International Business Final Exam
Three Steps in Planning
1. Determining the Organization's Mission and Goals 2. Formulating Strategy 3. Implementing Strategy
Two Types of Contractual Relationships
1. Licensing 2. Franchising
Inflation
A rise in the prices of goods and services
Trade Secret
Confidential know-how or information that has commercial value
Floating Rate System
Exchange rates are set by demand and supply
The Classical Gold Standard
(1875-1914) - Nations fixed the value of the currency in terms of gold - Gold was freely transferable between countries
Interwar Period
(1918-1944) - Periods of serious chaos such as German hyperinflation and the use of exchange rates as a way to gain trade advantage
What is a global marketing strategy? What are its various elements? What is the major challenge faced by marketing managers in devising a strategy?
- A plan of action that guides the firm in 1. how to position itself and its offerings in foreign markets and which customer segments to target and 2. the degree to which its marketing program elements should be standardized and adapted - Marketing segmentation:: the process of dividing the firm's total customer base into homogeneous clusters in a way that allows managers to formulate unique marketing strategies for each group. Within each market segment, customers exhibit similar characteristics regarding income level, lifestyle, demographic profile, or desired product benefits - A global market segment represents a group of customers that share common characteristics across many national markets. Firms target these buyers with relatively uniform marketing programs - Positioning:: the firm develops both the product and its marketing to evoke a distinct impression in the customer's mind, emphasizing differences from competitive offerings -Global positioning strategy:: one in which the offering is positioned similarly in the minds of buyers worldwide ELEMENTS:: global branding and product development, international pricing, international marketing communications, international distribution KEY CHALLENGE:: how to resolve the trade-offs between standardizing the firm's marketing program elements and adapting them for individual international markets - Adaptation:: firm efforts to modify elements of the international marketing program to accommodate specific customer requirements in a particular market - Standardization:: firm efforts to make the marketing program elements uniform, with a view to targeting entire regions of countries, or even the global marketplace, with a similar product or service
Comparative Advantage
- Ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another - Even if one country is more efficient in the production of all goods than the other both countries will still gain by trading with each other, as long as they have different relative efficiencies
Absolute Advantage
- Ability of a party to produce more of a good or service than competitors, using the same amount of resources - Since it is determined by a simple comparison of labor productivities, it is possible for a party to have no absolutely advantage in anything, in that case, according to the theory, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost
Resource or Asset seeking motives
- Access raw materials - Gain access to knowledge or other assets - Access technological and managerial know-how available in a key market
Master Franchise
- An independent company is licensed to establish, develop, and manage the entire franchising network in its market - Right to sub-franchise to other independent businesses and thus assume the role of the local franchisor
Turnkey Contracting
- Arrangement where the focal firm plans, finances, organizes, manages, and implements all phases of a project abroad and then hands it over to a foreign country after training local personnel
BRIC Economies
- Brazil, Russia, India, China - Fastest growing, dynamic, highest potential emerging markets - Leaders in respective regions - All faced substantial acceleration in growth, democratic political reform, market-oriented reforms manifest in FDI and some macroeconomic and reform setbacks - Each has had difference experience in pace, breadth, depth of reform
OECD
- Committed to democracy and the market economy - Governments can compare policy experiences, seek answers to common problems, identify good practice, coordinate domestic and international policies
Pros of Franchising
- Compared to licensing, usually a more stable, long-term entry strategy - More comprehensive than licensing because the franchisor prescribes virtually all business activities of the franchisee
Strategic Implications of Global Sourcing
- Consider R&D and design central to competitive advantage-- more likely to internalize - Manufacturing, logistics, and customer services tend to be more readily outsourced
Show the effects of German unification of Germany's interest rate
- Different interest rates exist for different assets since foreign currencies are different assets - From 1990 to 1995, the DM interest rate is higher than that of the US. Excluding this period, the dollar rates are higher, reflecting higher inflation in the US and depreciating of the dollar versus the German currency
Integration of World Financial Markets
- Enables internationally active firms to raise capital, borrow funds, and engage in foreign currency transactions wherever they go - Cross border transactions are made easier partly as a result of the ease with which funds can be transferred between buyers and sellers through a network of international commercial banks - The globalization of finance enables firms to pay suppliers and collect payments from customers worldwide.
Why do nations pursue economic integration? What are the factors that contribute to the success of regional integration?
