International Business Week 4 Quiz

Comparative Advantage

(country-specific advantage): The superior features of a country (natural or deliberate) providing unique benefits in global competition. (i.e. labor, climate, arable land, oil, etc.)

Competitive Advantage

(firm-specific advantage): Distinctive assets or competencies of a firm, which are difficult for competitors to replicate or imitate; derived from size, cost or innovative strengths.

Regional Economic Integration Bloc

- A geographic area consisting of two or more countries that have agreed to pursue economic integration by reducing barriers to the cross-border flow of products, services, capital and, in more advanced states, labor - Think: European Union (EU), The Association of Southeast Asian Nations (ASEAN) and the North American Free Trade Agreement (NAFTA) area

Managerial guidelines for cross-cultural success

- Acquire factual and interpretive knowledge about the other culture and try to speak their language - Avoid cultural bias: ->Self-reference criterion: the tendency to view other cultures through the lens of one's own culture - Develop cross-cultural skills: Tolerance for ambiguity, perceptiveness, valuing personal relationships, flexibility and adaptability

Economic Systems: Market Economy

- All productive activities are privately owned - No overall plan directing and determining volume and composition of goods and services that a country produces - Production is determined by supply and demand mechanisms - Role of government in a market economy: Encourage vigorous free and fair competition between private producers; Outlawing monopolies and restrictive business practices

Drawbacks and ethical dilemmas of regional integration

- Altered trade patterns between member and non-member bloc states: More trade takes place inside bloc and less trade with countries outside the bloc - Tendency for reduced worldwide free trade; Two counter-tendencies: Country that reduces trade barriers is moving towards free trade An economic bloc that imposes external trade barriers is moving away from worldwide free trade - Loss of national identity: Increased cross-border contact has a homogenizing effect - Sacrifice of autonomy: Later stages of regional integration require member countries to establish a central authority in order to manage bloc affairs, hence each participating country must ceded to central authority some of its autonomy - Corporate restructuring and job loss: Centralize management control to regional HQ

Success Factors for Regional Integration

- Economic similarity: More similar economies of member countries, more likely economic bloc will succeed - Political similarity: Countries should have similar political systems, share aspirations and be willing to surrender national autonomy - Similarity of culture and language: Provides a basis for mutual understanding and cooperation - Geographic proximity: Facilitates intra-bloc movement (products, labor, and other factors)

Rule of law

- Existence of a legal system in which rules are clear, publicly disclosed, fairly enforced and widely respected by individuals, organizations and the government - In the absence of the rule of law, economic activity can be impeded and firms have to contend with great uncertainty

Inflation

- Increase in general price level over time - Measured through Consumer Price Index (CPI) - High inflation is negative for international business - People less willing to save and lend due to uncertainty - Increased uncertainty determining returns from investment in long-term - Rising interest rates lead to increased cost of debt capital - Potential for currency depreciation - Hinders long-term development of economy

Explain why nations trade

- Increase standard of living - Creates more jobs, more cost efficient - Different countries have different resources - Boost economy - Cost efficient - Countries may have similar resources but could be more efficient to get it elsewhere - Allows countries to use their natural resources more efficiently - Allows industries and workers to be more productive

Dimensions of Market Globalization

- Integration and interdependence of national economies through firm value chains - Rise of regional economic integration blocs through government cooperation (trade blocs = EU, NAFTA, ASEAN) - Growth of global investment and financial flows through international transactions and globalization of capital - Convergence of consumer lifestyles and preferences - Globalization of production through economies of scale and location specific advantages

Language as a key dimension of culture

- Language is the 'mirror' or expression of a culture, it is essential for communication, and provides insights into culture - Linguistic proficiency is a great asset in international business; facilitates cross-cultural understanding - Language has both verbal and non-verbal characteristics (facial expressions and gestures)

Offensive Rationale for Government Intervention

- National strategic priorities: Government intervention sometimes aims to encourage the development of industries that bolster the nation's economy (i.e. high-tech or high value creating industries = IT, pharmaceuticals or financial services) - Increasing employment: Government often impose import barriers to protect employment in designated industries (i.e. Chinese Government requiring foreign companies to enter through joint ventures with local Chinese firms)

