International Business Chapters 6-9 (Exam 2) Flashcards
(134 cards)
1
Q
Risk in Brazil’s Political and Legal Systems
A
Odebrecht- Petrobras
Paying Bribe’s
Government officials’ involvement
Corruption
2
Q
Which Risk of International Business are we on
A
Country risk
3
Q
Country risk (political risk)
A
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environment
-Each country has unique political and legal systems that pose challenges for company performance
Ex: Recycling in Germany
4
Q
Which systems does country risk source from (2)
A
Political and legal systems
-country risk is always present but nature and intensity vary over time and from country to country
5
Q
Political System
A
Government
political parties
legislative bodies
lobbying groups
trade unions
other political institutions
6
Q
Legal system
A
Laws, regulations, and rules that aim to:
ensure order in commercial activities
resolve disputes
protect intellectual property
tax economic output
7
Q
Unique to a country
A
grounded in the particular historical, economic, and cultural contexts
8
Q
Political systems:
A
provide protection from external threats
establish stability (laws)
govern the allocation of valued resources
define how a society’s members interact
9
Q
Political system
A
A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other
10
Q
Three major types of political systems
A
- totalitarianism (authoritarianism)
- socialism
- Democracy
These are NOT mutually exclusive (they can happen at the same time)
11
Q
totalitarianism
A
NORTH KOREA, IRAN
-government control all economic and political matters
-either theocratic (religion based) or secular
-state party led by a dictator
-membership is mandatory
-power is sustained via secret police, propaganda, and regulation of free trade discussion and criticism
12
Q
Socialism
A
-Capital ($) is invested in the state and used as a means of production versus profit
-Group welfare outweighs individual welfare
- Government role is to control production, distribution, and commercial activity
-today seen in social democracy
13
Q
Democracy
A
-economic activity occurs freely, as per market forces
-Limited government
-Private property rights
-openness
14
Q
Limited government
A
The government performs only essential functions that serve all citizens, such as national defense, maintaining law and order, foreign relations, and providing basic infrastructure
15
Q
Private property rights
A
The ability to own property and assets and to increase one’s asset base by accumulating private wealth. Property includes land, buildings, stocks, contracts, patents. Encourages initiative, ambition, and innovation.
16
Q
Openness
A
Lack of regulation and barriers to entry (inequities)
17
Q
Political and economic systems
A
totalitarianism=command economies
democracy=market economies
socialism=mixed economies
18
Q
command economies
A
the state makes all decisions on what to produce, how much to produce, and what prices to charge
-lower living standards, bureaucratic system, weaker legal system, and more gov’t interactions
19
Q
Market economies
A
capitalism, decisions are largely left to market forces, that is, supply and demand
-higher living standards, more liberalized markets, more free trade, open barriers, more developed legal systems
20
Q
mixed economies
A
features of both market and command economies, combining state intervention with market mechanisms (Sweden, Singapore, etc.)
21
Q
Rule of law
A
Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government
(not with totalitarianism)
22
Q
The legal system is:
A
applied to citizens equally
Issued via recognized government authorities
Enforced fairly and systematically by police forced and formally organized judicial bodies
(economic activity suffers and uncertainty increases when the rule of law is weak)
23
Q
Four types of legal systems
A
1.common law
2. civil law
3. religious law
4. mixed system
24
Q
common law
A
-originated in England
-basis of law is tradition, past practices, and legal precedents set by courts via interpretation of statutes, legislations, and past rulings
-judges interpret laws based on circumstances of individual cases
-relatively flexible
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Civil law
-Found in France, Germany, Italy, Japan, and much of Latin America
-based on an all-inclusive system that have been "codified"-written by legislative bodies
-laws are more "cast in stone" and less subject to interpretation by courts
- Based on laws passe by national and state legislatures
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Religious law
-Found in Hindu, Jewish, and Islami Law
-Strongly influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being
-Islamic law spells out norms of behavior regarding politics, economies, banking, contracts, marriage, and other areas
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Mixed system
-Found in Lebanon, Morocco, and Tunisia (civil and Islamic law)
-Two or more legal systems operating together
-contrast between civil and common law has become blurred as countries combine both systems
-totalitarianism is most associated with religious and socialistic law
-democracy associated with common, civil, and mixed systems
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Participants in political and legal systems
-the GOVERNMENT or "public sector" operating at national and local levels
-INTERNATIONAL ORGANIZATIONS such as the world bank, world trade organization, and the united nations
-REGIONAL ECONOMIC BLOCS such as the European union, Nafta and many others
-SPECIAL INTEREST GROUPS such as labor unions and environmental advocates
-local competing FIRMS, which oppose foreign firms
