Exam Review II - International Management

These flashcards cover key concepts, terms, and definitions relevant to the upcoming International Management exam.

FDI (Foreign Direct Investment)

A method where a firm invests directly in production or business operations in a foreign country.

Monopolists

Firms that control a market and can set prices above the competitive level.

Cartel

An agreement between competing firms to control prices or limit production.

Liability of foreignness

The inherent disadvantage that foreign firms experience compared to local firms in a host country.

Market commonality

The degree to which firms compete in the same markets.

Economic union

A type of regional trade agreement that allows free movement of goods, services, capital, and labor among member states.

Principal-agent conflicts

Conflicts that arise when there is a separation between ownership (principals) and control (agents) in a firm.

Predatory pricing

The practice of setting prices low with the intent of eliminating competition and raising them later.

Mutual forbearance

A strategic approach where firms avoid aggressive competitive moves against rivals in exchange for similar restraint.

First-mover advantage

Advantages gained by being the first to enter a market, often including early access to resources.

A firm establishing a manufacturing plant in a foreign country due to the cheap labor costs in that country is an example of the _____ advantage that the firm enjoys.

a) location

b) ownership

c) internalization

d) externalization

 a) Location                              

_____ refers to price setting at a level higher than the competitive level by monopolists.

a) Collusive price setting

b) Predatory pricing

c) Mark-up pricing

d) Dumping

a) Collusive price setting

*Note how question says “by monopolists”

If a firm engages in final assembly in its home operations, then which of the following operations of the firm in a foreign country would be considered a downstream vertical FDI?

a) Research & Development

b) Components procurement

c) Marketing

d) Final assembly

c) Marketing

*Vertical FDI marketing involves establishing a presence in a foreign market to promote and sell products effectively.

Vertical FDI

is a foreign direct investment strategy where a company invests in operations along its supply chain, either upstream in production or downstream in marketing and distribution.

Downstream FDI

involves foreign investments made by a company to enhance its marketing and distribution capabilities in foreign markets.

Upstream FDI

refers to foreign investments aimed at securing resources or production inputs, often related to raw material extraction or initial production stages.

Horizontal FDI

is a foreign direct investment strategy where a company invests in the same stage of production in a foreign market, typically to expand its market presence or share.

Firms prefer FDI to licensing because FDI_____.

   a.   increases the chances of opportunism when dealing with a host nation entity

   b.   requires complete dissemination of technological know-how to host nation entity

   c.   protects the firm from economic agglomeration

   d.   provides the firm with direct ownership to its foreign assets

d) Provides the firm with the direct ownership to its foreign assets

An industry with heterogeneous products, in which rivals are forced to compete on price, is likely to lead to collusion.

T or F

False

Collusion happens with HOMOGENEOUS products

Which of the following statements best describes an FDI?

   a.   Setting up subsidiaries in foreign locations to do in-house work

   b.   Turning over an organizational activity to an outside supplier to perform on behalf of the firm

   c.   Outsourcing an in-house activity to another domestic firm

   d.   Assigning firm activities to foreign firms in neighboring countries

a) Setting up subsidiaries in foreign locations to do in-house work

Subsidiaries

are foreign branches or divisions established by a parent company to conduct business in a different country.

Inside directors are more independent and can better safeguard shareholder interests

T or F

False

If Apple, making smartphone, invests in iPhone dealerships in Asia but does not engage in distribution in the United States (Apple’s home country), then Apple’s Asian investment would be considered a(n) _____.

   a.   downstream vertical FDI

   b.   upstream vertical FDI

   c.   horizontal FDI

   d.   FPI

a) downstream vertical FDI

*When a company invests in operations that are closer to the consumer, such as retail or sales.

Mutual forbearance refers to retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market.

