IB- A business firm that enages in international economic activities and does business abroad

GB- International (cross-boarder) activites as well as domestic business activities.

FDI

Gross domestic product- The sum of the value added by resident firms, households, and governments operating in an economy.

Emerging markets contribute 50% of the global GDP

Gross National Product- Gross domestic product plus income from nonresident sources abroad.

Gross National Income- Term used by World Bank after GNP

Institution-based view vs Resource-based view

Institution- Focuses on external environment suggests thant success and failure of firms are enabled and constrained by the different rules fo the game. Formal rules like treating domestic and foreign firms as equals. Informal rules like cultures, eithics and norms play an important part in shaping the success and failure of firms

Resource- focuses on internal resources and capabilities. Firm can possess some very rare and powerful firm-specific resources and capabilities succeed in tough environments and have to overcome a liability of foreigness

Pro- higher economic growth and standards of living, increased sharing of technologies and more extensive cultural integration

Con- undermines wages in rich countries, exploits workers in poor countries and gives MNEs too much power

-A new force sweeping through the world in recent times

-A long-run historical evolution since the dawn of human history

-A pendulum that swing from one extreme to another time to time

Suggests that firm performance is, at least in part, determined by the institutional frameworks governing firm behavior around the world

formal institutions- political systems, legal systems and economic systems

informal- cultures, ethics and norms

institutional framework

regulatory pillar- primary pillar, the coercive power of govts (ex: laws, regulations and rules). Formal institutions

normative pillar- how values, beliefs and actions of other norms influence the behavior of focal individuals and firms (ex: firms have rushed to invest in china which has become a norm and many managers just imitate this not knowing exactly what they're doing), informal institution

cognitive pillar- the internalized, taken-for-granted values and beliefs that guide individual and firm behavior. (ex cultures and ethics like the whistle-blowers in Enron), informal institution

transaction costs and opportunism

the costs associated with economic transaction costs or the costs of doing business

an important source of transaction costs is opportunism (misleading, cheating and confusing other parties in transactions that will increase transaction costs

1) managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework

2) in situations where formal constraints are unclear or fail, informal contraints will play a larger role in reducing uncertainty and providing constancy to mgrs and firms

Democracy- people elect leadersto govern

Totalitarianism (dictatorship)- one person has power

communist- centers on a communist party (cuba, north korea, china)

right-wing- intense hatred of communism. one party backed by the military restricts political freedom arguing that such freedom would lead to communism (South korea, philippines, taiwan all now democracies)

theocratic- the monopolization of political power in the hands of one religious party or group (iran, saudi arabia)

tribal- one tribe or ethnic group monopolizing power and oppressing other tribes or ethinic groups (Rwanda)

legal systems

the rules of the game on how a country's laws are enacted and enforced

civil common and theorcratic law

uses comprehensive statutes and codes as a primary means to form legal judgements

common law

shaped by precedents and traditions from previous judicial decisions

to protect property rights (legal rights to use an economic porperty or resource and to derive income and benefits from it. ex: homes, offices, and factories)

economic system

how country is governed economically

2 types: market and command

market and command economy

market- characterized by the "invisible hand" of market forces, govt takes laissez faire approach, all production is privately owned and govt only does a few things like roads and defense

command- govt taking"commanding height" in the economy, production is govt or state-owned and controlled, all supply, demand, and pricing is planned by the govt

define culture

two biggest components of culture

The collective programming of the mind which distinguishes the members of one group or category of people from another

Language and religion

-“When in Rome, do as the Romans do”

a perspective that suggests that all ethical standards are relative

the background of interaction

Low-context: culture in which communication is usually taken at face value (NA and WE)

• Emphasis on VERBAL cues and should NOT be subject to multiple interactions

High-context: culture in which communication relies a lot on the underlying unspoken context (Arab and Asian)

• Emphasis on NON-VERBAL cues and an understanding of the CONTEXT
• Note that language itself is highly contextual

Three cultural clusters

*may not need for test

Ronen and Shenkar clusters

GLOBE Clusters

Huntington Civilizations

chart on page  63

• Power distance: weaker members’ acceptance of inequality (Malaysia)
• Individualism: loose ties between individuals; each responsible for him/herself (USA)
  • Collectivism: the idea that the identity of an individual is promarily based on the identity of his or her collective group (Guatemala)
•  Masculinity: the degree to which men have different values than women (Japan)
  • Femininity: women have positions that reward assertiveness and more men work in caring professions (Sweden)
• Uncertainty Avoidance: a function of how comfortable group members feel with uncertainty (Germany)
• Long-term Orientation: emphasizes perseverance and savings for future betterment 

• respect for human dignity and basic rights
• respect for local traditions
• respect for institutional context

Reactive: Deny responsibility, do less than required (Ford Pinto)

Defensive: Admit responsibility but fight it, do the least that is required (Nike)

Accomodative: Accept responsibilty; do all that is required (Ford Explorer)