- Expand market size - Achieve scale economies and enhance productivity - Attract direct investment from outside the bloc - acquire stronger defensive and political posture - Economic similarity - Political similarity - Similarity of culture and language - Geographic proximity
Who are the facilitators in International Business? Give examples. What do they do?
- Facilitators assist the focal firm with specialized services required in cross border transactions Banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers - Logistics Service Provider:: transportation specialist that arranges for physical distribution and storage for the focal firm, - Custom Brokers: Specialists that arrange for clearance of products through customs on behalf of the focal firm - Logistics: the process of strategically managing the procurement, movement, and storage of materials, parts, and finished investors through the organization and its marketing channels in such a way that current and the future profitability are maximized through the cost-effective fulfillment of orders - Supply Chain Management: The management of upstream and downstream relationship with suppliers and customers in order to deliver superior customer value at less cost to the supply chain as a whole
Outsource or not?
- Firms usually internalize those value-chain activities they consider a part of their core competence, or which involve the use of proprietary knowledge and trade secrets that they want to control
Attractions of Master Franchising
- Franchisees prefer the arrangement because it provides an exclusive, large, predefined territory and substantial economies of scale from operating numerous sales outlets simultaneously -Franchisee gains access to a proven retailing and marketing concept, and partnership with a corporate headquarters and master franchisees in other territories, which typically provide support, know how, and the latest innovations in the field - Master franchising accounts for as much as 80% of international franchising deals
The Franchisor Perspective
- Franchising is a low-risk, low-cost entry strategy - Offers ability to develop new and distant international markets relatively quickly - Can generate additional profit with only small investment in capital, personnel, and distribution
Franchisee Perspective
- Franchising is especially beneficial to the SME - Big advantage is ability to launch a business using a tested business model - Amounts to cling best practices
Business Format Franchising
- Franchisor transfers to the franchisee a total business method-- including production and marketing methods, sales systems, procedures, and management know-how, and the use of its name - Also provides the franchisee with training, ongoing support, incentive programs, and the right to participate in cooperative marketing programs - In return, the franchsiee compensates the franchisor, usually via a royalty representing a percentage of the franchisee's revenues - Franchisee may be required to purchase certain equipment and supplies from the franchisor to ensure standardized products and consistent quality
Market seeking motives
- Gain access to new markets or opportunities - Follow key customers - Compete with key rivals in their own markets
Public Policy Towards Global Sourcing
- Impractical for a nation to adopt a unilateral policy against - Role should be to mitigate the harm that it can cause -
Explain why despite enormous natural resources, much of Latin America's population remains in poverty and the region has been repeatedly experiencing financial crises
- In the 1960s and 1970s many Latin American countries (Brazil, Argentina, Mexico) borrowed huge sums of money from International creditors for industrialization - At the time these countries had great economies so the creditors were happy to keep providing loans. - Initially, developing countries were getting loans through public routes such as The World Bank - After 1973, private banks had an influx of funds from oil rich countries and believed that sovereign debt as a safe investment - Debt service grew even faster - As interest rates increased in the USA and Europe, debt payments also increased, making it harder for borrowing countries to pay back their debts deterioration in the exchange rate with the US dollar meant that Latin American governments ended up owing tremendous quantities of their national currencies as well as losing purchasing power - Caused the prices of primary resources (LA's primary export) to fall - Meixco declared that it couldn't meet its payment due dates and announced unilaterally-- requested a renegotiation of payment periods - Incomes dropped, economic growth stagnated, unemployment rose, inflation reduced buying power of middle classes - Investment that might have been used to address social issues and poverty was being used to pay the debt - In response, most nations abandoned their import substitution industrialization models of economy and adopted an export-oriented industrialization strategy
What is the North American Free Trade Agreement?
- Includes the US, Canada, and Mexico - abolished tariffs on 99% of the goods traded between members - removed barriers on the cross-border flow of services - protects intellectual property rights - removes most restrictions on FDI between members - Allows each country to apply its own environmental standards - Establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
Industrialization, Economic Development, and Modernization
- Industrialization transitions emerging markets from being low value-adding commodity producers, dependent on low cost labor, to sophisticated competitive producers and exporters of premium products - The adoption of modern technologies, improvement of living standards, higher discretionary income levels, and adoption of modern legal and banking practices increase the attractiveness of emerging markets as investment targets and facilitate the spread of ideas and products
What are the factors that are relevant to selecting FDI locations?
