INTB Exam 2

Regional economic integration

agreements between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other (inside is least integrated, outside is most integrated)

Free trade area

all barriers to the trade of goods and services among member countries are removed

e.g. NAFTA

Customs union

eliminates trade barriers between member countries and adopts a common external trade policy

e.g. Japanese cars coming into Colombia and Peru will have the same tariff rate

Common market

no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members

e.g. Mercosur

Economic union

Involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it requires a common currency

Political union

a central political apparatus coordinates the economic, social, and foreign policy of the member states 

E.g. USA

European Free Trade Association (EFTA)

A free trade association including Norway, Iceland, Liechtenstein, and Switzerland

The Single European act

created a single market by abolishing administrative barriers to the free flow of trade and investment among EU countries

EU members that do not use the euro

U.K., Denmark, Bulgaria, Croatia, Czech Republic

North American Free Trade Agreement (NAFTA)

Free trade area among Canada, Mexico, and the United States

Mercosur

Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area

The free trade of the Americas (FTAA)

the idea to have a trade union for the entire western hemisphere. Many countries didn’t want to get involved 

Association of Southeast Asian Nations (ASEAN)

free trade between member countries in Southeast Asia to achieve some cooperation in their industrial policies

Foreign exchange market

market for converting the currency of one country into that of another country

Carry trade

borrows one currency where interest rates are low and invest these in another currency where interest rates are high

Currency speculation

short term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates

Spot exchange rates

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

Spot exchange rate example

You go to Mexico today, arrive and exchange 500 USD into Mexican Pesos. The spot rate today is 20.0 ($500 x 20= 10,000 Mex Pesos), if tomorrow rate goes up to 21.5, the new yield = 10,750 Mex Pesos

Forward exchange rates

rates quoted for 30, 90, or 180 days into the future

Forward exchange rate example

If the 30 day forward rate is 22, if it goes above 22, it's not a good move, if it goes below 22 by 30 days in the future, then it is a good move

Arbitrage

the process of buying a currency low and selling it high

Capital flight

when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency

Location economies

economies that arise from performing a value creation activity in the optimal location for that activity (can be anywhere in the world)

Learning effects

 cost savings from learning by doing

Economies of scale

cost advantages associated with large-scale production

Cost and local matrix: Global standardization

High pressure cost reduction, low pressure local responsiveness

E.g. commodities, Texas instruments

Cost and local matrix: Localization

low pressure cost reduction, high pressure local responsiveness

E.g. Hasbro, ESPN deportes/europe

Cost and local matrix: Transnational

high pressure cost reduction, high pressure local responsiveness

E.g. John Deer, CAT

Cost and local matrix: International

low pressure cost reduction, low pressure local responsiveness

E.g. Ferrari, Rolex

Strategic alliances

refer to 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 that neither partner could easily develop on its own

Disadvantages of strategic alliances

• Loss of control

• Unequal Benefits

• Cultural & Operational Differences

• Risk of Opportunism & Trust Issues

Pioneering costs

costs that an early entrant has to bear that a later entrant can avoid

Exporting

consumers in another country who want your product

Advantages/disadvantages of exporting

• Advantages: 

  • Low cost

  • Achieve experience curve economies

• Disadvantages: 

  • Lower-cost manufacturing locations exist

  • Transportation costs are high

  • Tariff barriers are high

Turnkey projects

Involves a contractor that agrees to handle every detail of the project

Advantages/disadvantages of turnkey projects

• Advantages: 

  • Allows firms to earn great economic returns

  • Less risky in countries where the political and economic environment is complex

• Disadvantages: 

  • The firm's process technology is a source of competitive advantage

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/disadvantages of licensing

• Advantages: 

  • The firm does not have to bear the development costs and risks

  • The firm avoids barriers to investment

• Disadvantages: 

  • The firm doesn’t have the tight control over manufacturing, marketing, and strategy

  • There is a potential loss of proprietary technology or property

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

Advantages/disadvantages of franchising

• Advantages: 

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

• Disadvantages: 

  • 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

Joint ventures

the establishment of a firm that is jointly owned by two or more otherwise independent firms

Advantages/disadvantages of joint ventures

• Advantages: 

  • 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 risk of opening a foreign market are shared with the partner

  • Can help firms avoid the risk of nationalization

• Disadvantages: 

  • The firm might not have the tight control over subsidiaries 

  • Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

Wholly owned subsidiaries

100% ownership of the subsidiary

Advantages/disadvantages of wholly owned subsidiaries

• Advantages: 

  • Reduce the risk of losing control over core competencies 

  • Tighter control over operations in different countries

• Disadvantages: 

  • Firms bear the full costs and risks of setting up overseas operations

Pros acquisitions

Quick to execute

Enable firms to preempt their competitors

Can be less risky than greenfield ventures

Cons of acquisitions

High Costs

Integration Challenges

Potential for Employee Turnover

Why acquisitions fail

The acquiring firms often overpay for the assets of the acquired firm

There is a clash between the cultures of the acquiring and acquired firms

Attempts to realize gains by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast

Inadequate pre acquisition screening

Greenfield investment

establishing a new operation in a foreign country

Acquisition

 buying an existing company in a foreign market

Human resource management (HRM)

in an international setting, HRM must also deal with a host of issues related to expatriate managers

Staffing policies

 the selection of employees who have the skills required to perform a particular job

The ethnocentric approach

key management positions in an international business are filled by parent-country nationals (USA)

Ethnocentric approach advantage/disadvantage

• Advantage: the firm believes there is a lack of qualified individuals in the host country (e.g. Brazil), no cultural boundaries, more effective communication back and forth 

• Disadvantage: might not be responsive to local culture, higher wages/benefits expense

The polycentric approach

host country (local) nationals are hired to manage

The polycentric approach advantage/disadvantage

• Advantage: firms pursuing a localization strategy, individual understands how to manage the local workforce

• Disadvantage: may have some challenges getting on board in the vision/strategy of the corporate perspective

The geocentric approach

the best people are sought for key jobs regardless of nationality (third country)

The geocentric approach advantage/disadvantage

• Advantage: allows the firm to make the best use of its human resources, individual can help add new perspectives

• Disadvantage: can be expensive to hire

Expatriate failure

premature (early) return of an expatriate to their home country

Reasons for expatriate failure

• The inability for an expat’s spouse to adapt to a foreign culture

• The inability of the employee to adjust

• Other family related reasons

• The manager’s personal or emotional maturity

• The inability to cope with larger overseas responsibilities 

Four expatriate selection dimensions: Self orientation

Attributes strengthen the expatriate's self-esteem, self-confidence, and mental well-being

Four expatriate selection dimensions: Others orientation

the expatriate’s ability to interact effectively with host-country nationals

Four expatriate selection dimensions: Perceptual ability

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

Four expatriate selection dimensions: Cultural toughness

how well an expatriate adjusts to a particular posting tends to be related to the country of assignment

Repatriate of expatriates

preparing expats for reentry into their home country organization

Foreign service premium

extra pay the expat receives for working outside their country of origin

Repatriation concept/challenges/problems

• Firm was vague about return/role career progression

• Took lower level jobs

• Many leave the firm within 1-3 years