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C211 Study Guide Questions and Answers COMPETENCY: Globalization (Peng Chapters 1, 5, 6, 11) 1. Explain the New, Evolutionary, and Pendulum views of Globalization. How do these differ from one another? New: a new force sweeping through the world in recent times Globalization is a new phenomenon that comes from western ideology, technology and the want to dominate the world through MNE’s. Evolutionary: a long-run historical evolution since the dawn of human history States that globalization has been a natural part of history and that traces of globalization have existed within roman, Assyrian, Phoenician times. Some examples of this were importing silks or the East India Company importing goods in the colonial times. Pendulum: a pendulum that swings from one extreme to another from time to time The flows of goods, capital, knowledge, and people across borders. Neither recent or one directional, it moves back and forth with the flow of the worlds needs and events.

2.

What is Foreign Direct Investment?

Investing in, controlling, and managing value-added activities in other countries. 3. What different political views exist on FDI? Radical: Hostile to FDI – tracing roots to Marxism. Treats FDI as an instrument for imperialism and a vehicle for exploitation of the domestic resources a foreign economy can offer. Free Market View: Suggests that FDI, unrestricted by government, will enable countries to tap into their advantages for specializing in the production of certain goods and services. Win Win Logic. Pragmatic Nationalism: Views FDI to have both pros and cons and only approves FDI if the benefits outweigh costs. 4. What benefits exist to a country receiving FDI? Elaborate. Host (recipient) Country Benefits: Capital inflow, technology, management, job creation. Home (source) Country Benefits: Earnings, exports, learning FDI from operations abroad

5. What costs exist to a country receiving FDI? Host Country Costs: Loss of sovereignty, competition, capital outflow Home country Costs: Capital outflow, job loss 6.

Elaborate.

How do resources and capabilities influence the competitive dynamics of a business?

Value: Firm resources must create value when engaging rivals. The ability to attack in multiple markets. Samsung and Apple are good examples because new smartphone launches in various countries simultaneously will throw off rivals, adding value. The ability to respond rapidly to challenges also adds value. Another way of adding value is patenting. The proliferation of patents makes it very easy for one firm to unwittingly infringe on rival’s patents.

Rarity: rare assets. Emirates has on of the best locations as a home base and is a well-run organization supported by government. They also have the advantage to fly overnight from Dubai, when other airlines cannot. Imitability: How well competition can be imitated by others. Organization: Firms better organized for competitive actions, such as stealth attacks and answering challenges.

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What is resource similarity and how does this impact competitive dynamics?

Resource Similarity: the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm. Apple vs. Samsung, McDonalds vs. Starbucks. McDonalds attacking Starbucks with its iced coffee drinks, Starbucks seeing the need to introduce more cost-effective drinks into their menu.

COMPETENCY: International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10)      

mercantilism, absolute advantage, comparative advantage, product life cycle, strategic trade, and national competitive advantage. 1.

Give a description of the classical theory of international trade.

The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage. 2.

How would the modern theory compare to the classical theory?

The major theory of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries. 3.

Compare absolute advantage to comparative advantage. What differences exist?

With free trade, each nation gains by specializing in economic activities in which it has absolute advantage.

Absolute advantage is an advantage that influences countries to trade with one another based on their strengths: England should specialize in sheep and wool, Portugal should specialize in grapes and wines, and They should trade with each other. Comparative advantage: suggests that even though the United States has an absolute advantage over China in both wheat and aircraft, as long as China is not equally less efficient in the production of both goods, China can still choose to specialize in the production of one good (such as wheat) where it has comparative advantage—defined as the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. If China devotes all resources to wheat, it can produce 10,000 tons, which is four-fifths of the 12,500 tons the United States can produce. However, at a maximum, China can only produce 20 aircraft, which is merely half of the 40 aircraft the United States can make. By letting China specialize in the production of wheat and importing some wheat from China, the United States is able to leverage its strengths by devoting its resources to aircraft 4.

What is mercantilism and why is this an important term?

Mercantilism: Views international trade as a zero-sum game. Believed that the wealth of the world was fixed on the wealth of silver and gold. A nation that exported more and imported less would enjoy the net flows of gold and silver, and thus become richer. Self-sufficiency was the best way to combat this issue. Promotes each nation to be self-sufficient, but also engage in trade to enhance their economic growth.

5.

What are the critical features of the product life cycle?

The first dynamic theory to account for changes in the patterns of trade over time. 1. lead innovation nation (which, according to him, is typically the United States), 2. other developed nations, and 3. developing nations. Further, every product has three life cycle stages: new, maturing, and standardized 6.

How would you describe strategic trade?

