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22 Cards in this Set
- Front
- Back
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To generate profit need 3 things
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Open marketplace
Strategic management Access to capital |
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Mercantilism, Absolute Advantage, and comparative advantage
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Mercantilism-amass gold to become self sustaining and acheive an autarkey
Absolute advantage-produce what you are best at Comp-produce most efficient mix of products In comp. advantage both sides are better off after trade |
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Comparative Advantage today
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Doesn't really hold
Technology and capital flow easily between countries Countries dont only produce what they are most efficient at because of government interference Old model did not take into account EOS, information costs, uncertainty Today mostly based on services and cross border exchange through internet Global outsourcing when there is absolute advantage in price |
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Source of Comparative Advantage
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Labor
Access to capital Technology |
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Why firms invest abroad
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Market seekers
Raw material seekers Production efficiency seekers Knowledge seekers Political safety seekers Each move can be either proactive or defensive |
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Globalization
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Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology
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Product Cycle Theory
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Firm creates product to accomadate local demand and then exports to satisfy foreign demand
Firm creates foreign subsidiary Comp. advantage is lost or firm creates a new product to differentiate |
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Agency Problem
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Owner and management may not be perfectly aligned with business and financial objectives
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Goal of Management
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Maximization of shareholder wealth (US)
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Shareholder Wealth Maximization Model
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Firms should maximize return to shareholders at a given level of risk
Assumes an efficient market Share prices are best allocators of capital in economy Risk defined as added risk to a diversified portfolio Systematic risk cannot be eliminated Impatient capitalism (focus on short term earnings) v. patient capitalism (long term perspective) |
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Stakeholder Capitalism Model
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Non Anglo markets
Equity return still important but managers are constrained by labor unions and government Favors long term investors who influence corporate strategy Grow earnings and dividends over the long run with as much certainty as possible |
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Operational Goals of MNEs
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Maximization of after tax income
Minimization of global tax burden Correct positioning of firms income and cash flows and respective currencies |
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The Gold Standard
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1876-1913
Each country set rate at which currency would be convertible to gold Currency rates were fixed No expansionary monetary policy Interrupted when WWI started because gold could not be moved Between WWI and WWII currencies were able to fluctuate over a wide range in relation to gold and each other |
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Bretton Woods
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1944
After WWII to create a new financial system US becomes anchor of financial system IMF and World Bank created |
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IMF and World Bank
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IMF-help countries protect currency, help countries with structural trade problems
World Bank-economic development |
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SDR
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Basket of strong currencies
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Eurocurrencies
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Domestic currency of one country on deposit in another
Exists to serve as money market for excess corporate cash and to finance short term working capital needs LIBOR is rate at which eurocurrency is lent |
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Demise of Fixed Exchange rate
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Worked well for period during reconstruction
US dollar becomes main reserve currency for central banks resulting in growing BOP deficit which required heavy capital outflow to balance in 1971 Nixon stops converting dollars to gold because loss of confidence in US dollar |
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Types of currency regimes
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Exchange arrangements with no separate legal tender
– Currency board arrangements-set currency rate against another currency – Other conventional fixed peg arrangements – Pegged exchange rates within horizontal bands – Crawling pegs – Exchange rates within crawling pegs – Managed floating with no pre-announced path – Independent floating |
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Factors affecting a country's currency regime choice
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– inflation,
– unemployment, – interest rate levels, – trade balances – economic growth |
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Fixed versus flexible exchange rates
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Countries would prefer fixed rate because of price stability and antinflationary bias
BUT.. fixed rate requires central bank to hold a lot of reserve currency |
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Attributes of Ideal Currency
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Exchange rate stability
Full financial integration Monetary independence Have to give up one in order to function |