- Market attractiveness - Human resource factors - Infrastructure - Profit retention factors - Economic environment - Legal and regulatory environment - Political and governmental structure
What are the major problems faced by governments related to global sourcing? What are the arguments in favor of global sourcing?
- Job losses in the home country - Reduced national competitiveness - Declining standards of living - As more tasks are performed at lower cost with comparable quality in other countries, high wage countries will eventually lose their national competitiveness - critics fear that long held knowledge and skills will eventually drain away to other countries, and the lower wages paid abroad to perform jobs that were previously done in high wage countries will eventually pull down wages in the latter countries - By reconfiguring value chains to the most cost-efficient locations, companies reduce their production costs and enhance their performance - Cost reductions and enhanced competitiveness allow firms to reduce the prices that they charge their customers-- increase customers' purchasing power and living standards - Countries that outsource may be able to shift their labor force to higher-value activities-- boost nations productivity and industrial efficiency
What are the unintended consequences of market globalization?
- Loss of national sovereignty:: power shifts to MNEs and supranational organizations, concentration of power by MNEs leads to monopoly - Offshoring and the flight of jobs:: causes dislocation of jobs, firms shift manufacturing abroad in order to avoid workplace safety and health regulations - Effect on the poor:: benefits of globalization are not evenly distributed - Effects on the natural environment: fail to protect environment - Effect on national culture:: results in loss of national cultural values and identity
Developing economies
- Low-income countries characterized by limited industrialization and stagnant economies
Worldwide reduction of barriers to trade and investment
- National governments have sought to reduce trade and investment barriers, which has accelerated global economic integration - WTO has facilitated this - Market opening is closely associated with the emergence of regional trade blocs, a key dimension of market globalization
Disadvantages to the Franchisor
- Need to maintain control over potentially thousands of outlets worldwide - Risk of creating competitors is substantial
Business Process Outsourcing
- Outsourcing of business functions to independent suppliers such as accounting, payroll, and human resource functions, IT services, customer service, and technical support
Technological Advances
- Provides the means for internationalization of firms - Facilitates the development and spread of new products and technologies - Reduces the cost of doing business internationally - Enables even smaller firms to go international - Helps coordinate worldwide activities - Mitigates geographic distance
Disadvantages of Licensing
- Royalties are based on the licensee's scales volumes, so the licensor depends for its performance on the licensee's sales and marketing prowess - Licensor is limited in its ability to control the manner in which its asset is used - If the licensee is very successful, the licensor may wish it had entered the market through a more lucrative entry strategy - Focal firm should ensure that its value intellectual assets do not fall into the hands of individuals or firms likely to become competitors - Risk of creating a future competitors is substantial
Drivers of Global Sourcing
- Technological advances, including instant internet connectivity and broadband availability - Declining communication and transportation costs - Widespread access to vast information including growing connectivity between suppliers and customers that they serve - Entrepreneurship and rapid economic transformation in emerging markets
Build-Operate-Transfer
- The firm contracts to build a major facility abroad, such as a dam or water treatment plant, operates the facility for a specified period, then transfers its ownership to the project sponsor, typically the host-country government or public utility - Instead of turning the completed facility to the project sponsor, in a BOT deal, the builder operates it for a number of years before transferring ownership to the sponsor
The services sector has been steadily rising in relative importance in the GDP of the US, as well as elsewhere around the world. Since "Services" have been identified as non tradable, it may be argued that this trend will likely slow the rapid growth in International Trade. Discuss
- The past half century has seen a steady growth in the absolute and relative importance in international trade-- reversed only by global conflicts-- this trend has remained steady and robust despite major compositional shifts - Trend will probably continue, filed by regional preferential trade regions and a growing impact of the multilateral forces - Driven by technology, a reversal of the growing trade trend is not likely in the near future -In many cases, services are in fact tradable-- financial services, helpdesk, consulting, etc.
Configuration of value-adding activity
- The pattern or geographic arrangement of locations where the firm carries out value-chain activities
Market Liberalization and Adoption of Free Markets
- The tearing down of the Berlin Wall in 1989, the collapse of the Soviet Union's economy that same year, and China's free-market reforms signaled the end of the 50-year Cold War between communist regimes and democracy - It was the transition of command economies to market-driven economies that facilitated their membership into the global economy - The East Asian nations had already embarked upon an ambitious program of market liberalization in the 1980s - India joined this trend of economic liberalization in 1991 - These events opened roughly 1/3 of the world to freer international trade and investment - With privatization of previously state-owned industries these countries have enjoyed greater economic efficiency, simultaneously attracting foreign capital
Why do firms pursue FDI and international collaborative ventures?
