Reading Flashcards
(240 cards)
1
Q
Why Trade?
A
Nations trade in order to exchange valuable, unique, hard-to-imitate resources and to share in the gains from trade. Countries gain from trade by exploiting their comparative advantages in the production of particular goods and services. in order to achieve some benefit for their citizens, such as a higher per capita standard of living. The foreign exchange market is necessary because there are two prices in international trade: the domestic price of the goods and the price of that currency in terms of the currency of the trading partner.
2
Q
Why Supply and Demand?
A
Economists use the forces of supply and demand to analyze equilibrium prices and quantities.
3
Q
wholly owned subsidiary (WOS)
A
A subsidiary located in a foreign country that is entirely owned by the parent multinational.
4
Q
What fundamental aspect of democracy is relevant to the conduct of global business?
A
- An individual?s right to freedom of expression and organization.
- Right to organize economically has not only been extended to domestic individuals to firms, but also to foreign individuals and firms that come to do business.
5
Q
What does International trade involve?
A
Currencies from around the globe. Managers must understand foreign exchange and exchange rates in order to profit from and manage international trade.
6
Q
What determines the success and failure of firms around the globe?
A
- An institution-based /Environment view (shed a great deal of light on what drives firm performance around the globe); and
- Resource-based view (Firm?s internal valuable and unique firm-specific resources and capabilities that are not shared by competitors in the same environments.
7
Q
What are Formal Institutions?
A
Formal institutions include laws, regulations, and political and legal systems. Institutions set the ?rules of the game? for competition and international trade.
8
Q
Washington Consensus
A
A view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making, which is often spearheaded by two Washington-based international organizations: the International Monetary Fund and the
9
Q
vertical FDI
A
A type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country.
10
Q
upstream vertical FDI
A
A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.
11
Q
turnkey projects
A
A project in which clients pay contractors to design and construct new facilities and train personnel.
12
Q
Turnkey project
A
A project in which clients pay contractors to design and construct new facilities and train personnel.
13
Q
TRIPS
A
- Adopting the Paris Convention is required in order to become a signatory country to the WTO?s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
- Once countries join TRIPS, firms are often forced to pay more attention to innovation.
- Given the global differences in the formal rules, much stricter IP rights protection is provided by TRIPS.
14
Q
Tribal
A
One tribe or ethnic group (which may or may not be the majority of the population) monopolizing political power and oppressing other tribes or ethnic groups. (e.g. Rwanda)
15
Q
Transaction Costs
A
- The costs associated with economic transactions or, more broadly, the costs of doing business
- Transaction costs = ?the economic counterpart of frictions: ?Do the gears mesh, are the parts lubricated, is there needless slippage or other loss of energy?? Do the parties to exchange operate harmoniously, or are there frequent misunderstandings and conflicts?? (Oliver Williamson (2009 Nobel Prize in economics)
- If Transaction costs become prohibitively high due to unstable institutional frameworks, certain transactions will not take place. (e.g. No credible institutional frameworks that protect investors, domestic investors puts their money abroad (e.g. Africa, Russia))
16
Q
Trademarks
A
Exclusive legal right of firms to use specific names, brands, and designs to differentiate their products from others.
17
Q
Trade Gains
A
arise for a variety of reasons. Theories of international trade include mercantilism, absolute advantage, comparative advantage, product lifecycle, strategic trade, and national competitive advantage
18
Q
Totalitarianism (dictatorship)
A
A political system in which one person or party exercises absolute political control over the population.
19
Q
Totalitarianism
A
- Opposite of Democracy (no right to economic expression)
- A political system in which one person or party exercises absolute political control over the population. (also known as dictatorship)
- Four Types: Communist, Right Wing, Theocratic, and Tribal.
- High Political Risk: Totalitarian countries often experience wars, riots, protests, chaos, and breakdowns.
- Hostility towards business. Not as good for business as a democracy.
20
Q
Three Views of Globalization
A
- A new phenomenon beginning in the late 20th century, driven by recent technological innovations and a Western ideology focused on exploiting and dominating the world through MNEs.
- Globalization has always been part and parcel of human history.
- ?closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.
21
Q
Three Pillars Support Formal and Informal Institutions
A
- Regulatory
- normative, and
- cognitive pillars.
22
Q
Theories that drives economic development in different countries?
A
- Culture
- Geography
- Institutions
23
Q
Theocratic Legal System
A
- A legal system based on religious teachings.
- Islamic law is the only surviving example of a theocratic legal system that is formally practiced by some governments (e.g. Iran and Saudi Arabia).
- Myth: Islam is anti-business
- Mohammed was a merchant trader and the tenants of Islam are pro-business in general.
- Koran advises against certain business practices which increases the property, overhead, and personnel costs.
24
Q
theocratic law
A
A legal system based on religious teachings.
25
Theocratic
Monopolization of political power in the hands of one religious party or group. (e.g. Iran)
26
The Pendulum View on Globalization
1. The view that globalization has both rosy and dark sides, and it changes over time World War II major western countries committed to global trade and investment.
2. 1950-1970: Communist countries sought to develop self sufficiency. Other countries refused global trade and investment and fostered and protected domestic industries that weren?t competitive. Four tigers moved from emerging to developed.
3. 1970-2000: China, Latin America, India joined the world economy (?emerging economies.?)