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Country risk produced by political systems
1.government takeover of corporate assets
2. embargoes and sanctions3.boycotts against firms or nations
3. terrorism
4.War, insurrection, and violence
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Government takeover of corporate assets
Confiscation
Expropriation
Nationalization
Creeping expropriation
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confiscation
takes over business
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expropriation
takes over but gives compensation
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nationalization
whole industry is taken over
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creeping expropriation
squeezing you out of business slowly
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sanctions
ban on exports and imports from a country or restrict it
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Country risk produced by legal systems
1. Risks arriving from HOST-country legal environment
2. Risks arriving from HOME-country legal environment
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Risks arising from HOST-country legal environment
-foreign investment laws (find a local partner)
-Controls on operations and practices
-Marketing and distribution laws
-Income repatriation (transfer of funds back home is hard)
-environmental laws
-contract laws
-Internet and e-commerce regulations
-inadequate or underdeveloped legal systems
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Risks arriving from HOME-country legal environment
Extraterritoriality
the foreign corrupt practices act
accounting and reporting laws
transparency in financial reporting
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Extraterritoriality
the application of home-country laws to other countries. For example, the EU pursued Microsoft for monopolistic practices
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The foreign corrupt practice act (1966; US)
made it illegal to offer bribes to foreign parties. But the act may harm US firms because foreign competitors are usually not so constrained
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Managing country risk
1. proactive environmental scanning
2. strict adherence to ethical standards
3. alliances with qualified local partners
4. protection through legal contracts
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proactive environmental scanning
Management should develop a comprehensive understanding of the political and legal environment in target countries. Scanning- ongoing assessment of potential risks and threats to the firm, via intelligence sources such as:
-employees working in the host country
-embassy and trade association officials
-consulting firms, such as BERI
-minimize exposure to country risks
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Strict adherence to ethical standards
Firms that engage in questionable practices or operate outside the law invite redress from the governments of the host countries where they do business
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alliances with qualified local partners
for example, firms often enter China and Russia by partnering with local firms who assist in navigating the complex legal and political landscape
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protection through legal contracts
contract law varies widely, the firm must follow the law in each country
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Government Intervention
-governments intervene in trade and investment to achieve political, social, or economic objectives
-Governments impose trade and investment barriers that benefit interest groups, such as domestic firms, industries, and labor unions
-Government intervention alters the competitive landscape, by hindering or helping the ability of firms to compete internationally
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Protectionism
National economic policies that restrict free trade. Usually intended to raise revenue or protect domestic industries from foreign competition
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customs
the checkpoint at national ports of entry where officials inspect imported goods and levy tariffs
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Instruments of government intervention
-tariff
-nontariff trade barrier
-quota
-investment barriers
-subsidies
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Tariff
A tax on imports (citrus, textiles, etc.)
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Nontariff trade barrier
government policy, regulation, or procedure that impedes trade
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Quota
quantitative restriction on imports of a specific product (imports on Japanese Cars)
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Investment Barriers
Rules or laws that hinder foreign direct investment (Mexico's restriction in its oil industry)
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Subsidies
monetary or other resources that a gov't grants to a firm(s) intended to either encourage exports or facilitate lower operational costs
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Consequences of protectionism
-reduced supply of goods to buyers (leads to:)
-price inflation
-reduced variety, fewer choices available to buyers
-reduced industrial competitiveness
-various adverse unintended consequences (while the home country dithers, other countries can race ahead)
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Why do governments intervene?
