MGMT 688: Developing Global Business Strategy

Chapter 6: Investing Abroad Directly Pg 1

Chapter 8: Economic Integration Pg 4

Chapter 10: Entering Foreign Markets Pg 10

Chapter 11: Managing Global Competitive Dynamics Pg 12

Chapter 16: Financing And Governing The Corporation Globally Pg 15

CHAPTER 6
INVESTING ABROAD DIRECTLY
•Foreign Por+olio Investment (FPI)-Investment in por+olio of foreign securi9es such as stocks and bonds. (Indirect)
•Foreign Direct Investment (FDI)- Direct hands on management of foreign assets. (direct)
•Usually 10% or more in foreign based enterprise
•Exercise some management control rights

FOREIGN DIRECT INVESTMENT- HORIZONTAL VS VERTICAL

• Horizontal FDI Firm duplicates its home country based ac9vi9es at same value chain stage in host country.
• Ver9cal FDI Firm moves upstream (backward) or downstream (forward) at different value chain stages in host country.

FOREIGN DIRECT INVESTMENT- FLOW VS STOCK

•FDI flow- Amount of FDI moving in a given period (usually a year) in a certain direc9on
-FDI inflow Inbound FDI moving into a country
-FDI ou+low Outbound FDI moving out of a country
•FDI stock Total accumula9on of inbound FDI in a country or outbound FDI from a country across a given period (usually
several years)

MULTINATIONAL ENTERPRISE
•Mul9na9onal enterprise (MNE)- Firm that engages in FDI when doing business abroad.
•Non MNE can do business abroad by
1)Expor9ng and impor9ng
2)Licensing and franchising
3)Outsourcing
4)Engaging in FPI

WHY FIRMS BECOME MNE OLI FRAMEWORK

•Ownership- MNE’s possession and leveraging of certain VRIO assets overseas.
•Loca9on- Advantages enjoyed by firms opera9ng in a certain loca9on.
•Internaliza9on- Replacement of cross border markets with firm (MNE) loca9ng and opera9ng in mul9ple countries.

OWNERSHIP ADVANTAGES -FDI VS LICENSING/ FRANCHISING

•Licensing/ Franchising Firm A agrees to give Firm B rights to use A’s proprietary technology (e.g. patent) or trademark
(e.g. corporate logo) for royalty fee paid to A by B.
•Firms prefer FDI to licensing/ franchising because FDI-
•reduces dissemina9on risks risk associated with unauthorized diffusion of firm specific know how.
•provides 9ght control over foreign opera9ons.
•facilitates transfer of tacit knowledge through “learning by doing”

LOCATION ADVANTAGES -AGGLOMERATION

•Agglomera9on- Clustering economic ac9vi9es in certain loca9ons. Advantages stem from:
•Knowledge spillovers- Knowledge diffused from one firm to others among closely located firms.
•Industry demand that creates skilled labor force whose members may work for different firms without having
to move out of region.
•Industry demand that facilitates pool of specialized suppliers and buyers also located in the region.

INTERNALIZATION ADVANTAGES- FDI VS IMPORT/ EXPORT

•Market imperfec9on (failure)- Imperfect rules governing interna9onal transac9ons.
•Intrafirm trade Transac9ons between two subsidiaries in two countries controlled by same MNE.

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POLITICAL VIEWS: FDI
Radical- FDI is imperialism instrument where foreign firms exploit domes9c resources. Hos9le to FDI.
Free Market- FDI enables countries to tap into their absolute or compara9ve advantages by specializing in produc9on of
goods and services. FDI unrestricted by govt interven9on is best.
Pragma1c na1onalism- FDI has pros and cons and only approves when benefits outweigh costs.