Investment Barriers

- Ownership restrictions: restrict the ability of foreign firms to invest in some industry sectors or acquire local firms - Currency control: restrictions on the outflow of hard currency from a country or the inflow of foreign currencies

Various approaches used by firms to manage country risk

- Proactive environmental scanning: Allows firms to improve practices in ways that conform with the goals and standards of local laws and political entities - Strict adherence to ethical standards: Helps insulate firms from some country risks; Ethics -- moral principles and values governing behavior (relativism vs. normativism) - Alliances with qualified local partners: Avoid liability of foreignness - Protection through legal contracts.

Explain why globalization is not a new phenomenon

Declining trade barriers and the ease with which international business transactions take place due to the internet and other technologies, are contributing to a gradual integration of national economies into a unified market. Globalization isn't new, it has simply accelerated and acquired a more complex character in recent decades

Transparency in financial reporting

Degree to which firms regularly reveal substantial information about their financial condition and accounting practices - Promote greater transparency and enhance responsibility - Drawback = compliance cost

Long-term vs. Short-term Orientation

Degree to which people defer gratification to achieve long term success - Long-term orientation -- long view in planning and living (i.e. Asian cultures) - Short-term orientation -- (i.e. Australia, US, most Western and South American countries)

Power Distance

Describes how a society deals with inequalities in power that exist between people: - High power-distance societies -- relatively indifferent to inequalities and allow them to grow over time - Low power-distance societies -- gaps between the powerful and weak are minimal

Marketing and distribution laws

Determine what practices are allowed in advertising, promotion and distribution

Individualism vs. Collectivism

Does a person function primarily as an individual or within a group: - Individual societies: ties between people are relatively loose; each person tends to focus on his or her own self-interest - Collectivist societies: ties between individuals are more important than individualism

Polycentric Orientation

Host-country mindset where manager develops greater affinity with the country in which he or she conducts business; Doesn't make a judgement about another culture, but instead attempts to gain an understanding of what makes the culture and society unique

Intellectual property

Ideas or works that are created by people or firms and protected by patents, trademarks and copyrights = enforcement mechanisms

International Portfolio Investment

Passive ownership of foreign securities such as shares and bonds for the purpose of generating financial returns

Masculinity vs. Femininity

Refers to society's orientation, based on traditional male and female values - Masculine cultures -- tend to value competitiveness, assertiveness, ambition and the accumulation of wealth - Feminine cultures -- emphasize nurturing roles, interdependence between people and taking care of less fortunate people - Limitations: framework fails to account for cultural convergence; difficult to generalize from findings; don't capture from all potential cultural dimensions

Comparative Advantage Principle

Refinement of absolute advantage theory, whereby efficiency gains through trade even if a country has absolute advantage in many industries. Essentially, country gains if resources are placed into most efficient industries + import goods even where it has an absolute advantage.

Analyse responses of firms to government intervention

Research: - Understand trade and investment barriers abroad - Scan the business environment to identify the nature of government intervention Choose Appropriate Entry Strategy: - Consider exporting, licensing, joint ventures or FDI Investment incentives/government support programs: - Example: Toyota built a factory in the Australian state of Victoria, in the city of Altona, in part to benefit from reduced taxes and direct subsidies provided by the Victorian state government

Nationalization

Seizing of an entire industry with or without compensation

Confiscation

Seizure of corporate assets without compensation

International Business

Performance of trade and investment activities by firms across national borders: - Firms organize, source, manufacture, market and conduct value-adding activities on a global scale - Seeking foreign customers and engage in collaborative relationships with foreign business partners - International business gives you access to products and services from around the world - It also profoundly affects your quality of life and economic well-being

National Industry Policy

Proactive government development plan (partner with private sector) to develop and support particular industries

Internationalization Theory

Process by which firms acquire and retain one or more value-chain activities 'inside' the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations

Absolute Advantage

Producing products through absolute advantage - through natural advantage (i.e. climate, terrain, minerals, etc.) or acquired advantage (i.e. knowledge, skills, competencies, process technology, etc.)