-tariffs can generate substantial GOVERNMENT REVENUE. this is a key rationale for protectionism in underdeveloped economies
-helps ensure the SAFETY, SECURITY, AND WELFARE OF CITIZENS. (ex: most countries have basic regulations to protect the national food supply-want their own)
-helps the government pursue broad economic, political, and social objectives for the nation (no trade deficit)
-can serve the interests of the nations firms and industries
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Defensive rationale
-protection of the national economy
-protection of an infant industry
-national security (basically no bombs)
-national culture and identity (no buy empire state building or Swiss watches)
Trade barriers
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Offensive rational
-National strategic priorities (growing own food)
-increase employment
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Protectionist tendencies
The great depression, and isolationism shaped early 20th century world trade
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The Smoot-Hawley Act (1937)
raised US tariffs to more than 50% (compared to only 3% today)
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After WW2
Progressive trade policies reduced tariffs
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General Agreement on Tariffs and Trade (GATT)
-reduced tariffs via continuous worldwide trade negotiations
-created an agency to supervise world trade
-create a forum for resolving trade disputes
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GATT
-the Gatt introduce the concept of most favored nation (renamed normal trade relations), according to which each member nation agreed to extend the tariff reductions covered in trade agreements with one country to all other countries. A concession to one became a concession to all
-in 1995 the GATT was superseded by the World Trade Organization (WTO) and grew to include 150 member nations
- The GATT and WTO presided over the greatest global decline in trade barriers in history
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How firms can respond to government intervention
-research to gather knowledge and intelligence
-choose the most appropriate entry strategies
-take advantage of free trade zones
-seek favorable customs classifications for exported products
-take advantage of investment incentives and other government support programs
-Lobby for freer trade and investment
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Regional economic integration
The growing economic interdependence that results when nations within a geographic region form an alliance aimed at reducing barriers to trade an investment
- over 50 percent of world trade today occurs under some form of preferential trade agreements signed by groups of countries
-cooperation within bloc brings:
-increased product choices, productivity, living standards
-lower prices
-more efficient resource use
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free trade area
simplest, most common arrangement. Member countries agree to gradually eliminate formal trade barriers within the bloc, while each member maintains an independent international trade policy with countries outside the bloc (one example is NAFTA)
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Customs union
Similar to a free trade area except the members harmonize their trade policies toward nonmember countries, by enacting common tariff and nontariff barriers on imports from nonmember countries. (EX: MERCOSUR)
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Common Market
like a customs union, except products, services, and factors of production such as capital, labor, and technology can move freely among the member countries (EX:EU countries put in place many common labor and economic policies)
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Levels of regional integration
common market
economic union
free trade area
customs union
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Economic Union
Like a common market, but members also aim for a common fiscal and monetary policies, and standardized commercial regulations. The EU is moving toward an economic union by forming a monetary union with a single currency, the euro.
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Advantages of regional integration
Expand market size
Achieve scale economies and enhance productivity
attract direct investment from outside the bloc
acquire stronger defensive and political posture
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Advanced economies
Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure
-typically the richest countries, including Australia, Canada, Japan, United States and Nations of Western Europe
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Developing Economies
Low-income countries characterized by limited industrialization and stagnant economies (Bangladesh, Bolivia, etc.)
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Emerging Market Economies
Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth (Indonesia, Mexico, Poland, Turkey)
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Key differences among the Three major country groups
...
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Talk about the speaker we had
...
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EMERGING MARKET ECONOMIES
-about 30 countries with rising economic aspirations that enjoy rapidly growing standards of living
-evolving towards wealthy nation status
-Importance in the World economy is increasing as attractive destinations for exports, FDI, and sourcing
-Ex: Hong Kong, Israel, Singapore, etc.