EFFECTS OF FDI

Benefits Costs
•Capital inflow •Loss of economic sovereignty Host Country
•Technology spillovers •Drive domes9c firms out of business (Recepient)
•Demonstra9on effect •Capital ou+low
•Management know how
•Job crea9on
•Earnings •Capital ou+low Home Country
•Exports •Job loss (Source)
•Learning

LECTURE NOTES
I. UNDERSTANDING THE FDI VOCABULARY
1. Key Concepts
FDI refers to directly inves9ng in ac9vi9es that control and manage value crea9on in other countries. MNEs are firms that
engage in FDI. FDI can be classified as horizontal FDI and ver9cal FDI.
Flow is the amount of FDI moving in a given period in a certain direc9on (inflow or ou+low). Stock is the total
accumula9on of inbound FDI in a country or outbound FDI from a country.
2. Key Terms
• Downstream ver9cal FDI is a type of ver9cal FDI in which a firm engages in a downstream stage of the value chain in a
host country.
• FDI flow is the amount of FDI moving in a given period (usually a year) in a certain direc9on.
• FDI inflow is inbound FDI moving into a country in a year.
• FDI ou+low is outbound FDI moving out of a country in a year.
• FDI stock is the total accumula9on of inbound FDI in a country or outbound FDI from a country across a given period
(usually several years).
• Foreign por+olio investment (FPI) refers to an investment in a por+olio of foreign securi9es such as stocks and bonds.
• Horizontal FDI is a type of FDI in which a firm duplicates its home country-based ac9vi9es at the same value chain stage
in a host country.
• Management control right is the right to appoint key managers and establish control mechanisms.
• Upstream ver9cal FDI is a type of ver9cal FDI in which a firm engages in an upstream stage of the value chain in a host
country.
• Ver9cal FDI is a type of FDI in which a firm moves upstream or downstream at different value chain stages in a host
country.
II. WHY DO FIRMS BECOME MNEs BY ENGAGING IN FDI?
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1. Key Concept
FDI results in economic gain. Firms seek ownership (O) advantages, loca9on (L) advantages, and internaliza9on (I)
advantages—collec9vely known as the OLI advantages. The resource-based view suggests that the key word of FDI is D
(direct), which reflects firms’ interest in directly managing, developing, and leveraging their firm-specific resources and
capabili9es abroad. The ins9tu9on-based view argues that recent expansion of FDI is indica9ve of generally friendlier
policies, norms, and values associated with FDI (despite some setbacks).
2. Key Terms
• Internaliza9on refers to the replacement of cross-border markets (such as expor9ng and impor9ng) with one firm (the
MNE) loca9ng and opera9ng in two or more countries.
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• Licensing is Firm A’s agreement to give Firm B the rights to use A’s 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.
• Loca9on refers to advantages enjoyed by firms opera9ng in a certain loca9on.
• Market imperfec9on (market failure) is the imperfect rules governing interna9onal transac9ons.
• OLI advantage is a firm’s quest for ownership (O) advantages, loca9on (L) advantages, and internaliza9on (I) advantages
via FDI.
• Ownership is an MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organiza9onally
embedded (VRIO) assets overseas in the context of FDI.
III. OWNERSHIP ADVANTAGES
1. Key Concept
Ownership refers to MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organiza9onally
embedded (VRIO) assets overseas.
2. Key Terms
• Dissemina9on risk is the risk associated with unauthorized diffusion of firm-specific know-how.
IV. LOCATION ADVANTAGES
1. Key Concepts
Loca9on refers to certain loca9ons’ advantages that can help MNEs amain strategic goals.
2. Key Terms
• Agglomera9on is the clustering of economic ac9vi9es in certain loca9ons.
• Knowledge spillover is knowledge diffused from one firm to others among closely located firms.
• Oligopoly is an industry dominated by a small number of players.
V. INTERNALIZATION ADVANTAGES
1. Key Concept
Internaliza9on refers to the replacement of cross-border market rela9onship with one firm (the MNE) loca9ng in two or
more countries. Internaliza9on helps combat market imperfec9ons and failures.
2. Key Term
• Intrafirm trade involves interna9onal transac9ons between two subsidiaries in two countries controlled by the same
MNE.
VI. REALITIES OF FDI
1. Key Concepts
The radical view is hos9le to FDI, and the free market view calls for minimum interven9on in FDI.
Most countries prac9ce pragma9c na9onalism, weighing the benefits and costs of FDI. FDI brings a different (and onen
opposing) set of benefits and costs to host and home countries.
2. Key Terms
• Contagion effect (also called imita9on effect or demonstra9on effect) is the reac9on of local firms to rise to the
challenge demonstrated by MNEs through learning and imita9on.
• Demonstra9on effect (also called the contagion effect or imita9on effect) is the reac9on of local firms to rise to the
challenge demonstrated by MNEs through learning and imita9on.
• Free market view is a poli9cal view that suggests that FDI unrestricted by government interven9on is best.
• Pragma9c na9onalism is a poli9cal view that only approves FDI when its benefits outweigh its costs.
• Radical view is a poli9cal view that is hos9le to FDI.
• Technology spillover is technology diffused from foreign firms to domes9c firms

