Management Study Guide Essay

exacting Heights Episode 3 (Chapters 11-14) avail competent at online at http//www.pbs.org/wgbh/commandingheights/lo/ point/index.html With communism discredited, much and more populations harness their fortunes to the global unbosom-market. China, Southeast Asia, India, east Europe and Latin America all compete to attract the actual dry lands directment great, and tariff barriers fall. In the United States republi domiciliate and Democratic administrations both embrace unfettered globalization over the objections of unionized labor. But as new technology and ideas drive profound frugal change, unforeseen events unfold. A Mexican frugalalal meltdown sends the Clinton administration scrambling. Internet-linked pecuniary markets, unrestricted cracking gait of flows, and floating currencies drive levels of ideational investment that overshadow dish out in actual goods and services. Fueled by electronic capital and a global work superpower ready to adapt, entrepreneu rs create multinational corporations with military ratings greater than undefiled national economies.When huge pension funds go search higher(prenominal) returns in emerging markets, enterprise flourishes where poverty once ruled, al one endangerment grows, too. In Thai democracy the huge reservoir of available capital proves kickoff a blessing, then a curse. Soon all Asia is engulfed in an scotch crisis, and financial contagion spreads throughout the world, until Wall Street itself is threatened. A whiz global market is now the central economic reality. As the force of its effects is felt, popular unease grows. Is the brass just too composite to be controlled, or is it an insiders game played at outsiders expense? youthful centers of opposition to globalization framing and the debate turns violent over who allow rewrite the rules. Yet prosperity continues to spread with the expansion of trade, even as the gulf widens further amongst rich and poor. Imbalances too dangero us for the system to ignore now drive its s soak upholders to devise new means to imply the dispossessed lest, once again, terrorism and war destroy the st force of a deeply interconnected world.The Bush Bailout Plan (Rounds 1 and 2) Round 1 Allow the Treasury to borrow up to $700 billion to buy mortgage-related assets from US financial institutions over the next 2 years. May stabilize the capital markets ( could protect investment and retirement funds) MAY stabilize housing charges. Consequences of doing nobody -Small businesses forget fail. -Companies whitethorn not be able to make paysheet -People, even those with good credit records, may not be able to get credit for mortgages, car loans, student loans, or credit cards. -People impart lose jobs. Round 2 Same deal with same workable benefits. House version of the bill $350 billion upfront $350 billion later unless congress holds it bandaging. -NO new speciousen parachutes if the institution sells more than $300 trilli on in assets -Must try to claw back past bonuses if based on misleading financial statements -No specieen parachutes when the treasury has ownership stake in the solid (.ie., it is failing).Defined Contri aloneion Retirement Plans A decided parcel plan provides an individual account for apiece participant. The benefits be based on the amount contributed into the plan and argon also affected by income, expenses, gains and loses. on that point atomic number 18 no promises of a set monthly benefit at retirement. Some examples of defined contribution plans include 401(k) plans, 403(b) plans, employee production line ownership plans and realize sharing plans. Contagion The tendency to spread, as of a doctrine, influence, or randy state. When one nations economic system is negatively affected be beget of changes in the asset PRICES of another agriculturals financial market exotic Direct enthronization Is when a quick invests resources in facilities to produce and/or mar ket a product in a strange dry land. even FDI versus Vertical FDI Horizontal FDI investment in the same industriousness in which a squiffy ope range at home. Vertical FDI investment in an industry that provides inputs for a planetary houses municipalated operations or that sells the outputs of the firms domestic operations. backward Vertical FDI versus Forward Vertical FDI- Backward vertical FDI an investment in an industry abroad that provides inputs for a firms domestic deed processes. Forward Vertical FDI an investment in an industry abroad that sells the outputs of a firms domestic ware processes. BACKWARD vertical means that there are more places to back up build the product. Stock versus Flow of FDI Stock flow is the total salt away harbor. Flow of FDI is the value over time. Gross Fixed chief city composition GFCF is a flow value.It is usually defined as the total value of additions to fixed assets by resident producer enterprises, less disposals of fixed ass ets during the one-quarter or year, plus additions to the value of non-produced assets ( much(prenominal) as discoveries of mineral deposits, or land improvements). Greenfield