International Product Cycle Theory

Products go through three stages of evolution: 1) Introduction: new product is produced at home and enjoys a temporary monopoly 2) Growth: product's inventors mass-produce the good and seek to export it to foreign markets 3) Maturity: product's manufacturing becomes more standard, foreign competitors enter the marketplace and the monopoly power of the investors dissipates

Economic Instability

Recession, high inflation rates, rising interest rates, and volatile foreign exchange rates

Uncertainty Avoidance

The extent to which people can tolerate risk and uncertainty in their lives - High uncertainty avoidance societies: create institutions that minimise risk and ensure financial security - Low uncertainty risk avoidance societies: socialise their members to accept and become accustomed to uncertainty

Sanction

Type of trade penalty imposed on one or more countries by one or more other country (i.e. tariffs, trade barriers, import duties, etc.)

Ethnocentric Orientation

Using your own culture as a standard for judging other cultures, tendency to view the world primarily from our own perspective

War, insurrection and revolution

Violence pose significant problems for business operations

Boycotts

Voluntary refusal by consumers or special interest groups to engage in commercial dealings with a nation or a company

Factor Proportions Theory

Within a country, abundant factors are cheaper than scarce factors. Each country should export products that intensively uses abundant factors of production and import goods that use scarce factors of production. Essentially, determines which products a country trades.

Political System

a set of formal institutions that constitute a government

Legal System

a system for interpreting and enforcing laws

Commercial Risk

firm's potential loss/failure from poorly developed or executed business strategies or tactics

Dumping

pricing exported goods at less than their normal value

Cross-cultural Risk

situation/event where a cultural misunderstanding or miscommunication causes concern

Anti-dumping duty

tax imposed on products deemed to be dumped and causing injury to producers of competing products in the importing country

Globalization of Markets

the gradual integration and growing interdependence of national economies

Neo-mercantilism

the idea that the nation should run a trade surplus (exports more goods than it imports): supported by labor unions and farmers → restricting imports has negative implications: raw material/ component imports costly, reduced consumer choice, higher prices for consumers

Culture is...

the learned, shared and enduring orientation patterns in a society: People demonstrate their culture through values, ideas, attitudes, behaviors and symbols

Currency Risk

the risk of adverse fluctuations in exchange rates

Economic Growth

Common measure is the quarterly or annual percentage change in real GDP

Michael Porter's Diamond Model

Competitive advantage (company and national level) = from presence and quality of four main elements: 1) Firm strategy, structure and rivalry: Nature of domestic rivalry (competition) for innovation, technology and skills/competencies 2) Factor conditions: Factors of production (i.e. labor, natural resources, capital, technology, entrepreneurship, and know-how) 3) Demand conditions: High home country demand, sophisticated buyers (i.e. local producers satisfy high local demand for quality: French wine connoisseurs) 4) Related and supported industries: World-class production needs world-class inputs, support industries develop to provide inputs required by the industry, geographic proximity (i.e. sport car component suppliers close to sport car companies)

International Investment

Transfer of assets to another country or the acquisition of assets in that country

Defensive Rationale for Government Intervention

- Protection of the national economy: inability to compete with low-cost labor = calls for trade barriers to curtail import of cheap products - Protection of an infant industry: a young industry may need protection to give it a chance to grow and succeed (i.e. Japan long protected its car industry) - National security: countries impose restrictions on products viewed as critical to national defense and security (i.e. U.S. prohibits exports of plutonium and similar products to North Korea) - National culture and identity: countries impose restrictions on products or services viewed as threatening to national assets (i.e. Japan restricts the import of rice because it is central to the nation's diet and food culture)

Culture is not...

- Right or wrong, culture is relative. There is no cultural absolute. People of different nationalities simply perceive the world differently - Not about individual behavior: Culture is about groups. It refers to a collective phenomenon of shared values and meanings - Not inherited: culture is derived from the social environment. People are not born with a shared set of values and attitudes.