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CHAPTER 8
ECONOMIC INTEGRATION
TYPES OF ECONOMIC INTEGRATION
• Economic integra9on- Efforts to reduce trade barriers
•Global economic integra9on
GATT and WTO
•Regional economic integra9on
•In Europe: EU
•In North America: NAFTA and USMCA
•In South America: USAN
•In Asia Pacific: ASEAN and APEC
•In Africa: TOOMANY : )

GLOBAL ECONOMIC INTEGRATION MAIN MECHANISMS-

GATT- 1948-1994 WTO- 1995-present

GATT:
•Reduce tariff levels through mul9lateral nego9a9ons
1.Tariffs decreased to 5% in 1999
2.World GDP grew 5 9mes
3.Merchandise exports grew 100 9mes
4.Member countries: 23 in 1948 to 128 countries in 1994
•Disputes
1.Focus only on merchandise (not service) trade
2.No focus on IP protec9on
3.Loophole to limit free trade (e.g. in tex9les)
4.No effec9ve dispute resolu9ons (e.g. nontariff barriers invoked)

WTO:
•GATTT (ad hoc and provisional treaty) to WTO (permanent interna9onal organiza9on)

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•General principles
•Non discrimina9on
•Transparency
•Safety values

BENEFITS OF GLOBAL ECONOMIC INTEGRATION

Poli9cal Benefits
•Promote peace by promo9ng trade and investment
•Build confidence in mul9lateral trading system

Economic Benefits
•Disputes are handled construc9vely
•Rules make life easier and discrimina9on impossible by par9cipa9ng countries
•Free trade and investment raise incomes and s9mulate economic growth

ChatGPT answer:
1. **Benefits of Global Economic Integra9on:**
- **Poli9cal Benefits:** Global economic integra9on promotes peace by increasing trade and investment among
countries. It also helps build confidence in the mul9lateral trading system.
- **Economic Benefits:** It leads to the construc9ve handling of disputes and makes trade rules clearer and fairer,
preven9ng discrimina9on among par9cipa9ng countries. This openness in trade and investment raises incomes and
s9mulates economic growth【45†source】.

2. **Five Types of Regional Economic Integra9on:**

- **Free Trade Area:** This is where countries remove trade barriers among themselves but maintain their own
external trade policies.

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 - **Customs Union:** Here, countries not only remove trade barriers among themselves but also adopt common
external trade policies towards non-member countries.
- **Common Market:** This allows for the free movement of goods and people among member countries. It is a more
integrated form of a free trade area.
- **Economic Union:** This involves coordina9ng and harmonizing economic policies among member countries. It's a
step beyond a common market.
- **Poli9cal Union:** The most integrated form, combining the economic union with a full integra9on of poli9cal and
economic affairs. This onen leads to a shared currency, foreign policy, and even government【46†source】.

In summary, global economic integra9on brings poli9cal and economic benefits by promo9ng peace, fair trade, and
growth, while regional economic integra9on can range from simple trade agreements to complete poli9cal and economic
unions.

1. **Free Trade Area (FTA):**

- **Example:** North American Free Trade Agreement (NAFTA), now replaced by the United States-Mexico-Canada
Agreement (USMCA). It eliminated most tariffs and trade barriers among the U.S., Canada, and Mexico, but each country
maintains its own external trade policies.

2. **Customs Union:**
- **Example:** The East African Community (EAC) comprising Kenya, Uganda, Tanzania, Rwanda, Burundi, and South
Sudan. These countries have not only removed trade barriers among themselves but also apply a common external tariff
on imports from non-member countries.

3. **Common Market:**
- **Example:** The European Economic Area (EEA), which includes EU countries and also extends the single market to
non-EU member states like Norway, Iceland, and Liechtenstein, allowing free movement of goods, services, capital, and
people.

4. **Economic Union:**
- **Example:** The European Union (EU) is the most prominent example. It not only allows the free movement of
goods, services, capital, and people but also includes a common currency (Euro for many of its members) and
coordinated economic and monetary policies.

