busa 3000 final study guide

8/9/2019 BUSA 3000 Final Study Guide

1/13

Final Exam Study Guide (New Book)

Chapter 6

• Absolute advantage principle- A country should produce only those products in

which it has absolute advantage or can produce using fewer resources than

another country• Comparative advantage principle-The foundation concept of international trade,

which answers the question of how nations can achieve and sustain economicsuccess and prosperity. It refers to the superior features of a country that provide itwith unique benefits in global competition. Comparative advantages are derivedeither from natural endowments or from deliberate national policies.

• Competitive advantage- A foundation concept that explains how individual firms

gain and maintain distinctive competencies, relative to competitors, that lead tosuperior performance. It refers to the distinctive assets, competencies, andcapabilities that are developed or acquired by the firm.The collective competitiveadvantages held by the firms in a nation are the basis for the competitive

advantages of the nation at large.• ercantilism- A belief popular in the !"th century that national prosperity results

from maximi#ing exports and minimi#ing imports. $neo-merchantilism- tradesurplus%saves domestic &obs'.

• Theories of International Trade and Investment (ation level explanations-

o )iamond odel% *actor Conditions $quality' -+ elated and upported

Industries $presence of suppliercompetitorsfirms' -+ )emand Conditionsat /ome $trengths of customer demand' -+ *irm strategy, structure, andrivalry $firms createdorgani#edmanaged'

o (ew Trade Theory% Argues that economies of scale are an important

factor in some industries for superior international performance, even inthe absence superior comparative advantages. ome industries succeed best as their volume of production increases.

o *actor 0roportion Theory% Also 1nown as *actor 2ndowments Theory. It

argues that each country should produce and export products thatintensively use relatively abundant factors of production, and importgoods that intensively use relatively scarce factors of production

o International 0roduct 3ife Cycle Theory% 2ach product and its associated

manufacturing technologies go through three stages of evolution4introduction $monopoly', maturity$standardi#e', and standardi#ation$ceaseoriginal innovator'.

o (ational Industrial 0olicy% A proactive economic development plan

employed by the government to nurture or support promising industrysectors with potential for regional or global dominance. $incentives'.

• Theories of International Trade and Investment *irm level explanations-

o Internationali#ation% )omestic *ocus -+ 0re-export tage -+ 2xperimental

Involvement -+ Active Involvement -+ Committed Involvement


2/13

o onopolistic Advantage% Argues that (2s prefer *)I because it

provides the firm with control over resources and capabilities in theforeign mar1et, and a degree of monopoly power relative to foreigncompetitors. 5ey sources of monopolistic advantage include proprietary1nowledge, patents, unique 1now-how, and sole ownership of other assets

o )unning6s 2clectic 0aradigm% If company will enter country via *)I4 7wnership-pecific Advantage- 5nowledges1illsrelationships

3ocations-pecific Advantage- (atural resourcelow cost labor

Internationali#ation Advantage- control derives through

manufacturingdistributionetc8o International Collaborative 9enture% A form of cooperation between two

or more firms. 0artners pool resources and capabilities to create synergies,and share the ris1 of &oint efforts.

Equity-based joint ventures= result in the formation of a new legal

entity. In contrast to the wholly-owned *)I, the firm collaborateswith local partner$s' to reduce ris1 and commitment of capital.

Project-based alliances= do not require equity commitment fromthe partners but simply a willingness to cooperate in :),manufacturing, design, or any other value-adding activity. ince pro&ect-based alliances have a narrowly defined scope of activitiesand timeline, they provide greater flexibility to the firm thanequity-based ventures

Chapter 7

• ;hat is country ris1< 2xposure to potential loss or adverse effects on company

operations and profitability caused by developments in a country6s political andor

legal environments.

• 0olitical ystems

o )efine totalitarianism- =overnment controls all economic and political

matters $dictator'o )efine socialism- Capital is vested in the state and used primarily as

a means of production for use rather than for profit. $control productionetc, income tax rate are high, group welfare outweighs indiv.'

o )efine democracy- Limited government 4 The government performs only

essential functions that serve all citi#ens, such as national defense,maintaining law : order, foreign relations, and providing basic

infrastructure. Private property rights4 The ability to own property andassets and to increase one6s asset base by accumulating private wealth.0roperty includes land, buildings, stoc1s, contracts, patents. 2ncouragesinitiative, ambition, innovation.

o /ow political systems influence economic systems

)efine command economy- The state ma1es all decisions on what

to produce, how much to produce, and what prices to charge.$Totalitarian'.


