MGT302 Exam 2

  1. Culture
    Everything that people have, think, or do as members of society
  2. Cultural Determinism
    Belief that the culture in which we are raised determines who we are at emotional and behavioral levels
  3. The Iceberg Model of Culture
    The surface --> unspoken rules --> unconscious rules
  4. Non-Verbal Communication
    Any message processed independent of the written or spoken word
  5. Low versus High Context Communication
    • High = Japan, Middle East, Latin America
    • Low = Switzerland, Germany, Scandinavia
  6. Ethnocentrism
    Belief in the superiority of one’s own ethnic group or culture
  7. Cross-Cultural Literacy
    Understanding how cultural differences across and within nations can affect the way business is practiced
  8. Cultural Distance
    A gap between the culture of two different groups
  9. Hofstede’s Value Survey Model
    • Individualism versus Collectivism - the relationship between the individual and his/her fellows
    • Uncertainty Avoidance - the extent to which a culture accepts ambiguous situations and tolerates uncertainty
    • Masculinity versus femininity - the relationship between gender and work roles
    • Time Orientation/Confucian Dynamism - attitudes toward time, persistence and respect for tradition
  10. Hofstede’s Value Survey Model Strengths and Weaknesses
    • Strengths: Number of countries involved, size of sample, results replicated in later research
    • Weaknesses: used average responses for each country rather than individual responses, survey was not designed to test culture, potential cultural biases of researchers, data is becoming dated
  11. Phases of Cultural Adjustment
    Honeymoon, culture shock, adjustment, mastery
  12. Preparing for Culture Shock
    Cultural training, language training, practical training
  13. Exchange Rate
    Rate at which one currency is converted into another
  14. Currency Appreciation versus Depreciation
    • Appreciation: Currency appreciates when it increases in value compared to another currency
    • Depreciation: Currency depreciates if it declines in value compared to another currency
  15. Currency Devaluation versus Revaluation
    • Results of government actions including the changing of fixed exchange rate systems or the buying and selling of foreign exchange reserves.
    • Devaluation: deliberate downward adjustment in the exchange rate
    • Revaluation: upward change in the currency’s value
  16. Micro implications of exchange rate changes
    Micro: companies can earn less or pay more on individual transactions, the value of the company’s assets and liabilities can be affected, a firm’s supply chain decisions can be impacted.
  17. macro implications of exchange rate changes
    Macro: The value of a nation’s currency impacts the overall attractiveness of the nation’s exports, a nation can devalue its currency to increase the competitiveness of the nation’s exports.
  18. Arbitrage
    The purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy
  19. Currency Speculation
    Short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates
  20. Spot Exchange Rates
    Spot Exchange rates: Exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day
  21. Forward Exchange Rates
    Forward Exchange rates: Exchange rate at which a foreign exchange dealer will agree to convert one currency into another currency on a specific date in the future
  22. Hedging: Forward Contracts versus Options versus Currency Swaps
    • Forward exchange contracts: contracts that provide for two parties to exchange currencies on a future date at an agreed upon exchange rate.
    • Usually for 30, 90, or 180 days.
    • Changes in spot rate will result in equal but opposite gains and losses by the two parties.
  23. Selling on a Discount versus Selling at a Premium
    • Selling on a Discount: Foreign exchange dealers expect the home currency to depreciate
    • Selling at a Premium: Foreign exchange dealers expect the home currency to appreciate
  24. Law of One Price
    In an efficient market, all identical goods must have only one price
  25. Big Mac Index
    Local-currency under/over valuation against the dollar
  26. How increasing the money supply impacts exchange rates
    Increasing the money supply usually triggers inflation
  27. Price Discrimination
    Exists when sales of an identical good or service is transacted at different prices from the same provider
  28. Fisher Effect / International Fisher Effect
    Nominal interest rate = real interest rate plus the expected rate of inflation
  29. Real versus Nominal Interest Rates
    • Nominal interest rate does not account for the effects of inflation
    • Nominal interest equals total amount of interest paid on a loan for a specific period of time without separating out the “true” cost of inflation
    • True interest rates account for the effects of inflation
  30. Investor Psychology and Bandwagon Effects
    Play a major role in short term movements of exchange rates
  31. Efficient Market School
    Efficient Market: financial markets cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis
  32. Inefficient Market School
    Inefficient Market: Market prices of common stocks and similar securities are not always accurately priced and tend to deviate from the true discounted value of their future cash flows
  33. Fundamental versus Technical Analysis
    • Fundamental analysis: draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements
    • Technical Analysis: Uses price and volume data to determine trends
  34. Currency Convertibility: Freely
    Freely: residents and nonresidents can purchase unlimited amounts of a foreign currency with it.
  35. Currency Convertibility: Externally
    Externally Convertible: only nonresidents may convert it into a foreign currency.
  36. Currency Convertibility: Nonconvertible
    Nonconvertible: neither residents nor nonresidents are allowed to convert it into a foreign currency
  37. Capital Flight
    Occurs when assets and/or money rapidly flow out of a country due to an economic event
  38. Transaction Exposure
    the extent to which income from individual transactions is affected by fluctuations in foreign exchange values
  39. Translation Exposure
    the impact of currency exchange rate changes on the reported financial statements of a company
  40. Economic Exposure
    the extent to which a firm’s future international earning power is affected by changes in exchange rates
  41. Lead strategy
    An attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate, paying foreign currency payables before they are due when a foreign currency is expected to appreciate.
