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120 Cards in this Set

  • Front
  • Back
foreign exchange market
used to convert currency from one country into that of another

helps hedge against foreign exchange risk
foreign exchange risk
adverse consequences of unpredicted changes in exchange rates
currency conversion - when companies use the foreign exchange mkt.
when payments they recieve from licensing, exports, investments, etc. is in a foreign currency

when they must pay a foreign company is their currency

when they want to invest in foreign mkts.

currency speculation
currency speculation
short-term movement of currency from one currency to another in hopes of profiting from shifts in exchange rates
insuring against foreign exchange risk
can be used to protect against foreign exchange risk -- hedging

using forward exchange rates

using currency swaps

spot exchange rate has an effect
spot exchange rate
rate at which one currency is changed into another on a certain day

changes continually depending on supply and demand
forward exchange rate
to hedge against adverse movement of exchange rates

when two parties agree to execute a deal and pay eachother at some date in the future

forward exchange rate is the rate governing these transactions
currency swap
purchase or sale of a given amount of foreign exchange for two seperate dates

transacted between business and their banks, between banks, when it is desireable to move one currency into another for limited period without incurring risk
nature of the foreign exchange mkt.
network of banks, brokers, and foreign exchange dealers connected through electronic communication -- many locations

most important are london, NY, tokyo, and signapore

mkts. are always open somewhere in the world

no significant difference between rate quotes at the different centers

if not, there would be an opportunity for arbitrage -- buying low and selling high

most transactions involve dollars on side, along with euro, british pound, and yen
prices and exchange rates
3 factors that affect inflation: mkt. psychology, inflation, and interest rate

law of one price: identical products in competitev mkts. w/out low trade barriers and transportation costs should be the same price when expressed in the same currency

purchasing power parity (PPP): in efficient mkts. price of basket of goods should be fairly equal; predicts that changes in prices will result in changes in exchange rates; accurate in long run and for countries that have high inflation and underdeveloped capital mkts.

positive relationship between money supply and inflation rate: when growth of money supply is greater than output inflation occurs

a country with high inflation will see it's currency depreciate
international monetary system
institutional arrangements that companies adopt to govern exchange rates
floating exchange rate system
when country allows foreign exchange mkt. to determine the relative value of currency
pegged exchange rate system
when a country fixes the value of their currency relative to the value of another currency
dirty float
when a country tries to hold the value of its currency within some range of a reference currency
fixed exchange rate
when countries fix their rates against eachother
european monetary system (EMS)
prior to introduction of euro

some countries operated with a fixed exchange rate within in context of EMS
gold standard
dates back to ancient times when gold was a medium of exchange

paper currency was eventually adopted because it was easier to use when trading -- was still linked to gold at a fixed rate

defined as pegging currencies to gold

adopted in 1880s; exchange rates were easy to determine b/c gold was worth roughly the same in different countries

US dollar = 22.32 grains of pure gold
gold par value
amt. of currency needed to purchase an ounce of gold
balance of trade equilibrium
income people earn from exports = the amt. people pay to other countries for imports
period b/t wars: 1918-1939
gold standard worked fairly well until the start of WWI

countries financed war through printing extra money which = inflation

people started doubting value of money and demanding gold in exchange, which was not possible -- this killed the gold standard
Bretton Woods system
1944 in Bretton Woods, NH; 44 countries attended

goal: to design new econ. system to help ecourage new economic growth after war

- fixed exchange rate est.
- only currencies fixed to gold but only US dollar was directly convertable
- devaluations were not to be used for competition unless emergency -- 10% max. -- if more approval was need from IMF

created IMF and world bank to police monetary system
international monetary fund (IMF)
executed main goal of bretton woods: tried to stop the chaos that had occurred during the world wars

through discipline: need to maintain fixed exchange rate put brake on competitive devaluations and increased stability; curtailed infaltion

through flexibility: rigid discipline could be harmful; IMF would lend currency to help countries during time when rapid tightening of economy would be hurtful -- mainly during fundamental disequilibrium; if countries borrow too often they be under supervision
world bank
called international bank for reconstruction and development (IBRD)

