IB Exam 2

Levels of Economic Integration

• Free trade Area

• Customs Union

• Common Market

• Economic Union

• Political Union

Free Trade (FTA)

No tariffs between members, but independent trade policies (e.g., NAFTA/USMCA).  

Levels of Economic Integration

• Free trade Area

• Customs Union

• Common Market

• Economic Union

• Political Union

Free Trade (FTA)

No tariffs between members, but independent trade policies (e.g., NAFTA/USMCA).  

Customs Union

FTA + common external trade policy (e.g., Mercosur).  

Common Market

Customs union + free movement of labor/capital (e.g., EU Single Market).  

Economic Union

Common market + shared economic policies (e.g., Eurozone).

Political Union

Full integration (e.g., USA, proposed EU federalization).  

EFTA (European Free Trade Association)

Scope:* FTA (no customs union).  

  - Members: Iceland, Liechtenstein, Norway, Switzerland.  

*Single European Act (1986)

 Removed trade barriers, created EU Single Market.

Euro (€) Adoption

EU members not using the euro:** Denmark, Sweden, Poland, Hungary, Czechia, Romania, Bulgaria.

*NAFTA (Now USMCA)

Scope:** FTA between U.S., Canada, Mexico. 

Mercosur** 

Scope:* Customs union (incomplete common market).  

  - Full Members: Argentina, Brazil, Paraguay, Uruguay.

(Free Trade Area of the Americas)

Proposed FTA for the Americas (never implemented).

ASEAN (Association of Southeast Asian Nations)

Members:** Indonesia, Thailand, Vietnam, Malaysia, Singapore, Philippines, Myanmar, Cambodia, Laos, Brunei.

Currency conversion

• 1 euro = $1.07

• 1 pound = $1.25

Currency Speculation

Short-term movement of funds from 1 currency to another in hopes of profiting from shifts in exchange rates

Carry Trade

• Borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

  • Borrowing yen then converting it to dollars and depositing in a US bank

  • Based on the belief that there will be no adverse movement in exchange/interest rates

Spot Exchange

2 parties agree to exchange currencies and execute the deal immediately

Spot Exchange Rate

A foreign exchange dealer converts one currency into another on a particular dayat the current market rate.

Forward exchange

2 parties agree to exchange currency and execute the deal at some specific future date

Arbitrage

Buying a currency low and selling it high

Capital Flight

• Resident and non-residents rush to convert their holdings of domestic currency into a foreign currency

  • Likely to occur when the value of domestic currency is depreciating rapidly because of hyperinflation or a country’s economic prospects are shaky

Location Economies

• Economies that arise from performing a value creation activity in the optimal location for that activity 

  • It can lower the costs of value creation and help the firm to achieve a low-cost position and/or help firm differentiate its product from competitors

Learning Effects

• Cost savings that come from learning by doing

  • Ex. Labor learns by repetitions on how to carry out a ask

Economies of Scale

• Reductions in unit cost achieved by producing a large number of a product 

  • Lowers a firm’s unit costs and increases profitability

4 basic in’l strategies

1. Global Standardization

2. Localization Strategy

3. International Strategy

4. Transnational Strategy

Global Standardization Strategy

• Increasing profitability and profit growth by reaping the costs reductions that come from economies of scale, learning effects, and location economies 

  • Pursue a low-cost strategy on a global scale 

  • Try not to customize their product and marketing strategy 

  • Market a standardized product worldwide 

Localization Strategy

• Customizing the firm’s goods and services to provide a good match to tastes and preferences in different national/regional markets

• Good when there's a substantial difference between across nations 

• Downside is that customization limits the ability to have cost reductions associated with mass production

International Strategy

• Taking products first produced for their domestic market and selling them internationally with only minimal local customization

• Selling a product that serves universal needs , but don’t have many competitors 

• Unlike global standardization they don’t have the pressure to reduce their cost structure

Transnational Strategy

• Simultaneously achieve low costs through economies of scale, learning effects, and location economies while differentiate their product offering across geographic markets 

  • Foster a multidirectional flow of skills between subsidiaries on the firms global network of operations  

• Not easy to pursue because of conflicting demands placed on company

Strategic Alliance

cooperative agreements between potential or actual competitors 

Advantages of Strategic Alliances

• Facilitate entry into a foreign market 

• Allow firms to share the fixed costs and associated risks of developing new products or processes 

• Bring together complementary skills and assets neither company could easily develop on its own

• Help firm establish technological standards for the industry that will benefit the firm

Disadvantages of Strategic Alliances

• Give competitors a low-cost route to new technology and markets 

• ⅔ of alliances run into serious managerial and financial problems within 2 years of their formation; 33% percent of those ultimately rates failures to the parties involved

Pioneering Costs

• Costs that an early entrant has to bear that a later entrant can avoid. 