- Ultimate goal is to enhance the firm's competitiveness in the global marketplace - market-seeking motives - resource or asset seeking motives - efficiency seeking motives
It is argued that small countries tend to have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
- Yes-- they do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities - Another answer would rely on location argument-- assume that the natural market for any given plant is a circe with he radius of nu miles with the plant at its center-- assuming the production plants are located randomly across the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller the country
What are the advantages and disadvantages of licensing?
- a licensing agreement specifies the nature of the relationship between the licensor and the licensee - High technology firms routinely license their patents and know-how to foreign companies. - Upon signing a licensing contract, the licensee pays the licensor a fixed amount upfront and an ongoing royalty on gross sales generated from using the licensed asset - Requires neither substantial capital investment nor involvement of the licensor in the foreign market-- allows the firm to gain market presence without FDI - Allows the firm to exploit the results of R&D - Licensor bears no costs of establishing a physical presence in the market or maintaining inventory there - Makes entry possible in countries that restrict foreign ownership that may be considered critical for national security - enables firms to enter smaller markets or those that are difficult to enter because of trade barriers - Can be used as a low-cost strategy to test the viability of foreign markets - Pre-empt the entry of competitors in a target market - Licensor depends for its performance on the licensee's sales and marketing prowess - Licensor is limited in its ability to control the manner in which its asset is used - Licensor may wish it had entered the market through a more lucrative strategy if licensee is successful - Should ensure that its value intellectual assets do not fall into the hands of individuals or firms likely to become competitors - Risk of creating a future competitor is substantial
What are the Porter's determinants of National Competitive advantage?
- firm strategy, structure and rivalry - Factor endowments - Related and supporting industries - Demand conditions
Characterize the efforts of regional integration in the Americas
- move towards greater regional economic integration in the Americas - Biggest trade effort is NAFTA - Other efforts include the Andean community and MERCOSUR
What makes an emerging market attractive?
-- Target Markets:: growing middle class, growing imports, targets for manufacture products and tech -- Manufacturing Bases:: home to low-wage, high quality labor, large reserves of raw materials/natural resources - Sourcing Destinations:: investments from abroad benefit emerging markets as they lead to new jobs and production capacity, transfer of technology and linkages to the global marketplace
Potential Benefits to National Economy from Global Sourcing
1. By reconfiguring value chains to the most cost efficient locations, companies reduce their production costs and enhance performance 2. Cost reductions and enhanced competitiveness allow firms to reduce the prices 3. Shift labor force to higher-value activities
Strategies for Minimizing Risk in Global Sourcing
1. Firms ought to go offshore for the right reasons 2. Need to get employees on board 3. Choose between a captive operation and a contract with outside specialists carefully 4. Choose countries and suppliers carefully 5. The focal firm needs to invest in supplier development and collaboration
Potential Harm to Economies from Global Sourcing
1. Job losses in the home country 2. Reduced national competitiveness 3. Declined standards in living
Risk in Global Sourcing
1. Less than expected cost Savings 2. Environmental Factors 3. Weak legal environment 4. Risk of creating competitors 5. Inadequate or low-skilled workers 6. Over reliance on suppliers 7. Erosion of morale and commitment among home-country employees
What are the risks of global sourcing? What are the strategies to implement in order to minimize these risks?
