IBT Finals - International Business Theory

**Why do nations trade?**\ - consisting of exporting (selling abroad) and importing (buying from abroad) **Trade**-- Undertaken by 'firms from different nations'\ **Trade Deficit**- imports over exports\ **Trade Surplus**- exports over imports **Theories of International Trade\ [classical trade th...

**Why do nations trade?**\ - consisting of exporting (selling abroad) and importing (buying from abroad) **Trade**-- Undertaken by 'firms from different nations'\ **Trade Deficit**- imports over exports\ **Trade Surplus**- exports over imports **Theories of International Trade\ [classical trade theories\ ]**1. Merchantilism\ 2. Absolute Advantage\ 3. Comparative Advantage\ 4. Factor Endowment Theory\ **[modern trade theories\ ]**1. Product Life Cycle\ 2. Strategic Trade\ 3. National Competitive Advantage **Classical Theories-** evolved from approximately 300 years ago to the beginning of the 20th century.\ **Product Life Cycle**- Vernon developed this; first dynamic theory; patterns of trade over time\ **Vernon divided the world into three categories:**\ 1. Lead innovation nation\ 2. Other developed nations\ 3. Developing nations\ **The Product Life Cycle has been criticized on two accounts:\ **1. assumes that the USA will always be the lead innovation\ 2. assumes a stage-by-stage migration of production **Strategic Trade Theory-** enhance their odds for international success\ **First mover advantage**- Advantage that first entrants enjoy\ **Strategic Trade Policy**- Government subsidies **National Institutions and International Trade-**\ **[There are two broad types of trade barriers]**:\ 1. Tariff barriers\ 2. Nontariff barriers (NTBs)\ **include:**\ *(1)* Subsidies *(2)* Import quotas *(3)* Export restraints *(4)* Local content requirements *(5)* Administrative practices *(6)* Antidumping duties **Import quotas-** are restrictions on the quantity of imports.\ **Voluntary export restraints (VERs)-** have been developed to show that on the surface\ **Anti-dumping duties-** imports that have been sold at less than a 'fair' price.\ **Political arguments against free trade-** advance a nation's political, social and environmental agenda regardless of possible economic gains from trade.\ ***[These arguments include:]***\ (1) National security (2) Consumer protection (3) Foreign policy (4) Environmental and social responsibility **Implications For Action**- Discover comparative advantage.\ **Foreign portfolio investment (FPI)-** investment in a portfolio of foreign securities such as stocks and bonds\ **Foreign direct investment (FDI)-** Defined by the United Nations as involving an equity stake of 10% or more.\ **Horizontal FDI**- duplicates its home country-based activities.\ **Vertical FDI-** a type of FDI in which a firm moves upstream or downstream.\ **Upstream vertical FDI**- a type of vertical FRI.\ **Downstream vertical FDI-** a type of vertical FDI.\ **MNE-** is a firm that engages in FDI\ **non-MNE firms**- can also do business abroad by [(1) exporting and importing], ([2) licensing and franchising,] ([3) outsourcing], [(4) engaging in FPI or other means.\ ] In 1990, there were 37,000 MNEs, with 170,000 foreign affiliates.\ By 2009, more than 82 000 MNEs (more than double the 1990 number) managed about 810 000 foreign affiliates (almost five times the 1990 number). Clearly, there has been a **proliferation of MNEs lately**.\ **OLI paradigm**- most appropriate form of international business\ **Ownership advantages (O-advantages)-** Resources of the firm that are transferable across borders\ **Locational advantage (L-advantages-** Advantages enjoyed by firms operating\ **Internalization advantages (I-advantages)-** Advantages of organizing activities\ **Location-bound resources-** Resources that cannot be transferred abroad.\ **Protectionism**- form of tariffs or non-tariff barriers, may inhibit exports.\ **Transportation costs**- Local production allows serving a market at lower costs\ **Direct interaction with the customer-** need to produce near manufacturers to integrate into their supply chain.\ **Production and sale of some services-** cannot be physically separated\ **Marketing assets-** may be more important for a fast-entry strategy.\ **Agglomeration--** the location advantages that arise from the clustering of economic activities\ **Internalization Advantages-** A key advantage of FDI over other modes.\ **Asset specificity**- an investment that is specific to a business relationship.\ **Market failure**- imperfections of the market mechanism\ **FDI Versus Licensing-** There is a choice between licensing the technology to a local firm and FDI establishing its own production facilities.