Business 187 - Global Dimensions of Business

Slides for preparation and review for second midterm

Prof. Robert Chapman WOOD

The midterm …

25-28 multiple-choice questions A choice of one of two essays

(handed out ahead of time)

Bring Scantron (Form 882-E – the small style)

Blue book (small is OK)

Multiple choice questions will cover … Assigned reading in

Chapters 5, 7, 10, 11, 12, 14, 15, 16 Also p. 355 of Ch. 10 Note that assignments for Chs. 11, 15 are

small parts of those chapters From the first third of the course,

only Ch. 5 (trade theory) will be included Understanding trade theory is essential for

understanding Chapters 7, 8, 10, 11, and 12 Also, the Porter article “The Competitive

Advantage of Nations” Chapters 8 and 17 will not be on this test

Use these slides and the class review discussion as guides Study…

the text your notes the original slides available on the class web

page Memorizing stuff from the slides is not enough!

Make sure you understand each concept on the slides

Have slides, your notes, and text open all at once All midterm topics are mentioned on slides, but

the slides themselves cannot provide full detail

Essays graded on whether you practice

critical thinking

Show you understand the concepts In this case –

Gains from trade Comparative advantage Possibly ideas like infant industries, etc.

Your argument (whether you agree with what’s in the text or not) is based on and follows logically from facts and plausible existing theories.

Key issues in Ch. 5: International Trade Theory

Mercantilism Free trade – definition

No barriers limiting trade Economists think you should have the

same incentives when you consider a product from abroad as from your home country.

See special slides on the web site explaining what free trade is and why most economists support it

Arguments for gains from trade

Absolute advantage theory – Adam Smith Comparative advantage theory - Ricardo

Gains from trade when one country is better at everything

Extensions of comparative advantage theory Immobile resources will mean not all resources

shift to new uses Diminishing returns to specialization Free trade further increases efficiency over time

Your company has comparative advantage in the product or service where the ratio Cost in your country . Cost in the other country

is lowest

Product life-cycle theory (and limitations)

“New” trade theory – specialization leads to just a few winners in each industry Should government try to pick and

promote the winners of the future?

Key issues in Chap. 7: Foreign Direct Investment (FDI)

Definition of foreign direct investment Difference between indirect and direct

investments (See Chapter 7-8 slides)

Why firms do foreign direct investment Be able to think about under what circumstances

a firm would produce abroad Why not just license your tech to a local firm?

Acquisitions vs. build-it-yourself

Recent trends Rapid growth over 20 years Recent decline in direct investments

from one developed country to another Growth in direct investment in

developing countries especially East, South, and Southeast Asia

Key issues in Chap 10: Foreign exchange

Note: Parts of the text of Chs. 10 and 11 are confusing and difficult. Download the slides

What are money? foreign exchange? exchange rate?

How to find out a currency’s value (on line or in newspaper)

Dollar as most widely used/traded London as site of most trade

Fixed vs. “floating” exchange rates

Trading terms: bid, offer, spread Fully convertible (hard) currency vs.

“soft” currencies Key issues of “fundamental analysis”

in predicting change in a currency’s value See p. 355 in text (not in original assignment)

Key issues of Chap. 11: The International Monetary System

Fixed exchange rates from 1945-1971 (“The Bretton Woods system”)

The floating exchange rate regime

Key Issues of Chap. 12: Global Corporate Strategy

What goes into the big decisions? The core of strategy: value creation

Strategic positioning: Need to be explicit about choice of strategic emphasis

Reasons a firm that expands abroad may be more successful

Basic strategic choices The problem: pressures on

international businesses Pressures for cost reductions Pressures for local responsiveness

Possible responses “International” strategy Localization (or “Multidomestic”) strategy Global standardization strategy Transnational strategy

Porter’s Competitive Advantage of Nations

Understand what Porter means by the competitive advantage of an industry

Understand the four determinants Factor conditions (specialized factors) Demand conditions Related and supporting industries Firm strategy, structure, and rivalry

Understand what Porter means by each Importance of pressure on firms

Key issues in Chap. 14 Entry Strategy and Alliances

Choosing which foreign markets Know some key criteria for choosing

countries Size Growth rate Stability Spillovers

Know problems of deciding when to enter Scale of entry

Entry modes Exporting Turnkey projects Licensing Franchising Joint Ventures

Selecting mode to match competences Strategic alliances

Dangers Methods that can reduce the dangers

How location decisions should be influenced by Porter’s theories

Essential points from Chap. 15: Exporting and Importing

Information sources – U.S., local trade commissions Lack of trust in exporting/importing Getting paid

Open account – the seller just sends a bill (often very dangerous)

Letter of credit – document that obligates buyer’s bank to pay when goods shipped (usually very reliable)

Key export documents Draft – an order instructing someone to pay at a

specified time Bill of lading – receipt for goods from the carrier (airline,

shipping line)

17-11

Key Points of Ch. 16: Global Production, Outsourcing, Logistics

Definitiions Production

Includes both service and manufacturing activities

Logistics Outsourcing

Goals – include responsiveness To local demands To shifts in customer demand

Centralized vs. decentralized

Benefits of making yourself Benefits of buying from others

(outsourcing) Just-in-time inventory in the global

supply chain Electronic data interchange