4. 2000-Present: Backlash, 2008 global economic crisis, PIGS crisis, Protectionism (e.g. Buy American, hire locals)
27
technology spillovers
Technology diffused from foreign firms to domestic firms
28
Technology spillover
Technology diffused from foreign firms to domestic firms.
29
Target exchange rates (crawling bands)
Specified upper or lower bounds within which an exchange rate is allowed to fluctuate.
30
target exchange rates
Specified upper or lower bounds within which an exchange rate is allowed to fluctuate.
31
sunk costs
Cost that a firm has to endure even when its investment turns out to be unsatisfactory
32
Sunk cost
Cost that a firm has to endure even when its investment turns out to be unsatisfactory.
33
Strategic hedging
Spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions.
34
Statute Of Monopolies
1. Enacted in Great Britain in 1624
2. World?s first patent law to formally protect the IP rights of inventors and make innovation financially lucrative.
3. This law has been imitated around the world.
4. Its impact is still felt today, as we now expect continuous innovation to be the norm.
5. This would not have happened had there not been a system of strong protection of IP rights.
35
State owned Enterprises (SOE):
1. A firm owned and controlled by the state (government).
2. At least 10% owned by the state.
3. 2008 Crisis most governments in developed economies took similar action by bailing out their banks and turning them into SOEs. (e.g. Hong Kong)
36
spread
The difference between the offer price and the bid price.
37
Spot transactions
The classic single-shot exchange of one currency for another.
38
Spot transaction
The classic single-shot exchange of one currency for another.
39
SOX law
1. The Sarbanes-Oxley (SOX) law
2. Prevent Enron-style frauds
3. Makes it hard to list shares on US stock exchanges.
4. Result: US firms increasingly list elsewhere or go private, foreign firms shy away from US listings and US share of global initial public offerings (IPOs) dropped from 67% in 2002 (when SOX passed) to 16% in 2011.
40
sovereign wealth funds (SWFs)
A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets
41
Semi-Globalization
1. Do not have a globally integrated market.
2. A perspective that suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely.
3. More complex than extremes of total isolation and total globalization.
4. Calls for different ways to doing business.
5. In Total isolation on a nation-state basis would suggest localization-a strategy of treating each country as a unique market. (e.g. 100 different drinks)
6. In Total Globalization , would lead to standardization-a strategy of treating the entire world as one market. (e.g. world car)
42
scale of entry
The amount of resources committed to entering a foreign market.
43
Risk Management
1. The identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events. -the identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events.
2. A technique to prepare and plan for multiple scenarios (either high or low risk). is now extensively used by firms around the world.
44
Right-wing
1. Intense hatred against communism (e.g. Phillipines)
2. One party, typically backed by the military, restricts political freedom, arguing that such freedom would lead to communism.
45
Reverse innovation (Emerging Economies)
1. An innovation that is adopted first in emerging economies and is then diffused around the world.
2. The origin of new innovations is from the base of the pyramid.
3. The flow of innovation is bottom up. Potential to penetrate to the top.
4. Past: Innovation flow is top down from Triad (US, EU, JPN)
46
Resource Based View
How winning firms acquire and develop such unique and enviable resources and capabilities and how competitor firms imitate and then innovate in an effort to outcompete the winning firms.
47
Research and development (R&D) contracts
Outsourcing agreement in R&D
| between firms.
48
Regulatory Pillar
a. Primary supportive pillar
b. Represented by laws, regulations, and rules.
c. The coercive power of Governments
d. For example, paying taxes out of fear of the coercive power of the government if they are caught not paying.
49
Reason for Difference between PPP and GDP
Because the cost of living (such as housing and haircuts) in emerging economies tends to be lower than that in developed economies.
50
radical view
A political view that is hostile to FDI.
51
R&D contract
Outsourcing agreement in R&D
| between firms.
52
quota
The weight a member country carries within the IMF, which determines the amount of its financial contribution (technically known as its ?subscription?), its capacity to borrow from the IMF,
and its voting power.
53
Pure Market System
1. An economy that is characterized by the ?invisible hand? of market forces. (Adam Smith)
2. Laissez Faire: The government takes a hands-off approach
3. All factors of production should be privately owned.
4. The government should only perform functions that the private sector cannot perform (such as providing roads and defense).
No country has ever completely embraced Adam Smith?s ideal laissez faire.
54
Pure Command System
1. An economy that has elements of both a market economy and a command economy.
2. Relative distribution of market forces versus command forces.
3. The economic system of most countries
4. A country that organizes its economy mostly (but not completely) by market forces and that still has certain elements of a command economy.
5. ?Market economy,? has a different meaning in each country (Variety of capitalism)
55
Purchasing power parity (PPP)
1. A conversion that determines the equivalent amount of goods and services that different currencies can purchase, which is an adjustment to reflect the differences in cost of living
2. Using official (nominal) exchange rates without adjusting for PPP, emerging economies contribute about 26% of the global GDP.
3. The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country?s currency will purchase the same volume of goods and services in the second country.
56
Proponents of Globalization
1. Elite of Society (executives, policy makers, and scholars in both developed and emerging economies. Institutions are controlled by the Elites.)
