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Regional Economic Integration
- Agreements between countries in the same geographic regions to reduce tariffs and non tariff barriers
- PROMOTE FREE TRADE
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Free Trade
eliminates all barriers of trading goods and services among member countries
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EFTA
Iceland, Norway, Switzerland, and Liechtenstein
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Levels of Regional Economic Integration
- Free Trade
- Customs Union
- Common Market
- Economic Union
- Political Union
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Customs Union
- all countries involved have the same trade restrictions
- Eliminates barriers of free trade between neighboring countries
- Common External trade policy
- Andean Community( (Bolivia, Columbia, Ecuador, Peru)
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Common Market
No barriers all countries have the same policy MERCOSUR (Brazil, Argentina, Paraguay, Uruguay)
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Economic Union
- Same common currency and common monetary and fiscal policy
- EU
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Political Union
Central Political Apparatus that is in charge of the economic, social, and foreign policy of the states
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Pros of integrating economies
- Free trade and investment
- Political cooperation
- Dependent on each other
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Cons of integrating economies
- Loss of national sovereignty
- Cultural, language, and loss of control
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Trade Creation: when low cost producers within free trade are replaced with high cost domestic producers
when low cost producers within free trade are replaced with high cost domestic producers
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Trade diversion
occurs when high cost suppliers within free trade replace lower cost external suppliers (higher cost has better strategy)
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EU
- 27 members
- EFTA- 4 members
- Formed because of world war 2 on western Europe
- They wanted lasting peace and own political control
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European Economic Community
- Formed at the Treat of Rome ( formed institutions of EU)
- Wanted to become a common market
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Single European Act
- Wanted a single market
- Wanted faster economic growth
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Political Structure of the EU
- European Council
- European Commission
- European Parliament
- The Court of Justice
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European Council
controlling authority of the EU
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European Commision
in charge of implementing and monitoring laws and policies
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European Parlaiment
- Democratic part of EU
- members elected by the people
- works with the European council
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The court of justice
- Judge from each country
- There for business reasons
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Maastricht Treaty
- Adopted the euro(single currency)
- Euro is the 2nd largest currency
- Used by 18 of the 27 member states
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Benefits of the Euro
- Having a single currency is better than multiple
- Easier to compare price
- Increases range of investment options
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Negatives of the Euro
- Loss of control over national monetary policy
- EU is not an optimal currency area
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NAFTA( North American Free Trade Agreement)
- Abolishes tariffs
- Removes barriers on cross-border flow of services
- Protects intellectual property
- Removes a lot of restriction’s within FDI
- Each country can have their own environmental standards
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Benefits of NAFTA
- Mexico benefits (job increase)
- US. and Canada benefit
- Increase imports by Mexico
- Access to large market
- Low cost labor
- Low prices for consumers
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Negatives of NAFTA
- Agriculture (tariff on corn decreased)
- Jobs decline in U.S.
- Canada Pollution
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Andean Community
- Formerly The Andean Pact
- Operates as a custom union
- Wants the creation of free trade
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MERCOSUR
- Was a free trade pact between Brazil and Argentina
- Accused of trade diversion
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CARICOM
- Central American trade agreement
- Wanted to lower trade barriers between u.s and members
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CARICOM
established a customs union Caribbean
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Foreign Exchange Market
- Used to convert the currency of one country into the currency of another
- Provides insurance against foreign exchange risk(consequences of unpredictable changes in exchange rates)
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Exchange rate
- rate that one currency is converted into another
- Events in the market affect sales, profits, and strategy
- Determined by supply and demand for different currencies
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Three factors that impact future exchange movements
- Country’s price inflation
- Country’s interest rate
- Market psychology
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Currency speculation
the short term movement of funds from one currency to another in order to gain a profit from the change in exchange rates
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Hedging
when a firm insures itself against exchange risk
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Spot Exchange rates
- rate that the currency is converted into another currency on a particular day
- Based on supply and demand
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Forward Exchange rates
- to unsure against a possible adverse foreign exchange rate movement
- Two parties agree to exchange currency at a specific date in the future
- Used for 30,90,or 180 days in the future
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Currency Swap
- a purchase and sale at the same time for the same amount of foreign exchange for two different value dates
- Between banks
- Businesses and their banks
- Between governments
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Arbitrage
buying a currency low and selling it high
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Law of one price
- Identical products sold in different countries must sell for the same price when their price is in the same currency
- If not there can be arbitrage
- In competitive markets free of transportation and barriers to trade
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Purchasing power parity theory (PPP)
- The price of a “basket of goods” should roughly be equivalent in each country
- In relatively efficient markets
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International Fisher effect
Any two countries, the spot exchange rate should change in an equal amount but in opposite direction to the difference in nominal interest rates between two countries
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The bandwagon effect
- Traders can join the bandwagon and move exchange rates based on group expectations
- Influences short term exchange rate movements
- Government intervention can prevent from starting
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Efficient market school
Forward exchange rates do the best at forecasting future spot exchange rates so investing in forecasting services is a waste of money
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Inefficient market school
Companies can improve the foreign exchange market’s estimate of future exchange rates by investing in forecasting services
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An efficient maker is one that…
- Prices reflect all available information
- Forward exchange rates should be unbiased prediction of future spot rates
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Fundamental analysis
Analyzes factors such as interest rates, monetary policy, inflation rates, or balance of payments info to predict exchange rates
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Technical analysis
