GEB3373 Exam 1 – Flashcards
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International Business
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business transactions between parties from more than one country: private individuals; individual companies; consortia (groups of companies); governments/government agencies
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Differences in Domestic and International Business
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Boundaries, currencies, legal systems, cultures, resources, and skills and knowledge
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Boundary Differences
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High cost and delays due to poor infrastructure, multiple checkpoints, cumbersome administrative procedures, and corruption.
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Currency Differences
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Administrative costs of accounting for currency fluctuations Time cost of accounting for currency fluctuations Hedging costs to protect against currency fluctuations
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Resource Differences
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Different countries are abundant in different natural resources, affecting what type of business may be possible and/or profitable
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To be successful globally, you need the skills to navigate
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Economics, Finance, Culture, Politics, Law
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Cage Model Uses
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-Understand differences and challenges -Avoid mistakes -Pick markets where product/business can succeed -Create competitive advantage for company (e.g., buy labor-intensive inputs from low-wage countries)
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Cage Model
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Framework for understanding operating challenges that firms must meet when doing business in multiple countries Cultural distance: language, religion, values Administrative distance: laws, currency, politics Geographic distance: physical, communications, transport Economic distance: economic/human resource base, infrastructure, technology
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Exporting
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Selling of products made domestically for use/re-sale abroad
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Importing
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Buying of products made abroad for use domestically
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Merchandise
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Tangible, or visible trade: cars, food, oils, textiles
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Services
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Intangible, or invisible trade: Banking, tourism, accounting, consulting
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Foreign Direct Investment (FDI)
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Actively control property, asset, co's abroad ie: Procter ; Gamble subsidiaries in Mexico, UK
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Foreign Portfolio Investment (FPI)
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Asset purchase to increase rate of return ie: Person/co's shares of stock in Toyota
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International licensing
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Co allows use of intellectual property abroad (patents, trademarks, copyrights)
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International franchising
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special form of licensing; allows use of firm abroad to use operating systems, brand names, trademarks, logos in exchange for royalty payment
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International management contract
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Firm agrees to operate facilities or provide management services to firm abroad
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Multinational Corporation (MNC)
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firms that engage in FDI and own or control value-adding activities in more than one country
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Multinational Enterprise (MNE)
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firms that engage in FDI and own or control value-adding activities in more than one country, but not a corporation; partnership, LLC
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Multinational Organization (MNO)
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nonprofit organization in more than one country: Intl. Red Cross, Intl. Olympic Committee
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Globalization
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worldwide economic, social, technological, cultural, and political integration among individuals, groups of people, companies, and nations
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Six Aspects of Globalization
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Technological (new inventions) Economic (trade, currencies) Social (movement of people) Spatial (layout of cities, houses, etc.) Cultural (food, language, entertainment ) Biological (environment, disease)
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General Agreement on Tariffs & Trade (GATT, 1947)
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Created post-WWII to reverse restrictions on intl. trade and investment that occurred after WWI
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World Trade Organization (WTO, 1995)
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Successor to GATT Adds intellectual property, dispute-settlement mechanisms
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EU*, NAFTA, MERCOSUR**
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Regional trade accords relax trade/investment barriers among member nations
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First World
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Rich nations of West; US allies (incl. Japan)
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Second World
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USSR and Soviet allies
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Third World
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Middle/low-income nations in Lat. Am., Africa, most of Asia
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Trade Patterns
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Most IB occurred between 1st-world nations 2nd world mostly avoided commerce w/ 1st world 3rd world supplied raw materials/commodities to 1st world
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BRICS
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Brazil, Russia, India, China, South Africa
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Emerging Markets
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Countries whose recent growth or prospects for future growth exceed that of traditional markets
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Big Ten
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Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea, Turkey
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Increase/decrease percentage points
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Arithmetic difference between two percentages ie: 40% -> 30% = decrease of 10 percentage points ??????? ???????? 40% ?30%=10 ?????????? ??????
