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International Buss
University of Central Florida, Summer 2016, GEB3375, Peter Martin Resch Test 2
| Term | Definition |
|---|---|
| Protectionism | national economic policies that restrict free trade. Usually intended to raise revenue or protect domestic industries from foreign competition. |
| Customs | the checkpoint at national ports of entry where officials inspect imported goods and levy tariffs. |
| Tariff (definition, effect) | tax imposed on imported products; increase cost to importer, exporter, and usually the buyer of the product. discourages product imports. generates government revenue |
| quota (definition, effect) | quantitive restrains on imports of a product during a specified period of time; gives importer monopoly power and ability to charge higher prices, harms late importers, higher price to the buyer. |
| developing economies, tariffs are _____. | common |
| In advanced economies, tariffs have ______ _________ but still provide _____ _____. | declined significantly: significant revenue |
| Harmonized code | standardized worldwide system that determines tariff amount |
| Consequences of Protectionism(5) | Reduced supply of goods to buyers ; Price inflation ;Reduced variety, fewer choices available to buyers; Reduced industrial competitiveness ;Various adverse unintended consequences (e.g., while the home country dithers, other countries can race ahead) |
| Rationale for Government Intervention (2) | Tariffs can generate substantial government revenue ; Helps ensure the safety, security, and welfare of citizens.; |
| Defensive Rationale for Government Intervention(5) | 1. Protection of the national economy 2. National security 3.Protection of an infant industry 4. National culture and identity 5. National strategic priorities |
| Protection of the national economy | weak or young economies sometimes need protection from foreign competitors. E.g., India imposed barriers to shield its huge agricultural sector, which employs millions. |
| Protection of an infant industry – | a young industry may need protection, to give it a chance to grow and succeed. E.g., Japan long protected its car industry. |
| National security | – the United States prohibits exports of plutonium and similar products to North Korea. |
| National culture and identity – | Canada restricts foreign investment in its movie and TV industries. |
| National strategic priorities – | protection helps ensure the development of industries that bolster the nation’s economy. |
| Offensive Rationale for Government Intervention | Increase employment |
| Increase employment – | protection helps preserve domestic jobs, at least in the short term. |
| Subsidies | are government grants (monetary or other resources) to firm(s) intended to ensure their survival or success by facilitating production at reduced prices or by encouraging exports |
| Economic freedom | is the absence of government coercion so that people can work, produce, consume, and invest however they want. |
| Regional economic integration | results from agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production (e.g. capital) between each other. |
| Economic Bloc | A geographic area consisting of two or more countries that agree to pursue economic integration by reducing tariffs and other barriers to the cross-border flow of products, services, capital, and, in more advanced cases, labor |
| NAFTA | (Canada, Mexico, the United States) : Eliminated tariffs and most nontariff barriers for products and services: 1994 |
| El Mercado Comun del Sur (MERCOSUR) | The leading economic bloc in South America, accounting for nearly all of the region’s GDP Launched in 1991, the four initial members were Argentina, Brazil, Paraguay, and Uruguay. |
| The European Union | 28 members; Formally established in 1993: 19 member countries use the Euro (introduced 2002) – Eurozone |
| The EU: A Full-Fledged Economic Union | (1)Market access. . (2)Common market. (3)Trade rules. (4)Standards harmonization. (5) Common fiscal, monetary, taxation, and social welfare policies is the ultimate goal over time. |
| Advantages of regional integration | Expand market size Enhance productivity and economies of scale Attract investment from outside the bloc Acquire stronger defensive and political posture |
| Success factors for regional integration | Economic similarity Political similarity Similarity of culture and language Geographic proximity |
| Possible Drawbacks of Regional Integration | 1. Trade creation 2. Trade diversion 3. Aggregate effect |
| Trade creation | – As barriers fall, trade is generated inside the bloc. |
| Trade diversion | As within-bloc trade becomes more attractive, member countries discontinue some trade with nonmember countries. |
| Aggregate effect | National trade patterns are altered. More trade occurs inside bloc; less trade occurs with countries outside the bloc. |
| advanced economies | have largely evolved from manufacturing economies into service-based economies. democratic, multiparty systems of government and economic systems usually based on capitalism. tremendous purchasing power. world’s largest MNEs |
| advanced economies population | 14% of the world’s population. half of the world’s GDP |
| developing economies | have low discretionary incomes; the proportion of personal income they spend on purchases other than food, clothing, and housing is very limited |
| developing economies population | 17 % of citizens in developing economies live on less than $1 per day; around 40 % live on less than $2 per day. low income, high birth rates high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems |
| Emerging markets | rapidly improving living standards and a growing middle class with rising economic aspirations. They occupy a middle ground between advanced economic and developing economies. |
| Emerging markets are found in | 61% of the world’s population lives here in Asia, Eastern Europe, Southern Africa, Latin America, and the Middle East. Indonesia, Mexico, Poland, Turkey, China, India, South Africa, Brazil. |
| developing economies examples | Bangladesh, Bolivia, Zaire |
| Transition economies | Some of these countries have evolved from centrally planned economies to liberalized markets (China and Russia) : type of Emerging markets |
| economies population ( advanced , Emerging, developing) | advanced -14% of the world’s population Emerging- 61% of the world’s population developing- 25 % of the world’s population |
| What makes Emerging Markets Attractive | Target Markets, Manufacturing Bases , Sourcing Destinations |
| Emerging Markets as Target Markets | Many have huge middle classes with significant income for buying electronics, cars, health care services, and countless other products. Many exhibit high economic growth rates. |
| Emerging Markets as Manufacturing Bases | Home to low-wage, high-quality labor for manufacturing and assembly operations Large reserves of raw materials and natural resources as in South Africa, Brazil, Russia |
| Magnitude of Middle-Class Which country has the largest middle class? | China |
| PPP adjusted per capita GDP | represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living. |
| Market Consumption Capacity: | income of the middle class |
| Economic Freedom | : the degree to which government intervenes in business activities |
| Commercial Infrastructure: | density of telephone lines, number of personal computers, density of paved roads, population per retail outlet, and other such characteristics |
| Challenges of Emerging Markets(6) | 1. Political Instability. 2. Weak Intellectual Property Protection. 3. Bureaucracy, Red Tape, and Lack of Transparency. 4. Poor Physical Infrastructure. 5. Partner Availability and Qualifications. 6. Dominance of family conglomerates |
| Political Instability. | The absence of reliable or consistent governance from recognized government authorities adds to business costs, increases risks, and reduces managers’ ability to forecast business conditions |
| weak Intellectual Property Protection | Even when they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow. In Argentina, enforcement of copyrights on recorded music, videos, books, and computer software is inconsistent. |
| Poor Physical Infrastructure. | High-quality roads, drainage systems, sewers, and electrical utilities are typically lacking in emerging markets. In India, many still do not have access to toilets and sewage treatment systems. |
| Partner Availability and Qualifications. | Foreign firms should seek alliances with well-qualified local companies in countries characterized by inadequate legal and political frameworks. |
| Dominance of family conglomerates | Emerging economies are often dominated by privately-owned, local companies that are highly diversified and control supplies and employment. |
| New global challengers | are top firms from emerging markets that are fast becoming key contenders in world markets |
| Currency Risk | Refers to the potential harm that arises from changes in the price of one currency relative to another. |
| dollarization. | Other countries, such as Ecuador, Panama, and East Timor, have adopted the U.S. dollar as their currency in a process known as |
| In general: Exchange rates affect the fortunes of the firm in various ways – | costs of inputs, sales performance, which market entry strategies to use, etc. |
| Convertible currencies: | can be readily exchanged for other currencies and used most often for international transactions. |
| Foreign exchange | represents all forms of money that are traded internationally, including foreign currencies, bank deposits, checks, and electronic transfers |
| foreign exchange market, | the global marketplace for buying and selling national currencies |
| How are Exchange Rates Determined? | The greater the supply of a currency, the lower its price The lower the supply of a currency, the higher its price The greater the demand for a currency, the higher its price The lower the demand for a currency, the lower its price |
| The Floating Exchange Rate System(3) | 1. (Relatively) “Free” from systematic government intervention. 2. The nation’s currency ‘floats’ independently according to market forces. 3. Most advanced economies use this system. |
| The Fixed Exchange Rate System (4) | 1. Also called “pegged” exchange rate system. 2.The value of a currency is set relative to the value of another currency 3.As this “reference value” rises and falls, so does the currency pegged to it. 4. used by developing economies |
| pegged” exchange rate system | The value of a currency is set relative to the value of another currency (or to the value of a basket of currencies) |
| dirty float. | that is, the value of the currency is determined by market forces, but the central bank intervenes occasionally in the foreign exchange market to maintain the value of its currency within acceptable limits relative to a major reference currency. |
| What was the idea of European countries adopting a common currency (Euro)? | One of the driving idea was to take away currency risk affecting business transactions for European companies doing business in other European countries. |