\ **Dissemination risk--** The unauthorized diffusion of firm-specific know-how.\ **Sovereign wealth funds (SWF)** -- 'a state-owned investment fund of financial assets\ **Stakeholders-** 'any group or individual who can affect or is affected by the achievement of the organization's objectives'\ **Corporate Social Responsibility (CSR**)- A 'firms' consideration of, and response to, issues beyond the narrow economic\ **Triple bottom line-** The [economic], [social] and [environmental performance]\ **Sustainability**- ability to meet the needs of the present without compromising the ability of future generations\ **Primary stakeholder groups**- constituents which the firm relies for its continuous survival and prosperity\ **Secondary stakeholder groups-** Those who influence or affect\ **Non-governmental organizations (NGOs)-**organizations, such as environmentalists, human rights activists\ **Instrumental view-** A view that treating stakeholders well\ **Normative view-** A view that firms ought to be self-motivated **Shared value creation**- An approach to CSR that focuses on activities\ **Labour standards** -- rules for the employment of labourers.\ **Footloose plants** -- plants that can easily be relocated.\ **Working poor-** The miserable working conditions in some parts of the world\ **Standards of engagement-** MNE's have this that they impose on suppliers. *This allows MNEs to shift from a focus on compliance with the standards of engagement to a commitment approach.\ ***Explicit CSR-** describe corporate activities that assume responsibility for the interest of the society.\ **Implicit CSR**- describe corporations role within the wider formal and informal institution.\ ***Is CSR good for financial performance?***\ -- Consistent CSR policies over long time periods seem to have a positive effect, while short-term or temporary initiatives do not.\ ***Is CSR good for society?\ ***-- Critics describe CSR activity as 'window dressing'\ **Hypernorms-** norms considered valid anywhere in the world.\ **Small and Medium Enterprises (SMEs)-** are companies with less than 250 employees.\ **Entrepreneurs-** who are leaders in identifying opportunities and taking decisions\ **Firms-** can act as sellers or buyers or both\ **Exporters-** the sellers\ **Importers-** the buyers\ **Sporadic Exporters**- This strategy is attractive for less experienced firms\ **Direct exports-** the most basic mode capitalizing on economies of scale in production\ **Indirect exports--** exporting through an intermediary\ **Local sales agents**- receive a commission on sales.\ **Distributors-** trade on their own account.\ **Contract Licensing --** Firm A's agreement to give Firm B the rights to use A's proprietary technology *(e.g. patent)* or trademark for a royalty fee paid to A by B\ **Licensor** is the company granting a license.\ **Licensee** is the company receiving a license.\ **Franchising-** typically covers entire business concepts\ **Franchisor** is the company granting a franchise.\ **Franchisee** is the company receiving a franchise.\ **Turnkey project --** A project in which clients pay contractors to design and construct\ **Design and build (DB) contract --** A contract combining the architectural or design work\ **Build--operate--transfer (BOT) --** A contract combining the construction and temporary operation\ **Consortium --** A project based temporary business owned\ **Subcontracting --** A contract that involves outsourcing of an intermediate stage\ **Experiential knowledge --** Knowledge learned by engaging in the activity and context\ **Uppsala model**- is a model of internationalization\ **Network internationalization model-** firms in a network reinforce each other\ **Stages models of internationalization**- seen as a slow stage-by-stage process\ **Born global (international new venture)**- Start-up company that from inception seeks to derive significant competitive advantages **Institutions and Internationalization**\ The ability of internationally inexperienced firms to engage in international business is to a large extent shaped by:\ 1. [The institutional environment of the home country] -Open economies with low trade barriers allow foreign entrants to challenge local firms\ 2. [Institutional distance between the home and host countries]\ - The extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries. **Designing and combining entry modes** -- New forms of contracts are designed to share resources\ **Foreign entry in the digital age** -- Exporters can use the internet to complement their traditional offerings.