MGMT 459 Exam 2

Foreign Direct Investment (FDI)

Investment in another country where the firm controls and manages operations there.

Multinational Enterprise (MNE)

A firm that engages in FDI and operates in multiple countries.

Horizontal FDI

When a firm duplicates home-country activities in another country at the same stage of the value chain.

Vertical FDI

When a firm moves upstream or downstream into different stages of the value chain in another country.

Upstream Vertical FDI

Moving into earlier stages of production in a host country.

Downstream Vertical FDI

Moving into later stages of the value chain in a host country.

FDI Flow

Amount of FDI moving in a given period.

FDI Stock

Total accumulation of FDI over time.

Foreign Portfolio Investment (FPI)

Investment in foreign stocks and bonds without control.

Management Control Right

Right to appoint managers and establish control.

OLI Advantages

Ownership, Location, and Internalization advantages that motivate FDI.

Licensing

Allowing another firm to use technology or trademarks for a fee.

Dissemination Risk

Risk that firm knowledge leaks to competitors.

Agglomeration

Clustering of economic activities in a location.

Knowledge Spillover

Knowledge diffusing between nearby firms.

Intrafirm Trade

Transactions between subsidiaries of the same MNE.

Radical View

Political view hostile to FDI.

Free Market View

Belief that FDI should be free of government restrictions.

Pragmatic Nationalism

Allowing FDI only when benefits outweigh costs.

Global Economic Integration

Efforts to reduce trade and investment barriers worldwide.

Regional Economic Integration

Reducing trade barriers within a geographic region.

GATT

Agreement governing international trade in goods.

WTO

Organization overseeing global trade rules since 1995.

General Agreement on Trade in Services (GATS)

WTO rules governing service trade.

TRIPS

WTO rules on intellectual property rights.

Free Trade Area (FTA)

Group of countries removing trade barriers among themselves.

Customs Union

FTA with common external policies.

Common Market

Customs union plus free movement of people.

Economic Union

Common market with harmonized economic policies.

Political Union

Integration of political and economic affairs.

Euro Zone

EU countries using the euro currency.

NAFTA

Free trade agreement between U.S., Canada, and Mexico.

ASEAN

Regional economic group in Southeast Asia.

APEC

Asia-Pacific economic cooperation group.

Liability of Foreignness

Costs or disadvantages of doing business abroad.

Location-Specific Advantage

Benefit gained from features unique to a place.

Institutional Distance

Differences between countries' regulatory, cultural, and cognitive systems.

First-Mover Advantage

Benefits gained by entering a market before others.

Late-Mover Advantage

Benefits gained from entering after others have paved the way.

Scale of Entry

Amount of resources committed to an entry.

Non-Equity Mode

Entry modes with lower commitment like exporting or contracts.

Equity Mode

Higher-commitment entry modes like joint ventures or wholly owned subsidiaries.

Joint Venture (JV)

New entity jointly owned by two or more parent firms.

Wholly Owned Subsidiary (WOS)

A foreign subsidiary fully owned by the parent firm.

Greenfield Operation

Building new facilities from scratch.

Turnkey Project

Contractor designs, builds, and hands over a ready facility.

Competitive Dynamics

Actions and responses among competing firms.

Collusion

Firms collectively reducing competition.

Tacit Collusion

Indirect coordination to reduce output and keep prices high.

Explicit Collusion

Direct agreements on prices or market divisions.

Cartel

Group of firms that collude on prices and output.

Concentration Ratio

Market share held by the top firms in an industry.

Market Commonality

Extent to which rivals compete in the same markets.

Attack

Initial move to gain competitive advantage.

Counterattack

Response to a competitor's attack.

Blue Ocean Strategy

Entering new markets rather than attacking existing ones.

Cross-Market Retaliation

Attacking a rival in another market in response to aggression.

Defender Strategy

Local firms relying on strengths where MNEs are weak.

Dodger Strategy

Local firms cooperating or selling to MNEs.

Contender Strategy

Local firms that learn quickly and compete globally.

Equity

Shares of ownership in a firm.

Debt

Loans the firm must repay with interest.

Cost of Capital

Return a firm must pay its capital providers.

Bond

A loan investors make to a company.

Default

Failure to meet loan repayment obligations.

Diffused Ownership

Many small shareholders with no dominant controller.

Concentrated Ownership

Ownership controlled by a family or government.

Agency Relationship

Relationship where owners (principals) hire managers (agents).

Principal-Agent Conflict

Conflict between owners and managers.

Principal-Principal Conflict

Conflict between controlling and minority shareholders.

Information Asymmetry

When one party has more information than another.

Board of Directors

Group overseeing the firm's strategy and management.

CEO Duality

One person serving as both CEO and board chair.

Inside Director

Board member who is a firm executive.

Outside Director

Independent board member not involved in management.

Exit-Based Mechanism

Governance mechanism where shareholders sell shares to show dissatisfaction.

Voice-Based Mechanism

Shareholders push for changes through communication or voting.

Leveraged Buyout (LBO)

Using borrowed money to buy a company.

Horizontal FDI Example

A firm opening the same type of operation abroad as at home (e.g., Starbucks opening coffee shops in another country).

Upstream Vertical FDI Example

A firm sourcing raw materials or components from another country.

Downstream Vertical FDI Example

A firm opening a distribution or sales facility abroad.

Technology Spillover Example

Local firms learning new manufacturing techniques after MNEs enter their market.

Knowledge Spillover Example

Employees from one firm sharing ideas informally with nearby firms in the same cluster.

Agglomeration Example

Companies clustering in Silicon Valley to benefit from shared talent and knowledge.

Contagion/Demonstration Effect Example

Local firms upgrading their operations after seeing MNEs improve quality.

Political Views on FDI Example

Radical view = 'FDI is bad.' Free market view = 'FDI should be unrestricted.' Pragmatic nationalism = 'FDI is allowed only if benefits > costs.'

GATT Example

Post-WWII agreement focused on reducing tariffs on goods.

WTO Example

Global organization that governs trade rules for goods, services, and intellectual property.

Free Trade Area Example

NAFTA (U.S., Canada, Mexico).

Customs Union Example

Mercosur in South America.

Common Market Example

Parts of the European Union allowing free movement of goods and people.

Economic Union Example

The EU using a shared currency (Euro).

Political Union Example

A region with both shared political and economic institutions.

Schengen Area Example

Passport-free travel zone inside Europe.

ASEAN Example

Regional integration in Southeast Asia.

APEC Example

Asia-Pacific cooperation group involving 21 economies.

TPP Example

Multilateral trade agreement negotiated by Pacific Rim countries.

First-Mover Advantage Example

Being first into a foreign market and gaining brand recognition.

Late-Mover Advantage Example

Entering later and learning from early entrants' mistakes.

Liability of Foreignness Example

Higher costs due to unfamiliarity with local culture, legal systems, or consumers.