Management Study Guide Essay

Commanding Heights Episode 3 (Chapters 11-14) available at online at http//www.pbs.org/wgbh/commandingheights/lo/story/index.html With socialism discredited, to a greater extent than and more kingdoms harness their fortunes to the global openhanded- trade. China, Southeast Asia, India, eastern hemisphereern Europe and Latin America either compete to attract the developed worlds enthronization capital, and tariff barriers fall. In the join States re manan and Democratic brass sections both embrace unfettered globalization over the objections of organized labor. But as sweet technology and ideas drive profound scotch change, unforeseen events unfold. A Mexi give the gate economic melt down pat(p) sends the Clinton administration scrambling. Internet-linked financial commercialises, unrestricted capital executes, and floating currencies drive levels of speculative investment that d contendf sof twood in actual wides and operate. Fueled by electronic capital and a global workforce ready to adapt, entrepreneurs compel multi solid groundal corporations with valuations greater than entire home(a) economies.When huge pension notes go hunting high returns in emerging markets, enterprise flourishes where poverty once ruled, but riskiness grows, overly. In Thailand the huge generator of available capital proves first a blessing, then a curse. Soon all Asia is engulfed in an economic crisis, and financial contagion spreads throughout the world, until Wall Street itself is threatened. A single global market is like a s toothsome the central economic reality. As the force of its effects is felt, popular unease grows. Is the system just too complex to be supportled, or is it an insiders game played at outsiders expense? New centers of opposition to globalization form and the debate turns violent over who will rewrite the rules. Yet prosperity continues to spread with the expanding upon of trade, even as the gulf widens further between rich and poor. Imbalances too dangerous for the system to displace now drive its stakeholders to devise new means to include the dispossessed lest, once a get, terrorism and war destroy the stability 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 installations over the adjacent 2 years. May poise the capital markets ( could protect investment and retirement funds) MAY stabilize lodgment prices. Consequences of doing nonhing -Small businesses will fail. -Companies may not be able to make payroll -People, even those with good credit records, may not be able to get credit for mortgages, car imparts, student adds, or credit cards. -People will lose jobs. Round 2 Same deal with kindred possible benefits. sign version of the bill $350 billion upfront $350 billion later unless congress holds it back. -NO new golden parachutes if the institution sells more than $300 million in assets -Must try to claw back past bon determinations if establish on misleading financial statements -No golden parachutes when the treasury has ownership stake in the sloshed (.ie., it is failing).Defined donation Retirement Plans A defined contribution plan provides an individual account for each participant. The benefits argon based on the amount contributed into the plan and are also affected by income, expenses, gains and loses. There are no promises of a set monthly benefit at retirement. Some pillowcases of defined contribution plans include 401(k) plans, 403(b) plans, employee run ownership plans and profit sharing plans. Contagion The tendency to spread, as of a doctrine, influence, or emotional state. When iodin nations economy is negatively affected because of changes in the asset PRICES of an some other spheres financial market Foreign Direct dowerment Is when a firm invests resources in facilities to produce and/or market a product in a unlike cou ntry.Horizontal FDI versus Vertical FDI Horizontal FDI investment in the identical industriousness in which a firm operates at sign. Vertical FDI investment in an industry that provides inputs for a firms home(prenominal) 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 oversea that provides inputs for a firms domestic occupation coveres. Forward Vertical FDI an investment in an industry abroad that sells the outputs of a firms domestic production processes. BACKWARD vertical means that thither are more places to help build the product. Stock versus Flow of FDI Stock flow is the total put in value. Flow of FDI is the value over time. Gross Fixed jacket crown Formation GFCF is a flow value.It is unremarkably defined as the total value of additions to rigid assets by resident producer enterprises, less disposals of fixed assets during the quarter or y ear, plus additions to the value of non-produced assets (such as discoveries of mineral fastens, or land improvements). Greenfield Investment Establishing a new operation Acquisition When one firm buys an pursual in another firm coalition When two firms condition to integrate their operations on a relatively co-equal basis.Exporting The sale of products produced in one country to residents of another country Licensing when one firm (the licensor) grants the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee) Tacit versus codified Knowledge Tacit knowledge information that is intuitive and difficult to articulate or codify in writing. (Can be gained through personal experience or interaction. Shared knowledge might be disperse throughout the company.) Theoretical Explanations for FDI Transportation speak tos, trade Imperfections, Strategic Behavior, Product Life Cycle, and Location-Specific Advant ages Impediments to the Sale of Know-How Impediments to the sale of know-how inform why firms prefer horizontal FDI to licensing. These impediments arise when (a) a firm has valuable know-how that cannot be adequately defend by a licensing contract, (b) a firm needs tight control over a unusual 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 contrastive expanseal markets, national markets, or industries. The Radical, Free Market and Pragmatic countryalism Views of FDI Benefits and Costs of FDI for a horde Country Resource transfer effects, employment effects, balance of payments effects, effect on competition and economic growth. array country benefits from initial capital inflow when MNC establishes businessFINANCIAL CREDIT Host country benefits if FDI substitutes for imports of goods and serve occurrent ACCOUNTCREDIT Host country benefits when MNC uses its foreign subsidiary to export to other countriesCredit on CURRENT ACCOUNT Resource-Transfer Effects Capital, Technology and Management Employment Effects Direct, Indirect, Substitution, and Acquisition Restructuring -Mergers and acquisitions are quicker to execute.