global business final

Wholly owned subsidiary

100% ownership of the subsidiary. Set up a new operation in that country or acquire an established firm.

Green field venture / Greenfield investment

Involves establishment of new operation in foreign country.

Disadvantages of green field venture

Are slower to establish. Are risky because they have no proven track record. Can be problematic if a competitor enters via acquisition and quickly builds market share.

franchising

A form of licensing in which the franchisor sells intangible property and requires the franchisee agree to abide by strict rules as to how it does business.

Advantage of joint venture

A firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. The costs and risks of opening a foreign market are shared with the partner.

Disadvantage of franchising

It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect.

Advantage of franchising

It can avoid costs and risks of opening up a foreign market.

Disadvantages of licensing

could result in a firm's giving away valuable technological know-how to a potential foreign competitor; does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country; may be difficult if the firm's competitive advantage is not amenable to it.

What is licensing

An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee.

Advantages of licensing

The firm does not have to bear the development costs and risks associated with opening a foreign market. The firm avoids barriers to investment. It allows a firm with intangible property that might have business applications, but which doesn't want to develop those applications itself, to capitalize on market opportunities.

Turnkey project

Involve a contractor that agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation.

Advantages of turnkey project

Allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process. Less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk.

Disadvantage of turnkey project

The firm has no long-term interest in the country. The firm can create a competitor. The firm's process technology is a source of competitive advantage.

Pioneering cost

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

First mover advantage

The ability to pre-empt rivals and capture demand by establishing a strong brand name. The ability to build up sales volume and ride down the experience curve ahead of rivals. The ability to create switching costs that tie customers into their products or services.

First mover disadvantage

Disadvantages associated with entering a foreign market before other international businesses. These may result in pioneering costs such as the costs of business failure due to ignorance of the foreign environment, or the costs of promoting and establishing a product offering including educating customers.

Global standardization strategy

Focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. The goal is to pursue a low-cost strategy on a global scale.

localization strategy

focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets.

Universal needs

Needs that exist when the tastes and preferences of consumers in different nations are similar if not identical.

Experience curve

Depicts the overall cost savings as the production grows in volume; more time task is performed, less is required for each subsequent iteration. A production cost declines by some quantity every time cumulative output doubles.

Economies of scale

Reductions in unit cost achieved by producing a large volume of a product.

Learning effects

Cost savings that come from learning by doing. Labor productivity increases when individuals learn the most efficient ways to perform particular tasks.

Global web

Multinationals that take advantage of location economies create value creation activities.

Location economies

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

Organizational culture

Norms and value systems that are shared among the employees.

Organization architecture

The totality of a firm's organization - formal organizational structure, control systems and incentives, organizational culture, processes, and people.

processes

Manner in which decisions are made and work is performed.

primary activities

Involves the design, creation, and delivery of the product; its marketing; and its support and after-sale service. Divided into: research and development, production, marketing and sales, customer service.

What are support activities

Provides the inputs that allow the primary activities to occur. Divided into: information systems, company infrastructure, logistics, human resources.

Low cost strategy

Lowering production cost.

Differentiation strategy

Focuses primarily on increasing attractiveness of product.

Value creation

The difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product).

Profitability

The rate of return the firm makes on its invested capital.

Profit growth

The percentage increase in net profits over time.

Difference between banking crisis and currency crisis

1. Banking crisis refers to a loss of confidence in the banking system that leads to a run on the banks.

2. Currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency.

Difference between fixed and floating exchange rate

1. Fixed: currencies fix against each other at a mutually agreed upon value.

2. Floating: foreign exchange market determines the relative value of a currency.

Jamaica Agreement of 1976

Floating rates were declared acceptable. Gold was abandoned as a reserve asset. Total annual IMF quotas were increased.

International Bank for Reconstruction and Development (IBRD)

Money is raised through bond sales in the international capital market and borrowers pay what the bank calls a market rate of interest.

Mission of the World Bank

Reduction of poverty in the global marketplace.

Bretton Woods Agreement

Established IMF to maintain order in the international monetary system and the World Bank to promote general economic development.

Balance of trade program

when the income a country's residents earn from its exports is equal to the money its residents pay for imports.

Gold par value

The amount of a currency needed to purchase one ounce of gold.

International monetary system

The institutional arrangement that govern exchange rates.

Gold standard

The practice of pegging currencies to gold and guaranteeing convertibility.

dirty float

exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency.

Pegged exchange rate

Countries peg the value of their currency to that of other major currencies.

Multipoint competition

When two or more enterprises encounter each other in different regional markets, national markets, or industries.

Internalization theory

Seeks to explain why firms often prefer FDI over licensing as a strategy for entering foreign markets. Also known as market imperfection approach.

