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Chapter 1 The Rise of Globalization International Monetary System/Fund (IMF) -5 focus areas that accommodate & facilitate the globalization
-the system of exchange rates and international payments that process (Bank’s Strategic Framework):
Globalization ENABLESs countries and their citizens to purchase goof and 1. trade expansion has been a leading factor in global
-ENCOMPASSES the socioeconomic reform process of eliminating services from one another integration
trade, investment, information technology, and cultural and --the global system of exchange rate and international payments 2. Bank’s analytical and advisory role has been
political barriers across countries, which could lead to increased that enables countries to buy good and services from each other. essential
ECONOMIC GROWTH and GEOPOLITICAL INTEGRATION and -CONCEIVED in July 1947, after deducting the in Washington, DC, 3. financial crises of 1997-1998 and 2008-2009
INTERDEPENDENCE among nations of the world. IMF, ship began 4. ROLE as a knowledge and information technology
-began to ACCELERATE after World War II (beginning 1944), with transfer agent to developing countries
the creation and implementation of open-market policies THE IMF AND GLOBALIZATION 5. FOCUSES on eradicating communicable diseases
advocated by international institutions (World Bank, IMF, WTO) -188-member countries as of September 18, 2014, and currently -The World Bank Group’s Developmental Institutions
have 189. (a) International Bank for Reconstruction and Development
*ECONOMIC REFORMS are economic policies that promote -tracks global economic trends and performance -SUPPORTS reconstruction and restructuring of member
private sector, development, competitive markets, market pricing, -alerts its member countries when it sees problem on the horizon countries using funds raised in international capital
freer trade, and deregulation. * -provides forum for economic policy dialog markets.
-disseminate information government on how to implement (b) International Development Association
The fundamental basis of globalization represents FREER economic reforms to meet global challenges -PROVIDES long-term low-interest social sector and
INTERNATIONAL TRADE AND INVESTMENT or the FREE FLOW OF -MAIN PURPOSE: to provide global financial stability infrastructure loans to the poorest members using
GOODS AND SERVICES between countries. -SPECIFICALLY: (1) provide a forum for cooperation on foreign aid funds provided by the rich nation member
international monetary problems; (2) facilitate the sustainable (c) International Finance Corporation.
*Globalization and international trade and investment are growth of international trade, thus PROMOTING job creation, -PROVIDES loans and takes equity position in private
INTERLINKED. * economic growth, and poverty reduction; (3) promote exchange companies of developing countries and works toward
rate stability and an open system of international payments; and developing capital markets in those economies.
Emerging Economies (4) lend countries foreign exchange when needed, on a temporary (d) Multilateral Investment Guarantee Agency
-countries that have been implementing more open trade and basis and under adequate safeguards, to HELP address balance of -PROVIDES political risk coverage for private investments
free-market-policies payment problems made in developing countries.
-the world’s center of economic gravity is shifting toward -WORKS with countries to help them manage or REDUCE global (e) International Center for the Settlement of Investment Disputes
emerging economies credit crisis through analysis and policy advice and technical -WORKS on issues related to foreign investment
assistance in areas such as macroeconomic policy reforms, disputes.
DECOUPLING AND THE MOVE TO A MULTIPOLAR WORLD financial sector sustainability, and exchange rate management
ECONOMIC ORDER The World Trade Organization
*ECONOMIC REFORMS is an economic policy changes that -operation on January 1, 1995
Decoupling promote private sector development, competitive markets, -under the General Agreement on Tariffs and Trade (GATT) began
-fundamental global shift in which industrialized country- market pricing, freer trade, and deregulation. * on 1948
dependent developing economies begin to grow based on their -DEALT with merchandise trade in agriculture, services,
own underlying economic strengths rather than the ups The World Bank inventions, and intellectual property
and downs of the world’s richest countries -CONCEIVED at the Bretton Woods Conference in 1944 -liberation of the trading system is the lowering and/or removing
-AID the reconstructions or Europe after World War II trade barriers
Multipolar World -ROLE: RECONSTRUCTION and RESTRUCTING economies to make -ADDRESSES the rules of trade between nations at a near-global
-a world economy in which the engines of growth could comprise them efficient membership level
the US, the EU, China, India, Brazil, Russia, South Africa rather -OBECTIVES: (1) administering trade agreements; (2) acting as a
than Americans THE WORLD BANK AND GLOBALIZATION forum for trade negotiations; (3) settling trade disputes; (4)
-sees globalization as an OPPORTUNITY to reach global solutions reviewing national trade policies; (5) assisting developing
to national challenges countries with trade policy issues, trough technical assistance and

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AEC35 MIDTERM REVIEWER
training programs; and (6) cooperating with other international THE GLOBALIZATION CONTROVERSY INTERNATIONAL FORMS OF GOVERNMENT
institutional organizations like the IMF and World Bank 1. Job losses and Income stagnation -GOVERNMENT, body of people that sets and administers publicly
2. Sustainable Development and Environmental policy and exercises executive, political, and sovereign power
*INSTITUTIONS is the rules, enforcement, mechanism, and Degradation through customs, institutions, and laws within a state, country, or
organizations that support market transactions. * other political unit.
