Glossary of intbusiness 2
Created by ajp17
- Culture is that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society.
A system of values and norms that are shared among a group of people and that when taken together constitute a design for living.
- the belief in the superiority of one’s own ethic group or culture.
- Cross-Cultural Literacy
- refers to understanding how cultural differences across and within nations can affect the way business is practiced.
- the patterns of conventional behavior in a society that apply to everyday matters.
Violating a folkway may cause the person to be laughed at, frowned upon, or scolded.
- express fundamental values of a society and are much more strictly enforced than folkways.
Violating a more will offend others and may result in punishment or retribution.
- Culture Shock Phases
- refers to the anxiety and feelings (of surprise, disorientation, uncertainty, confusion, etc.) felt when people have to operate within a different and unknown culture such as one may encounter in a foreign country.
- Selection Criteria for Expatriates
- Training for Expatriate Managers
- Cultural Training
Business practices, social etiquette, political environment, etc.
Everyday adjustment concerns, currency, etc.
- Cultural Frameworks
- a term used in social science to denote the longstanding background traditions, value systems, myths and symbols that are widespread in a given population.
For example, in the early twentieth century, Christianity, German patriotism, and a belief in the virtues of the Frankish tribes and pioneers who conquered the forests of central Europe were part of the cultural framework of Germany; Nazism in contrast was an ideology.
- Hofstede’s Value Survey Model
- Power Distance - the society’s tolerance for inequalities
Individualism versus Collectivism - the relationship between the individual and his/her fellows
Uncertainty Avoidance - the extent to which a culture accepts ambiguous situations and tolerates uncertainty
Masculinity versus Femininity - the relationship between gender and work roles
Time Orientation / Confucian Dynamism – attitudes toward time, persistence and respect for tradition
- strengths of the Hofstede’s Value Survey Model
- Number of countries involved.
Size of sample.
Results replicated in later research.
- Class Consciousness
- awareness of ones social class or economic rank in society
- Foreign Exchange Market
- The factors that impact exchange rates
The micro and macro implications of exchange rate changes
Approaches for forecasting exchange rates
Techniques to protect against exchange rate risk
- Exchange Rate
- An exchange rate is the rate at which one currency is converted into another.
- Foreign Exchange Risk
- Transaction Exposure: the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
Translation Exposure: the impact of currency exchange rate changes on the reported financial statements of a company
- Currency Appreciation versus Depreciation
- The market forces of supply and demand cause currencies to gain or lose value.
A currency is said to appreciate when it increases in value compared to another currency; the currency can be used to purchase more foreign currency units than it could in the past.
A currency is said to depreciate if it declines in value compared to another currency; a given quantity of the currency can purchase fewer foreign currency units than it could in the past.
- Currency Devaluation versus Revaluation
- Currency devaluations and revaluations are the result of government actions including the changing of fixed exchange rate systems or the buying and selling of foreign exchange reserves.
Devaluation is the deliberate downward adjustment in the exchange rate.
Revaluation is an upward change in the currency’s value.
- Micro Implications of Exchange Rate Fluctuations
- Companies can earn less or pay more on individual transactions.
The value of the company’s assets and liabilities can be affected.
A firm’s supply chain decisions can be impacted.
- Macro Implications of Exchange Rate Fluctuations
- The value of a nation’s currency impacts the overall attractiveness of the nation’s exports.
Exports are cheaper if the currency has lost value, but imports are more expensive.
A nation can devalue its currency to increase the competitiveness of the nation’s exports
- the purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy
- Currency Speculation
- short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates
- Spot Exchange Rate
- the exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day
- Forward Exchange Rate
- the exchange rate at which a foreign exchange dealer will agree to convert one currency into another currency on a specific date in the future
- Forward Exchange Contracts
- Contracts that provide for two parties to exchange currencies on a future date at an agreed upon exchange rate.
Forward contracts are usually for 30, 90 or 180 days.
Changes in the spot rate at the end of the contract will result in equal but opposite gains and losses by the two parties.
- Currency Swaps
- A foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert back to the original currency at a specific Time 2 in the future.
Swaps bring together two counter-parties with opposite hedging needs.
- Give the right, but not the obligation, to buy or sell a certain amount of foreign currency at a set exchange rate at a specified time.
Options result in asymmetric risk; only the holder of the option will gain if there is a change in the value of the currencies.
