Globalization Business Textbook Summary

Chapter 1 (pp. 3-25) Chapter 5 pp. 124-148” thru “Table 5.7” (“In Focus” Chapter 2 pp. 31-53 (“In Focus” optional) optional) Chapter 7 pp. 192-202: (up through “Investor Psychology”) Chapter 3 pp. 59-82 (“In Focus” (“In Focus” o...

Chapter 1 (pp. 3-25) Chapter 5 pp. 124-148” thru “Table 5.7” (“In Focus” Chapter 2 pp. 31-53 (“In Focus” optional) optional) Chapter 7 pp. 192-202: (up through “Investor Psychology”) Chapter 3 pp. 59-82 (“In Focus” (“In Focus” optional) optional) Chapter 7 pp. 205-209: “Managing Exchange Rate Risk thru Chapter 4 pp. 88-112 (“In Focus” “Financial Management Responses (“In Focus” optional) optional) Chapter 1: GLOBALIZING BUSINESS European and Global Business International Business Firms engaging in international economic activities and or activity of doing business abroad Important actors in IB ○ MNEs: firm that engage in FDI ○ FDI: directly investing in controlling and managing value-added activities The international aspect in business is important because of: ○ International competition ○ With the creation of the common market in the European Union (EU), the definition of a home market is increasingly ambiguous, with the creation of the common market in the European Union (EU). Emerging economies: ○ Recently established institutional frameworks that facilitate international trade and investment, typically with low- or middle-level invokes and above average economic growth ○ Important because The increasing weight in the global economy Possible rich future opportunities Gross Domestic Product: ○ 85% live in an emerging market but collectively contribute to about 30% of global GDP GDP: The sum of value added by resident firms, households and governments operating in an economy. Gross national product & gross national income (gni referred by world bank, the rest uses gnp) ○ Gdp + income from nonresident sources abroad Purchasing power parity ○ A conversion that determines the equivalent amount of goods and services different currencies can purchase. This conversion is usually used to capture the differences in cost of living in different countries.  ○ For example, imagine you have $10. In the U.S., maybe you can buy a burger with that. But in another country, that same $10 might buy you two burgers or just half a burger. PPP helps adjust for these differences so we can compare living costs between countries more fairly. Unified Framework 1. Institution-based view a. Suggests success and failure of firms are enabled and constrained by the different rules of the game b. Formal rules: laws and regulations governing businesses c. Informal rules: culture, norms, and value = important in shaping success/failure of firms 2. Resource-based view a. Suggests success and failure of firms are influenced by firm’s internal resources and capabilities b. Harsh, unattractive environments = firm suffer to exit BUT some will thrive c. Liability of outsidership: i. Inherent disadvantage outsiders experience in new environment because of lack of familiarity ii. Increases when firm’s origin differ from host environment = the less the firm has experience in host country Understanding Globalization Defining globalization A process leading to greater interdependence and mutual awareness (reflexivity) among economic, political and social units in the world, and among actors in general. → by Mauro Guillén  ○ Has created unprecedented contacts between cultures, but hasn't significantly reduced conflicts or disagreements between them. Other definitions of globalization ○ Young people: globalization is often first and foremost the internet and the information and communication technology that comes with it. ○ a force that eliminates the distinctiveness of our national cultures and identities Risk management: ○ The identification, assessment and management of risks. Trends of Globalization 16th century: ○ Spanish and Portuguese traders dominated intercontinental trade, sourcing silver from South America to buy products in Europe, Africa and Asia. 18th century: ○ Spanish and Portuguese had been replaced by merchants from two initially quite small countries, England and the Dutch Republic. 19th century → accelerated following major innovation, in manufacturing, communication, transport, and legal changes ○ Industrialization (invention of steam machines) → powered the new railway network. ○ Invention of telegraph → Accelerated communication. ○ Liberalization → The removal of regulatory restrictions on business → the reduction or elimination of government regulations or restrictions on private business and trade ○ From 1850s many started imposing tariffs → only Britain, NL, and Denmark free trade ○ Peaked with outbreak of WW1 20th Century ○ 1920s many countries raised tariffs to record levels. ○ Many developing countries nationalized natural resource investments between the 1930s and 1960s. ○ International trade declined during World War I, recovered moderately during the 1920s, and then collapsed in the depression of the 1930s. 21st century ○ Global financial crisis ○ Covid-19 pandemic 2020/2021 disruption of many global supply chains ○ Proof of connectedness of the global economy ○ Many economies entered a major recession around the same time. ○ The current wave of globalization gradually evolved after World War I In conclusion, waves of globalization (The pattern of globalization arising from a combination of long-term trends and pendulum swings) may appropriately describe the world economy. The current wave of globalization Gradually evolved after WW2  Initiatives took place, where countries started to make commitments in international treaties or delegated authority to FTAs → World Trade Organization (WTO) Dramatic increase of globalization in 1990s when emerging economies joined global Business. ○ Reverse innovation: goods that are initially produced for the developing world, before being repackaged and resold at low cost to industrialized countries. Resistance towards globalization is a result of tensions of political forces, new regulations eg. new regulations motivated by national security, data protection. Debates and extensions Globalization associated with many benefits: Cheaper products Choices for consumers Travel and career opportunities Consequences of globalization Optimistic Views (pros) Pessimistic Views (cons) Impact on Productivity gains through Loss of national sovereignty → National Societies specialization reduced ability to make and Greater choice of less enforce its own decisions, i.e. expensive products control over key roles and Catch-up opportunities for national identity