T or F

False

Mutual forbearance refers to a competition reduced strategy

Which of the following is a primary cost of FDI to home countries?

   a.   Loss of sovereignty

   b.   Increase in local competition

   c.   Capital outflow and job loss

   d.   Increased exports of components and services to host countries

c) Capital outflow and job loss

*Refers to the financial and employment impacts when domestic companies invest abroad, potentially leading to a reduction in jobs and capital resources in the home country.

One of the main objectives for establishing the WTO was to strengthen the trade dispute settlement mechanism.

T or F

True

*This aims to resolve trade conflicts efficiently and ensure fair treatment among member countries.

Dissemination risk refers to the cost that a firm has to endure even when its investment turns out to be unsatisfactory

T or F

False

*Dissemination risk refers to the potential loss of competitive advantage when a firm's proprietary knowledge is shared or leaked.

In firms with separation of ownership and control, ownership is concentrated with a few owners.

T or F

False
*In firms with separation of ownership and control, ownership is typically dispersed among many shareholders, while control is exercised by managers.

Which of the following political perspectives maintains the view that FDI has both pros and cons and can only be approved when its benefits outweigh costs?

   a.   Pragmatic nationalism

   b.   Protectionism

   c.   The radical view of FDI

   d.   The free market view of FDI

a) Pragmatic nationalism

*Is a political perspective that evaluates foreign direct investment (FDI) on a case-by-case basis, considering both the potential benefits and costs to the host country.

Efficiency-seeking firms go to countries that have ____.

A. an abundance of natural resources and related transport and communication infrastructure

B. a strong demand for their products and services

C. world-class innovations (innovative individuals, firms, and universities)

D. economies of scale and abundance of low-cost factors

D. economies of scale and abundance of low-cost factors

*Efficiency-seeking firms are motivated to reduce production costs by utilizing countries that provide abundant low-cost resources and capabilities, allowing for greater operational efficiency.

Passport-free travel zones can only be set up in political unions.

T or F

False

*Passport-free travel zones can also be established in other agreements that ensure mutual recognition of border control protocols, allowing for free movement between participating countries.

Cartel is an output- and price-fixing entity involving multiple competitors

T or F

True

*A cartel is an organization of independent companies that work together to control production, pricing, and marketing of a product, limiting competition.

Information asymmetries exist between principals and agents.

T or F

True

*Information asymmetries occur when one party, typically the agent, has more or better information than the principal, leading to potential misalignments in decision-making and incentives.

In a(n) ____, members coordinate and harmonize monetary, fiscal, and taxation policies.

A. customs union

B. common market

C. Economic union

D. Free trade area

C. Economic union

*An economic union is a type of agreement where countries coordinate and harmonize their monetary, fiscal, and taxation policies to promote economic integration and cooperation among member states.

NAFTA is an example of an economic union.

T or F

False.

*NAFTA is a trade agreement that primarily focuses on reducing trade barriers between the U.S., Canada, and Mexico, but does not involve coordination of monetary and fiscal policies.

All members of the EU have adopted the euro as their currency.

T or F

False.

*Not all members of the European Union have adopted the euro; several countries retain their own currencies and have opted out of the eurozone.

Liability of foreignness is the inherent disadvantage firms experience in home countries.

T or F

False

*Liability of foreignness refers to the inherent disadvantage that firms experience when operating in a foreign market due to their non-native status, including challenges related to unfamiliarity with local laws, culture, and business practices.

Collusion is more difficult between firms with high market commonality than firms with low market commonality.

T or F

False

*Collusion tends to be easier among firms with high market commonality because they are more familiar with each other's actions and market dynamics.

High market commonality

refers to the extent to which firms compete in the same markets and offer similar products or services, which can facilitate collusion.

In an agency relationship, a person who delegates authority is called a(n) ____.

A. employee

B. agent

C. principal

D. managers

C. Principal

*the principal is the individual or entity that assigns authority to another party, known as the agent, to act on their behalf.

A form of corporate theft that diverts resources from the firm for personal or family use is called ____.

