Intro to International Business Exam 3

Regional Economic Integration

Agreements between countries in a geographic region to reduce tariff and non-tariff barriers.

Levels of Economic Integration

Different stages of economic cooperation among countries, including Free Trade Area, Customs Union, Common Market, Economic Union, and Political Union.

Free Trade Area

Most popular form of integration, where all barriers to trade among member countries are removed.

Customs Union

Eliminates trade barriers between member countries and adopts a common external trade policy.

Common Market

No barriers to trade between member countries, a common external trade policy, and free movement of factors of production.

Economic Union

A form of integration that allows free flow of products and factors of production, includes a common currency and harmonization of policies.

Political Union

Combines independent states into a single union with a central political structure for economic, social, and foreign policy coordination.

Trade Creation

Occurs when low-cost producers within a free trade area replace high-cost domestic producers.

Trade Diversion

Occurs when higher-cost suppliers within a free trade area replace lower-cost external suppliers.

North American Free Trade Agreement (NAFTA)

A trade agreement between the U.S., Canada, and Mexico that was renegotiated to become the US-Mexico-Canada Agreement (USMCA).

European Union (EU)

A political and economic union of member states established to facilitate economic cooperation and a single market.

Euro

The common currency used by 19 of the 28 member states of the European Union, adopted under the Maastricht Treaty.

ASEAN

Association of Southeast Asian Nations, a regional intergovernmental organization comprising ten Southeast Asian countries.

MERCOSUR

A South American trade bloc with Brazil, Argentina, Paraguay, Uruguay, and Venezuela aiming for free trade and economic integration.

Maastricht Treaty

A treaty that committed EU members to adopt a single currency and enhanced political integration among its member states.

Implications for Managers

Regional economic integration creates more competitive markets and opens up previously protected markets to foreign competition.

Pros of Regional Integration

Promotes trade, reduces conflict between nations, and provides greater bargaining power in global affairs.

Cons of Regional Integration

Can lead to trade diversion, loss of sovereignty, and may not always result in better trade solutions.

International Monetary System

The institutional arrangements that govern exchange rates via foreign exchange markets (ForEx Mkts).

Floating Exchange Rate System

A system where the foreign exchange market determines the relative value of a currency.

Pegged Exchange Rate System

A system where the value of a currency is fixed to another country's currency.

Dirty Float

A currency value determined by market forces with central bank interventions to remain competitive.

Bretton Woods System

An international monetary system established in 1944 that pegged the U.S. Dollar to gold, with other currencies valued relative to it.

Jamaica Agreement

The 1976 agreement that revised IMF Articles to recognize floating exchange rates and abandoned gold as a reserve asset.

Exchange Rate Crisis

A crisis resulting from a speculative attack on a currency, leading to sharp depreciation.

Monetary Policy Autonomy

The ability of a government to control its own monetary policy free from the constraints of maintaining exchange rate parity.

Fixed Exchange Rate System

A system that offers monetary discipline, limits speculation, and reduces uncertainty in exchange rates.

IMF Quotas

The total amount contributed by member countries to the International Monetary Fund, currently around $300 billion.

Financial Crisis Types

Three types: currency crisis, banking crisis, and foreign debt crisis.

Speculation

The act of buying or selling currencies based on predictions of future market behavior, which can lead to exchange rate volatility.

Trade Balance Adjustments

Mechanisms by which balance of payments are corrected, more smoothly under a floating exchange rate system.

Managed Float System

A system where countries allow their currency to float but with some intervention by the government.

Corporate-Government Relations

The lobbying efforts of businesses to influence government trade and currency policies for reduced exchange risk.

Entry Modes

Different methods a firm can use to enter foreign markets, including exporting, licensing, franchising, joint ventures, and wholly owned subsidiaries.

Pioneering Costs

Costs incurred when a firm enters a foreign market as an early entrant, including costs of business failure or establishing a product.

Wholly Owned Subsidiaries

A form of market entry where a firm owns 100% of the subsidiary, either through new operations or acquiring an existing firm.

Licensing

A business arrangement where a licensor grants rights to intangible property to a licensee in exchange for royalties.

Joint Ventures

A business entity created by two or more independent firms that share ownership, profits, and costs.

Exporting

The process of selling domestically produced goods to foreign markets, often considered the first method for market entry.

Greenfield Venture

A strategy for entering a foreign market by building new operational facilities from the ground up.

Acquisition

The act of obtaining control over an existing firm in a foreign market.

Franchising

A form of licensing in which a franchisor provides intangible assets and requires strict operational guidelines from the franchisee.

Political Stability

A condition where a country's government and political environment are stable, making it favorable for businesses.

Market Entry Timing

The strategy of deciding when to enter a foreign market, which can be early or late based on competitors' presence.

Experience Curve Economies

Cost advantages that companies experience as they produce more, allowing them to lower prices and increase market share.

Market Potential Assessment

Evaluating the long-term profit potential of foreign markets to determine attractiveness for entry.

Operational Risks

Challenges and uncertainties a firm faces when entering and operating in a foreign market.

Competitive Advantage

A condition or circumstance that puts a company in a favorable position over its competitors.

Exporting

The process of selling goods and services to foreign countries.

Importing

The buying of goods and services from foreign countries.

Countertrade

A range of barter-like agreements that facilitate the trade of goods and services when cash payment is not an option.

Letter of Credit

A document issued by a bank guaranteeing payment to a seller, provided that certain delivery conditions are met.

Draft

An order written by an exporter instructing an importer or the importer's agent to pay a specified amount of money at a specified time.

Bill of Lading

A document issued by a carrier that details the type and quantity of goods being transported and serves as proof of the transfer of ownership.

Export Management Company (EMC)

A firm that provides export marketing services and manages the export process for client companies.

Counterpurchase

A reciprocal buying agreement where a firm agrees to purchase materials back from a country to which a sale is made.

Barter

A direct exchange of goods and/or services between two parties without involving cash.

Offset

An agreement where one party agrees to purchase goods and services with a percentage of the proceeds from an original sale.