C211 Global Economics for Managers

List two core perspectives for global business

Institution based view & Resource based view

Institution based view

success and failures of firms are enabled/constrained by institutions. they are the formal and informal rules of the game (ex: regulatory, normative, cognitive pillar)

Resource based view

focuses on firm internal resources and capabilities (ex: southwest airlines, pepsico, VRIO)

What is globalization? and what are the three views on globalization?

closer economic integration of countries and peoples of the world. New force, evolutionary, pendulum

New Force

sweeping through world in recent times (modern): technology based, late 20th century, causes environmental stress, social injustice, labor, etc.

Evolutionary

a long running historical view: it is nothing new and always exists

Pendulum

a pendulum swinging between extremes: neither recent nor one direction

What is FDI?

foreign direct investment: the control and management of activities in a foreign country.

Multinational Enterprise (MNE)

firms that engage in FDI

Foreign Portfolio Investments (FPI)

holding securities, such as stocks and bonds, of companies in countries outside one’s own but does not enatil the active management of foreign assets (basically stocks and bonds)

Management control rights

authority to appoint key managers and establish control mechanisms

Horizontal FDI

producing the same products or offering the same services in a host country as firms do at home (duplication its home country-based activities) at same value chain stage

Vertical FDI

firm moves upstream or downstream in different value chain stages in a host country through FDI

What is the OLI advantage?

stands for ownership, location, internalization; together forming a framework known as the OLI model that explains why and how multinational enterprises (MNE) expand internationally. Each component highlights the factors that influence a company’s decision to invest in foreign markets.

Ownership

MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets. If a firm’s resources and capabilities pass the VRIO test, they contribute to its competitive edge, which forms the basis of its Ownership advantage.

Example of Ownership in OLI

A company like Apply, has ownership advantages in the form of proprietary technology, strong brand identity, and advanced management practices. These assets are difficult for competitors to replicate, providing Apple with a competitive edge when it operates overseas. (Owning technology/management to make product)

Location

Location advantages refer to the benefits derived from operating in a specific geographic location. near natural or labor resources or location near particular markets.

Internalization

advantage of replacement of cross-border markets (such as exporting and importing) with one firm (the MNEs) locating and operation in two or more countries

What are the three political view on FDI?

radical view, free market view, pragmatic view

Radical view

treats FDI as an instrument of imperialism (from Marxism) and a vehicle for exploiting domestic resources, industries, and people by foreign capitalists and firms (evil corps only care about profit)

Free market view

unrestricted by government intervention, FDI will enable counties to tap into their absolute or comparative advantages by specializing in the production of certain goods and services

Pragmatic nationalism

considering both the pros and cons of FDI and approving FDI only when its benefits outweigh its costs

Carrier (HVAC company) decided to close its manufacturing plant in Ohio and move it to Mexico. Which country is the host and which is the home?

host: mexico, home: USA/ohio

Carrier (HVAC company) decided to close its manufacturing plant in Ohio and move it to Mexico. What are the costs and benefits of FDI to the host country?

(mexico)

benefits: capital inflow, technology transfer/spillover, management techniques, job creation

costs: loss of sovereignty about closures/layoffs, increased competition, capital outflow (profit repatriation)

Carrier (HVAC company) decided to close its manufacturing plant in Ohio and move it to Mexico. What are the costs and benefits of FDI to the home country?

(USA/ohio)

benefits: earnings from abroad from FDI, increased exports (may increase the need for intermediate goods and services in home country), learning via FDI from operations abroad.

costs: capital outflow (investment in foreign assets), job losses domestically

What is collusion, and what characteristics of a market make collusion difficult?

collective attempts between competing firms to reduce competition.

can be tacit or explicit

Potential/characteristic for collusion: concentration ratio, price leader, homogeneous products, market commonality

Tacit collusion

firms engage in this when they indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels

Explicit collusion

exists when firms directly negotiate output and pricing and divide markets. antitrust laws make collusion more difficult

Concentration ratio

The percentage of total industry sales accounted for by the top four, eight, or 20 firms. in general, the higher the concentration, the easier it is to organize collusion

Price leader

the existence of a price leader — a firm that has a dominant market share and sets “acceptable” prices and margins in the industry —- helps maintain order and stability needed for tacit collusion

Capacity to punish

sufficient resources possessed by a price leader to deter and combat defection (if you try to undercut prices you get punished)

Industry with Homogeneous products

An industry with homogeneous products, in which rivals are forced to compete on price (rather than differentiation), is likely to lead to collusion

Market commonality

the degree of overlap between two rivals’ markets — also had a significant bearing on the intensity of rivalry. a high degree of market commonality may act as a restraining factor on rivalry (to avoid tit for tat in common markets)

How do resources (remember: resource-based view of global business) and capabilities influence the competitive dynamics of a business?