Investment Establishing a new operation Acquisition When one firm buys an interest in another firm Merger When dickens firms equal to integrate their operations on a copulationly co-equal basis.Exporting The sales symmetry of products produced in one untaught to residents of another sphere Licensing when one firm (the licensor) grants the right to produce its product, use its production processes, or use its grade name or trademark to another firm (the licensee) Tacit versus systemise Knowledge Tacit knowledge information that is intuitive and difficult to order or codify in writing. (Can be gained through personal go or interaction. Shared knowledge might be dispersed throughout the compevery.) Theoretical Explanations for FDI Transportation cost, Market Imperfections, Strategic Behavior, Pr oduct Life Cycle, and Location-Specific Advantages Impediments to the deal of Know-How Impediments to the sale of know-how explain why firms prefer horizontal FDI to licensing. These impediments arise when (a) a firm has valuable know-how that cannot be adequately protected by a licensing contract, (b) a firm needs tight control over a conflicting entity to maximize its market share and earnings in that country, and (c) a firms skills and know-how are not amenable to licensing. Multi-Point Competition Arises when two or more enterprises encounter each other in distinguishable neighbourhoodal markets, national markets, or industries. The Radical, promiscuous Market and Pragmatic nationalism Views of FDI Benefits and Costs of FDI for a innkeeper solid ground Resource transfer effects, utilisation effects, balance of payments effects, effect on competition and economic growth. Host country benefits from initial capital inflow when MNC establishes businessFINANCIAL CREDIT Ho st country benefits if FDI substitutes for imports of goods and servicesCURRENT ACCOUNTCREDIT Host country benefits when MNC uses its opposed marcher to export to other countriesCredit on CURRENT ACCOUNT Resource-Transfer set up great(p), Technology and Management Employment set up Direct, Indirect, Substitution, and Acquisition Restructuring -Mergers and acquisitions are quick to execute.-Foreign firms have valuable strategic assets that would be venturey and time down to develop. -Acquiring firm believes it can use its core competencies to increase the qualification of the acquired firm. Balance-of-Payments Effects of FDI for the Home and Host Countries Home country The balance of payments account is amend by the inward flow of repatriated earnings. The balance of payments account is improved if the foreign subsidiary needs home country equipment, component parts, etc. matter Sovereignty Sovereignty is the exclusive right to control a directment, a country, a natio n, or oneself. A sovereign is the supreme lawmaking authority. Benefits and Costs of FDI for a Home Country Balance of payments effects, employment effects. Home Country Policies to Encourage and Restrict Outward FDI Restrict Limits on capital outflows, impose incentives to invest at home, Nation-specific prohibitions Encourage Foreign Risk Insurance, Capital Assistance, impose income Incentives to Invest Abroad, governmental Pressure.Host Country Policies to Encourage and Restrict inwards FDI Restrict Ownership Restraints Encourage To gain from the resource-transfer and employment effects of FDI, to detain FDI away from other potential host locations. Performance Requirements An expectation rigid on a foreign direct thingy requiring them to do certain things handle having around local employees. Basically, this puts restrictions on them like local production extremitys. regional Economic desegregation refers to agreements among countries in a geographic region to sc orn and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production amongst each other. Levels of Economic Integration impoverished Trade eye socket Remove native Barriers Customs sum total Common External Barriers Common Market disembarrass Movement of Factors Economic Union Common Economic Policy Political Union Political Integration The Case for and the Case against Regional Integration For Increases world production, stimulates growth, regional economic integration can provide special gains from free trade beyond the international agreements such as GATT and TWO.Against a regional trade agreement is beneficial only(prenominal) if it creates more trade than it diverts. Impediments to Regional Integration Nation as a whole may benefit but certain groups within countries may be hurt. Concerns active loss of national sovereignty and control over the nations sovereignty and control over the nations monetary, fiscal and t rade policies. Trade conception versus Trade Diversion When an in high-octane non fragment nation replaces an cost-effective member nation (NAFTA). Like Mexico replacing China in the textile business. humanity occurs when free trade leads to the substitution of inefficient domestic production for efficient production in another member country.Diversion Occurs when efficient non-member production is re