3/13

)efine mar1et economy $capitalism'- )ecisions are largely left to

mar1et forces, that is, supply and demand. $)emocracy'. )efine mixed economy- features of both mar1et and command

economies, combining state intervention and mar1et mechanism$ocialism'.

• 3egal ystemso )efine Common 3aw- A legal system that originated in 2ngland and

spread to Australia, Canada, >A, and other former members of the?ritish Commonwealth $also 1nown as case law'. The basis of law istradition, past practices, and legal precedents set by courts viainterpretation of statutes, legislation, and past rulings. @udges have much power to interpret laws based on the circumstances of individual cases.Thus, common law is relatively flexible. $&udicial court law'

o )efine Civil 3aw- *ound in *rance, =ermany, Italy, @apan, Tur1ey, and

much of 3atin America. ?ased on an all-inclusive system of laws that have been codifiedBclearly written by legislative bodies. 3aws are more

Dcast in stone6 and not strongly sub&ect to interpretation by courts.$nationaland state legisatures'

o )efine eligious $Theocratic' 3aw- trongly influenced by religious

beliefs, ethical codes, and moral values, viewed as mandated by a supreme being. ost important religious legal systems are based on /indu, @ewish,and Islamic law. Islamic law spells out norms of behavior regarding politics, economics, ban1ing, contracts, marriage,and many other social and business issues.

o )efine ocialism 3aw-

o ixed ystems- Two or more legal systems operating together. The

contrast between civil and common law has become blurred as countries

combine both systems. Totalitarianism is most associated with religiouslaw and socialist law. )emocracy is associated with common law, civillaw, and mixed systems.

• Actors in 0olitical and 3egal ystems

o =overnment- or the Dpublic sector6, operating

at national and local levels.o International 7rgani#ations-such as the ;orld ?an1, ;orld Trade

7rgani#ation, and the >nited (ationso egional 2conomic ?locs- such as the 2uropean >nion, (A*TA, and

many others.o pecial Interest =roups- such as labor unions and environmental

advocateso Competing *irms- which oppose foreign firms.

• Types of Country is1 0roduced by the 0olitical ystem

o =overnment ta1eover of Corporate Assets- Confiscation4 ei#ure of

corporate assets without compensation. Expropriation4 Asset sei#ure withcompensation. Nationaliation4 Ta1eover of an entire industry, with orwithout compensation.


4/13

o 2mbargoes and anctions- Embargoes are bans on exports or imports that

forbid trade in specific goods with specific countries. 2xample4 The >..has enforced embargoes against Cuba, Iran, and (orth 5orea, labeled asstate sponsors of terrorism. !anctions are bans on international trade,usually underta1en by a country, or a group of countries, against another

&udged to have &eopardi#ed peace and security.o ?oycotts against *irms or (ations- 9oluntary refusal to engage in

commercial dealings with a nation or a companyo ;ar, Insurrection, and evolution- Indirect effects can be disastrous for

company activities.o Terrorism- the threat or actual use of force or violence to attain a political

goal through fear and intimidation.

• Types of Country is1 0roduced by the 3egal ystem

o Country ris1 arising from the host country legal environment-

*oreign investment laws- affect *)I-based entry.

Controls on operating forms and practices- laws and regulations on

how firms can conduct production, mar1eting, and distributionactivities.

ar1eting and distribution laws- regulate practices in advertising,

promotion, and distribution. 3aws regarding income repatriation- limit the amount of net

income or dividends that firms can bring bac1 to the home country. 2nvironmental laws- aim to preserve natural resources, combat

pollution, and ensure safety. Contract laws- affect the sale of goods and servicesE intermediary

agreementsE licensing and franchisingE foreign direct investmentEand &oint ventures.

Internet and e-commerce regulations-

o Country ris1 arising from the home country legal environment

)efine extraterritoriality- the application of home-country laws to

other countries. *or example, the 2uropean >nion pursuedicrosoft for monopolistic practices

The *oreign Corrupt 0ractices Act- made it illegal to offer bribes

to foreign parties. ?ut the act may harm >.. firms because foreigncompetitors are usually not so constrained.

