans. •If the loan is made through a bank in a tax haven country, the parent can minimize taxes that might otherwise be due if the loan were made directly. •Transfer pricing (also known as intracorporate pricing) refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same M N E. •Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries; minimize foreign exchange risks, for example, by moving funds out of countries where a currency devaluation is forecast; and optimize the management of internal cash flows.

Commercial Risk

•Weak partner •Operational problems •Timing of entry •Competitive intensity •Poor execution of strategy

Globalizations - what forces drive it

•Worldwide reduction of barriers to trade and investment •Market liberalization and adoption of free trade (e.g., in China, former Soviet Union countries, and elsewhere) •Industrialization, economic development, and modernization •Integration of world financial markets •Advances in technology

Indulgence versus restraint

•describes the degree to which people in a society attempt to control their impulses and desires. •Members of indulgent societies allow relatively free gratification of their basic and natural human desires related to having fun and generally enjoying life. •Restrained societies believe that such gratification should be curbed and regulated by strict norms. •For example, Denmark, Mexico, and the U.S. score high on indulgence. China, Iraq, and South Korea score high on restraint.

Masculinity versus femininity

•refers to a society's orientation based on traditional male and female values. •Masculine cultures value competitiveness, ambition, assertiveness, and the accumulation of wealth. Both men and women are assertive, focused on career and earning money. Examples: Australia, Japan •Feminine cultures emphasize nurturing roles, interdependence among people, and caring for less fortunate people for both men and women. Examples: Scandinavian countries, where welfare systems are highly developed, and education is subsidized.