position by inefficient production by a member nation as a result of high trade barriers for non-members. The European Union (EU) is composed of 27 member countries, covers an area of 4 million unbent kilometers and has approximately 460 million inhabitants. The EUs member states combined match the worlds macroscopicst parsimony by GDP, the seventh largest territory in the world by area and the third largest by population. Political construction of the European Union European Commission, Council of the European Union, European Parliament and butterfly of Justice Optimal Cur rency Area In economics, an optimum property area (OCA), also cognise as an optimal bullion region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single gold. It describes the optimal characteristics for the merger of currencies or the creation of a new capital. Copenhagen Criteria are the rules that define whether a nation is eligible to join the European Union.The criteria require that a nation have the institutions to preserve elected governance and human rights, a functioning market economy, and that the nation accept the obligations and intent of the EU. The Lisbon conformity The Treaty of Lisbon (also known as the Reform Treaty) is a accord designed to streamline the workings of the European Union (EU) with amendments to the Treaty on European Union (TEU, Maastricht) and the Treaty establishing the European federation (TEC, Rome), the latter cosmos renamed Treaty on the Functioning of the European U nion (TFEU) in the process.The utter aim of the treaty is to complete the process started by the Treaty of capital of The Netherlands and by the Treaty of Nice with a view to enhancing the efficiency and democratic legitimacy of the Union and to improving the coherence of its action. The North American Free Trade Agreement (NAFTA) Pros and Cons of NAFTA Pros Labor intensive industries move to Mexico, resulting in rectify resource allocation, Mexico gets investment and employment, increased Mexican income to buy US/Canadian goods, demand for goods increases jobs, consumers get lower prices. Cons Loss of jobs to Mexico for people who dont have other employment options, Mexican firms have to compete against efficient US/Canadian firms, environmental degradation, loss of national sovereignty.The Andean Community The Andean Community is mainly a trade block erst called the Andean Group (Grupo Andino, in Spanish) which saw light after the Andean Pact (Pacto Andino) or more formally t he Cartagena Agreement (Acuerdo de Cartagena) was signed in 1969, in Cartagena (Colombia). Mercado Comn del Sur (MERCOSUR) Argentina, brazil nut, Paraguay, Uruguay, and Venezuala. Was originally envisioned as a common market but has yet to reach that goal. Critics contend the agreement results in more trade diversion than trade creation as a result of the high external tariffs. Free Trade Area of the Americas was a proposal to expand NAFTA to include all countries in the westward Hemisphere, except Cuba. This region has 850 million people and a $13.5 trillion economy. negotiation are stalled and stronger support would be needed by the USA and Brazil for this agreement to become a reality. Association of Southeast Asian Nations (ASEAN) / ASEAN Free Trade Area In dosia, Malaysia, Philippines, capital of Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia.Total population of 500 million, GDP of US $740 billion, and a total trade of US $720 billion A free trade area amo ng some of the nations exists, but several nations are refusing to lower all tariffs. Asia-Pacific Economic Cooperation (APEC) Founded in 1990 to promote open trade and economic cooperation. Currently has 21 members including the United States, Japan and China. Members account for 57% of the worlds GNP and 46% of global trade. Despite little progress, it could potentially become the worlds largest free trade area. Fiscal versus monetary Policy Market economies have regular fluctuations in the level of economic activity which we call the business motorcycle. It is convenient to think of the business cycle as having ternary phases. The first phase is expansion when the economy is outgrowth along its long call trends in employment, output, and income. But at some point the economy testament overheat, and suffer rising prices and interest place, until it reaches a turning point a peak and turn downward into a recession (the second phase).Recessions are usually brief (six to n ine months) and are attach by travel employment, output, income, prices, and interest rates. Most significantly, recessions are marked by rising unemployment. The economy get out hit a loafer point a trough and rebound into a strong recuperation (the third phase). The recovery will enjoy rising employment, output, and income while unemployment will fall. The recovery will gradually slow down as the economy once again assumes its long term growth trends, and the recovery will transform into an expansion. Foreign Exchange Market a market for converting the bullion of one country into the money of another. Exchange Rate the rate at which