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Increase/decrease percent
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A relative change; fraction of an original amount ie:40% -> 30% = decrease of 25% (40?30)/40 ? 100=10/40 ?100=0.25 ? 100=25%
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The United States
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Worlds largest economy, political stability, 21% of world's GDP, Prime Export Market
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Flight Capital
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Money sent away from political/economic instability to perceived safe haven
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Invoicing Currency
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Currency in which sale of goods/services is denominated; accounts for about ½ of all international transactions
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Canada
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Pop: 34 Million World's 2nd-largest land mass Major Exporter; 31% of GDP Natural Resources: forest products, petroleum, minerals, grain
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Mexico
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Federal govt. like US pres.-terms = 6 yrs. Was anti-FDI/trade Over last 20 years, moved to open-market system; NAFTA 1994 Free-trade pacts w/ El Salvador, Guatemala, Honduras, Japan, Uruguay, and EU
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Germany
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World's 4th-largest economy, 3rd-largest exporter Major role in EU history
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France
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Major role in EU history Pushes for common foreign/defense policies and strong human rights More protectionist than other members
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United Kingdom
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Counterweight to French influence London—world's largest financial center Major trade partner/FDI destination
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Former Communist Countries in the EU
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Estonia, Czech Republic, Latvia, Hungary, Lithuania, Poland, Bulgaria, Slovakia, Solenia, Romania
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High Income Countries not in the EU
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Iceland, Norway, Switzerland, Andorra, Monaco, and Liechtenstein
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Middle Income Countries not in the EU
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Albania, Bosnia-Herzegovina, Macedonia, Kosovo, Montenegro, and Serbia Development hindered by war and genocide after Yugoslavia's disintegration (1991-1995, 1998-2001)
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EU was created
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to prevent war; make unified coal market
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Russia
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Largest country (land mass) Ninth largest population Rich in natural resources (oil, gas, minerals, gold, diamonds 2nd-largest oil producer/exporter Benefited from ? oil/raw materials prices Since 2003, GDP ? at rate of 4.8% per year 2013: Russia accumulates $526 billion in currency reserves, fifth largest Who benefits from all this wealth? -Putin and his cronies -Oligarchs
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Oligarchs
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Businessmen who became rich in 1990s ? Own mass media, oil fields, steel factories, engineering companies ? Paid little tax until Putin: reform and mass- media nationalization ? Pardoned and released 12/20/13 after 10 years in prison for fraud, embezzlement, money laundering
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Japan
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Pop: 128 million World's 3rd-largest economy GDP: $5.9 trillion Economic growth due to strong partnership between -MITI: Ministry of International Trade and Industry -Concentrated industrial sector Keiretsu: large families of interrelated companies that control Japanese industry -Act as each other's suppliers, financers -System of cross-ownership
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Australia
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Pop: 23 Million 40% in Sydney and Melbourne Exports = 20% of $1.38 trillion GDP Natural resources: gold, iron ore, coal, wool, beef, wheat
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New Zealand
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Pop: 4.4 Million Most (;80%) on North/South Is Exports = 24% of $160 billion GDP Dairy products, meat, wool
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The Four Tigers
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High-income Asian Nations: South Korea, Taiwan, Singapore, Hong Kong
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China
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Pop: 1.3 Billion World's Most Populous Grew 10.8% 2003 - 2011 Some economists believe exaggerated As a result, FDI has spiked Increased investments by Chinese in Taiwan, Hong Kong, Singapore; by US/EU China has hard-working, low-cost labor
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India
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Pop: 1.2 billion, 2nd to China 1947: Independence from UK Govt. structure: Strong UK influence Post-WW2: Used state ownership of key industries to spur growth 1991: Market reforms/privatization -FDI inflows, 8.1%/year avg. GDP growth since 2003 Challenges -Corruption -Infrastructure (July 2012 blackout affected 700 mill) -Govt. red tape discourages FDI
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Africa
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Pop: 1.1 billion, 55 countries 1800s-1950s: European colonization Colonial influence remains -Political/economic ties -Political problems Commodity boom -Oil (Algeria, Angola, Libya, Nigeria) -Minerals (Zambia, Botswana, DRC) Agriculture > 40% of GDP in CAR, Sierra Leone, Tanzania, Rwanda -Many on continent employed in subsistence farming South Africa: Continent's economic powerhouse -Moved from apartheid to democracy in 1994 (Mandela)* -Modest but steady GDP growth since (3.3% per year avg.) -Joined BRIC summit first time in April 2011 -Exports = 24% of GDP, mostly minerals
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Artic as an emerging market
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One of world's largest emerging markets -Natural resources -Fisheries -Global warming trade/transshipment routes Growing Tensions: security, sovereignty, trade, energy, transit, indigenous people, fisheries, environment -Arctic Five: US, Russia, Canada, Denmark, Norway
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International Business Laws
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Can affect markets firms may serve, prices they charge for goods/services, cost of inputs (labor, raw materials, technology), location of businesses' economic activity
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Common Law
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Foundation of UK/former colonies' legal systems Based on cumulative wisdom of judges' decisions in history (i.e., case law, precedent)
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Statutory Law
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(i.e., laws enacted by legislative action) and case law affecting businesses differ country to country
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Civil Law
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Origins: compilation of Roman law commissioned by the Emperor Justinian in 6th century CE Spread from Continental Europe to colonies Based on codification (detailed listing) of what is/isn't permissible Judges are advocates, unlike in common law setting, where they are neutral referees
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Religious Law
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Based on officially established rules governing the faith and practice of a particular religion
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Theocracy
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Country that applies religious law to civil and criminal conduct
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Islamic Banking
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Around since 7th century Key differences from Western banking: No interest allowed; profits made only on tangible assets All profits/losses shared by business and lender Because every transaction must be based on tangible assets, some Islamic finance experts say 2008 financial crisis could have been avoided had their banking principles been applied But.... "a subprime asset is still a subprime asset
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Bureaucratic Law
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System in communist/dictatorships Is whatever leaders say it is, regardless of laws on books Contracts can be made or broken at whim of those in power Makes doing business extremely risky Examples: Idi Amin's Uganda in 1970s, Stalin's USSR of 1930s, China currently
