Beruflich Dokumente
Kultur Dokumente
2/25/2013
Chapter 6: Investing Abroad Directly
1. Key Terms:
a. Foreign Portfolio Investment (FPI): “foreign indirect management;” holding securities of
companies in other countries, but does not entail active management of foreign assets;
based on financial securities – the price of this investment depends on the stock market
b. Foreign Direct Investment (FDI): the direct, hands-on management of foreign assets. For
statistical purposes, the UN defines FDI as an equity stake of 10% or more in a foreign-based
enterprise; based on tangible investments – manage this investment through people
managers
c. Management Control Rights: without FDI, it is difficult to establish this - the authority to
appoint key managers and establish control mechanisms.
d. FDI Flow: the amount of FDI moving in a given period.
e. FDI Inflow: FDI moving into a country.
f. FDI Outflow: FDI moving out of a country.
g. FDI Stock: total accumulation of inbound FDI in a country of outbound FDI from a country.
2. Horizontal FDI: when a firm takes the same activity at the same value-chain stage from its home
country and duplicates it in a host country through FDI; refers to producing the same products or
offering the same services in a host country as firms do at home; e.g. BMW
3. Vertical FDI: when a firm moves upstream or downstream in different value-chain stages in a host
country through FDI
* Remember the Value Chain
Input
R&D
Components
Final Assembly
Marketing
Output
4. FDI Flow v. Stock:
a. FDI Flow: is the amount of FDI moving in a given period (usually a year) in a certain
direction
i. FDI Inflow: moving into a country in a year
ii. FDI Outflow: moving out of a country in a year
b. FDI Stock: is the total accumulation of inbound FDI in a country or outbound FDI from a
country
5. Why Does FDI Take Place? FDI provides gains to a firm through OLI
a. Ownership Advantages: Possession and leveraging of certain valuable, rare, hard to
imitate, organizationally embedded resources.
i. Direct ownership provides combination of equity ownership rights and management
control rights.
ii. FDI vs. Licensing:
1. FDI reduces dissemination risk
2. FDI provides tight control over foreign operations
3. FDI facilitates the transfer of tacit knowledge through “learning or doing”
b. Location Advantages: Features unique to a place that provide advantage to a firm.
i. Some locations possess geographical features that are difficult to match.
ii. Location advantage can arise from agglomeration – the clustering of economic
activities in certain locations.
iii. Results from:
1. Knowledge spillover
2. Industry demand for skilled workers
3. Industry demand that facilitates a pool of specialized suppliers and buyers in
a region.
iv. Acquiring and Neutralizing Location Advantages:
1. Location advantage does not entirely overlap with country-level advantages.
2. Refers to advantage that firm obtains when operating in a specific location
due to firm-specific resources.
3. When one firm enters a foreign country through FDI, competitors are likely to
increase FDI in order to acquire or neutralize location advantages.
2/27/2013
Chapter 7: Dealing With Foreign Exchange
1. What Determines Foreign Exchange Rates? (5 determinants of the exchange rate)
a. Long term:
i. Price differential / Relative price differences and PPT: the relative inflation level;
some countries have expensive prices, while others have cheap ones.
1. Purchasing power parity - a conversion that determines the equivalent
amount of goods and services that different currencies can purchase, after
converting your dollars to euros, you should be able to buy the exact amount
a. The PPP does not hold, because
i. Transaction costs – fees paid to change the money
ii. Differing taxation systems
iii. Information – the markets are not perfect, they don’t have real
time information
2. Higher inflation – less demand for US goods and more demand for foreign
goods, leading to lower exchange rate for US dollar and higher demand for
euros and higher exchange rate for the euro
a. If domestic inflation is higher than foreign inflation - If the US inflation
level was higher, then the inflation would go up, there will be more
demand for the British pound because it is worth more and can buy
more, so the exchange rate will go up
b. If foreign inflation is higher - the value of the foreign currency goes
down, because there is less of a demand for the foreign currency, so the
exchange rate goes down
ii. Interest rate differential / Interest rates and money supply: If a country’s
interest rates are high, it will attract foreign funds, and vice versa.