2. Failed to take into sufficient account the social, political, and environmental costs associated with globalization.
3. Does not mean that most other members of the society share the same views.
4. Business Students (economic gains, self-selection, free trade)
57
Property Rights
1. The legal right to use an economic property (resource) and to derive income and benefits from it.
2. Focuses on the role played by formal institutions, particularly the protection of property rights afforded by a functioning legal system.
3. Examples of property include homes, offices, and factories.
4. Because of the stability and predictability of such a legal system, tangible property can lead to an invisible, parallel life alongside its material existence.
5. It can be used as collateral for credit. For example, the single most important source of funds for new start-ups in the United States is the mortgage of entrepreneurs? houses.
6. Funds through informal means (e.g. parents) are almost certainly more limited than funds that could have been provided formally by banks.
7. To develop and facilitate economic growth, a country needs is formal protection of property rights in order to facilitate economic growth. (e.g. Africa)
58
Profit maximizing Firms
make production and pricing decisions based on their costs of production. It is important to understand the types of costs in order to analyze firm behavior and market outcomes. Economists take opportunity costs into account when calculating economic profit. Firms in competitive markets produce a quantity of output such that marginal revenue equals marginal cost. Because firms in competitive markets are price takers, their marginal revenue equals the market price. Hence, firms in competitive markets set output so that price equals marginal cost. With free entry and exit, economic profit in competitive markets is driven down to zero in the long-run. Unlike firms in competitive markets, monopolists are sole producers. In comparison to firms in competitive markets, monopolists produce less, sell at a higher price, and earn greater profits. There is a deadweight loss to society associated with monopolies.
59
pragmatic nationalism
A political view that only approves FDI
| when its benefits outweigh its costs.
60
post-Bretton Woods system
A system of flexible exchange rate regimes with no official common denominator.
61
political system
The rules of the game on how a country is governed politically
62
Political Risk
1. Risk associated with political changes that may negatively impact domestic and foreign firms.
2. Most Extreme is Expropriation of Foreign assets.
63
Political and Economic Forces
A global business must deal with a range of political systems and maneuver successfully among a network of economic forces and policies. Just like having two differing prices in international trade, there are political systems that differ to varying degrees (e.g., running the gamut from various forms of socialism to free-market capitalism). Success in this environment requires the knowledge and use of such tools as hedging techniques as reflected in financial markets highlighted by foreign exchange forward, futures, and options markets.
64
Piracy
1. Unauthorized use of intellectual property
2. Widespread, ranging from unauthorized sharing of music files to deliberate counterfeiting of branded products.
3. Global problem.
65
peg
A stabilizing policy of linking a developing country?s currency to a key currency.
66
Patents
Exclusive legal right of inventors of new products or processes to derive income from such inventions. are legal rights awarded by government authorities to inventors of new products or processes, who are given exclusive (monopoly) rights to derive income from such inventions through activities such as manufacturing, licensing, or selling.
67
Patents
Exclusive legal right of inventors of new products or pro- cesses to derive income from such inventions.
68
Patent
Exclusive legal right of inventors of new products or processes to derive income from such inventions.
69
Paris Convention
For the Protection of Industrial Property is the ?gold standard? for a higher level of IP rights protection.
70
ownership
An MNE?s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI.
71
opportunism
The act of seeking self-interest with guile.
72
oligopoly
Industry dominated by a small number of players.
73
Oligopolies
markets with only a few sellers. Oligopolists can maximize their profits by forming a cartel and setting price and quantity as if they were a monopolist. However, the Prisoners? Dilemma tells us that it is difficult to maintain cooperation in cartels. Hence, oligopolies tend to have lower prices and higher levels of output than monopolies.
74
OLI advantages
A firm?s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI.
75
offer rate
The price to sell a currency.
76
obsolescing bargain
The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.
77
norms
Values, beliefs, and actions of relevant players that influence the focal individuals and firms.
78
Normative Pillar
1. Informal Institution
2. The mechanism through which norms influence individual and firm behavior.
3. How the values, beliefs, and actions of other relevant players influence the focal individuals and firms.
4. Rushing into China, imitating other companies, without a clear understanding on how to make it work.
79
Nongovernmental organizations (NGOs)
1. An organization that is not affiliated with governments. such as environmentalists, human rights activists, and consumer groups., who oppose globalization
2. Focus: Firms, especially MNEs, should have a broader concern for the various stakeholders affected by the MNEs? actions around the world.
3. Feel powerless. Resort to unconventional tactics (e.g. mass protests)
4. Ignoring them will be a grave failure when doing business around the globe.
5. Many MNE firms view them as partners.
80
Non-equity modes
A new corporate entity created and jointly owned by two or more parent companies.
81
Non-equity mode
A mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets.
82
Multinational Enterprise (MNE)
1. Most frequently discussed foreign entrant
2. A firm that engages in foreign direct investment (FDI).
3. Engages in both Foreign and domestic (e.g. compete/collaborate with foreign entrants.)
4. Focus primarily on top and second tiers on the pyramid and countries whose income levels are rising.
83
moral hazard
Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions.
84
Monopolistically competitive markets
consist of many firms selling differentiated products with free entry. Firms in monopolistically competitive markets set output so that they have excess capacity and price above their marginal costs. There is a deadweight loss to society associated with monopolistic competition, although it is smaller than the deadweight loss associated with monopoly.