1. Less than expected cost savings 2. Environmental factors 3. Weak legal environment 4. Risk of creating competitors 5. Inadequate or low skilled workers 6. Over reliance on suppliers 7. Erosion of morale and commitment among home country employees 1. Offshore for the right reasons 2. Get employees on board 3. Choose between a captive operation and a contract with outside specialists carefully 4. Choose countries and suppliers carefully 5. The focal firm needs to invest in supplier development and collaboration 6. Managers need to proactively safeguard interests
Phases in the Evolution of Global Sourcing
1. Manufacturing of input products-- shift of European and US manufacturing to low-cost countries like Mexico 2. Offshoring-- IT services and customer-support activities 3. Business- Process outsourcing in product development, HR, and finance/accounting
What are the drivers of market globalization
1. Worldwide reduction of barriers to trade and investment 2. Market liberalization and adoption of free markets 3. Industrialization, economic development, and modernization 4. Integration of world financial markets 5. Advances in technology
Emerging Market Economies
A subset of former developing economies that have achieved substantial industrialization, modernization, improved living standards, and remarkable economic growth
Unofficial Pegging
Actually fixing the rate without saying so
Industrial Design
Appearance or features of a product, intended to improve the aesthetics and usability of a product in order to increase its production efficiency, performance, or marketability
Stuck in the Middle
Attempting to simultaneously pursue both a low cost strategy and a differentiation strategy - difficult to achieve low cost with the added costs of differentiation
Discuss the benefits and costs of joining a fixed-exchange rate area
Benefits:: gains from the stability of the area/reduced uncertainty, provide a more predictable basis for decisions that involve international transactions Costs:: gives up ability to use the exchange rate and monetary policy for the purpose of stabilizing output and employment, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output/employment
Target-Zone Arrangement
Countries agree to maintain exchange rates within a certain bound, what makes target zone arrangements special is the understanding that countries will adjust real economic policies to maintain the zone
Front office activities
Customer-related services such as marketing or technical support
Low-Control Strategies
Exporting, countertrade, and global sourcing. They provide the least control over foreign operations, since the focal firm delegates considerable responsibility to foreign distributors
International Leasing
Focal firm rents out machinery or equipment to corporate or government clients abroad - Focal firm retains ownership of the property throughout the lease period and receives regular lease payments from the lessee - Lessee-- leasing helps reduce its costs of using needed machinery and equipment
Market Seeking Motives
Gain access to new markets or opportunities Follow key customers Compete with key rivals in their own markets
What is an emerging market?
Gross National Income/Capita is between 1035 and 12616
Power of Customers
If there are only a few large buyers, they can bargain down prices
Back Office Activities
Includes internal, upstream business functions such as payroll biling
Discuss some of the main reasons why EU countries have favored mutually fixed exchange rates over other exchange rate policies
On the whole, the countries believe that monetary cooperation will give them a heavier weight in international economic negotiations. In addition, they view fixed exchange rates as a complement to EU initiatives aimed at building a common European market
Advanced Economies
Post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure
Global Sourcing
Procurement of products or services from suppliers or company owned subsidiaries located abroad from consumption in the home country or a third country
Outsourcing
Procurement of selected value-adding activities including production of intermediate goods or finished products, from independent suppliers
Offshoring
Relocation of a business process or entire manufacturing facility to a foreign country
Fixed Rate System Advantages
Stability and Predictability
Related Diversification
Strategy of entering a new industry and establishing a new business division that is linked to a company's existing divisions because they share resources that will improve the competitive position
Diversification
Strategy of expanding a company's operations into a new industry in order to produce new kinds of valuable goods or services
Mercantilism
The economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the state. In particular, it demands a positive balance of trade. - Dominated Western European economic policy and discourse from the 16th to late 18th centuries - Cause of frequent European wars in that time and motivated colonial expansion - High tariffs, especially on manufactured goods, are an almost universal measure of mercantilist policy - Other policies have included: building a network of overseas colonies, forbidding colonies to trade with other nations, monopolizing markets with stable ports, banning the export of gold and silver, forbidding trade to be carried in foreign ships, export subsidies, promoting manufacturing with research or direct subsidies, limiting wages, maximizing the use of domestic resources, restricting domestic consumption with non-tariff barriers to trade
Moderate-control strategies
contractual relationships such as licensing and franchising and project-based collaborative ventures
Level of Rivalry
Increased competition results in lower profits
Substitutes
More available substitutes tend to drive down prices and profits
Strategic Leadership
The ability of the CEO and top managers to convey a compelling vision of what they want to achieve to their subordinates