poorer countries Increased inequality within countries Loss of certain types of jobs in advanced economies Impact on Natural Sharing of ‘green’ Increased pollution from Environment technologies and business transport practices Shifting of pollution to countries Energy-efficient scale of with less regulation production Destruction of natural habitats by Locating production where infrastructure and mining clean energy is available projects Global business vs. national societies Has reduced inequality between countries, BUT increase inequalities within countries ○ High skilled people = high income → perbedaan sama workers yg low-skilled income itu is that their jobs are terancam krn globalization enables outsourcing for cheaper labor International trade reduces demand for certain skills, especially hitting low- and medium-skilled workers. In Europe, government-funded retraining helps workers gain new skills, but there are concerns that the high costs may reduce the competitiveness of businesses in the long run. Global business vs. natural societies Many economic activities affect local natural environment → issues of biodiversity and climate change Combination of free trade and increased standards of environmental protection = lead companies to relocate production to countries with looser regulations → increasing pollution in developing countries Transportation is responsible for 24% of global greenhouse gas emissions, particularly from long-distance travel and shipping. Air travel and imported goods can significantly increase an individual’s carbon footprint. Higher costs for environmentally-friendly shipping and travel could lead to increased prices for goods, such as fresh fruit in winter. It’s uncertain whether consumers would accept these higher prices. Multinational companies can help share technology and practices that reduce pollution and improve efficiency. Implication for practice Two traps in engaging engaging in IB: 1. Ethnocentric perspective: a. ‘Best practices’ b. view the world through their own culture c. Believe in superiority of their own culture d. will hit a wall when their ‘best practices’ fail to deliver → complaints about the incompetence of local employees or customers are symptoms of that phenomenon. 2. Not-invented-here syndrome: a. ‘Exceptionalist’ b. Tendency to distrust new ideas from outside organization/community c. Prevalent in countries with distinct social histories and limited international exchange d. likely to fail even in their home country because international competition is a reality virtually everywhere (at least in Europe). Successful managers operate within the spectrum between universalists and exceptionalists.  Global mindset (think global): ○ Cognitive ability to connect your own activities to what is happening around the world Cosmopolitans: ○ The people embracing cultural diversity and the opportunities of globalization. Think locaI → get to know common rules, norms in doing business in a foreign country. Integrate global and local knowledge. Communicate effectively with those who are not in the global jet set. → People with cosmopolitan worldviews and experience need to remember that not everyone shares their broad perspective. Chapter 2: FORMAL INSTITUTIONS: POLITICAL, ECONOMIC AND LEGAL SYSTEM Institutions: Formal and informal rules of the game. ○ The humanly devised constraints that structure human interaction Institutional framework: Formal and informal institutions governing individual and firm behavior Institution-based view: a perspective that suggests a firm’s performance is, at least in part, determined by the institutional frameworks governing firms. Institution-based view of international business Transaction cost: cost of organizing economic transactions Informal institutions: Rules that are not formalized but exist in, for example, norms, values and ethics ○ Concern what behaviors are morally right/wrong and what is important/not within a society ○ Deeply imbedded in societies, and change very slowly Formal institutions: laws, regulations, and rules that are set by the authorized bodies ○ On national level → usually government Pillars by W. Richard Scott 1. Cognitive pillar: a. The internalized, taken-for- granted values and beliefs that guide individual and firm behavior (usually unconscious) b. This refers to the deeply ingrained assumptions about how the world works, which unconsciously shape people's behaviors. c. Example: When the novel virus emerged in Wuhan, many in the USA and Europe underestimated its relevance and speed of spread. In contrast, people in Asia, having experienced SARS in 2003, quickly grasped the seriousness of the situation.  2. Normative pillar: a. how the norms, values, beliefs and actions of other relevant players influence the behavior of individuals and firms. b. Example: Before official government actions, social norms like protecting and respecting others guided behaviors such as wearing masks during the Covid-19 pandemic. During lockdowns, compliance with government rules and health expert advice during lockdowns was also driven by social norms, influencing how people followed these regulations. 3. Regulatory pillar: a. reflects the coercive power of governments and largely corresponds to formal institutions → refers to the formal power of governments to enforce rules, such as the mandated lockdowns during Covid-19, with the ability to use police and courts to ensure compliance. What do institutions do? Reduce uncertainty by ○ Influencing individuals and firms decision-making → what conduct is legitimate and acceptable Why important to reduce uncertainty → reduced people’s willingness to make long-term commitments. Examples: ○ Political uncertainty, like the chance that the government might take over private property, can make long-term planning useless. ○ Economic uncertainty, such as volatile exchange rates or high inflation, makes it difficult to predict returns on investments ○ Behavioral uncertainty, such as fear that a partner may fail to carry out obligations set out in a contract, may result in economic losses. Behave opportunistically → misleading, cheating and confusing other parties in a transaction. Opportunistic behavior ○ Seeking self-interest with guile → when another party exploits your lack of knowledge about the rules of the game ○ Reduce by creating trust between members or punishment for those who cheat Unstable institutions = doing business costly, often preventing key transactions. Both foreign and domestic investors avoid unstable countries, moving their money to safer, more reliable markets abroad. Institutions are not static. They evolve over time under the influence of economic and political actors. → institutional transition Institutional transition ○ Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players. ○ Emerging economies often undergo significant changes in formal and informal rules, affecting businesses. Two core propositions 1. Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework. a. For example, in countries with strong labor laws, workers have more job security during economic downturns because it's harder to fire them. However, this also makes employers hesitant to hire new workers due to the long-term commitment. 2. Although formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing consultancy to managers and firms. → both formal and informal institutions influence how firms operate. a. For example, after the Soviet Union's collapse, businesses relied heavily on informal networks and personal connections (known as blat in Russian) to navigate the uncertainty and achieve their goals. Political Systems Rules of the game on how the country is governed politically Business interact with political systems indirectly but still need to understand it because it shapes the commercial rules and regulations for businesses → Major source of risk Democracy Governments derive their legitimacy from election by their citizens Variance among democracies include: ○ Proportional representation vs first-past-the-post: Proportional representation: Election system that allocates seats in parliament in proportion to the votes received by each party (usually subject to minimum threshold). First-past-the-post: Election system by which in each constituency (daerah pemilihan) the candidate with the most votes gets the seat. ○ Direct vs indirect elections: Direct: elect a president with executive power who then appoints government ministers Indirect: Voters elect parliamentary representatives, who in turn select and oversee the government and the country's top official, usually the prime minister. ○ Representative vs direct democracy Representative: voters elect representatives who will act on their behalf Direct democracy: in some territories, voters can vote directly for certain laws → gives voters more power, but may lead to inconsistencies and rigidities in the overall legal framework ○ Centralization of power:  While the national government usually holds central power, people elect local representatives and regional assemblies, with varying degrees of authority. Authoritarianism System in which power is concentrated in the hands of one person. In an authoritarian state → freedom = small, submission to authority = expected Contemporary authoritarian regimes are motivated by a combination of an overriding national objective (such as economic catch-up), ethnic nationalism or a (real or imagined) external enemy. Business and Politics Why it matters for international business 1. Political systems determine who sets the rules and whose interests may be reflected in the rules 2. Political systems determine where and how businesses may be able to influence legislative processes through lobbying or corruption a. Lobbying: Making your views known to decision makers with the aim to influence political processes. b. Corruption: The abuse of public power for private benefits. c. Non market strategy: Political and social activities aimed at influencing the rules set in their host countries. 3. Political systems vary in how frequently the rules of the game for business are changed → political risk = major source of risk a. Political risk: risk associated with political changes that may negatively impact domestic and foreign firms. Economic systems Rules of the game on how a country is governed economically. The theoretical prototypes are pure market economy and a command economy, yet between them exists a wide variety of capitalism. Market economy: ○ An economy characterized by the ‘invisible hand’ of market forces ○ All factors of production are privately owned, and ○ individuals are free to engage in all sorts of contracts. ○ The government only performs functions the private sector cannot perform (such as providing roads and defense) Command economy: ○ An economy in which all factors of production are government- or state- owned and controlled, and all supply, demand and pricing are planned by the government Varieties of capitalism View suggesting that economies have different inherent logics on how markets and other mechanisms coordinate economic activity 1. Liberal market economy (LME): a. System of coordination primarily through market (price) signals b. Companies mainly get their money by selling shares on stock exchanges, while labor markets are flexible, and workers have limited job protection. 2. Coordinated market economy (CME) a. System of coordinating through variety of mechanisms → not only signals b. Provide employees with more legal protection c. Apprenticeship system: vocational training system for crafts and professions Elements of LME and CME are combined in different ways in different countries Legal Systems Rules of the game on how a country’s laws are enacted and enforced Civil law and common law 1. Civil law: a. Legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments b. In Business this means that contracts and codes of practice are comparatively brief, traditionally more protection of employees and consumers. 2. Common law: a. A legal tradition that is shaped by precedents (an earlier event or action that is regarded as an example) and traditions from previous judicial decisions. b. Primary sources of laws are statutes, customs, and court decisions. c. In Business this means greater freedom to design contracts and codes of practice; detailed contracts filling gaps in the legal framework; extensive use of lawyers. d. Case law: Rules of law that have been created by precedents of cases in court. Legal Processes Legal processes in countries with the Civil law system have very detailed rules. Legal processes in countries with the Common law system are: Highly confrontational (lawyers arguing with each other, juries having to make tricky decisions) Each organization has its own rules which leads to lack of clarity over the relevant rules in each situation (legal certainty). ○ Legal certainty: clarity over the relevant rules applying to a particular situation Debates and Extensions Property rights Legal rights to use an economic property (resource) and to derive income and benefits from it ○ Examples of property: homes, offices, factories, intellectual property Clearly defined property rights enable businesses to make contracts