5. **Poli9cal Union:**
- **Example:** The United States is an example of a poli9cal union. Originally independent states joined together to
form a single na9on with a unified poli9cal and economic system, a common foreign policy, and a shared currency.

Each of these types represents a different level of integra9on among member countries, from simply reducing trade
barriers to fully integra9ng poli9cal and economic policies.

REGIONAL ECONOMIC INTEGRATION IN EUROPE

•In 1951, 6 countries signed European Coal and Steel Community (ECSC)
•In 1992, 12 countries signed Treaty on European Union to establish EU
•Criteria:
•Stable democracy that respects human rightsand rule of law
•Func9oning market economy
•Acceptance of membership obliga9ons
•In 2020, 27 countries are in EU
•United Kingdom withdrew from EU in 2020

European Union(EU):
Schengen- 22 countries in passport free travel zone
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Euro Zone- 18 countries use euro as currency

•Poli9cal benefits
•Nobel Peace Prize recipient in 2012
•Economic benefits
•Single currency; single market
•Four freedoms of movement: People, goods, services, and capital
•Challenges
•Economic union vs poli9cal union
•New EU members burden EU 15
•Vo9ng power by popula9on: Turkey
•Financial crises and recession

REGIONAL ECONOMIC INTEGRATION IN NORTH AMERICA

•North American Free Trade Agreement (NAFTA) -Free trade agreement among Canada, Mexico, and US since 1994
•US trade with Canada has tripled (Canada is biggest importer of US goods)
•US trade with Mexico has increased by 506% (Mexico is 2 nd biggest importer of US goods)
•US generated 20 million new jobs during first decade of NAFTA
•Opponents focus less on compe99on from Mexico, more on from China

REGIONAL ECONOMIC INTEGRATION IN SOUTH AMERICA

•Not effec9ve
•Only 5-20% trade within regions
•Largest trading partner is US, outside regions
•Union of South American Na9ons (USAN)
•Integra9ng Andean Community and Mercosur in 2008
•Inspired by EU, intent to adopt common currency, parliament and passport, but slow progress
Andean community- Since 1969 More pro free trade
Mercosur- Since 1991 More protec9onist and suspicious of US

REGIONAL ECONOMIC INTEGRATION IN ASIA PACIFIC

• Associa1on of Southeast Asian Na1ons (ASEAN) -Among 10 Southeast Asia countries since 1967
•ASEAN Free trade area since 1992
•Intra ASEAN trade is less than 25%
•Largest trading partners, US, EU, Japan, and China, are outside region
•ASEAN China Free Trade Agreement (ACFTA) -ASEAN + China since 2002
•Asia Pacific Economic Coopera1on (APEC)
-ASEAN + China + Australia + Japan + China + Tawian + Hong Kong + US + Canada + Mexico + Russia + Chile + Peru
since 1989
•Trans Pacific Partnership (TPP) -Free trade agreement being nego9ated by 12 Asia Pacific countries in 2016

REGIONAL ECONOMIC INTEGRATION IN AFRICA

•Numerous- One country onen has memberships in mul9ple regional deals
•Ineffec9ve- Rela9vely limle trade within Africa Less than 10% of con9nent’s total trade; protec9onism prevails

LECTURE NOTES
I. GLOBAL ECONOMIC INTEGRATION
1. Key Concept
The case for global economic integra9on includes both poli9cal and economic benefits for global economic integra9on.
2. Key Terms
• European Union (EU) refers to the official 9tle of European economic integra9on since 1993.

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• General Agreement on Tariffs and Trade (GATT) is a mul9lateral agreement governing the interna9onal trade of goods
(merchandise).
• Global economic integra9on refers to efforts to reduce trade and investment barriers around the globe.
• North American Free Trade Agreement (NAFTA) is a free trade agreement among Canada, Mexico, and the United
States.
• Regional economic integra9on refers to efforts to reduce trade and investment barriers within one region.
• World Trade Organiza9on (WTO) is the official 9tle of the mul9lateral trading system and the organiza9on underpinning
this system since 1995.

