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156 Cards in this Set
- Front
- Back
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CEOS main concerns are what?
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market factors
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studens main concerns are what?
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globalization
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what is main point of smiglobalization?
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national marekts are far from perfectly integrated
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what are the six forms of seperation?
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physical, political, relational, developmental, cultural, and enviornmental
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what is physicall serperation?
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distance between countries.. tend to trade with those that are closer
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what channels can distance affect business
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transportation costs,
information frictions enforcement frictions |
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ebay study?
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distance was a driver for transactions, holding other things constant
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what is political separation?
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man made frictions to the mobility of goods, labor, and capital
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examples of political separation
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self imposed autarky: north korea
import tarriffs and quotas technical barriers: regulatoins, standards, testing and redtape national currienceies and restrictions on foreign currencies |
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how are political separation and border separation differnet?
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distance is continuous and border is binary, you are either at the border or not.
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what are 3 ways to look at border effects?
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trade flows, prices, and market shares
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what is the tinbergen gravity equation?
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lnXAB = ln + lnGDPA + lnGDPB +
ln distanceAB basically distance negatively correlated to trade |
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due borders have effects?
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yes! canadian provinces more with eachotehr 22x than with states
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how do border effects show in prices?
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law of one price doesnt hold, prices differ across the border for identical goods. grocery stores across borders
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How do you calculate the width of the border?
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border coefficient/disance coefficient gives distance units. width of candian border is equivelent to 47k miles of distance!
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why might a retailer charge different prices for same product?
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unit costs, wholesaler pricing to market same markup, different costs
mark-up, retailer pricing to market, different markups for different markets |
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why do most border price discrepancies exist?
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whole sale unit cost variations
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what is relational sepearation?
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information:learning about business opportunities
reputation: preventing opportunistic behavior in weak legal enviornments difficult to form these across borders and distance |
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why are reputations important?
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powerful mechanism to subsitute legal enforcement.
news spread faster in dense networks threat of punishment credible when repeat and future transactions are likely |
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repuation on ebay
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powersellers can overcome distance with strong reputation, just like ancient traders
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are relational and physical separation connected?
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yes hard to form relations when far apart. once they are formed hard to break
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what is developmental separation?
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varying GDPs across countries
richer countries often pay more and demand higher quality |
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what is cultural separation?
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each country has preferences due to language and how you grew up. local music market share increasing due to technological barriers lowering entry.
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what is enviornmental spearation?
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climates are different in each country. have different needs
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is the world perfectly global?
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no, suggest still local, but integration is growing with time
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trade is increasing over time, why?
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decreased trade costs
changing nature of trade |
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shipping costs have not decreased that much with containerization, why?
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gas, not passing on savings of innovatoin
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cost to communicate?
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has decrease substantially, making hte world more global
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policies?
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policy barriers have begun to decrease subtantially
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what is problem with using TRADE/GDP
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accounting problem, exports based on total sales, where GDP is value added. distorts the ratio for assembly hubs that look like adding big value.
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why has FDI (foreign direct investment) increased over time?
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decreased political risk
more open trade policies more open investment treaties and taxation policies |
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what is the largest barrier to success for globalization remaining?
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mobility of labor and people
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why do we trade based on old views?
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productivity advantages from one area to another. specialize in what you are good at. this is gives a comparitive advantage and decide to export and import
ENTIRELY SUPPLY DRIVEN! NEED HETEROGENEITY |
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what are sources of CA
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productivity differences in goods across countries
input availability discrepancies |
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Current explanation of trade
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lots of trade between similiar products and simliar countries
more DEMAND driven |
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Why do countries trade today
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variety differneces. tastes will vary largely in popilations, creates all kinds of submarkets. Each producer is like a monopoly for their own variety.
fixed costs to produce, so making more makes sense to lower AC makes sense to make in one spot and ship across the world |
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what are the two conditions for intra industry trade?
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differentiated varietites
increasing returns to scale |
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what is IIT
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100*min(exports and imports)/average(imports + exports)
it is the index of intra industry trade... 100 means equal, zero means trade is one way commodities tend to me be more towards zero |
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what are the 3 levels of global engagement?
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Export, Liscensing, FDI
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where do the 3 levels of global engagement fit on level of risk and control?
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export = low invest, low control
liscensing = mid mid FDI = high, high |
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what are the 9 facts of global engagement (exporting)
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1.) few firms are globally engaged
2.) few firms do the heavy lifting 3.) trade is concentrated among larger and more productive firms that trade multiple products 4.) similiar that they ship to many locations (countries) 5.) most trade is with upper income countries, only large firms export to low income destinations 6.) majority of firms are trading at arms length 7.) there is considerable churning 8.) there is an exporter premium 9.) exporters that survive enter foreign markets sequentially |
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why do exporters that survive enter foreign markets sequentially
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learning about demand
rapid expansions are costly: capacity alignment liquidity constraints |
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are firms exporting because they are productive or vice versa?