A. Foreign portfolio investment

B. Foreign direct investment

C. Dumping

D. Tunneling

D. Tunneling

*Tunneling involves the transfer of assets and profits out of a company for the personal benefit of its executives or majority shareholders, often at the expense of minority shareholders.

One of the leading indicators of concentrated family ownership and control is the appointment of family members as board chairman, CEO, and other TMT members

T or F

True

*This is often indicative of a family's influence over the firm's strategic decisions and governance.

The preemption of scare resources is a first-mover advantage

T or F

True

*This refers to the ability of a company that enters a market first to secure resources or advantages over competitors, enhancing its market position.

Which of the following is an example of a customs union?

A. The former Soviet Union

The EU (European Union)

C. The Andean Community (South America)

D. The NAFTA (North American Free Trade Agreement)

C. The Andean Community (South Africa)

*The Andean Community is a regional integration agreement that facilitates trade and economic cooperation among its member countries. It combines elements of both a free trade area and a customs union.

Customs Union

A trade agreement between member countries that eliminates tariffs on goods traded among them while imposing a common external tariff on imports from non-member countries, enhancing economic cooperation.

NAFTA (North American Trade Agreement)

A trade agreement between Canada, Mexico, and the United States aimed at reducing trade barriers and promoting economic cooperation among the three countries.

Market-seeking firms go to countries that have a strong demand for their products and services

T or F

True

Market-seeking firms prioritize countries with high consumer demand for effective sales.

Which of the following characterizes a customs union?

A. It requires each member to maintain different external policies regarding non-members

B. It imposes common external policies on non-members.

C. It integrates the political and economic affairs of a region.

D. It permits the free movement of goods and people among its members

B. It imposes common external policies on non-members.

A customs union facilitates trade by harmonizing tariffs on external imports while allowing free trade among members.

____ occurs when firms engage the same rivals in numerous markets.

A. Market commonality

B. Multimarket competition

C. Explicit collusion

D. Cross-market retaliation

B. Multimarket competition

*Multimarket competition occurs when firms engage the same rivals in multiple markets, allowing them to leverage their presence across these markets to enhance competitive advantage.

The GATT system is an example of a strictly bilateral trading system

T or F

False

*The GATT (General Agreement on Tariffs and Trade) system is a multilateral trading system aimed at promoting international trade through negotiation and reducing trade barriers among many countries.

The act of setting prices below cost to eliminate rivals while intending to raise them in the long run to make up for the initial losses is known as ____.

A. Counterattack

B. Predatory pricing

C. Collusive price setting

D. Dumping

B. Predatory pricing

*Predatory pricing is a strategy where a firm sets the prices of its products below cost to drive competitors out of the market, with the intention of later raising prices to recover initial losses.

The distinction between _____ is what defines an MNE from a firm that merely exports or imports.

A. direct and indirect exports

B. Licensing and franchising

C. small- and large- scale of entry

D. equity and non-equity modes of entry

D. equity and non-equity modes of entry

*The distinction between equity and non-equity modes of entry highlights the different levels of investment and control a multinational enterprise (MNE) has compared to a firm that merely engages in export or import activities.

One of the late-mover disadvantages is the establishment of entry barriers by the first-mover.

T or F

True

*Late movers can face significant challenges as established players may create high entry barriers, making it difficult for new entrants to compete effectively.

The conflicts between controlling shareholders and minority shareholders are called ____.

A. principal-agent conflicts

B. principal-principal conflicts

C. agent-principal conflicts

D. moral hazards

B. principal-principal conflicts
*Principal-principal conflicts arise when the interests of controlling shareholders diverge from those of minority shareholders, potentially leading to decisions that do not align with the welfare of all stakeholders.

Strategic goals and institutional distances influence the location of foreign entries.

T or F

True

*Strategic goals refer to the long-term objectives of a company, while institutional distances involve differences in regulatory, cultural, and economic environments that affect the feasibility and success of foreign market entries.

