C211 Study Guide Questions V3 PDF

C211 Study Guide Questions V3 Do NOT copy/paste this document – click File (top left) and then Save As or Create a Copy. Choose “download a copy”. The following questions are developed as a study aid for C211 – Global Economics for Managers. They cover important concepts in each competency. The qu...

C211 Study Guide Questions V3 Do NOT copy/paste this document – click File (top left) and then Save As or Create a Copy. Choose “download a copy”. The following questions are developed as a study aid for C211 – Global Economics for Managers. They cover important concepts in each competency. The questions are designed to serve as an indicator of your preparedness to take the C211 assessment. You can use these to help you take notes as you go through the chapters. You may also use them to reinforce your understanding after covering the material. Competency 1: Business Decision-Making in the Global Environment Globalization (Peng Chapters 1, 5, 6, 11) 1. List and explain the two core perspectives for global business in detail with examples for each. a. The sources offer two core perspectives for understanding global business: b. Institution-Based View i. This perspective emphasizes the significant role of institutions, both formal and informal, in shaping the success or failure of firms in the global arena. Institutions, as "rules of the game," guide and constrain the behavior of individuals and firms, influencing their strategic choices and ultimately their outcomes. c. Formal institutions encompass explicit regulations like laws, regulations, and rules. For instance: i. Property rights laws ii. Contract enforcement mechanisms iii. Trade policies d. These directly influence a firm's ability to operate, invest, and trade internationally. A company seeking to establish a manufacturing facility in a foreign country must navigate the host country's legal and regulatory framework regarding foreign investment, labor laws, and environmental regulations. Strong  property rights protection encourages investment, while weak enforcement may deter it. e. Informal institutions, on the other hand, are less codified but equally powerful. These include: i. Cultural norms ii. Ethical values iii. Societal expectations f. Understanding cultural differences, such as attitudes towards time, communication styles, and business etiquette, is crucial for successful global business. For example, a company marketing its products in a new market needs to tailor its message to resonate with local cultural sensitivities. Failure to do so could lead to misinterpretations and lost opportunities. g. Resource-Based View i. This perspective focuses on the firm's internal resources and capabilities as the primary drivers of competitive advantage in global markets. According to this view, firms that possess valuable, rare, inimitable, and organizationally embedded (VRIO) resources are better positioned to succeed internationally. 1. Valuable resources enable a firm to exploit opportunities or mitigate threats in the external environment. For example, a company with a strong brand reputation can leverage its brand equity to enter new markets and command premium prices. 2. Rare resources are not widely available to competitors, providing a source of differentiation. A company with a unique technology or patent may enjoy a temporary competitive advantage until competitors catch up. 3. Inimitable resources are difficult for competitors to replicate. This could be due to factors such as unique historical conditions, complex social networks, or causal ambiguity, where it is unclear what exactly contributes to the resource's success.  4. Organizationally embedded resources are effectively integrated within the firm's structures, systems, and culture. This ensures that the firm can fully leverage its valuable, rare, and inimitable resources to achieve sustained competitive advantage. h. The liability of foreignness, the inherent disadvantage faced by foreign firms in host countries due to their non-native status, underscores the importance of a resource-based view. Overcoming this liability requires firms to deploy overwhelming resources and capabilities to offset the challenges of unfamiliarity with the local environment, institutional differences, and potential discrimination. For example, a foreign firm entering a new market might need to invest heavily in building local relationships, adapting its products or services to local tastes, and establishing a strong local presence to gain acceptance and credibility. 2. What is globalization? Explain the three views on globalization. a. Globalization is defined as the close integration of countries and peoples of the world. However, there are three different views of globalization: b. Globalization as a New Force Sweeping through the World in Recent Times: This view sees globalization as a recent phenomenon, driven by technological advancements and the rise of multinational enterprises. Proponents of this view often emphasize the negative aspects of globalization, arguing that it leads to the exploitation of developing countries by multinational corporations, cultural homogenization, and environmental degradation. c. Globalization as a Long-Run Historical Evolution: This perspective argues that globalization is not a new phenomenon but rather a continuation of historical trends of trade, migration, and cultural exchange dating back to ancient times. Globalization, according to this view, is an ongoing process of increasing interconnectedness and interdependence among  nations, driven by forces such as technological progress, economic liberalization, and the spread of ideas and cultures. d. Globalization as a Pendulum Swinging between Extremes: This view suggests that globalization is not a one-directional process but rather a cyclical phenomenon, characterized by periods of intense integration followed by periods of retrenchment. This perspective recognizes that globalization has experienced both periods of rapid expansion and periods of backlash, driven by factors such as economic crises, political shifts, and social movements. e. These three views offer different interpretations of the nature and significance of globalization. Understanding these perspectives is crucial for navigating the complex challenges and opportunities presented by the increasingly interconnected world. 3. What is FDI? What are horizontal and vertical FDI? a. Foreign direct investment (FDI) is when a firm invests in, controls, and manages value-added activities in other countries. This means that a firm is not just passively investing in foreign securities, but actively participating in the management and operation of foreign assets. An example of this would be General Motors, a US-based company, opening a factory in Mexico. Multinational enterprises (MNEs) are the firms that engage in FDI. b. There are two main types of FDI: horizontal and vertical. i. Horizontal FDI occurs when a firm duplicates its home country-based activities at the same value chain stage in a host country. This means that the firm is essentially replicating its existing business model in a new location. For example, if General Motors produces cars and trucks in the United States and then opens another factory in Mexico to produce the same cars and trucks, that would be considered horizontal FDI. ii. Vertical FDI is when a firm moves upstream or downstream at different value chain stages in a host  country. This means that the firm is expanding its operations to include different stages of the production process in a foreign country. 1. Upstream vertical FDI occurs when a firm invests in an earlier stage of the value chain, such as acquiring a supplier of raw materials or components. For example, if General Motors invested in a Mexican company that supplies parts for its cars and trucks, that would be considered upstream vertical FDI. 2. Downstream vertical FDI involves investing in a later stage of the value chain, such as setting up a distribution network or opening retail stores in a foreign country. For example, if General Motors opened a dealership in Mexico to sell its cars and trucks, that would be considered downstream vertical FDI. c. The decision of whether to engage in horizontal or vertical FDI is driven by a variety of factors, including the firm's strategic goals, the nature of its products or services, and the characteristics of the host country. 4. What is the OLI advantage? Explain, providing an example of each. a. The OLI advantages framework explains why firms engage in Foreign Direct Investment (FDI) instead of alternative strategies like exporting or licensing. The framework suggests that MNEs (multinational enterprises) pursue three key advantages via FDI: b. O - Ownership Advantages: Ownership advantages refer to the firm-specific resources and capabilities that provide it with a competitive edge in foreign markets. These can include: i. Tangible assets: like proprietary technology, patents, or access to raw materials. ii. Intangible assets: like brand reputation, managerial expertise, or marketing skills.  iii. For example, a pharmaceutical company with a patent for a life-saving drug has a valuable ownership advantage that it can leverage through FDI to establish manufacturing facilities in foreign markets and protect its intellectual property. c. L - Location Advantages: Location advantages stem from attractiveness of a particular host country or region. These can include: i. Access to markets: FDI provides direct access to target customers in foreign markets, reducing transportation costs and trade barriers. For example, a clothing retailer may choose to open stores in a foreign country to gain a direct presence and build relationships with local customers. ii. Availability of resources: Certain resources, such as natural resources, skilled labor, or technological expertise, may be concentrated in specific locations, making FDI an attractive option. For example, an energy company might invest in a country with abundant oil reserves to secure access to this critical resource. iii. Favorable government policies: Host governments may offer incentives like tax breaks, subsidies, or streamlined regulations to attract FDI.. d. I - Internalization Advantages: Internalization advantages arise when it is more efficient for a firm to conduct transactions within its own organization rather than through external markets. This can be due to: i. High transaction costs: Market imperfections like high transportation costs, trade barriers, or contractual uncertainties can make it more cost-effective to internalize operations through FDI. ii. Protecting proprietary knowledge: FDI allows firms to maintain control over their technology, processes, and other intellectual property, reducing the risk of unauthorized diffusion or imitation.  