*SUSTAINBALE DEVELOPMENT an economic development that -NONGOVERNMENT ORGANIZATIONS, include any nonprofit,
Transparency of Political Institutions meets the needs od the present generation without compromising voluntary citizens’ groups that are organized on a local, national,
-the foundations of the globalized business world are POLITICAL the ability of future generations to meet their own needs, whether or international level
(the biggest threats to the systems) environmental, socially, or economically. *
-ADAPTIVE INSTITUTIONS are government organizations that We live in a FLAT WORLD
create strong incentives for private investment and operate under Chapter 1 International Business -Thomas Friedman (2005), “The World is Flat”
s system of checks and balances Reference book - “globalization as a modern phenomenon”
-AACOUNTABILITY is a system of responsibility, such as the GLOBALIZATION -STAGES (1) discovery of the New World; (2) the Great Depression
government, is answerable for its actions -the SHIFT toward a more independent and integrated global and World War; and (3) advances in global electronic
-TRANSPARENCY is system full disclosure and openness that aims economy interconnectivity
to avoid any semblance of corruption and cronyism -CREATES greater opportunity for international business - THREE POWERFUL FORCES:
1. New software and increased public familiarity with
EFFECTIVE Policy Measures that PORMOTE GLOBALIZATION INTERNATIONAL BUSINESS internet
1. Good Governance -relates to any situation where the production or distribution of 2. The incorporation of that knowledge into business and
2. Competitive Markets goods or services crosses country borders personal communication
3. Property Rights -a broad set of entities and activities 3. The market influx of billions of people from Asia and the
4. Anticorruption Policies former Soviet Union who wants to be more prosperous-
*ANTITRUST LAWS are national laws aimed at maintaining STRATEGIC MANAGEMENT and ENTREPRENEURSHIP fast.
competition in all sectors of the economy and preventing -enhances the understanding od international business
monopolistic behavior of firms. * -STRATETEGIC MANAGEMENT, is the body of knowledge that CAGE Framework
answers questions about the development and implementation -by Pankaj Ghemawat, “a world be characterized as “semi
IMPACT OF INFORMATION TECHNOLOGY ON GLOBALIZATION of good strategies and is mainly concerned with the determinants globalized” and “multidomestic”
-DIGITAL ERA, the period of transformation that adjusts lifestyle if firm performance. -to study “barriers to cross-border economic activity
to make the Internet and wireless technologies as a part of -STRATEGY, the central, integrated, and externally oriented -Cultures, Administration, Geography, Economics
everyday life. concept of how an organization will achieve its performance
-BANDWIDTH, the amount of date and other information that can objectives. (SWOT)
be transferred in a second via the internet -ENTREPRENEURSHIP, recognition of opportunities and the use or
1. The Digital Generation creation of resources to implement innovative ideas for new,
2. Expanding the Global Use of Information Technology thoughtfully planned ventures.
3. The Digital Divide Myth -ENTREPEUR, a person who engages in entrepreneurship.
4. How Countries “Leapfrog” into the Internet and Cell SHAREHOLDER ANALYSIS
Phone Era -is a technique use to identify and assess the importance of key
people, groups of people, or institutions that may significantly
*THE WEB the world wide web, abbreviated “www” and influence the success of an activity
commonly known as the web; is a system of interlinked documents
contained and accessed via the internet. * FORMS OF INTERNATIONAL BUSINESS
*DIGITAL DIVIDE the perceived economic gap between countries 1. Government Organizations
or people with access to digital and information technology (and 2. Nongovernment Organizations (NGOs)
its benefits) and those with very limited access, or none at all. *

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Chapter 2 The Evolution of International Business 2. Specialized as a Basis for trade Theory: ABSOLUTE AND 4. Porter’s “DIAMOND” Model of National Competitive
COMPARATIVE ADVANTAGE Advantage
International Business -Adam Smith (British economist), father of free market -Michael Porter (Harvard BS professor), found that
-all commercial transactions, both private and public between and open trade system, recognized the ABSURSITY of TRADE THEORIES broadly explained the basis upon which
nations of the world mechanism and argued that free trade without countries exported certain goods, services, or
restrictions would increase the wealth commodities.
BENEFITS OF TRADE AND FOREIGN DIRECT INVESTMENT (FDI) -BELIEF that free trade encourages countries to -Porter BELIEVED that the trade theories DID NOT
-TRADE specialize in the production of those goods and services explain enough.
-the two-way flow of exports and imports of goods and that they most efficiently produce -Porter ARGUED that firms and not countries conduct
services. -TWO BASIS THEORY: most trade.
-influenced culture, shaped history, raised living (a) Theory of Absolute Advantage -Porter’s HYBRID model was designed to operate within
standards. -the ability of one country to produce a good an environment of government actions and unforeseen
-generates jobs in both the export and import sectors of or service more efficiently than another external events
an economy (b) Theory of Comparative Advantage -CHARACTERISTICS of Porter’s Diamond Model:
-creates winners and losers -the ability of one country that has an absolute (a) Factor Conditions -factor endowment as a
-(open trade) increase competition advantage in the production of two or more goods to basis for international trade.
-FDI (Foreign Direct Investment) produce one of them relatively more efficiently than the (b) Demand Conditions -when domestic
-foreign inflow of capital, technology, and skills to other demand remains high, the number of suppliers
enhance domestic investment and economic growth will also be high.
-creates new well-paying jobs, introduces technologies, 3. Factor Endowments as Basis for Trade Theory: (c) Related and Supporting Industries -the
and enhances the skills of domestic workers HECKSCHER-OHLIN and PRICE EQUALIZATION quality and competitive nature of supplier
-Three Major Ways: -Eli Heckscher and Bertil Ohir (Swedish economists), industries will determine how successful a
1. Greater amount of choices in the availability of goods refined David Recardo’s theory of comparative country will be.
and services advantage and showed that nations primarily export (d) Firm Strategy, Structure, and Rivalry
2. Lower price for goods and services consumes goods and services that intensely use their abundant -FIRM STRATEGY, deals with the way companies
3. Higher living standards factors of production in an industry manage their operations as well
-ATTRIBUTES the comparative advantage of a nation to as the structure of the organization.
