RSM490 Midterm notes.docx

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Rotman Commerce
Course Code
Prof.Jan Klakurka

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RSM490 Global Business 9/22/2012 3:19:00 PM  International business (IB): a business that engages in international economic activities or doing the action of business abroad  Multinational enterprise (MNE): a firm that engages in foreign direct investment (FDI)  Foreign direct investment (FDI): investment in, controlling and managing value added activities in other countries  IB has two sides, foreign entrants, existing domestic firms  Global business: business around the globe that include both foreign and domestic sides  Emerging economies: developing countries, =emerging markets  Gross domestic product (GDP): the sum of value added by resident firms, households and government operating in an economy  Purchasing power parity (PPP): a conversion that determines the equivalent amount of goods and services different currencies can purchase  Adjustment to reflect differences in cost of living  Cost of living in emerging markets tends to be lower  BRIC: Brazil, Russia, India and China  Gross national product (GNP): GDP plus income from nonresident sources abroad  Gross national income (GNI): GDP + income from nonresident sources abroad  Triad: North America, Western Europe and Japan  Base of the pyramid: economies where people make less than $2000 a year  Group of 20 (G20): 19 countries + EU, meet biannual basis to solve global economic problems  Expatriate manager (expat): manager works abroad  International premium: a significant pay raise when working overseas  Unified Framework  What determines the success and failure of firms around the globe  Two core perspectives o Institution-based view  Institutions: rules of the game  Formal rules (laws), informal rules (values, cultures, ethics and norms) o Resource-based view  Institution based view is external while resource based is internal resources and capabilities  Firms must have firm-specific resources and capabilities that are not shared by competitors in the same environments  Liability of foregineness: inherent disadvantage due to nonnative status  What is Globalization  Globalization: close integration of countries and peoples of the world  Three view of globalization o Globalization can be  A new force sweeping through the world in recent times  A long run historical evolution since the dawn of human history  A pendulum that swings from one extreme to another from time to time  Pendulum view o Globalization is unable to keep going in one direction o The rapid growth of globalization led to the historically inaccurate view that globalization is new o Created fear among people in developed economies o Risk management: the identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events o Scenario planning: a technique to prepare and plan for multiple scenarios  Semi globalization o A perspective that suggests barriers to market integration may be high but not enough for complete insulation o Total isolation -> localization which treats each country as a unique market o Total globalization -> standardization which treats the entire world as one market  Global business and globalization at a crossroads  Nongovernmental organization (NGO): organizations that are not affiliated with governments Understanding Formal Institutions 9/22/2012 3:19:00 PM  Institutions: formal and informal rules of the game  Institutional transitions: fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players  Institution-based view: a leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions  UNDERSTANDING INSTITUTIONS  Institutional framework: formal and informal institutions governing individual and firm behavior  Formal institutions: institutions represented by laws, regulations and rules o Regulatory pillar: the coercive power of governments  Informal institutions: norms cultures and ethics o Normative pillar: the mechanism through which norms influence individual and firm behavior o Cognitive pillar: the internalized values and beliefs that guide individual and firm behavior  WHAT DO INSITUTIONS DO?  Key role is to reduce uncertainty  Uncertainty can lead to transaction cost (associated with economic transactions or cost of doing business)  Opportunism: the act of seeking self-interest with guile  INSTITUTION-BASED VIEW OF GLOBAL BUSINESS  Interaction between institutions and firms and firm behavior as the outcome  Managers and firms rationally pursue their interests and make choices within institutional constraints  Informal constraints play a larger role in reducing uncertainty and providing constancy for managers and firms in situations where formal constraints are unclear or fail  POLITICAL SYSTEMS  Political systems: the rules of the game on how a country is governed politically  Two primary political systems: democracy and totalitarianism  Democracy o Political system in which citizens elect representatives to govern the country on their behalf o Individuals have right to freedom of expression and organization  Totalitarianism o Aka dictatorship o One person or party exercise absolute political control over the population o Four major types  Communist totalitarianism - communist party  Right-wing totalitarianism – hatred communism  Theocratic totalitarianism – monopoly of one religious  Tribal totalitarianism – monopoly of one ethnic group  Political Risk o PR: risk associated with political changes that may negatively impact domestic and foreign firms  LEGAL SYSTEMS  LS: the rules of the game on how a country‟s laws are enacted and enforced  Reduces transaction costs by minimizing uncertainty and combating opportunism  Civil law, common law and theocratic law o Civil law: a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments o Common law: a legal tradition that is shaped by precedents and traditions from previous judicial decisions  More flexible because judges base on their interpretation of the law  Thus more confrontational o Theocratic law: a legal system based on religious teachings  Legal systems form regulatory pillar  Property rights o PR: the