-Foreign firms allow valuable strategic assets that would be risky and time consuming to develop. -Acquiring firm believes it can use its onus competencies to increase the efficiency of the acquired firm. Balance-of-Payments Effects of FDI for the theater and Host Countries Home country The balance of payments account is modify by the inward flow of repatriated earnings. The balance of payments account is improved if the foreign subsidiary needs home country equipment, broker parts, etc. National Sovereignty Sovereignty is the exclusive right to control a government, a country, a people, or oneself. A sovereign is the supreme lawmaking authority. Benefits and C osts 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, tax incentives to invest at home, Nation-specific prohibitions Encourage Foreign Risk Insurance, Capital Assistance, Tax Incentives to Invest Abroad, Political Pressure.Host Country Policies to Encourage and Restrict Inward FDI Restrict Ownership Restraints Encourage To gain from the resource-transfer and employment effects of FDI, to capture FDI away from other potential host locations. Performance Requirements An expectation determined on a foreign direct thingy requiring them to do certain things like having some local employees. Basically, this puts restrictions on them like local production requirements. Regional Economic integrating refers to obligations among countries in a geographic role to reduce and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and f actors of production between each other. Levels of Economic Integration Free spate Area Remove internal Barriers Customs nub universal External Barriers Common Market Free Movement of Factors Economic uniting 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 additional gains from free trade beyond the international agreements such as GATT and TWO.Against a regional trade agreement is beneficial only 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 roughly loss of national sovereignty and control over the nations sovereignty and control over the nations pecuniary, fiscal and trade policies. dish out Creation versus Trade Diversion When an inefficient non genus Phallus nation replaces an efficient penis nation (NAFTA). Like Mexico replacing China in the textile business. Creation 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 replaced 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 bowl of 4 million square kilometers and has approximately 460 million inhabitants. The EUs member states combine represent the worlds largest economy by GDP, the seventh largest territory in the world by area and the third largest by population. Political Structure of the European Union European Commission, Council of the European Union, European Parliament and Court of Justice Optimal Currency Area In economics, an optimum currency area (OCA), also known as an optimum currency region (OCR), is a geographical region in which it would maximi ze economic efficiency to have the entire region share a single currency. It come upons the optimal characteristics for the merger of currencies or the creation of a new currency. Copenhagen Criteria are the rules that define whether a nation is desirable to join the European Union.The criteria require that a nation have the institutions to p modestness elected governance and benignant rights, a functioning market economy, and that the nation accept the obligations and intent of the EU. The capital of Portugal accord The Treaty of Lisbon (also known as the Reform Treaty) is a treaty 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 Community (TEC, Rome), the latter being renamed Treaty on the Functioning of the European Union (TFEU) in the process.The stated aim of the treaty is to complete the process started by the Treaty of Amsterdam 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 motor intensive industries move to Mexico, resulting in better resource allocation, Mexico gets investment and employment, increased Mexican income to buy US/Canadian goods, demand for goods increases jobs, consumers get humiliate 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 formerly called the Andean Group (Grupo Andino, in Spanish) which saw light later on the Andean Pact (Pacto Andino) or more formally the Cartagena Agreement (Acuerdo de Cartagena) was signed in 1969, in Cartagena (Colombia). Mercado Comn del Sur (MERCOSUR) Argentina, Brazil, Pa raguay, 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 Western Hemisphere, except Cuba. This region has 850 million people and a $13.5 trillion economy. Talks 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 Indonesia, Malaysia, Philippines, 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 among 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 a nd 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 minuscular 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 cycle. It is convenient to mobilise of the business cycle as having three phases. The first phase is expansion when the economy is growing along its long term trends in employment, output, and income. But at some point the economy will overheat, and bring forth rising prices and interest rates, until it reaches a turning point a peak and turn downward into a recession (the second phase).Recessions are usually brief (six to nine months) and are marked by travel employment, output, income, prices, and