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86 Cards in this Set
- Front
- Back
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Who engages in foreign direct investment?
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Multinational enterprises
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What is FDI?
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Investment in, controlling, and managing value-added activities in other countries
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Gross National Product
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Gross domestic product plus income from nonresident sources abroad
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Gross National Income
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Gross domestic product plus income from nonresident sources abroad (used by WorldBank to supersede GNP).
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Gross Domestic Product
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The sum of value added by resident firms, households, and government operating in an economy.
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Why is the base of the pyramid important?
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The base of the pyramid is the 4 billion people that earn less that $2,000/yr per capita.
It is important because an increasing number of such low-income countries have shown a great deal of economic opportunities as income levels have risen. More and more companies are aggressively investing in the base of the pyramid. |
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What determines the success and failures of firms around the globe
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Institution-Based View: Institutions shed a great deal of light on what drives firm performance around the globe (success/failure of firms are determined by environment)
Resource-Based View: Focuses on firm’s internal resources/capabilities. Focuses on how winning firms acquire and develop unique and enviable resources and capabilities. |
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What is the institutional framework is made up of?
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It is made up of both formal and informal institutions governing individual and firm behavior.
-Formal Institutions: laws/regulations/rules Regulatory Pillar: coercive power of government -Informal Institutions: norms/cultures/ethics Normative Pillar: how values/beliefs influence the behavior of firms/individuals Cognitive Pillar: taken-for-granted values and beliefs guide firm behavior |
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What are the main supportive pillars of informal?
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Normative Pillar: how values/beliefs influence the behavior of firms/individuals
Cognitive Pillar: taken-for-granted values and beliefs guide firm behavior |
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What are the various law systems?
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Civil Law- uses statutes and codes as a primary means to form legal judgments. Ex. Brazil/China/Russia/Italy/Japan/Mexico
Common Law- shaped by precedents and traditions from previous judicial decisions. Ex. Canada/United Kingdom/United States Theocratic Law-Based on religious teachings. Ex. Iran/Saudi Arabia/United Arab Emirates |
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Patents
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Exclusive legal rights of inventors of new products or processes to derive income from such inventions
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Copyrights
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Exclusive legal rights of authors and publishers to publish and disseminate their work
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Trademarks
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Exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others
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Market Economy
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“invisible hand” of market forces. Government should take a hands-off approach (laissez-faire). All factors of products should be privately owned. No country has a pure market economy approach.
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Command Economy
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Government taking “commanding height” of economy. All factors are controlled by government.
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Mixed Economy
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Elements of both market economy and mixed economy. Relative distribution of market forces vs. command forces.
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What is culture?
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ulture is the collective programming of the mind, which distinguishes the members of one group or category of people from another. Culture is impacted by language/religion/social structure/education.
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Why has English been accepted as the global business language?
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-The first reason is that English-speaking countries contribute the largest share of global output
-The second reason is that recent globalization has called for the use of one common foreign language for languages to pass through each other (ex. Instead of Portuguese into Estonian, Portuguese into English then into Estonian) |
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What are the five dimensions outlined in the Dimensions Approach?
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Power Distance: extent to which people accept power as distributed unequally
Individualism vs. Collectivism: Whether an individual identity is tied to a group or not Masculinity vs. Femininity: Sex role differentiation Uncertainty Avoidance: Acceptance or avoidance of ambiguous situations Long-Term Orientation: Dimensions of how much emphasis is placed on perseverance and savings for future benefit |
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What are the major criticisms against Hofstede’s Dimensions Approach?
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-Cultural boundaries are not the same as national boundaries
-He is Dutch and therefore there could be bias against the contingent factors of how countries are categorized (possibly missing crucial dimensions to Easterners) -It was conducted only to IBM employees (might have only captured IBM or a specific industry) -His work is 40yrs old and may have failed to capture culture change |
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What are the three “middle-of-the-road” guiding principles?
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-Respect for human dignity and basic rights
-Respect for local traditions -Respect for institutional context |
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What are: cultural intelligence, cultural awareness and cultural skills?
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Cultural Intelligence- An individual’s ability to understand and adjust to new cultures
Phase 1: Awareness- recognition of both the pros and cons of your views and appreciation for others Phase 2: Knowledge- ability to identify with symbols/rituals in other cultures Phase 3: Skills-based on awareness and knowledge + practice |
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What is a value chain?