Bandwagon effect

Occurs when expectations on the part of traders turn into self-fulfilling prophecies.

International Fisher Effect

Suggests that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.; connects dissimilarity of currency exchange rate with nominal interest rates of two countries

Fisher effect

Nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation (l). i = r + l.; signifies the variation in nominal interest rates to indicate inflation, it does not associate concept with currency exchange

Nominal interest rate

The sum of required real rate of interest and expected rate of inflation.

How to calculate nominal interest rate

i = r + l

Efficient market

Prices reflect; all prices reflect all available information; best predictors are foreign exchange rates, it doesn’t make sense to invest in forecast service; has no impediments to the free flow of goods and services such as trade barriers

PPP Theory (Purchasing Power Parity)

Given relatively efficient markets (markets in which few impediments to international trade and investment exist) the price of a "basket of goods" should be roughly equivalent in each country.

Foreign exchange market

A market where buyers and sellers are involved in the sale and purchase of foreign currency.

Law of one price

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when price is expressed in terms of the same currency.

Foreign exchange

The act of purchasing and holding foreign currency in the hopes of selling that currency at an appreciated price or higher rate in the future

Currency swap

Simultaneous purchase and sale of a given amount of foreign exchange for two different value days.

Hedging

When a firm engages itself in foreign exchange risk.

Spot exchange rate

Rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Carry trade

Speculation that has become more common; involves borrowing when currency and interest rates low, invest when rates are high.

Currency speculation

Short term movements of funds from one currency to another in hopes of profiting.

Market psychology

Refers to prevailing sentiment of financial market participants at any one point in time.

How exchange rate can be quoted

As amount of foreign currency one USD will buy. As value of a dollar for 1 unit of foreign currency.

Who makes up foreign exchange market

Made up of banks, forex dealers, central banks, investment management firms, hedge funds, and investors.

Externalities

Knowledge when companies in same industry are located in same area, ex: Silicon Valley.

Dunning’s argument (Eclectic paradigm)

Combines perspectives; shows three kinds of advantages for multinational company: Ownership, Location, Internationalization.

free market

International production should be distributed among countries according to the theory of comparative advantage.

Eclectic paradigm

Business approach that analyzes whether a company should make a FDI. Shows ownership, location, and internalization advantages.

Location specific advantages

Arise from using resources of dominance, ex: oils and minerals which are specific to certain locations.

Oligopoly

Industry composed of limited number of large firms. Ex: an industry in which 4 firms controls 80% of domestic market.

Formal favor FDI over exporting

when transportation costs are high and barriers are high.

Foreign direct investment (FDI)

A firm invests directly in new facilities to produce or market in a foreign country.

Government imposed quotas

By limiting imports through quotas, the government increases the attractiveness of FDI and licensing.

Licensy (Licensing)

An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee.

Exporting

Producing goods at home and then shipping them to receiving country for sale.

FDI inflows

Flows of FDI going in; value of inward direct investment made by non resident investors.

FDI outflows

Flows of FDI going out; value of outward direct investments made by residents of reporting economies to external economies.

Stock of FDI

Total accumulated value of foreign-owned assets at a given time.

Multinational enterprise

A firm engaged in FDI

6 countries account for 60% of all FDI outflows from 1998-2014

Netherlands, France, Germany, Japan, UK, US.

Leading economy for FDI inflows

China attracted about $60 billion of foreign direct investment in 2004 and grows steadily as it hits record of $128 billion in 2018.

How a domestic firm expands its operation to a foreign country

Firm can set up new operation in country (greenfield venture) or acquire established firm in nation and use firm to promote product.

Decide model

Scale of entry decisions — firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field.

ISO 9000

EU’s quality guidelines promoted for product reliability.

Time draft

Negotiable instrument, once draft is stamped with acceptance, maker can sell draft to investor at discount from face value.

Side draft (Sight draft)

Type of bill of exchange in which exporter hold title to transport of goods until importer receives and pays for them.

USMCA

United States-Mexico-Canada Agreement; replaced NAFTA, ratified by all 3 countries by March 2020.

Entrepreneur Magazine Top 5 global franchises

McDonalds, KFC, Taco Bell, Pizza Hut, Dunkin.

Main elements that support floating exchange rates

Monetary policy autonomy, trade balance adjustments, crisis recovery.

Four of world’s major trading currency

Dollar, Euro, Yen, Pound.

Drawbacks of licensing

can result in firm’s giveaway of valuable technological know how to potential foreign competitor; does not give firm tight control over manufacturing, marketing, strategy in foreign country. May be difficult if firm’s competitive advantage is not amenable to it.

Protectionism

Despise general decline, firms still fear protectionist policies. Trump is protectionist president.