1. Higher interest rate – more demand for US, and then the exchange rate goes
up
a. Domestic interest rate higher than foreign interest rate – people will
invest in the US with the higher interest rate, and the demand for the
British pound will decrease, and the British pound exchange rate will
decrease
b. Foreign interest rate is higher than Domestic interest rate – there is
more of a demand for the foreign currency British pounds, and then
the exchange rate increases
2. Three quotations:
a. Direct Quotation: the number of American dollars per foreign
currency (US $ / euro)
b. Indirect Quotation: the number of (euro / US $)
iii. Productivity and balance of payments:
1. A rise in a country’s productivity relative to others will improve its
competitive position in international trade and attract more FDI, fueling more
demand for its currency.
a. Higher productivity – the exchange rate increases, because people have
more money to spend, and demand more foreign goods
2. A country in account surplus will see its currency appreciate, while a
country in account deficit will see its currency depreciate.
iv. Exchange rate policies:
1. 2 Policies:
a. The floating (flexible) exchange rate policy the policy which is
adopted by most economies; is the willingness of a government to let
demand and supply conditions determine exchange rates.
i. The policy can involve either a clean (free) float, which is a
pure market solution
ii. Or a dirty (managed) float, with selective governmental
interventions.
b. A fixed rate policy adopted fixed the exchange rate of a domestic
currency relative to other currencies. A specific version of the policy
involves pegging the domestic currency, which means to set the
exchange rate of the domestic currency in terms of another currency
(the peg).
b. Short term:
i. Investor psychology: The factors noted above predict long-run movements, but
most short-term movements are affected by investor psychology / or expectations;
depend on market perception
1. Bandwagon effect
2. Capital flight
3/4/ 2013
Chapter 7, continued
1. Balance of Payments: A country’s international transaction statement.
a. 2 different accounts:
i. Current Account: considers Goods and services
ii. Financial Account: considers the movement of capital
2. The Evolution of the International Monetary System:
a. The Gold Standard (1870-1914): the price of different currencies was based on how much
gold a certain economy had, the price of the currency was stronger or weaker; the price of
currencies was determined based on the amount of gold the entire economy had
b. Bretton Woods System (1944-1973): during this period, the other currencies different
than the dollar were based on an exchange rate based on the dollar
c. The Post Bretton Woods System (1973-present): the system where the exchange rate of
the most important currencies is allowed to fluctuate freely, and there is a diversity of
exchange rates; determined by the market equilibrium of demand and supply
3. International Monetary Fund: IMF
a. Legacy of the Bretton Woods system
b. Lender of last resort for countries experiencing balances of payment problems
c. Each member country is assigned a quota that determines the required contribution
i. Quota: depends on the economic size of a country
1. The amount of its financial contribution
2. Its capacity to borrow from the IMF
3. Its voting power
d. Loans typically require long term policy reforms, recommends policies to country members
4. Strategic Responses to Foreign Exchange Movements:
a. Strategies for Financial Companies:
i. The Exchange Rate: how companies can make or lose money based on the exchange
rate, how to manage exchange rate risk
1. Main goal – to profit from the foreign exchange market
ii. Three strategies to reduce the exchange rate risk or to make profit from
exchange rate:
1. Passive:
a. Spot transactions – single shot exchange of one currency for another,
this is called a passive exchange rate policy – because the company
does not do much to lower exchange rate risk
2. Active:
a. Forward / Future transactions – one transaction of a currencies for
future delivery you are obligated to buy a foreign currency at a price
decided today; today, you lock in the exchange rate in order to execute
a future operation, and in 6 months, you lock in that exchange rate for
the purchase of another item in a business contract, no matter what
the actual market exchange rate is
b. Currency – swap – two transactions, because you only need a foreign
currency for a certain amount of time; conversion of one currency into
another at time 1, with agreement to revert it back to the original
currency at time 2 in the future; the biggest difference – there are 2
transactions
b. Strategies for Non financial companies:
i. Currency hedging: a transaction that protects trades and investors from exposure
to the fluctuations of the spot (daily) exchange rate
1. Three types of currency hedging:
