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 Iceberg Model of Culture
The surface --> unspoken rules --> unconscious rules
Any message processed independent of the written or spoken word
Low versus High Context Communication
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
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
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
Phases of Cultural Adjustment
Honeymoon, culture shock, adjustment, mastery
Preparing for Culture Shock
Cultural training, language training, practical training
Rate at which one currency is converted into another
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
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
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.
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.
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
Spot Exchange rates: Exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day
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
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.
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
Law of One Price
In an efficient market, all identical goods must have only one price
Big Mac Index
Local-currency under/over valuation against the dollar
How increasing the money supply impacts exchange rates
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
Fisher Effect / International Fisher Effect
Nominal interest rate = real interest rate plus the expected rate of inflation
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
Investor Psychology and Bandwagon Effects
Play a major role in short term movements of exchange rates
Efficient Market School
Efficient Market: financial markets cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis
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
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
Currency Convertibility: Freely
Freely: residents and nonresidents can purchase unlimited amounts of a foreign currency with it.
Currency Convertibility: Externally
Externally Convertible: only nonresidents may convert it into a foreign currency.
Currency Convertibility: Nonconvertible
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.
Fixed Exchange Rate Systems Benefits/Drawbacks
Benefits: Encourage monetary discipline, provide predictability.
Drawbacks: Limit flexibility to deal with economic problems.
Drawbacks: Volatility of exchange rates, currency speculation.
Exchange Rate Regimes: Formal Dollarization
the currency of another country circulates as the sole legal tender
Exchange Rate Regimes: Fixed
the values of a set of currencies are fixed against each other at some mutually agreed on exchange rate.
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
Exchange Rate Regimes: Pegged
the value of one currency is fixed relative to a reference currency
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.
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
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
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
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)
Cost of Capital
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 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.
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 and Dangers of Financial Globalization
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
The Value Chain: Primary versus Support Activities
Collection of activities that are performed to design, manufacture, market, deliver, and support a product
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
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.
Pressure for local responsiveness
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
Control Systems: Personal
use personal contact with subordinates
Control Systems: Bureaucratic
use budgets, capital spending rules and procedures to direct the actions of sub-units
Control Systems: Output
use objective performance metrics such as profitability, productivity, growth, market share, and quality
Control Systems: Cultural
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
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