MGT302 Exam 2

Everything that people have, think, or do as members of society

Belief that the culture in which we are raised determines who we are at emotional and behavioral levels

The surface --> unspoken rules --> unconscious rules

Any message processed independent of the written or spoken word

• High = Japan, Middle East, Latin America
• Low = Switzerland, Germany, Scandinavia

Belief in the superiority of one’s own ethnic group or culture

Understanding how cultural differences across and within nations can affect the way business is practiced

A gap between the culture of two different groups

• 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

• 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

Honeymoon, culture shock, adjustment, mastery

Cultural training, language training, practical training

Rate at which one currency is converted into another

• Appreciation: Currency appreciates when it increases in value compared to another currency
• Depreciation: Currency depreciates if it declines in value compared to another currency

• 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

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.

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.

The purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy

Short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates

Spot Exchange rates: Exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day

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

• 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.

• 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

In an efficient market, all identical goods must have only one price

Local-currency under/over valuation against the dollar

Increasing the money supply usually triggers inflation

Exists when sales of an identical good or service is transacted at different prices from the same provider

Nominal interest rate = real interest rate plus the expected rate of inflation

• 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

Play a major role in short term movements of exchange rates

Efficient Market: financial markets cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis

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

• 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

Freely: residents and nonresidents can purchase unlimited amounts of a foreign currency with it.

Externally Convertible: only nonresidents may convert it into a foreign currency.

Nonconvertible: neither residents nor nonresidents are allowed to convert it into a foreign currency

Occurs when assets and/or money rapidly flow out of a country due to an economic event

the extent to which income from individual transactions is affected by fluctuations in foreign exchange values

the impact of currency exchange rate changes on the reported financial statements of a company

the extent to which a firm’s future international earning power is affected by changes in exchange rates

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.

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.

• Benefits: Encourage monetary discipline, provide predictability.
• Drawbacks: Limit flexibility to deal with economic problems.

• Benefits: Maintain monetary policy autonomy, allow currency devaluations to adjust trade imbalances.
• Drawbacks: Volatility of exchange rates, currency speculation.

the currency of another country circulates as the sole legal tender

the values of a set of currencies are fixed against each other at some mutually agreed on exchange rate.

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

the value of one currency is fixed relative to a reference currency

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.

the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand

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

rate of US inflation had to be low, US could not run a trade deficit, the dollar could not be under speculative attack

Occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk

Market for securities where companies and governments can raise long-term funds (periods longer than a year)

Adverse changes in exchange rates can increase the cost of foreign currency loans

Risk associated with aggregate market returns

funds which flow into a country to take advantage of a favorable interest rate

Any currency banked outside of its country of origin

• 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.

regulated by the domestic market authorities

a bond issued in a currency other than the currency of the country or market in which it is issued

• Benefits: Lower cost of capital, portfolio diversification
• Dangers: Excessive speculative capital flows, contagion

Refers to the transmission of a financial shock in one entity to other interdependent entities

a firm offers a relatively low price to stimulate demand and gain market share

a firm aims to develop and market unique products for different customer segments

Collection of activities that are performed to design, manufacture, market, deliver, and support a product

Leveraging products and competencies, location economies, experience effects, leveraging subsidiary skills

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

Used by firms in a monopolistic competition environment, causes firms to produce similar or identical products

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.

Difference in consumer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels, host government demands.

Costs incurred when a customer changes from one supplier or marketplace to another

the location of decision-making responsibilities within a structure

the formal division of the organization into sub-units

Mechanisms for coordinating sub-units within an organization

use personal contact with subordinates

use budgets, capital spending rules and procedures to direct the actions of sub-units

use objective performance metrics such as profitability, productivity, growth, market share, and quality

use the norms and value systems of the firm to control employee behavior

• 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

Requirements for effective organizational architecture: must be internally consistent, must fit the strategy of the firm, must be consistent with competitive conditions

citizens of the country where the firm is headquartered

individuals who are citizens of countries other than the one in which the MNC is headquartered or where the subsidiary is located