e. For instance, a technology company with valuable software may choose to establish its own subsidiaries in foreign markets to maintain control over its code and prevent piracy, rather than licensing it to a foreign partner and risking losing control over its intellectual property. 5. What are the three political views on FDI? (Explain) a. 1. The Radical View: i. This perspective is hostile to FDI. It sees FDI as a tool of imperialism used by foreign capitalists and firms to exploit developing countries, their resources, industries, and people. The radical view often argues that FDI leads to a loss of economic and political sovereignty for host countries, with profits flowing out of the country and back to the foreign investors, leaving little benefit for the local economy. b. 2. The Free Market View: i. This perspective is strongly in favor of FDI. It argues that unrestricted FDI, free from government intervention, allows countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. The free market view believes that FDI brings capital, technology, and jobs to host countries, leading to economic growth and development. This view sees the benefits of FDI outweighing any potential costs. c. 3. Pragmatic Nationalism: i. This perspective takes a more balanced approach to FDI. It acknowledges that FDI can have both pros and cons and advocates for a case-by-case evaluation of FDI projects. Pragmatic nationalism suggests that governments should only approve FDI when its benefits outweigh its costs. This view often involves negotiating with MNEs to ensure that FDI benefits the host country, such as through technology transfer, job creation, and local sourcing requirements. 6. Carrier (HVAC company) decided to close its manufacturing plant in Ohio and move it to Mexico. a. Which country is the host, and which is the home? i. The United States is the home country.  ii. Mexico is the host country. b. What are the costs and benefits of FDI to the host country? i. Benefits of FDI to the Host Country (Mexico) 1. Capital inflow: Carrier's investment injects capital into the Mexican economy, which can be used to fund new businesses, infrastructure projects, and other investments that boost economic growth. 2. Technology spillover: Carrier's operations in Mexico can bring advanced manufacturing technologies and know-how, which can be adopted by local firms, leading to increased productivity and innovation. 3. Advanced management know-how: Carrier's experienced management team can bring best practices and industry knowledge to Mexico, helping to improve the efficiency and competitiveness of local businesses. 4. Job creation: The new manufacturing plant creates jobs for Mexican workers, boosting employment levels and reducing poverty. ii. Costs of FDI to the Host Country (Mexico): 1. Loss of sovereignty: Some argue that large-scale FDI can lead to foreign companies having undue influence over government policies and regulations, potentially undermining national interests. 2. Adverse effects on competition: Carrier's presence in Mexico could create challenges for local HVAC companies, potentially driving some out of business if they can't compete with Carrier's scale and resources. 3. Capital outflow: When Carrier earns profits in Mexico, those profits may be repatriated back to the United States, which can lead to a net outflow of capital from Mexico in the long run. c. What are the costs and benefits of FDI to the home country? i. Benefits of FDI to the Home Country (United States):  1. Repatriated earnings: Profits earned by Carrier in Mexico can be sent back to the United States, increasing the company's earnings and potentially leading to higher dividends for US shareholders. 2. Increased exports of components and services: Carrier may source components and services from US suppliers to support its operations in Mexico, boosting exports for those businesses. 3. Learning via FDI from operations abroad: Carrier may gain valuable insights and experience from operating in Mexico, which can be applied to its operations in other markets, including the US. ii. Costs of FDI to the Home Country (United States): 1. Capital outflow: Carrier's initial investment in Mexico represents a flow of capital out of the US economy. 2. Job loss: The closure of the Ohio manufacturing plant leads to job losses for US workers. This can create economic hardship in the affected communities and increase unemployment. d. It is important to note that the specific costs and benefits of FDI can vary depending on the particular circumstances of the investment and the policies of both the host and home countries. 7. What is collusion, and what characteristics of a market make collusion difficult? a. Collusion refers to the collective attempts between competing firms to reduce competition. Collusion can take various forms, including: i. Explicit collusion: Firms directly negotiate output, pricing, and divide markets, often forming a cartel. ii. Tacit collusion: Firms indirectly coordinate their actions by signaling their intentions to reduce output and maintain prices above competitive levels. b. While firms might benefit in the short run, collusion is generally detrimental to consumers as it leads to higher prices and  reduced output. In many countries, including the US, collusion is illegal. c. Certain market characteristics make collusion difficult to maintain: i. Large Number of Firms: The more firms in a market, the harder it is to coordinate actions and monitor compliance with a collusive agreement. Each firm has a greater incentive to cheat and undercut rivals to gain market share. ii. Product Differentiation: When products are differentiated, firms have more leeway to compete on non-price factors like quality, features, or branding. This makes it harder to establish and enforce a common price. iii. Low Entry Barriers: If new firms can easily enter the market, it becomes difficult to maintain a collusive agreement. New entrants may not be part of the agreement and could undercut established firms, undermining the cartel's control over prices. iv. Fluctuating Demand: Unpredictable changes in demand make it difficult for firms to anticipate and coordinate production levels, making it harder to maintain stable prices under a collusive agreement. v. Antitrust Laws and Enforcement: Strong antitrust laws and active enforcement discourage collusion by imposing penalties on firms that engage in anti-competitive practices. vi. Lack of a Price Leader: In some industries, a dominant firm can act as a price leader, setting a benchmark for other firms to follow, which makes tacit collusion easier. The absence of a clear price leader can make coordination more challenging. vii. Asymmetric Information: When firms have different levels of information about costs, demand, or each other's strategies, it can be harder to reach and sustain a collusive agreement.  d. In addition to market characteristics, factors such as the firms' capacity to punish each other for cheating and the ability to establish trust and repeated interactions can influence the likelihood of successful collusion. 8. How do resources and capabilities influence the competitive dynamics of a business? (Give an example) a. A firm's unique resources and capabilities are crucial in shaping its competitive dynamics and determining its success in the marketplace. The VRIO framework, discussed in the context of competitive dynamics, provides a useful lens for understanding how resources and capabilities influence a firm's competitive actions: b. V - Value: Firms must possess valuable resources and capabilities that enable them to create products or services that customers are willing to pay for. For instance, Apple's innovative product design and strong brand reputation are valuable assets that allow them to command premium prices and maintain a loyal customer base. c. R - Rarity: Resources and capabilities must be rare to provide a competitive edge. If many firms have access to the same resources, no single firm can achieve a sustainable advantage. For example, De Beers' control over a significant portion of the world's diamond supply gives it a rare and valuable advantage in the diamond market. d. I - Imitability: Difficult-to-imitate resources and capabilities are essential for sustaining a competitive advantage. Factors like unique historical conditions, causal ambiguity (difficulty in identifying the sources of advantage), and social complexity (advantages stemming from interpersonal relationships and organizational culture) can make imitation challenging. For example, Southwest Airlines' unique organizational culture, focused on employee empowerment and operational efficiency, has been difficult for competitors to replicate, contributing to its long-term success.  e. O - Organization: A firm's organizational structure, processes, and systems must be aligned to effectively leverage its valuable, rare, and inimitable resources and capabilities. For instance, Toyota's renowned production system, emphasizing lean manufacturing principles and continuous improvement, requires a highly coordinated and disciplined organizational structure to function effectively. f. In essence, firms that possess and effectively leverage VRIO resources and capabilities are better positioned to: i. Launch successful attacks to gain market share. ii. Mount effective counterattacks to defend their position against rivals. iii. Send credible signals to deter competitive threats. iv. Shape industry structure to their advantage. g. For example, Amazon's sophisticated logistics network, massive scale, and data analytics capabilities are valuable, rare, and difficult-to-imitate resources that enable it to compete aggressively on price, offer fast delivery, and personalize customer experiences. These capabilities have disrupted traditional retail and allowed Amazon to dominate e-commerce. 