over properties = engage in business Intellectual property rights (IPRs) are rights associated with the ownership of intellectual property. The intangible nature of IPRs makes their protection difficult. IPRs primarily include rights associated with: ○ Patents: legal rights awarded by government to investors of new technological ideas → given exclusive rights to derive income from such invention through manufacturing, licensing, or selling ○ Copyrights: exclusive legal rights of authors and publishers to publish and distribute their work ○ Trademarks: exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products Problems in the field: ○ The enforcement of IPR on the internet is technological → Therefore, a lot of copying happens. ○ Some countries are slow in implementing IPRs. ○ IPRs are not equally applied around the world. Corporate Governance Rules by which shareholders and other interested parties control corporate decision-making Corporate governance outlines the rights and responsibilities among the board, managers, shareholders, and stakeholders, detailing decision-making processes. ○ Effective corporate governance ensures managers act in the best interests of the firm rather than their personal interests, encouraging investment. Differences in corporate governance rules are linked to variations in economic and legal systems worldwide. Common law systems: These systems offer strong protection for financial investors, placing shareholders at the center of corporate governance, where managers must prioritize their interests. Shareholder incentives: Stock options motivate managers to align with shareholder interests, while potential takeovers incentivize them to maintain high share prices. Civil law countries: These often provide less protection for outside shareholders, leading to more family and state ownership. Employee representatives often sit on supervisory boards of large firms, participating directly in corporate governance. Political Risk takes many forms and is hard to capture using formal indices changes in the law, such as new taxation or regulation, are common around the world and represent a mild form of political risk. More serious political risk → military embargoes or trade sanctions Implications for action When entering a new country, develop a thorough understanding of the formal institutions governing firm behavior. Beware of small institutional differences among superficially similar countries; not recognizing such differences can cost your business a lot of money. Changes in formal institutions can be anticipated, or even influenced, by engaging in processes in the economic, political and legal systems. Chapter 3: INFORMAL INSTITUTIONS: ANALYZING CULTURE Culture Definition by Victor Barnouw ○ a way of life of a group of people, the configuration of all the more or less stereotyped patterns of learned behavior, which are handed down from one generation to the next through means of language and imitation. Definition by Geert Hofstede ○ Culture is a collective phenomenon that is shared with people who live or lived within the same social environment, which is where it was learned. It is the collective programming of the mind which distinguishes the members of one group or category of people from another Culture as shared values and norms Hofstede’s cultural dimension 1. Power distance: a. extent to which less powerful members within a society expect and accept that power is distributed unequally → the strength of a society's social hierarchy b. High power distance = "Superiors" see themselves and are viewed by others as being at a higher level, giving them significant control over others. c. Biasanya in asian countries where respect itu penting bgt, terutama to the elders 2. Individualism vs collectivism a. Individualism: perspective that the identity of an individual is fundamentally his or her own b. Collectivism: the idea that the identity of an individual is primarily based on the identity of his or her collective group (such as family, village or company). i. In-group: Individuals and firms regarded as part of ‘us’. ii. Out-group: Individuals and firms NOT regarded as part of ‘us’. 3. Masculinity vs femininity a. Masculinity: Values traditionally associated with male roles → assertive, decisive and aggressive. b. Femininity: Values traditionally associated with female roles → compassion, care and quality of life. 4. Uncertainty avoidance a. The extent to which members in different cultures accept ambiguous situations and tolerate uncertainty. b. High uncertainty avoidance = resist to change → avoids/minimize uncertainty c. Low uncertainty avoidance = characterized by a greater willingness to take risks and less resistance to change → can adapt easily, is okay with unpredictability 5. Long-term orientation  a. the extent to which a culture values long-term goals, perseverance, thrift, and adaptation to changing circumstances b. Long-term orientation tends to be characterized by a focus on the future, a focus on perseverance c. Short-term orientation tends to be characterized by a pursuit of immediate gratification, fulfilling social obligations, and concern with social hierarchy. d. Long term orientation vs short term orientation Limitations of Hofstede's Cultural Dimensions Cultural boundaries are not the same as national boundaries. Being more familiar with European cultures, Hofstede might inevitably be more familiar with dimensions relevant to distinguishing European cultures. Research was based on IBM employees. ○ Pro: same industry, same company ○ Con: capturing only one company and only one industry, so we do not know whether employees working for BIM were true representatives of their respective national culture. Fails to reflect aspects of cultural change → data that research is based on is 40 years old. Religion Major manifestation of culture, and a major source of differences in norms and values that in turn shape business practices. Religious beliefs and activities affect business through: ○ Religious festivals → christmas shopping, ramadan for muslims, diwali ○ Daily and weekly routines → going to church weekly, praying 5x a day, dll ○ People’s perception about their environment → how people perceive themselves and around them (e.g. whom they will face on judgment day encourage people not to cheat) Holy: An item or activity that is treated with particular respect by a religion. Secular societies: Societies where religion does not dominate public life. Religious differences, more than any other differences, tend to raise emotions – and thus are challenging to handle for businesses. Language A