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A chain of vertical activities used in the production of goods and services that add value. Area 1 (Primary Activities) & Area 2 (Support Activities). Forces managers to think about resources at a micro level
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What is benchmarking?
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An examination on whether a firm has the resources to perform a particular activity in a manner superior to competitors. Industry specific? Firm specific?
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What is commoditization?
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The process of market competition through which unique products that command high prices and high margins gradually lose their ability to do so. (industry wide).
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Captive Sourcing
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Setting up subsidiaries abroad so that the work done is in-house but the location is foreign (FDI)
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Outsourcing
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Turning over an organizational activity to an outside supplier that will perform it on behalf of the focal firm
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Inshoring
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Domestic outsourcing
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Offshoring
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Outsourcing to an international/foreign firm
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What are the four focal points of the resource-based view?
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V-Value: Do the firm resources add value?
R-Rarity: How rare are the resources? I-Imitability: Are they difficult to imitate? O-Organization: How should the firm organize to develop full potential of resources? |
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Original Design Manufacturers
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A firm that both designs and manufacturers products
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Original Equipment Manufacturers
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A firm that executes design blueprints provided by other firms/manufacturers such products
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Original Brand Manufacturers-
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A firm that designs, manufacturers, and markets branded products
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Theory of Absolute Advantage
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A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage (superior to other nations).
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Theory of Mercantilism:
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A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer
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Protectionism
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The idea that governments should actively protect domestic industries from imports and vigorously promote exports
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Modern Trade Theories
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Major theories of international trade that were advanced in the 20th Century, which consists of:
1. Product Life: 2. Strategic Trade: 3. National Competitive Advantage of Industries: |
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What does the national competitive advantage of industries depends on?
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It depends on four aspects, which form a “diamond”:
1. Factor Endowments (natural/human resources) are not enough 2. Domestic Demand Condition: A tough domestic crowd may make it easier overseas 3. Firm Strategy, Structure, and Rivalry: Play a huge factor in success/failure overseas 4. Related and Supporting Industries: Provide foundation upon which key industries can succeed. Necessary for success. |
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Import Tariff
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A tax on imports
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Export Tariff:
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A tax on exports
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Deadweight Costs
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Net losses that occur in an economy as a result of tariffs
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NTBs: (Non-tariff Barrier)
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Trade barrier that relies on nontariff means to discourage imports other than taxes. Ex) Antidumping/import quotas/admin policies
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Voluntary Export Restraints
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An international agreement that shows that exporting countries voluntarily agree to restrict their exports
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Local Content Requirements
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A requirement stipulating that certain proportion of the value of the goods made in one country must originate from that country.
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Administrative Policies
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Bureaucratic rules that make it harder to import foreign goods.
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Antidumping Duties
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Tariffs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business)
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What determines the success and failure of a firm’s exports around the globe?
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Resource-Based View: Successful exports are Valuable, unique, and hard-to-imitate products generated by certain firms from a nation.
Institution-Based View: Laws and regulations promoted by special interest groups and protect certain domestic firms and industries. |
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What is FDI stock?
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Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually 7rs).
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Ownership
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An MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded(VRIO) assets overseas in the context of FDI
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Why do firms prefer FDI to licensing?
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-FDI reduces dissemination risks (risks associated w/ unauthorized diffusion of firm-specific know-how)
-FDI provides tight control over foreign operations -FDI facilitates the transfer of tacit knowledge through “learning by doing.” |
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Explicit Knowledge
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Knowledge that can be written down and transferred with little loss of richness
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Implicit Knowledge
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Knowledge kept in a person’s mind that is not usually transferred but is acted on instinctively
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Why are a firm’s rivals likely to follow by undertaking additional FDI in a host
country? |
If one firm enters a foreign country through FDI, the rivals will increase FDI in that host country to either acquire location advantages themselves or at least neutralize the firm mover’s location advantages. (Likely in oligopolies-industries dominated by a small number of players).
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Based on resource and institution based views, what is FDI is a reflection of?
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FDI is a reflection of both a firm’s motivation to extend its firm-specific capabilities abroad and its responses to overcome market imperfections and failures.
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Radical View on FDI
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A political view that is hostile to FDI. It is an instrument of imperialism (a vehicle for exploiting domestic resources by foreign capitalists). Declined due to economic development in those countries was poor w/o FDI and the few developing countries that embraced FDI flourished
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Free-Market View on FDI:
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A political view that suggests that FDI is unrestricted by government intervention is the best.