Key dimensions describing the economic environment of a country

- Size of Economy: Level of National Income/Production measured by Gross national income (GNI): value of a nation's income earned by residents of a nation; Gross domestic product (GDP): value of production/income earned from that production within a country; National Population - Geography: Natural resources and geographic features - People: Population characteristics help define market potential and production location; Influence of pop. density and a skilled labor force - Infrastructure and Institutions: Infrastructure: the created assets (physical, economic, and commercial structures and institutions) in a country - Competitiveness: Internal and external factors influence the level of firm competitiveness - Productivity: Use inputs more effectively and efficiently to generate output

Explain how the economic dimensions of a country impact market potential and international business location decisions

- Size of Economy: Sufficient people with sufficient income to spend are the foundations of a viable market (Can be measured through GNI per capita) - Geography: Natural resources and geographic features affect the level/pattern of market demand and production (Ex: rivers provide cost-effective transport services and natural hydroelectricity); Location can be a valuable business source (Ex: Singapore or Hong Kong centrally located between North/South America and Europe is ideal as sea transportation hub and finance center) - People: Population characteristics help define market potential and production location ---Pop. size, growth and distribution (age,gender, and location) combined with national income growth/distribution can provide an indicator of potential market size ---Influence of pop. density and a skilled labor force - Infrastructure and Institutions: Poorly developed infrastructure can limit the size of the market, impact costs, alter product design, and determine location decisions and market entry strategies

Regional Economic Integration

- The growing economic interdependence that results when two or more countries within a geographic region form an alliance aimed at reducing barriers to trade and investment - It is estimated that more than 50 percent of world trade today is under some form of preferential trade agreement signed by groups of countries - The free trade that results from economic integration helps nations attain high living standards by encouraging specialization, lower prices, greater choices, increased productivity and more efficient use of resources

Societal consequences of market globalization

- Threats to national sovereignty - Globalization has created countless new jobs, but it has also cost many people their jobs - Allegations of labor exploitation - Globalization can harm the environment - Globalization exerts strong pressure on national culture

Drivers of Market Globalization

- Worldwide reduction of barriers to trade and investment - Market liberalization and adoption of free markets - Industrialization, economic development and modernization: advancing standards of living and discretionary income in emerging markets - Integration of world financial markets: possible to raise capital, borrow funds, engage in foreign currency transactions - Technological advances: facilitator of cross-border trade and investment

Why do firms pursue internationalization strategies?

1) Market-seeking opportunities: these include opportunities for growth through market diversification and/or earning higher margins and profits 2) Resource-seeking opportunities: including being closer to supply sources, benefit from global sourcing advantages or gain flexibility in the sourcing of products, gain access to lower cost and/or better value factors of production 3) Knowledge-seeking opportunities: includes gaining new ideas about products, services and business methods 4) Firm-specific methods: develop economies of scale in sourcing, production, market and R&D, invest in a potentially rewarding relationship with a foreign partner and/or confront international competitors more effectively or thwart growth of competition in the home market

Socialism

Capital and wealth should be vested in the state and used primarily as a means of production for use rather than for profit: - Collective welfare of people is believed to outweigh the welfare of the individual - Government should control the basic means of production, distribution and commercial activity - Social democratic regimes (i.e. France and Norway)

Mixed systems

Combination of systems: - South Africa: common and civil law systems - Indonesia: civil and Islamic systems

High-context Cultures

A culture that emphasises non-verbal messages and views communication as a means to promote smooth, harmonious relationships (i.e. Japan and China prefer an indirect and polite face-saving style that emphasises a mutual sense of care and respect for others)

Low-context Cultures

A culture that relies on elaborate explanations, putting great emphasis on spoken words (i.e. Northern Europe and North America long tradition of rhetoric and give central importance to delivery of verbal messages)

Geocentric Orientation

A global mindset where the manager is able to understand a business or market without regard to country boundaries; cognitive orientation that combines openness to, and awareness of, diversity across cultures

Private Property Rights (PPR)

Ability to own property and assets + accumulate private wealth = situation encourages individual initiative, ambition and innovation

Free Trade

Absence of restrictions to flow of goods and services between nations, generally leads to greater consumer choice, lower cost/prices, increased overall prosperity

Foreign investment laws

Affect the type of entry strategy that firms choose, as well as their operations and performance