*OUTSOURCING, the corporate practice of acquiring or producing its factor endowments: land, labor, capital, and -FIRM STRUCTURE & RIVALRY, address the
quality goods or services abroad at a lower cost thereby technology. competitive structure of industries in a nation.
eliminating domestic production. * -KEY ASSUMPTIONS:
1. perfect competition in the marketplace TWO OTHER CRUCIAL VARIABLES OUT-SIDE DIAMOND that plays
MAJOR THEORIES ON INTERNATIONAL TRADE 2. perfect immobility of factors of production among an important role in the competitiveness of nations: CHANCE and
1. Wealth Accumulation as a Basis for Trade Theory: countries GOVERNMENT.
MENCANTILISM -helps explain why the export of manufactured good in
-a theory od international trade that SUPPORTS the China’s competitive advantage CHANCE -refer to an external shock or development that could
premise that a nation could only gain from trade if it had -FACTOR PRICE EQUALIZATION THEORY (related drastically change or hasten the course of economic
a state surplus theory), states that when factors are allowed to move development.
-FACTORS OR PRODUCTIONS: endowments used to freely among trading nations, efficiency further GOVERNMENT -institutions and policies could help or hurt
produce goods and services; land, labor, capital, and increases, which LEADA to superior allocation of the competitiveness of nations, due to the fact that government
technology production of goods and services among countries. institutions and policies have the potential to affect all four sets of
-TRADE SURPLUS: when the value of exports exceeds the characteristics associated with Porter’s diamond.
value of imports; the opposite of TRADE DEFICIT
*GOVERNMENT POLICY could also stifle demand through
excessive taxation or preserve incentive programs.*

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THE PRACTICE OF TRADE POLICY CURRENT PRACTICE PF “MANAGED” TRADE Chapter 3 Regional Economic Integration
-TRADE POLICY, all government actions that seek to alter the size 1. Socioeconomic Rationale – addresses the study of the
of merchandise and/or service flows from and to a country relationship between business or economic activity and TRANS-PACIFIC PARTNERSHIP (TPP) agreement
1. Tariffs, Preferential Duties, and Most Favored Nation the social life of residents in a nation. -trade agreement between AUS, Brunei, Canada, Chile, JPN,
Status a. Countertrade – agreement in which an exporter of goods or services Malaysia, Mexico, NZ, Peru, SG, Vietnam, US
-TARIFFS, taxes on imports; also known as custom duties to another country commits to import goods services of -a new high-standard trade agreement that levels the playing field
in some countries. corresponding value from that country. for American workers and American businesses, supporting more
-CUSTOM DUTIES, taxes on imports that are collected byb. Export Cartels – a group of countries that could effectively control Made-in-America and higher-paying American jobs
a government agency responsible for regulating imports. export volume to keep their export prices, revenues, and economic -PROMOTE increased trade and economic cooperation within its
-SPECIFIC TARIFF, an import tax that assign a fixed dollar growth stable or high. members (determine the Union’s success)
amount per physical unit. c. Infant Industry Argument -temporary provision of protection to -UNION, could lead to increased sustainable economic growth in
-AD VALOREM TARIFF, a tax on imports levied as a nascent industries that have good prospects of becoming globally the Pacific region
constant percentage of the monetary value of one unit competitive in the medium term.
of the imported good. d. Questionable Labor Practices and Environmental Considerations – 3-1. REGIONAL INTEGRATION
-PREFERENTIAL DUTIES, an especially advantageous or used by developed countries for reasons of unethical labor practices -an ongoing process
low import tariff established by a nation for all or some and violation of basic human rights -INCLUDES: economic, political, or both
goods of certain countries and not applied-to the samee. Health and Safety – every country has the sovereign right to protect -REASON: increase its global competitiveness
goods of other countries. the health and physical safety of its citizens from contaminated -HELPS: small and medium-sized countries scale up their supply
-GENERALIZED SYSTEM OF PREFERENCES (GSP), an imports capacity
agreement where a large number of developed -THROUGH: regional production networks
countries permit duty-free imports of a selected list of 2. Geopolitical Rationale – to sacrifice some economic -tariffs and nontariff are reduce only among member countries
products that originate from specific countries efficiency for the greater good of the country in terms of
-EXPORT SUBSIDY, a negative tariff or tax break aimed at the national security, protection of critical industries, SPATIAL TRANSFORMATION
boosting exports. and international commerce. -process of allowing efficient geographic distribution of business
-EXPORT TAXES, taxes meant to raise export cost and a. National Security – exports of certain types of high- activities within and among countries
divert production for home consumption. technology defense equipment, instruments,
-MOST FAVORED NATION (MFN), an agreement among devices, and components are generally restricted to 3-1a STAGES OF REGIONAL INTEGRATION
WTO countries in which any tariff concession granted by allies and friendly countries. -COUNTRIES’ REASONS: social, economic, security or political
one member to any other country will automatically be b. Strategic Industries – have a significant reasons for regional integration
extended to all other countries of WTO. employment impact on certain sectors of an STAGE 1. ECONOMIC INTEGRATION
2. Nontariff Barriers economy – also known as “national champions”, – occurs when two or more countries join together to form a
-IMPORT QUOTAS, also known as Quantitative when these champions are unable to compete larger economic bloc.
