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2/25/2013
Chapter 6: Investing Abroad Directly
1. Key Terms:
a. Foreign Portfolio Investment (FPI): foreign indirect management;
holding securities of companies in other countries, but does not entail active
management of foreign assets; based on financial securities the price of this
investment depends on the stock market
b. Foreign Direct Investment (FDI): the direct, hands-on management of
foreign assets. For statistical purposes, the UN defines FDI as an equity stake
of 10% or more in a foreign-based enterprise; based on tangible investments
manage this investment through people managers
c. Management Control Rights: without FDI, it is difficult to establish this the authority to appoint key managers and establish control mechanisms.
d. FDI Flow: the amount of FDI moving in a given period.
e. FDI Inflow: FDI moving into a country.
f. FDI Outflow: FDI moving out of a country.
g. FDI Stock: total accumulation of inbound FDI in a country of outbound FDI
from a country.
2. Horizontal FDI: when a firm takes the same activity at the same value-chain stage
from its home country and duplicates it in a host country through FDI; refers to
producing the same products or offering the same services in a host country as
firms do at home; e.g. BMW
3. Vertical FDI: when a firm moves upstream or downstream in different value-chain
stages in a host country through FDI
* Remember the Value Chain
Input
R&D
Components
Final Assembly
Marketing
Output
4. FDI Flow v. Stock:
a. FDI Flow: is the amount of FDI moving in a given period (usually a year) in a
certain direction
i. FDI Inflow: moving into a country in a year
ii. FDI Outflow: moving out of a country in a year
b. FDI Stock: is the total accumulation of inbound FDI in a country or outbound
FDI from a country
5. Why Does FDI Take Place? FDI provides gains to a firm through OLI
a. Ownership Advantages: Possession and leveraging of certain valuable,
rare, hard to imitate, organizationally embedded resources.
i. Direct ownership provides combination of equity ownership rights and
management control rights.
ii. FDI vs. Licensing:
1. FDI reduces dissemination risk
2. FDI provides tight control over foreign operations
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c. The Post Bretton Woods System (1973-present): the system where the
exchange rate of the most important currencies is allowed to fluctuate freely,
and there is a diversity of exchange rates; determined by the market
equilibrium of demand and supply
3. International Monetary Fund: IMF
a. Legacy of the Bretton Woods system
b. Lender of last resort for countries experiencing balances of payment problems
c. Each member country is assigned a quota that determines the required
contribution
i. Quota: depends on the economic size of a country
1. The amount of its financial contribution
2. Its capacity to borrow from the IMF
3. Its voting power
d. Loans typically require long term policy reforms, recommends policies to
country members
4. Strategic Responses to Foreign Exchange Movements:
a. Strategies for Financial Companies:
i. The Exchange Rate: how companies can make or lose money based
on the exchange rate, how to manage exchange rate risk
1. Main goal to profit from the foreign exchange market
ii. Three strategies to reduce the exchange rate risk or to make
profit from exchange rate:
1. Passive:
a. Spot transactions single shot exchange of one currency
for another, this is called a passive exchange rate policy
because the company does not do much to lower exchange
rate risk
2. Active:
a. Forward / Future transactions one transaction of a
currencies for future delivery you are obligated to buy a
foreign currency at a price decided today; today, you lock in
the exchange rate in order to execute a future operation,
and in 6 months, you lock in that exchange rate for the
purchase of another item in a business contract, no matter
what the actual market exchange rate is
b. Currency swap two transactions, because you only
need a foreign currency for a certain amount of time;
conversion of one currency into another at time 1, with
agreement to revert it back to the original currency at time
2 in the future; the biggest difference there are 2
transactions
b. Strategies for Non financial companies:
i. Currency hedging: a transaction that protects trades and investors
from exposure to the fluctuations of the spot (daily) exchange rate
1. Three types of currency hedging:
a. Obligated:
i. Swap: obligated to swap something in the future at
the exchange rate today
3/6/2013
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b. Disadvantages:
i. Organizationally complex
ii. Difficult to implement
c. Examples usually automobiles
2. Global matrix structure: the structure used to alleviate the
pressure from both global production division and geographical
area structure
a. Difficult to deliver in practice
b. May add layers of management, slowing down decision
speed.
*Example General Motors, has ownership stakes in foreign
carmakers; so a big MNE offers local products through its
relationships with subsidiaries
3. Knowledge Management: the structures, processes, and systems that actively
develop, leverage, and transfer knowledge
a. 2 kinds:
i. Explicit knowledge: codifiable, easy to be transferred
ii. Tacit knowledge: non-codifiable, transfer requires hands-on practice
(based on expertise, training process)
b. Knowledge Management in 4 types of MNEs:
i. Globalizing R&D: a fundamental basis for competitive advantage is
innovation based firm heterogeneity; decentralized R&D in different
locations virtually guarantees persistent heterogeneity
4. Questions
a. What pressure is unique to international competition? Pressure to local
responsiveness
b. Describe 4 strategy choices: 1. home replication strategy 2.
