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