9. What is resource similarity and how does this impact competitive dynamics? (Give an example) a. Resource similarity is the extent to which competing firms possess comparable strategic endowments in terms of both type and amount. Essentially, it means how alike competitors are in their resources and capabilities. b. Resource similarity significantly impacts competitive dynamics: i. Increased Rivalry: When firms have similar resources, they tend to compete more intensely. They are vying for the same opportunities and customers, which can lead to price wars, aggressive marketing campaigns, and increased innovation to gain an edge. ii. Imitation and Catch-Up: Resource similarity makes it easier for firms to imitate each other's successful  strategies and products. This can erode competitive advantage and make it difficult for firms to differentiate themselves. iii. Reduced Cooperation: Firms with similar resources might be less inclined to cooperate, as they perceive each other as direct threats rather than potential partners. They are more likely to view competition as a zero-sum game where one firm's gain is another's loss. c. Example: i. The intense rivalry between Coca-Cola and Pepsi illustrates the impact of resource similarity. Both companies have: 1. Global brand recognition. 2. Extensive distribution networks. 3. Large marketing budgets. 4. Similar product portfolios. d. This resource similarity has fueled decades of fierce competition, with both companies constantly trying to outdo each other in advertising, product innovation, and market share. 10. What is cooperation and signaling? a. Cooperation and Signaling b. In the context of competitive dynamics, cooperation refers to the efforts between competing firms to reduce the intensity of competition. It can range from informal agreements to more structured partnerships. While collusion involves explicit agreements to manipulate prices or output, cooperation encompasses a broader range of activities, including joint ventures, technology sharing, and industry standards setting. c. Signaling, on the other hand, is a strategic communication tactic firms use to influence the perceptions and actions of their rivals. In a competitive environment characterized by uncertainty about rivals' intentions and capabilities, signaling can play a crucial role in shaping competitive dynamics. d. Firms may engage in signaling to:  i. Convey their intentions: A firm may signal its commitment to a particular market or product line by making significant investments or announcing ambitious growth targets. This can deter rivals from entering the market or challenging the firm's dominance. ii. Demonstrate their strength: Firms can signal their competitive strength through actions such as aggressive pricing, rapid product development, or expansion into new markets. These signals can discourage rivals from attacking the firm. iii. Reduce the risk of misinterpretation: Signaling can help avoid misunderstandings or misinterpretations of a firm's actions. For example, a price cut intended to clear inventory might be misinterpreted as a predatory move to undercut rivals, potentially triggering a price war. By clearly communicating its intentions, a firm can minimize the risk of such escalation. e. The sources mention four common means of signaling: i. Preemptive moves: Being the first to enter a new market or launch a new product can signal a firm's commitment and deter rivals from following. ii. Announcements: Public statements about future plans, investments, or strategic direction can signal a firm's intentions and capabilities to competitors. iii. Public commitments: Entering into binding agreements or contracts can signal a firm's long-term commitment to a market or strategy. iv. Strategic alliances: Forming partnerships with other firms can send a signal of strength, shared resources, and a unified front against competitors. f. Cooperation and signaling often go hand in hand. Firms may cooperate to reduce competition while simultaneously using signaling to manage their relationships with rivals and influence the industry landscape. For example, firms in an oligopoly, where a small number of firms dominate the market,  may engage in tacit collusion by signaling their pricing intentions through public statements or price leadership, thereby avoiding a destructive price war. g. It is important to note that while cooperation and signaling can be beneficial in some situations, they can also raise concerns about anti-competitive behavior. Regulators often scrutinize such practices to ensure they do not harm consumer welfare or stifle innovation. 11. Explain the four strategies that local firms can take to fight MNEs. a. When multinational enterprises (MNEs) enter a new market, local firms face the challenge of competing with these often larger and more resource-rich companies. The sources outline four distinct strategies that local firms can employ to combat MNEs effectively: i. Contender Strategy: This strategy involves rapid learning and subsequent expansion into overseas markets. Contenders aggressively acquire knowledge and capabilities to compete head-on with MNEs. They often focus on niche markets or segments where they can leverage local expertise and agility to gain an advantage. Once they establish a strong foothold in the domestic market, contenders may expand internationally, challenging MNEs on their own turf. ii. Defender Strategy: Defenders concentrate on leveraging local assets in areas where MNEs are weak. They capitalize on their deep understanding of local market conditions, customer preferences, and cultural nuances to differentiate their offerings. This strategy is particularly effective when MNEs struggle to adapt their products or services to the local context. Defenders may also exploit their relationships with local suppliers, distributors, or government agencies to create barriers to entry for MNEs. iii. Dodger Strategy: Dodgers choose to cooperate with MNEs rather than directly compete. They might form  joint ventures, strategic alliances, or even sell off parts of their business to MNEs. This allows dodgers to access the resources, technology, and global reach of MNEs while retaining a degree of control over their operations. Dodgers benefit from the synergy of combining their local knowledge with the MNE's global expertise. iv. Extender Strategy: Extenders focus on leveraging their homegrown competencies abroad. They identify their core strengths and capabilities that have proven successful in their domestic market and then expand internationally to markets with similar characteristics. This strategy allows extenders to tap into new customer bases and growth opportunities while capitalizing on their existing expertise. b. The choice of strategy depends on factors such as: i. Industry Dynamics: The level of competition, the pace of innovation, and the degree of globalization in the industry influence the suitability of each strategy. ii. Firm-Specific Resources and Capabilities: A firm's strengths and weaknesses determine which strategies are feasible and likely to succeed. iii. Institutional Environment: Local regulations, government policies, and cultural norms can shape the competitive landscape and influence the effectiveness of different strategies. c. By carefully analyzing their situation and choosing the most appropriate strategy, local firms can effectively compete with MNEs and thrive in a globalized marketplace. International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10) 1. Define each of the following: trade deficit, trade surplus, and balance of trade. a. Trade Deficit: A trade deficit occurs when a nation imports more goods and services than it exports. This means the  country is spending more on foreign goods and services than it is earning from selling its own goods and services abroad. b. Trade Surplus: Conversely, a trade surplus exists when a nation exports more goods and services than it imports. The country earns more from its international sales than it spends on purchases from other countries. c. Balance of Trade: The balance of trade is a comprehensive measure that reflects the overall difference between a nation's imports and exports. It is the aggregation of a country's import and export activities, resulting in either a trade surplus or a trade deficit. 2. Explain the three types of classical international trade theories. a. Mercantilism: This theory, prevalent before the 18th century, viewed international trade as a zero-sum game, where one nation's gain came at the expense of another. Mercantilists believed that a country's wealth was measured by its accumulation of gold and silver. They advocated for protectionist policies like tariffs and subsidies to promote exports and restrict imports, aiming to maximize a nation's treasure reserves. b. Absolute Advantage: Developed by Adam Smith, this theory argues that nations should specialize in producing and exporting goods and services in which they have an absolute advantage, meaning they can produce those goods more efficiently than other nations. By specializing and trading, countries can increase their overall production and consumption, leading to mutual benefits. The focus here is on productivity and efficiency in producing goods. c. Comparative Advantage: Introduced by David Ricardo, this theory builds upon absolute advantage but focuses on relative costs and opportunity costs. It states that even if a country has an absolute advantage in producing all goods, it can still benefit from trade by specializing in goods where it has a comparative advantage—meaning it can produce them at a lower opportunity cost compared to other nations. Comparative advantage emphasizes specializing in the production of goods where a country is relatively more efficient, even if it's not the absolute best producer. 