one coin is converted into another. Foreign Exchange Risk the risk of an investments value changing due to changes in the coin supersede rates. Arbitrage the purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy.Currency Speculation short-term movement of funds from one c urrency to another in hopes of profiting from shifts in exchange rates. Spot Exchanges the exchange rate at which a foreign exchange dealer would convert one currency to into another currency on that day. Forward Exchanges the 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 interchange on a Discount versus Selling at a Premium Currency Swaps A currency flip-flop (or cross currency swap) is a foreign exchange agreement mingled with two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. Economic Theories of Exchange Rate Determination Law of champion Price The law of one price is an economic law utter as In an efficient market all identical goods essential have only one price.The intuition for this law is that all sellers will flock to the highest prev ailing price, and all buyers to the lowest current market price. In an efficient market the convergence on one price is instant. purchase Power Parity The purchasing power parity (PPP) theory uses the long-run equilibrium exchange rate of two currencies to equalize their purchasing power. positive by Gustav Cassel in 1920, it is based on the law of one price the theory states that, in an ideally efficient market, identical goods should have only one price. Big Mac big businessman The Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in disparate countries. As stated in The Economist, it seeks to make exchange-rate theory a bit more digestible In 120 nations the big mac is the same.How Increasing the capital Supply Impacts Exchange rate Price Discrimination Price unlikeness or yield management occurs when a firm charges a dif ferent price to different groups of consumers for an identical good or service, for reasons not associated with costs. pekan Effect / International Fischer Effect Real versus Nominal Interest Rates 8% interest + 2%inflation = 10% nominal interest. $ deoxycytidine monophosphate on $1000 loan. Investor Psychology and Bandwagon Effects The Efficient Market train versus the Inefficient Market School Efficient Those who believe the foreign exchange market actually predicts things accurately. Fundamental versus Technical Analysis Currency Convertibility Freely, Externally, and Nonconvertible Currencies Capital Flight Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength.This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country (depreciation in a variable exchange rate regime, or a forced devaluation in a fixed exchange rate regime). traffic versus Translation versus Economic Exposure Economic exposure the extent to which a firms future international earning power is affected by changes in exchange rates. Lead versus lock Strategies Lead an attempt to nail foreign currency receivables when a foreign currency is expect to depreciate.Lag An attempt to delay the hookup of foreign currency receivables if that currency is judge to appreciate. Delay paying foreign currency payables if the foreign currency is expect to depreciate. International Monetary System are institutional arrangements countries adopt to govern exchange rates. Exchange Rate Regimes Formal Dollarization, Fixed, Currency Boards, Pegged, Dirty/Managed Floats and on an individual basis Floating The Gold Standard Pegging currencies to gold and guaranteeing convertibility is known as the gold touchstone. Gold P ar Value The amount of a currency in an ounce, one ounce of gold was referred to as the gold par value.The Bretton forest Exchange Rate System Created a fixed exchange rate system where the countries agreed to peg their currencies to the US dollar which was convertible to gold at $35 an ounce. Countries agreed to defend the value of their currencies to within 1% of par value. Currency, Banking and Foreign Debt Crises Currency speculators believed that the devaluation of the dollar was inevitable. President Nixon dropped the gold standard conversion and the dollar was devalued. Following a second round of speculative attacks, the US dollar was allowed to float against other world currencies. Concerns nigh the IMFs Policy Prescriptions The system of adjustable parities allowed for the devaluation of a countrys currency by more than 10 percent if the IMF agreed that a countrys balance of payments was in fundamental disequilibrium. Moral Hazard arises when people behave recklessl y because they know they will be saved if things go wrong. Capital Market The capital market is the market for securities, where companies and governments can grow longterm funds.The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the capital markets in their designated countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the petty(a) market, where existing securities are traded. Cost of Capital The cost of capital is an expected return that the provider of capital plans to earn on their investment. Initial