II. ORGANIZING WORLD TRADE

1. Key Concept
The GATT (1948–1994) significantly reduced tariff rates on merchandise trade. The WTO (1995–present) was set up not
only to incorporate the GATT but also to cover trade in services, intellectual property, trade dispute semlement, and peer
review of trade policy. The Doha Round, intended to promote more trade and development, has failed to accomplish its
goals.
2. Key Terms
• General Agreement on Trade in Services (GATS) is a WTO agreement governing the interna9onal trade of services.
• Trade-Related Aspects of Intellectual Property Rights (TRIPS) is a WTO agreement governing intellectual property rights.

III. REGIONAL ECONOMIC INTEGRATION

1. Key Concept
Poli9cal and economic benefits for regional integra9on are similar to those for global integra9on. Regional integra9on
may undermine global integra9on and lead to some loss of countries’ sovereignty.
2. Key Terms
• Common market is a market that combines everything a customs union has. In addi9on, a common market 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
nonpar9cipa9ng countries.
• Economic union has all the features of a common market. Members also coordinate and harmonize economic policies
(in areas such as monetary, fiscal, and taxa9on) to blend their economies into a single economic en9ty.
• Free trade area (FTA) is a group of countries that remove trade barriers among themselves.
• Poli9cal union is the integra9on of poli9cal and economic affairs of a region.

IV. REGIONAL ECONOMIC INTEGRATION IN EUROPE

1. Key Concept
The EU has delivered more than half a century of peace and prosperity, launched a single currency, and constructed a
single market. Its challenges include internal divisions and enlargement concerns.
2. Key Terms
• Euro is the currency used in 18 EU countries.
• Euro zone is the 18 EU countries that currently use the euro as the official currency.
• Schengen is a passport-free travel zone within the EU.

V. REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS

1. Key Concept
Despite problems, NAFTA has significantly boosted trade and investment among members. In South America, the
prominent regional deals are Andean Community, Mercosur, USAN/UNASUR and CAFTA.
2. Key Terms
• 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 Na9ons (USAN/UNASUR) is a regional integra9on mechanism integra9ng two exis9ng
customs unions (Andean Community and Mercosur) in South America.

8
• United States–Dominican Republic–Central America Free Trade Agreement (CAFTA) is a free trade agreement between
the United States and five Central American countries and the Dominican Republic.

VI. REGIONAL ECONOMIC INTEGRATION IN THE ASIA PACIFIC

1. Key Concept
Regional integra9on in Asia Pacific centers on ASEAN, APEC, and TPP.
2. Key Terms
• Asia-Pacific Economic Coopera9on (APEC): is the official 9tle for regional economic integra9on involving 21 member
economies around the Pacific.
• Associa9on of Southeast Asian Na9ons (ASEAN) is the organiza9on underpinning regional economic integra9on in
Southeast Asia.
• Trans-Pacific Partnership (TPP) is a mul9lateral free trade agreement being nego9ated by 12 Asia Pacific countries.
VII. REGIONAL ECONOMIC INTEGRATION IN AFRICA
1. Key Concept
Regional integra9on deals in Africa are both numerous and ineffec9ve.

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CHAPTER 10
ENTERING FOREIGN MARKETS
I. LIABILITY OF FOREIGNNESS
When entering foreign markets, firms confront liability of foreignness. Both ins9tu9on- and resource-based views cover
how to overcome such liability.
Inherent disadvantage that foreign firms experience in host countries because of their non-na9ve status.
Ins1tu1on-based view– Firms need to take ac9ons deemed legi9mate and appropriate by various formal and informal
ins9tu9ons governing market en99es.
• Poli9cal, economic, and legal systems (Ch 2)
• Trade and investment barriers (Ch 5, 6 and8)
• Cultures, norms, and values (Ch 3)

II. WHERE TO ENTER?

1. Key Concept
Two sets of considera9ons drive the loca9on of foreign entries: (1) strategic goals and (2) cultural and ins9tu9onal
distances. Favorable loca9ons provide loca9on-specific advantages. Firms’ strategic goals include seeking (1) natural
resources(Possession of natural resources), (2) market seeking (Strong market demand and customers willing to pay), (3)
efficiency seeking(Economies of scale and low-cost factors), and (4) innova9on seeking (Abundance of innova9ve
individuals and firms).
2. Key Terms
• Ins9tu9onal distance is the extent of similarity or dissimilarity between the regulatory, norma9ve, and cogni9ve
ins9tu9ons of two countries.
• Stage Models– First enter countries with shorter ins9tu9onal distance and gain confidence. Then enter ins9tu9onal
distant countries at later stages.
• Loca9on-specific advantage is the benefits a firm reaps from the features specific to a place.
• Strategy goals – Strategic goals are more important than ins9tu9onal distance. Firms have few alterna9ves elsewhere.