Antiboycott regulations-

Accounting and reporting laws- Physical asset valuations4 Canada

and the >.. use historical costs. ome 3atin American countriesuse inflation-ad&usted mar1et value. R&D costs4 expensed asincurred in most of the worldE Capitali#ed in outh 5orea andpain. ome countries use both conventions.

)efine transparency- is the degree to which firms regularly reveal

substantial financial and accounting information. 9ariesworldwide.

2thical values and practices


5/13

• anaging Country is1

o 0roactive 2nvironmental canning- anagement should develop a

comprehensive understanding of the political and legal environment intarget countries. Scanning F ongoing assessment of potential ris1s andthreats to the firm.

o trict Adherence to 2thical tandards- *irms that engage in questionable practices or operate outside the law invite redress from the governments of the host countries where they do business

o )efine Corporate ocial esponsibility-

o Allying with Gualified 3ocal 0artners

o 0rotection through 3egal Contracts- Conciliation is a formal process of

negotiation whose ob&ective is to resolve differences in a friendly manner.It is the least adversarial method. Common in China. In arbitration, aneutral third party hears both sides of a case and decides in favor of one party or the other, based on an ob&ective assessment of the facts. Litigationoccurs when one party files a lawsuit against another. The most adversarial

approach, it is common in the >nited tates.o afeguarding Intellectual 0roperty ights

Chapter 8

• =overnment Intervention in International ?usiness

o )efine protectionism- national economic policies that restrict free trade.

>sually intended to raise revenue or protect domestic industries fromforeign competition.

o )efine tariffs- a tax on imports $e.g., citrus, textiles'

o )efine (ontariff trade barrier- government policy, regulation, or procedure

that impedes tradeo )efine customs- the chec1point at national ports of entry where officials

inspect imported goods and levy tariffs. o )efine quota- quantitative restriction on imports of a specific product

$e.g., imports of @apanese cars'

• ationale for =overnment Intervention

o )efensive ationale- 0rotection of the national economy F wea1 or young

economies sometimes need protection from foreign competitors. 2.g.,India imposed barriers to shield its huge agricultural sector, whichemploys millions. 0rotection of an infant industry F a young industry may

need protection, to give it a chance to grow and succeed. 2.g., @apan long protected its car industry. (ational security F the >nited tates prohibitsexports of plutonium and similar products to (orth 5orea. (ationalculture and identity F Canada restricts foreign investment in its movie andT9 industries.

)efine export control

o 7ffensive ationale- National trate!i" prioritie F protection helps

ensure the development of industries that bolster the nation6s economy.


6/13

Countries create better &obs and higher tax revenues when they supporthigh value-adding industries, such as IT, automotive, pharmaceuticals, orfinancial services. #n"reae employment F protection helps preservedomestic &obs, at least in the short term. /owever, protected industries become less competitive over time, especially in global mar1ets, leading

to &ob loss in the long run.• Instruments of =overnment Intervention

o 5now the different 1inds of tariffs

o )efine Import license- Government authorization granted to a firmfor importing a product.

o )efine currency control- Restrictions on the outflow of hard currencyfrom a country or the inflow of foreign currencies.

o )efine subsidies- are government grants $monetary or other resources' to

firm$s', intended to ensure their survival or success by facilitating production at reduced prices, or encouraging exports.

o )efine countervailing duty- Tariff imposed on products imported into

a country to offset subsidies given to producers or exporters in theexporting country.

o )efine dumping- Pricing exported products at less than their normal value, generally less than their price in the domestic or third-country marets, or at less than production costs.

o )efine antidumping duty- ! tax imposed on products deemed to bedumped and causing in"ury to producers of competing products inthe importing country.

o )efine investment incentive- Transfer payment or tax concessionmade directly to foreign firms to entice them to invest in thecountry.

• =overnment Intervention, 2conomic *reedom, and 2thical Concerns- Economic freedom is the absence of government coercion so that people can wor1, produce,consume, and invest however they want to.