legal rights to use an economic property and to derive income and benefits from it  Intellectual Property Rights o IP: intangible property that is the result of intellectual activity o Intellectual property rights (IPR): rights associated with the ownership of intellectual property o Patents: exclusive legal rights of inventors of new products or processes to derive income from such inventions o Copyrights: exclusive legal rights of authors and publishers to publish and disseminate their work o Trademarks: exclusive legal rights of firms to use specific names, brands and designs to differentiate their products from others  ECONOMIC SYSTEMS  EC: rules of the game on how a country is governed economically  Market economy: an economy of invisible hand  Command economy: government ownership and control of factors  Mixed economy: has elements of both  Moral hazard: recklessness when people and organizations do not have to face the full consequences of their actions Informal Institutions 9/22/2012 3:19:00 PM  Informal institutions come from socially transmitted information and are a part of the heritage that we call cultures, ethics and norms  Ethnocentrism: a self-centered mentality held by a group of people who perceive their own culture, ethics and norms as natural, rational and morally right  Three different informal institutions: culture, ethics and norms  CULTURE  Culture: the collective programming of the mind that distinguishes the members of one group or category of people from another  No strict one-to-one correspondence between cultures and nation- states exists  Four major components of culture: language, religion, social structure and education o Language  Lingua franca: a global business language o Religion o Social structure: how a society broadly organizes its members- with rigidity or flexibility  Social stratification: the hierarchical arrangement of individuals into social categories such as classes, castes, or divisions within a society  Social mobility: the degree to which members from a lower social category can rise to a higher status  Social structure define its norms and values o Education  CULTURAL DIFFERENCES  Three different ways to understand cultural differences o Context approach  Straight-forward method  Context: the underlying background upon which social interaction takes place  Low context culture: a culture in which communication is usually taken at face value without much reliance on unspoken context  High context culture: a culture in which communication relies a lot on the underlying unspoken context, which is as important as the words used o The Cluster Approach  Cluster: countries that share similar cultures  Ronen and Shenkar Clusters  GLOBE clusters  Huntington Civilizations clusters  Civilization: the highest cultural grouping of people and the broadest level of cultural identity people have  People feel more comfortable doing business with other countries within the same cluster due to common language, history, religion and customs o The Dimension Approach  Five dimensions  Power distance: the extend to which less powerful members within a country expect and accept that power is distributed unequally  Individualism: the idea that an individual‟s identity is fundamentally his or her own  Collectivism: the idea that an individual‟s identity is tied to the identity of his or her collective group  Masculinity: strong form of societal-level sex role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions  Femininity: weak form of societal-level sex role differentiation  Uncertainty avoidance: the extend to which members in a culture accept or avoid ambiguous situations and uncertainty  Long-term orientation: dimension of how much emphasis is placed on perseverance and savings for future betterment  ETHICS  Ethics: the principles, standards and norms of conduct that govern individual and firm behavior  Code of conduct: a set of guidelines for making ethical decisions  Views o Negative view: firms appear more legitimate o Positive view: firms are self-motivated o Instrumental view: good ethics can help make money  Managing Ethics Overseas o Ethical relativism: a perspective that suggests that all ethical standards are relative o Ethical imperialism: a perspective that suggest that there is one set of Ethics and we have it o Three principles  Respect for human dignity and basic rights  Firms should respect local traditions  Respect for institutional context calls for a careful understanding of local institutions  Ethics and Corruptions o Corruption: the abuse of public power for private benefits, usually in the form of bribery o Corruption and poverty go together o Foreign Corrupt Practices Act (FCPA): a US law enacted in 1977 that bans bribery of foreign officials  NORMS AND ETHICAL CHALLENGES  Four broad strategic responses o Reactive  Deny responsibility, do less than required o Defensive  Admit responsibility but fight it, do the least that is required o Accommodative  Accept responsibility, do all the requirements o Proactive  Anticipate responsibility, do more than required  In-group: individuals and firms regarded as a part of „us‟  Out-group: individuals and firms not regarded as part of „us‟ Leveraging Resources and Capabilities 9/22/2012 3:19:00 PM  Resources: tangible and intangible assets a firm uses to choose and implement its strategies, same as capabilities  Tangible resources/capabilities: assets that are observable and easily quantified  Financial  Physical  Technological  Organizational  Intangible resources/capabilities: harder to observe and difficult to quantify  Human  Innovation  Reputational  Resources, capabilities and the value-chain: in house VS outsourcing  Value chain: a chain of vertical activities used in the production of goods and services that add value o Consists of primary and support activities  Benchmarking: examination on whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors  Commoditization: a process of market competition through which unique products that command high prices and high margins gradually lose their ability to do so, thus becoming commodities  Outsourcing: turning over an organizational activity