You are on page 1of 6

Chapter 7

Dealing with Foreign Exchange

Learning Objectives
After studying this chapter, students should be able to:
1. List the factors that determine foreign exchange rates.
2. Articulate and explain the steps in the evolution of the international monetary system.
3. Identify strategic responses firms can take to deal with foreign exchange movements.
4. Identify three things you need to know about currency when doing business
internationally.

Key Terms
Appreciation: An increase in the value of the currency.
Balance of payment: A countrys international transaction statement, which includes
merchandise trade, service trade, and capital movement.
Bandwagon effect: The effect of investors moving in the same direction at the same
time, like a herd.
Capital flight: A phenomenon in which a large number of individuals and companies
exchange domestic currencies for a foreign currency.
Clean (or free) float: A pure market solution to determine exchange rates.
Depreciation: A loss in the value of the currency.
Dirty (or managed) float: Using selective government intervention to determine
exchange rates.
Fixed rate policy: Setting the exchange rate of a currency relative to other currencies.
Foreign exchange rate: The price of one currency in terms of another.
Floating (or flexible) exchange rate policy: The willingness of a government to let
demand and supply conditions determine exchange rates.
Target exchange rate (or crawling band): Specified upper or lower bounds within
which an exchange rate is allowed to fluctuate. Bretton Woods system: A system in
which all currencies were pegged at a fixed rate to the U.S. dollar.
Common denominator: A currency or commodity to which the value of all currencies
are pegged.
Gold standard: A system in which the value of most major currencies was maintained
by fixing their prices in terms of gold.
International Monetary Fund (IMF): An international organization that was
established to promote international monetary cooperation, exchange stability, and
orderly exchange arrangements.
Post-Bretton Woods system: A system of flexible exchange rate regimes with no
official common denominator.
Quota: The weight a member country carries within the IMF, which determines the
amount of its financial contribution (technically known as its subscription), its
capacity to borrow from the IMF, and its voting power.
Moral hazard: Recklessness when people and organizations (including governments)
do not have to face the full consequences of their actions.
Bid rate: The price at which a bank is willing to buy a currency.
Currency hedging: A transaction that protects traders and investors from exposure to
the fluctuations of the spot rate.
Currency risk: refers to the potential for loss associated with fluctuations in the
foreign exchange market.
Currency swap: A foreign exchange transaction between two firms in which one
currency is converted into another at Time 1, with an agreement to revert it back to the
original currency at a specified Time 2 in the future.
Foreign exchange market: The market where individuals, firms, governments, and
banks buy and sell currencies of other countries.
Forward discount: A condition under which the forward rate of one currency relative
to another currency is higher than the spot rate.
Forward premium: A condition under which the forward rate of one currency relative
to another currency is lower than the spot rate.
Forward transaction: A foreign exchange transaction in which participants buy and
sell currencies now for future delivery.
Offer rate: The price at which a bank is willing to sell a currency.
Spot transactions: The classic single-shot exchange of one currency for another.
Spread: The difference between the offer price and the bid price.
Strategic hedging: Spreading out activities in a number of countries in different
currency zones to offset any currency losses in one region through gains in other
regions.

Chapter 8
Capitalizing on Global & Regional Integration

Learning Objectives
After studying this chapter, students should be able to:
1. Make the case for global economic integration.
2. Explain the evolution of the GATT and the WTO, including current challenges.
3. Make the case for regional economic integration.
4. List the accomplishments, benefits, and costs of the European Union.
5. Identify the five organizations that promote regional trade in the Americas and describe
their benefits and costs.
6. Identify the four organizations that promote regional trade in the Asia Pacific and describe
their benefits and costs.
7. Articulate how regional trade should influence your thinking about global business.