unexclusive Offering Initial public offering (IPO), also referred to simply as a public offering, is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, young companies seeking capital to expand, but can al so be done by large privately-owned companies looking to become publicly traded. Commercial Banks versus Investment Banks Equity Loan An rightfulness loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $100,000, but does not shortly have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on call placed by the lender of the equity loan.Debt Loans A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. Corporate Bonds A Corporate Bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. domineering Risk In finance, Systemic Ri sk is that risk which is common to an entire market and not to any individual entity or component thereof. It can be defined as financial system instability, potentially catastrophic, ca utilize or exacerbated by idiosyncratic events or conditions in financial intermediaries1. It refers to the movements of the whole economy and has wide ranging effects. It is also sometimes erroneously referred to as systematic risk.Portfolio Diversification By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. The most significant consequence of this choice is that investors can transfigure their portfolios internationally, thereby reducing their risk to below what could be achieved in a purely domestic capital market. Drivers of the Global Capital Market cultivation Technology Financial services is an information-intensive industry. It draws on large volumes of information about markets, risks, exchange rates, interest rates, creditworthiness, and so on. It uses this information to make decisions about what to invest where, how much to change borrowers, how much interest to pay to depositors, and the value and risk of a range of financial assets including corporate bonds, stocks, government securities, and currencies.Deregulation many restrictions have been crumbling in the US since the early 80s. In this part, this has been a solution to the development of the Eurocurrency market, which from the beginning was outside of national control. Hot Money In economics, hot money refers to funds which flow into a country to take advantage of a favorable interest rate, and therefore obtain higher returns. They influence the balance of payments and strengthen the exchange rate of the recipient country while weakening the currency of the country losing the money. These funds are held in currency markets by speculators as opposed to national banks or domestic investors. As such, they are highly vo latile in Mexico and East Asian financial crisis. Patient Money Selling land in large blocks under frontier conditions is to sell at a time in the beginning it begins yielding much if any rent. It is bid in by those a couple of(prenominal) who have large discretionary funds of patient money.Eurocurrency Eurocurrency is the term used to describe deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in. For example a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency deposit, or more specifically a Eurodollar deposit. Attractions and Drawbacks of the Eurocurrency Market Attractions Lack of government regulation. Drawbacks When depositors use a regulate banking system they know that the probability of a bank failure that would cause them to lose their deposits is very low. Secondly, borrowing funds internationally can queer a company to foreign exchange risk. Reserve Requirement s The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum militia each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.Foreign Bonds vs. Eurobonds A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world for example in Singapore or Tokyo. Attractions of the Eurobond Market Absence of regulatory interference. Less stringent revealing requirements than in most domestic bond markets. A favorable tax status. The Impact of Exchange Rate Risk on the Cost of Capital Benefits and Costs of Financial Globalization Inter-Temporal Trade Consumption smoothin g usually between advanced economies and developing economies. Developing economies need money NOW.Capital Mobility The ability of money to cross national borders. The free flow of money in and out of a country. Impossible Trinity The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of Impossibility or Unholy Trinity) is the possibility in international economics that it is impossible to have all three of the following at the same time Exchange Rate Stability, single-handed Monetary Policy, and Capital Mobility. You can only have 2 of these 3 things at the same time ever. The Exchange Rate is simply the relative price of currencies. For example It tells you how many Euros you can get for a dollar.A government has to main monetary policies it can use The Fiscal Policy, or the Monetary Policy The Fiscal Policy concerns government expenditures and tax collection The Monetary Policy concerns the interest rate in the economy. The interest rates are established to help stabilize the economy.