a. Obligated:
i. Swap: obligated to swap something in the future at the
exchange rate today
ii. Forward: obligated to buy something in the future at the
exchange rate today
b. Not obligated:
i. Option: not obligated to buy something, it depends on the
exchange rate in the future
ii. Strategy hedging: spreading out activities in a number of countries in different
currency zones to offset losses in any one region, you are diversifying your risk by
holding different currencies in the places you are operating
5. Strong v. Weak Dollar:
a. Weak Dollar:
i. Positive – helps remedy the US balance if payments, results in more global balancing
ii. Negative - If the dollar is weak, then you are fostering exporting activities,
1. Then the domestic unemployment rate goes down
2. The demand for cheap US goods increases and the inflation rate goes up
b. Strong dollar:
i. Positive – rest of the world likes this because it keeps their currency down,
promoting exports
ii. Negative - If the dollar is strong,
1. There is more of a demand for foreign goods, the unemployment rate goes up,
2. Then the demand for foreign goods is higher and the prices for these foreign
goods increases, “importing inflation”
c. Common sense: you want a strong dollar, but it costs us higher inflation and higher
unemployment
3/6/2013
Chapter 8: Capitalizing on Global and Regional Integration
1. The Case for Global Economic Integration:
a. Global economic integration: efforts to reduce trade and investment barriers around the
globe
i. Political benefits:
1. Promotes peace by promoting trade and investment
2. Builds confidence in a multilateral trading system - because it involves all
participating countries (the key word being multilateral) and not just two
countries (bilateral)
3. Nondiscrimination: country can not make distinctions between its trading
partners; if a country lowers a trade barrier, it has to do the same for all WTO
member countries
ii. Economic benefits:
1. Disputes are handled constructively
2. Rules make life easier and discrimination impossible for all participating
countries
3. Free trade and investment raise incomes and stimulate economic growth
iii. Problems:
1. Environmental impact
2. Uneven distribution between the “haves” and “have-nots”
2. The Evolution of the GATT and WTO
a. GATT (General Agreement on Tariffs and Trade): 1948-1994
i. Reduced level of tariffs through multilateral negotiations
ii. Three areas of concern:
1. No protection for services or intellectual property
2. Loopholes needed reform –
a. Multifber Arrangement (MFA) – was designed to limit free trade in
textiles
3. Global recessions led governments to invoke non-tariff barriers (NTBs) – such
as subsidies and local content requirements
b. WTO (World Trade Organization): 1995 – present
i. Transformed GATT from provisional treaty to full-fledged international organization
ii. New features:
1. Agreement governing trade of services (GATS)
2. Agreement governing intellectual property rights (TRIPS)
3. Trade dispute settlement mechanisms – old GATT trade dispute settlement
mechanisms experienced long delays
a. However, WTO rulings are recommendations not orders – so the WTO
has no real power to enforce its rulings
b. Country can either:
i. Change its laws
ii. Defy the ruling by doing nothing, and suffer trade retaliation by
the winning country
4. Trade policy reviews
3. The Case for Regional Economic Integration:
a. Regional economic integration: efforts to reduce trade and investment barriers within
one region
i. Pros:
1. Promotes Peace
2. Disputes handled constructively
3. Consistent rules
4. Raise incomes and stimulate economic growth
5. Larger market
6. Simpler standards
7. Reduced distribution costs
8. Economies of scale for firms in the region
ii. Cons:
1. Discrimination against firms outside of region
2. Some loss of sovereignty
iii. E.g. Norway and Sweden chose not to join the EU
b. 6 Types of Regional Economic Integration:
i. Free Trade Area (FTA): A group of countries that remove trade barriers among
themselves. Each country still maintains different external policies regarding non-
member. There is no freedom of movement among people. E.g. NAFTA
ii. Customs Union: One stop beyond an FTA, so in addition to FTA policies, a customs
union has common external policies on non-participants in order to combat trade
diversion. e.g. Benelux – Belgium, the Netherlands, and Luxembourg
iii. Common Market: In addition to Customs Union, allows the free movement of goods
and people. E.g. EU used to be a common market
iv. Economic Union: Has all the features of Common Market, but members also
coordinate and harmonize economic policies in order to blend their economies into a
single economic entity. E.g. EU is now an economic union
v. Monetary Union: a group of countries that use a common currency E.g. 12 countries
of the Euro area
vi. Political Union: The integration of all political and economic affairs of a region. E.g.