3. Explain the three types of modern international trade theories. a. Product Life Cycle Theory: This theory, developed by Raymond Vernon, suggests that the patterns of international trade change over time as a product progresses through its life cycle stages: introduction, maturity, and standardization. i. Introduction: A new product is typically introduced in a developed country, where innovation and higher-income consumers drive demand. The innovating firm enjoys a temporary monopoly and charges premium prices. ii. Maturity: As the product matures, demand expands in other developed countries, and production might shift to these locations to serve those markets efficiently. Competition increases, and prices begin to decline. iii. Standardization: The product becomes standardized, and production moves to developing countries where labor costs are lower. The original innovator might become an importer of the product it initially invented. iv. Example: The personal computer industry exemplifies this cycle. Initially developed and produced in the United States, production later shifted to other developed nations and eventually to developing countries like China, as the technology matured and became more standardized. b. Strategic Trade Theory: This theory suggests that government intervention can enhance a nation's competitive advantage in specific industries. It argues that targeted policies, such as subsidies, tax breaks, and protectionist measures, can foster the development of industries with high growth potential, particularly those with significant economies of scale or network effects. i. First-mover advantage plays a crucial role in this theory. By supporting domestic firms to become early entrants in promising industries, governments can help them gain a dominant position in the global market. ii. Example: The success of Airbus, a European aircraft manufacturer, is often attributed to the strategic support it received from European governments, enabling it to  compete with the long-established American giant, Boeing. c. National Competitive Advantage of Industries (Diamond Theory): Developed by Michael Porter, this theory identifies four key factors that determine a nation's competitive advantage in specific industries. These factors are depicted as points on a diamond: i. Factor Conditions: The availability of resources like skilled labor, natural resources, capital, and infrastructure. ii. Demand Conditions: The size and sophistication of the domestic market for a particular product or service. iii. Related and Supporting Industries: The presence of strong, competitive supplier and supporting industries that contribute to the value chain. iv. Firm Strategy, Structure, and Rivalry: The intensity of competition in the domestic market, the organizational structures of firms, and the strategies they pursue. v. Example: The dominance of Italian firms in the luxury fashion industry can be explained by the presence of all four diamond factors. Italy has a highly skilled workforce in design and manufacturing, a sophisticated domestic market for high-end fashion, a cluster of supporting industries in textiles and leather goods, and intense competition among Italian fashion houses, driving innovation and quality. d. These modern theories offer more dynamic perspectives compared to classical theories, acknowledging factors such as technological change, government policies, and the evolution of industries over time. 4. What is an exchange rate? a. An exchange rate is the price of one currency expressed in terms of another currency. It represents the rate at which one currency can be exchanged for another in the foreign exchange market. For example, if the exchange rate between the US  dollar (USD) and the euro (EUR) is 1 USD = 0.90 EUR, this means that one US dollar can be exchanged for 0.90 euros. b. The exchange rate is determined by various factors, with supply and demand playing the most crucial role. Other factors influencing exchange rates include: i. Purchasing power parity (PPP): This concept suggests that exchange rates should adjust to equalize the purchasing power of different currencies. In simpler terms, identical goods should cost the same in different countries when expressed in a common currency. ii. Interest rates and money supply: Higher interest rates in a country can attract foreign investment, leading to an appreciation of its currency. Changes in a country's money supply can also impact its exchange rate. iii. Productivity and balance of trade: A country with higher productivity may experience currency appreciation. Similarly, a country with a trade surplus, where exports exceed imports, may see its currency strengthen. iv. Exchange rate policies: Governments can influence exchange rates through various policies, such as fixed exchange rates, floating exchange rates, or pegged exchange rates. v. Investor psychology: Market sentiment and speculation can also impact exchange rates, leading to fluctuations based on perceived risks and opportunities. c. Exchange rates are constantly fluctuating in response to these factors. 5. What are the determinants of supply and demand for an exchange rate market? a. The exchange rate market is where currencies are traded, and, just like any other market, it is subject to the forces of supply and demand. However, the specific factors that drive supply and demand in this market can be complex. i. Supply and Demand in the Exchange Rate Market  ii. Supply: The supply of a currency in the foreign exchange market is determined by the amount of that currency that individuals, businesses, and governments are willing to sell. Factors increasing the supply of a currency, and thus depreciating its value, include: 1. Increased imports: When a country imports more goods and services, it needs to sell its own currency to buy foreign currencies to pay for those imports, increasing the supply of its currency in the market. 2. Capital flight: If investors lose confidence in a country's economy or political stability, they may move their capital out of the country, selling the local currency and buying foreign currencies, leading to a depreciation of the local currency. 3. Central bank intervention: A central bank might intentionally increase the supply of its currency to lower its value, perhaps to make its exports more competitive. iii. Demand: The demand for a currency is determined by how much of that currency individuals, businesses, and governments want to buy. Factors increasing demand for a currency, and thus appreciating its value, include: 1. Increased exports: When a country exports more goods and services, foreigners need to buy its currency to pay for those exports, increasing the demand for the currency. 2. Foreign investment: When foreign investors want to invest in a country, they need to buy the local currency, increasing its demand. This might be driven by factors like: a. Higher interest rates: Attractive interest rates offered on investments in a country can draw in foreign capital, increasing demand for its currency.  b. Strong economic growth: A robust and growing economy can attract foreign investors seeking higher returns, boosting demand for the country's currency. c. Political stability: A stable political environment can make a country a safer and more attractive destination for foreign investment, supporting its currency. 3. Speculation: Traders might buy a currency if they anticipate that its value will rise in the future, increasing demand and potentially driving self- fulfilling prophecies. b. Key Points i. Exchange rate fluctuations: The exchange rate is constantly fluctuating as supply and demand shift in response to economic events, political developments, market sentiment, and other factors. ii. Impact on trade: Changes in exchange rates can significantly affect a country's international trade. A stronger currency can make exports more expensive and imports cheaper, while a weaker currency can have the opposite effect. iii. Government policies: Governments can attempt to influence exchange rates through policies such as setting interest rates, controlling the money supply, or directly intervening in the foreign exchange market. However, the effectiveness of such interventions can be limited, especially in a globalized economy with free-flowing capital. c. Understanding the interplay of these supply and demand factors is essential for businesses and investors operating in the global economy. 