Base of the pyramid
part of the view of the global economy as a pyramid. The vast majority of humanity, about four billion people, lives at the base of this pyramid making less than $2,000 a year.
BRIC
stands for Brazil, Russia, India, and China.
Emerging economies (emerging markets)
are countries that are starting to emerge as new players in the world economy.
Foreign direct investment (FDI)
is direct investment in, control, and management of value-added activities in other countries.
Global business
is defined in this book as business around the globe. The activities include both (1) international (cross-border) activities covered by traditional IB books and (2) domestic business activities.
Gross domestic product (GDP)
A nation's total output of goods and services.
Gross national product (GNP)
GDP plus income from nonresident sources abroad.
Gross National Income
is GDP plus income from nonresident sources abroad.
International business (IB)
is defined as (1) a business firm that engages in international (cross border) economic activities and/or (2) the action of doing business abroad.
Multinational enterprise (MNE)
is defined as a firm that engages in foreign direct investment by directly investing in, controlling, and managing value-added activities in other countries.
Purchasing power parity (PPP)
is an adjustment to reflect the differences in cost of living in various countries.
Reverse innovation
an innovation that is adopted first in emerging economies and then diffused around the world.
Triad
refers to the developed economies in the three regions that consist of North America, Western Europe, and Japan.
Expatriate Manager (expat)
A manager who works abroad, or “expat” in short.
Group of 20 (G-20)
The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems.
International premium
Managers who work abroad (expats) often command a significant pay raise when working overseas.
Institution based view
suggests that the success and failure are enabled and constrained by institutions.
Institutions
are the structures that define the rules of the game.
Institutional framework
is the formal and informal institutions that govern individual and firm behavior in a country.
Liability of foreignness
is the inherent disadvantage that foreign firms experience in host countries because of their nonnative status.
BRIC
is a newly coined acronym for Brazil, Russia, India, and China.
Globalization
can be viewed as a new force sweeping through the world in recent times, a long-run historical evolution since the dawn of human history, and a pendulum that swings from one extreme to another from time to time. The last (pendulum) view suggests that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.”
Risk management
The identification and assessment of risk and the preparation to minimize the impact of high-risk unfortunate events.
Scenario planning
Planning for multiple high or low risk scenarios.
Semiglobalization
avoids total isolation and total globalization and calls for more than one-way for doing business around the globe.
Nongovernment organization (NGO)
is a term that includes environmentalists, human rights activists, and consumer groups
Balance of trade
the aggregation of buying (importing) and selling (exporting) by both sides leads to the country-level trade surplus or deficit.
Export
selling abroad.
Importing
buying from abroad.
Merchandise
transactions involving tangible goods.
Service
transactions involving intangibles.
Trade deficit
an economic condition in which a nation imports more than it exports.
Trade surplus
an economic condition in which a nation exports more than it imports.
Absolute advantage
involves being more efficient than anyone else in the production of any good or service.
Classical trade theories
the major theories typically studied consist of mercantilism, absolute advantage, and comparative advantage.
Comparative advantage
is the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.
Factor endowments
the extent to which different countries possess various factors such as labor, land, and technology.
Factor endowment theory (or Heckscher-Ohlin theory)
is the proposition that nations will develop comparative advantage based on their locally abundant factors.
First-mover advantages
advantages that first entrants enjoy and do not share with late entrants.
Free trade
the idea that free market forces should determine how much to trade with little (or no) government intervention.
Mercantilism
Classical trade theory that viewed international trade as a zero-sum game.
Modern trade theories
the major theories typically studied consist of product life cycle, strategic trade, and national competitive advantage.
Opportunity cost
given the alternatives, the cost of pursuing one activity at the expense of another activity.
Product life cycle theory
an economic theory that accounts for changes in the patterns of trade over time.
Protectionism
the idea that governments should actively protect domestic industries from imports and vigorously promote exports.
Resource mobility
the assumption that a resource removed from one industry can be moved to another.
Strategic trade policy
economic policies that provide companies a strategic advantage through government subsidies.
Strategic trade theory
a theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.
Subsidy
Government payments to domestic firms.
Theory of absolute advantage
the economic advantage one nation enjoys that is absolutely superior to other nations.
Theory of comparative advantage
the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.
Theory of Mercantilism
the belief that held that the wealth of the world (measured in gold and silver) was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer.
Theory of national competitive advantage of industries (or diamond theory)
The theory that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”
Administrative policy
bureaucratic rules that make it harder to import foreign goods.
Antidumping duty
costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business).
Deadweight cost
net losses that occur in an economy as the result of tariffs.
Import quota
restrictions on the quantity of imports for specific period of time.
Import tariff
a tax imposed on imports.
Infant industry argument
the belief that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals.
Local content requirements
a requirement that a certain proportion of the value of the goods made in one country originates from that country.