• Arise when business system in a foreign country is so different than the firm’s home market that the enterprise has to devote effort, time, and expense to learning the rules of the game

6 entry mode types

1. Exporting

2. Turnkey Projects

3. Licensing

4. Franchising

5. Joint Ventures

6. Wholly Owned Subsidiaries

Exporting Advantages

• Avoids substantial costs of establishing manufacturing operations in host country 

• Help achieve experience curve and location economies

Exporting Disadvantages

• Only good for firms pursuing global or transnational strategies

• High transportation costs particularly for bulk products 

  • Could get around by manufacturing bulk products regionally

• Tariff barriers can make exporting uneconomical 

• A local marketing agent might not do as great as a job as the firm’s own marketing team 

  • Can set up wholly owned subsidiaries in foreign markets to handle local marketing, sales, and service

Turnkey Projects

• Contractor agrees to handle every detail of the project for a foreign client

  • At end of contract, client is handed key to plant that is ready for all operation

Turnkey Project Advantages

When foreign direct investment is limited by host-government regulations

Turnkey Project Disadvantages

• Firm that enters into deal will have no long-term interest in deal 

• May inadvertently create competitors 

• Sells the competitive advantage to potential and/or actual competitors

Licensing

Arrangement where licensor grants the rights to intangible property to another entity (the licensee) for a specific period, in return the licensor receives a royalty fee from licensee

Licensing Advantages

• Firm does not have to bear the development costs and risks associated with opening a foreign market 

• A firm doesn’t have to commit substantial financial resources to an unfamiliar or political volatile foreign market 

• Great for firms lacking the capital to develop operations overseas 

• Could be used when firm wish to participate in foreign market but is prohibited from doing so by barrier to investment 

• Great when firm possesses some intangible property that has business applications but doesn’t want to develop those applications itself 

Licensing Disadvantages

• Doesn’t give form tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies 

• Limits firm ability to take advantage of being multinational and use its profits to support a different licensee operating in different country 

• Lose control of its technology

Franchasing

A specialized form of licensing in which the franchiser not only sells intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business

Franchising Advantages

• Relieved of costs and risks of opening a foreign market 

• Similar to licensing 

Franchising Disadvantages

• May inhibit the firm’s ability to take profits out of one country to support competitive attacks in another country

• Quality control

Joint Ventures

Establishing a firm that is jointly owned by 2 or more otherwise independent firms

Joint Ventures Advantages

• Form benefits from a local partner’s knowledge of host;s country’s competitive conditions, cultures, language, political systems, and business 

• Sharing entry cost/risks with the partner 

• Low risk of being subject to nationalization or other forms of adverse government interference

Joint Ventures disadvantages

• Risks giving control of its technology to its partner 

• Doesn’t give a form the tight control over subsidiaries that it might need to realize experience curve or location economics 

• Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals 

• Shared ownership arrangements can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be

Wholly Owned Subsidiaries

• The firm owns 100% of the stock

• Can either set up a new operation in that country referred to as greenfield venture or ot can acquire established firm 

Wholly Owned Subsidiaries Pros

• When competitive advantage is based on tech competence, a wholly owned subsidiary reduces the risk of losing control over that competence 

• Gives firm tight control over operations in different counties, which is necessary for engaging in global strategic coordination 

• Needed to realize location and experience curve economies, when cost pressures are intense it may pay a firm to configure its value chain such a way that the value added a t each stage is maximized 

• Owns all profits generated in a foreign market

Wholly Owned Subsidiaries cons

• Most costly method 

• Firms bear fill capital costs and risks of setting up overseas operations

Pros of Acquisitions

• Quick to execute 

• Preempt their competitors 

• Less risky

Why do acquisitions fail

• Acquiring firms often overpay for the assets of the acquired

• Too optimistic about the value that can be created via acquiring firm and thus willing pay a significant premium over a target firm’s market capitalization

• Hubris Hypothesis = top management typically overestimate their ability to create value since rising to the top of a corporation has given them an exaggerated sense of their own capabilities

• Clash between the cultures of the acquiring and acquired films (chrysler vs german)

• Failed attempts to realize gain by integrating operations often run into roadblocks and take much longer than expected