85
modes of entry
Method used to enter a foreign market.
86
Mixed Market System
1. An economy that has elements of both a market economy and a command economy.
2. Relative distribution of market forces versus command forces.
3. The economic system of most countries
4. A country that organizes its economy mostly (but not completely) by market forces and that still has certain elements of a command economy.
5. ?Market economy,? has a different meaning in each country (Variety of capitalism)
87
mixed economy
An economy that has elements of both a market economy and a command economy.
88
Microeconomics
concerned with how individuals and firms make decisions. In microeconomics, supply and demand combine to determine equilibrium quantities and prices. The study of microeconomics focuses on the laws of supply and demand, elasticity, and the effect of government interventions. According to the laws of supply and demand, when prices increase, quantity supplied will go up whereas quantity demanded will go down.
89
market imperfections (market failure)
The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes
make transactions unable to take place.
90
Market imperfection (market failure)
The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes
make transactions unable to take place.
91
market economy
An economy that is characterized by the ?invisible hand? of market forces.
92
management control rights
The rights to appoint key managers and establish control mechanisms.
93
Macroeconomics
involves the study of how the economy works as a whole. In macroeconomics, fiscal and monetary policies combine to affect business cycles, aggregate demand, inflation, and unemployment. Macroeconomics is concerned with the functioning of the economy as a whole.
94
Macroeconomic Principles
Fiscal and monetary policies are the key tools used to offset swings in the business cycle. Fiscal policies are implemented by the government through spending and taxes. Monetary policies are implemented by the Federal Reserve primarily through open market operations, reserve ratios, and the discount rate. Policy makers intervene in the economy to correct downturns in the business cycle and control aggregate demand, inflation, and unemployment.
95
location-specific advantages
The benefits a firm reaps from the features specific to a place.
96
Location
Advantages enjoyed by firms operating in a certain location.
97
LLL advantages
A firm?s quest for linkage (L) advantages, leverage (L) advantages, and learning (L) advantages. These advantages are typically associated with multinationals from emerging economies.
98
liability of foreignness
The inherent disadvantage that foreign firms experience in host countries because of their non-native status
99
Legal Systems (Formal Institution)
1. An important component of the first, regulatory pillar.
2. Crucial component of the institutional framework.
3. The rules of the game on how a country?s laws are enacted and enforced.
4. Impacts property rights and intellectual property
5. Reduces transaction costs by minimizing uncertainty and combating opportunism, by imposing the do?s and don?ts on businesses around the globe.
6. Three Legal Traditions: Civil, Common and Theocratic Law.
7. Laws in different countries typically are not enacted from scratch.
8. Often transplanted-voluntarily or otherwise-from three legal traditions (or legal families)
100
legal system
The rules of the game on how a country?s laws are enacted and enforced.
101
late-mover advantages
Benefits that accrue to firms that enter the market later and that early entrants do not enjoy.
102
Knowledge spillovers
Knowledge diffused from one firm to others among closely located firms.
103
Knowledge spillover
Knowledge diffused from one firm to others among closely located firms.
104
joint venture (JV)
A mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets
105
Is a democracy conducive to economic growth? (Pros)
1. No serious case for totalitarianism to facilitate economic development.
2. ?Benign? totalitarian regimes that delivered strong economic growth, , have become democracies in the last two decades (e.g. South Korea)
3. Democracy has spread around the world (from 69 countries in the 1980s to 117 in the 2000s).
4. Only Superpower is Democratic.
106
Is a democracy conducive to economic growth? (Cons)
1. The fastest-growing major economy in the last three decades remains totalitarian (China)
2. The growth rate of India, the world?s largest democracy, in the same period is only about half of China?s.
3. Russia grew faster under Putin?s more authoritarian rule during the 2000s compared with the 1990s, when Russia was presumably more democratic under Yeltsin
107
intrafirm trade
International transactions between two subsidiaries in two countries controlled by the same MNE.
108
International Trade
International trade involves the exchange of goods, services, and capital between nations. International trade is influenced by the comparative advantages of nations and limited by the tariffs that countries erect to protect their domestic industries. Countries gain from international trade when they have different relative efficiencies in producing certain goods and services.
109
International Monetary Fund (IMF)
An international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
110
International business (IB):
1. (Traditionally) A business (or firm) that engages in international (crossborder) economic activities and/or
2. Action of doing business abroad
3. IB course is an integrative course. Provides an overall business perspective (rather than a functional view) grounded in a global environment
111
Internalization
The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries.
112
Intellectual Property Rights
1. Rights associated with the ownership of intellectual property. are rights associated with the ownership of intellectual property.
2. They primarily include rights associated with Patents, Copyrights, and Trademarks.
3. The intangible nature of IP rights makes their protection difficult.
4. IP rights need to be asserted and enforced through a formal system, which is designed to provide an incentive for people and firms to innovate and to punish violators.
5. Activities are conducted by ordinary individuals, who have made a rational decision by investing in skills and knowledge in this business. Stronger IP protection may reduce their incentive to do so.
113
Intellectual property (IP) rights
Rights associated with the ownership of intellectual property.
114
Intellectual Property
Intangible property that is the result of intellectual activity (e.g. books, videos, and websites).
115
intellectual property
Intangible property that is the result of intellectual activity.
