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22 Cards in this Set

  • Front
  • Back
To generate profit need 3 things
Open marketplace

Strategic management

Access to capital
Mercantilism, Absolute Advantage, and comparative advantage
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
Comparative Advantage today
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
Source of Comparative Advantage

Access to capital

Why firms invest abroad
Market seekers

Raw material seekers

Production efficiency seekers

Knowledge seekers

Political safety seekers

Each move can be either proactive or defensive
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
Product Cycle Theory
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
Agency Problem
Owner and management may not be perfectly aligned with business and financial objectives
Goal of Management
Maximization of shareholder wealth (US)
Shareholder Wealth Maximization Model
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)
Stakeholder Capitalism Model
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
Operational Goals of MNEs
Maximization of after tax income

Minimization of global tax burden

Correct positioning of firms income and cash flows and respective currencies
The Gold Standard

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
Bretton Woods

After WWII to create a new financial system

US becomes anchor of financial system

IMF and World Bank created
IMF and World Bank
IMF-help countries protect currency, help countries with structural trade problems

World Bank-economic development
Basket of strong currencies
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
Demise of Fixed Exchange rate
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
Types of currency regimes
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
Factors affecting a country's currency regime choice
– inflation,
– unemployment,
– interest rate levels,
– trade balances
– economic growth
Fixed versus flexible exchange rates
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
Attributes of Ideal Currency
Exchange rate stability

Full financial integration

Monetary independence

Have to give up one in order to function