Restrictions (QRs) are regulation that limit the amount or globally. -OBJECTIVES:
number of units of products that can be imported to a c. Embargoes – trade sanction that are imposed upon (1) economic gain
country. a nation to restrict trade with that country. (2) increase economic growth and efficiency (to work together
-VOLUNTARY EXPORT RESTRAINT (VER), a nontariff rather than separately)
barrier in which an efficient exporting nation agrees to (3) raise employment, skills, and quality of life
limit exports of a product to another country for a -PROMOTE: peace and prosperity
temporary period -two more countries may create FREE-TRADE ARE
STAGE 2. FREE-TRADE AREA
-an area in which two or more countries agree to eliminate all
barriers to trade (tariffs, quotas, nontariff barriers-boarder
restrictions

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-at the same time keeping their own external tariffs (within WTO 3-2 THE ECONOMIC GEOGRAPHY OF REGIONAL -Regional trading blocs that are close to world markets such as:
guidelines) against nonmembers INTEGRATION NAFTA North American Free Trade Agreement
STAGE 3. CUSTOMS UNION DR-CAFTA Dominican Republic-Central America Free
-a group of free-trade member countries that have adopted a -REMOVAL OF TRAFFIS & NONTARIFF BARRIERS across national Trade Agreement
common external tariff with nonmember countries borders can enable small and medium-sized firm to consolidate, CARICOM Caribbean Community
STAGE 4. COMMON MARKET/SINGLE MARKET specialize, and gain economies of scale in production CEFTA Central European Free Trade Agreement
-formed when member countries of a customs union remove all -HELP: achieve competitiveness on regional and global scale ASEAN The Associate of South East Nations
SAARC South Asian Association for Regional
barriers to allow the movement of capital and labor within the
3-2a STEPS TO REGIONAL INTEGRATION Cooperation
customs EU European Union
STAGE 5. ECONOMIC & MONETARY UNION 3.2a (i) START SMALL
-formed when member market agrees to implement common -regional integration should have clear
goals and address a well-defined area of 3-2b (ii) REMOTE REGIONS WITH LARGE LOCAL MARKETS
social programs and coordinated macroeconomic policies (fiscal
cooperation. -LARGE LOCAL MARKET gives countries the advantage of
& monetary) that would lead to the creation of a single regional
3-2a(ii) THINK GLOBAL attracting industrial activities
currency and a regional apex central bank
-regional integration should not create -regions with large home markets but located far from world
STAGE 6. POLITCAL UNION
unconnected/isolated countries. markets: Australia, NZ, Brazil, Argentina, Tanzania, South Africa,
-created when member countries of an economic and monetary
3-2a (iii) COMPENSTAE THE LEAST FORTUNATE Angola, etc.
union work closely with one another to arrive at common defense
-external revenue-sharing tariff in 2000 -major markets: U.S, EU, CHINA, INDIA, JAPAN
and foreign policies and behave as a single country
-REGIONAL INTEGRATION GROUP, the
West African Economic and Monetary 3-2b (iii) REMOTE REGIONS WITH SMALL LOCAL MARKETS
3-1b PROS & CONS OF REGIONAL INTEGRATION
Union helps less fortunate members. -bottom billion regions: CENTRAL ASIA; EAST, CENTRAL, & WEST
BENEFITS COSTS AFRICA; PACIFIC ISLANDS
-creating a larger pool of -undermining the most- -regional integration blocs in these countries:
**ECONMIC GEOGRAPHY
consumers with growing income favored-nation status rule, an CIS & SCO Commonwealth Org. & Shanghai Co. Org.
and similar cultures, taste and social essential principle of the WTO -study of principles that govern the efficient spatial allocation of
economic resources & the resulting consequence CACEU Central African Customs & Economic Union
values -imposing laws and APEC Asia Pacific Economic Cooperation
-encouraging economies of regulations that are uniform and -Paul Krugman (American economist), his insights on how
scale in production that at times do not take into economic that have transformed region
-increasing the region’s level account national economic,
-CHALLENGE: to find ways to successfully integrate regionally and
of global competitiveness cultural, &social differences 3-2b MAJOR CLASSES AND CHARACTERIS OF REGIONAL internationally.
-enhancing economic growth -eliminating jobs & INTEGRATION -regions with small countries located far from world markets:
through investment flows increasing unemployment in Kazakhstan, Pacific Island, Africa between the tropics, etc.
-freeing the flow of capital, protected industries -countries within trading blocs that have significantly lowered
labor &technology to the most -losing sovereignty, national trade barriers have done-better economically than others 3-4 THE EUROPEAN UNION (EU)
productive areas in the region independence and identity -HEADQUARTER: Brussels, Belgium
-increasing cooperation, -reducing the powers of the 3-2b (i) REGIONAL BLOCS CLOSE TO WORLD MAEKET -MEMBERS: Sweden, UK, Poland, Hungary, Romania, Bulgaria,
peace, & security National Gov’t -developed countries that seek regional blocs to: Denmark, Belgium, Netherlands, Ireland, France, Spain, Portugal,
-encouraging member states -increasing the probability of -1- expand their growth potential abroad as domestic market Turkey, Finland, Czech Repub., Austria, Italy, etc.
to enhance their level of social rising crime associated with mature -most highly evolved example of regional integration in the world
welfare to match that of the most illegal drugs and terrorism because -2- deliver low-cost manufacturing platforms for locally based -OBJECTIVE: to create a strong, democratic, independent, and
of the ease of cross-border labor firms united Europe based on free-market principles and open
progressive states
movements
economic systems
-ORIGIN: European Coal and Steel Community (ECSC)
---established a common market in coal, steel, and iron

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---France, West Germany, Italy, Belgium, Netherlands, -2- promote regional peace and stability through the rule of law Chapter 4 The International Flow of Fund and Exchange Rates
Luxembourg in 1952 in relationship among countries in the region
---OBJECTIVE: to encourage member countries to cooperate in -THREE PILLARS: Major changes in the world monetary system have had an impact
steel production, preventing these countries from warring with 3.6a ASEAN Security Community (SC) – ensure that on foreign exchange-also called as FOREX- markets over the years.
each other countries in the region live in peace with one another and rely
-next major step: Treaty of Rome in 1957 exclusively on peaceful processes in the settlement if intra- FACTORS THAT CHANGES THE CURRENCY VALUES
---established: European Economic Community (EEC) regional differences. 1. PRICE IMBALANCE
---called for free trade among members as well as a common 3.6b ASEAN Economic Community – create a stable, -Different price levels in different countries for the same
external tariff for nonmember prosperous, and highly competitive ASEAN economic region. goods and services.