- Selling on a Discount
- foreign exchange dealers expect the home currency to depreciate; a USD could buy more of a foreign currency today than in the future at the forward rate
- Selling at a Premium
- foreign exchange dealers expect the home currency to appreciate; a USD could buy less of a foreign currency today than in the future at the forward rate
- Economic Theories of Exchange Rate Determination
- Price Inflation and Exchange Rates
Interest Rates and Exchange Rates
Investor Psychology and “Bandwagon” Effects
- Law of One Price
- in an efficient market all identical goods must have only one price
- Purchasing Power Parity
- uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power
- Purchasing Power Parity puzzle
- a common term for two much-discussed anomalies of real exchange rates: that real exchange rates are more volatile and show more persistence than what most models can account for
- Big Mac Index
- an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. It "seeks to make exchange-rate theory a bit more digestible"
- How increasing the money supply impacts exchange rates
- usually triggers inflation.
- Price Discrimination
- exists when sales of identical goods or services are transacted at different prices from the same provider.
- Fisher Effect / International Fisher Effect
- Nominal Interest Rate = Real Interest Rate plus the Expected Rate of Inflation
The expected change in the spot exchange rates between any two currencies should be equivalent to the difference between the two countries’ nominal interest rates for that time.
- Nominal versus Real Interest Rates
- Inflation rates impact the rate of return for savings and the costs of lending.
A nominal interest rate does not account for the effects of inflation.
Nominal interest equals the total amount of interest paid on a loan or the total amount of interest received from an investment for a specific period of time without separating out the “true” cost or return from the impact of inflation.
A real interest rate accounts for the effects of inflation.
- Investor Psychology and Bandwagon Effects
- play a major role in short term movements of exchange rates.
- Technical Analysis
- Uses price and volume data to determine trends.
- Fundamental Analysis
- Draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.
- Currency Convertibility: Freely, Externally, and Nonconvertible Currencies
- Freely Convertible: residents and nonresidents can purchase unlimited amounts of a foreign currency with it
Externally Convertible: only nonresidents may convert it into a foreign currency
Nonconvertible: neither residents nor nonresidents are allowed to convert it into a foreign currency
- Capital Flight
- occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength.
- Transaction exposure
- the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
- Translation Exposure
- the impact of currency exchange rate changes on the reported financial statements of a company
- Economic Exposure
- the extent to which a firm’s future international earning power is affected by changes in exchange rates
- Lag Strategies
- An attempt to delay the collection of foreign currency receivables if that currency is expected to appreciate.
Delay paying foreign currency payables if the foreign currency is expected to depreciate.
- Lead Strategy
- An attempt to collect foreign currency receivables when a foreign currency is expected to depreciate.
Paying foreign currency payables before they are due when a foreign currency is expected to appreciate.
- International Monetary System
- institutional arrangements countries adopt to govern exchange rates
- Floating Exchange Rate Systems
- Benefits of Floating Exchange Rate Systems
Maintain monetary policy autonomy
Allow currency devaluations to adjust trade imbalances
Drawbacks of Floating Exchange Rate Systems
Volatility of exchange rates
Contagion and currency speculation
- Fixed Exchange Rate Systems
- Benefits of Fixed Exchange Rate Systems
Encourage monetary discipline
Drawbacks of Fixed Exchange Rate Systems
Limit flexibility to deal with economic problems
- Formal Dollarization
- the currency of another country circulates as the sole legal tender
- Fixed Exchange Rates
- the values of a set of currencies are fixed against each other at some mutually agreed on exchange rate
- Currency Boards
- exchange domestic currency for a specified foreign currency at a fixed exchange rate and the nation holds reserves of the foreign currency equal to the fixed exchange rates to at least 100% of the domestic currency
- Pegged Exchange Rates
- the value of one currency is fixed relative to a reference currency
- Dirty/Managed Floats
- a country’s currency is nominally allowed to float freely against other currencies, but the government will intervene if it believes that the currency has deviated too far from its fair value
- Independently Floating
- the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand
- gold standard
- a monetary system in which the standard economic unit of account is a fixed weight of gold.
- The Bretton Woods Exchange Rate System
- Countries were able to borrow money from the IMF to maintain their par values.
Allowed for changes in the par values of currencies.
- Moral Hazard
- occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk
- Capital Market
- a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds.
- Cost of Capital
- Adverse changes in exchange rates can increase the cost of foreign currency loans.
Firms can hedge their risk by entering into forward contracts to purchase the necessary currency and lock in the exchange rate, but this will raise costs.
Firms must weigh the benefits of a lower interest rate against the risk of an increase in the cost of capital due to adverse exchange rate movements.