Key Terms
European Union (EU): the official title of European economic integration since 1993.
General Agreement on Tariffs and Trade (GATT): is a multilateral agreement
governing the international trade of goods (merchandise).
Global economic integration: refers to efforts to reduce trade and investment barriers
around the globe.
Multilateral trading system: is the global system that governs international trade
among countriesotherwise known as the GATT/WTO system.
Non-discrimination: is a principle that a country cannot make distinctions in trade
among its trading partners.
North American Free Trade Agreement (NAFTA): a free trade agreement among
Canada, Mexico, and the United States.
Regional economic integration: refers to efforts to reduce trade and investment
barriers within one region.
World Trade Organization (WTO): is the official title of the multilateral trading
system and the organization underpinning this system since 1995.
Doha Round: was a round of WTO negotiations to reduce agricultural subsidies, slash
tariffs, and strengthen intellectual property protection that started in Doha, Qatar, in
2001. Officially known as the Doha Development Agenda, it was suspended in 2006
due to disagreements.
General Agreement on Trade in Services (GATS): is a WTO agreement governing
the international trade of services.
Trade-Related Aspects of Intellectual Property Rights (TRIPS): is a WTO
agreement governing intellectual property rights.
Common market: combining everything a customs union has, a common market
additionally permits the free movement of goods and people.
Customs union: is one step beyond a free trade area (FTA), a customs union imposes
common external policies on non-participating countries.
Economic union: having all the features of a common market, members also
coordinate and harmonize economic policies (in areas such as monetary, fiscal, and
taxation) to blend their economies into a single economic entity.
Free trade area (FTA): is a group of countries that remove trade barriers among
themselves.
Monetary union: is a group of countries that use a common currency.
Political union: is the integration of political and economic affairs of a region.
Euro: is the currency currently used in 18 EU countries.
Euro zone: is the 18 EU countries that currently use the euro as the official currency.
Schengen: refers to a passport-free travel zone within the EU.
Andean Community: is a customs union in South America that was launched in 1969.
Mercosur: is a customs union in South America that was launched in 1991.
Union of South American Nations (USAN/UNASUR): is a regional integration
mechanism integrating two existing customs unions (Andean Community and
Mercosur) in South America.
United StatesDominican RepublicCentral America Free Trade Agreement
(CAFTA): is a free trade agreement between the United States and five Central
American countries and the Dominican Republic.
Australia-New Zealand Closer Economic Relations Trade Agreement
(ANZCERTA or CER): a free trade agreement between Australia and New Zealand.
Asia-Pacific Economic Cooperation (APEC): is the official title for regional
economic integration involving 21 member economies around the Pacific.
Association of Southeast Asian Nations (ASEAN): is the organization underpinning
regional economic integration in Southeast Asia.
Trans-Pacific Partnership (TPP): a multilateral free trade agreement being negotiated
by 12 Asia Pacific countries.

Chapter 9
Growing & Internationalizing the Entrepreneurial Firm

Learning Objectives
After studying this chapter, students should be able to:
1. Define entrepreneurship, entrepreneurs, and entrepreneurial firms.
2. Identify the institutions and resources that affect entrepreneurship.
3. Identify three characteristics of a growing entrepreneurial firm.
4. Describe how international strategies for entering foreign markets are different from those
for staying in domestic markets.
5. Articulate what you should do to strengthen your entrepreneurial ability on an international
level.

Key Terms
Entrepreneur: Founders and owners of new businesses or managers of existing firms
who identify and exploit new opportunities.
Entrepreneurship: The identification and exploitation of previously unexplored
opportunities.
International entrepreneurship: A combination of innovative, proactive, and risk-
seeking behavior that crosses national borders and is intended to create wealth in
organizations.
Small- and medium-sized enterprise (SME): Firm with fewer than 500 employees in
the United States and with fewer than 250 employees in the European Union.
Born global firm: A start-up company that attempts to do business abroad from
inception.
Direct export: The sale of products made by firms in their home country to customers
in other countries.
Export intermediary: A firm that acts as a middleman by linking domestic sellers and
foreign buyers that otherwise would not have been connected.
Franchising: Firm As agreement to give Firm B the rights to use As proprietary assets
for a royalty fee paid to A by B. This is typically done in service industries.
Indirect export: A way for SMEs to reach overseas customers by exporting through
domestic-based export intermediaries.
Letter of credit (L/C): A financial contract that states that the importers bank will pay
a specific sum of money to the exporter upon delivery of the merchandise.
Licensing: Firm As agreement to give Firm B the rights to use As proprietary
technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee
paid to A by B. This is typically done in manufacturing industries.
Sporadic (or passive) exporting: The sale of products prompted by unsolicited
inquiries from abroad.
Stage model: Model of internationalization that involves a slow step-by-step (stage-by-
stage) process a firm must go through to internationalize its business.

Chapter 15
Managing Corporate Social Responsibility Globally

Learning Objectives
After studying this chapter, students should be able to:
1. Articulate a stakeholder view of the firm.
2. Apply the institution-based and resource-based views to analyze corporate social
responsibility.
3. Identify three ways you can manage corporate social responsibility.

Key Terms
Corporate social responsibility (CSR): Consideration of, and response to, issues
beyond the narrow economic, technical, and legal requirements of the firm to
accomplish social benefits along with the traditional economic gains that the firm
seeks.
Global sustainability: The ability to meet the needs of the present without
compromising the ability of future generations to meet their needs around the world.
Primary stakeholder group: Constituent on which a firm relies for its continuous
survival and prosperity.
Secondary stakeholder group: Group or individual who can indirectly affect or are
indirectly affected by a firms actions.
Stakeholder: Any group or individual who can affect or is affected by a firms actions.
Triple bottom line: Economic, social, and environmental performance that
simultaneously satisfies the demands of all stakeholder groups.
Accommodative strategy: A strategy characterized by some support from top
managers, who may increasingly view CSR as a worthwhile endeavor.
Defensive strategy: A strategy that focuses on regulatory compliance but with little
actual commitment to CSR by top management.
Proactive strategy: A strategy that anticipates CSR and endeavors to do more than is
required.
Reactive strategy: A strategy that would only respond to CSR causes when required by
disasters and outcries.
Social issue participation: Firms participation in social causes not directly related to
the management of primary stakeholders.