\ **Natural resource seeking FDI** -- Investors' quest to [pursue natural resources]\ **Market-seeking FDI** -- Investors' quest to go after countries that [offer strong demand]\ **Efficiency enhancing FDI** -- Investors' quest to single out the [most efficient locations]\ **Capability-enhancing FDI** -- Investors' quest for [new ideas and technologies\ ]**Modes of entry-** The format of foreign market entry. **Non-equity modes-** A mode of entry that does not involve owning equity in a local firm.\ **Equity modes**- A mode of entry equity ownership in a local firm.\ **Wholly-owned subsidiary (WOS)** -- Subsidiary located in a foreign country\ **Scale of entry**- The amount of resource committed to foreign market entry\ **Platform investment-** An investment that provides a small foothold in a market\ **Attack** is an initial set of actions to gain competitive advantage\ **Counter-attack** is a set of actions in response to an attack\ **Blue ocean strategy**- A strategy of attack that avoids direct confrontation.\ **Oligopoly-** A market structure with only a small number of competing firms\ **Competitive dynamics**- The actions and responses by competing firms.\ **Competitor analysis**- The process of anticipating a rival's actions\ **Blue ocean strategy-** A strategy of attack that avoids direct confrontation\ **AMC framework**- indicating when firms are likely to attack and counterattack\ **Collusion--** Collective attempts between competing firms\ **Tacit collusion--** Firms indirectly coordinate actions by signaling their intention\ **Explicit collusion--** Firms directly negotiate output\ **Cartel--** An entity that engages in output- and price-fixing\ **Prisoners' dilemma--** In game theory, a type of game in which the outcome depends on two parties\ **Concentration ratio**- % of total industry sales\ **Price leader-** A firm that has a dominant market share\ **Capacity to punish-** Sufficient resources possessed by a price leader\ **Collusive price setting-** Price setting by monopolists or collusion parties\ **Leniency programme-** A programme that gives immunity to members\ **Market division collusion**- A collusion to divide markets amongst competitors.\ **Value-creation** -- Firm has to create more value for the customers than their competition.\ **Rarity** -- Either by nature or nurture, some assets are very rare\ **Organization** -- Some firms are better organized for competition\ **Imitability --** Most rivals watch each other to see how their rivals compete\ **Dumping** is when an exporter is (1) selling below cost abroad and (2) planning to raise prices after eliminating local rivals.\ **Survival strategies** are designed to ensure survival by ensuring liquidity and positive cash flow.\ **economic forecasting**- businesses try to look into the future\ **scenario planning**- a technique generating multiple scenarios of possible future states of the industry\ **contingency plans**- implemented when certain events\ **Defender strategy** -- Leveraging local assets in areas in which MNEs are weak.\ **Extender strategy** -- Leveraging home-grown competencies abroad.\ **Dodger strategy** -- Cooperating through joint ventures with MNEs\ **Contender strategy** -- A firm engaging in rapid learning\ **Global strategies** take advantage of operations spread across the world\ **AAA typology** of strategies illustrates different ways in which firms can create value\ **Aggregation**- global integration\ **Adaptation-** Local responsiveness\ **Arbitrage-** Global Production\ **Acquisition --** The transfer of the control of operations and management from one firm (target) to another (acquirer)\ **Merger --** The combination of operations and management of two firms\ Most large M&As are **cross-border (international) M&As\ Synergistic motives-** enhance market power\ **Hubris Motives**- managers overconfidence in their own capabilities\ **Managerial motives**- self interest actions\ **Managing Acquisitions**- Even if potential synergies between two firms make an acquisition look promising\ **Due diligence** **-** The assessment of the target firm's financial status, resources and strategic fit.\ **Strategic fit**- The effective matching of complementary strategic capabilities.\ **Organizational fit-** The similarity in cultures, systems and structures.\ **strategic alliance**- alternative to a full take-over of another firm is a collaboration with that firm\ **operational collaboration-** strategic alliance may consist of far-reaching\ **Hidden champions** -- International business is often presented as primarily a matter of big MNEs\ **Global focusing** -- A strategic shift from diversification to specialization