• Inadequate pre acquisition screening 

  • Don’t thoroughly analyze potential benefits and costs

Greenfield Ventures

• Gives firm greater ability to build the kind of subsidiary company that it wants 

• Much easier to establish a set of operating routines than convert the operating of an acquired unit 

• Less risky than acquisitions with respect to the less possibility of unpleasant surprises

Acquisitions

• Quicker than greenfields ventures to establish 

• Not as risky as greenfields in respect to the degree of uncertainty associated with future revenue and profit prospects 

• Greenfield ventures face possibility of being preempted by more aggressive global competitors who enter via acquisitions and build a big market presence that limits the market potential

3 staffing policies

1. ethnocentric Approach

2. polycentric approach

3. Geocentric

Ethnocentric Aproach

One which all key management positions are filled by parent-country nationals

Ethnocentric Polcity Pros

• Best way to maintain a unified corporate culture

• If firm is trying to create value by transferring core competencies to a foreign operations,

Ethnocentric Polcity cons

• Limits advancement opportunities for host-country nationals. Which can lead to resentment, lower productivity, and increased turnover 

• Can lead to cultural myopia - the firm’s failure to understand host-country differences that require different approaches to marketing and management

Polycentric Approach 

Requires host-country nationals to be recruited to manage subsidiaries while paren-nationals occupy key positions at corporate headquarters

Polycentric Pros

• Less likely to suffer from cultural myopia 

• May be less expensive to implement reducing costs of value creation

Polycentric Cons

• Host-country nationals have limited opportunities to gain experience outside their own country and this cannot progress beyond senior positions in their own subsidiary 

• Gap that can form between host-country managers and parent-country managers

Geocentric Approach

Seeks the best people for key jobs throughout the organization, regardless of nationality

Geocentric Approach Pros

• Enables the firm to make best use of its human resources 

• Enables the firm to build a cadre of international executives who feel at home working in a number of cultures 

• Better able to create value from the pursuit of experience curve and location economic and from multidirectional transfer of core competencies

Geocentric Approach Cons

• Expensive to implement; Training and relocation costs 

• compensation structure with standard international bas pay level higher than national levels in many countries

• Many countries have laws require employment of host-country nationals

4 expatriate selection dimensions (Mendenhall/Oddou)

1. Self - Orientation

2. Others - Orientation

3. Perceptual Ability

4. Cultural ˇToughness

Self - Orientation

• Strengthen the expatriate’s self esteem, self-confidence, and mental well-being 

• Expatriate with high self esteem/confidence and mental wellbeing were more likely to to succeed in foreign postings

Others-orientation

• Ability to interact effectively with host-country nationals

• The more effectively expatriate’s interact with host-country nationals the more likely they are to succeed 

• Relationship development & Willingness to communicate

Perceptual Ability

• This is the ability to understand why people of other countries behave the way they do

• Non- judgemental and non-evaluative

Cultural Toughness

• Relationship between how well people adjust to particular countries 

• Some countries are much tougher than others due to unfamiliarity

5 reason US managers fail

• Inability of spouse to adjust 

• Manager’s inability to adjust 

• Other family problems 

• Manager’s personal/emotional maturity 

• inability to cope with larger overseas responsibilities

Repatriation

• Preparing expatriate managers for reentry into their home countries and organization

• People usually come back after being celebrated and well compensated for being unknown and not needed anymore. Or give them busy job that don’t really use their expatriate skills 

• Need good HR planning

Foreign Service Premium 

• Extra pay the expatriate receives for working outside their home country

• 16% average premium

Tim Hortons in China: Overcoming Entry Barriers

1. Differentiation – Highlight Canadian roots (hockey, doughnuts) to stand out.  

2. Pricing – Position between Starbucks (premium) and Luckin (budget).  

3. Localization – Add espresso-based drinks and tea options to suit Chinese tastes.  

4. Expansion – Focus on Tier 1 cities first (Shanghai, Beijing), then expand.  

5. Digital & Delivery – Partner with Meituan/Ele.me for online orders.  

6. Marketing – Use hockey-themed promotions and influencer collaborations. 

Xiamen Airlines: Recruiting Foreign Pilots**

1. Competitive Pay – Match global salaries ($200K+) and offer bonuses.  

2. Career Growth – Provide advanced training and titles (e.g., "Honoured Captain").  

3. Work-Life Balance – Flexible schedules (commuting vs. full-time options).  

4. Support – Housing, relocation help, and language/cultural training.  

5. Retention – Long-term contracts with increasing benefits.