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Transition Economies
A subset of emerging markets that evolved from centrally (socialist or communist) planned economies into liberalized markets
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Privatization
Transfer of state owned industries to private concerns
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new global challengers
leading firms from emerging markets that are fast becoming key contenders in world markets
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What makes emerging markets attractive
Emerging markets as target markets
Emerging markets as manufacturing bases
emerging markets as sourcing destinations
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Emerging markets as target markets
-many have huge middle classes, with significant income for buying electronics, cars, health care services, and countless other products
-many exhibit high growth rates
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Emerging markets as Manufacturing Bases
home to low-wage, high-quality labor for manufacturing and assembly operations
-large reserves of raw materials and natural resources (South Africa, Brazil, Russia)
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Emerging markets as sourcing destinations
Investments from abroad benefit emerging markets as they lead to new jobs and production capacity, transfer of technology and linkages to the global marketplace
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outsourcing
The procurement of selected value-chain activities , including production of intermediate goods or finished products, from independent suppliers
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global sourcing
The procurement of products or services from independent suppliers or company-owned subsidiaries located abroad for consumption in the home country to a third country
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Assessing the potential of emerging markets
-estimations are challenging because of peculiar economic and social environments in these countries
-limited availability and reliability of data
-market research can be very costly and less precise, as compared to the advanced economies
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Market potential indicators include
-GDP growth rate
-income to distribution
-Commercial infrastructure
-unemployment rate
-consumer expenditures for discretionary items (disposable income)
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Key Criteria for Assessing market attractiveness of emerging markets
Market size- the country's population, especially those living in urban areas
Market Growth Rate- the country's real GDP growth rate
Market Consumption Capacity- Income of the middle class
Commercial Infrastructure -Density of telephone lines, number of personal computers, density of paved roads, population per retail outlet, and other such characteristics
Economic freedom- the degree to which government intervenes in business activities
Country Risk- degree of political and macroeconomic risk
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Challenges of doing business in emerging markets
-political instability
-weak intellectual property protection
-bureaucracy, red tape, and lack of transparency
-poor physical infrastructure
-partner availability and qualifications
-resistance from family conglomerates
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Strategies for doing business in emerging markets
-customize offerings to unique emerging market needs
-partner with family conglomerates
-target governments/ state enterprises who may be buyers
-skillfully challenge emerging market competitors
-low-cost labor, skilled workforce, government support, and family conglomerates give emerging market firms various advantages- FOREIGN FIRMS NEED TO... conduct research, acquire new capabilities to build CA, and leverage the same advantages of local firms
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Corporate social responsibility, sustainability, and poverty
Corporate social responsibility: Operating a business to met or exceed the ethical, legal, commercial, and public expectations of customers, shareholders, and employees, and communities
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The sustainable firms pursue three types of interests:
1. economic interests refer to the firms economic impact on the localities where it does business, such as regarding job creation, wages, and public works
2. Social interests refer to how the firm performs relative to social justice, such as avoiding the use of child labor, sweatshops, as well as providing employee benefits
3. environmental interests refer to the extent of the firm's impact and harm to the natural environment
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Foreign firms fostering local economic development
-walmart and home depot have created new, cost-effect distribution channels in Mexico
- unilever and P&G sell shampoo in India for less than 2 cents per mini-sachet
-cemex provides low-cost buildings to millions of poor people
-Etc.
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Microfinancing to aid entreprenuership
microfinancing provides small scale financial services
-microcredit, microloans
-loans> $100
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Exchange rates and currencies
-more than 170 currencies in use worldwide
-most currencies are not very convertible, the dollar, yen, pound, euro are hard currencies- universally accepted and preferred in international transactions
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Exchange rate
price of one currency in terms of another
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Exchange rates affect the fortunes of the firm in various ways
cost of inputs, sales performance, which market entry strategies to use, etc.
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Exchange rates fluctuate and international managers need to keep the following three items in mind
1. the prices the firm charges can be quoted in the firm's currency or in the currency of each foreign customer
2. Because several months can pass between placement and delivery of an order, fluctuations in the exchange rate during that time can cost or earn the firm money
3.The firm and its customers can use the exchange rate as it stands on the date of each transaction, or they can agree to use a specific exchange rate
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Foreign exchange
All forms of internationally-traded monies including foreign currencies, bank deposits, checks, and electronic transfers
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Foreign exchange MARKET
the global marketplace for buying and selling national currencies
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capital flight
rapid sell off of capital in less valuable currency
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Currency Risk
Exchange rates are in constant flux
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How exchange rates are determined
supply and demand
economic growth
inflation and interest rates
market psychology
government action
-trade surplus
-trade deficit
-devaluation
-BOP
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Supply and demand
-greater the supply, the lower its price
lower the supply, higher its price
greater the demand, higher its price
lower the demand, lower its price
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Economic growth
Increase in the value of goods and services produced by an economy
-measured as the annual increase in real GDP(inflation rate-growth)
-Driven by entrepreneurship and innovation
-central bank-regulates money supply, issues currency, manages exchange rate to foster growth
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Inflation and interest rates
Inflation is the increase in the prices of goods and services
Interest rate is the return on invested money
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Market psychology
refers to investor behavior (herding; momentum trading)
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Government action
governments intervene to influence the value of their currency
(trade surplus-exports>imports
trade deficit-imports>exports
devaluation-reduce currency value
BOP-annual accounting of all economic transactions of a nation)
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The exchange rate system today
Advanced economy currencies float according to market forces, their value determined by supply and demand
-most developing and emerging economies use fixed exchange rate systems
-in fixed regimes the value of a currency is pegged to the value of another, or to a basket of currencies, at a specified rate
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International Monetary and financial systems
International monetary system
Global financial system
Key players:
central banks, firms, commercial banks, IMF and world bank, National stock exchange, and bond markets
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International monetary system
Framework for monetary and foreign exchange activities as to how currencies are traded among nations (rules and procedures)
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Global financial system
Collection of financial institutions that facilitate and regulate the flow of investment and capital funds worldwide (banks, national stock markets, etc.)