• 2volution of =overnment Intervention- 0rotectionist tendencies, the =reat

)epression, and isolationism shaped early Hth century world trade. The moot-/awley Act $!JKL' raised >.. tariffs to more than MN $compared to only KNtoday'. 0rogressive trade policies reduced tariffs after ;;II. In !JOP, HK nationssigned the =eneral Agreement on Tariffs and Trade $=ATT'. The =ATT4 reducedtariffs via continuous worldwide trade negotiationsE created an agency tosupervise world tradeE and created a forum for resolving trade disputes.

• /ow *irms hould espond to =overnment Intervention- Research to gather

knowledge and intelligence. >nderstand trade and investment barriers abroad.can the business environment to identify the nature of government intervention.Choose the most appropriate entry strategies. ost firms choose exporting astheir initial strategy, but if high tariffs are present, other strategies should beconsidered, such as licensing, or *)I and @9s that allow the firm to producedirectly in the mar1et.

o trategies for anagers-


7/13

o )efine foreign trade #one- *TQs are areas where imports receive

preferential tariff treatment, intended to stimulate local economicdevelopment

o )efine maquiladoras-export-assembly plants in northern exico.

Chapter $

• %e!ional #nte!ration and E"onomi" Blo"

o )efine egional economic integration- The growing economic

interdependence that results when nations within a geographic region forman alliance aimed at reducing barriers to trade and investment

o )efine egional economic integration bloc- ! geographic areaconsisting of two or more countries that have agreed to pursueeconomic integration by reducing barriers to the cross-border flowof products, services, capital, and labor.

o )efine free trade agreement- ! formal arrangement between two or

more countries to reduce or eliminate tariffs, #uotas, and barriers totrade in products and services.

• Types of egional Integration

o )efine *ree trade area- ! stage of regional integration in whichmember countries agree to eliminate tariffs and other barriers totrade in products and services within the bloc.

o )efine Customs union- ! stage of regional integration in which themember countries agree to adopt common tariff and nontariff barriers on imports from nonmember countries.

o )efine Common mar1et- ! stage of regional integration in whichtrade barriers are reduced or removed. $ommon external barriers

are established. !nd products, services, and factors of productionare allowed to move freely among the member countries.

o )efine 2conomic >nion- ! stage of regional integration in whichmember countries en"oy all the advantages of early stages but alsostrive to have common fiscal and monetary policies.

• 3eading 2conomic ?locs

o The 2uropean >nion- 27 members. Founders members are Belgium,

Italy France, Germany, Luxembourg, and the Netherlands. Newmembers such as Poland, ungary, !"ech #e$ublic % are low&costmanu'acturing sites. Peugeot, !itro(n )France* % 'actories in !"ech#e$ublic+yundai )outh -orea* % -ia $lant in loa/ia+u"u/i)0a$an* % 'actory in ungary. 1ost new 3 entrants are in asternuro$e % one&time satellites o' the oiet 3nion, most areemerging mar/ets with 'ast economic growth rates.

o 2uropean *ree Trade Association $2*TA'-

o (orth American *ree Trade Agreement $(A*TA'- 0assage of (A*TA in

!JJO was facilitated by the maquiladora program, thru which >.. firmslocated factories &ust south of the >.. border to access low-cost labor


8/13

without significant tariffs. (A*TA4 2liminated tariffs and most nontariff barriers for products and services. 2stablished trade and investment rules,uniform customs procedures, and intellectual property rights 0rovided procedures for settling trade disputes

o 2l ercado Comun del ur $2C7>'- The leading economic bloc in

outh America, accounting for nearly all of the region6s =)0 3aunched in!JJ!, the four initial members were Argentina, ?ra#il, 0araguay, and>ruguay. 2stablished free movement of products and services, commonexternal tariff and trade policy, and coordinated monetary and fiscal policies. ay be integrated with (A*TA and )-CA*TA as part of afuture *ree Trade Area of the Americas.

o The Caribbean Community $CAIC7'-

o Comunidad Andina de (aciones $CA('

o Association of outheast Asian (ations $A2A('

o Asia 0acific 2conomic Cooperation $A02C'

o Australia and (ew Qealand Closer 2conomic elations Agreement $C2'

o 2conomic Integration in the iddle 2ast and Africa• ;hy Countries 0ursue egional Integration- Expand mar"et sie Increases si#e

of the mar1etplace for firms inside the economic bloc. ?elgium has a populationof &ust ! millionE the 2> has a population of nearly Mm ?uyers can accesslarger selection of goods Enhance productivity and economies of scale?iggermar1et facilitates economies of scale. Internationali#ation inside the bloc helpsfirms learn to compete outside the bloc. Competition and efficient resource usageinside the bloc leads to lower prices for bloc consumers. #ttract investment fromoutside the blocCompared to investing in stand-alone countries,foreign firms prefer to invest in countries belonging to an economic bloc. =eneral ills,amsung, and Tata have invested heavily in 2>-member countries. #cquire

stronger defensive and political posture ?elonging to a bloc provides membercountries with a stronger defensive posture relative to other nations and worldregions. This was a 1ey motive for formation of the 2uropean >nion.