Proactive: Anticipate responsibility, do more than is required (BMW)

The local

the analyst

the natural

the mimic

the chameleon

pg 77

A firm's Strength's, Weaknesses, Opportunities, and Threats

resources: the tangible and intangible assets a firm uses to choose and implement its strategies

Tangible

• Plant
• Labor
• Finance

Intangible

• Information
• Reputation
• Knowledge

the tangible and intangible assets a firm uses to choose and implement its strategies

Activities (Tangible)-

-use of technology

-innovation

-training

Processes (intangible)-

-routines

-tricks of the trade

-knowledge management

offshoring: outsourcing to an international or foreign firm

inshoring: outsourcing to a domestic firm

captive sourcing: setting up subsidiaries abroad, the work is done in-house but location is foreign. (also known as FDI)

• Value: Only value-adding resources can possibly lead to competitive advantage
• Rarity: Only if few have it can it provide some temporary competitive advantage
• Imitability: source of competitive advantage only if competitors have a difficult time imitating
• Organization: How can a firm be organized to develop and leverage the full potential of its resources and capabilities?

1. to exploit exisiting resources abroad
2. to acquire or develope new resources

Original Equipment Manufacturer (OEM)- a firm that executes the design blueprints provided by other firms and manufactures the products

Original Design Manufacturer (ODM)- a firm that both design and manufacturers products

Outsource: an activity with a high degree of industry commonality and a high degree of commoditization can be outsourced

In-House: an industry-specific and firm-specific (proprietary) activity is better in-house

1. Offshoring
2. Inshoring
3. captive sourcing/FDI
4. domestic in-house activity

• Financial
  • Ability to generate internal funds and raise external capital 
• Physical
  • Location of plants, offices and equipment
  • Access to raw materials and distrib chnnls
• Technological
  • Having patents, trademarks, copyrights and trade secrets
• Organizational
  • Formal planning, command and control systems
  • Integrated mgmt info systems

• Human
  • Managerial talents, organizational culture
• Innovation
  • R&D capabilities
  • Capacities for org innovation and change
• Reputation
  • -of product quality, durability and reliability among customers
  • Reputation as a good employer
  • Reputation as a socially responsible corporate citizen

classical: before the 20th century - mercantilism, absolute advantage and comparative advantage

modern: in the 20th century - product life cycle, strategic trade, and national competitive advantage

theory advocated by Adam Smith, suggests that under free trade, each nation gains by specializing in economic activities in which it has absolute advantage

Smith wanted free trade (the idea that free market forces should determine how much to trade with little or no govt intervention

theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations

suggests that nations will develop comparative advantage based on their locally abundant factors

Factor endowments: the extent to which different countries possess various facors such as labor, land, and technology

a theory that accounts for changes in the patterns of trade over time by focusing on product life cycles

much production will move to low-cost developing nations, which export to developed nations (comparative advantage may change over time)

strategic trade theory (Krugman, 1986)

first-mover advantage

Competitive advantage of nations: that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond” (Porter, 1990)

4 Aspects:

-Country Factor Endowments (There natural resources)

-Must be domestically demanded

-Must have firm strategy, structure and rivalry (domestically)

-Must have related and supporting industries

tariff barriers

type of tariff barrier resulting in 'deadweight costs'

trade barriers that rely on tariffs to discourage imports

import tariff: tax on imports

deadweight costs: net losses that occur in an economy as the result of tariffs

• Subsidies: govt pmts to domestic firms
• Import quotas: restrictions on the quatity of imports
• Export restraints: restrictions on exports
• Local Requirements: certain proportion of the value of goods made in one country originate from that country
• Admin policies: rules that make it harder to import foreign goods
• Antidumping duties: costs levied on imports that have been "dumped" (sold below costs to drive domestic firms out of business)

1. national security
2. consumer protection
3. foreign policy
4. environmental and social responsibility

Horizontal FDI: When a firm duplicates its home country-based activities at the same value chain stage in a host country. Typical in industries with low vertical integration and few opportunities for economies of scale

Vertical FDI: When a firm moves upstream or downstream to different value chain stages in a host country. Typical in vertically integrated sectors w/ opportunities for economies of scale and ‘arbitrage’

Investments in portfolios of foreign securities such as stocks and bonds that do not entail the active management of foreign assets

• FDI Flow: the amount of FDI moving in a given period
• FDI Inflow: The volume of FDI from firms abroad into a given country
• FDI Outflow: The volume of FDI abroad by firms from a given country

• FDI Stock: the total amount og inbound FDI in a country or output FDI from a country over a period
• Inward FDI stock: The total cumulative value of all foreign direct investments in a host economy at a given moment in time (net of inflow – outflow)
• Outward FDI stock: The total cumulative value of all foreign direct investments held abroad by resident firms from given country host economy at a given moment in time

Ownership – Firm-specific assets that are valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) and allow firm to overcome ‘liability of foreignness’

