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International Management (Fach) / Definitions (Lektion)

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• Challenges of Multilateral System - global balance of power is shifting (US vs. China vs. World)- multilateral cooperation is challenged when states choose to solve their problemy bilaterally - liberal - liberal values, standards and rights are under pressure- lack of efficiency - world is facing new problems that the multilateral system is not ready to handle
• Free trade when a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
• Benefits of free trade - allows a country to specialize in products that can be produced most efficiently in that country- creates new entrepreneurial opportunties- expand the choice of goods and services- better choices for consumers and firms- better worker wages- higher living standards for consumers (because low prices)- greater prosperity in poorer countries
• Mercantilism - 16-18th- a countrys wealth measured by its holding of gold and silver- should be accumulated by maximizing exports and limiting imports via tariffs
• Theory of Absolute/Comperative Advantage - Absolute: Adam Smith, Comparative: Ricardo- a country should specialize in production and export of goods which it is the best at and have an absolute advantage and then trade these goods for the goods producted by other countries- imports are just as valuable to use as our exports are to others- idea of unrestricted free trade
• Heckschers-Ohnlin's (H-O) / Factor Proportions Theory - the more abundant a factor, the lower its cost- Comparative advantage arises from differences in national factor endowments - each country should produce and export products that intensively use relatively abundant factors of production and import goods that intensviely use relatively scare factors of production  Leontief-Paradox: countries can successfully export product that use less-abundant resources; results showed that the US seemed to export labor intensive goods and import capital intensvie ones 
• Early Trade Theories - Mercantalism - Absolute advantage- Comparatative advantage- H-O-Theory
• The Product Lifecycle Theory - 1960s - as a product mature, the location of sales and the optimal production location will change affecting the flow and direction of trade Stage 1) New Product/Introduction (high purchase power + demand)Stage 2) Maturing Product/Maturity (higher international sales than domestic sales)Stage 3) Standardizes Product/Standardization (search for low-cost production base, demand decreses) Problem:- globalization and integration of the world economy has made this theory less valid- today, many new products are initially introdcued in Japan or Europe- production may also be dispersed to those location where it is most favorable
• New Trade Theory - trade can increase the variety of goods available to consumers and decrease their average cost- if one country specializes in a certain industry, it may gain economies of scale and other network benefits 
• National Competitive Advantage - Porters Diamond of Competitive Advantage- tries to explain why a nation achieves international success in a particular industry 1) Firm Strategy, Structure and Rivarly2) Demand Conditions3) Related and supporting industries4) Factor Conditions+ Government + Chance Implications for manager:- Location implication - First-mover implication- Government policy
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• Reasons for international trade - differences in factor endowments - gains from specialization- political benefits- efficiency gains
• US-China Trade War - two global superpowers- concern: US buys a lot more from then than China buys from US- US felt like they are importing more from china, then they are exporting to it- US imposed tariffs on Chinese imports- therefore, China put tariffs on US imports- Covid brought Chinese imports back up to pre-tariff levels (home office equipments, facemasks)- when new tariffs are applied to product, it's not the countries that pay for them but the customers- price for smartphones raise due to tariffs
• Tesla - Gigafactory in Brandenburg- estimate 10,000 jobs - Germany is a place of investment and technology- Brexit drove auto industry towards Germany - fear of Americanism, groundwater, no jobs (=polish cheap workers) 
• IKEA - national pricing policy- each product is manufactured in Sweden- in order to buy goods from around the world, IKEA has to deal in different currencies - small changes in the daily foreign currency market can impact the costs for IKEA and in turn both its profitability to build new stores, expand, refurbish stores, purchase products, pay salaries 
• Foreign Exchange Market - refers to the trading of one currency to another - foreign exchange means the money of a foreign country that is foreign currency bank balances, banknotes, checks and drafts- most currencies are allowed by their central banks to "float"- the value of a currency will depend on the economic health - this creates risk for companies that operate internationally- the forex market is a market for converting the currency of one country into that of another country- the exchange rate is the rate at which one currency is converted into another- a forex transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivery for some other currency at a specified date
• Floating Exchange Rates - most of the major currencies float against each other in value - many currency pairs are only inactively traded, so their exchange rate is determined through their relationship to a widely traded third currency
• Forex market participants - Interbank - Client - Individuals and firms- Speculators- Central Banks
• Impact of foreign currency on MNEs such as IKEA - RMB is valued cheaply, the Chinese importers that buy foreign goods find that the prices are more expensive- Chinexe exporters find that sales increase because their prices are cheaper or lower to the foreign buyers- economists say that the Chinese government has tried to keep the RMB cheap in order to keep Chinese exports cheap and promote exports- for IKEA, a cheap RMB means that it takes fewer Euros to buy Chinese products
• Exchange rate movements - exchange rate is constantly changing - when this relationship changes, the market speaks of one currency as strengthening or weakening vis-à-vis the second currency- e.g., when the dollar strengthens, the other currency must have weakened - e.g., if the dollar:yen opened up at 124.10 and closed at 124.60, you would say that the dollar strenghened since one dollar buys more yen at the close than it did in the open
• Types of FX transactions Spot transaction: - purchase of foreign exchange with delivery and payment between banks to take place, normally on the second following business day Forward transaction:- exchange at some future date, normally 30/90/180 days into the future
• Factors that have an impact on future exchange rate movement 1) a countrys price inflation2) a countrys interest rate3) market psychology
• Law of one price the price of a good will be the same throughout the world
• Purchasing Power Parity (PPP) - changes in prices will result in changes in exchange rates- if we can predict inflation rates, we can predict the change of a currency value
• How should exchange rate forecasts be prepared? 1) Fundamental Analysis2) Technical Analysis
• What does the foreign exchange market mean for international firms? - they must understand the influence of exchange rates in terms of profitability of trade and investment deals
• How can firms minimize translation and transaction exposure? - buying forwards- using swaps- collecting foreign currency early when a foreign currency is expected to depreciate and paying foreign currency paybles before they are due
• How can a firm reduce economic exposure? - distribute productive assets to various locations - firms assets are not overly concentrated in countries where likely rises in currency values 
• To manage foreign exchange risk, firms should: - establish central control to protect resources efficiently- distinguish between transaction and translation / economic exposure- attempt to forecast future exchange rates- establish reporting systems- produce monthly foreign exchange exposure reports

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