Nontariff barrier (NTB)
laws, selective enforcement of laws, government purchasing policies and other means used intended to place products and investments of companies based in other countries at a competitive disadvantage compared to local companies.
Resource mobility
assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.
Subsidy
government payment to domestic firms to produce a competitive advantage.
Tariff barrier
taxes intended to result in products produced overseas to be priced higher than products produced locally.
Trade embargo
politically motivated trade sanctions against foreign countries to signal displeasure.
Voluntary export restraint
a superficial policy to show that exporting countries voluntarily agree to restrict their exports.
Downstream vertical FDI
expanding through the stages of production and distribution toward distribution.
FDI flow
is the amount of FDI moving in a given period (usually a year) in a certain direction.
FDI inflow
usually refers to inbound FDI moving into a country in a year.
FDI outflow
typically refers to outbound FDI moving out of a country in a year.
FDI stock
is the total accumulation of inbound FDI in a country or outbound FDI from a country.
Foreign direct investment (FDI)
is defined as directly investing in activities that control and manage value creation in other countries.
Foreign portfolio investment (FPI)
FPI refers to investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets.
Horizontal FDI
when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
Management control rights
namely, the rights to appoint key managers and establish control mechanisms.
Multinational enterprise (MNE)
firms that engage in FDI.
Upstream vertical FDI
expanding back through the stages of production and distribution toward production.
Vertical FDI
a firm through FDI moves upstream or downstream in different value chain stages in a host country.
Internalization
refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries.
Licensing
selling technology for a fee, a non-FDI-based market entry mode.
Location
refers to advantages enjoyed by firms operating in certain areas.
Market imperfection (market failure)
imperfect rules governing international transactions.
OLI advantages
ownership (O) advantages, location (L) advantages, and internalization (I) advantages.
Ownership
refers to MNE's possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas.
Agglomeration
the clustering of economic activities in certain locations.
Knowledge spillover
knowledge diffused from one firm to others among closely located firms that attempt to hire individuals from competitors.
Oligopoly
industries populated by a small number of players.
Intrafirm trade
involves trade between two subsidiaries in two countries controlled by the same MNE.
Contagion (imitation effect)
Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate it.
Demonstration effect(sometimes also called the contagion or imitation)
local rivals, after observing technology, may recognize its feasibility and strive to imitate it.
Free market view
suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services.
Pragmatic nationalism
views FDI as having both pros and cons and only approving FDI when its benefits outweigh costs.
Radical view
treats FDI as an instrument of imperialism and as a vehicle for exploitation of domestic resources, industries, and people by foreign capitalists and firms.
Technology spillover
foreign technology diffused domestically that benefits domestic firms and industries.
Bargaining power of both sides
the ability to extract a favorable outcome from negotiations due to one party's strengths.
Expropriation
confiscating foreign assets.
Obsolescing bargain
the deal struck by MNEs and host governments which change their requirements after the initial FDI entry.
Sunk costs
the MNE has already invested substantial sums of resources and often has to accommodate some new demands.
Sovereign wealth fund
A state owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.
Antitrust laws
laws that attempt to curtail anticompetitive business practices.
Capacity to punish
defined as the capacity to punish. A firm that has sufficient resources to deter and combat defection.
Cartel
an entity that engages in output and price-fixing involving multiple competitors.
Collusion
defined as collective attempts between competing firms to reduce competition.
Competitive dynamics
the actions and responses undertaken by competing firms.
Competition policy
determines the institutional mix of competition and cooperation that gives rise to the market system.
Competitor analysis
the process of anticipating a rival's actions in order to both revise a firm's plan and prepare to deal with rival's responses.
Concentration ratio
the percentage of total industry sales accounted for by the top four, eight, or twenty firms.
Cross-market retaliation
the ability of a firm to expand in a competitor's market if the competitor attacks in its original market.
Explicit collusion
the result of firms directly negotiating output and pricing and dividing markets.
Game theory
a branch of mathematics that studies the interactions between two competing parties.
Market commonality
the overlap between two rival's markets.
Multimarket competition
when firms engage the same rivals in multiple markets.
Mutual forbearance
an act of strategic deterrence in which multimarket firms respect their rival's spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion.
Price leader
a firm that has a dominant market share and sets “acceptable” prices and margins in the industry.
Prisoner's dilemma
in game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect.
Tacit collusion
the result of firms indirectly coordinating actions by signaling their intention to reduce output and maintain pricing above competitive levels.
Trust
another name for a cartel because members have to trust each other to honor agreements.
Antitrust policy
government policies designed to combat monopolies and cartels.
Antidumping laws
laws intended to protect domestic firms from predatory pricing by foreign competitors.
Collusive price setting
price setting by monopolists or collusion parties at a higher than competitive level.
Competition policy
the way in which a company determines the institutional mix of competition and cooperation, which gives rise to the market system.
Dumping
an attempt by an exporter to monopolize a market by selling below cost abroad, and then raising prices to eliminate a competitor.
