International trade: firms use it to penetrate markets (by exporting) or to obtain low cost supplies (importing) a disadvantage is the firm cannot provide quality control in the foreign production process. Establishing new foreign subsidiaries firms can penetrate in foreign markets by establishing new operations firms in a foreign country to produce and sell their products.
International trade: firms use it to penetrate markets (by exporting) or to obtain low cost supplies (importing) a disadvantage is the firm cannot provide quality control in the foreign production process. Establishing new foreign subsidiaries firms can penetrate in foreign markets by establishing new operations firms in a foreign country to produce and sell their products.
International trade: firms use it to penetrate markets (by exporting) or to obtain low cost supplies (importing) a disadvantage is the firm cannot provide quality control in the foreign production process. Establishing new foreign subsidiaries firms can penetrate in foreign markets by establishing new operations firms in a foreign country to produce and sell their products.
For countries to specialize in one good rather than all. USA and Japan specialize in technology while Jamaica and Mexico in agriculture. Then, trade between countries occur 2. Imperfect Market Theory Because there are restrictions (transfer of labor and other resources) and costs it cause for firms to seek foreign opportunities. The market has to be imperfect otherwise there will be equality in costs and remove the comparative advantage. 3. Product cycle theory: The firm first stablish in his home country and if foreign customers demand for the firms product they may stablish in another country. The firm may first export the product and if the demand is high and to reduce costs they may move to another country. The firm must differentiate the product and maintain an advantage over other firms products. Methods of International Business International Trade: Firms use it to penetrate markets (by exporting) or to obtain low cost supplies (importing) The firm does not place any of its capital at risk. If there is a decline it can reduce or discontinue the trade at a low cost. Firms can use internet to sell their products over a webpage and list all items with their prices. Technology is used to monitor inventory if a warehouse is having low amount of a product. Licensing: Obligate the firm to provide the copyright, patent, trademark in exchange for fees or some other benefit. Licensing allow firms to use their technology in foreign markets without a major investment in foreign countries and no transportation costs from exporting. A disadvantage is the firm cannot provide quality control in the foreign production process. Franchising: Obligate the firm to provide sales or service strategy, support assistance and an initial investment in the franchise in exchange for fees. Joint Venture: Is a venture that is jointly owned and operated by two or more firms. Acquisitions of existing operations Firms acquire other firms in foreign countries to penetrate foreign markets. Firms will have full control over their foreign business and will have a large portion of foreign market share. Establishing new foreign subsidiaries Firms can penetrate in foreign markets by establishing new operations firms in a foreign country to produce and sell their products.
Risks a Domestic Company will face when turning to MNC Exposure to international Economic conditions: The amount of consumption in a country is influenced by the income earned by consumers in a country, therefore if economic conditions weaken the income of consumers will be low, consumer purchases of products decline, and an MNC sales in the country stablished will be lower than expected. This will reduce the MNC cash flows and its value. Exposure to international political risks: Political risk in any country can affect the levels of an MNC sales. Can increse taxes or impose barriers to a MNC subsidiary. Exposure to exchange rate risk The exchange rate may vary; if the dollar weakens the MNC will receive a lower amount of dollar cash flows than was expected. If the dollar strenghten, the MNC will need a large amount of dollars to obtain the foreign currencies that it needs to make its payments. This can reduce MNC dollar cash flows and reduce value of that MNC. MNC Valuation Model: 1. The level of Future cash flow 2. The timing 3. The riskiness of FCF Chapter 2 Balance of Payments: - Summary of transactions between domestic and foreign residents for a specific country over a specified period of time. 2 Types Current Account: summary of flow of funds due to purchases of goods or services or the provision of income on financial assets. 1. Payments for merchandise and services o Merchandise exports and imports represent tangible products that are transported between countries. Service exports and imports represent tourism and other services. The difference between total exports and imports is referred to as the balance of trade. 2. Factor income payments o Represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities). 3. Transfer payments o Represent aid, grants, and gifts from one country to another.
Capital Account: summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time. 1. Direct foreign investment o Investments in fixed assets in foreign countries
2. Portfolio investment o Transactions involving long term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. 3. Other capital investment o Transactions involving short-term financial assets (such as money market securities) between countries. 4. Errors and omissions o Measurement errors can occur when attempting to measure the value of funds transferred into or out of a country. Financial Accounts: Portfolio Investments when I buy stocks from another country. DFI For the currency not to lose value, the country create incentives to receive money back. - Increase of tax rates, interest rates.
Factors affecting Current Accounts (summary of flow of funds due to purchases of goods) Exports - Imports 1.Cost of labor: CA 2.rate of inflation CA 3.national income CA 4.goverment restrictions CA 5.exchange rates: CA The $ will be expensive, others will use more money to buy $
Any method of increasing international business that requires a direct investment in foreign operations is called Direct Foreign investment. International trade and Licensing are not Direct Foreign investment bc they are not involved in direct investment in foreign operations but to a limited degree. Foreign acquisitions and Establishing new foreign subsidiaries require substantial investment in foreign operations and use largely Direct Foreign Investment. Factors affecting DFI Goods / Services Assets 1.changes in restrictions: DFI 2.privatization DFI 3.potential economic growth: DFI 4.tax incentives: DFI 5.exchange rates expectations. DFI
Factors Affecting Direct Foreign Investing (DFI) o Changes in Restrictions New opportunities have arisen from the removal of government barriers. o Privatization DFI is stimulated by new business opportunities associated with privatization. Managers of privately owned businesses are motivated to ensure profitability, further stimulating DFI. o Potential Economic Growth Countries with greater potential for economic growth are more likely to attract DFI. o Tax Rates Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI. o Exchange Rates Firms typically prefer to pursue DFI in countries where the local currency is expected to strengthen against their own
Factors affecting Exchange Rates: 1. Relative Inflation Rate ER 2. Relative Real Interest ER 3. Relative Income level ER 4. Goverment controls ER 5. Market Mechanism: Expectations about future economic conditions. Chapter 3 Bond market: 1. Foreign bonds are issued by borrower foreign to the country where the bond is placed. 2. Eurobonds are bonds sold in countries other than the country of the currency denominating the bond - Bonds from the US, payed in $, sold in Europe. Chapter 5 What is a Currency Derivative? 1. A currency derivative is a contract whose price is derived from the value of an underlying currency. A forward contract is an agreement between a corporation and a financial institution: -is tailormade and less liquid. To exchange a specified amount of currency At a specified exchange rate called the forward rate On a specified date in the future futures contracts: is to agree a price today, to buy or sell in the future. Option contract: 2. What people are involved in Forward/Future Markets:
Speculators Hedgers Gain profits from the exchange of currencies Help hedgers and markets to be liquid
Trade currencies to avoid loses/risks. Hedger pay with forgone gains. Sell currency depending on the business needs Will lock a price