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productivity leads to exporting and not typically vice versa
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what will optimal quantity be for a firm?
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productivity(z) raised to the constant theta
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what will the profit equation then be
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z^(theta-1)/theta
more productive firms are more profitable |
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what costs are involved in exporting?
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fixed: market research, marketing, distribution, modifications
variable: shipping, insurance, tariffs, packaging |
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what is optimal quantity with trading?
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q=(z/(1+trade costs T)^theta
higher variable trade costs reduce foreign sales of exporters |
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what will profit be with trading?
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1/theta(z/(1+T)^(theta-1)
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when will a firm export?
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when its profits with trading are greater than its fixed costs to trade
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what does the decision for a firm to export imply?
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there is a productivity level Z threshold, above which a firm will choose to export
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what do reductions in variable and fixed cost due to the decision to export?
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lower the threshold of productivity requried to be profitable, and thus more will export
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how could exporting lead to greater productivity
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economies of scale
learning by doing investing in productivity enhancements technology diffusion: exposure to new ideas |
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how does technolgoy change the decision and group into three choices
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z < zx: basic technology and no exports
zx z zh: basic technology and exporting zh < z: high technology and exporting. |
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how can we check causation of productivity and exporting?
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look at exporter premiums. shows that productivity leads to exporting and not vice versa
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how does the natural selection to export affected by trade policies?
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they may reduce fixed and variable costs, but not on an even playing field. If lowered for all firms would be a good thing, but only for small firms gives bias to firms that should not be exporting because not efficient enough
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why are some firms inshoring?
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increasing labor costs
increasing shipping costs cost saving designs and tech at home efficiency losses due to distance IP concerns |
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why are small firms first to inshore?
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need to be responsive and have specialized products
big manufacturers want volume so go to the end of the line |
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how do information tech make task tradeable?
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computers make task codibale, internet makes remote work possible
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what makes soomehting offshorable
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codifiable, repeatable, cna be trained and repeated
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what are liscense agreements?
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contractual agranagments which patents trademarks, copyrights, or trade secrets are rented to a licensee in exchange for royalties (lump sum or tied to production volume).... leasing an intangible asset
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what is a franchise agreement
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implies a stronger bond then license agreement
not only use its intellectual property but also its operating system with more control and or assistance over the business activities/operations/marketing |
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why are licensing patents important?
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main source of revenue for many companies
main source of techonolgy for many companies |
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what are some examples of intangible assets?
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r&d - patents technology designs
software and databases brand equity org capital firm specific human capital |
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why is most liscensing to affiliates in foreign countries?
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minimize risk of getting IP stolen, tax considerations
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why do chemicals and electornics make good licensing deals?
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they make the majority because they are repeatable and prescribable. basically if you know how to make it, you can make the capital investment to do so. Not like service where its hard to transplant
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What influences the level of licensing between countries?
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IP protection
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what are benefits of licensing?
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quick access to foreign markets with low opeartional risk
economize R&D, reduce research risk Both get to economize on transportation costs |
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what are the costs of licensing?
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less control: can harm reputation
licensee may become competitor through imitaiton or innovation risk of inability to replicate product due to tacit knowledge limited period of time... sunk costs could create hostage situation creates transaction costs for both parties through contracts and bargaining |
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what are some contractual issues to negotiate?
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exclusivity
sub license? right to reneew? licensor support and know-how technology flow back on improvements market restrictions production restrictions |
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what are some problems that arrise in barganing license agreements?
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uncertainty will techonolgy work in foreign market
incomplete information: neither side knows true value and cost limited outside options: licensor has monopoly on patent, and its hard to find qualified licensees. |
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what percent do licensors typicall get?
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33-50% mean of 40
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what is 0 - 10% ownership in a foreign firm called?
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portfolio investment
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what is 10-50% called?
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associates
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what is 50-100 called?
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subsidiaries. control
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what is more than 10% ownership called?
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Direct Investment and voice
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what is horizontal FDI?
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produce the same good overseas in order to sell overseas
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what is vertical FDI?
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affiliates are part of a supply chain
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what is a complex integration strategy?
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a mix of horizontal and vertical that is hard to identify separately
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what is the difference between m&A and greenfield
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merger you buy
greenfield you build |
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what are ways to finance FDI?
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equity
profits loans |
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what are 7 facts of FDI?
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1.) grew dramatically at end of 20th century, far greater than trade
2.) still originates primarily from developed countries but share is declining 3.)goes mostly to developing, but share is declining 4.)mergers are dominate, but share is declining. Mergers mostly happen in developed countries, greenfield preferred in developing (who would you buy??) 5.)FDI concentrated in skill and tech intense industries, with 60% in services 6.)MNEaccount for an important component of internationsl trade 7.)intra firm trade grew over past decades |
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what are the 4 motives for FDI?