3-6c ASEAN Sociocultural Community – ensure that the -due to mispricing or due to different inflation across
EUROPEAN FREE TRADE ASSOCIATION ASEAN workforce is well prepared to benefit from the economic countries
-UK (Trojan Horse), Denmark, Sweden, Finland, Switzerland, integration process. 2. VARYING INTEREST RATES
Austria, Portugal -price levels and debt cost should be the same in
3-7 REGIONAL INTEGRATION IN LATIN AMERICA different countries after considering exchange rates
3-4a TURKEY -LAFTA: Latin American Free Trade Agreement (Argentina, Brazil, Chile, (PARITY THEORY)
-uncertain member of EU Mexico, Paraguay, Peru, Uruguay) create a free-trade zone by 1972 -if not, exchange rates should change to make prices
-only 5% of its land mass in in Europe -MERCOSUR: Mercado Comun del Sur, a progressive tariff reduction. more uniform across countries
-military is powerful in this country
-POPULATION: 74 million 4-1 THE BALANCE OF INTERNATIONAL PAYMENTS

3-4b THE EURO BALANCE OF PAYMENTS

-EU’s single currency -a statement of account that summarizes all transactions
-the crowning success of the EU’s plans to integrate European between the residents of one country and the rest of the world
economies for a given period
-shows how well the country’s economy and government policies
3-5 NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) are performing
-comprehensive free-trade agreement among Canada, US, -TWO MAJOR COMPONENTS:
Mexico (1) current account
-addresses issues ranging from protection of workers’ rights and (2) financial account
the environment
-reduction of tariff and nontariff trade barriers eliminated in 2009 4-1a THE CURRENT ACCOUNT
-OBJECTIVES:
-1- expansion of trade in goods and services through phased CURRENT ACCOUNT
elimination of all trade barriers -driven by activities of consumers and business
-2- protection of intellectual property rights -FOUR SUBACCOUNTS:
-3- creation of institutions to address potential problems 1. Trade Balance – the net of merchandise exports and
merchandise imports.
3-6 ASSOCIATION OF SOUTH EAST ASIAN NATIONS (ASEAN) 2. Services Balance – (shipping, airlines, consulting, insurance,
-HEADQUARTER: Jakarta, Indonesia banking, tourism, software development, etc.) the net of
-MEMBERS: Indonesia, Malaysia, Philippines, SG, Thailand, exports of services and imports of services
Brunei, Vietnam, Laos, Myanmar, Cambodia, 3. Income Balance – the net of investment income from
-OBJECTIVES: abroad and investment income paid to foreigners
-1-accelerate economic growth, social progress, and cultural 4. Balance of Transfer – the net of transfer payments
development between countries based on outflows and inflows.

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AEC35 MIDTERM REVIEWER
5. Current Account Balance – the sum of the four -MANAGED FLOATING EXCHANGE RATE SYSTEM, a system that (GOLD STANDARD), and the fixed currencies of 43 other
subaccounts, which is more important than trade determines the value of some currencies partly by demand and countries fixed to the dollar
balance. supple in the foreign exchange market and partly by active -a global currency system based on a GOLD STANDARD
government intervention in the foreign exchange market. (monetary system that pegs currency values to the
**TRADE DEFICIT is when the country imports more than it export. -FIXED EXCHANGE RATE SYSTEM, s system in which the country market value of gold)
**CAPITAL SURPLUS COUNTRY a country with a current account pegs its currency at a fixed rate to a major currency or basket of -IMF established under Bretton Woods Agreement
surplus. currencies, while the exchange rate fluctuates within a narrow -AUGUST 15, 1971 – USA stops buying and selling gold
**CURRENT ACCOUNT DEFICIT implies that a country needs to margin around a central rate. for the settlement of international transactions
attract capital from abroad in order to finance current account -DECEMBER 17-18, 1971 – USA devalued the dollar
deficit. COMPONENTS OF THE FOREIGN EXCHANGE MARKET against other countries’ currencies (SMITHSONIAN
1. Spot Market AGREEMENT), thereby beginning the breakdown of the
4-1b THE FINANCIAL ACCOUNT -exchange that trades currencies on a real-time basis for 1944 Bretton Woods Agreement
immediate delivery -JANURAY 1976 – IMF members adopted the JAMAICA
FINANCIAL ACCOUNT 2. Bid-Ask Spread AGREEMENT that allowed countries to adopt different
-describes the second half of a country’s balance of payments -the difference between bid and ask prices of a currency exchange rate systems including floating their currencies
-shows how the country’s current account balance is financed -the transaction fee earned by the bank in world market
-THREE SUBACCOUNTS: 3. Forward Market -KEY PRINCIPLES IN THE JAMAICA AGREEMENT:
1. Foreign Direct Investment (FDI) – encompasses -exchange the enables purchases and sales of currencies (1) members could adopt their own exchange
purchases of fixed assets (such as factories and in the future with prices (forward rate) established at a system
equipment) abroad used in the manufacture and sales of previous time (2) a system of global fixed exchange rates
goods and services. would only be implemented if approved by a
2. Security Investments **DIRECT QUOTES, the prices of a foreign currency in dollars or vote of 85% of membership
3. Statistical Discrepancy – reconciles any imbalance the number of dollars per one unit of foreign currency. (3) gold would no longer be a common denomi-
between the current account and financial account to **INDIRECT QUOTES, the reciprocal of the direct quote, or the nator of the monetary system
ensure that all debit and credit entries in the balance of prices of dollar in foreign currency terms. (4) the Special Drawing Right (SDR) as the
payments statement sum of ZERO. **FORWARD RATE, the price at an earlier time of a currency in primary reserve asset of the IMS
terms of another currency established for a future delivery in the -SDR, a basket of currencies consisting of dollars, euros,
**RISK PREMIUM is the added return required by investors for risk forward market. pounds, & yen with relative weights set by IMF based on
associated with a security or asset. It increases the interest rate of **DISCOUNT, in the forward market, the selling of a currency at a trade patterns (for use as a benchmark to value the