VRIO framework:

Value - a firm’s recources must create value when engaging rivals. patents can prevent competitors from easily copying innovations. also, for example, the ability to attack in multiple markets — of the sort Apple and Samsung process when launching their smartphones in numerous countries — throws rivals off balance, thus adding value. likewise, the ability to respond rapidly to challenges also adds value.

Rarity - certain assets are very rare, generating a competitive advantage. Emirates airport location in Dubai is rare for its location.

Imitability - how easily a resource is imitated and how a rival competes.

Organization - some firms are better organized for competition, such as stealth attacks (lowkey introducing a product in a market) and answering challenges tit for tat.

What is resource similarity?

the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the local firm

How does resource similarity impact competitive dynamics?

Firms with a high degree are likely to have similar competitive actions (Apple vs. Samsung, McDonald’s vs. Starbucks). McDonald's is attacking Starbucks with its iced coffee drinks, and Starbucks seeing the need to introduce more cost-effective drinks into their menu

What is cooperation and signaling?

How firms signal their intention to cooperate in order to reduce competitive intensity.

short of illegaly talking directly to rivals, firms have to resort to signaling — that is “While you can’t talk to your competitors on pricing, you can always wink at them.”

What four strategies can local firms take to fight MNEs? (multinational enterprises)

dodger (“sold out DODGERs stadium” - the company SOLD OUT

contender

extender (both contender & extender have “t’s” so think TRANSFERABLE)

defender (defend home plate so think MARKET ADVANTAGE)

Dodger

cooperate with MNEs through joint ventures or sell-offs. in this strategy, the local firm recognizes that competing directly with large MNEs is difficult, so it seeks alliances or partnerships with them.

Contender

Rapid learning and expansion overseas. The local firm seeks to develop capabilities quickly and then compete on a global scale. This involves heavy investment in R&D or operational improvements.

Defender

Focuses on leveraging local assets where MNEs are weak, such as cultural understanding, customer relationships, or niche market needs. The goal is to protect the local firm’s home market by utilizing its deeper knowledge of local tastes or conditions.

Extender

A strategy that centers on leveraging homegrown competencies abroad/internationally. A firm uses its strengths in its home market, such as unique products or business models, to expand into other regions with similar conditions.

Trade deficit

nation imports more than exports

Trade surplus

nation exports more than it imports

balance of trade

nation has neither surplus or deficit

Classical International trade theory - mercantilism

a theory that suggest that the wealth of the world is fixed and that a nation that exports more and imports less will be richer

Classical International trade theory - absolute advantage

nation gains by specializing in economic activities in which that nation has an absolute advantage. Absolute advantage = to be more efficient than anyone else in the production of any good or service

Classical International trade theory - comparable advantage

relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

ex: nation A has an absolute advantage in production of all goods compared to nation B. As long as nation B is not equally less efficient in the production of both goods, nation B can still choose to specialize in the production of one good in which it has comparative advantage.

Modern international trade theories - product life cycles

this theory explains how a company’s location of production and export patters change over time as its product(s) moves through its life cycle stages (introduction, growth, maturity, and decline).

Modern international trade theories - strategic trade

a theory that suggests that strategic intervention by governments in certain industries can enhance their odds of international success. ex: Airbus and EU subsidy and support. (first mover firms, aided by governments, may have better odds at winning internationally.)

Modern international trade theories - theory of National Competitive Advantage of Industries “Porter DIAMOND theory”

a theory that sugges that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”

-overseas demand may stimulate the competitiveness of certain industries

How can changes in the interest rate affect the exchange rate?

if one country’s interest rate is high relative to other countries, then the country will attract foreign funds (leading to currency appreciation)

How do changes in the inflation rate affect the exchange rate?

Inflation affects the purchasing power of a country’s currency. If a country experiences higher inflation than other countries, its goods and services become more expensive, reducing demand for exports and foreign investment.

Strategic hedging

spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions (currency diversification)

Currency hedging

a transaction that protects traders and investors from exposure to the fluctuations of the spot rate (FX rate)

Three types of currency transactions presented in this course?

spot, forward, currency swap

Which type of currency transaction is considering currency hedging?

forward transactions

Spot transactions

single-shot exchange of one currency for another

Forward transactions

foreign exchange transaction in which participants buy and sell currencies now for future delivery (currency hedging)

Currency swap

a foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it to the original currency at a specified Time 2 in the future.

If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?

forward transactions (currency hedging), it locks in the exchange rate, protecting the company for unfavorable currency fluctuations.

Give an example of a first mover, and list advantages and disadvantages

proprietary, technological leadership (Apple)

-pre-emption of scarce resources, establishment of entry barriers for late entrants

-avoid clashing with dominant firms in their home market

Give an example of a late mover, and list advantages and disadvantages

BMW, GM, Toyota waiting for Nissan Leaf to resolve uncertainties about electric car

-opportunity to free ride on first mover investments,

What are the two modes of foreign market entries? Describe each scale of entry (# resources committed) with examples.