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resource seeking - secure key inputs
market seeking - serve the host country efficiency seeking - cheaper production knowledge seeking - acquire access to tech and innovation |
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what is the definining charachteristic of MNEs?
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ownsership
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what is the market transasctions for:
resource seeking market efficiency knowledge |
import
export outsource license |
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why do firms prefer to own?
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to have more control of operations and maintain their level of standards, quality, and reputation
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when will FDI take place without licenseing?
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when discounted profits are greater than fixed costs to make FDI
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what happens to the FDI decision under perfect information?
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firms extract all the value and prefer to simply license out with 100% of the profits paid as royalties
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What happens when licesning is a possible nad info is not perfect?
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have to lower the royalty to a point where the franchisor wont want to cheat and sell crap.
profits of FDI need to be greater than the discounted lower royalty. |
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what does imperfect quality of info do to reputation?
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it makes it very important and an intangible asset
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what causes the inefficiency in an agreement with an MNE and licensee
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the difficulty of having enforceable contracts to stipulate penalties for cheating, thus makes it hard to transfer reputation and firms chose more FDI
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what are the four forms of collaberation in increasing order of commitment?
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long term sourcing
non-equity alliances equity alliances joint ventures |
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what is long term sourcing?
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contract manufacturing.
allows company to seek efficiency without incurring fixed costs. example nike and Apple OEMs, allows MNE to focus on their core competency |
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what is the difference between long term sourcing and licensing? similar?
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long term sourcing the firm determines output levels and shipped back to the sourcing compnay
licensing decide its own output and sells on its own similiar because subject to same intangible assets dissipation risks |
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what are 5 motives of alliances and joint ventures?
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acquistion of technology and joint R&D
complemenatary resources risk reduction goverment policies co-opting competiors or teaming up against particular competitors |
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what is a non-equity alliance?
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things like co-branding, markeiting alliances, joint manufacturing p[rjects, but no actual investment in eachother.
toytoa and BMW, swapping knowledge and not competing with eachother |
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what is an equity alliance?
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collaborative arrangement in which at least one company takes an ownership position in the other. sometime both take ownership of eachother
typically amimed at economoies of scales and capacity sharing/specialization of technology... imp[important to be viewed as equals for success |
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what is an alliance group?
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like star alliance where multiple companies join forces for scale in procurement, and offering where individuals are weak.
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what is a joint venture?
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creation of a new entity through equity of two firms
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how does a JV differ from an alliance?
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nature of resource allocation by each partner is known
well-defined management structure long term perspective |
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what is the best split for a joint venture?
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50/50 works best, but can cause problems with voting
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discuss fuji-xerox
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started as a desire to enter japanese market because of regulations, ended up being more innovative then xerox. as xerox came off patents, fuji xerox provided a lot of innovation.
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why was fuji xerox succesful
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forward looking managment
japan market had lots of competition autonomy through 50/50 structure lack of market overlap |
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why might an alliance need to change?
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new market or technological opportunities
shifts in the goals or capabilities of partners logic of collaboration itself changes sometimes alliances should just be ended (good or bad reasons... i.e goals met, or just not working) management needs to periodically reveille goals and status |
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are JVs staying common?
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no, fully owned are becoming more common
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what are two main problems with JVs
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objections of local partners can make it hard for MNE to optimize production across countries to minimize global costs
because local partner has stake in the profitablity of the JV, MNE cannot set intercompany transaction prices to minimize its global tax burden |
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what is underlying freature of JVs/alliances
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partners can add values, but they can create complicaitons
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describe the hold up situation
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two firms are investing together, and once one has invested in a specific product, the other acts opportunisticlly to buy at pennies on the dollar.
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why does hold up problem arrise?
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relation specificity of the inputs
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what is the outcome of the hold up problem?
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both firms under invest in key complimentary resources as neither will gain the full share of profits. results in an inefficient level of investment and suboptimal profits
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where is the optimal braganing share?
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around a 50/50 split as both firms stand to gain. if one has all the bargaining power, the other decides its not worth investing
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how does a firm decide to outsource or FDI?
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weight the chances of hold up and quality, as well as if they can reach a common ground on bargining. otherwise may internalize and do whole thing even if sub-optimal
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What type of FDI are associated with market and efficiency seeking?
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market seeking -horizontal FDI
Efficiency seeking - Vertical FDI |
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What is HFDI
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horizontal foreign direct investment
setting up foreign operations that duplicate home operations can be limited to destination market or other markets in the region )export-import HFDI) |
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what are costs and benefits of HFDI?