6. What is purchasing power parity (PPP)? a. Purchasing Power Parity (PPP) is a theory that attempts to explain the relationship between exchange rates and price  levels across different countries. In its simplest form, PPP suggests that in the long run, exchange rates should adjust so that the price of a basket of identical goods and services is the same in different countries when expressed in a common currency. b. Here's a breakdown of the core concept: i. Imagine you could buy a basket of goods, say a Big Mac, for $5 in the United States. ii. If PPP holds true, then you should be able to buy the same Big Mac in another country for the equivalent of $5 in their currency. iii. If the Big Mac costs more in another country when converted to US dollars, then according to PPP, that country's currency is overvalued. iv. Conversely, if the Big Mac costs less, their currency would be considered undervalued. c. Why PPP Matters d. PPP is important because it provides a way to compare living standards and economic output across countries with different currencies. Here's how it's used: i. Comparing Living Standards: By adjusting for PPP, we can get a more accurate sense of how much people can buy with their income in different countries. For example, if someone in India earns significantly less than someone in the United States, but the cost of living is also much lower in India, their actual purchasing power might be closer than it appears based on nominal exchange rates alone. ii. Adjusting Economic Output: When comparing the size of economies or Gross Domestic Product (GDP) across countries, PPP adjustments can provide a more meaningful comparison. This is because nominal exchange rates don't always reflect the real purchasing power of currencies in different countries. e. Limitations of PPP  f. While PPP is a useful concept, it's essential to recognize its limitations: i. Non-tradable Goods: PPP focuses on a basket of tradable goods. However, many goods and services are not easily traded across borders, such as housing, healthcare, or haircuts. These non-tradable goods can have significant price differences between countries, affecting the overall cost of living. ii. Trade Barriers and Transportation Costs: Tariffs, quotas, and transportation costs can create price differentials between countries, even for tradable goods. These barriers can prevent prices from fully converging across borders. iii. Market Imperfections: Government policies, regulations, taxes, and differences in competition can also lead to price differences that are not reflected in exchange rates. g. PPP as a Long-Run Tendency h. It's important to note that PPP is generally considered a long- run tendency rather than a precise short-term predictor of exchange rates. Exchange rates are influenced by many factors beyond price levels, as discussed in our conversation history. However, PPP provides a useful framework for understanding how exchange rates and price levels are interconnected over time. 7. What does it mean if a country’s currency depreciates? Appreciates? a. When a country’s currency depreciates, it means that the value of that currency decreases relative to other currencies in the foreign exchange market. For instance, if the exchange rate between the US dollar (USD) and the Canadian dollar (CAD) changes from 1 USD = 1.30 CAD to 1 USD = 1.35 CAD, the USD has appreciated, and the CAD has depreciated. This means it now takes more Canadian dollars to buy one US dollar. b. Several factors can lead to currency depreciation, including:  i. Increased supply of the currency in the foreign exchange market: This can happen due to factors like an increase in imports, where a country needs to sell its currency to buy foreign currency to pay for those imports. ii. Capital flight: When investors lose confidence in a country’s economy or its political stability, they may move their capital out, selling the local currency to buy foreign currencies, which can lead to a depreciation of the local currency. iii. Central bank intervention: Sometimes, a central bank might intentionally increase the supply of its currency, perhaps to make the country's exports more competitive in the global market. This can lead to a depreciation of the currency. c. The consequences of currency depreciation can be complex: i. Exports become cheaper: A weaker currency can make a country's exports more attractive to buyers in other countries because they can purchase those goods at a lower price in their own currency. This can boost the country’s export industries. ii. Imports become more expensive: A depreciated currency makes imported goods more expensive for consumers and businesses within that country, as it now takes more of the local currency to buy the same amount of foreign goods. This can lead to inflation if the country relies heavily on imports. iii. Reduced purchasing power for citizens: Depreciation can reduce the purchasing power of domestic consumers when buying goods and services from other countries. d. When a country's currency appreciates, it means that its value increases relative to other currencies. This means it takes fewer units of the appreciated currency to buy one unit of a foreign currency. e. Factors leading to currency appreciation can include:  i. Strong demand for the currency: Factors such as increased exports, foreign investment, or speculation can lead to a higher demand for the currency, pushing up its value. ii. Higher interest rates: Higher interest rates relative to other countries can attract foreign investment, leading to an appreciation of the currency. iii. Robust economic growth: If a country has a strong and growing economy, it can attract foreign investment seeking higher returns, increasing demand for the currency and potentially leading to appreciation. f. The effects of currency appreciation: i. Exports become more expensive: Appreciation can make a country's exports more expensive for buyers in other countries, potentially harming export industries. ii. Imports become cheaper: Appreciation makes imported goods less expensive for domestic consumers and businesses. iii. Increased purchasing power for citizens: Appreciation can boost the purchasing power of domestic consumers when buying foreign goods and services. g. Currency appreciation and depreciation are natural occurrences in a globalized economy with fluctuating exchange rates. Understanding these dynamics is crucial for businesses, investors, and policymakers as they navigate the complexities of international trade and finance. 8. What are fixed, pegged, floating, and managed (dirty) float exchange rates? a. There are several different ways that a country can manage its exchange rate, each with its own set of implications for the country's economy and international trade. Here's a breakdown of the key types of exchange rate regimes: b. Fixed Exchange Rate i. Under a fixed exchange rate system, the government of a country sets a specific, fixed value for its currency  relative to another currency (usually a major currency like the US dollar or a basket of currencies). ii. To maintain this fixed rate, the central bank actively intervenes in the foreign exchange market by buying or selling its own currency as needed. For example, if demand for the domestic currency falls, putting downward pressure on its value, the central bank would buy its currency using its foreign exchange reserves to maintain the fixed rate. iii. Example: For much of the 20th century, many countries operated under a fixed exchange rate system known as the Bretton Woods System, where currencies were pegged to the US dollar. c. Advantages: i. Stability and predictability: Fixed rates can provide stability and predictability for businesses involved in international trade, as they know that the exchange rate will not fluctuate significantly. This can make planning and investment decisions easier. d. Disadvantages: i. Loss of monetary policy independence: To maintain a fixed rate, the central bank must prioritize exchange rate stability over other objectives, such as controlling inflation or stimulating economic growth. This limits the country's ability to use monetary policy to address domestic economic challenges. ii. Vulnerability to speculative attacks: If investors believe that a fixed exchange rate is unsustainable, they may engage in speculative attacks, selling the country's currency and forcing the central bank to deplete its foreign exchange reserves to defend the peg. This can ultimately lead to a currency crisis. e. Pegged Exchange Rate i. A pegged exchange rate is similar to a fixed exchange rate, but the peg is typically allowed to adjust within a  narrow band or at a predetermined rate. This offers a bit more flexibility than a strictly fixed rate. ii. The pegging country's central bank intervenes in the foreign exchange market to manage the exchange rate within the set parameters. iii. Often used by developing countries: Pegged exchange rates are often used by developing countries to stabilize their currencies against a more stable currency, such as the US dollar or the euro. iv. Advantages: 1. Stability with some flexibility: A pegged system offers more flexibility than a fixed rate while still providing a degree of stability. v. Disadvantages: 1. Still requires intervention: Pegged rates still require central bank intervention in the foreign exchange market, which can be costly and deplete foreign exchange reserves. 2. Potential for misalignment: If the peg becomes misaligned with underlying economic fundamentals, it can become vulnerable to speculative attacks and create economic distortions. f. Floating Exchange Rate i. Under a floating exchange rate, the value of the currency is determined by market forces of supply and demand in the foreign exchange market without direct government intervention. ii. The exchange rate fluctuates freely in response to economic events, political developments, market sentiment, and other factors influencing supply and demand. iii. Example: The US dollar, the euro, the Japanese yen, and the British pound all float freely against each other. iv. Advantages:  1. Monetary policy independence: Floating exchange rates give central banks more freedom to use monetary policy to address domestic economic issues without being constrained by exchange rate targets. 2. Automatic adjustment: A floating exchange rate can adjust automatically to changes in economic conditions, helping to correct trade imbalances and absorb external shocks. v. Disadvantages: 1. Volatility: Floating rates can be volatile, creating uncertainty for businesses engaged in international trade and making planning and investment decisions more challenging. 2. Potential for overshooting: Exchange rates can sometimes overshoot in response to market events, moving further than warranted by underlying economic fundamentals. This volatility can create instability in the economy. g. Managed (Dirty) Float Exchange Rate i. A managed float, also known as a dirty float, is a hybrid system where the exchange rate is generally allowed to float, but the central bank intervenes selectively to influence its value. This intervention might be to smooth out excessive volatility or to prevent the currency from appreciating or depreciating too rapidly. ii. A common approach: Many countries today operate under a managed float system, aiming to balance the flexibility of a floating rate with some degree of stability. iii. Advantages: 1. Flexibility with some control: Offers a balance between the flexibility of a floating rate and the ability to influence the exchange rate to some degree. iv. Disadvantages:  1. Intervention can be costly: Central bank interventions can deplete foreign exchange reserves and create uncertainty about the government's intentions in the market. 