Location - Location-specific assets (markets, resources, labor) the firm hopes to acquire

Internalization – The advantage of replacing arm’s length transactions (such as exporting and importing) with intra-firm trade

Benefits

• economies of scale
• exploit 'intangible assets' (brand, know-how) in new markets
• risk reduction
• exploit differences in factor endowments

Costs

• new entrant
• (cultural) distance
• learning costs
• transaction costs
• coordination costs

Benefits

• learning from abroad
• increased income through increased trade
• profit repatriation

Costs

• job loss
• capital outflow
• loss of value added

Benefits

• knowledge spillovers
• innovation through competition
• backward and forward linkages
• capital inflow, tachnology, mgmt and job creation

Costs

• loss of competiton (crowding out)
• capital outflow
• profit repartation
• loss of sovereignty (capital flows and macro-economic stability)

• printing new money increases money supply, but leads to inflation and reduces the future value of the currency
• raising interest rates will reduce the supply of money, because it raises the cost of borrowing money form the govt which will make people borrow less.

1. relative differences and purchasing power parity (prices in developing countries are cheaper)
2. interest rates and money supply (high interest rates lead to higher exchange rates, inflation decreases exchange rate- big supply=less demand and value goes down)
3. productivity and balance of payments (higher productivity will increase exchange rate, more FDI will be attracted to country fueling demand for its home currency) (account deficit decreases exchange rate)
4. exchange rate policies (floating, clean, dirty, target exch rate, fixed e.r. and pegged e.r.)
5. investor psychology (determines short-run exchange rates, bandwagon and capital flight are examples)

• Floating exchange rate policy
• clean (free) float
• dirty float
• target exchange rates
• fixed exchange rates
• peg

• Target: limited govt intervention, only when the exchange rate moves out of specified upper or lower bounds

• the result of investors moving as a herd in the same direction at the same time
• a phenomenon where a large # of people and companies exchange domestic currencies for a foreign currency

1. monitoring the global economy
2. providing technical assistance to developing countries
3. lending 

a foreign exchange transaction in which people by and sell currencies now for future delivery, from 30 to 180 days, after the date of the transaction.

primary benefit is to protect traders and investors from exposure to the fluctuations of the spot rate, an act known as currency hedging.

ex. if the forward rate of the euro per dollar is higher than the spot rate, the euro has a forward discount

forward premium is vice versa

currency swap

bid and offer rate and the spread

foreign exchange transaction between two banks in which one currency is converted into another now, with an agreement to revert it back to the original currency at future time.

• bid: the price offered to buy a currency
• offer: the price offered to sell a currency
• spread: difference "buy low, sell high" to get a profit

financial

-spot transactions

-forward transactions

-currency swap

nonfin

-currency hedging

-strategic hedging

nonfinancial companies

currency hedging and strategic hedging

• agree to exchange your currency for another currency at a given rate over a timespan (Japanese airlines) dangerous if your exchange rate gets higher
• strategic: spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions (currency diversification)

strong vs weak dollar

who benefits

pg 198

strong

• US consumers benefit from low import prices
• US firms that source their parts from abroad
• Foreign debt holders (reduces your debt)

weak helps

• exporters (more people buy your products)
• import-competing industries (US toy makers can compete with CHinese toy makers)
• MNEs repatriating (bringing back) income from abroad because foreign currency is worth more

1. disputes are handled constructively
2. rules make life easier and discrimination impossible for all participating countries
3. free trade and investment raise incomes and stimulate economic growth

General Agreement on Tariffs and Trade

• dropped tariffs considerably
• only focused on merchandise trade and not services trade or intellectual property protection

three rounds of GATT

• Kennedy Round: focused on anti-dumping
• Tokyo Round: limited; tariff reduction but general economic crisis precipitated new protectionism, esp. in agriculture
• Uruguay Round: aimed at transforming GATT into the WTO

• GATT antequated
• trade more complex
• trade in services growing
• FDI growing
• failure to liberalize agriculture and there are now other non-tariff barriers like subsidies

• Agreement establishing the WTO (now had secretariat with offices and workers)
• (Goods) GATT- General Agreement on Tariffs and Trade
• (Services) GATS - General Agreement on Trade in Services
• (Intellectual Property) TRIPS - Trade-related Aspects of Intellectual Property Rights
• Trade dispute settlement mechanisms
• Trade policy reviwes, enabel WTO and other countries to peer review a country's trade policy

5 types of regional economic integration

free trade area

customs union

common market

economic union

monetary union

political union

• Free trade area (FTA)- a group of countries that remove trade barriers among themselves (removal of intragroup tariffs)
• customs union- one step beyond FTA, imposes common external policies on nonparticipating countries (common external tariff)
• common market- combining everything a customs union has, in addition permits free movement of goods and people (free movement of goods, people and capital)
• economic union- all the features of common market also have (common economic policies)
• monetary union- countries use same currency
• political union- integration of political and economic affairs