Identify and describe two of the arguments that exist against the practice of imposing antidumping restrictions on foreign firms

1) Critics argue that antidumping restrictions can lead to higher prices for consumers and can provoke retaliatory measures from foreign governments.

2)Additionally, such restrictions may stifle competition and innovation by protecting domestic firms from necessary market pressures.

3) Antidumping measures can result in resource misallocation by diverting company focus from efficiency and competitiveness.

4) They can also protect inefficient domestic firms at the expense of overall economic welfare, hindering progress in industries.

5) Lastly, these measures can undermine long-term trade relationships and create a more fragmented global market.

Pros and cons of regional economic integration

Regional economic integration involves the unification of economic policies, trade regulations, and market standards among neighboring countries.

Pros: increased trade, investment opportunities, and economic growth

Cons: loss of sovereignty and economic disparities between member states

Why is it difficult for companies to succeed in foreign markets?

Companies face challenges such as cultural differences, unfamiliar regulatory environments, and varying consumer preferences, which can complicate entry and operations in foreign markets.

Describe how strategic goals drive the location of foreign entities

Strategic goals drive the location of foreign entities by aligning business operations with market opportunities, resource availability, and competitive advantages.

Companies often choose locations that optimize supply chains, access to talent, and proximity to customers to achieve their strategic objectives.

Elaborate on principal-principal conflicts

Principal-principal conflicts occur in situations where multiple principals (owners) have conflicting interests, often in organizations with dispersed ownership like firms with multiple shareholders.

These conflicts can lead to inefficiencies and challenges in decision-making, as each principal may pursue their own agenda rather than the collective best interest of the company.

Global economic integration

refers to the increasing interdependence and interconnectedness of national economies through trade, investment, and capital flows. This process enables countries to partake in a larger global market, fostering economic cooperation and collaboration.

GATT (General Agreement on Tariffs and Trade

is a multilateral agreement aimed at reducing trade barriers between member countries, promoting international trade and economic cooperation.

Established in 1947, it laid the groundwork for the World Trade Organization (WTO).

Current challenges include: trade disputes, protectionism, and compliance issues.

World Trade Organization (WTO)

is an intergovernmental organization that regulates international trade.

It provides a framework for negotiating trade agreements and a dispute resolution process among member countries.

Established in 1995, the WTO aims to ensure that trade flows as smoothly, predictably, and freely as possible.

Current challenges include: trade tensions, tariffs, and the impact of digital commerce.

Regional economic integration

is a process whereby countries in a specific region increase their economic cooperation through reduced trade barriers and common policies, often resulting in free trade areas, customs unions, or other forms of economic collaboration.

Regional economic integration efforts in Europe

include the European Union (EU), which promotes economic cooperation, a single market, and common policies among member states.

Regional economic integration efforts in the Americas

include various trade agreements such as the United States-Mexico-Canada Agreement (USMCA) and efforts from the Organization of American States (OAS) to promote economic collaboration and trade among countries in the region.

Regional economic integration efforts in the Asia Pacific

include initiatives like the Asia-Pacific Economic Cooperation (APEC) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), aimed at promoting trade and investment among member economies.

Regional economic integration efforts in Africa

include organizations like the African Union (AU) and trade agreements such as the African Continental Free Trade Area (AfCFTA), which aim to enhance economic cooperation and trade among African nations.

The Doha Round

refers to a series of negotiations under the World Trade Organization aimed at lowering trade barriers globally and promoting fair trade practices among member countries.

It started in 2001 and focuses on issues such as agriculture, services, and trade facilitation to enhance global trade.

How does FDI result in ownership, location, and internalization (OLI) advantages?

-allowing firms to utilize their proprietary assets (ownership),

-effectively choose sites that optimize operational efficiency (location),

-control operations through direct investment rather than licensing (internalization).

This strategic approach enhances competitive advantages in international markets.

Different political views on FDI based on an understanding of its benefits and costs to host and home countries

highlight the diverse perspectives that nations have regarding foreign direct investment. These views often balance the potential for economic growth and job creation against concerns about economic dependency, loss of control over local resources, and profit repatriation.