the borrowing country. spot rate that is less than the forward rate. Currencies of different countries)
**PREMIUM, in the forward market, the selling of a currency at a 3. The Flexible Exchange Rate System
4-2 THE FOREIGN EXCHANGE MARKET spot rate that is less than the forward rate. -FORCES THAT AFFECTS THE CURRENCY VALUE:
The exchange of currencies takes place in foreign exchange **HEDGE, insurance that reduces future risk. (1) current account balance
markets (FOREX) which consists of a network of international (2) economic conditions
banks (works with exporters and importers) and currency traders 4-3 INTERNATIONAL MONETARY SYSTEM (3) inflation and interest rates
(who buy, sell, and speculate in currencies). 1. MONETARY and INFLATION -CLEAN FLOAT CURRENCY – monetary system with
-printing more money could increase economic activity minimal government interventions; largely market
EXCHANGE RATE -INFLATION, an increase in the prices of goods and determined
-a price at which one currency can be converted to another services caused by the supply of money exceeding the -DIRTY FLOAT CURRENCY – monetary system with
currency demand for goods and services varying degrees of government intervention to maintain
-INDEPENDENT FLOATING EXCHANGE RATE SYSTEM, a system 2. The Bretton Woods Agreement a range of acceptable values against other currencies
that sets the values of major currencies based on their demand -1944 decision to establish a global currency system with -DOLLARIZATION – the practice of using the dollar or
and supply in world markets. the U.S. dollar pegged at a fixed rate of exchange to gold some other foreign currency together with, or instead of,
a domestic currency in a country

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AEC35 MIDTERM REVIEWER
4. The European Euro -UNCOVERED INTEREST RATE PARITY – principle implying that Chapter 5 The Cultural Environment
-the European community established the European expected future spot exchange rates and spot exchange rates set
Exchange Rate Mechanism (ERM) different countries equal 5-1 DEFINING CULTURE AND ITS CHARACTERISTICS
-ERM, a weighted basket of European Currencies Unit -(1) Problems with IRP – (1) empirical theories is mixed -CULTURE: learned behavior; a way of life for one group of people
(ECU) was defined based on a managed-float system living in a single, related, and independent community
with fixed rates varying within 2.25% margins THE BUBLE HAD BURST -CULTURAL GROUPS: Organization (business), Nationalities
5. HARD and SOFT Currencies -the banks, firms, and government could not pay back many loans (country), Subculture
-HARD CURRENCIES, leading world currencies of denominated in appreciating foreign currencies -FOUR CHARACTERISTICS:
developed industrialized countries (US dollar, European -1- culture is not inherited
Euro, Japanese Yen, and British pound) sterling 4-5 FORECASTING EXCHANGE RATES -2- culture is nearly impossible to change
-SOFT CURRENCIES, emerging market countries’ -PPP and IRP theories can be used to forecast future exchange -3- it is the responsibility of the global firm to ascertain the level
currencies that are less stable in value than hard rate of importance of various aspects of culture in the foreign market
currencies and are sometimes pegged to hard currency it serves
values -4- companies’ operations need to recognize and adjust to the
cultural environment existing in the countries the global company
4-2 INTERNATIONAL FLOWS OF GOODS AND CAPITAL serves
-ACCULTURATION: term used to describe the ability of a firm to
LAW OF ONE PRICE adjust to a culture different from its own
-identical goods should sell for the same price in different
countries according to the local currencies 5-2 ELEMENTS OF CULTURE
1. Language
ARBITRAGE 2. Religion
-buying goods in lower priced market and selling them in a higher 3. Values and Attitudes
priced market to make profits 4. Manners and Customs
5. Material Elements
4-4a PURCHASING POWER PARITY (PPP) theory 6. Aesthetics
-theory stating that a basket of goods should have approximately 7. Education
the same prices across different countries 8. Social Institutions
-(i) The Big Mac Index – calculation using the cost of a McDonald’s
restaurant sandwich to assess the relative values of currencies I. LANGUAGE
-(ii) Inflation and PPP Primary types of language:
-(iii) Problems with PPP – (1) failure of PPP for shorter durations 1. Verbal communication
of time, (2) PPP is predictive of exchange rate movements, (3) PPP - Refers to message's actual content - Use of sound and voice to
is less reliable convey message
2. Non-verbal communication
4-4b INTEREST RATE PARITY - Accompanies verbal communication - Involves tone of voice as
-theory stating that interest rates on bonds in different countries well as gestures, body positions, facial expressions, eye contact,
should be the same, as investors would buy and sell these bonds and any other body language
to make arbitrage profits until this condition holds
-COVERED INTEREST RATE PARITY – principle implying that BACKWARD TRANSLATION
forward exchange rates and spot rates on bonds in different -way of avoiding language misinterpretations
countries equal -TECHNIQUE in which a message is translated into foreign
language and someone skilled in that foreign language will

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AEC35 MIDTERM REVIEWER
translate it back to the original language for the interpreted -in the social sciences, social structure is the patterned (v) TIME ORIENTATION
meaning to be compared social arrangements in society that are both emergent -The extent to which a society emphasizes short-run or
from and determinant of the actions of the individuals long-run time horizons.
II. RELIGION -Time horizon means the length of time over which an
-faith/belief 5-3 CLUSTERING COUNTRIES AND REGIONS BY CULTURE investment is made or held before it is liquidated or the
-powerful cultural aspect 1. Hofstede’s Research total length of time a security is expected to be held by
-Muslims, Jews, Christians, etc. 2. Tormpenaars’s Cultural Dimensions an investor.