Strategic trade theory suggests that strategic intervention by governments in certain industries can enhance their odds for international success. What are these industries? They tend to be high capitalintensity, high entry-barrier industries in which domestic firms may have little chance without government assistance. One leading example is the commercial aircraft industry. Founded in 1915 and strengthened by large military orders during World War II, Boeing has long dominated this industry. In the jumbo jet segment, Boeing’s first-mover advantages associated with its 400-seat 747, first launched in the late 1960s, are still significant today. Alarmed by such US dominance, in the late 1960s, British, French, German, and Spanish

governments realized that if they did not intervene in this industry, individual European aerospace firms on their own might be driven out of business by US rivals. Therefore, these European governments agreed to launch and subsidize Airbus. In four decades, Airbus has risen from nowhere to a position where it now has a 50–50 split of the global market with Boeing. 7.

How are supply and demand related to the exchange rate of a country?

Strong demand will lead to price hikes, and over-supply will result in price drops. Of course, we are dealing with a most unusual commodity here, money, but the basic underlying principles still apply. What determines the supply and demand of foreign exchange?     

relative price differences, interest rates and monetary supply, productivity and balance of payments, exchange rate policies, and investor psychology.

8.

Which theory came first, mercantilism or modern-day protectionism?

Mercantilism – 1600s-1700’s Modern Day Protectionism - now 9.

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

Hedging 10.

What is transaction risk?

The Risk that a company will incur losses in a transaction comprising multiple Currie cites due to exchange rate movement. (If exchange rates decrease during their "lag" wait time they will lose money on their exchange). 11.

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Explain the concept of “hedging” as it relates to reducing various types of risk.

invoicing in their own currencies, currency hedging (as discussed earlier), and strategic hedging.

The most basic way is to invoice customers in your own currency. By invoicing in dollars, many US firms have enjoyed such protection from unfavorable foreign exchange movements. Example:

Currency hedging is risky in case of wrong bets of currency movements. For example, most airlines in the world engage in currency hedging to manage fuel cost fluctuations, and most suffered losses in 2009. In 2008, oil price was at a record high, US$147 per barrel. Some airlines entered 180-day forward transactions with foreign exchange traders, say, at US$100 per barrel. This looked like a fantastic deal, representing 32% savings. However, by 2009, oil was only trading at US$41 per barrel. But some airlines were bound by the contract to purchase oil at US$100 per barrel, they were thus paying 144% (!) higher than the market. 12.

What is the difference between currency hedging and strategic hedging?

Currency Hedging: A transaction that protects traders and investors from exposure to the fluctuations of the spot rate. Strategic Hedging: spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions. Currency hedging focuses on using forward contracts and swaps to contain currency risks, a financial management activity that can be performed by in-house financial specialists or outside experts (such as currency traders) (see the Closing Case). Strategic hedging refers to geographically dispersing operations —through sourcing or FDI—in multiple currency zones. By definition, this is more strategic, involving managers from many functional areas (such as production, marketing, and sourcing) in addition to those from finance.

13.

What advantages exist with first mover?

first-mover advantages: Benefits that accrue to firms that enter the market first and that late entrants do not enjoy.  

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First movers may gain advantage through proprietary technology. Think about Apple’s iPod, iPad, and iPhone. First movers may also make pre-emptive investments. A number of Japanese MNEs have cherrypicked leading local suppliers and distributors in Southeast Asia as new members of the expanded keiretsu networks (alliances of Japanese businesses with interlocking business relationships and shareholdings) and have blocked access to the suppliers and distributors by late entrants from the West. First movers may erect significant entry barriers for late entrants, such as high switching costs due to brand loyalty. Buyers of expensive equipment are likely to stick with the same producers for components, training, and services for a long time. That is why American, British, French, German, and Russian aerospace firms competed intensely for Poland’s first post–Cold War order of fighters—America’s F-16 eventually won. Intense domestic competition may drive some nondominant firms abroad to avoid clashing with dominant firms head-on in their home market. Matsushita, Toyota, and NEC were the market leaders in Japan, but Sony, Honda, and Epson all entered the United States in their respective industries ahead of the leading firms.

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First movers may build precious relationships with key stakeholders, such as customers and governments. For example, Citigroup, JP Morgan Chase, and Metallurgical Corporation of China have entered Afghanistan, earning a good deal of goodwill from the Afghan government, which is interested in wooing more FDI.

14.

What advantages exist with late mover?

Benefi t st hatac c r uet ofi r mst hatent ert hemar k etl at erandt hatear l yent r ant sdonotenj oy . 