system of shared meanings that enables people to effectively communicate. Important carrier of culture and shared identity Language barriers ○ Communication barriers between people who speak different mother tongues and lack a shared language in which all are fluent. Using translators can lead to misunderstandings because not all terms can be translated/have the exact expression in another language  How to handle language differences ○ Translating all official documents ○ Hire an interpreter. ○ lace multilingual people in key positions ○ Provide language training. ○ Adopt Corporate language: The language used for communications between entities of the same MNE in different countries ○ Lingua franca The dominance of one language as a global business language. Cultural diversity and openness Units of culture: social groups The concept of national culture is a simplification because: 1. Many regional subcultures co-exist a. Groups within a nation sharing a culture that substantially varies from the national average 2. Cultures evolve and change → although slow a. Values held by people of different generations may be quite different b. Globalization can lead to cultural convergence (cultures becoming more similar) because people around the world increasingly adopt western values c. But studies found more evidence of cultural divergence (cultures becoming less similar) 3. Within a firm, we may find a specific organizational culture a. Those shared values and beliefs are often inspired by founders to create a common sense of purpose and rules for interacting Cultural tightness-looseness Refers to the strength of social norms and the degree of sanctioning within societies. distinction between tight and loose cultures can help to explain many differences across nations, organizations and social classes.  Tight cultures ○ strict rules, and people are punished for breaking them. ○ cultures are usually quite similar, with most people sharing the same values and norms. Lose cultures ○ more open to new people, new ideas and change → like the US and Europe In Business: ○ may impact the ability of expatriates to operate effectively in a foreign society ○ success of mergers and acquisitions by firms from different countries National cultural differences Cultural clusters Refers to countries that share similar cultures Countries can be clustered based on shared religion, languages Cultural and institutional distance Cultural distance: ○ difference between two cultures along some dimensions of value or subjective affinity Institutional distance: ○ The extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries. Debates and extensions Informal institutions such as norms and religions provoke debates that often get emotional. Do business norms travel? When doing business abroad, people often face unclear rules or conflicting norms from their home country. Which is where ethics come into play Ethics: The principles, standards and norms of conduct governing individual and firm behavior ○ Answer the ‘what is the right thing to do?’ Ethical relativism: ○ A perspective that suggests that all ethical standards are relative. ○ “When in rome, do as the romans do” Ethical imperialism ○ The absolute belief that ‘there is only one set of Ethics (with the capital E), and we have it’.  In practice, neither ethical relativism and imperialism are realistic But in practice, companies choose three elements: 1. Respect human dignity and human rights a. such as those concerning health, safety and the need for education instead of working at a young age b. Code of conduct: Written policies and standards for corporate conduct and ethics. 2. Respect for local traditions 3. Respect for institutional context Corruption Stereotypes: ○ A set of simplistic and often inaccurate generalizations about a group that allows others to categorize them. Implications for practice What determines the success and failure of firms around the globe? 1. Develop cultural intelligence in terms of awareness, knowledge and skills and invest in learning foreign languages. 2. Be prepared to discard your stereotypes. 3. Beware of subtle shifts in informal rules over time. 4. Respect cultural differences. Chapter 4: FIRM RESOURCES: COMPETITIVENESS AND GROWTH Identifying Resources Competitive advantage: ability of firm to outperform rivals Resources: tangible and intangible assets a firm uses to choose and implement its strategies ○ Primary Resources: tangible and intangible assets + HR a firm uses to implement its strategies Capabilities → associated with primary resources: firm-specific capabilities to use resources to achieve organizational objectives ○ Developed internally ○ Specific to the firm do not take the form of assets that can be traded Primary Resources Tangible assets: assets that are observable and easily quantified → physical assets Examples of primary resources Tangible Examples Financial Cash, securities, borrowing capacity Physical Plants, equipment, sales outlets, land, natural resources Intangible Examples Technological Patents, trademarks, copyrights, trade secrets Reputational Brands, relationships, corporate goodwill (e.g. reputation as a quality manufacturer or as a socially responsible corporate citizen) Goodwill: value of a firm’s abilities to develop and leverage its reputation Human → embedded in Examples individuals working in an org. Skills and know-how Job-specific skills and know-how held by individual employees Communication and Interpersonal skills and learning capacity for teamwork and collaboration abilities collaboration, emotional intelligence Organizational culture Values, traditions, organizational norms Capabilities Harder to observe, difficult to quantify/measure Must exist because how else would the firm create competitive advantage Value chain: chain of activities vertically related in the production of goods and services ○ For example, a manufacturing process may flow from raw materials, to primary components, to intermediate components, to assembly, to sales and to after-sales service. These primary activities are backed up by support activities, such as finance and human resources. ○ Firms may outsource Capabilities in innovation ○ Firm’s assets and capabilities that enables the development of new products and services → introduce to new and existing customers Capabilities in operations ○ Firm’s ability to effectively implement regular activities → manufacturing process Capabilities in marketing ○ Enables firms to develop and sustain brands to induce consumers to buy these products ○ integrate a firm’s ability to recognize consumer demands + develop products