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Extraterritoriality
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Regulating business activities conducted outside country's borders
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Antiboycott provisions
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No U.S. firms can comply with boycott ordered by foreign nation against ally
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Helms-Burton Act
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: Takes action against companies/ owners that traffic in assets of U.S. companies confiscated by Castro regime
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Nationalization
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Transfer ownership of resources from private to public sector Most vulnerable: industries that lack mobility, e.g., oil, mining, steel, chemicals
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Expropriation:
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Host government compensates private owners for losses
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Confiscation
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No compensation
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Privatization
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Conversion of state-owned property to privately owned property; opposite of nationalization
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Limits on Foreign Ownership/Operation
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Restrict ownership in key industries
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Sanctions
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Limits to commerce with a country
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Embargo
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Total sanction barring all commerce with a country
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Forum Shopping
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Each party seeks to have case heard in country where laws are most favorable
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Principle of Comity
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One jurisdiction will apply laws of another jurisdiction so long it doesn't violate own laws
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Arbitration
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Parties to a conflict agree to submit case to a private individual/committee whose decision they will honor
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Sovereign Immunity
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IBs in disputes with foreign governments have little recourse
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Sarbanes-Oxley Act, 2002
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Public Company Accounting Oversight Board: Develops/enforces ethical/auditing standards for auditors of publicly traded companies Outlaws firms from providing both consulting and auditing services to companies Imposes new requirements on execs, auditors, and boards of directors Section 404: Requires creation of "adequate internal control structure and procedures for financial reporting"
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LIFO
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Last in first out: Most recently produced goods recorded as being sold first
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FIFO
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(first in, first out): Oldest inventory items recorded as sold first; Gives clearer estimate of inventory value; Taxes higher than under LIFO
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Accounting Reserves
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Accounts created in firm's financial reports to record foreseeable future expenses that might affect operations
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Capitalization
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Recording cost as a fixed asset (written off as depreciation over several periods) instead of an expense (subtracted from earnings in one period)
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Goodwill
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Paying more than book value when acquiring firm
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Political Risk Assessment
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A systematic analysis of political risks faced in foreign countries
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Political Risk
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Any change in political environment that may adversely affect value of firm's business activities
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Ownership Risk
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Firm's property threatened through confiscation or expropriation
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Operating Risk
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Safety of firm's employees or operations threatened via changes in laws, taxes, political unrest, terrorism
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Transfer Risk
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Government interferes with firm's ability to move funds into and out of country In times of crisis, government may freeze capital flows
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Macropolitical
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Risks affect all firms in country Civil wars Changes in overall business/tax law
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Micropolitical
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Risks affect only certain firms or industries Nationalization Targeted public protests (Disney, McD's in France)
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Monitor
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Use info from employees, embassies, chambers of commerce, governments, news; The larger and more long-term a firm's investment is, the broader its risk assessment should be
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Balance
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Firms must ensure that rates of return in market offset risks of entering market
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Minimize
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Reduce net investment in subsidiary -Repatriate profits home to keep them safer -Utilize short-term leases for capital equipment
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Popularize
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Build local support w/positive activities -Purchase and employ locally -Support local charities and projects
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OPIC
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U.S. Overseas Private Investment Corporation: Government-sponsored organizations insure firms against political risk
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MIGA
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World Bank subsidiary Multilateral Investment Guarantee Agency insures firms against political risk
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Culture
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The collection of values, beliefs, behaviors, customs, and attitudes that distinguish one society from another; determines the rules that govern how firms operate within the society
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Learned
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Transmitted from one member of society to another
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Interrelated
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Affect many facets of society, from personal to work
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Adaptive
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Changes in response to external forces
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Shared
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Creates members who are in/out of society
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Basic Elements of Culture
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Social structure, Language, Religion, Communication, Values and Attitudes
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Social Structure
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The framework that determines: The roles of individuals within society The stratification of society Individuals' mobility in society
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Individualism
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Promoted in U.S.; individuals are more important than groups
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Families
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Nuclear families more important in U.S.; extended family more important elsewhere
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Social Stratification
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How people are classified on the basis of birth, occupation, educational achievement, or other attributes
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Social Mobility
