Introduction to International Business July 28, 2008 Discussion Section Foreign Direct Investment; Political Economy of FDI; Foreign Exchange; International Monetary System
Agenda Chapters 3, 4, 5, 6 in a nutshell Tips for future assignment Review Chapters 7 ◦ Discussion Questions Review Chapter 9, 10 ◦ Discussion Questions Q&A regarding the Midterm
Chapters 3, 4, 5, 6 in a nutshell Chapter 3: Chapter 4: Chapter 5: Chapter 6: ◦ What is culture? What are the determinants of culture? How does culture affect business? ◦ What are ethical dilemmas? How do ethical dilemma’s arise? What are some of the standards used to evaluate ethics? Which ones are “straw men” arguments? ◦ What are theories that explain the observed pattern of international trade? ◦ What are some of the instruments that governments use to restrict trade? What are some political and economic justifications for trade intervention? Are these justifications “justified”? How has the world trading system developed?
Chapter 7 Learning Goals Be familiar with current trends regarding FDI in the world economy. Understand the different theories of foreign direct investment. Appreciate how political ideology shapes a government’s attitudes towards FDI. Understand the benefits and costs of FDI to home and host countries. Be able to discuss the range of policy instruments that governments use to influence FDI. Articulate the implications for management practice of theory and government policies associated with FDI.
Chapter 7: Foreign Direct Investment What is FDI? FDI in the world economy ◦ Trends; Direction of FDI; Source of FDI; Shift to Services ◦ Form of FDI Greenfield vs. Acquisitions and Mergers Types of FDI ◦ Horizontal FDI Why undertake horizontal FDI? Transportation costs; market imperfections (internalization theory: impediments to exporting, impediments to sale of know how); strategic behavior ◦ Vertical FDI Why undertake vertical FDI? Strategic behavior; market imperfections (impediments to the sale of know how; investment in specialized assets)
Chapter 7 Review continued Political Ideology and FDI What are the benefits of FDI to host countries? What are the costs and benefits to home countries? What are some government policies/instruments regarding FDI? ◦ Radical View ◦ Free Market View ◦ Pragmatic Nationalism ◦ Resource-transfer effects (capital, technology, know-how); Employment effects; Balance-of-payment effects; Effect on competition and economic growth ◦ Adverse effect on competition; adverse effects on the balance of payments; national sovereignty and autonomy ◦ Benefits: inward cash flow; employment effects; skills learned from abroad ◦ Costs: balance of payments; employment effects (outsourcing) ◦ Home country: encourage some outward FDI; restrict some outward FDI ◦ Host country: encourage some inward FDI; restrict other inward FDI
Chapter 9 Learning Goals Be conversant with the functions of the foreign exchange market. Understand what is meant by spot exchange rates. Appreciate the role that foreign exchange rates play in insuring against foreign exchange risk. Understand the different theories explaining how currency exchange rates are determined and their relative merits. Be familiar with the merits of different approaches towards exchange rate forecasting. Understand the differences between transaction, translation, and economic exposure, and what managers do to manage each type of exposure.
Chapter 9: The Foreign Exchange Market What is the FOREX market for? ◦ Currency conversion; insuring against foreign exchange risk (using spot exchange, forward exchange, or currency swaps) Arbitrage in FOREX markets Theories about how FOREX rates are determined Forecasting in FOREX markets ◦ Price and exchange rates: law of one price; purchasing power parity; money supply and price inflation ◦ Interest rates and exchange rates: Fisher Effect; International Fisher Effect ◦ Investor psychology and bandwagon effects Efficient v. Inefficient Schools; Approaches FOREX Exposures and Multinational Firms Transaction, Translation, Economic
Chapter 10 Learning Goals Be familiar with the historical development of the modern global monetary system. Describe the role played by the World Bank and the IMF in the international monetary system. Be familiar with the differences between a fixed and a floating exchange rate system. Know what exchange rate systems are used in the world today and why countries adopt different exchange rate regimes. Understand the debate surrounding the role of the IMF in the management of financial crises. Appreciate the implications of the global monetary system for currency management and business strategy.
Chapter 10: The International Monetary System Different exchange rate regimes: ◦ Fixed ◦ Floating: pegged; dirty float Fixed versus Floating Exchange Rates ◦ Why choose floating exchange rates? Monetary policy autonomy Trade balance adjustments ◦ Why choose fixed exchange rates? Monetary discipline Speculation Uncertainty Trade Balance Adjustment ◦ Who is right?
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