to fit demand Capabilities in logistics and service ○ Enable firms to manage interactions with customers and bring products to the right customer at the right time Capabilities in corporate coordination ○ Enable firm to share resource across business units Capabilities in strategic renewal ○ Enable firms to stay ahead in industries that are rapidly changing ○ Dynamic capabilities: higher level capabilities that enable an organization to continuously adapt to new technologies and changes in the external environment Appraising Resources: The VRIO Framework The resource-based framework that focuses on the value creation (V), rarity (R), imitability (I) and organizational (O) aspects of resources The question of Value creation Value creating resources can replace competitive advantage Non value creating capabilities = competitive disadvantage With changes in the competitive landscape, previously value-creating resources may become obsolete → important to ensure continuous strategic renewal. The question of Rarity Temporary competitive advantage: ability to outperform rivals for a limited time Value-creating + rare resources = temporary advantage Not rare = competitive parity → everyone can do the same thing Example of a rare resource: new software but eventually competitors catch up with the new technology. Licensing reduces the rarity of the asset → makes that resource more widely available to other companies or individuals. The question of Imitability How difficult is it to imitate the resources? Easy to imitate tangible, but intangible is more challenging because: ○ Causal ambiguity: The difficulty of identifying the causal determinants of successful firm performance. hard to figure out exactly how something causes a specific outcome ○ Social complexity: The socially complex ways of organizing typical of many firms. In the international companies these are invisible relationships that add value and are difficult to imitate. The question of Organization refers to whether a company is properly organized to capture the value of its resources and capabilities.  Even if a company has valuable, rare, and hard-to-imitate resources, it still needs to be well-structured and managed to fully exploit them. Sustainable competitive advantage: The ability to deliver persistently above-average performance → checks all the VRIO Appropriability: the ability of the firm to appropriate the values for itself Appraising Resources: Benchmarking Benchmarking: an examination of resources to perform a particular activity compared against competitors Which resources are most important in conferring sustainable competitive advantage in your industry? How strong are your strengths and weaknesses as compared to your competitors? Steps to benchmarking 1. Choose a benchmark organization 2. Identify the relevant resources 3. Assess the importance of your resources 4. Assess the relative strengths of the resources you have identified, compared to your benchmark organization(s) Scope of a firm’s resources Outsourcing Turning over an activity to an outside supplier that will perform it on behalf of the firm. Business process outsourcing (BPO): The outsourcing of business services such as IT, HR or logistics. Can take place at home or internationally Offshoring Moving an activity to a location abroad The decision over offshoring is largely driven by differences in production costs, transportation costs for materials, finished products, coordination between units based in different locations. Nearshoring: offshoring to a nearby location Reshoring: bringing activities back to a firm's home country. This can be done because of several reasons: ○ Rising labor costs in emerging economies ○ Rising fuel costs increase transportation costs. ○ Awareness of the risks (negative effect on innovation, disruptions in global supply chains) Offshore Outsourcing Offshore outsourcing: ○ Outsourcing to another firm doing the activity abroad Domestic outsourcing ○ Outsourcing to a firm in the same country Captive offshoring ○ Setting up subsidiaries abroad – the work done is in-house but the location is foreign Domestic in-house activity Debates and Extensions Global Value Chains (GVCs): Chains of geographically dispersed production activities governed by MNEs. Robustness and Resilience of GVCs Supply chain robustness: ○ is the ability to supply a product under any circumstances. How can companies ensure the robustness of their supply chain? 1. Redundancy (in supply chains): Options to source a product from a supplier at short notice → having backup options 2. Organizational Slack: A cushion of resources that allow an organization to adapt successfully to pressures. → extra resources or "wiggle room" a company has that it doesn’t immediately need to use. a. Too much slack = organization bloated and inefficient b. Too little slack = inflexible and vulnerable to external shocks 3. Supply chain resilience: The ability of a supply chain to bounce back after a disaster. Long-term consequences of offshoring The development of new products and processes requires close coordination between different activities – from sales to R&D to production Offshoring service providers are gradually moving up the value chain In many Asian firms, they use: ○ Original equipment manufacturers (OEMs): Firms that execute the design blueprints provided by other firms and manufactures such products.  ○ original design manufacturers (ODMs): Firms that both design and manufacture products. ○ Original brand manufacturers (OBMs): Firms that design, manufacture and market branded products. Implications for Practice Back to the key question: What determines the success and failure of firms around the globe? Answer based on resource-based view: Winners exploit some value-creating, rare, hard-to-imitate and organizationally embedded resources that competitors do not have. Identify, develop, leverage capabilities. Continuously upgrade capabilities to remain competitive in rapidly changing environments. Develop strategic foresight because no competitive advantage lasts forever. Chapter 5: TRADING INTERNATIONALLY Exporting: selling abroad Importing: buying from abroad What is International Trade? Trade in goods (merchandise trade): sale of physical goods across borders Trade in services: sale of intangibles across national borders ○ E.g. financial services, licenses, transport service, or tourism Trade deficit: economic condition when a country import > export Trade surplus: economic condition when a country export > import Balance of trade: The aggregation of importing and exporting that leads to the country-level trade