1. under IBRD money is raised from bond sales in int. capital mkt.; borrowers pay mkt. rate of interest - lower than normal bank's rate
2. through int. development association; loans go only to poorest countries; raised through subscription ; 50 yrs. to repay
collapse of fixed exchange rate system
bretton woods worked until 1960s

increases in welfare programs and vietman funding were done through inflation under johnson

other countries increased their currency values relative to the dollar after rumor that dollar was being devalued

since system centered on dollar it could not go one any longer; balance of payments was off, there was high inflation and trade deficits; countries refused to revalue to save system b/c it would make their goods seem to expensive; floating system was created as a temp. response
floating exchange rate regime
in 1976 after collapse of bretton woods, countries meant in jaimaca to formulate this policy that is in place today
jamaica agreement
under agreement:
- floating rates were considered acceptable; IMF member could enter foreign exchange mkt. to even out fluctuations
- gold was abandoned as a reserve asset; IMF members could sell their gold reserves at mkt. price
- total IMF quotas -- amt. member countries contribute -- increased to $41 billion
fixed vs. floating rates
many countries are disappointed with fixed system
case for floating exchange rates
two elements: monetary policy autonomy and trade balance adjustments

removing obligation to hold exchange rates increases control; countries were limited under the fixed system; with fixed system IMF had to improve devaluation

help adjust trade imbalances
case for fixed exchange rate
issues: monetary discipline, speculation, uncertainty, trade balance adjustments

fixed system insures against inflation

speculation associated with floating rates increases uncertainty

little help in adjusting trade imbalances
exchange rate regimes in practice
majority of countries use more flexible systems
pegged exchange rates
pegs the value of a currency to another major one

popular among smaller nations

help to curb inflation

can sometimes fail in small nations since they cant keep up with nations they are pegged to

more rigid
currency board
countries commit to converting domestic currency into another on demand at a fixed rate

in order to be credible currency board holds reserves of foreign currency = at fixed exchange rate to at least 100% of domestic currency issued

Hong kong board is a popular example
crisis mgt. by IMF
after bretton woods IMF has redefined its mission

now focusing on lending to countries in crisis

sometimes this has worsened to situation in these countries
financial crises post bretton woods
data suggests that developing countries
2x as likely to experience currency and banking crises; sometimes multiple ones can occur simultaneously

currency crisis
banking crisis
foreign debt crisis
currency crisis
speculative attack on exchange value of currency results in depreciation of value or forces authority to expend large vols. of int. currency reserves and increases interest rates to defend against prevailing exchange rates
banking crisis
loss of confidence leads to run on banks as people try to withdraw their money all at once
foreign debt crisis
country cannot service its foreign debt obligations, whether public or private
currency management
current system is a floating one; speculative buying or selling can create volatile movements in mkt.

invtervention can help drive the mkt.
business strategy and currency
exchange rates hard to control but can have a competitve impact on business

managers need strategic flexibility
benefits of global capital mkts.
functions shared by both global and international capital mkts.

global mkts. offer some things not found in capital markets
functions of generic capital mkt.
brings together investors (corps., people, non-bank ints.) and borrowers (people, companies, and govts.)
-- between these two groups are mkt. makers: they connect the two groups and include commercial banks (indirect) and investment banks (direct)

commercial banks: they take money from corps. and people and pay them a rate of interest; they lend money at a higher rate and make a profit b/c they lend at higher rate than the interest rate;

investment banks: direct; bring investors and borrowers together and charge a rate for doing so

equity loans (stock) or debt loans (bonds of debt loans)

investors --> mkt. makers --> borrowers
attractions of global capital mkt.
borrowers benefit from:
- additional supplies of funds
- lower cost than domestic mkts. (cost of capital)

investors benefit from:
- wider range of choices, lower risk through diversification (only about 27% as risky as normal stock)
- movements in stock prices across countries are not totally correlated (due to diff. macoreconomic policies and trade restrictions)
cost of capital
price of borrowing money, or the rate that borrowers pay investors
growth of global capital mkts.
grow at a rapid rate