• uccess *actors for egional Integration- Economic similarity trong similarity

on wage rates, economic conditions, and other factors helps ensure success. ost2> countries are similar in this way. Political similarity Countries should havesimilar political systems, share aspirations, and be willing to surrender nationalautonomy. This is a 1ey success factor of the 2>. !imilarity of culture andlanguage 2C7> and Australia(ew Qealand C2 are similar in this way.$eographic proximity *acilitates intra-bloc movement of products, labor, andother factors. 7ften, neighboring countries share a common history, culture and

language.• )rawbac1s and 2thical )ilemmas of egional Integration- %rade creation F As

barriers fall, trade is generated inside the bloc. %rade diversion F As within-bloctrade becomes more attractive, member countries discontinue some trade withnonmember countries. &!!re!ate e''e"t F (ational trade patterns are altered.ore trade occurs inside blocE less trade occurs with countries outside the bloc. A bloc can become an Deconomic fortress6 leading to more within!bloc trade and lessbetween!bloc trade, which can reduce global free trade. o o' national identity.


9/13

Increased cross-border contact ma1es members more similar to each other. Inresponse to (A*TA, Canada has restricted the ability of >.. movie and T9 producers to invest in the Canadian film and broadcasting industries. Sa"ri'i"e o'autonomy. In later stages, a central authority is set up to manage the bloc6saffairs. embers must sacrifice some autonomy to the central authority, such as

control over their own economy. 2.g., ?ritain in the 2>. ran'er o' power toad*anta!ed 'irm. Integration can concentrate economic power in the hands offewer, larger firms, often in the most advantaged member countries. Failure o'mall or weak 'irm. As barriers fall, protections are eliminated that previouslyshielded smaller or wea1er firms from foreign competition. Corporateretru"turin! and +o, lo estructuring and increased competitive pressuresmay lead to layoffs or re-assigning employees to distant locations, disruptingwor1ers and entire communities.

• anagement Implications of egional Integration- #nternationaliation ,y

'irm inide the e"onomi" ,lo". egional integration facilitates companyinternationali#ation. %ationaliation o' operation. ?y restructuring an

consolidating company operations, managers can develop strategies and value-chain activities suited to the region as a whole, not &ust individual countries. =oalis to cut costs and redundancy, and increase efficiencies via scale economies.*irms centrali#e production and mar1eting, instead of decentrali#ing them toindividual countries. .er!er and a"/uiition. 2conomic blocs lead to :A,the tendency of one firm to buy another, or of two or more firms to merge andform a larger firm. %e!ional produ"t and marketin! trate!y. *irms cut costs by standardi#ing products and services. Case Inc. reduced its agnum line oftractors from !P to only a few versions in 2urope, following integration of the2>. #nternationaliation ,y 'irm 'rom outide the ,lo". ?ecause externaltrade barriers mainly affect exporting, many foreign firms prefer to enter a bloc

through *)I. In this way, after formation of the 2>, ?ritain became the largestrecipient of *)I from the >nited tates.Chapter 01

• The )istinction between Advanced 2conomies, )eveloping 2conomies, and

2merging ar1etso )efine Advanced economies- 0ost-industrial countries characteri#ed by

high per capita income, competitive industries, and developed commercialinfrastructure. 2.g., world6s richest countries, including Australia, Canada,@apan, >nited tates, and the nations of ;estern 2urope.

o )efine )eveloping economies- 3ow-income countries characteri#ed by

limited industriali#ation and stagnant economies. 2.g. ?angladesh, (icaragua, Qaire.

o )efine 2merging economies- A subset of former developing economies

that have achieved substantial industriali#ation, moderni#ation, andremar1able economic growth. 2.g., Indonesia, exico, 0oland, Tur1ey.

o )efine Transition economies- ! subset of emerging marets thatevolved from centrally planned economies into liberalized marets.