MNEs are firms that

engage in FDI

Stock

The total accumulation of inbound FDI in a country or outbound FDI from a country

Management control right

refers to the rights held by an owner or manager to make decisions regarding the operations and strategic direction of a subsidiary or business unit.

Internalization

is the process by which businesses expand their operations into foreign markets while retaining control over their resources and capabilities.

Dissemination risk

refers to the potential for sensitive information to be improperly shared or spread, which can lead to competitive disadvantages or security breaches.

Agglomeration

is the clustering of businesses or organizations in a specific geographical area, which can lead to increased efficiency, innovation, and competitiveness.

Oligopoly

is a market structure characterized by a small number of firms that have significant market power, often leading to limited competition and the ability to influence prices.

Intrafirm trade

refers to transactions that occur between different divisions or subsidiaries of the same company, often involving the exchange of goods and services across borders.

Contagion effect

refers to the spread of economic or financial crises from one market or country to others, often due to interconnectedness in global markets.

Pragmatic nationalism

is a political approach that emphasizes the importance of national interests and values while being open to international cooperation and economic engagement. It balances national policies with global economic realities.

When entering foreign markets, firms confront liability of foreignness. Both institution-and resource-based views cover how to overcome such liability

and establish a competitive advantage in the market.

Institution-based view

focuses on the impact of regulatory, normative, and cognitive institutions on a firm's strategies and performance, emphasizing the role of formal and informal rules in shaping competitive behavior.

Resource-based view

is a management perspective that emphasizes a firm's internal resources and capabilities as key drivers of competitive advantage and performance, focusing on the unique assets that a firm possesses.

Scale of entry

refers to the amount of resources a firm commits when entering a foreign market, influencing its market presence and competitive strategy.

Turnkey project

is a type of project where a firm designs, constructs, and equips a facility, then hands it over to the client, ready for operation, often seen in industries like construction and manufacturing.

Wholly owned subsidiary (WOS)

is a business entity that is fully owned by another company, allowing for complete control over operations and the ability to generate profits independently in the foreign market.

When confronting MNEs, local firms can choose a variety of strategic choices

1) Defender

2) Extender

3) Dodger

4) Contender

Contender strategy

centers on a firm engaging in rapid learning and expanding overseas

Defender strategy

centers on local assets in areas which MNEs are weak

Dodger strategy

centers on cooperating through joint ventures with MNEs and sell-offs to MNEs to enhance competitive advantage while minimizing control risks.

Local firms, in emerging economies, use a dodger strategy to respond to MNEs entry when the results of firms INDIRECTLY coordination actions by SIGNALING their intention to reduce output and maintain PRICING ABOVE competitive levels

Dodger strategy is appropriate for responding to MNEs when there is a high pressure to globalize, and competitive assets are customized to home markets

Extender strategy

strategy that centers on leveraging homegrown competencies abroad

Blue ocean strategy

a marketing strategy that focuses on creating uncontested market space and making the competition irrelevant.

focuses on developing new markets and avoids attacking core markets defended by rivals

Antidumping laws

regulations designed to protect domestic industries from unfair competition by foreign imports priced below market value.

How do governance mechanisms vary around the world?

Governance mechanisms differ globally in terms of structures, processes, and cultural influences, impacting how organizations operate and make decisions. These variations can be seen in legal frameworks, regulatory standards, and ethical norms.

Bond

a fixed income investment where an investor loans money to an entity for a defined period at a fixed interest rate.

Agency Theory

a theory explaining the relationship between principals and agents, specifically focusing on conflicts of interest and information asymmetry in business and organizational settings.

Top Management Team (TMT)

the group of individuals at the highest level of management in an organization, responsible for making strategic decisions and directing the company's overall operations.

Voice-based mechanism

used to enhance communication and engagement among team members, allowing for real-time feedback and discussions.