surplus or deficit. Theories of International Trade Classic trade theories (4): ○ The major theories of international trade advanced before the mid-20th century: mercantilism, absolute advantage, comparative advantage and factor endowments. Modern trade theories (3): ○ The major theories of international trade advanced in the second half of the 20th century: product life cycle, strategic trade and national competitive advantage. Mercantilism Theory that holds that the wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer. Weaknesses of the theory: ○ Inefficient allocation of resources ○ Reduces the wealth of the nation in the long run. Absolute Advantage Theory of absolute advantage: argued that in the aggregate, it is the ‘invisible hand’ of markets, rather than governments, that should determine the scale and scope of economic activities. Argued free trade: trade inhibited by trade barriers Proposed theory of absolute advantage: ○ Under free trade, each nation gains by specializing in economic activities in which it has absolute advantage ○ Absolute advantage: economic advantage one nation enjoys due to higher productivity in an economic activity ○ Smith argued that (1) by specializing in the production of goods for which each has an absolute advantage, both can produce more and (2) by trading, both can benefit more.  Weakness of theory ○ when one nation is inferior to another, the theory is unable to provide any advice ○ when there are many nations, it may be difficult to find an absolute disadvantage Comparative Advantage What happens when one nation has absolute advantage in all product categories? → absolute advantage theory runs into a dead end Theory of comparative advantage: theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nation ○ the country should specialize in the production of the product with lower Opportunity costs. → the cost of pursuing one activity at the expense of another activity. Comparative advantage is the idea that people or countries should focus on doing what they’re best at compared to others, even if someone else can do it better overall. ○ For example, imagine two friends—one is great at baking and okay at cleaning, and the other is great at cleaning but only decent at baking. Even if the first friend is a bit better at both, it makes sense for them to focus on baking and let the second friend handle the cleaning. That way, they both use their time more efficiently and get the most done. Weaknesses of the theory: ○ Relatively static if comparative advantages do not change over time. Factor Endowments Resource (factor) endowments: extent of different countries possessing various resources/factors such as labor, land and technology Factor endowment theory (heckscher-ohlin theory): suggests that nations will develop comparative advantage based on their locally abundant resources/factors Product life cycle Product life cycle theory: ○ Accounting for changes in patterns of trade over time by focusing on product life cycle 3 categories of countries ○ Lead innovation nation (usually USA) ○ Other developed nations ○ Developing nations 3 product life cycle stages: ○ New → lead innovation country exports to other developed nations ○ Maturing stage → developed nations start producing the product, ○ Standardized → previously new product is standardized/commoditized is developed nations and production is moved to developing countries Weakness of theory ○ Only assumes USA will always be the lead innovation nation for new products ○ theory assumes a stage-by-stage migration of production that takes several years (if not decades) → reality: Many new products are now launched simultaneously around the world. Strategic trade theory A Theory that suggests that strategic intervention (subsidiaries, tariffs, or other forms of protection) by governments in certain industries can enhance their odds for international success → support by government can assist in gaining a competitive edge in the international market. Characteristics of those industries: ○ High up-front costs of entry ○ Need high investment in research and capability development. ○ Tend to be highly capital-intensive El creates high entry barriers (first mover advantage is present) First mover advantage: ○ Advantages that first entrants enjoy and do not share with late entrants Strategic trade policy ○ Government subsidies inspired by strategic trade theory Weaknesses of the theory: ○ Ideological resistance from many 'free trades' scholars and policymakers : ○ Invite many industries to claim they are strategic National competitive advantage of Industries Theory of national competitive advantage ○ It suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a ‘diamond’. → porter’s diamond Porter’s diamond 1. Resource endowments in terms of natural and human resources a. Traditional trade theories, such as those focusing on resource endowments (like natural resources, labor, or capital), suggest that countries succeed in industries where they have these inherent advantages. b. For example, the coal and steel industry historically developed where coals and iron ore were found 2. Sophistication and scale of domestic demand a. Domestic demand can push firms to improve and innovate b. Competing in a tough home market helps companies gain a competitive edge that makes them more successful in global markets with less demanding customers c. In Japan, highly demanding consumers push companies to innovate and develop cutting-edge, high-quality electronics, giving them a competitive edge in both domestic and less demanding international markets. 3. Domestic firm strategy, structure, and rivalry a. When companies face fierce local rivals = pushed to innovate and improve. b. Those that succeed in their home market often find international competition easier, as foreign markets tend to be less demanding than their highly competitive domestic environment. 