| Herding: | Tendency of investors to mimic each other’s actions |
| International monetary system | : the institutional framework, rules, and procedures by which national currencies are exchanged for one another. |
| Global financial system: | the collection of financial institutions that facilitate and regulate the flows of investment and capital funds worldwide. It includes the national and international banking systems, the international bond market, and national stock markets. |
| Lead strategy | - attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate |
| Lag strategy - | delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate |
| Global market opportunity | A favorable combination of circumstances, locations, or timing that offers prospects for exporting, investing, sourcing, or partnering in foreign markets |
| The Six Tasks of Global Market Opportunity Assessment (GMOA)(1-3) | 1. Analyze organizational readiness to internationalize 2. Assess the suitability of the firm’s products and services for foreign markets 3. Screen countries to identify attractive target markets |
| The Six Tasks of Global Market Opportunity Assessment (GMOA)(4-6) | 4. Assess the industry the market demand for the product(s) or service(s) in selected target markets 5. Choose qualified business partners, such as distributors or suppliers 6. Estimate company sales potential for each target market |
| GMOA Task 1. Organizational Readiness | Examine company strengths and weaknesses for international business, such as: Appropriate financial and tangible resources Relevant skills and competencies Management’s commitment to internationalization |
| The products or services with the best international prospects tend to have the following four characteristics: | 1. Sell well in the domestic market 2.Cater to universal needs 3. Address a need not well served in particular foreign markets. 4. Address a new or emergent need abroad. |
| GMOA Task 2. Product Suitability : Foreign customer characteristics and behavior questions | Who initiates purchasing? Who uses the product or service? Why do people buy the product or service? Where do people purchase the product or service? What economic, cultural, geographic, and other factors in the target market may limit sales? |
| GMOA Task 3: Screening countries to identify target markets | most likely for your do reduce the number of possible markets (your company considers to be interesting) and then look at those countries in more detail. |
| GMOA Task 3: Screening countries to identify target markets: detailed information things to look at | Market intensity (customers’ buying power), Consumption capacity (size and growth rate of the middle class), Cultural Similarity with Target Market may Matter. Targeting a Region may Make Sense. |
| Gradual Elimination | Firm narrows the choices by examining increasingly specific information. Initially, macro-level indicators like population, income, and economic growth are examined before delving into specific information. |
| Indexing and Ranking: | Firm assigns scores to countries based on their overall market attractiveness. |
| Market intensity | customers’ buying power |
| Consumption capacity | size and growth rate of the middle class |
| Company Sales Potential | An estimate of the share of annual industry sales that the firm expects to generate in a particular target market. |
| industry Market Potential | An estimate of the likely sales that can be generated by all firms in a particular industry during a specific time period. |
| GMOA Task 4: Assessing Industry Market Potential | you know need to get an idea about the SIZE of the opportunity in a foreign market – you need some quantitative measure. |
| GMOA Task 5: Choosing Foreign Business Partners | What TYPE of foreign business partner you will needs depends to a large extent on exactly HOW the company intends to to business there (Entry Strategies: e.g. exporting, franchising, licensing, FDI, sourcing). |
| GMOA Task 6: Estimating Sales Potential | Survey end-users and intermediaries Competitor assessment Obtaining estimates from local partners Limited marketing efforts to “test the waters |
| Low-control strategies | are exporting, countertrade, and global sourcing. They provide the least control over foreign operations, because the focal firm delegates considerable responsibility to foreign partners, such as distributors or suppliers. |
| Moderate-control strategies | are contractual relationships such as licensing and franchising and project-based collaborative ventures. |
| High-control strategies | are equity joint ventures and FDI. The focal firm attains maximum control by establishing a physical presence in the foreign market |
| high-control strategies require ____ ______ commitments by the focal firm | substantial resource |
| because the firm becomes anchored or physically tied to the foreign market for the long term, it has less ______ | Flexibility |
| longer-term involvement in the market also implies considerable ______ due to uncertainty in the political and customer environments | risk |
| Exporting: | Producing products or services in one country (often the producer’s home country), and selling and distributing them to customers in other countries. |
| Importing or Global sourcing, | also known as global procurement, or global purchasing, is the strategy of buying products and services from foreign sources and bringing them into the home country or a third country. |
| Countertrade | refers to an international business transaction in which full or partial payments are made in kind rather than cash. That is, instead of receiving money as payment for exported products, the firm receives other products or commodities |