2. Potential for manipulation: There's a risk that governments might manipulate the exchange rate for their own advantage, leading to unfair trade practices and economic distortions. h. The choice of exchange rate regime depends on a country's specific economic circumstances, its policy objectives, and its level of integration into the global financial system. 9. How can changes in the interest rate affect the exchange rate? And how do changes in the inflation rate affect the exchange rate? Explain clearly. a. Changes in Interest Rates i. Higher interest rates in a country relative to other countries tend to attract foreign investment, as investors seek higher returns. This increased demand for the country's currency to invest in assets like bonds or other interest-bearing instruments puts upward pressure on the exchange rate, leading to an appreciation of the currency. ii. Conversely, if a country lowers its interest rates, it becomes less attractive to foreign investors. This can lead to a decrease in demand for the currency, putting downward pressure on the exchange rate and causing a depreciation of the currency. b. Changes in Inflation Rates i. Higher inflation in a country compared to its trading partners tends to reduce the purchasing power of its currency. This means that the same amount of currency can buy fewer goods and services.  ii. As the purchasing power of a currency declines, demand for that currency in the foreign exchange market weakens. This leads to a depreciation of the currency. iii. On the other hand, lower inflation can make a country's goods and services more competitive relative to countries with higher inflation, potentially leading to increased demand for its currency and an appreciation of its exchange rate. c. It is important to note that exchange rate movements are influenced by a complex interplay of factors, including: i. Economic growth ii. Government policies iii. Trade balances iv. Market sentiment d. Therefore, while interest rate and inflation differentials can be significant drivers of exchange rate movements, other factors can also play a substantial role. 10. What is the difference between currency hedging and strategic hedging? a. Currency hedging and strategic hedging are both techniques used by companies to manage their exposure to currency risk, but they differ in their approach and focus: b. Currency Hedging i. Primarily used by financial companies: Currency hedging is a financial transaction that specifically aims to protect traders and investors from short-term fluctuations in exchange rates. ii. Uses financial instruments: Currency hedging typically involves using financial instruments like forward contracts, futures contracts, options, or currency swaps to lock in a specific exchange rate for a future transaction. iii. Focus on short-term risk: The primary goal is to minimize losses from adverse exchange rate movements that could impact specific transactions or investments over a relatively short time horizon.  c. Strategic Hedging i. Used by non-financial companies: Strategic hedging, also known as currency diversification, is a broader, longer-term approach used by non-financial companies to mitigate currency risk. ii. Involves diversifying operations: Strategic hedging involves spreading out a company's operations, assets, or investments across multiple countries with different currencies. iii. Reduces overall exposure: By diversifying across different currency zones, a company can reduce its overall exposure to the fluctuations of any single currency. If one currency depreciates, losses in that region might be offset by gains in regions with appreciating currencies. iv. Focus on long-term risk management: Strategic hedging is a more comprehensive risk management strategy that seeks to minimize the long-term impact of currency fluctuations on a company's overall financial performance. d. In essence: i. Currency hedging is a tactical, short-term, transaction- specific approach using financial instruments to lock in exchange rates. ii. Strategic hedging is a strategic, long-term, company- wide approach using diversification to mitigate overall currency risk. 11. What are the three types of currency transactions presented in this course? Which one is considered currency hedging? a. Spot Transactions: This is a direct exchange of one currency for another at the current market exchange rate, known as the spot rate. It's like a "single-shot" exchange where you get the prevailing rate at that moment. b. Forward Transactions: This is when participants agree to buy or sell currencies at a specific future date and at a  predetermined exchange rate. This helps to reduce uncertainty and risk associated with future exchange rate fluctuations. For example, if a business knows it will need to pay a foreign supplier in euros in three months, it can enter a forward contract to lock in the euro/dollar exchange rate today. c. Currency Swaps: In a currency swap, two parties exchange one currency for another at the beginning of the agreement and agree to revert back to the original currencies at a specified time in the future. It's often used to manage longer-term currency risk and can be a more flexible alternative to a series of forward contracts. d. Out of these three, forward transactions are considered a form of currency hedging. They are specifically designed to protect traders and investors from the uncertainty of future exchange rate movements by locking in an exchange rate in advance. 12. If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this? a. The most effective way for a company to limit its exposure to future fluctuations in foreign exchange rates is to engage in a forward transaction. In a forward transaction, participants buy and sell currencies at a predetermined exchange rate for future delivery. This allows companies to lock in an exchange rate today for a transaction that will happen later, such as paying a foreign supplier in a different currency. b. By using a forward transaction, businesses can avoid the risk of losing money if the exchange rate moves against them before the payment date. For example, if a company needs to pay 1 million euros to a European supplier in three months, they could enter a forward contract today to exchange US dollars for euros at a specific rate. Even if the euro appreciates against the dollar over those three months, the company will still pay the agreed- upon rate, protecting them from potential losses. c. Forward transactions are a common tool used by businesses to hedge against currency risk and provide greater certainty in international transactions. 13. Give an example of a first and late mover. List each mover’s advantages and disadvantages. a. Here's an example of a first mover and a late mover, along with their respective advantages and disadvantages: b. Example: i. First Mover: Nike entering the athletic shoe market with Air Jordans in the 1980s. ii. Late Mover: Other athletic gear companies entering the market with similar products after Air Jordans' success. c. First Mover Advantages: i. Establish Entry Barriers: Nike was able to build a strong brand reputation, a loyal customer base, and economies of scale, making it more difficult for new entrants to compete. ii. Capture Market Share: Nike dominated the athletic shoe market for many years, capturing significant market share before competitors entered with similar products. iii. Set Industry Standards: As the first mover, Nike was able to influence industry trends and shape consumer preferences in athletic footwear. iv. Secure Access to Resources: First movers can secure access to key resources, such as raw materials, manufacturing facilities, or endorsements from popular athletes, before competitors. d. First Mover Disadvantages: i. Higher Risk and Uncertainty: Entering a new market first involves a higher level of risk and uncertainty. Nike faced the challenge of developing a new product and creating demand for a specialized shoe like Air Jordans. ii. High Development Costs: First movers often incur significant research and development costs and may need to invest heavily in marketing and advertising to build brand awareness. iii. Potential for Mistakes: As the pioneer, first movers can make mistakes that later entrants can learn from.  e. Late Mover Advantages: i. Learn from First Mover's Mistakes: Competitors could observe Nike's strategies, successes, and failures, learning from their experience and avoiding costly mistakes. ii. Free Ride on First Mover Investments: Competitors could benefit from the market development and consumer awareness that Nike had already established for athletic shoes. iii. Lower Entry Costs: Competitors could potentially enter the market with lower development costs, as some of the initial groundwork had already been done by Nike. iv. Adapt to Market Changes: Late movers have the advantage of being able to adapt their products or services to meet evolving market demands and consumer preferences that might not have been apparent to Nike initially. f. Late Mover Disadvantages: i. Difficult to Gain Market Share: Entering the athletic shoe market later, competitors faced the challenge of competing against an established incumbent like Nike with a strong market position and brand loyalty. ii. Overcoming Entry Barriers: Competitors had to overcome the entry barriers that Nike had created, such as brand recognition, economies of scale, and established distribution networks. iii. Limited Access to Resources: Late movers may find it more difficult to secure access to key resources, like endorsements from high-profile athletes, that have already been captured by first movers. 