Predatory pricing
an attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals.
Resource similarity
is the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.
Attack
an initial set of actions to gain competitive advantage.
Blue ocean strategy
Strategy that avoids attacking core markets defended by rivals which would likely result in a bloody price war or a “red ocean.”
Counterattack
A set of actions in response to an attack.
Feint
in competitive dynamics, a firm's attack on a focal arena important to a competitor but not the attacker's true target area.
Gambit
to withdraw from a low-value market to attract rivals to divert resources into it and then to capture a high-value market.
Thrust
the classic frontal attack with brute forces.
Contender strategy
this strategy centers on a firm engaging in rapid learning and then expanding overseas.
Defender strategy
leveraging local assets in areas in which MNEs are weak.
Dodger strategy
this strategy centers on cooperating through joint ventures (JVs) with MNEs and sell-offs to MNEs.
Extender strategy
this strategy centers on leveraging homegrown competencies abroad.
Balance of payments
a country's international transaction statement.
Bandwagon effect
the result of investors moving as a herd in the same direction at the same time.
Capital flight
a phenomenon in which a large number of individuals and companies exchange domestic currencies for a foreign currency.
Clean (or free) float
a pure market solution to determine exchange rates.
Dirty (or managed) float
the common practice of determining exchange rates through selective government intervention.
Fixed rate policy
fixing the exchange rate of a currency relative to other currencies.
Foreign exchange rate
the price of one currency in terms of another.
Floating (or flexible) exchange rate policy
the willingness of a government to let the demand and supply conditions determine exchange rates.
International Monetary Fund (IMF)
an international organization of 185 member countries that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.
Peg
a stabilizing policy of linking a developing country's currency to a key currency.
Purchasing power parity
a theory that suggests that in the absence of trade barriers (such as tariffs), the price for identical products sold in different countries must be the same.
Target exchange rates (or crawling band)
a limited policy of intervention, occurring only when the exchange rate moves out of the specified upper or lower bounds.
Bretton Woods system
a system in which all currencies were pegged at a fixed rate to the U.S. dollar.
Gold standard
a system in which the value of most major currencies was maintained by fixing their prices in terms of gold, which served as the Common denominator.
Post–Bretton Woods system
a system of flexible exchange rate regimes with no official common denominator.
Quota
the financial contribution, capacity to borrow, and voting power of IMF member countries that is based broadly on its relative size in the global economy.
Bid rate
the price offered to buy a currency.
Currency hedging
a transaction that protects traders and investors from exposure to the fluctuations of the spot rate.
Currency risks
the fluctuations of the foreign exchange market.
Currency swap
a foreign exchange transaction in which one currency is converted into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future.
Foreign exchange market
a market where individuals, firms, governments, and banks buy and sell foreign currencies.
Forward discount
when the forward rate of one currency relative to another currency is higher than the spot rate.
Forward premium
when the forward rate of one currency relative to another currency is lower than the spot rate.
Forward transaction
a foreign exchange transaction in which participants buy and sell currencies now for future delivery, typically in 30, 90, or 180 days, after the date of the transaction.
Moral hazard
refers to recklessness when people and organizations (including governments) do not have to face the full consequences of their actions.
Offer rate
the price offered to sell a currency.
Spot transaction
the classic single-shot exchange of one currency for another.
Spread
the difference between the offered price and the bid price.
Strategic hedging
spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions.
Currency board
a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate.
Build-operate-transfer (BOT) agreement
A non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm.
Co-marketing
Efforts among a number of firms to jointly market their products and services.
Country-of-origin effect
The positive or negative perception of firms and products from a certain country.
Cultural distance
The difference between two cultures along identifiable dimensions such as individualism.
Equity mode
A mode of entry (JV and WOS) that indicates relatively larger, harder-to-reverse commitments to overseas markets.
First-mover advantages
Benefits that accrue to firms that enter the market first and that late entrants do not enjoy.
Greenfield operations
Building factories and offices from scratch (on a proverbial piece of “green field” formerly used for agricultural purposes).
Institutional distance
The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.
Joint venture (JV)
A new corporate entity created and jointly owned by two or more parent companies.
Late-mover advantages
Benefits that accrue to firms that enter the market later and that early entrants do not enjoy.
LLL advantages
A firm's quest for linkage (L) advantages, leverage (L) advantages, and learning (L) advantages. These advantages are typically associated with multinationals from emerging economies.
Location-specific advantages
The benefits a firm reaps from the features specific to a place.
Mode of entry
Method used to enter a foreign market.
Non-equity mode
A mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets.
R&D contract
Outsourcing agreement in R&D between firms.
Scale of entry
The amount of resources committed to entering a foreign market.
Turnkey project
A project in which clients pay contractors to design and construct new facilities and train personnel.
Wholly owned subsidiary (WOS)
A subsidiary located in a foreign country that is entirely owned by the parent multinational.