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RSM490H1 Study Guide - Midterm Guide: Foreign Direct Investment, Gross Domestic Product, Intellectual Property

Rotman Commerce
Course Code
Prof.Jan Klakurka
Study Guide

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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
Gross national income (GNI): GDP + income from nonresident sources
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

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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
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
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
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

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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
Institutional framework: formal and informal institutions governing
individual and firm behavior
Formal institutions: institutions represented by laws, regulations and
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
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
Interaction between institutions and firms and firm behavior as the
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: the rules of the game on how a country is governed
Two primary political systems: democracy and totalitarianism
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