III. WHEN TO ENTER?

1. Key Concepts
In regards to first- and late-mover advantages (when to enter), each has pros and cons, and there is no conclusive
evidence poin9ng in one direc9on.
2. Key Terms
• First-mover advantage is benefits that accrue to firms that enter the market first and that late entrants do not enjoy.
1. Proprietary, technological leadership
2. Pre-empt scarce resources
3. Establish entry barriers for late entrants
4. Avoid clash with dominant firms at home
5. Form rela9onships with key stakeholders such as governments
• Late-mover advantage is benefits that accrue to firms that enter the market later and that early entrants do not enjoy.
1. Free ride on first mover investments
2. Lower technological and market uncertainty
3. Flexibility to adapt to market changes

IV. HOW TO ENTER

1. Key Concept
How to enter depends on the scale of entry: large-scale versus small-scale entries. A comprehensive model of foreign
market entries first focuses on the equity (ownership) issue. The second step focuses on making the actual selec9on,
such as exports, contractual agreements, JVs, or wholly owned subsidiaries.
• Scale of entry is the amount of resources commimed to entering a foreign market.

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 Large Scale Small Scale
Benefits Demonstrate strategic commitment, which helps assure Less costly
local customers and suppliers and deters poten9al entrants
Costs Limited strategic flexibility elsewhere Lack of strong commitment, which may lead
Huge losses if these large-scale “bets” turn out to be wrong to difficul9es in building market share and in
capturing first-mover advantages

• Mode of entry is the method used to enter a foreign market.

2. Key Terms
• Co-marke9ng is efforts among a number of firms to jointly market their products and services.
• Equity mode is a mode of entry (JVs and WOS) that indicates a rela9vely larger, harder to reverse commitment.
• Greenfield opera9on is building factories and offices from scratch (on a proverbial piece of “green field” formerly used
for agricultural purposes).
• Joint venture (JV) is a new corporate en9ty created and jointly owned by two or more parent companies.
• Non-equity mode is a mode of entry (exports and contractual agreements) that reflects rela9vely smaller commitments
to overseas markets.
• Research and development (R&D) contract is an outsourcing agreement in R&D between firms.
• Turnkey project is a project in which clients pay contractors to design and construct new facili9es and train personnel.
• Wholly owned subsidiary (WOS) is a subsidiary located in a foreign country that is en9rely owned by the parent
mul9na9onal.

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CHAPTER 11
MANAGING GLOBAL COMPETITIVE DYNAMICS
COMPETITIVE DYNAMICS AND ANALYSIS
Compe11ve dynamics- ac9ons and responses by compe9ng firms.
Compe1tor analysis- process of an9cipa9ng rivals’ ac9ons to revise firm’s plan and prepare to deal with rivals’ response.
COLLUSION:
Collec9ve amempts between compe9ng firms to reduce compe99on.
• Tacit collusion: Firms indirectly coordinate ac9ons by signaling their inten9on to reduce output and maintain pricing
above compe99ve levels.
• Explicit collusion: Firms directly nego9ate output and pricing and divide markets.
-Cartels: Output fixing and price fixing en9ty involving mul9ple compe9tors.
-An9trust law: Law that makes monopolies and cartels illegal.

INDUSTRY CHARACTERISTICS COLLUSION VS COMPETITION

Collusion Possible Collusion Difficult (compe99on likely)

Few firms(higher concentra9on) Many firms(low concentra9on)
Existence of a industry price leader No industry price leader
Homogenous Products Heterogenous Products
High barriers to entry Low barriers to entry
High market commonality(mutual forbearance) Lack of market commonality(No mutual forbearance)