10/13

o )efine 0rivati#ation- Transfer of state-owned industries to privateconcerns.

• ;hat a1es 2merging ar1ets Attractive for International ?usiness

o 2merging ar1ets as Target ar1ets- any have huge middle classes,

with significant income for buying electronics, cars, health care services,

and countless other products. any exhibit high economic growth rates.o 2merging ar1ets as anufacturing ?ases- /ome to low-wage, high-

quality labor for manufacturing and assembly operations. 3arge reservesof raw materials and natural resources. 2.g., outh Africa, ?ra#il, ussia.

o 2merging mar1ets as ourcing )estinations- (2s have established

numerous call centers in 2astern 2urope, India, the 0hilippines, andelsewhere. )ell and I? outsource certain technological functions to1nowledge wor1ers in India. Intel and icrosoft have much of their programming activities performed in ?angalore, India. Investments fromabroad benefit emerging mar1ets as they lead to new &obs and productioncapacity, transfer of technology and lin1ages to the global mar1etplace

o )efine 7utsourcing- The procurement of selected value-addingactivies including production of intermediate goods or finishedproducts from independent suppliers.

o )efine =lobal sourcing- The procurement of products or servicesfrom independent suppliers or company-owned subsidiaries locatedabroad for consumption in the home country or a third country.

• 2stimating the True 0otential of 2merging ar1ets

o 0er-capita Income as an Indicator of ar1et 0otential- 000 ad&usted per

capita =)0 represents the amount of products that consumers can buy in agiven country, using their own currency and consistent with their ownstandard of living.

o iddle Class as an Indicator of ar1et 0otential-o >se of a Comprehensive Index to easure ar1et 0otential

• is1s and Challenges of )oing ?usiness in 2merging ar1ets

o 0olitical Instability- corruption, wea1 legal systems, and unreliablegovernment authorities increase business ris1s and costs, and hinderforecasting.

o ;ea1 Intellectual 0roperty 0rotection- discourages producing or selling

goods that entail valuable assets.o ?ureaucracy, ed Tape, and 3ac1 of Transparency- burdensome rules,

excessive requirements for licenses, approvals, and paperwor1E not

accountable legal and political systems. 2.g., it may ta1e years, or many bribes, to obtain permissions to do business. China, India, and ussia are particularly problematic

o 0artner Availability and Gualifications- given emerging mar1et challenges,

foreign firms may see1 local partners, who provide access to mar1ets,supplier and distributor networ1s, and 1ey government contacts. ?utqualified partners are often hard to find, or require much assistance toupgrade their abilities.


11/13

o )ominance of *amily Conglomerates- economies are often dominated by

privately-owned local companies that are highly diversified, and controlsupplies and employment. Common in outh 5orea $chaebols', India$business houses', 3atin America $ grupos', and Tur1ey $holdingcompanies'.

•trategies for )oing ?usiness in 2merging ar1ets

o 0artnering with family conglomerates- ! large highly diversifiedcompany that is privately owned.

o ar1eting to =overnments in 2merging ar1ets-which buy enormous

quantities of products, such as computers, furniture, office supplies, andmotor vehicles, as well as services. tate enterprises operate in areas suchas railways, airlines, ban1ing, oil, chemicals and steel.

o )efine tenders- %ormal offers made by a buyer to purchase certainproducts or services

o 1illfully challenge emerging mar1et competitors- 3ow-cost labor, s1illed

wor1force, government support, and family conglomerates give emerging

mar1et firms various advantages. Advanced economy firms must4Conduct research to understand target mar1ets and the indigenouschallengersEAcquire new capabilities that build competitive advantage$e.g., develop new products, new ways of doing business, local alliances'3everage the same advantages in emerging mar1ets en&oyed by local firms$e.g., low-cost labor, s1illed wor1force, cheap capital, 1ey partnerships'.