Equity mode - a mode of entry (JVs and wholly owned subsidiaries) that is indicative of relatively larger, harder to reverse commitments (like strategic alliances, acquisitions)

Nonequity mode - a mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas market

How do institutions reduce uncertainty?

-by signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions

-institutional frameworks increase certainty by spelling out the rules of the game so that violations (such as failure to renew a contract) can be mitigated with relative ease (such as through formal arbitration and courts)

Institutional-based view of global business

-made up of formal and informal institutions governing individual and firm behavior

-three pillars: regulatory pillar, normative pillar, cognitive pillar

Regulatory pillar

the coercive power of governments

Normative pillar

the mechanism through which norms influence individual and firm behavior (vlaues, norms, external expectations, CSR)

Cognitive pillar

the internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior (internal belief system, culture)

What are the two core propositions that lie at the root of institution-based view of global business?

first core proposition & the second proposition

First core proposition

managers and firms rationally pursue their interests and make choices within institutional contraints

The second proposition

while formal and informal institutions combine to govern individual and firm behavior, in situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing uncertainty and providing constancy to managers and firms.

Totalitarianism

a political system in which one person or party exercises absolute political control over the population

Communist totalitarianism

centers on a communist party

Right-wing totalitarianism

characterized by its intense hate against communism.

one party, typically backed by the military, restrics political freedom, arguing that such freedom would lead to communism.

Theocratic totalitarianism

refers to the monopolization of political power in the hands of one religious group or party

think religion (theo)

Tribal totalitarianism

refers to one tribe or ethnic group (which may or may not be the majority of the population) monopolizing political power and oppressing other tribes or ethnic groups

Democracy

a political system in which citizens elect representatives to govern the country on their behalf.

Civil law & example of country in system

-a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgements (China)

Common Law & example of country in system

legal tradition that is shaped by precedents and traditions

-United States

Theocratic law & example of country in system

religious law

-Iran

Market Economy

an economy that is characterized by the “invisible hand” of market force (hands off approach aka laissez-faire)

-no gov’t involvement

-most flexible

-has private property

Command economy

an economy that is characterized by government ownership and control of factors of production (N-korea)

-has public owned means of production

Mixed economy

an economy that has elements of both a market economy and a command economy

What is political risk? Describe and provide an example

-risk associated with political changes that may negatively impact domestic and foreign firms

-Zimbabwe demanded that foreign mining companies cede 51% of their equity without compensation

What are the business implications for conducting international business in countries with different political and economic systems?

-Totalitarianism in general is not as good for business as compared to democracy. Totalitarian counties often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk. A business also might lose its equity and right to do business.

What are property rights, and how are they protected?

the legal right to use an economic property (resource) and to derive income and benefits from it.

How is intellectual property protected? What are the different types of intellectual property protections?

-intangible property that results from intellectual activity.

-IPR: rights associated with ownership of intellectual property (patents, copyrights, and trademarks)

What are the reasons why intellectual property protections are critical in today’s global business environment?

supports the development of knowledge-based industries, stimulates international trade and encourages investment and technology transfer

What is a budget constraint? What information is being represented by the constraint?

-a boundary or limit that determines the combinations of goods and services that a person or household can afford to purchase, given their income and the prices of the goods and services

-illustrates the prices that a consumer chooses to pay for products he consumes

How would a budget constraint be impacted by the following? an increase in income

The consumer can afford more of both goods - the increase income, therefore shifts the

How would a budget constraint be impacted by the following? the price of one of the goods increased

-the slope is pivoted inwards (the rate of exchange has changed)

How would a budget constraint be impacted by the following? the price of both goods decreased by 10%

-slope has shifted outwards since the consumer can now afford more of both goods

What does an indifference curve show/represent?

shows consumption bundles that give the consumer the same level of satisfaction.

-the slope of an indifference curve at any point is the consumer’s marginal rate of substitution

-basically a way to show how a consumer feels about different combinations of goods

What type of curve is preferred in context of the budget line?

higher curves are preferred over lower curves

4 properties of indifference curves

-Property 1: Higher indifference curves are preferred to lower ones. People like to consume more than less

-Property 2: Indifference curves slope downward. reflects the rate at which a consumer is willing to substitute one good for the other.

-Property 3: indifference curves do not cross. This would contradict that the consumer always prefers more of both goods to less.

-Property 4: indifference curves are bowed inward. The slope is the marginal rate of substitution - the rate at which the consumer is willing to trade off one good to another

Optimum consumption point

the point at which the indifference curve and the budget constraint touch

Total cost is made up of two types of cost, what are they?

-fixed cost & variable cost

-fixed cost + variable cost = total cost

Fixed cost

costs that do not vary with the quantity of output produced (rent, wages of non-production staff)

Variable cost

costs that vary with the quantity of output produced. (supplies for production, production staff)