Herding
The tendency of investors to mimic each other's actions
Collapse of Bretton Woods
(1971) - US high inflation rate - US money depreciated sharply - Smithsonian agreement-- US devalued to 1/38 oz. of gold - 1973 the US dollar is under heavy pressure, European and Japanese currencies are allowed to float - 1976 Jamaica Agreement-- flexible exchange rates declared acceptable, gold abandoned as an international reserve
International Development Association
- 1960 - Assist the poorest developing countries - Lends to countries with annual per capita incomes of about 1100 or less
International Collaborative Ventures
- A partnership between two or more firms and includes equity joint ventures as well as non-equity, project based ventures - Sometimes referred to as international partnerships and international strategic alliances - Helps firms overcome the often substantial risk and high costs of international business
Success Factors in Collaborative Ventures
- Be aware of cultural differences - Pursue common values and culture - Pay attention to planning and management of the venture - Protect core competencies - Adjust to new environmental circumstances
Maastricht Treaty
- Called for monetary union by 1999 - Established a single currency - Called for creation of a single central EU bank
Project- Based, Non-Equity Ventures
- Collaboration in which the partners create a project with a relatively narrow scope and a well-defined timetable, without creating a new legal entity - Typically collaborate on joint development of new technologies, products, or share other expertise with each other
Risks in the Globalization of Finance
- Contagion - Capital flows are much more volatile than FDI- type investments - Financial instability is worsened due to underdeveloped regulatory frameworks, and insufficient monitoring of banking and financial sectors
Multi- Domestic Strategy
- Customizing products and marketing strategies to specific national conditions - Help gain local market share - Raises production costs
Advantages of Licensing
- Requires neither substantial capital investment nor involvement of the licensor in the foreign market-- Allows the firm to gain market presence without FDI - allows the firm to exploit the results of R&D. Once the licensing relationship is established, the licensor need invest little additional effort while it receives a stream of royalty income - Licensor bears no costs of establishing a physical presence in the market or maintaining inventory there - Makes entry possible in countries that restrict foreign ownership in specific industries - Enables firms to enter smaller markets or those that are difficult to enter because of trade barriers - Can be used as a low-cost strategy to test the viability of foreign markets - Pre-empt the entry of competitors in a target market
Alternative Exchange Rate Systems
- Freely Floating - Managed Float - Target Zone - Fixed Rate
Multilateral Investment Guarantee Agency
- Helps developing countries attract foreign investment
Benefits of the Euro
- Savings from having to handle one currency - It is easier to compare prices across Europe-- firms are forced to be more competitive - Gives a strong boost to the development of highly liquid pan- European capital market - Increases the range of investment options open both to individuals and institutions
The Bretton Woods Legacy
- Instituted the concept of 'international monetary cooperation' among central banks - Established the concept of fixing exchange rates to minimize currency risk - Created the IMF and the World Bank, agencies that aim to stabilize currencies and reduce global poverty
The Bretton Woods Agreement
- Signed by 44 countries in 1944 - Pegged value of the dollar to an established value of gold, at $35 per ounce - US government agreed to buy and sell gold to maintain the fixed rate - All other signatories pegged their currencies to the US dollar, and agreed to maintain this value via central bank intervention - System kept exchange rates stable for 27 years - Broke down in early 1970s
Special Drawing Right
- Invented currency - Value is based on the worth of the world's five major currencies - Countries add SDRs to their holdings of foreign currencies
Criteria for a Successful Currency Union
- Labor mobility across the region - Openness with capital mobility and price and wage flexibility across the region - A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics - Participant countries have similar business cycles
The Five Forces
- Level of Rivalry - Potential for Entry - Power of Suppliers - Power of Customers - Substitutes
Costs of the Euro
- Loss of control over national monetary policy, output, and unemployment - EU is not an optimal currency area - A single currency should follow, not preceded, political union-- will unleash enormous pressures for tax harmonization and fiscal transfers - Makes it harder for Euro zone exporters to sell their goods
Factors Relevant to Selecting FDI Locations
- Market attractiveness - Human resource factors - Infrastructure - Profit retention factors - Economic environment - Legal and regulatory environment - Political and governmental structure
Managed Float
- Market forces set rates unless excess volatility occurs, then, central bank determines rate by buying or selling currency. Managed float isn't really a single system, but describes a continuum of systems
Motives for FDI and Collaborative Ventures
- Ultimate goal is to enhance firm competitiveness in the global marketplace - Market-seeking motives -Resource or asset-seeking motives - Efficiency seeking motives
Facilitating Trends of Globalization of Finance
- Monetary and financial deregulation worldwide - New technologies and the Internet - Growing role of single-currency systems
Where does the IMF get its money