4. Related and supporting industries a. Consider the upstream and downstream industries that facilitate innovation through exchanging ideas → can spur innovation depending on the degree of transparency and knowledge transfer. b. Having good suppliers and related industries nearby helps companies. Porter’s Diamond Model explains how the competitive advantage of industries arises from the interaction of four key factors within a country, making it the first theory to connect firms, industries, and nations on multiple levels. Weakness that the model overemphasizes domestic conditions. Evaluating theories of international trade Resource mobility: the ability to move resources from one part of a business to another. National Institutions and Barriers to Trade Trade is inhibited by transportation costs → costs incurred moving products from one country to another ○ including payments to shipping companies, the handling agents, the insurance companies and others. Protectionism ○ Government policies designed to protect a domestic industry from foreign competition. Tariffs Import tariff: tariff imposed on imports Deadweight loss: Net losses that occur in an economy as the result of tariffs. ○ Deadweight loss = Loss to consumer − Gains to farmers − Tariff revenues to government → Farmers sell more rice at a higher price; they gain area A. → The government pockets tariffs on imports, area C. → However, consumers are worse off having to pay higher prices, and some of them will not buy rice at all, represented by the area consisting of A, B, C and D. Non-tariff barriers (NTBs) NTBs: Government policies designed to protect a domestic a domestic industry from foreign competition Subsidies: government payments to domestic firms Import quotas: restrictions on the quantity of imports Anti-dumping duties: Extra taxes placed on imports that are sold at very low prices, often below production costs, to unfairly push local companies out of business → the duties are to protect the local businesses Public procurement: units of government buying products or services Local content requirements: a requirement that value added is created locally Export restraints Divergent regulations vary across countries and deal with issues such as consumer protectionism, environmental standards, or labor rights. Economic arguments against free trade 1. The need to protect domestic industries 2. The necessity to shield infant industries a. The argument that temporary protection of young industries may help them to attain international competitiveness in the long run b. Governments are asked to level the playing field to assist infant industries 3. The distribution effects  a. Removing trade barriers can benefit society as a whole, but it often leaves some workers, particularly in low-skilled industries, at a disadvantage due to increased competition from abroad. Political arguments against free trade 1. National security a. often invoked to protect defense-related industries b. Nations fear if they rely on arms imports → national security may be compromised 2. Consumer protection a. invoked as an argument to justify trade barriers 3. Foreign policy a. Governments often use trade measures like tariffs or quotas to meet foreign policy goals, using these economic tools to influence relationships and support their strategic interests. b. Trade embargoes: politically motivated trade sanctions against foreign countries to signal displeasure 4. Environmental and social responsibility Debates and Extensions Trade deficit versus trade surplus Trade deficit is the value of a country's imports that exceeds that of its exports What about jobs? → impact of trade on job markets Implications for Practice Discover and leverage comparative advantage of world-class locations Monitor and nurture the current comparative advantage of certain locations and take advantage of new locations Be politically aware to demonstrate, safeguard, and advance the gains from international trade Chapter 7: EXCHANGE RATES Chapter 7 pp. 192-202: (up through “Investor Psychology”) (“In Focus” optional) Chapter 7 pp. 205-209: “Managing Exchange Rate Risk thru “Financial Management Responses (“In Focus” optional) Exchange rate: price of one currency in another currency Appreciation (of a currency): increase in the value of a currency Depreciation (of a currency): decrease in the value of a currency Markets for Currencies Currency exchange market: market where individuals, firms, governments, and banks buy and sell foreign currencies Relative price differences and purchasing power parity Purchasing power parity (PPP) hypothesis: suggests in the long run, baskets of goods would cost the same in all currencies (law of one price) Relative PPP hypothesis: suggests that changes in exchange rates will be proportional to differences in inflation rates. ○ Example: When prices rise faster (the inflation is higher) in Switzerland than in the eurozone, the Swiss franc should depreciate relative to the euro proportional to the difference in the inflation rate. Inflation: the average change of prices over time Interest rates and interest rate parity Interest rate parity: suggests the interest rate in 2 currencies should be the same after accounting for spot and forward exchange rates Spot market rate: exchange rate for immediate payment Forward transaction: A currency exchange transaction in which participants buy and sell currencies now for future delivery, typically in 30, 90 or 180 days, after the date of the transaction. ○ Forward transaction rate: exchange rate for forward transactions Productivity and balance of payments Balance of payments (BoP): A country’s international transaction statement, including merchandise trade, service trade and capital movement. Current account (of the BoP): exports and imports of goods and services Capital and financial account (of the BoP): sales and purchases of financial assets Investor Psychology Bandwagon effect: result of investors moving as a herd in the same direction at the same time Capital flight: phenomenon in which a large number of individuals and companies exchange domestic currencies for a foreign currency. Managing exchange risks Exchange rate risk/currency risk: risk of financial losses because of unexpected change in exchange rate Strategic responses 1. Invoicing in their own currency 2. Strategic hedging: organizing activities in such a way that currencies of revenues and expenditures match 3. Currency risk diversification: reducing overall risk exposure by working with a number of different currencies Financial management responses 3 primary types of exchange transactions: 1. Currency hedging: a. Transaction that protects traders and investors from exposure to fluctuations of the spot rate 2. Forward transactions a. Forward discount: i. Condition under which the forward rate of one currency relative to another currency is higher than the spot rate b. Forward premium: i. when the forward rate of one currency relative to another currency is lower than the spot rate 3. Currency swap a. A currency exchange transaction between two firms in which one currency is converted into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future. b. Offer rate: i. Price offered to sell a currency c. Bid rate: i. Price offered to buy a currency d. Spread: i. Difference between offered price and the bid price