Glossary of intbusiness 2

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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
Perceptual Ability
Cultural Toughness

Training for Expatriate Managers
Cultural Training
Business practices, social etiquette, political environment, etc.
Language Training
Practical Training
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
Provide predictability
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
Portfolio Diversification

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
Capital Mobility

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
Location Economies
Experience Effects
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
Control Systems
Organizational Culture

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
Liaison Roles
Cross-Functional Teams
Matrix Structure

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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