to an outside supplier that will perform it on behalf of the local firm  Captive sourcing: setting up subsidiaries abroad so that the work dine is inhouse but the location is foreign. AKA FDI  Offshoring: outsourcing to an international or foreign firm  Inshoring: outsourcing to a domestic firm  Analyzing resources and capabilities with a VRIO framework  VRIO framework: the resource-based framework that focuses on the value, rarity, imitability organizational aspects of resources and capabilities  Causal ambiguity: the difficulty of identifying the causal determinants of successful firm performance  Complementary assets: the combination of numerous resources and assets that enable a firm to gain a competitive advantage  Social complexity: the socially intricate and interdependent ways firms are typically organized  Original equipment manufacturer (OEM): a firm that executes design blueprints provided by other firms and manufactures such products  Original design manufacturer (ODM): a firm that both designs and manufactures products  Original brand manufacturer (OBM): a firm that designs, manufactures and markets branded products Trading Internationally 9/22/2012 3:19:00 PM  Trade deficit: an economic condition in which a nation imports more than it exports  Trade surplus: nation exports more than it imports  Balance of trade: aggregation of importing and exporting that leads to the country-level trade surplus or deficit  Theories of International Trade  Classical trade theories: the major theories of international trade that were advanced before the 20 thcentury, which consist of mercantilism, absolute advantage and comparative advantage o Mercantilism  Theory that suggests that wealth of the world is fixed and nation that exports more and import less will be richer  Protectionism: the idea that governments should actively protect domestic industries from imports and vigorously promote exports o Absolute advantage  Free trade: free market forces should determine how much to trade with little or no government intervention  Absolute advantage: under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage  Absolute advantage: the economic advantage one nation enjoys that is absolutely superior to other nations  By specializing in the production of goods for which each has an absolute advantage, both can produce more  Both can benefit more by trading  There are net gains from trade based on absolute advantage o Comparative advantage  Focuses on the relative advantage in one economic activity that one nation enjoys in comparison with other nations  Comparative advantage: relative advantage in one economic activity that one nation enjoys in comparison with other nations  Opportunity cost: cost of pursuing one activity at the expense of other activity given the alternatives  It is more realistic and useful  Factor endowment: the extent to which different countries possess various factors of production such as labor, land and technology  Factor endowment theory: suggests that nations will develop comparative advantages based on their locally abundant factors o The classical theories above have laid the foundation  Modern trade theories: the major theories of international trade that th were advanced in the 20 century, which consist of product life cycle, strategic trade and national competitive advantage of industries o Product life cycle  Endowments and trade patterns change over time (dynamic)  Product life cycle theory: accounts for changes in the patterns of trade over time by focusing on product life cycle  Lead innovation nations, developed nations, developing nations  Product – new, maturing, standardized  Comparative advantage may change over time o Strategic trade  Suggests that strategic intervention by governments in certain industries can enhance their odds for international success  Subsidy: government payment to domestic firms  Strategic trade policy: government policy that provides companies a strategic advantage in international trade through subsidies and other supports o National competitive advantage of industries  Theory of national competitive advantage of industries (diamond theory): suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a diamond  Factor endowment: natural and human resources  Domestic demand conditions: propels firms to be strong domestically first  Domestic firm strategy, structure and rivalry  Related and supporting industries  Some argue that too much focus on domestic conditions  Evaluating theories o They are simplified  Assumes only two nations and two goods  Resource mobility: assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry o Modern theories rely on more realistic product life cycles  REALITIES OF INTERNATIONAL TRADE  Two broad types of trade barriers: tariff barriers and nontariff barriers  Tariff Barriers o Trade barrier that relies on tariffs to discourage imports o Import tariff: a tax imposed on imports o Deadweight costs: net losses that occur in an economy as a result of tariffs  Nontariff barriers (NTBs) o NTB: trade barrier that relies on nontariff means to discourage imports  Import quota: restriction on the quantity of imports  Voluntary export restraint (VER): an international agreement that shows that exporting countries voluntarily agree to restrict their exports  Local content requirements: a requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country  Administrative policy: bureaucratic rules that make it harder to import foreign goods  Antidumping duty: tariffs levied on imports that have been dumped (selling below costs)  Infant industry argument: the argument that if domestic firms are as young as infants, in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals  Trade embargo: politically motivated trade sanctions against foreign countries to signal displeasure Investing Abroad Directly 9/22/2012 3:19:00 PM  Foreign portfolio investment (FPI): investment in a portfolio of foreign securities such as stocks and bonds  Management control rights: the rights to appoint key managers and establish control mechanism  HORIZONTAL AND VERTICAL FDI  Horizont
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