United States or the Soviet Union
4. Accomplishments of the European Union:
a. 1951 – Belgium, France, Germany, Italy, Luxembourg, and the Netherlands signed the
European Coal and Steel Community (ECSC) Treaty, which integrated the coal and steel
industries among the 6 countries to promote trade and prevent future wars form breaking
out (because the coal and steel industries have traditionally provided the raw materials
necessary for war)
b. 1957 – ECSC signed the Treaty of Rome, which launched the European Economic
Community (first a customs union, and then a common market)
c. EU and predecessors have delivered over 50 years of peace
d. Introduction of common currency, the euro – it account for approximately 21% of the
world’s GDP
e. Formation of a single market
f. Benefits:
i. Reduces currency conversion costs
ii. Facilitates direct price comparison
iii. Imposes monetary disciplines on governments
g. Costs:
i. Countries unable to implement independent monetary policy
ii. Limits the flexibility in fiscal policy (in areas such as deficit spending)
5. Five Organizations in the Americas:
a. NAFTA (North American Free Trade Agreement; 1994): Mexico, US, and Canada
b. Andean Community (1969):
c. Mercosur (1991):
d. Union of South American Nations (USAN; 2005)
e. United States-Dominican Republic-Central America Free Trade Agreement (CAFTA; 2005)
Four sections:
1. Market Intelligence Report – include the most important facts regarding the company of your
choice, focus the analysis on the formal and informal institutions
a. Depending on your product – maybe an analysis of per capita income is appropriate,
depending on how expensive your product is
b. Demographic Analysis – will be interesting, if our product is focused on most of the
population
c. Infrastructure – if you need certain logistics in order to distribute your product across the
country, then this is relevant
d. Formal and informal - Domestic laws and Domestic regulations that could affect your
product
2. BEAR – resource based view, analysis of internal factors
3. ROME – assess the different potential market entry strategies
a. Why do you want to go to your country by exporting directly, or licensing, or franchising?
b. Joint ventures
c. Or even direct acquisition through FRE?
d. So – analyze each of them, and then pick the strategy of your choice
4. MESA – the most important
a. Description of the final choice made regarding the market entry strategy
5. 3-4 members per group
6. No more than 12 pages, but it doesn’t matter – could be 6-7-8
7. Content – sound analysis
Chapter 13:
1. Terms:
a. Human resources management: the set of different activities for hiring managers;
attracting, selecting, and managing employees
b. Staffing: the human resource management activities related to hiring managers and filling
the positions
c. Host country nationals: managers from the host country, from the same country
d. Parent country nationals: managers from the parent country
e. Third country nationals: managers from neither the host or parent country
f. Expatriates: managers from foreign countries
2. 2 Types of expatriates:
a. Parent country nationals (PCNs):
i. Advantages:
1. Control by headquarters is facilitated
2. May be the most qualified
3. Managers are given international experience
ii. Disadvantages:
1. Opportunities are limited
2. Adaptation may take a long time