| Export Intermediation Option (3) | 1. Indirect Exporting: 2. Direct Exporting 3. Company-Owned Foreign Subsidiary: |
| Indirect Exporting: | Contracting with an intermediary in the firm’s home country to perform all export functions, often an export management or trading company. Common among firms new to exporting. |
| Indirect Exporting:The advantage | The advantage is that it provides a way to penetrate foreign markets without the complexities and risks of more direct exporting. |
| Direct Exporting | Contracting with intermediaries in the foreign market, such as distributors or agents, to perform export functions. They perform downstream value-chain activities in the target market |
| Direct Exporting: The main advantage | The main advantage of direct exporting is that it gives the exporter greater control over the export process and potential for higher profits, as well as allowing a closer relationship with foreign buyers and the marketplace. |
| Direct Exporting: The main disadvantage | exporter also must dedicate substantial time, personnel, and corporate resources to developing and managing export operations |
| Company-Owned Foreign Subsidiary: | Similar to direct exporting except the exporter owns the foreign intermediation operation; the most advanced option. |
| Quotation or pro forma invoice: | Issued on request to advise a potential buyer about the price and description of the exporter’s product or service. |
| Documentation refers to: | the official forms and other paperwork required in export transactions for shipping and customs procedures. The exporter usually first issues a quotation or pro forma invoice upon request by potential customers. It informs them about the price |
| Commercial invoice: | Actual demand for payment issued by the exporter when a sale is concluded. |
| Bill of lading: | Basic contract between exporter and shipper. Authorizes the shipping company to transport the goods to the buyer’s destination. |
| Shipper's export declaration: | Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped. Used by governments to collect statistics. |
| Certificate of origin: | The "birth certificate" of the goods, showing country where the product originated. |
| Incoterms (International Commerce Terms) | A system of universal, standard terms of sale and delivery. |
| Incoterms (International Commerce Terms) Commonly used in international sales contracts and price lists to: | specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods. |
| EXW ex Works (named place) | Delivery takes place at the seller's premises or another named place; buyer arranges sipping |
| FOB free on board(named Port of shipment) | Delivery takes place when the goods passed a shipper at the main support of shipment, the port hub Origin in the seller's own country. |
| CIF cost insurance and freight | Seller pays the cargo insurance and delivery of goods to the named for of the destination. From the destination port buyers responsible for customs clearance and other costs and risks. Seller arrange shipping insurance |
| Cash in Advance | When the exporter receives cash in advance, payment is collected before the goods are shipped to the customer. ADVANTAGES :Best for the seller DISADVANTAGES: Risky from the buyer’s standpoint, and thus unpopular; tends to discourage sales. |
| Open Account ADVANTAGES and DISADVANTAGES | ADVANTAGES :Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed. DISADVANTAGES: Risky unless there is a strong, established relationship between exporter and buyer |
| Open Account | t When the exporter uses an open account, the buyer pays the exporter at some future time following receipt of the goods, in much the same way a retail customer pays a department store on account for products he or she has purchased |
| Letter of Credit ADVANTAGES and DISADVANTAGES | ADVANTAGES :A contract between the banks of the buyer and the seller. Largely risk-free, it helps establish instant trust. DISADVANTAGES: Requires following a strict protocol specified in the contract. Can involve much paperwork. |
| letter of credit | is a contract between the banks of the buyer and seller that ensures payment from the buyer to the seller upon receipt of an export shipment. |
| Barter | : Goods are directly exchanged without the transfer of any money. |
| Compensation deal: | Payment in goods and cash |
| Counterpurchase, | Entails two distinct contracts. In the first, the seller agrees to a set price for goods and receives cash from the buyer, contingent on a second contract in which the seller agrees to purchase goods from the buyer. |
| Foreign direct investment (FDI): | Strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labor, land, plant, and equipment. |
| International collaborative venture: | A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture. |
| Joint venture (JV): | A form of collaboration between two or more firms to create a jointly-owned enterprise. |
| three motives for direct investment | 1. market seeking motives. 2. resource or asset seeking notice. 3. efficiency seeking motives |
| market seeking motives | gain access to new markets or opportunities follow key customers compete with key rivals in their own markets |
| resource or asset seeking motives | resource or asset seeking motives raw materials needed in extractive or agricultural industries, knowledge or other assets, technological and managerial know-how |