- Most comes from the quota subscriptions-- the money each members contributes when joining the IMF - General arrangements to borrow--- the line of credit set up with several governments and banks throughout the world
Equity Joint Ventures
- Normally formed when no one party possesses all of the assets needed to exploit an available opportunity - The foreign partner typically contributes capital, technology, management expertise, training, or some type of product - The local partner contributes the use of its factory or other real estate, knowledge of the local language and culture, market navigations, connections to the host country government, lower cost production factors such as labor - Allows the foreign firm to access key market knowledge, gain immediate access to a distribution system and customers, and greater control over local operations
Concentration in a single business
- Organization uses its functional skills to develop new kinds of products or expand its locations - Appropriate when managers see the need to reduce the size of their organizations to increase performance
Cross-Licensing Agreement
- Project-based, non-equity venture where partners agree to access licensed technology developed by the other - Agreement assumes each partner has or expects to have something to license
Consortium
- Project-based, usually non-equity venture with multiple partners fulfilling a large-scale project - Typically formed with a contract, which delineates the rights and obligations of each member
Establishing Major Organization Goals
- Provides the organization with a sense of direction - Stretches the organization to higher levels of performance - Goals must be challenging but realistic with a definite period in which they are to be achieved
Efficiency Seeking Motives
- Reduce sourcing and production costs - Locate production near customers - Take advantage of government incentives - Avoid trade barriers
Advantages of Globalization of Finance
- Reduces cost of capital for firms - More financing alternatives for firms - More investment opportunities for people - More financing options for emerging markets and developing economies
Interest Rates and Inflation
- Reduces the purchasing power of the affected currency - Interest rates and inflation are positively related - Where inflation or interest rates are rising, the value of the currency generally falls
Disadvantages of High Control Strategies
- Require substantial resource commitments by the focal firm - Firm becomes anchored to the foreign market for the long term, it has less flexibility to reconfigure its operations there, as conditions in the country evolve over time - Longer time involvement in the market also implies considerable risk due to uncertainty in the political and customer environments
Vertical Integration
- Strategy that involves a company expanding its business operations either backward into a new industry that produces inputs (backward vertical integration) or forward into a new industry that uses, distributes, or sells the company's products (forward vertical integration)
Considerations Relevant to Choice of Foreign Market Entry Strategy
- The degree of control it wants to maintain over the decisions, operations, and strategic assets involved in the venture - The degree of risk it is willing to tolerate, and the timeframe in which it expects returns - The organizational and financial resources it will commit to the venture - The availability and capabilities of partners in the market - The value-adding activities it is willing to perform itself in the market, and what activities it will leave to partners - The long-term strategic importance of the market
Global Strategy of International Expansion
- Undertaking very little customization to suit the specific needs of customers in different countries - provides for lower production costs - ignores national differences that local competitors can address to their advantage
Organization for Economic Cooperation and Development
- Tries to produce internationally agreed instruments and decisions and recommendations - Focuses on economic and social issues like macroeconomics, international trade, education, development, science and innovation - Provides comparative data, analysis and forecasts, obtained from member countries to help other members increase policy effectiveness
Is the Euro Zone an Optimal Currency Area?
- While Europe scores well on some of the measures characterizing an OCA, it has lower labor mobility than the United States and similarly cannot rely on fiscal federalism to smooth out regional economic disturbances
Differentiation
-Distinguishing the organization's products from those of competitors on one or more important dimensions - Differentiation must be valued by the customer in order for a producer to charge more for a product
Questions to Define the Business
-Who are our customers? - What customer needs are being satisfied? - How are we satisfying customer needs
Success Factors for Retailers
1. Advanced research and planning is essential 2. Establish efficient logistics and purchasing networks in each market 3. Entrepreneurial, creative approach to foreign markets 4. Adjust business model to suit local conditions
Principal Corporate-Level Strategies
1. Concentration on a single industry 2. Vertical integration 3. Diversification 4. International Expansion
Barriers to Retailer Success Abroad
1. Cultural and language barriers 2. Loyalty to indigenous retailers 3. Legal and Regulatory Barriers 4. Develop local sources of supply
Factors That Influence the Supply and Demand of a Currency
1. Economic Growth 2. Interest Rates and Inflation 3. Market Psychology 4. Government Action
Four Fundamental Challenges in the Pharmaceutical Case
1. Rising customer expectations 2. Poor scientific productivity 3. Soaring healthcare costs: new models needed 4. Adopt the right entry strategy in new markets
International collaborative venture
A cross-border business alliance in which partnering firms pool their resources and share costs and risks of the venture
