Exam 2
Terms
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- incentives
- devices used to reward appropriate managerial behavior
- hedging
- a firm insures itself against foreign exchange risk
- Currency Speculation
- short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
- organizational culture
- norms and value systems that the employees of an organization share
- strategy
- actions that managers take to attain the goals of the firm
- Jamaica agreement
- revised the IMF's Articles of Agreement to reflect the new reality of floating exchange rates
- cross-licensing agreement
- firm licenses some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm
- wholly owned subsidiary
- firm owns 100% of the stock
- localization strategy
- focus on increasing profitability by customizing the firm's goods or services so they provide a good match to tastes and preferences in different national markets
- translation exposure
- impact of currency exchange rate changes on the reported financial statements of a company
- economic exposure
- extent to which a firm's future international earning power is affected by changes in exchange rates
- lead strategy
- attempting to collect foreign currency receivables (payments from customers) early when a foreign currency is expected to to depreicate and paying foreign currency payables
- gold standard
- pegging currencies to gold and guaranteeing convertibility
- PPP theory
- when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled
- translational strategy
- trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations
- global standardization strategy
- focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale
- cultural controls
- employees "buy into" the norms and value systems of the firm
- balance-of-trade equilibrium
- income its residents earn from exports is equal to the money its residents pay to other countries for imports
- performance ambiguity
- causes of a subunits poor performance are not clear
- profit growth
- percentage increase in net profits over time
- horizontal differentiation
- formal division of the organization into subunits
- arbitrage
- buying a currency low and selling it high
- worldwide area structure
- firms with a low degree of diversification and a domestic structure based on functions
- knowledge network
- network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems
- universal needs
- tastes and preferences of consumers in different nations are similar but not identical
- foreign debt crisis
- situation in which a country cannot service its foreign debt obligations
- timing of entry
- early if the first business to enter a foreign market
- profitability
- rate of return that the firm makes on its invested capital (ROIC)
- currency board
- converting domestic currency on demand into another currency at a fixed exchange rate
- International Fisher Effect
- spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries
- joint venture
- establishing a firm that is jointly owned by two or more otherwise independent firms
- forward exchange rates
- exchange rates governing such future transactions
- turnkey project
- contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
- Foreign Exchange Risk
- adverse consequences of unpredictable changes in exchange rates
- franchising
- a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business
- dirty float
- hold the value of their currency within some range against an important reference currency
- personal control
- control by personal contact with subordinates
- efficient market
- no impediments to the free flow of goods and services
- floating exchange rate
- foreign exchange market determines the relative value of a currency
- externally convertible
- only nonresidents may convert it into a foreign currency without any limitations
- transaction exposure
- extent to which fluctuations in foreign exchange values affect the income from individual transactions
- experience curve
- systematic reductions in production costs that have been observed to occur over the life of a product
- World Bank
- promote development
- value
- cost of production minus the value the consumers perceive in its products
- Bretton Woods Conference
- created IMF and World Bank
- debt loan
- corporation repays a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making
- International Monetary Fund (IMF)
- maintain order in the international monetary system
- strategic commitments
- consequences of entering on a significant scale- enter rapidly, long-term impact and difficult to reverse
- processes
- manner in which decisions are made and work is performed within the organization
- inefficient market
- one in which prices do not reflect all available information
- global web
- disperse different stages of the value chain to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized
- pegged exchange rate
- value of the currency is fixed relative to a reference currency
- people
- strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation
- learning effects
- cost savings that come from learning by doing
- spot exchange rate
- rate at which a foreign exchange dealer converts one currency into another currency on a particular day
- Exchange rate
- the rate at which one currency is converted into another
- global matrix structure
- two dimensions: product division and geographic area
- law of one price
- competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the the same price when their price is expressed in terms of the same currency
- currency swap
- simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
- Fisher Effect
- a country's nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (l): i= r + l
- lag strategy
- delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate
- control systems
- metrics used to measure the performance of subunits
- international monetary system
- institutional arrangements that govern exchange rates
- output controls
- setting goals for subunits to achieve and expressing those goals in terms of relatively objective performance metrics such as profitability, productivity, growth, market share, and quality
- operations
- different value creation activities a firm undertakes
- forward exchange
- two parties agree to exchange currency and execute the deal at some specific date in the future
- capital flight
- residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency
- economies of scale
- reductions in unit cost achieved by producing a large volume of a product
- countertrade
- range of barterlike agreements by which goods and services can be traded for other goods and services
- bureaucratic control
- control through a system of rules and procedures that directs the actions of subunits
- vertical differentiation
- location of decision-making responsibilities within a structure
- organizational architecture
- totality of a firm's organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people
- international strategy
- taking products first produced for their domestic market and selling them internationally with only minimal local customization
- integrating mechanisms
- mechanisms for coordinating subunits
- moral hazard
- people behave recklessly because they know they will be saved if things go wrong
- strategic alliance
- cooperative agreements between potential or actual competitors
- worldwide product structure
- firms that are reasonably diversified and originally have domestic structures based on product divisions
- banking crisis
- loss of confidence in the banking system that leads to a run on banks
- nonconvertible
- neither residents nor nonresidents are allowed to convert it into a foreign currency
- fixed exchange rate
- values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate
- location economies
- economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be
- equity loan
- corporation sells stock to investors
- European Monetary System (EMS)
- European Union operated with fixed exchange rates
- managed-float system
- frequency of government intervention in the foreign exchange market explains why the current system is a dirty float
- licensing agreement
- arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee
- currency crisis
- a speculative attack forces authorities to expand large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate
- Foreign Exchange Market
- market for converting the currency of one country into that of another country
- international division
- when firms initially expand abroad, group all their international activities