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Late movers can free-ride on first movers’ pioneering investments. In Saudi Arabia, Cisco invested millions of dollars to rub shoulders of dignitaries, including the king, in order to help officials grasp the promise of the Internet in fueling economic development. Then Cisco lost out to late movers, such as Ericsson, that offered lower-cost solutions. For instance, the brand new King Abdullah Economic City awarded an US$84 million citywide telecom project to Ericsson, whose bid was more than 20% lower than Cisco’s—in part because Ericsson did not have to offer basic education and did not have to entertain that much. “We’re very proud to have won against a company that did as much advance work as Cisco did,” an elated Ericsson executive noted. First movers face greater technological and market uncertainties. Nissan, for example, has launched the world’s first all-electric car, the Leaf, which can run without a single drop of gasoline. However, there were tremendous uncertainties. After some of these uncertainties were removed, late movers such as BMW, GM, and Toyota joined the game with their own electric cars. As incumbents, first movers may be locked into a given set of fixed assets or reluctant to cannibalize existing product lines in favor of new ones. Late movers may be able to take advantage of the inflexibility of first movers by leapfrogging them. Although Greyhound, the incumbent in intercity bus service in the United States, is struggling financially, it cannot get rid of the expensive bus depots in inner cities that are often ill-maintained and dreadful. Megabus, the new entrant from Britain, simply has not bothered to build and maintain a single bus depot. Instead, Megabus uses curbside stops (like regular city bus stops), which have made travel by bus more appealing to a large number of passengers. 15.

Consider the model of foreign market entries. How is scaleof-entry related/relevant?

Scale of Entry: The amount of resources committed to entering a foreign market. The benefits of large-scale entries are a demonstration of strategic commitment to certain markets. This both helps assure local customers and suppliers (“We are here for the long haul!”) and deters potential entrants. The drawbacks are  

limited strategic flexibility elsewhere, and huge losses if these large-scale “bets” turn out to be wrong.

The benefits of large-scale entries are a demonstration of strategic commitment to certain markets. This both helps assure local customers and suppliers (“We are here for the long haul!”) and deters potential entrants. The drawbacks are

limited strategic flexibility elsewhere, and huge losses if these large-scale “bets” turn out to be wrong.

Competency 2 COMPETENCY: Political and Economic Forces (Peng Chapter 2) 1. How do institutions reduce uncertainty? By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions. In short, institutions reduce uncertainty, which can be potentially devastating. 2.

Discuss and compare the three pillars (regulatory, normative, and cognitive)

Regulatory Pillar: The coercive power of governments. Example: while many individuals and companies may pay taxes out of their patriotic duty, a larger number of them do so in fear of the coercive power of the government if they are caught not paying. Normative: The mechanism through which norms influence individual and firm behavior. Recent norms centered on rushing to invest in China and India have prompted many Western firms to imitate each other without a clear understanding of how to make such moves work. Cautious managers resisting such “herding” are often confronted by board members and investors: “Why are we not in China and India?” In other words, “Why don’t we follow the norm?” Cognitive: The internalized values and beliefs that guide individual and firm behavior. Example, what triggered whistleblowers to report Enron’s wrongdoing was their belief in what was right and wrong. While most employees may not feel comfortable with organizational wrongdoing, the norm is to shut up and not to “rock the boat.” Essentially, whistleblowers choose to follow their internalized personal beliefs on what is right by overcoming the norm that encourages silence. 3.

Compare formal and informal institutions.

Formal: Institution represented by laws, regulations and rules. Informal: Institutions represented by cultures, ethics and norms. 4.

On what is the institution-based view of global business grounded?

Success and failure of firms are enabled and constrained by institution. Focuses on the dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction Firm behaviors are often a reflection of the formal and informal constraints of a particular institutional framework 5.

What core propositions lie at the root of this view?

Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms 6.

How is global business affected by democracy?

Democracy: A political system in which citizens elect representatives to govern the country on their behalf. Example: Individual’s right to freedom of expression and organization. For example, starting up a firm is an act of economic expression, essentially telling the rest of the world: “I want to be my own boss! And I want to make some money!” In most modern democracies, this right to organize economically has been extended not only to domestic individuals and firms, but also to foreign individuals and firms that come to do business. 7.

How is global business affected by totalitarianism?

Totalitarianism/Dictatorship: A political system in which one person or party exercises absolute political control over the population. Communist totalitarianism centers on a communist party. This system had been embraced throughout Central and Eastern Europe and the former Soviet Union until the late 1980s. It is still practiced in China, Cuba, Laos, North Korea, and Vietnam. Right-wing totalitarianism is characterized by its intense hatred against communism. One party, typically backed by the military, restricts political freedom, arguing that such freedom would lead to communism. In postwar decades, Argentina, Brazil, Chile, the Philippines, South Africa, South Korea, and Taiwan practiced right-wing totalitarianism. Most of these countries have recently become democracies. Theocratic totalitarianism refers to the monopolization of political power in the hands of one religious party or group. Iran and Saudi Arabia are leading examples. 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. Rwanda’s bloodbath in the 1990s was due to some of the most brutal practices of tribal totalitarianism. Totalitarian countri...