- equity loans
- a mortgage placed on real estate in exchange for cash to the borrower
- systematic risk
- sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with overall aggregate market returns. Systematic risk is a risk of security that cannot be reduced through diversification
- Portfolio Diversification
- a risk management technique, related to hedging, that mixes a wide variety of investments within a portfolio
- hot money
- refers to stolen currency that can easily be traced back to the crime, such as marked bills or new currency with consecutive serial numbers. It is also known as bait money.
- Advantages of the Eurocurrency Market
- Reserve requirements for eurocurrency accounts are generally not regulated.
The interest rate spread between the eurocurrency deposit and lending rates is less than the spread between the domestic deposit and lending rates.
Savers earn a higher interest rate and borrowers pay a lower interest rate as compared to domestic deposits.
- Drawbacks of the Eurocurrency Market
- Because the eurocurrency market is unregulated, there is a higher risk of bank failure.
Individuals and companies borrowing eurocurrencies can be exposed to foreign exchange risk.
- Reserve Requirements
- are generally not regulated
- Foreign bonds
- sold outside the borrower’s country and are denominated in the currency of the country in which they are issued.
- underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated.
- Attractions of the Eurobond Market
- It lacks regulatory interference.
It has less stringent disclosure requirements than domestic bond markets.
It is more favorable from a tax perspective.
- The Impact of Exchange Rate Risk on the Cost of Capital
- can increase the cost of foreign currency loans.
- Benefits of Financial Globalization
- Lower Cost of Capital
- Dangers of Financial Globalization
- Excessive Speculative Capital Flows
- refers to the transmission of a financial shock in one entity to other interdependent entities.
- Impossible Trinity
- Exchange Rate Stability
Independent Monetary Policy
- Value Chain Analysis
- The value chain refers to the collection of activities that are performed to design, manufacture, market, deliver, and support a product.
Composed of primary and support activities.
Value chain analysis attempts to delineate how a firm chooses to add value through its business-level strategy.
- when the characteristics of the product/service are perceived as being unique
strategy is to satisfy customer needs in a way that is not matched by competitors
uniqueness allows the firm to charge a higher or premium price
- Low-Cost Strategy
- when a firm produce goods or services at lower cost levels than competitors
strategy emphasizes efficiency, cost control and standardization
firm can charge a lower price and/or earn a higher margin
- Strategic Reasons for Global Expansion
- Leveraging Products and Competencies
Leveraging Subsidiary Skills
- Core Competencies
- Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals.
Allow the firm to implement a value-creating strategy which other companies are unable to duplicate or imitate.
- Criteria for a Sustainable Source of Competitive Advantage
- Valuable: allows firm to exploit opportunities or address threats
Rare: possessed by few, if any, current or potential competitors
Costly-to-imitate: other firms cannot develop easily
Nonsubstitutable: no strategic equivalent
- Experience Curve Effects: Learning Effects and Economies of Scale
- express the relationship between equations for experience and efficiency or between efficiency gains and investment in the effort.
- Pressures for Cost Reductions
- Strong in industries producing commodity-type products where meaning differentiation is difficult.
Strong if major competitors are based in low-cost locations, there is persistent excess capacity in the industry, consumers are powerful or face low switching costs.
- Pressures for Local Responsiveness
- Differences in Consumer Tastes and Preferences
Differences in Infrastructure and Traditional Practices
Differences in Distribution Channels
Host Government Demands
- switch costs
- describe any impediment to a customers changing of suppliers
- Organizational Architecture
- Organizational Structure
- Organizational Structure
- Vertical Differentiation: the location of decision-making responsibilities within a structure
Horizontal Differentiation: the formal division of the organization into sub-units
Integrating Mechanisms: mechanisms for coordinating sub-units within an organization
- Formal Integrating Mechanisms
- Direct Contact
- Informal Integrating Mechanisms
- Knowledge networks transfer information within an organization through informal contacts outside of the formal organization structure.
Knowledge networks can be established using information systems and management development policies.
- International Structural Stages
- International Division
Worldwide Area Structure
Worldwide Product Divisional Structure
Global Matrix Structure
- Knowledge networks
- transfer information within an organization through informal contacts outside of the formal organization structure.
can be established using information systems and management development policies.
- Personal Controls
- use personal contact with subordinates
- Bureaucratic Controls
- use budgets, capital spending rules and procedures to direct the actions of subunits
- Output Controls
- use objective performance metrics such as profitability, productivity, growth, market share and quality
- Cultural Controls
- use the norms and value systems of the firm to control employee behavior
- Should be linked to targets the individual can control.
May need to be adapted to ensure cooperation across divisions.
May need to be adjusted based on national differences.
Need to be concerned about unintended consequences.
- Performance Ambiguity
- high global standardization, low localization, very high transnational
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