14. What are the two modes of foreign market entries? Describe each scale of entry with examples. a. The two primary modes of entry into foreign markets are equity and non-equity modes. The main difference between the two  is the scale of entry, which refers to the amount of resources a company commits to entering a foreign market. b. Equity Modes c. Equity modes involve a larger, more permanent commitment to the foreign market and often indicate the establishment of ownership in the foreign venture. They come with higher risk but offer greater control and potential returns. Examples of equity modes include: i. Wholly Owned Subsidiaries (WOS): A wholly owned subsidiary is a company that is entirely owned and controlled by a parent company. The parent company can establish a WOS by building a new facility (a greenfield operation) or by acquiring an existing local company. ii. Joint Ventures (JV): A joint venture is a partnership between two or more companies to create a new entity in the foreign market. The companies share ownership, control, risks, and rewards of the venture. d. Non-Equity Modes e. Non-equity modes involve smaller commitments and often do not involve ownership in the foreign venture. They carry less risk but also offer less control and potentially lower returns. Examples of non-equity modes include: i. Exports: Exports are the most basic mode of entry. A company simply ships its products or services directly to customers in the foreign market. Exports can be direct, where the company handles all aspects of the export process, or indirect, where the company works with intermediaries. ii. Contractual Agreements: Contractual agreements are a diverse category that includes various arrangements, such as: 1. Licensing: A company grants another company the right to use its intellectual property, like patents or trademarks, in the foreign market in exchange for royalties.  2. Franchising: A company grants another company the right to operate a business under its brand name and using its business model in the foreign market. 3. Turnkey Projects: A company designs, builds, and equips a facility for a foreign client and then hands over the "key" to the client to operate. 4. R&D Contracts: A company outsources its research and development activities to a firm in the foreign market. f. The choice of entry mode depends on a company's strategic goals, risk tolerance, available resources, and the specific characteristics of the target market. Competency 2: Political and Economic Forces Political and Economic Forces (Peng Chapter 2) 1. How do institutions reduce uncertainty? a. Institutions, which are essentially the "rules of the game" that govern individual and firm behavior, play a crucial role in reducing uncertainty in various ways: i. Signaling Legitimate and Illegitimate Actions: Institutions establish a framework of acceptable and unacceptable behavior. By defining the boundaries of permissible actions, they create a predictable and stable environment for individuals and firms. ii. Formal Rules: These include laws, regulations, and rules. They create a level playing field for domestic and foreign firms, helping foreign entrants assess their chances of success. For example, property rights laws protect investments, contract laws facilitate transactions, and labor laws govern employment practices, all contributing to reduced uncertainty. iii. Enforcement Mechanisms: Formal institutions often have mechanisms to ensure compliance. Courts enforce contracts, regulatory bodies monitor compliance, and law  enforcement agencies uphold the law. The existence of such mechanisms enhances the predictability of outcomes and reduces the risk associated with uncertain enforcement. iv. Informal Rules: Though not codified, informal institutions like cultures, ethics, and norms also play a crucial role in shaping the success and failure of firms. Understanding these unwritten rules helps navigate social expectations, business etiquette, and ethical considerations. v. Bounded Rationality: The concept of bounded rationality recognizes that managers and firms make rational decisions within the constraints set by institutions. By providing these constraints, institutions create a framework for rational decision-making, helping firms assess risks and make informed choices. vi. Reducing Opportunism: Institutions help reduce opportunistic behavior—actions taken in self-interest that may harm others. By establishing norms of fairness and mechanisms to punish dishonesty, institutions create a more trustworthy environment where firms are less likely to face unexpected losses from unethical behavior. b. In conclusion, institutions reduce uncertainty by setting clear expectations, providing a stable framework for decision-making, and establishing mechanisms for enforcement and dispute resolution. They create a more predictable and reliable environment where individuals and firms can engage in economic activities with reduced risk and greater confidence. 2. Discuss and compare the three pillars (regulatory, normative, and cognitive) under the institution-based view of global business. a. The institution-based view of global business emphasizes that a firm's success or failure is influenced by the formal and informal "rules of the game," or institutions, in the environment in which it operates. Informal institutions include cultures, ethics, and norms that guide behavior. These institutions can be further categorized into three pillars: regulatory, normative, and cognitive.  b. The regulatory pillar refers to the formal, coercive power of governments. It encompasses the laws, regulations, and rules that businesses are required to follow. Examples of regulatory institutions include contracts, traffic laws, and property rights. These regulations provide a predictable framework for businesses to operate in and reduce uncertainty by outlining permissible and prohibited actions. c. The normative pillar, in contrast to the regulatory pillar's formal structure, embodies the informal constraints on behavior. It focuses on values, beliefs, and actions within a society that shape how individuals and firms behave. Examples include social expectations, ethical norms, and industry best practices. The normative pillar influences decision-making by setting expectations for socially responsible behavior. For instance, a company might choose to engage in fair labor practices, even in the absence of strict legal requirements, because it is considered the ethical norm in its industry. d. The cognitive pillar, the most internalized of the three pillars, refers to the deeply ingrained values and beliefs that guide individuals and firms. These are often taken for granted and shape how individuals perceive the world and make decisions. Whistleblower culture, where individuals are expected to report unethical behavior, is an example of a cognitive institution. e. The interplay of these three pillars—regulatory, normative, and cognitive—shapes the institutional environment for businesses. The regulatory pillar provides the formal rules, the normative pillar sets societal expectations, and the cognitive pillar influences individual and organizational mindsets. Understanding the nuances of these pillars is crucial for businesses operating in different cultural contexts, as these informal rules can vary significantly across countries. For example, a "thumbs-up" gesture is acceptable in the US but can be offensive in other cultures. 3. What are the two core propositions that lie at the root of the institution-based view of global business? a. The institution-based view of global business emphasizes how formal and informal rules, known as institutions, shape the behavior and success of firms in the global economy. At the core of this perspective are two key propositions:  b. Proposition 1: Managers and firms rationally pursue their interests and make choices within the constraints defined by institutions. This idea, also known as bounded rationality, recognizes that individuals and firms operate within a framework of established rules and norms, which guide their decision-making processes. For example, a manager might see an opportunity for profit in a foreign market but choose not to pursue it due to concerns about political instability or weak property rights in that country. c. Proposition 2: Where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to individuals and firms. This proposition highlights the significance of informal institutions, such as culture, ethics, and norms, in situations where formal institutions, like laws and regulations, are weak or ambiguous. For instance, in countries with underdeveloped legal systems, businesses might rely more heavily on informal networks of trust and reputation to enforce contracts and conduct transactions. 4. Describe the political system of Totalitarianism, including the distinct types of totalitarian regimes. i. Totalitarianism stands in stark contrast to democracy, concentrating absolute political control in the hands of a single person or party and suppressing individual rights and freedoms. Totalitarian regimes often exhibit high political risk due to the instability inherent in their systems, including wars, riots, and protests, which negatively impact domestic and foreign firms. There are four primary types of totalitarian regimes: ii. Communist Totalitarianism: Power is centralized in the Communist party, which controls all aspects of political and economic life. iii. Right-Wing Totalitarianism: Characterized by intense nationalism, anti-communism, and the suppression of political opposition. These regimes often rely on the military to maintain control.  iv. Theocratic Totalitarianism: Political power is derived from religious principles and a religious elite governs the state. v. Tribal Totalitarianism: One tribe or ethnic group dominates political power, marginalizing other groups and controlling their access to resources and opportunities. b. While there are distinct types of totalitarian regimes, they all share the defining characteristic of absolute power concentrated in a small ruling elite, with minimal to no political freedom for citizens. 