3. Usually very expensive
b. Third country nationals (TCNs):
i. Advantages:
1. May bridge the gap between headquarters and the subsidiary
2. May be less expensive than PCNs
3. Don’t have conflicts, culturally, because they do not belong to the home
country or the host country cultures – more flexible than PCNs or HCNs
4. Typically have a lot of international experience
ii. Disadvantages:
1. Host government and employees may resent TCNs
2. Similar to disadvantages for PCNs
3. Three Approaches to Staffing:
a. Ethnocentric approach:
i. Emphasizes norms and practices of parent company
ii. Relies on PCNs
iii. Perceived lack of talent among HCNs often necessitates this approach
iv. E.g. occurs in Asian multinational companies
v. Focus on PCNs
b. Polycentric approach:
i. Focuses on the norms and practices of host country
ii. Relies on HCNs
iii. “When in Rome…”
iv. HCNs have no language or cultural barriers
v. Placing HCNs in top roles may boost morale of other HCNs
vi. E.g. Price Waterhouse Coopers, SLU Madrid
vii. Focus on HCNs
c. Geocentric approach:
i. Focuses on finding the most suitable managers, disregarding nationality
ii. This approach can create a corporate wide culture and identity
iii. Focus on TCNs / skills
4. Strategy and Staffing:
a. Systematic link between strategic posture of an MNE and its staffing approach
MNE strategies Typical staffing Typical top managers at
approaches local subsidiaries
Home replication Ethnocentric Parent country nationals
Localization Polycentric Host country nationals
Global standardization Geocentric A mix of all 3
Transnational Geocentric A mix of all 3
4/17/2013
Chapter 13, continued:
1. Performance Appraisal: evaluation of employee performance for the purpose of promotion,
retention, or ending employment
2. Labor Relations at Home:
a. Firm’s key concern – cut costs, enhance competitiveness
b. Union’s concern – higher wages and more benefits
c. Threat of job loss v. threat of strike
3. Formal Institutions and Human Resource Management:
a. Formal institutions: every country has rules and regulations governing HRM
b. Informal institution: MNEs from different countries have different norms in staffing.
4. Questions:
a. What are the four most important roles that expatriate play?
b. What is the relationship between the MNE strategies and the staffing approaches?
c. Two different systems:
i. Going rate
ii. Balance sheet
5. Quiz Review:
a. Format:
i. 2 T/F
ii. 7 MC
iii. 3 Short Answer
iv. Chapters 7, 9, 10, 11, 12, 13
v. Chapter 8 – on final only, not on the quiz
b. Chapter 7 – Foreign Exchange Rates
i. What happens, for instance, in the balance of payments if we do have a strong or
weak domestic currency?
ii. Is the trade deficit or trade surplus affected by a strong or weak domestic currency?
iii. Different determinants of the exchange rates:
1. Long term
a. Relative price difference between countries
b. Differential between interest rates
c. Productivity
d. Exchange rate policies
2. Short term
a. Investor’s psychology – expectations of the market
iv. Relationship between the exchange rates and the labor market –
1. What happens if a certain economy has a very strong domestic currency, how
does that affect the labor market?
2. For example – what happens, or what would you prefer, to reduce
unemployment in an open economy? A strong or weak domestic currency?