2 factors:
1. growth of tech. of int. communications and data processing; 24 hr./day trading; when a shock occurs it can spread fast but have s/t impact
2. deregulation of govts.: in the past countries regulated the amt. of of equity foreign companies could invest in companies and amt. of foreign investment citizens could make; since the 1980s this has been decreasing in response to eurocurrency mkt. and financial pressure; deregulation began in the US and has spread

capital controls have been dismanteld making it easier for outward investment; trend is spreading and global mkt. is expecting to go
eurocurrency mkt.
currency banked outside of its country of origin

eurodollars (dollars banked outside the US) account for 2/3; others are euro-yen, euro-pound and euro-euro
genesis and growth of the eurocurrency mkt.
began in 1950s when eastern bloc countries thought that the US may seize their dollar holdings -- deposited holdings in europe esp. london; additional dollar deposits w. european banks and companies that exported from the US

in 1957 mkt. surged again after change in British laws -- british banks could no longer use pounds to finance foreign investment; they began financing this using dollars

in 1960s the mkt. grew again when US banks were discouraged from lending to non-US residents; would-be borrowers turned to the eurocurrency mkt.

next surge came in 70s during oil price increases; OPEC avoided confiscation of dollars by investing in London
global bond mkt.
most common-type is fixed rate bond

grew rapidly in the 1980s and 1990s

two types:
1. foreign bonds: sold outside borrower's country and denominated in the currency of the country in which they are ussed
2. eurobonds: underwritten by syndicate of banks and placed in countries other than the one in which the currency is denominated; sometimes not offered in their own country
global equity mkt.
largest equity mkts. are US, japan, and britain

many people invest in foreign equities to diversify their portfolios

countries are now listing their stock in mkts. of other nations -- tapping liquidity of foreign mkts. and reducing the cost of capital

can be used to satisfy stock options for workers in other locations that the company has
foreign exchange risk and the cost of capital
adverse exchange rates can increase the cost of foreign currency loans

is not always favorable to borrow from other countries once exchange risk is factored in

companies can hedge this by using forward exchange rates and locking in the rate, but this can increase costs

companies must weigh the benefits lower interest rates vs. exchange rate risks
actions that mgt. takes to meet the goals of the firm
usually the goal is max. value
rate of return that a firm makes on its invested capital (ROIC)

expaning internationally can increase this
profit growth
% increase in net profits over time

expanding internationally can increase this
value creation
measured as the difference b/t V(price that firm can charge for a product given competition) and C(cost of production)

the more value customers place on a product, the higher that can be charged

profits can be increased by:
- adding value through differentiation
- lowering costs with a low-cost strategy

Porter: superior profitability goes to the firms that can create superior value by lowering cost structure of differntiating so that they can charge more
strategic positioning
Porter: firms need to choose either differentiation or low cost and then configure firm to go with that choice

to max. l/r return on invested capital firms must:
- pick a viable position of efficiency frontier
- configure int. operations to support that
- have the right structure to execute that strategy

strategy, operations, and org. must be consistent with each other to achieve this
value chain composed of series of distinct value creation activies (i.e.: production, marketing, materials mgt., R & D, HR, info. systems, human information structure)
primary activities
deal with design, creation, and delivery of the product

R & D, production of sales, customer service
support activities
allow primary activities to occur; just as important as primary activities if not more so

information systems, logistics, HR
global expansion, profitability, and growth
firms can:
- expand mkt.: in domestic product offerings by selling in foreign mkts.
- realize location economies: by dispersing individual value creation activities to places where they can be performed most efficiently and effectively
- realize cost economies: from experience effects by serving global mkt. from a central place, reducing costs of value creation
- earn a greater return: leveraging valuable skills from foreign ops. and transferring them to other entities within network of operations
expanding the market: leveraging products and competencies
firms can increase growth by selling goods/services from at home internationally

success depends on goods and services they sell and core competencies (skills that cannot easily be matched or imitated)

core competences are the source of competitve advantage

they enable firm to reduce costs or create value
location economies
when firms base production in a place where econimic, political, and cultural conditions are conducive to good performance

economies that arise from performing activities at optimal location

by achieving this firms can:
- lower costs of value creation and achieve low cost position
- differntiate product offering

firms should create a global web of value creation activities

different stages of production are sent to locations where cost is minimized and value is maximized
cautions about location economies
transportation costs, trade barriers, and political risks can complicate
experience curve
systematic reduction of costs that have been observed over life of a product

production costs decline about each time that cumulative output doubles

by moving down experience curve firms reduce the cost of creating value

to get down it fast, firms can use a single plant to serve global mkts.
learning effects
cost savings that come from learning by doing

when productivity increases people learn more efficient ways of doing tasks and mgt. learns how to manage new operations more efficiently

more significant with technologically complex tasks

learning effects usually disappear in time; seen mostly during the start-up phase
economies of scale
reductions in unit cost achieved by producing a large volume of a product