III. VALUES AND ATTITUDES 5-3a HOFSTEDE’S RESEARCH 5-3b TROMPENAARS’S CULTURAL DIMENSIONS
-VALUES: basic beliefs or philosophies that are pervasive in a -research was primarily conducted with among IBM employees -based on the work of Hostede, Fons Trompenaars added a
society upon 64 countries; number of cultural variables
-ATTITUDES: feelings/opinions -Hofstede’s Five Cultural Levels or Dimensions (i) UNIVERSALISM VS. PARTICULARISM
(i) INDIVIDUALISM VS. COLLECTIVISM (I VS. WE) -Cultures based on universalism try to treat all cases the
IV. MANNERS AND CUSTOM -Involves the worth of an individual versus the worth of same, even if they involve friends or loved ones. The
- the way a society does a group of which that individual belongs. focus is more on the rules than the relationship.
-INDIVIDUALIST: Individuals are expected to take care of -On the other hand, cultures based on particularism will
V. MATERIAL ELEMENTS only themselves and their immediate families. find relationships more important than rules. You can
- Demonstrated by a country's infrastructure -COLLECTIVIST: Individuals can expect their relatives or bend the rules for family members, close friends, or
-Enables Society to Function- Economic, social, financial and members of a in group to look after them in exchange for important people.
marketing framework unquestioning loyalty. (ii) NEUTRAL VS. EMOTIONAL
● Economic- Transportation, energy, communications (ii) POWER DISTANCE -In a neutral emotion are controlled, whereas in an
●Social- Housing, medical services, educational institution -Refers to egalitarianism (equality) versus authority. emotional culture emotion is expressed openly and
● Financial- banks -HIGH POWER DISTANCE COUNTRIES are those where spontaneously.
● Marketing- research and advertising firms superiors and elders are treated with deference and (iii) SPECIFIC VERSUS DIFFUSE
respect. -In a specific culture, people tend to keep their personal
VI. AESTHETICS -LOW POWER DISTANCE COUNTRIES are more and work life separate. These cultures don’t see an
-Color, form and music Color; packaging variable; egalitarian. overlap between the two spheres.
-represents different things in different countries (iii) MASCULINE VS. FEMININE -In a diffusive culture, people tend to see their personal
-This dimension DOES NOT refer to the position or role and work life as interconnected. These cultures believe
VII. EDUCATION of women in society. that objectives can be better achieved when
-major factor in explaining economic growth -It is the extent to which a society values intentionally relationships are strong. As such, in these cultures work
VIII. SOCIAL INSTITUTIONS masculine attributes (assertive, competitive, etc.) or colleagues socialize with each other outside of work
-how people relate to one another within group settings in a traditionally feminine ones (modesty, caring for other, more.
society. etc.). (iv) ACHIEVEMENT VS ASCRIPTION
-examples: - Families - Churches - Workplaces – Friends (iv) UNCERTAINTY AVOIDANCE -In an achievement culture, you earn status through
-REFERENCE GROUPS -The extent to which societies tolerate risks—or are risk knowledge or skill. Job titles are earned and reflect this
-groups that are important to individuals. averse. knowledge and skill. Anyone can challenge a decision if
-can be those of which people are already a member -It expresses the degree to which the members of a they have a logical argument.
-can be those to which people aspire to belong society feel uncomfortable with uncertainty and -In an ascription culture, you are given status based on
-SOCIAL STRATIFICATION ambiguity. The fundamental issue here is how a society who you are. This could be because of your social status,
-groups at the top of the social pyramid exert a great deal deals with the fact that the future can never be known: your education, or your age. Power, title and position
of control over those at lower levels of the pyramid. should we try to control the future or just let it happen? matters.
-SOCIAL PYRAMID -The lower the uncertainty avoidance, the more risk
taker.

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AEC35 MIDTERM REVIEWER
COMMUNICATION -important elements: rocks, trees, clouds, skies Chapter 6 The Legal and Political Environment of Global Business
1. VERBAL LANGUAGE -INHWA, Korean philosophy stressing harmony among
-Language is one of the more conspicuous expressions of culture. unequal, loyalty to parents and authority figures, and 6-1 POLITICAL SYSTEMS
-Language or words become a code, and you need to understand superiors being responsible for the well-being of Greek for “rule by the people”; form of
the word and the context. subordinates DEMOCRACY government in which all citizens have a
2. BODY LANGUAGE 3. CHINA right to vote.
-represents a veritable legend to your emotions. Being able to -GUANXI, Chinese philosophy denoting friendships ATHENIAN The purest form of democracy, in which all
suitably read—and broadcast among unequal and unlimited exchanges of favors; it is DEMOCRACY audit citizens vote directly on matters
-can significantly increase your chances of understanding and not based on sentiment, emotions, or a group affecting the community.
being understood. orientation REPRESENTATIVE For of government in which citizens cote to
3. ETHNOCENTRISM 4. ARAB COUNTRIES DEMOCRACY elect given individuals to serve as their
-the view that a person’s own culture is central and other cultures -avoid sitting so that the sole’s one show is shown representative for a certain period of time.
are measured in relation to it. -left hand is unclean
System of government in which individuals
-It’s akin to a person thinking that their culture is the “sun” around -good postures is imperative
TOTALITARIAN govern without the support or consent of
which all other cultures revolve. -do not inquire about Arab wives
GOVERNMENT the citizenry; for example, a military
-do not overly effusive when praising the possession of dictatorship.
CULRURAL DIMENSIONS AND CONDUCTING BUSINESS IN Arab hosts
INDIVIDUAL COUNTRIES -modest dress is appropriate (women)
6-2 NATIONAL ECONOMIC IDEOLOGIES
1. JAPAN -divert from topic initially discussed, then return to it
An economic ideology where the
-a slight bow and handshake are appropriate 5. LATIN AMERICA
government/state basically owns and controls
-business card etiquette is important (Japanese and -understand that potential customers want to develop a
COMMUNISM all major factors or production and is
English information) personal relationship before doing a business with
philosophically an economically classless
-it is not appropriate to look directly into the eyes of a foreign executives
society.