116
Institutions reduce Political Uncertainty
1. Render long range planning obsolete.
2. Terrorist Attacks
3. Political deadlocks in Washington (reduced AAA rating)
4. Legislation (e.g. Dodd Franks, SOX, and Health Care Reform Act)
117
Institutions Reduce Economic Uncertainty
1. Failure to carry out contractual obligations may result in economic losses (Force Majeur (only on natural disasters) due to 2008 economic crisis.)
2. Result: Uncertainty surrounding economic transactions can lead to transaction costs
118
institutions
Formal and informal rules of the game.
119
Institution-Based View (Two Core Propositions)
1. Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework. (e.g. Brazil and US firm?s migration to escape taxes). Based on Bounded Rationality.
2. While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms
120
institution-based view
A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions.
121
institutional transitions
Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players.
122
Institutional Transition
i. Widespread in the world.
| ii. Create both huge challenges and tremendous opportunities for domestic and international firms.
123
institutional framework
Formal and informal institutions governing individual and firm behavior.
124
institutional framework
Formal and informal institutions governing individual and firm behavior.
125
institutional distance
The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.
126
Institution Based View
1. It is economically advantageous for individuals and firms to grow and specialize in order to capture the gains from trade.
2. A lack of strong formal, market-supporting institutions forces individuals to trade on an informal basis with a small neighboring group and forces firms to remain small, thus foregoing the gains from a sharper division of labor by trading on a large scale with distant partners.
3. Emergence of formal, market-supporting institutions encourages individuals to specialize and firms to grow in size to capture the gains from complicated long-distance trade (such as transactions with distant, foreign countries).
4. When formal, market-supporting institutions protect property rights, they will fuel more innovation, entrepreneurship, and thus economic growth.
5. A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions.
6. Focuses on the dynamic interaction between institutions and firms
7. Considers firm behaviors as the outcome of such an interaction.
8. The skillful use of a country?s institutional frameworks to acquire advantage
9. Drives Economic Development
127
Institution
1. ?Humanly devised constraints that structure human interaction"-- Douglass North, Nobel Laureate
2. Key Role: reduce uncertainty by signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions.
3. Types of Uncertainty: Political, Regulatory, and Economic
4. Institutions are not static
5. Rich countries have developed better market-supporting institutional frameworks.
6. ?The basic determinants of the performance of an economy.?
7. Provide the incentive structure of a society, formal political, legal, and economic systems have a significant impact on economic development by affecting the incentives and the costs of doing business.
128
Institutinoal Transition Economies
1. Subset of ?Emerging Economies?
2. Where countries who have Emerging economies are moving from central planning to market competition (e.g. China, Russia)
129
informal institutions
Institutions represented by cultures, ethics, and norms.
130
informal institutions
Institutions represented by cultures, ethics, and norms.
131
Informal Institution
1. Cultures, ethics, and norms.
2. Political marketplace is where firms also compete (e.g. lobbying)
3. If a firm cannot be a market leader, it can beat the competition in the non-market, political environment.
4. Politics determine if there is equal treatment among foreign and domestic firms, which enhances the odds for foreign firms? success (e.g. Hong Kong) or if there are if discriminate against foreign firms and undermine their chances for success (e.g. Pre-1990 India)
5. Example: Bank of America (bought Merrill lynch through US Govt Support) vs. Lehman Bros (No US Support)
132
Informal Constraints
1. If Formal constraints are unclear or fail, informal constraints Play a larger role in reducing uncertainty and providing constancy to managers and firms.
2. Based on personal relationships and connections among managers and officials.
3. Result: Facilitated growth of many entrepreneurial firms.
4. Example: Russia (blat) has informal but clear rules of engagement for oligarch (e.g avoid politics and pay taxes)
133
Individualistic Society
1. English-speaking countries such as Australia, Britain, and the United States
2. Have a relatively higher level of entrepreneurship as reflected in the number of business start-ups.
3. Because the act of founding a new firm is a widely accepted practice in individualistic societies.
134
How do these three forms of supportive pillars combine to shape individual and firm behavior? Caught Speeding
1. Regulatory: Speed limit formally defines how fast drivers can go.
2. Normative: Many drivers adjust their speed depending on the speed of other vehicles-a form of normative pillar.
3. Cognitive: ?We are barely keeping up with traffic!?
4. This statement indicates that they do not have a clear cognitive pillar regarding what is the right speed
135
How do these three forms of supportive pillars combine to shape individual and firm behavior? 2008 Wall Street Exec Bonuses
1. Regulatory: In 2008, a year during which Wall Street had to be bailed out by trillions of taxpayer dollars, Wall Street executives paid themselves $18 billion in bonuses. These executives did not commit any crime or engage in any wrongdoing in accepting these bonuses.
2. Cognitive: In the minds of these executives they deserved such bonuses.
3. Normative: The resulting public outcry was understandable.
4. The regulatory pillar had little teeth and they failed to read the normative pressure coming from an angry public.
136
How can IP rights be protected when countries have uneven levels of rights enforcement?
1. Paris Convention
| 2. TRIPS
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How can businesses enter into a foreign business?
variety of ways, each with advantages and disadvantages. Key questions include where, when, and how to enter a foreign market. Entry can be accomplished through either equity or non-equity modes such as direct exports, licensing, joint ventures, and acquisitions.