Uses charts trend with the assumption that past trends are reasonable predicators of future trends and waves
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Freely convertible
Government allows both residents and non residents to purchase unlimited amount of foreign currency with domestic currency
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Externally convertible
- Non residents can convert their holdings of domestic currency into foreign currency
- Residents are limited in some way
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Nonconvertible
Both residents and non residents cant convert their holdings
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Countertrade
barter like agreements, goods and services are sold for other goods and services
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Truncation exposure
Extent that the income from individual transactions are affected by fluctuations in foreign exchange values
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Translation exposure
Impact of currency exchange rate changes on reported financial statements of a company
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Economic exposure
Extent that a firms future internal earning power is affected by changes in rates
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To reduce exchange rate risk…
Buy forward Use swaps Lead and lag payables and receivables
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International Monetary System
Institutional arrangements that countries adopt to govern exchange rates
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Floating exchange rate system
- when a country allows the foreign exchange market to determine the relative value of a currency
- Euro, dollar, and yen are floating
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Pegged exchange rate system
When a country fixes the value od its currency relative to a reference currency
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Dirty Float Country
tries to hold the value of its currency within a range of a reference currency such as the US dollar
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Fixed exchange rate system
- When a country fixes their currencies against each other at some mutually agreed on exchange rate
- European monetary system
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Gold Standard System
that countries peg currencies to gold
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Bretton Wood System
- new international monetary system that would facilitate postwar economic growth
- Established the IMF to maintain order Established The World Bank to promote general economic development
- Countries can borrow money in 2 ways(IBRD scheme, money is raised through bond sales) (International Development Agency, IDA loans go only to the poorest countries)
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Fixed Exchange Rate System collapse
- Collapsed when increases in welfare programs
- Vietnam ware was finances by increasing money supply causing inflation
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Jamaica Agreement
- New exchange rate system established in Jamaica
- Rules: Floating rates were acceptable, gold was abandoned, total annual IMF quotas
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Floating exchange rates provide...
- Monetary policy autonomy
- Automatic trade balance adjustments
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Fixed Exchange rates provide...
- Monetary disciple
- Minimizes speculation
- Reduces uncertainty
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Marketing Mix
- choices firms offer to its targeted market pricing strategy
- product attributes
- distribution strategy
- communication strategy
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Theodore Levitt
- Argues that the markets were becoming similar making it unnecessary to localize the marketing mix
- NOT RIGHT
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Global standardization is not possible b/c..
- Cultural differences
- Economic differences
- Trade barriers
- Difference in product and technical standards
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Market segmentation
- Identifying strict groups of people whom purchasing behaviors differ
- Segmented by geography demography, socio-cultural factors, psychological factors
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Distribution systems
- Retail concentration
- Channel length
- Channel Exclusivity
- Channel quality
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Channel length
- Number of intermediaries between producer and the consumer
- (short channel- sells directly… long channel- sells through someone else)
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Channel Exclusivity
How difficult it is for outsider to access
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Channel quality
The expertise, competencies, and skills of established retailers and ability to sell and support products
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Communication channels
- Direct selling
- Sales promotions
- Direct marketing
- Advertising
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Push strategy
- emphasizes personnel selling
- For industrial product or new products
- Short channels
- Few print or electronic media is available
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Pull strategy
- emphasizes mass media advertising
- For consumer good products
- Long channels
- Media is available to carry the marketing message
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Price discrimination
charging different prices for the same product
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Price elasticity of demand
- Measure of responsiveness of demand for a product to changes in price
- Elastic- small price change =larger demand
- Inelastic- large price change= small demand
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Predatory pricing
using profit gained in one market to support pricing to drive competitors out in another market
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Multi-point pricing
firms in one market may have an impact on a rivals pricing strategy in another
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Experience curve pricing
low prices worldwide in attempt to build global sales volume quickly
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Antidumping
When selling a product for a price less than the cost of producing it
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Competition policy
Regulations designed to promote competition and restrict monopoly
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Staffing Policy
Selection of employees who have skills required to perform a certain job
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Ethnocentric approach
fill management positions with parent country nationals
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Polycentric approach
recruit host country national to manage subsidiaries in their own country
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Geocentric approach
seek the best people regardless of nationality for key jobs
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Expatriate failure
- is the premature return of an expatriate manager to the home country
- Ethnocentric and geocentric
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Balance sheet approach
equalizing purchasing power across countries so employees have same standard of living
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Growing entrepreneurial firms exhibit
- Growth
- Innovation
- Financing
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angel investors
just wants to give money and watch the company grow
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venture capital
companies that look for promising to make money of them
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Microfinance
- Provides micro loans (50-300)
- used to start small businesses in order to get entrepreneurs out of poverty
- Mohammad Unis
- Started with small businesses by women
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Licensing
agreement to give another firm has the right to use your patent or trademark for a royalty fee(technology or pharmaceutical)
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Franchising
agreement to give another firm the rights (food industry, hotels, rental cars)
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Stage model Model
that shows the step by step process a small or medium enterprise must go through
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