5. Describe the political system of Democracy. a. Democracy is a political system that vests power in the citizens and allows them to elect representatives to govern the country on their behalf. One of the key features of democratic systems is the recognition of individual rights and freedoms, including the freedom of expression and organization. This means that citizens have the right to voice their opinions, form associations, and participate in political processes without fear of reprisal. b. Transparency and accountability are other essential characteristics of democratic systems. Citizens have access to information about government actions and policies and can hold their elected officials accountable through various mechanisms, such as elections and the media. c. In the context of business, democracy promotes a more stable and predictable environment. Transparent legal frameworks and established property rights protect investments and foster economic activity. Businesses can operate with greater confidence, knowing that their interests are safeguarded by a system based on the rule of law. d. This contrasts sharply with totalitarian systems where power is concentrated in the hands of a few, and individual rights are suppressed. Totalitarian regimes are often associated with higher political risk due to their inherent instability, which can manifest in various forms, such as wars, riots, and protests, making it challenging for businesses to operate successfully. 6. Compare and contrast the different legal systems. Give an example of countries that fit into each system: Civil Law, Common Law, & Theocratic Law a. Civil law, common law, and theocratic law are three distinct legal systems that govern how laws are enacted and enforced, shaping the business environment in various countries. b. Civil Law i. Civil law is the oldest and most widely distributed legal system globally. It originates from Roman law and relies on comprehensive statutes and codes to form legal judgments. These codes are designed to be all- encompassing, covering a wide range of situations and providing clear rules for various scenarios. ii. Key features of civil law include: 1. Codification: Laws are codified in a systematic and comprehensive manner. 2. Deductive Reasoning: Judges apply the codified law to specific cases using deductive reasoning, interpreting the relevant code provisions. 3. Limited Judicial Discretion: Judges have less flexibility in interpreting the law compared to common law systems. iii. Examples of countries that follow the civil law system include France, Germany, Mexico, and Brazil. c. Common Law i. Common law, with origins in England, contrasts with civil law in its reliance on precedents and traditions from previous judicial decisions. This system is based on the principle of stare decisis, where judges are bound to follow the rulings established in previous similar cases. ii. Key features of common law include: 1. Precedence: Past court rulings establish precedents that guide future decisions. 2. Inductive Reasoning: Judges use inductive reasoning, considering previous cases and applying  legal principles to the specific facts of the current case. 3. Greater Judicial Discretion: Judges have more flexibility to interpret the law and adapt it to changing circumstances. iii. Examples of countries that follow the common law system include the United States, the United Kingdom, Canada, and Australia. d. Theocratic Law i. Theocratic law derives its principles and rules from religious teachings and doctrines. In these systems, religious texts and interpretations serve as the foundation for legal decisions. ii. Key features of theocratic law include: 1. Religious Basis: Legal principles are based on religious texts and interpretations. 2. Limited Role of Precedent: While past interpretations might be considered, the primary source of law remains the religious text. 3. Clerical Courts: Legal matters are often adjudicated in religious courts, with judges trained in religious law. iii. Examples of countries that follow the theocratic law system, specifically based on Islamic law, include Saudi Arabia, the United Arab Emirates, and Iran. iv. Comparing and Contrasting the Systems 1. Civil Law prioritizes comprehensive codification and deductive reasoning, leading to a more predictable but less flexible system. 2. Common Law emphasizes precedent and inductive reasoning, offering greater adaptability but potentially less predictability. 3. Theocratic Law derives its legal framework from religious principles, with interpretations of religious texts guiding legal decisions.  e. Understanding the nuances of these legal systems is crucial for businesses operating internationally. The legal framework influences how contracts are enforced, disputes are resolved, and property rights are protected. f. For example, a business entering a contract in a civil law country like Germany would rely heavily on the written terms of the contract, while a similar contract in a common law country like the United States might be more open to interpretation based on past legal precedents. 7. Compare and contrast Market Economy, Command (Centrally Planned) Economy, and Mixed Economy. Which is the most flexible? Which has private property, and which has public owned means of production? a. Different economic systems utilize various methods to organize their economies, resulting in varying levels of government control, private ownership, and economic freedom. b. Market Economy i. A market economy, in its purest form, operates on the principle of the "invisible hand," where market forces of supply and demand determine the allocation of resources and the prices of goods and services. In such a system, private individuals and firms own the factors of production, including land, labor, and capital. ii. The pursuit of self-interest and profit motivates individuals and businesses, leading to competition and innovation. iii. The government's role is minimal, limited to protecting property rights, enforcing contracts, and ensuring fair competition. iv. Pure market economies are theoretical constructs; in reality, most economies exhibit some degree of government intervention. c. Command Economy i. A command economy, also known as a centrally planned economy, stands in stark contrast to the free-market model. In a command economy, the government  controls the factors of production, including land, labor, and capital, and dictates the production and distribution of goods and services. ii. Central planners determine what to produce, how much to produce, and the prices at which goods and services will be sold. iii. The emphasis is on centralized control and meeting the needs of the state, rather than individual consumer preferences. iv. Command economies often struggle with inefficiency and a lack of innovation due to the absence of market-driven incentives. While pure command economies are rare, some countries, such as North Korea and Cuba, exhibit strong elements of central planning. d. Mixed Economy i. Most economies in the world operate as mixed economies, combining elements of both market and command systems. In a mixed economy, the government plays a role in regulating the market, providing public goods, and redistributing income, while still allowing for private ownership and market-driven decision-making. 1. The balance between government intervention and free-market principles varies across countries. 2. For example, the United States is generally considered a market-oriented economy with a relatively limited government role, while countries like Sweden and Denmark have more extensive social welfare programs and greater government involvement in the economy. ii. The mixed economy model allows governments to address market failures, such as environmental pollution or income inequality, while also harnessing the efficiency and innovation of market forces. e. Comparing and Contrasting  i. Flexibility: The market economy is the most flexible, allowing for rapid adjustments to changing conditions through the price mechanism. Command economies are the least flexible, with centralized planning hindering their ability to adapt quickly. Mixed economies fall in between, with their flexibility depending on the degree of government intervention. ii. Ownership: Market economies are characterized by private ownership of the means of production, fostering competition and innovation. Command economies rely on public ownership, with the government controlling resources and decision-making. Mixed economies incorporate both private and public ownership, with the balance varying across countries. f. The choice of an economic system has significant implications for a country's economic performance, social welfare, and the role of the government in society. 8. What is Political Risk? Describe and provide an example. a. Political risk is the risk associated with political changes or instability that may negatively impact domestic and foreign firms. These risks can manifest in various forms, such as: i. Wars and Conflicts: Armed conflicts can disrupt business operations, damage infrastructure, and create uncertainty, making it difficult for firms to operate effectively. ii. Riots and Protests: Civil unrest can lead to property damage, disruptions to supply chains, and safety concerns for employees, impacting business continuity. iii. Government Seizures and Expropriation: Some governments might seize foreign assets or impose strict regulations that make it challenging for foreign firms to operate profitably. iv. Policy Changes: Sudden shifts in government policies, such as tax increases or trade restrictions, can negatively affect businesses, particularly those operating in  industries heavily reliant on government regulations or subsidies. v. Totalitarian regimes, characterized by concentrated power and limited individual freedoms, often exhibit higher political risk. b. For example, a company operating in a country with a history of political instability might face challenges due to sudden changes in leadership, nationalization of industries, or the outbreak of civil war. In these situations, the company's assets, investments, and employees might be at risk, impacting its profitability and long-term sustainability. 9. What are the business implications for conducting international business in countries with different political and economic systems? a. When conducting in