| efficiency seeking motives | reduce sourcing and production costs by accessing inexpensive labor and other cheap inputs to the production process, locate production near customers, take advantage of government incentives, avoid trade barriers |
| 3 ways to classify FDI and collaborative venture activities | 1. By form (Greenfield investment vs. Mergers and Acquisitions) 2. By Nature of Ownership (wholly owned vs. joint venture) 3. By Level of Integration (vertical vs. horizontal). |
| Greenfield investment: | The firm invests to build a new manufacturing, marketing, or administrative facility (as opposed to acquiring existing facilities). |
| Acquisition: | direct investment or purchase of an existing company or facility. |
| Acquisition: Advantage | Home Depot entering Mexico: Acquired an existing Mexican retailer (Home Mart) instead of starting from scratch (greenfield investment). |
| Merger: | special type of “acquisition” in which two firms join to form a new, larger company. |
| equity joint-venture | (partnership in which a separate firm is created abroad through the investment or pooling of assets by two ore more companies) |
| Horizontal Integration | An arrangement whereby a firm owns, or seeks to own, the activities performed in a single stage of the value chain. |
| Vertical Integration | An arrangement whereby the firm owns, or seeks to own, multiple stages of a value chain for producing, selling or delivering a product or service. |
| Vertical Integration: Forward integration | towards the consumer |
| Vertical Integration: Backward integration: | towards the materials or parts |
| International Collaborative Venture | A partnership between two or more firms Includes equity joint ventures (seen before) and non-equity, project-based ventures |
| International Collaborative Venture, advantages | Collaboration helps overcome the often substantial risk and high costs of international business. It makes possible the achievement of projects that exceed the capabilities of the individual firm. |
| Consortium: | project-based, usually non-equity venture with multiple partners fulfilling a large-scale project (e.g. Shanghai airport) |
| services | such as lodging, construction, and personal care – must offer them when and where they are consumed. |
| Service firms establish either a permanent presence via____ (e.g., retailing), or a ______ ___ ______ _____ (e.g., construction industry). | FDI : temporary relocation of personnel |
| If an individual buys from a supplier whose currency is depreciating against the individual's currency, the individual will have to pay a larger amount of his own currency to complete the purchase. | False |
| All else being equal, the greater the supply of a currency, the lower its price; the lower the supply of a currency, the higher its price. | True |
| When assessing the firm's readiness to internationalize, managers peer into their organization to determine the degree to which it has the resources necessary to successfully engage in international business. | True |
| Products or services that are well-received at a firm's home country are more likely to be accepted in foreign countries as well. | True |
| With a high percentage of college-educated citizens, countries such as China and India have become a source for international firms seeking knowledge workers. | True |
| Market consumption capacity is the proportion of a country's population concentrated in cities. | False |
| Compared to other entry strategies, exporting minimizes risk and maximizes flexibility. | True |
| The bill of lading is the "birth certificate" of the goods being shipped and indicates the country where they originate. | False |
| Compensation deal is a type of countertrade in which goods are directly exchanged without the transfer of any money. | False |
| Which of the following foreign market entry strategies offers the focal firm the highest degree of control over foreign operations? | wholly owned subsidiary (FDI) |
| Which of the following is true about FDI? | A focal firm attains maximum control by establishing a physical presence in the foreign market. |
| Which of the following documents is the contract between the shipping company and the exporter? | bill of lading |
| Which of the following methods of payment is the LEAST popular among foreign buyers? | cash in advance |
| A greenfield investment is a direct investment to purchase an existing company or facility. | False |
| FDI is the most advanced and complex foreign market entry strategy. | True |
| A firm that owns the activities performed in a single stage of its value chain is demonstrating ________. | horizontal integration |
| A firm that builds a new manufacturing facility in a foreign market is participating in a(n) ________. | greenfield investment |
| Rationale for Protectionist measures: | Increase government revenue, Protection of the national economy (against competition), protection of an infant industry, protect national security, protect national culture, increase employment. |
| Index of Economic Freedom | assesses the rule of law, trade barriers, regulations, and other criteria. |
| Emerging Markets as Sourcing Destinations examples | MNEs have established numerous call centers in Eastern Europe, India, the Philippines, and elsewhere. Intel and Microsoft have much of their programming activities performed in Bangalore, India. |
| Market Size | the country’s population, especially those living in urban areas |
| Market Growth Rate: | the country’s real GDP growth rate |
| Two systems govern exchange rates: | 1. The International Monetary System 2. The Global Financial System |
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