4/15/2013
Monday next week, quiz
Final is on May 3rd , 8:30 AM
Chapter 13:
1. Terms:
a. Human resources management: the set of different activities for hiring
managers; attracting, selecting, and managing employees
b. Staffing: the human resource management activities related to hiring
managers and filling the positions
c. Host country nationals: managers from the host country, from the same
country
d. Parent country nationals: managers from the parent country
e. Third country nationals: managers from neither the host or parent country
f. Expatriates: managers from foreign countries
2. 2 Types of expatriates:
a. Parent country nationals (PCNs):
i. Advantages:
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iii. Mix
iv. Mix
The Role of Expatriates (just TCNs and PCNs)
a. 4 Roles:
i. Strategist: representing interests of the MNEs headquarters, in order
to maximize the wealth of current shareholders
ii. Daily managers: run operations and build local capabilities
iii. Ambassador: representing headquarters interests, build relationship
with host-country stakeholders, represent subsidiary to headquarters
iv. Trainer: for their replacements
Factors in Expatriate Selections:
a. Expatriate failures are high
i. Premature (earlier than expected) return
ii. Unmet business objectives
iii. Unfulfilled career development objectives
b. Causes for failure:
i. Familys inability to adjust to culture
ii. Usually a combination of work-related and family-related problems
c. Situation:
i. Corporation headquarters preferences
ii. Host country subsidiary preferences
iii. Language
d. Individual:
i. Technical ability and experience
ii. Cross cultural ability
iii. Family and spousal attachments
Development for Expatriates and Repatriates:
a. Psychological contract: is an informal understanding of expected delivery of
future benefits
b. Career anxiety
c. Loss of status
d. Cultural re-adjustment
Training and Development for HCNs:
a. In China, for example, the key factor in retaining or losing talent is which
employer can offer training and development opportunities
Compensation for Expatriates:
a. Going rate: you get exactly the same salary as a HCN, In line with the
polycentric approach
i. Advantages:
1. Equally among parent, third, and host country nationals in the
same location
2. Simplicity
3. Identification with host country
ii. Disadvantages:
1. Variation between assignments in different locations for the same
employee
2. Re-entry problem if the going rate in the parent country is less
than that in the host country
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4/17/2013
Chapter 13, continued:
1. Performance Appraisal: evaluation of employee performance for the purpose of
promotion, retention, or ending employment
2. Labor Relations at Home:
a. Firms key concern cut costs, enhance competitiveness
b. Unions concern higher wages and more benefits
c. Threat of job loss v. threat of strike
3. Formal Institutions and Human Resource Management:
a. Formal institutions: every country has rules and regulations governing HRM
b. Informal institution: MNEs from different countries have different norms in
staffing.
4. Questions:
a. What are the four most important roles that expatriate play?
b. What is the relationship between the MNE strategies and the staffing
approaches?
c. Two different systems:
i. Going rate
ii. Balance sheet
5. Quiz Review:
a. Format:
i. 2 T/F
ii. 7 MC
iii. 3 Short Answer
iv. Chapters 7, 9, 10, 11, 12, 13
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c.
d.
e.
f.
g.
4/22/2013
strong currency import more current account deficit
weak currency export more current account surplus
real option with a non equity agreement, the buying company has the option to later
purchase assets to buy the other percent of the company, making the buying company
the major shareholder
80
*Final Friday, May 3
Chapters 7,8,9,10,11,12,13
1. 34 questions, in total
a. MC 17
b. TF - 6
c. Short Answer 11
i. Pay attention to the specific topics on informal institutions, such as
cultural differences, the liability of foreignness
ii. Advantages and disadvantages of first and late movers
iii. Chapter 8 which talks about the different international agreements
and the different levels of integration
1. FTA importing and exporting without tariffs
2. Custom unions
3. Common markets
4. Political unions
iv. Couple of questions over alliances
1. Advantages and Disadvantages
2. Non-equity and equity modes
v. Focused on differentiating or relating concepts
vi. Review the integration responsiveness framework which relates the
strategies with the structures
1. Advantages and Disadvantages
vii. At least one or two questions based on the last chapter about HRM
1. Different components
2. Types of staffing approaches
3. Relationship between staffing approaches and strategy/structures
4. Different compensation methods when to apply one of them
instead of the other advantages and disadvantages
a. Going rate
b. Balance sheet
Review on Monday
4/29/2013
Final Friday May 3 at 9 AM
1. Chapter 6
a. FDI
b. Different Ways to Go Abroad
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7.
8.
i. HCNS
ii. PCNS
iii. TCNS
m. Two additional questions EC upgrades midterm by 4 pts if correct, if youre
wrong you are downgraded on your midterm by 1 pt you have to answer
them both correctly in order to get the points