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benefit = proximity to local consumers
cost- loss of concentration and economies of scale |
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what does proximity provide in HFDI?
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close to final conusmers
reduces transportation costs and tariffs easier to adapt to local culture and tastes if desired |
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what wil lincrease HFDI?
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higher trade costs (distance, trade barriers)
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what are the sources of economies of scale?
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fixed costs being spread over more product
learning by doing |
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what is firm level economies of scale?
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more production spreads overhead costs over more products
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what is plant level economies of scale?
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more product produced at a plant makes them cheaper
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discuss economies of scale with HFDI
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diseconomies of scale at the plant level
economies of scale at firm level high plant level economies of scale = less HFDI high firm level economies of scale = increase HFDI |
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discuss market size and HFDI
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foreign market size should increase HFDI through economies of scale
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explain export-platform HFDI
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realize that their is benefits in proximity and concentration trade-off, so cannot put HFDI in each market. Limited number of locations in geographic regions to reduce distance, but achieve some scale
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discuss HFDI and export platforms
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being geographically and institutionally close to large markets increases export platform in HFDI
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what choice must a firm face when contemplating HFDI?
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replication versus adaptation
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describe market adpatation in relation to firm-level economies of scale
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adapatation means you give up economies of scale because it imposes product development costs, marketing costs, and consumer confusion costs
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what are four aspects to successful adaptation in foreign markets?
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product
price promotion placement |
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what is the levitt hypothesis?
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should make same product everywehre
focus on ultimate needs instead of stated wants majority want the same thing:high Q, low price under-appreciate large volume, low price strategies |
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what industry is most affect by product adaptation problems?
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consumer goods, others are typically the same across the world... i.e chemicals
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what are two key trends emergin?
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emerging middle class
global consumers |
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what does an emerging middle class in developing countries mean for mNE?
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can recylce old product ideas to new markets
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what does the global consumer mean for MNEs
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demand heterogenity exists in emerging countries. have a small group of very wealth people who fit developed demands and need to decide how to target
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what are the trends leading to?
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local affordable brands for the emerging middle class in developing countries
global premium brands for developed countries and affluent consumers in developing countries |
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what options does a firm have with price?
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one price everywhere
apply the same markup to different costs set different prices in different countries due to differences in elasticity of demand and competition |
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why must you be careful charging a lower price internationally then to domestic customers?
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anti-dumping alligations in attempts to elminate competiton
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what challenges with promotion?
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communication adaptation: advertising and campaigns
sales promitions: can be regulated in some countries intent is to protect customers about true value of product |
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what challenges in placement?
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distribution systems vary widely in countries
can make it costly for companies to try and undertake themselves some countries restrict how much ownership firm can have in distribution or retail restrictions on shopping times |
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what challenges do governments deal with in retail sector?
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govs favor mom and pops
fiscally favor chains as easier to collect taxes inflation considerations favor chains due to scale |
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what is VFDI?
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vertical foreign direct investment
when a firm splits it activities and puts part of its prosecution in a separate foreign plant |
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what are the cost of VFDI
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international shipping costs
foregone economies of integration |
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what are the sources of economies of integration
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sequential production: hot steel
design/manufacturing interdpeendence: matters for high tech coordination costs |
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benefits of VFDI
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can rank based on how skill intensive they are... perform r&D where scientists are abundant, perform assemble in countries where unskilled workers are abundant
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How do you decide where to produce?
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look at unit and shipping costs
go to lower wage and higher productivity combination |
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whats the relationship with wages and productivity
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typically higher wages associated with higher productivity, makes manufacturing choice non triviall
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how to choose where to produce?
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compare wage/productivity in both countries to determine unit costs
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firm level scale?
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+ hfid
+vfdi |
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plant level scale
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- hfdi
? vfdi |
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trade costs
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+ hfdi
-vfdi |
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disintegration costs
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? hfdi
- vfdi |
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factor intensities differences
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? HFDI
+VFDI |
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distance
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+HFDI
- VFDI |
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trade barriers
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+ HFDI
-VFDI |
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market size
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+HFDI
? VFDI |
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factor cost differences
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? HFDI
+VFDI |
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describe the changing nature of FDI
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becoming more networked FDI which is hard to distinguish
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what are other determinants of FDI?
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government incentives- taxes, land grants etc
diversification - geographical macroeconomics clustering - ertical linkages, thick labor, knowledge spill over (external increasing economies of scale) |
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describe host country effects?
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MNE larger, more productive, pay higher wages, and employ more skilled workers
no evidence of spillover of tech to local firms HFDI reduce home employment manufacturing but increases HQ needs VFDI dislocats offshored employees but increases need for task and components produced at home. on aggregate no change in employment, but does change distribution of countries |