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Three types of currency exposure
Currency risk concern exchange rate fluctuations that harm business profits
1.transaction exposure
2. translation exposure
3. Economic exposure
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transaction exposure
currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies
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translation exposure
currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm.
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economic exposure
currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.
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Foreign Exchange trading
-A relatively limited number of currencies facilitate cross-border trade and investment, mainly dollars, euros, yen, and pounds.
-The daily volume of global trading in foreign exchange amounts to 5 trillion, which is more than 100 times the daily value of global trade in products and services.
-Large banks are the primary dealers in currency.
-Currency traders are especially active in major financial centers such as London, New York, and Tokyo. Trading is done increasingly online.
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Spot rate
Exchange rate based on the current rate of exchange.
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forward rate
Exchange rate applicable at some future date, but specified at time of the transaction.
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direct quote
the number of units of the domestic currency needed to acquire one unit of the foreign currency. For example, “it costs $1.42 to acquire one euro.”
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indirect quote
the number of units of the foreign currency obtained for one unit of the domestic currency. For example, “for $1, I can receive 0.74 euros.”
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Types of currency traders
hedgers
speculators
arbitragers
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hedgers
seek to minimize the risk of exchange rate fluctuations, often by buying forwards or similar financial instruments. They include MNEs who conduct international trade.
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speculators
are currency traders who seek profits by investing in currencies with the expectation that they will rise in value.
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arbitragers
are currency traders who buy and sell the same currency in two or more foreign-exchange markets to profit from differences in the currency’s exchange rate, for the sake of generating profits.
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Exchange rates forecasting
Exchange rates typically respond rapidly to economic information, such as election of a new government, labor disputes, and major supply shocks (as when oil-exporting countries announce a drop in supply).
Managers seek to forecast exchange rates to protect against currency risk.
Firms with extensive international operations develop in-house forecasting capabilities. Other firms rely on reports provided by major banks and professional forecasters.
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Management of currency risk through hedging
Hedging refers to efforts to compensate for a possible loss from a bet or investment by making offsetting bets or investments. In international business, it refers to using financial instruments and other measures to reduce or eliminate exposure to currency risk.
If the hedge is perfect, the firm is protected against the risk of adverse changes in the price of a currency.
Banks offer various financial instruments - forward contracts, options, and swap agreements - to facilitate hedging.
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Hedging instruments
Forward contract
futures contract
currency option
currency swap
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forward contract
A financial instrument to buy or sell a currency at an agreed-upon exchange rate at the initiation of the contract for future delivery.
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futures contract
An agreement to buy or sell a currency in exchange for another at a pre-specified price and on a pre-specified date.
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currency option
Gives the purchaser the right, but not the obligation, to buy a certain amount of foreign currency at a set exchange rate within a specified amount of time.
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currency swap
The exchange of one currency for another currency, according to a specified schedule.
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managerial guidelines for minimizing currency risk
1.Seek expert advice
2.Centralize currency management within the M N E
3.Decide on the level of risk the firm can tolerate
4.Devise a system to measure exchange-rate movements and currency risk
5.Monitor changes in key currencies
6.Be wary of unstable currencies or those subject to exchange controls
7.Monitor long-term economic and regulatory trends
8.Distinguish economic exposure from transaction and translation exposures
9.Emphasize flexibility in international operations