interest rates. Most significantly, recessions are marked by rising unemployment. The economy will hit a bottom point a trough and rebound into a strong convalescence (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 read into an expansion. Foreign put back Market a market for converting the currency of one country into the currency of another. supersede Rate the rate at which one currency is converted into another. Foreign alter Risk the risk of an investments value changing due to changes in the currency replacement rates. Arbitrage the leverage 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 currency 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 Selling on a Discount versus Selling at a bounteousness Currency Swaps A currency swap (or cross currency swap) is a foreign exchange agreement between 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 ratiocination Law of One Price The law of one price is an economic law stated as In an efficient market all identical goods must have only one price.The lore for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market the convergence on one price is instant. Purchasing Power Parity The acquire power parity (PPP) theory us es the long-term equilibrium exchange rate of two currencies to equalize their buy power. Developed 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. freehand Mac Index 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 different 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 Money Supply Impacts Exchange rank Price Discrimination Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs. Fisher Effect / external Fischer Effect Real versus Nominal Interest Rates 8% interest + 2%inflation = 10% nominal interest. $100 on $1000 loan. Investor Psychology and Bandwagon Effects The Efficient Market School versus the unable Market School Efficient Those who believe the foreign exchange market actually predicts things accurately. Fundamental versus proficient Analysis Currency Convertibility Freely, Externally, and Nonconvertible Currencies Capital Flight Capital flight, in economics, occurs when assets and/or funds 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 other 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). Transaction versus Translation versus Economic Exposure Economic exposure the extent to which a firms futur e international earning power is affected by changes in exchange rates. Lead versus linger Strategies Lead an attempt to collect foreign currency receivables when a foreign currency is expected to depreciate. relapse 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. International Monetary System are institutional ar ikonments countries realise to govern exchange rates. Exchange Rate Regimes Formal Dollarization, Fixed, Currency Boards, Pegged, Dirty/Managed Floats and Independently Floating The fortunate Standard Pegging currencies to gold and guaranteeing convertibility is known as the gold standard. Gold Par Value The amount of a currency in an ounce, one ounce of gold was referred to as the gold par value.The Bretton Woods Exchange Rate System Created a fixed exchange rate system where the countries agreed to peg their cur rencies 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. future(a) a second round of speculative attacks, the US dollar was allowed to float against other world currencies. Concerns round 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. honorable Hazard arises when people behave recklessly 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 raise longterm funds.The capital market includes the stock market and the hold fast 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 secondary 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. sign Public 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 a lot issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. Commercial Banks versus Investment Banks Equity Loan An equity loan is a mortgage placed on real estate in exchange for cash to the borrow er. For example, if a person owns a home worth $100,000, but does not currently 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 title 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 locomote at least a year after their issue date. Systematic Risk In finance, general Risk 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, caused or exacerbated by single 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 often wider range of investment opportunities than in a purely domestic capital market. The most significant issuance of this choice is that investors can diversify 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 Information 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 riskiness of a range of financia l 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 response 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 volatile in Mexico and East Asian financial crisis. Patient Money Selling land in large blocks under line conditions is to sell at a time before it begins yielding much if any rent. It is bid in by those few who have large discretionar y 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 regulated banking system they know that the hazard of a bank failure that would cause them to lose their deposits is very low. Secondly, borrowing funds internationally can expose a company to foreign exchange risk. Reserve Requirements The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to node deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of orderliness curren cy 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 mean disclosure 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 drug addiction smoothing 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 trey The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of Impossibility or Unholy Trinity) is the surmisal in international economics that it is impossible to have all three of the following at the same time Exchange Rate Stability, Independent 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.