a. You would want a weak currency, then you can export more, you need
to hire more people, and the unemployment is lower
c. Chapter 9 – Entrepreneurship
i. Described the different foreign entry strategies – direct exports, franchising,
licensing, FDI
ii. Letter of credit – when you export, you have your exporting and importing banks,
and there’s an agreement between the two of collateral credit
d. Chapter 10 – Entering Foreign Markets
i. Two different modes to enter a foreign market –
1. Equity based
2. Non-equity based
ii. Advantages and disadvantages of these different strategies
iii. Different non-equity modes – contractual methods
iv. Licensing, franchising, turnkey projects, and FDI, co-marketing
e. Chapter 11 – Alliances and Acquisitions
i. Several of the same concepts between 10 and 11
ii. Joint ventures
iii. Dissolution of alliances – marriage
f. Chapter 12
i. Structures and strategies – the four strategies with their own associated structures
ii. Think about examples of each of these strategies and structures
g. Chapter 13
i. The staffing approaches
ii. Different kinds of expatriates
iii. Relationship between staffing approaches and types of expatriates
4/22/2013
strong currency – import more – current account deficit
weak currency – export more – current account surplus
real option – with a non equity agreement, the buying company has the option to later purchase assets to
buy the other percent of the company, making the buying company the major shareholder
80
1. 34 questions, in total
a. MC – 17
b. TF - 6
c. Short Answer – 11
i. Pay attention to the specific topics on informal institutions, such as cultural
differences, the liability of foreignness
ii. Advantages and disadvantages of first and late movers
iii. Chapter 8 – which talks about the different international agreements and the
different levels of integration
1. FTA – importing and exporting without tariffs
2. Custom unions
3. Common markets
4. Political unions
iv. Couple of questions over alliances
1. Advantages and Disadvantages
2. Non-equity and equity modes
v. Focused on differentiating or relating concepts
vi. Review the integration responsiveness framework – which relates the strategies with
the structures
1. Advantages and Disadvantages
vii. At least one or two questions based on the last chapter about HRM –
1. Different components
2. Types of staffing approaches
3. Relationship between staffing approaches and strategy/structures
4. Different compensation methods – when to apply one of them instead of the
other – advantages and disadvantages
a. Going rate
b. Balance sheet
Review on Monday
4/29/2013
Final Friday May 3 at 9 AM
1. Chapter 6
a. FDI
b. Different Ways to Go Abroad
c. Different Advantages in terms of ownership, location
2. Chapter 7 – very important
a. Exchange Rates
b. 4 Determinants of the Exchange Rates – specific questions about this – and how exchange
rates affect the performance of companies
i. Differential in interest rates –
1. 2 Countries – US and UK
a. US has higher interest rates than the UK
i. People want to put their money in the US
ii. British investors want to put their money in the US
iii. Increase in demand for US dollars
iv. The dollar will appreciate and get stronger
v. The exchange rate will go down, because you need less dollars
to purchase each pound
ii. Differential in inflation – how does it affect the exchange rates?
1. 2 Countries – US and UK
a. Higher domestic inflation - higher inflation in US than in UK
i. People in US demand cheaper British goods
ii. In order to buy these, you will demand British pounds
iii. More demand for British pounds
iv. The US dollar will depreciate and get weaker relative to the
British pound
v. And the exchange rate goes up, you have to pay more dollars for
each pound
iii. Differential in income levels
1. 2 Countries – US and UK
a. Higher income levels in US than in UK
i. People in US have more money, have more demand for all goods
ii. Including more demand for foreign goods – like British goods
iii. More Demand for British pound
iv. The US dollar will depreciate and get weaker relative to the
pound
v. And the exchange rate goes up, you have to pay more dollars for
each pound
iv. Expectations / Investor psychology – up or down
1. Good expectations about performance in domestic economy – more demand
for US dollars – dollar becomes stronger
c. Evolution of the international monetary system
d. Different exchange rate systems – take a look at these ***
i. Types:
1. Free floating
2. Managed
3. Fixed
ii. Definitions
iii. Examples
e. Real Options
f. Related the exchange rate with the trade deficit
g. Relationship between exchange rates and labor market and unemployment
i. Strong currency – purchasing power increases, buying more foreign goods than
domestic goods – then domestic industry drops – and domestic unemployment
increases
ii. Most countries want weak currencies so that they can better export and decrease
domestic unemployment
3. Chapter 8
a. International Trade Agreements
b. 5 Different Levels of Integration Between the Different Economies
4. Chapter 9
a. Entrepreneurial Firms
b. Advantages and Disadvantages or Early Movers and Late Movers
5. Chapter 10
6. Chapter 11
a. Alliances and Acquisitions
b. Non-equity and Equity contracts
c. Different steps in order to form an alliance
d. Steps to dissolve alliances
7. Chapter 12
8. Chapter 13
a. HRM
b. Different kinds of expatriates
c. Different staffing approaches, how to hire foreign managers depending on your strategy