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horizontal FDI
A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country.
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Health care reform law of 2010
Generates 30 minutes of paperwork for every hour spent treating a patient.
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Group of 20 (G-20)
1. The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems. only has 19 member countries.
2. The 20th member is the European Union (EU)-a regional bloc, not a single country
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Gross national product (GNP)
GDP plus income from non-resident sources abroad.
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Gross national income (GNI)
1. New term by the World Bank and other international organizations
2. GNI replaces GNP.
3. No difference between GNI and GNP.
4. GNI = GDP + income from non-resident sources abroad.
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gross domestic product (GDP)
1. The sum of value added by resident firms, households, and governments operating in an economy
2. Measured as the sum of value added by resident firms, households, and governments operating in an economy.
3. For example, the value added by foreign-owned firms operating in Mexico would be counted as part of Mexico?s GDP.
4. However, the earnings of non-resident sources that are sent back to Mexico (such as earnings of Mexicans who do not live and work in Mexico and dividends received by Mexicans who own non-Mexican stocks) are not included in Mexico?s GDP.
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greenfield operations
Building factories and offices from scratch (on a proverbial piece of ?green field? formerly used for agricultural purposes).
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gold standard
A system in which the value of most major currencies was maintained by fixing their prices in terms of gold.
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Globalization
The close integration of countries and peoples of the world. Current era originated after World War II, when major western countries committed to global trade and investment. Acceleration is due to emerging economies.
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Global competitive dynamics
influenced by industry conditions, formal institutions such as anti-trust and anti-dumping regulations, the characteristics of resources and capabilities, and the attacks, counterattacks, and signals available to companies.
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Global business:
1. Both international (cross-border) business and domestic business activities.
2. Important because many previously national (domestic) markets are now globalized.
3. Enhance your employability and advance your career in the global economy ?
4. Better preparation for possible expatriate assignments abroad ?
5. Stronger competence in interacting with foreign suppliers, partners, and competitors and in working for foreign-owned employers in your own country
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Global business
business that is conducted around the world. It is important to study global business in order to understand what determines the success and failure of businesses around the globe. Two core perspectives on global business are the institution-based perspective and the resource-based view.
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free market view
A political view that suggests that FDI unrestricted by government intervention is the best.
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Forward transactions
A foreign exchange transaction in which participants buy and sell currencies now for future delivery.
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Forward transaction
A foreign exchange transaction in which participants buy and sell currencies now for future delivery.
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forward premium
A condition under which the forward rate of one currency relative to
another currency is lower than the spot rate.
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forward discount
A condition under which the forward rate of one currency relative to another currency is higher than the spot rate.
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formal institutions
Institutions represented by laws, regulations, and rules.
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Formal Institution: Political System
1. Outline the differences among civil law, common law, and theocratic law.
2. The rules of the game on how a country is governed politically.
3. Two primary political systems: democracy and totalitarianism.
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Formal Institution
1. They are: Political systems, Legal systems, and Economic systems.
2. Rules of the Game (e.g. conducive to FDI (Hong Kong) vs. Non-Conducive (Pre-1990s India))
3. In developed economies, formal rules only make up a small (although important) part of institutional constraints
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foreign portfolio investment (FPI)
Investment in a portfolio of foreign securities such as stocks and bonds.
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foreign exchange rate
The price of one currency in terms of another.
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foreign exchange market
The market where individuals, firms, governments, and banks buy and sell foreign currencies.
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Foreign Direct Investment ("FDI")
Investment in, controlling, and managing value-added activities in other countries. by directly investing in, controlling, and managing value-added activities in other countries
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Foreign direct investment
refers to the hands-on management of foreign assets. Companies engage in foreign direct investment in order to directly manage, develop, and leverage their firm-specific resources and capabilities. Foreign direct investment has expanded in part because of more friendly norms, policies, and values toward the practice.
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Floating (flexible) exchange rate policy
A government policy to let supply-and- demand conditions determine exchange rates.
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floating
A government policy to let supply-and- demand conditions determine exchange rates.
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fixed rate policy
A government policy to set the exchange rate of a currency relative to other currencies.
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Fixed exchange rate policy
A government policy to set the exchange rate of a currency relative to other currencies.
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first-mover advantages
Benefits that accrue to firms that enter the market first and that late entrants do not enjoy.
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Firm Behaviours
A reflection of the formal and informal constraints of a particular institutional framework
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Firm Behavior Under Different Market Structures
In order to maximize their profits, firms make decisions with respect to equilibrium output and price that differ depending on the structure of the market in which they operate. Market structures include perfectly competitive markets, monopolistic competition, oligopoly, and monopoly.
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Federal Reserve
Changes in the money supply have profound effects on the economy. The Federal Reserve controls the money supply through monetary policy, including open-market operations, reserve ratios, and the discount rate.
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FDI stock
Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years).
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FDI outflow
Outbound FDI moving out of a country in a year.
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FDI inflow
Inbound FDI moving into a country in a year.
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FDI flow
The amount of FDI moving in a given period (usually a year) in a certain direction.
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expropriation
Government?s confiscation of foreign assets.
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expatriate manager
A manager who works abroad to gain global experience
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equity modes
A mode of entry (JV and WOS) that indicates relatively larger, harder-to- reverse commitments to overseas markets.