  42. Lag strategy
    an attempt to delay the collection of foreign currency receivables if that currency is expected to appreciate, delay paying foreign currency payables if the foreign currency is expected to depreciate.
  43. Fixed Exchange Rate Systems Benefits/Drawbacks
    • Benefits: Encourage monetary discipline, provide predictability.
    • Drawbacks: Limit flexibility to deal with economic problems.
  44. Floating Exchange Rate Systems
    • Benefits: Maintain monetary policy autonomy, allow currency devaluations to adjust trade imbalances.
    • Drawbacks: Volatility of exchange rates, currency speculation.
  45. Exchange Rate Regimes: Formal Dollarization
    the currency of another country circulates as the sole legal tender
  46. Exchange Rate Regimes: Fixed
    the values of a set of currencies are fixed against each other at some mutually agreed on exchange rate.
  47. Exchange Rate Regimes: Currency Boards
    exchange domestic currency for a specified foreign currency at a fixed exchange rate and the nation holds reserves of the foreign currency equal to the fixed exchange rates to at least 100% of the domestic currency
  48. Exchange Rate Regimes: Pegged
    the value of one currency is fixed relative to a reference currency
  49. Exchange Rate Regimes: Dirty/Managed Floats
    a country’s currency is nominally allowed to float freely against other currencies, but the government will intervene if it believes that the currency has deviated too far from its fair value.
  50. Exchange Rate Regimes: Independently Floating
    the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand
  51. The Bretton Woods Exchange Rate System
    Created a fixed exchange rate system where the countries agreed to peg their currencies to the US dollar, countries agreed not to engage in competitive devaluations for trade purposes, countries were able to borrow money from the IMF to maintain their par values
  52. The Bretton Woods Exchange Rate System Requirements
    rate of US inflation had to be low, US could not run a trade deficit, the dollar could not be under speculative attack
  53. Moral Hazard
    Occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk
  54. Capital Market
    Market for securities where companies and governments can raise long-term funds (periods longer than a year)
  55. Cost of Capital
    Adverse changes in exchange rates can increase the cost of foreign currency loans
  56. Systematic Risk
    Risk associated with aggregate market returns
  57. Hot Money
    funds which flow into a country to take advantage of a favorable interest rate
  58. Eurocurrency
    Any currency banked outside of its country of origin
  59. Attractions and Drawbacks of the Eurocurrency Market
    • Attractions: Reserve requirements for eurocurrency accounts are generally not regulated
    • Drawbacks: Because the eurocurrency market is unregulated, there is a higher risk of bank failure, individuals and companies borrowing eurocurrencies can be exposed to foreign exchange risk.
  60. Foreign Bonds
    regulated by the domestic market authorities
  61. Eurobonds
    a bond issued in a currency other than the currency of the country or market in which it is issued
  62. Benefits and Dangers of Financial Globalization
    • Benefits: Lower cost of capital, portfolio diversification
    • Dangers: Excessive speculative capital flows, contagion
  63. Contagion
    Refers to the transmission of a financial shock in one entity to other interdependent entities
  64. Low-Cost Strategy
    a firm offers a relatively low price to stimulate demand and gain market share
  65. Differentiation
    a firm aims to develop and market unique products for different customer segments
  66. The Value Chain: Primary versus Support Activities
    Collection of activities that are performed to design, manufacture, market, deliver, and support a product
  67. Strategic Reasons for Global Expansion
    Leveraging products and competencies, location economies, experience effects, leveraging subsidiary skills
  68. Core Competencies
    Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals, allow the firm to implement a value-creating strategy which other companies are unable to duplicate or imitate, a core competency can create a sustainable source of competitive advantage if the core competency is valuable, rare, costly to imitate and non-sustainable
  69. Location Economies
    Used by firms in a monopolistic competition environment, causes firms to produce similar or identical products
  70. Pressures for cost reductions
    Strong in industries producing commodity-type products, strong if major competitors are based in low-cost locations, there is persistent excess capacity in the industry, consumers are powerful or face low switching costs.
  71. Pressure for local responsiveness
    Difference in consumer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels, host government demands.
  72. Switching Costs
    Costs incurred when a customer changes from one supplier or marketplace to another
  73. Vertical differentiation
    the location of decision-making responsibilities within a structure
  74. Horizontal differentiation
    the formal division of the organization into sub-units
  75. Integrating Mechanisms
    Mechanisms for coordinating sub-units within an organization
  76. Control Systems: Personal
    use personal contact with subordinates
  77. Control Systems: Bureaucratic
    use budgets, capital spending rules and procedures to direct the actions of sub-units
  78. Control Systems: Output
    use objective performance metrics such as profitability, productivity, growth, market share, and quality
  79. Control Systems: Cultural
    use the norms and value systems of the firm to control employee behavior
  80. Incentives
    • Linked to targets the individual can control
    • Need to be adapted to ensure cooperation across divisions
    • May need to be adjusted based on national differences
    • Need to be concerned about unintended consequences
  81. Requirements for Effective Organizational Architecture
    Requirements for effective organizational architecture: must be internally consistent, must fit the strategy of the firm, must be consistent with competitive conditions
  82. Parent-Country nationals
    citizens of the country where the firm is headquartered
  83. Third-Country nationals
    individuals who are citizens of countries other than the one in which the MNC is headquartered or where the subsidiary is located
Card Set
MGT302 Exam 2
MGT302 Exam 2