- spreading FC over large volume
- utilizing production facilities more intensely
- increasing bargaining power with suppliers
leveraging subsidiary skills
mgt needs to:
- valuable skills that can be applied elsewhere can arise anywhere in global network -- not just corp. center
- establish incentive systems that make employees want to acquire more skills
- have a process of identifying whether new skills are valuable
- must reward people who come up with new skills and not punish those who take risks to do so
summary of expansion issues
may be good to price low in the beginnin to gain mkt. share

complex relationship b/t profitability and profit growth
two types of competitive pressures
pressure to reduce costs
pressure to be locally responsive

these are conflicting demands

cost reductions require lowering of costs while localizing can increase costs
pressures for cost reduction
good for industries whose products serve universal needs -- price is the main competitive weapon

- when major competitors are based at cost efficient locations
- when there is persistent excess capacity
- when consumers are powerful and face low switching costs

greater competition of today had increased cost pressures
pressures for local responsiveness
arise from:

- differences in tastes and preferences
- differences in traditional policy and infrastructure (ex: electronics, cars in great britain)
- differences in distribution channels (ex: pharmaseuticals)
- host govt demands: economic and political demands may cause a need to local responsiveness; threats of protectionism, nationalism, and local content rules
choosing a strategy
depends on pressure for cost and local respsonsiveness
global standardization
increases profitability and growth from cost reductions due to economies of scale, learning effects, and location economies

when cost pressures are high and local responsiveness pressures are low

to pursue a low-cost strategy on a global scale

common in industrial products

HQ maintains control over decisions

high need to integrating mechanisms

strong organizational cultures encouraged

worldwide division structure is common
localization strategy
high pressure for local responsiveness, low cost pressure

focusing on increasing profitabilty by customizing goods and services so that they meet the tastes of int. mkts.

makes sense when there are substantial differences on needs and tastes across countries and when cost pressures are not too intense

increases value in the local mkt. so firms can get away with higher prices

firms still must be efficient as possible

low need to for inegrating mechanisms

low performance ambiguity

low cost of control

worldwide area structure common
transnational strategy
high pressures for cost reductions and local responsiveness

tries to:
- tries to achieve low cost through location economies, economies of scale, and learning effects
- differentiate product offering across mkts. to account for local differences
- foster multidirectional flow of skills through global network

not easy to pursue due to conflicting demands

some decisions are centralized and some are not

high need for coordination

array of formal and informal integrating methods are used

cost of control is high

strong culture is encouraged

matrix structures are common
international strategy
low cost pressures and low pressures for local responsiveness

taking domestic products and selling them internationally with only minimal customization

usually for companies that serve a universal need but have few competitors

need for control is moderate

need for integrating mechanisms is moderate

low cost of control

low performance ambiguity

worldwide product division structure is common
evolution of strategy
international may not be viable in the long-term

to survive firms need to go to a global standardization or transiational strategy due to competition

with localization, it may start out being good, but if competition grows, the firm may need to shirt to a transitional strategy
organizational architecture
totality of firm's organization including formal structure, incentives, control systems, processes, organizational culture, and people

to be most profitable firms must be sure:
- different elements of org. structure are internally consistent
- organizational architecture fits strategy of firm
- strategy and architecture are consistent with eachother and competitive conditions
organizational structure
formal division of org. into subunits

location of decision-making responsibilities within stucture - central vs. decentral

integrating activities to coordinate subunits
control systems
metrics used to measure performance of subunits and make sure managers are running subunits properly
devices used to reward appropriate managerial behaviors
manner in which decisions are made and work is performed

processes used in making the decision itself

ex: deciding on strategy, choosing how to allocate resources, etc.
organizational culture
refers to norms and values shared among employees

affect how a company operates
refers not just to employees

also refers to how people are recruited, compensated, retained, etc.