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Extent to which individuals can move from one stratum of society to another
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Competitive Advantage of Language
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Makes doing business in some countries easier
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Lingua Franca
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Dominant language; is currently English
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Asia/Middle East Gifts
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Elaborate hospitality and gift-giving
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Middle East Gifts
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Gifts opened publicly so giver's generosity known
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Asia Gifts
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opened privately so giver doesn't lose face
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US Gifts
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"See and be seen" hospitality
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China Gifts
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Private banquets
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Low-Context
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Words used by speaker convey message directly Specific terms of transaction are important Fact-oriented U.S., Canada, Germany, Switzerland
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High-Context
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Context in which conversation occurs just as important as words spoken Cultural clues (e.g., nonverbal communication, cultural understanding) important to understanding message Interpersonal relationships important in determining business relationships Japan, Arab nations
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Social orientation
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Beliefs about importance of individual and groups to which person belongs
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Power orientation
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Beliefs about appropriateness of power and authority differences in hierarchies (e.g., businesses)
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Uncertainty orientation
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How people feel about uncertain, ambiguous situations
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Goal Orientation
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How people work toward goals
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Time orientation
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Does society have a short-term or long-term outlook? Also known as pragmatic vs. normative orientation
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Gratification orientation
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Does society focus on allowing people to enjoy life and have fun?
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Ethics
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An individual's personal beliefs about whether a decision, behavior, or action is right or wrong Varies person to person Determined by interactions with parents, other adults, peers; everyday occurrences; religious training; personal values
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Social Responsibility
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Here defined in context of relationship between an organization and its overall environment (natural, social, political, etc.)
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Ethical Behavior
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Behavior that conforms to generally accepted social norms
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Slavery
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30 million worldwide; 60,000 in U.S
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Conflict of interest
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Decision benefits individual but hurts organization
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Guanxi
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Based on reciprocal exchanges of favors Relationship, mutual back-scratching
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Customer Ethics
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Truthful ads, safe products
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Competitor Ethics
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Bribes, stealing ideas
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Stockholders Ethics
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Honest Financial Disclosure
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Dealers Ethics
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Fair relationship
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Labor Union Ethics
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Good worker conditions
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Supplier Ethics
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Ethical Subcontractors
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Written Guidelines
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Rules detailing how to treat suppliers, customers, competitors, other stakeholders
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Code of Ethics
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Written statement of firm's guiding values and ethical standards;
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Corporate Social Responsibility
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Set of obligations an organization undertakes to protect and enhance society in which it functions
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Triple Bottom Line
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Corporations must consider and balance three objectives when formulating and implementing strategies and decisions: Fulfill economic mission of creating profits and value for shareholders Protect natural environment Enhance general welfare of society AKA "People, planet, and profits" Example: Benefit corporations
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Shareholder Model
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Traditional model of corporation whereby firm's goal is to maximize profits for shareholders
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Stakeholder Model
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More recent model whereby firms consider shareholders and other stakeholders when making decisions
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Primary stakeholders
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directly affected by firm and have an economic stake in firm's performance (employees, customers, investors)
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Secondary stakeholders
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may be affected by firm's decisions but aren't directly involved (community, media)
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Obstructionist
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Get away with doing as little as possible; when caught crossing line, deny/shift responsibility Nestlé, Toyota
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Defensive
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Do what is legally required but nothing more; when caught, take action required by law (Big Tobacco)
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Accommodative
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Go beyond legal requirements; agree to participate in social programs after being asked (Vodafone)
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Proactive
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Actively seek opportunities to contribute (McDonald's, L'Oréal)
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Whistle-blowing
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Does company encourage and protect whistleblowers or harass and fire them?
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Corporate Social Audit
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Like financial or management audit, a formal, thorough analysis of effectiveness of firm's CSR programs Define specific social goals Analyze resources devoted to goals Assess goal achievement Recommend courses of action
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Foreign Corrupt Practices Act
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Passed 1977 Bars U.S. firms and employees from bribing foreign govt. officials to gain/retain business
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U.K. Anti-Bribery Act
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Passed 2010
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Alien Tort Claims Act
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Passed 1789 U.S. MNCs may be responsible for human rights violations by foreign govts. if co. benefited from abuses
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International Labor Organization
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Monitors working conditions worldwide