• Catering to 2conomic )evelopment (eeds of 2merging ar1ets and )eveloping

2conomieso *ostering 2conomic )evelopment with 0rofitable 0ro&ects- Increasingly,

firms are involved in fostering economic development in emerging

mar1ets. Assisting economic development may $or may not' be part ofefforts aimed at corporate social responsibility. ore commonly, doing business in emerging mar1ets ma1es good business sense, and generates big profits./elpful ventures include moderni#ation pro&ects $e.g., power plants'E infrastructure pro&ects $highways'E in&ections of capital $viamicrofinance'E mar1eting consumer products $which leads to distributionchannels, reduces prices, and creates &obs'.

o icrofinance to facilitate 2ntrepreneurship- ;al-art and /ome )epot

have created new, cost-effective distribution channels in exico >nileverand 0:= sell shampoo in India for less than R.H per mini-sachet. Cemex provides low-cost building materials to millions of poor people. (arayana

/rudayalaya sells health insurance for less than R.H per person permonth in India. 9arious cell-phone and telecom firms have substantially

Chapter 00

• Currencies and 2xchange ates in International ?usiness

o )efine currency ris1


12/13

o )efine 2xchange rate- The price of one currency expressed in termsof another.$urrency ris,Potential harm that arises from changes inthe price of one currency relative to another.

o Convertible and (onconvertible Currencies- ost currencies are not very

convertible. The dollar, yen, pound, euro are hard "urren"ie F

universally accepted and preferred in international transactionso *oreign 2xchange ar1ets

o )efine *oreign 2xchange- !ll forms of money that are tradedinternationally. This includes foreign currencies, ban deposits,checs, and electronic transfers.

o )efine *oreign exchange mar1et- The global maretplace for buyingand selling national currencies.

o 2xchange ates are in constant flux- currency rate change

• /ow 2xchange ates are )etermined

o 2conomic =rowth- is the increase in value of the goods and services

produced by an economy.o Interest ates and Inflationo )efine Central ?an1- The monetary authority in each nation that

regulates the money supply and credit. &t issues currency and alsomanages the exchange rate of the nation's currency .

o ar1et 0sychology- refers to investor behavior, such as herding behavioror momentum trading.

o =overnment Action- governments intervene to influence the value of their

own currencies, e.g., the Chinese government regularly intervenes in theforeign exchange mar1et to 1eep the renminbi undervalued, to help ensureexports.

o )efine Trade urplus- ! condition in which a nation's exports exceedits imports for a period of time.

o )efine Trade deficit- ! condition in which a nation's imports exceedits exports for a period of time.

o )efine )evaluation- Government action to reduce the official value of its currency, relative to other currencies.

o )efine ?alance of payments- The annual accounting of all economictransactions of a nation with !(( other nations.

• )evelopment of the odern 2xchange ate ystem

o )efine I*- !n international agency that aims to stabilizecurrencies by monitoring the foreign exchange systems of member

countries and lending money to developing economies.o )efine ;orld ?an1- !n int. agency that provides loans and technical

assistance to low and mid-income countries with the goal ofreducing poverty.

o The 2xchange ate ystem today

• The International onetary and *inancial ystems


13/13

o )efine International onetary ystem- &nstitutional framewor, rules,and procedures by which national currencies are exchange for oneanother.

o )efine =lobal financial system- The collective of financial institutionsthat facilitate and regulate investment and capital flow worldwide.

These include central bans, commercial bans, and national stocexchanges.o )efine Contagion- the crisis spread quic1ly to 2urope and beyond.

• 5ey 0layers in the onetary and *inancial ystems

o The *irm- International transactions require firms to deal with huge sums

of foreign exchange.o (ational toc1 2xchanges and ?ond ar1ets- *acilities for trading

securities and bonds.o Commercial ?an1s- 3end money to finance business activity, play a 1ey

role in nations6 money supplies, and exchange foreign currencies. o Central ?an1s- egulate money supply, issue currency, manage exchange

rates, control national reserves. o )efine onetary Intervention- The buying and selling of currencies by

a central ban to maintain the exchange rate of a country's currency at some acceptable level.

o The ?an1 for International ettlements- upervises Central ?an1

monetary policy and other activitieso I*- Agency that promotes exchange rate stability, monitors exchange

systems provides funding to developing economies. o )efine pecial )rawing ight- ! unit of account or reserve asset...a

type of currency used by central bans to supplement their existingreserves in transactions with the &)%.

o ;orld ?an1- Agency that provides loans and technical assistance to

combat global poverty around the world.

busa 3000 final study guide

Documents