Foreign Direct Investment (FDI)

An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets

Extraterritoriality

Application of home-country laws to persons or conduct outside of national borders

Expropriation

Asset seizure with compensation

Civil law

Based on an all-inclusive system of laws that have been 'codified' -- they are clearly written and accessible

Common law

Basis is tradition and past practices and legal precedents set by the nation's courts through interpretation of statutes, legislation and past rulings

Country Risk

Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political, legal and/or economic environments

Limited Government (LG)

Government performs only essential functions that serve all citizens (i.e. national defense, construction of infrastructure). State control and intervention in economic activities or private individuals or firms is minimal

Non-Tariff Barriers

Government policies/measures that restrict trade without imposing a direct tax or duty (i.e. quotas, import licenses, local content requirements, government regulations and bureaucratic procedures)

International vs. Domestic Business

International businesses operate in environments characterized by: - Unique economic conditions - National culture - Legal and political systems International businesses are in unfamiliar surroundings, encountering uncontrollable variables that introduce new or elevated risks

Contract laws

International contracts attach rights, duties and obligations to the contracting parties

Internationalization Process Model

Internationalization is a gradual process that takes place in incremental stages over a longer period of time (Born-global is an exception)

Environmental Laws

Laws to preserve natural resources, to combat pollution and the abuse of air, earth and water resources, and to ensure health and safety

Income repatriation

MNEs earn profits in various countries and seek ways to transfer these funds back to their home country; some governments devise laws to restrict such transfers

Foreign Corrupt Practices Act (FCPA)

Makes it illegal for a firm to offer bribes to foreign parties for the purpose of securing or retaining business

Customs Union

Member countries agree to adopt common tariff and non-tariff barriers on imports from non-member countries (i.e. MERCOSUR)

Free Trade Area

Member countries agree to eliminate tariffs and other barriers to trade in products and services within the bloc (i.e. NAFTA, ASEAN)

Political Union

Member countries enjoy all the advantages of an economic union, but also have a central government and military that represent all member states

Economic Union

Member countries enjoy all the advantages of early stages, but also strive to have common fiscal and monetary policies

Subsidies

Monetary or other resources government grants a firm, usually intended to ensure their survival by facilitating production and marketing of products at reduced prices or to encourage exports (i.e. French Government has provided large subsidies to Air France, the national airline)

Mercantilism

National prosperity via positive balance of trade (i.e. maximising exports/ minimising exports)

Embargo

Official ban on exports or imports to a particular country, in order to isolate it and punish its government

Indulgence vs. Restraint

Society allows or restricts the gratification of human drives - Indulgence allows free gratification of basic and natural human drives that are related to enjoying life and having fun - Restraint: through strict social norm, regulates and suppresses the gratification of need

Totalitarianism

State attempts to regulate most aspects of public and private behavior - Economic and political matters + attitudes, values and beliefs of citizenry - Can be either theocratic (religion based) or secular (non religion based) - Do not tolerate activities by individuals or groups such as churches, labor unions or political parties that aren't direct towards the state's goals

Religious law

System strongly influenced by religious beliefs, ethical codes and moral value, viewed as mandated by a supreme being

Tariff Barrier

Tax imposed on imported or exported product; Can be either ad valorem (% of value); specific (flat $ amount) or compound (both % & $)

Corruption

The abuse of power in order to achieve illegitimate personal or business gain

Terrorism

Threat or actual use of force or violence to attain a political goal through fear, coercion or intimidation

Common Market

Trade barriers are reduced or removed, common external barriers are established and products, services and factors of production are allowed to move freely between the member countries

Analyse the firm-level consequences of market globalization: internationalization of the firm's value chain

The most direct implication of market globalization is for the firm's value chain - Market globalization compels firms to organize their sourcing, manufacturing, marketing and other value-adding activities on a global scale - Each value-adding activity in an international firm's value chain is subject to internationalization: that is, can be performed abroad instead of at home: - Internationalization may take the form of global sourcing, exporting or investment in key markets abroad

Democracy

The prevailing political system in much of the world's advanced economies. Characterized by private property rights (PPR) + limited government (LG)