Japanese hosts -not conscious about time as are North Americans
An economic ideology where the
-let the Japanese hosts know your title and rank (prefer -not rushed as workers from US
SOCIALISM government/state plays a strong role in the
high-ranking individuals) -if not today then tomorrow-or next day
economy and may own stakes in certain
-group orientation rather than individualistic one “The -not as immersed in their work as the businesspeople in
businesses.
peg that stands out gets hammered down.” (old Jan the US
An economic ideology where businesses are
saying) -motto: “We work to live” not “We live to work”
CAPITALISM privately owned, strong individual incentives
-expect foreign business representatives to arrive
exist, and the government plays very little role
prepared and to have decision-making authority
in the economy.
-third party referential IMPOTANCE OF CULTURAL FOR MANAGING AND MARKETING IN
2. KOREA OVERSEAS MARKETS
-older gen are respected for their knowledge and 1. Management Styles 6-3 POLITICAL RISKS, ECONOMIC RISKD, AND CORRUPTION
wisdom (gray hair is viewed as positivity) 2. Production Development and Management The risks that economic problems or
-#1 is good, #4 signifies death of failure 3. Advertising Campaigns ECONOMIC mismanagement in a given country will have a
-children are not supposed to say their parents’ names 4. Communication RISKS meaningful negative impact upon the conduct
-younger sibling are not allowed to use the names of of business in that country.
their older siblings
-YANGBAN, noble class Currency devaluation and Conversion
-WE is more important than I restrictions are some of the economic risk in
- older gen eat first followed by younger ones businesses.
-do not show backside when meeting a colleague The risks that political forces or problems in a
-teachers: waling in their shadows is viewed as impolite given country will have a meaningful negative

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AEC35 MIDTERM REVIEWER
POLITICAL impact upon the conduct of business in that PUBLIC CORRUPT PRACTICES ACT **COLLUSION – practice of companies acting in a manner that
RISKS country. -a US aw that prohibits US companies from bribing or otherwise secretly thwarts competition among themselves.
Nature of Political Risks: corrupting foreign government officials in order to win foreign **MONOPOLY – situation where there is only a single seller of a
1. Micropolitical Risk – only affects a government contracts or obtain other foreign government product in an industry, and there are very high barriers to enter
certain industry or set of firms in a assistance for their businesses. this industry.
given country. **CAVEAT EMPTOR – “buyer beware”; involves placing the
2. Macropolitical Risk – essentially 6-4 THE LEGAL ENVIRONMENT burden of determining product safety on consumers.
affects all businesses in a given LEGAL 1. Civil Law Legal Systems **CAVEAT VENDITOR – “seller beware”; involves placing on
country. SYSTEMS -a legal system based on a manufacturers/sellers of products the burden of making sure
A situation where businesses are able to comprehensive listing of legal rules in products are safe or at least clearly and explicitly warning
illegally alter relevant private/public decision sets of written codes of law consumers about the potential safety risks of said product.
CORRUPTION making by way of bribes, kickbacks, blackmail, -real power lies with the legislative **LITIGATION – involves bringing a dispute to a publicly or
extortion, and related activities. branch governmentally run court of law for resolution.
Two types of business corruption: 2. Common Law legal Systems **ARBITRATION – an alternative dispute resolution process
1. Private Corruption – involving other -a legal system where legislative bodies whereby the parties designated a neutral private person or group
private businesses, individuals, or generally enact less specific legal rules of persons to hear and decide the case.
groups. giving judges/courts considerable
2. Public Corruption – the practice of authority in interpreting these rules 6-5 INTELLECTUAL PROPERTY PROTECTIONS
making illegal payments to based on precedent and other factors The limited monopoly rights legally granted by a nation to the
government officials or engaging in -“free speech” creator of intellectual property.
blackmail, extortion, or other related 3. Theoretical Law Legal Systems
activities in order to obtain -a legal system based on a religious INTELLECTUAL PROPERTY
government contracts or document and religious teachings -property that us the product of intellectual rather than physical
governmental approval for business CRIMINAL Law that establishes which violations of a activities
activities. LAW nation’s laws are crimes punishable by possible
incarceration. PATENT The right granted to the inventor of a product
*economic risks are not independent of political risks.* CONTRACT The body of law governing legally enforceable or process that excludes other from selling,
LAW agreements between parties to engage in making, or using the invention or a certain
TERRORISM economic exchange. period of time.
-involves unlawful acts or violence threatening the physical safety TAX LAW The body of law dealing with governmental TRADEMARK A distinctive phrase, name, word, picture,
of others levying of taxes on individuals and corporations. symbol, or design, or a combination of these,
PRODUCT The law that establishes the standards or that identifies a given business’s services or
TERRORISM RISK INSURANCE ACT OF 2002 SAFETY LAW product safety to which the manufacturers and product and is owned by said business.
-a U.S. law that after a certain deductible provides U.S. businesses sellers of products are to be held. COPYRIGHT The exclusive legal right of authors,
government insurance coverage for the risk of terrorism DISPUTE The law governing how disputes arising in the playwrights, publishers, artists, and
-in response to the September 11 attacks SETTLEMENT conduct of global business are stelled. composers have to publish and disseminate
LAW their work as they fit.
OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) ANTITRUST Laws to promote “fair competition” among
-a U.S. government agency that sells political risk insurance to U.S. LAW businesses. **GENERICIZED TRADEMARK – a trademark that has become so
businesses operating in countries with which the U.S. has a well known or colloquial that is now describes s general class of
bilateral investment treaty **TAX HAVEN COUNTRIES – countries with little or no tax product or service, as opposed to a specific product or service as
transparency intended by the trademark’s owners.

CONTRATISTA, WENDELLIN