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Equity mode
A mode of entry (JV and WOS) that indicates relatively larger, harder-to- reverse commitments to overseas markets.
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Equilibrium
At equilibrium in competitive markets, the quantity supplied equals the quantity demanded. An allocation of scarce resources that maximizes the sum of consumer surplus and producer surplus is said to be efficient. Equilibrium outcomes in competitive markets are efficient. Policy makers are concerned with the efficiency as well as the equality of economic systems.
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Enormous Size of MNEs
1. If the largest MNE, Wal-Mart, were an independent country, it would be the 22nd largest economy
2. BP larger than: Norway, Denmark, Greece, and Ireland.
3. Sinopec larger than Malaysia, Singapore, and New Zealand. Today, over 77,000 MNEs control at least 770,000 subsidiaries overseas.
4. Total annual sales for the largest 500 MNEs exceed $20 trillion (about one third of global output).
5. In general, MNEs from the Triad dominate the list.
6. Beijing is now headquarters to 41 Fortune Global 500 firms, more than New York?s 27
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Emerging multinationals
MNEs based in emerging economies. AKA "third World multinationals" or "Dragon Multinationals"
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emerging economies
1. Contribute approximately 45% of the global gross domestic product (GDP).
2. Characterized by a lack of institutional development (development of market-supporting political, legal, and economic institutions) and/or the lack of infrastructure and factor market development.
3. low-cost production locations or attractive new markets.
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Elasticity
indicates the responses of consumers and producers to changes in prices and income. Elasticity describes how people respond to changes in the price of a good, their income, or the price of a related good. Government interventions, including price ceilings and floors, further impact equilibrium quantities and prices. Applied to demand, elasticity describes how the quantity of a good demands changes as its own price changes, the prices of other goods change, or the consumer?s income changes. Elasticity of supply describes how producers respond to changes in the price of a good.
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Economic System
1. Rules of the game on how a country is governed economically.
2. Market, Mixed or Command Economy
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Economic performance
Measured in a variety of ways. Gross domestic product (GDP) is used to indicate the size of the economy while the consumer price index (CPI) is used to measure inflation. These and other macroeconomic measurements are important since they ultimately determine a country?s productivity and standard of living. The availability of loanable funds indicates liquidity in the economy. Economists measure national income primarily by gross domestic product or GDP. GDP is equal to the sum of consumption, investment, government purchases, and net exports (exports minus imports).
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Economic Decision Making by Firms and Consumers
Firms and consumers use marginal analysis to make economic decisions in order to maximize their profit and utility, respectively. Firms consider marginal costs and marginal revenues, whereas consumers consider marginal utility.
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downstream vertical FDI
A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.
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Domestic Price
The effects of trade can be anticipated by comparing the domestic price of a good before trade with the world price. A low domestic price indicates that the country has a comparative advantage in the production of a good. Some sectors will be better off while others will be worse off after opening trade. Tariffs limit trade between countries and raise the prices of goods.
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Dodd-Franks Law
1. Prevent another financial crisis by improving transparency and forbidding banks from taking on excessive risk
2. Two Complaints: Lengthy and Regulations are not clear, since they have not been articulated or are confusing (Causes uncertainty)
3. Result: Additional costs for compliance may threaten jobs.
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Division of Labor (Adam Smith):
It is economically advantageous for individuals and firms to grow and specialize in order to capture the gains from trade.
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dissemination risks
The risk associated with unauthorized diffusion of firm-specific know-how.
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Dissemination risk
The risk associated with unauthorized diffusion of firm-specific know-how.
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Dirty (managed) float
Using selective government intervention to determine exchange rates.
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dirty
Using selective government intervention to determine exchange rates.
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depreciation
A loss in the value of the currency.
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demonstration effect
The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
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Democratic Political System
1. A political system in which citizens elect representatives to govern the country on their behalf.
2. Political party with the majority of votes wins.
3. Political Risk is low compared to totalitarian (e.g. Quebec leaving Canada)
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Democracy
A political system in which citizens elect representatives to govern the country on their behalf.
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currency swap
A foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future.
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currency risks
The potential for loss associated with fluctuations in the foreign exchange market.
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Currency risk
The potential for loss associated with fluctuations in the foreign exchange market.
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currency hedging
A transaction that protects traders and investors from exposure to the fluctuations of the spot rate.
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currency board
A monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate.
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Cultural distance
The difference between two cultures along identifiable dimensions such as individualism.
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country-of-origin effect
The positive or negative perception of firms and products from a certain country.
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Copyrights
Exclusive legal right of authors and publishers to publish and disseminate their work.
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Copyright
Exclusive legal right of authors and publishers to publish and disseminate their work.
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Consumer Behavior
Consumers who make rational decisions will maximize the utility they derive from the goods and services they purchase subject to their preferences and budget constraints. Both managers and consumers benefit from understanding how consumers make these decisions. how consumers make decisions given the prices of goods and their income. These decisions determine demand.
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Communist
Centers on a communist party. (e.g. China)
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Common Law
1. A legal tradition that is shaped by precedents and traditions from previous judicial decisions, which is English in origin
2. Common law has spread to all English-speaking countries and their (former) colonies.
3. Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law, and such interpretation may give new meaning to the law, which will shape future cases.