Greenfield investment
A firm invests to built a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities
Functional-Level Strategies
A plan that indicates how a function intends to achieve its goals - Seeks to have each department add value to a good or service. Marketing, service, and production functions can all add value to a good or service through - Lowering the costs of providing the value in products - Adding new value to the product by differentiating - Functional strategies must fit with business level strategies
Merger
A special type of acquisition in which two firms join to form a new, larger firm
Resource or Asset-Seeking Motives
Access raw materials Gain access to knowledge or other assets Acces technological and managerial know-how available in a key market
World Bank
Aids in development and reconstruction of its members
Foreign Direct Investment
An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant and equipment
Know how Agreement
Contract in which the focal firm provides technological or management knowledge about how to design, manufacture, or deliver a product or service
Acquisition
Direct investment or purchase of an existing company or a facility
Trademark
Distinctive design, symbol, logo, word, or series of words placed on a product label-- identifies a product or service as coming from a common source
Advantages of Gold System
Disturbances in Price Levels would be offset-- when a balance of payments surplus led to a gold inflow this in turn would lead to higher prices which reduced balance of payments surplus
Low Cost Strategy
Driving the organization's total costs down below the total costs of rivals - Manufacturing at lower costs, reducing waste - Lower costs than competition means that the low cost producer can sell for less and still be profitable
Collective mark
Logo belonging to an association or group whose members have given firms the right to use the mark to identify the origin of a product or service
Potential for Entry
Easy entry leads to lower prices and profits
Market Psychology
For example, in early 2000s, Argentina experienced a massive flight of capital investment when the government announced it would default on its international bank loans
Government Action
Governments intervene to influence the value of their own currency - Intervention is conducted via the nation's Central Bank, by buying and selling currency in the foreign exchange market
Cross- Border Contractual Relationships
Granting permission to use intellectual property to a foreign partner in exchange for a continuous stream of payments
Intellectual property
Ideas or works created by firms or individuals, such as patents, trademarks, and copyrights. It incorporates such knowledge-based assets of the firm or individuals as, industrial designs, trade secrets, inventions, works of art, literature, and other 'creations of the mind'
Power of Suppliers
If there are only a few suppliers of important items, supply costs rise
Momentum Trading
Investors buy stocks whose prices have been rising and sell stocks whose prices have been falling- usually done via computers set to do massive buying/selling when asset prices reach certain levels
Intellectual Property Rights
Legal claim through which the proprietary assets of firms and individuals are protected from unauthorized use by other parties
International Monetary Fund
Maintains international monetary cooperation among its members - Expansion and balanced growth of international trade - Promote exchange rate stability - Establish multilateral system of payments - Make resources of the Fund available to members - Shorten the duration and lessen the degree of disequilibrium in international balances of payments
The Exchange Rate System Today
Most advanced economies use the floating exchange rate system-- the value of the currency floats according to market forces with little government intervention - Many developing economies and emerging markets use the fixed exchange rate system-- the value of a currency is set at a specific rate to value of another currency
Synergy
Obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately and independently
Copyright
Protects original works of authorship, giving the creator the exclusive right to reproduce the work, display and perform it publicly and to authorize others to do these activities
Patent
Provides an investor with the right to prevent others from using, selling or importing an invention for a fixed period Granted to any firm or individual that invents or discovers any new and useful process, machine, manufactures product, or any new and useful improvement
Contagion
Tendency of a financial or monetary crisis in one country to spread rapidly to others due to worldwide financial integration
Global Financial System
The collection of financial institutions that facilitate and regulate the flows of investment and capital funds worldwide, incorporating the national and international banking systems, the international bond market, national stock markets, and the market of bank deposits denominated in foreign currencies
Fixed Rate System Disadvantages
The country loses control of monetary policy and loses control of output and employment
Franchising
The firm allows another the right to use an entire business system in exchange for fees, royalties, or other forms of compensation
Economic Growth
The increase in value of the goods and services produced by an economy - Typically measured as the annual increase in real GDP - Innovation and entrepreneurship drive business activity and demand
International Monetary System
The institutional framework, rules, and procedures by which national currencies are exchanged for one another
Licensing
The owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation
High control strategies
equity joint ventures and FDI. The focal firm attains maximum control by establishing a physical presence in the foreign market