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Pragmatic Nationalism on FDI
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A political view that only approves FDI when its benefits outweigh its costs. Some restrictive policies are put in place. Most Popular.
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What approach to FDI to most countries practice?
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Pragmatic Nationalism
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What are the benefits of FDI to home countries?
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Earnings from profits from FDI
Increased Exports Learning from FDI operations abroad *Home countries-source *Host countries-recipient |
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What are the components of the balance of payments?
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a county’s international transaction statement, which includes merchandise trade, service trade, and capital movement
*Balance on merchandise (exports-imports of merchandise) *Balance on service (exports-imports of services) *Capital Movement (Income receipts on US owned assets abroad/Income Payments on foreign-owned assets in the US/Government grants and private remittances) |
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What will happen to the currency of a country experiencing a current account
surplus? A current account deficit? |
A country’s currency in a time of a current account surplus will appreciate. On the other hand, a country with a current account deficit has to be financed by financial account consisting of purchases and sales of assets. (spending from savings or by borrowing). Therefore, their currency will depreciate.
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What are the three primary activities of the International Monetary Fund?
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1. Promote international monetary cooperation
2. Determine the amount each country should contribute and collecting funds 3. Lending to a country based on its capacity to borrow. |
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What are the advantages and disadvantages of currency hedging?
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Advantages
-Increased stability of cash flows and earnings (insurance-esque) Disadvantages -Many believe that it eats into profits the more transactions made |
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Global Economic Integration
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Efforts to reduce trade and investment barriers around the globe
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Local Economic Integration
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Efforts to reduce trade and investment barriers within one region
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What are the economic benefits of global economic integration?
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Political:
-Promote peace by promoting trade and investment -Build confidence in a multilateral trading system Economic: -Disputes are handled constructively -Rules make life easier and discrimination impossible for all participating countries -Free trade and investment raise incomes and stimulate economic growth |
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Monetary Union
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A group of countries that sue a common currency
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Political Union
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The integration of political and economic affairs of a region
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Economic Union
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Having all the features of a common market, members also coordinate and harmonize economic policies (in areas such as monetary, fiscal, and taxation) to blend their economies into a single economic entity.
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Customs Union
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One step beyond a free trade area, a customs union imposes common external policies on nonparticipating countries
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What are the benefits of adopting the euro?
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Benefits:
1. It reduces currency conversion costs 2. Facilitate direct price comparison 3. Impose monetary disciplines on governments Costs: 1. Unable to implement independent monetary policy 2. Limit the flexibility in fiscal policy |
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What are the functions of WTO?
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Bringing a multilateral trading system in services, intellectual property, strengthens the trade dispute settlement mechanisms, and peer review of policy.
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Purchasing Power Parity (PPP)-
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Conversion that determines the equivalent amount of goods and services different currencies can purchase. Conversion is usually used to capture differences in cost of living between countries
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Resources/Capabilities
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Tangible and intangible assets a firm uses to choose and implement its strategies
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tangible assets/ intangible assets
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Tangible Assets: Can be quantified
Intangible Assets: Assets that are hard to observe and difficult/impossible to quantify |
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Strategic Trade Theory
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A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.
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Product Life Theory:
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A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles
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Strategic Trade Policy:
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Government policy that provides companies a strategic advantage in international trade through subsidies and other supports.
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Bretteon Woods System
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A system in which all currencies were pegged at a fixed rate to the US Dollar. 1955-1973. Only the dollar (the official reserve currency) was convertible into gold.
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International Monetary Fund
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186 member countries that attempt to promote international monetary cooperation and provide temporary financial assistance to member countries in order to help overcome balance of payments problems. (Lending is the core responsibility). The IMF collects funds from member countries. Loans have to be repaid in 1-5yrs.
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Floating Rate
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A government policy to let supply-and-demand conditions determine exchange rates
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Dirty Float Rate
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Using selective government intervention to determine exchange rates
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Target Exchange Rate
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Specified upper or lower bounds within which an exchange rate is allowed to fluctuate
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Currency Swap
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A foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future.
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Spot Transaction
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The classic single-shot exchange of one currency for another
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Forward Transaction
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A foreign exchange transaction in which participants buy and sell currencies now for future delivery
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