also refers to the type of people they are in their skills, values, and orientation
vertical differntiation
location of decision making responsibilities within structure

determines where power in concentrated

centralized vs. decentalized decision making

can be worthwhile to centralize some decisions and decentralize others

may make more sense to centralize decisions on overall strategy and decentralize decisions on operations
centralized decision making
faciliates coordination

ensures that decisions go along with firm's objectives

give top-level mgt. means to bring about change

avoids duplication of activities
decentralized decision making
relieves decision-making burden

increases motivation

increases flexibilty

can result in better decisions

can increase control within units
horizontal differentiation
the design of structure

concerned with how the firm decides to divide itself into subunits

decision normally made based on function, type of business, or geographical area

firm splits in to functions regarding value creation activities

functions typically coordinated and controlled by top mgt. and decisions tend to be centralized

firms may switch to a product divisional structure where each division is responsible for a product line

worldwide product division structure
worldwide area structure
global matrix structure
internation division
international division
part of horizontal differentiation

when firms expand internationally, they often group all activities dealing with that into an international division

in time it may be more viable to manufacture product within countries

firms with a functional structure at home may replicate that into operations in each country

creates potential for domestic and foreign conflict in operations
worldwide product divisional structure
adopted by diversified firms that have a domestic product division

each division is self-contained and autonomous with its own responsibility for value creation activities

value creation should be coordinated worldwide

worldwide coordination of value creation activities for each division

realizes location and experience curve economies
worldwide area structure
tends to be adopted by undiversifed firms whose domestic structures are based on functions

world is divided into geographic structures

each division is self-contained

decentralizes decision making

facilitates local responsiveness

can result in fragmentation

consistent with localization

facilitates transfer of foreign competnecies

does not support localization
global matrix structure
minimizes limitations worldwide division and area structure

allows for differentiation among product division and geographic area

dual decision making: product division and geographic location and have equal weight in making decisions

can be bearucratic and slow

can result in conflict between areas and product divisions

can result in finger-pointing between decisions when something goes wrong
types of control systems
4 main types:

personal: control by personal contact with subordinates -- more widely used in small firms

bereaucratic controls: control through procedures and rules that direct actions of subunits -- most important are budgeting and capital spending rules

output controls: setting goals for subunits and expressing them through performance metrics; acheived by comparing actual performance against targets and intervening to take corrective actions

cultural controls: when employees buy into norms and value systems; organizations with strong culture have less need for other forms of controll
incentive systems
devices used to reward behavior; usually closely tied to output controls

should vary depending on employee and nature of work
should promote cooperation b/t subunits
should reflect natl. differences in institutions and cultures
can have unintended consequences
control and incentive system strategies
key to understanding relationship b/t international strategy, control systems, and subunits is performance ambiguity
performance amiguity
common when one subunit's performance depends on another

lowest in firms with localization strategy

higher in international firms

higher in global standardization firms

highest in transnational firms
organizational culture
systems of values and norms shared among people

changes very slowly
creating org. culture
comes from:
founders and important leaders
national social culture
company history
decisions that result in high performance
maintaining org. culture
hiring and promotional practices
reward strategies
communication strategies
organizational culture in internaional business
strong culture: people have consistent set of values and understand its impact on the work performed

not always good
may lead to high performance sometimes
not good at all times

companies with adaptive cultures have the highest performance
basic entry decision
1. which mkts. to enter
2. when to enter
3. on what scale
which mkts. to enter
depends on long run profit potential

good mkts. are politically stable developing and developing nation with free mkt. systems and low inflation and private sector debt

bad mkts. are politically unstable and developing with mixed or command economies, and excessive levels of borrowing

mkts. are also attractive when product satisfies an unmet need
timing of entry
early = firm enters the mkt. first

late = firm enters the mkt. after other firms have already established themselves in the mkt.