4. Contracts in common law countries tend to be long and detailed to cover all possible contingencies, because common law tends to be relatively underdefined.
5. Common law is more confrontational, because plaintiffs and defendants, through their lawyers, must argue and help judges to favorably interpret the law largely based on precedents.
6. This confrontation is great material for movies.
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Common law
A legal tradition that is shaped by precedents and traditions from previous judicial decisions.
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common denominator
A currency or commodity to which the value of all currencies are pegged.
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Command economy
An economy that is characterized by government ownership and control of factors of production.
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Co-marketing
Efforts among a number of firms to jointly market their products and services.
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Collective Society
1. Japan
2. Hard time fostering entrepreneurship.
3. Most people there refuse to stick their neck out to found new businesses because it is contrary to the norm.
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Cognitive Pillar
1. The internalized (or taken-forgranted) values and beliefs that guide individual and firm behavior
2. For example, what triggered whistleblowers to report Enron?s wrongdoing was their belief in what?s right and wrong, that overcame the norm that encourages silence.
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cognitive pillar
The internalized (or taken-forgranted) values and beliefs that guide individual and firm behavior.
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Clean (free) float
A pure market solution to determine exchange rates.
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clean
A pure market solution to determine exchange rates.
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Civil law
A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments.
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Civil Law
1. A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments.
2. Derived from Roman law and strengthened by Napoleon?s France.
3. It is ?the oldest, the most influential, and the most widely distributed around the world.?
4. Less flexibility because judges only have the power to apply the law.
5. less confrontational, because comprehensive statutes and codes serve to guide judges.
6. Contracts in civil law countries are usually shorter and less specific because many issues typically articulated in common law contracts are already covered in comprehensive civil law codes.
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capital flight
A phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency.
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build-operate-transfer (BOT) agreement
A non-equity mode of entry used to build a longer-term presence by building and then operating a facility
for a period of time before transferring operations to a domestic agency or firm.
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BRIC
1. Brazil, Russia, India, and China
1. Generate 17% of world exports
2. Absorb 16% of FDI inflows
3. Contribute 28% of world GDP (on a PPP basis).
4. Contribute 62% of the GDP of all emerging economies (on a PPP basis).
5. Generate 8% of world FDI outflows.
6. MNEs from BRIC (e.g. M&M) are increasingly visible in making investments and acquiring firms around the world.
7. A force to be reckoned with in global business.
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Bretton Woods system
A system in which all currencies were pegged at a fixed rate to the US dollar.
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bounded rationality
The necessity of making rational decisions in the absence of complete information.
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bounded rationality
1. The necessity of making rational decisions in the absence of complete information.
2. Could cause issues- Broke and in jail (e.g. no prior experience in overseas management, burn cash overseas, and become counterfeiters)
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bid rate
The price to buy a currency
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Beijing Consensus
A view that questions Washington Consensus? belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government.
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bargaining power
Ability to extract favorable outcome from negotiations due to one party?s strengths.
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bandwagon effect
The effect of investors moving in the same direction at the same time, like a herd
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balance of payments
A country?s international transaction statement, which includes merchandise trade, service trade, and capital movement.
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Backlash against Globalization
1. Rapid growth of globalization led to the historically inaccurate view that globalization.
2. Created fear among many people in developed economies that they would lose jobs.
3. Due to an onslaught of MNEs, alleging that they destroy local companies as well as local cultures, values, and environments.
4. Small-scale acts of vandalizing McDonald?s restaurants are reported in a variety of countries
5. December 1999 anti-globalization protests in Seattle
6. September 2001 terrorist attacks in New York and Washington
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Assessing Global Economic Performance and International
| Trade
The accurate measurement of economic performance is essential for effective policy design. Economic policy makers need to know the size of the economy, the standard of living enjoyed by a nation?s citizens, the cost of living, and the health of the financial system. Countries can increase their gross domestic product (GDP) and standard of living through international trade if each has a comparative advantage in producing certain goods and services.
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appreciation
An increase in the value of the currency
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Aggregate demand
can be amplified by an increase in government spending, a reduction in taxes, or an increase in the money supply by the Federal Reserve. Aggregate demand is important to study because it determines the size of GDP.
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agglomeration
Clustering of economic activities in certain locations.
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A Country?s institutional framework,
1. Rules of the game that govern competition which consists of the formal (e.g. laws) and informal (e.g. values) institutions that govern individual and firm behavior.
2. Success and failure of firms are enabled and constrained by institutions.
3. Doing business around the globe requires intimate knowledge.
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2010 PIGS crisis
1. Portugal, Ireland or Italy, Greece, and Spain
2. Fiscally more responsible EU countries that adopted the euro as the common currency, such as Germany and France, felt compelled to bail out the countries in crisis.
3. The already slow recovery in Europe thus became slower, and unemployment hovered at very high levels.
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2008 Global Economic Recession
1. Due to deteriorating housing markets in the United States, fueled by unsustainable subprime lending practices, led to unprecedented intervention of government through bailouts of financial services firms. (governments ended up being many banks? largest shareholder)
2. Unlike anything the world had seen since the Great Depression (1929-1933).
3. Showed how interconnected the global economy has become.
4. Crisis quickly spread around the world.
5. Global output, trade, and investment plummeted, while unemployment skyrocketed.