first mover advantages
first mover advantages
ability to pre-empt rivals and establish brand

ability to build up sales vol. and ride experience curve

creating switching costs that make it hard for later entrants to steal business
first mover disadvantages
pioneering costs: when foreign business system is different from that of the firm's home; firm must dedicate time and effort into learning the rules of the game
- costs of failure to the firm due to ignorance and mistakes
- cost of promoting and establishing brand and educating clients
scale of entry
entering the mkt. on a large scale chanes the playing field

if on a large scale, a strategic comittment must be made -- long-term and hard to reverse

small-scale entry allows the firm to learn about the mkt. while limiting the exposure
common first step in international expansion process for many manufacturing firms

pros: avoids costs of establishing local operations

cons: there may be lower cost manufacturing observations, high transport costs and tariffs make it uneconomical, agents in other countries may not act in exporter's best interstests
licensor grants rights to licensee to intanigable asset or other property for a spec. period of time in return for royalty

may include: patents, processes, inventions, trademarks, etc.

pros: no development costs of starting up in foreign mkt., no barriers to investment, firm with property can capitlize on mkt. opportunies without developing applications itself

cons: firm does not have tight control of production, etc. required for realizing experience curve and location economies, limits ability to coordinate strategic moves in countries with money made in the foreign mkt., intangible assets could be lost

risks can be reduced through cross-licensing agreement
cross licensing agreement
firm may license intangible property, but requests that in exchange firm licenses them some of their intangible property on top of the royalties that they must pay
specialized form of licensing where licensee uses intangible product but also follow a strict set of rules and guidelines on how it does business

primarily service

pros: firms avoid risks of opening on their own in global mkt., can still build a global presence

cons: inhibits firm's ability to take profits out of one country and direct them into another mkt., faraway location can make it hard to detect poor quality on part of licensee
joint venture
establishment of a firm that is owned by two independent firms; usually 50-50

pros: can benefit from partner's knowledge of the country and mkt., costs and risks are shared, good when political issues make it the only feasible entry mode

cons: firm risks giving control of its technology to the partner, firm may not have control that subsidiaries need in order to realize experience curve or location economies, shared owenership can lead to conflict
wholly-owned subsidiary
firm owns 100% of stock; can establish through starting new operation or through acquitistion

pros: reduces risk of losing control over core competencies, gives tight control for gaining strategic coordination, may be required in order to realize experience curve and location economies

con: firm bears full cost and risk
core competencies and entry mode
entry mode depends somewhat on firm's core competencies

if competency is tech. know-how, firm should avoid licensing and joint-ventures

if competecy is mgt. know-how, there is not much risk of loss of that, and getting brand name out there is important
pressures for cost reduction and entry mode
when pressure is high firms are more likely to pursue combo. of exporting and wholly owned subsidiaries

this allows firms to keep control and to gain over manufacturing and distribution and to acheive location and scale economies

firms pursuing global standardization or transnational prefer wholly owned subsidiaries
pros of acquisition
quick to execute
enable firms to preempt competition
less risky than greenfield
cons of acquisitions
can fail when:
firm overpays for acquired firm
cultures of firm and acquired firm clash
attempts to realize synergies run into roadblocks and take much longer to forecast
inadequate preacuistion screening

to avoid to these issues:
firms need to screen acquisitions well
integration plan needs to implemented fast
pros and cons of greenfield
pro: gives firm greater ability to build exactly what it wants

cons: risky, slower to establish
choice b/t greenfield and acquisition
depends on firm's situation

acquisitions are good when there is already competition and firm wants to build mkt. presence

greenfield is better when firm needs to transfer competencies, skills, culture, etc.
strategic alliances
cooperative agreements b/t actual or true competitors

range from formal short ventures to contractual agreements

amt. of strategic alliance has exploded in recent decades
pros of strategic alliances
facilitate entry into foreign mkt.

allow firms to share FC of developing new products or processes

bring together complementary skills and assets

can help firm establish tech. stds. for industry
cons of strategic alliances
can give competitors low cost routes to new technology and mkts., but sometimes one firm can give too much
making alliances work
success is function of: partner selection, alliance stricture, how alliance is managed

good partner: helps firms achieve goals, shares vision, unlikely to oppotunisticly exploit partner

structure: needs to hard to transfer tech. that is not meant to be, contractual safegaurds, allow for skills and tech. swaps and equal gains, minimize risk of opportunism

sucessful mgt. requires good interpersonal relationships

major determinant of gains is ability to learn from partners