HIGH CONCENTRATION
• Concentra9on ra9o – Percentage of total industry sales accounted for by the top four, eight, or twenty firms.
PRICE LEADER
• Price leader – Firm that has dominant market share and sets “acceptable” prices and margins in industry.
• Capacity to punish – Sufficient resources possessed by price leader to deter and combat defec9on.
HOMOGENEOUS PRODUCTS
• Commodity – Compete on price, rather than differen9a9on
ENTRY BARRIERS
• High entry barriers – New entrants likely ignore industry norms. Incumbents have collec9ve interests to resist
new entrants.
MARKET COMMONALITY
• Market commonality – Overlap between two rivals’ markets.
• Mutual forbearance – Mul9market firms respect their rivals’ spheres of influence in certain markets and their rivals
reciprocate, leading to tacit collusion.
• Cross-market retalia9on – Retaliatory amacks on compe9tor’s other markets if this compe9tor amacks firm’s original
market.

FORMAL INSTITUTIONS FOR DOMESTIC COMPETITION: ANTITRUST

Collusive price se|ng: Price set by monopolists or collusion par9es at level higher than compe99ve level.
Predatory pricing: Monopolize by (1) se|ng prices below cost and (2) intending to raise prices in long run aner
elimina9ng rivals. But difficult to prove!

ANTITRUST LAW: CRITICISMS

• An9trust laws created in response to old reali9es of mostly domes9c compe99on.
• The very “an9compe99ve” ac9ons may be highly “compe99ve” or “hypercompe99ve”.
• U.S. an9trust laws may be unfair because these laws discriminate against U.S. firms.

FORMAL INSTITUTIONS FOR INTERNATIONAL COMPETITION: ANTIDUMPING

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• An1dumping law: Illegal for exporter to sell goods below cost abroad with intent to raise prices aner elimina9ng local
rivals.
• Easy to win an9dumping case - Emo9onally accused of being unfair.
• If foreign Firm F dumps in domes9c Firm D’s country, Firm D can (a) sue Firm F or (b) retaliate by dumping in
Firm F’s country.
• If (a) were difficult, Firm D would choose (b) resul9ng in benefits for customers in both countries.

Response to compe11on:
ATTACK AND COUNTERATTACK
•Amack: Ini9al set of ac9ons to gain compe99ve advantage.
•Counteramack: Set of ac9ons in response to amack.
How to amack successfully? – Awareness, Mo9va9on, Capability

COOPERATION AND SIGNALING

• Firms can choose not to compete but cooperate.
How do firms signal inten9on to cooperate?
1.Enter new market to create mul9market contact and seek mutual forbearance
2.Form alliance for cost reduc9on
3. Send open signal through media
4. Ini9ate lawsuits and nego9ate through semlement or governments

LECTURE NOTES
I. COMPETITION, COOPERATION, AND COLLUSION
1. Key Concept
Industries primed for collusion tend to have (1) fewer rivals, (2) a price leader, (3) homogeneous products, (4) high entry
barriers, and (5) high market commonality (mutual forbearance).
2. Key Terms
• An9trust law is law that makes cartels (trusts) illegal.
• Capacity to punish is sufficient resources possessed by a price leader to deter and combat defec9on.
• Cartel (trust) is an output-fixing and price-fixing en9ty involving mul9ple compe9tors.
• Collusion is collec9ve amempts between compe9ng firms to reduce compe99on.
• Compe99ve dynamics are the ac9ons and responses undertaken by compe9ng firms.
• Compe9tor analysis is the process of an9cipa9ng rivals’ ac9ons in order to both revise a firm’s plan and prepare to deal
with rivals’ responses.
• Concentra9on ra9o is the percentage of total industry sales accounted for by the top four, eight, or twenty firms.
• Cross-market retalia9on is retaliatory amacks on a compe9tor’s other markets if this compe9tor amacks a firm’s original
market.
• Explicit collusion is firms directly nego9a9ng output and pricing and dividing markets.
• Game theory is a theory that studies the interac9ons between two par9es that compete and/or cooperate with each
other.
• Market commonality is the overlap between two rivals’ markets.
• Mul9market compe99on is firms engaging the same rivals in mul9ple markets.
• Mutual forbearance is mul9market firms respec9ng their rivals’ spheres of influence in certain markets and their rivals
reciprocate, leading to tacit collusion.
• Price leader is a firm that has a dominant market share and sets “acceptable” prices and margins in the industry.
• Prisoners’ dilemma, in game theory, a type of game in which the outcome depends on two par9es deciding whether to
cooperate or to defect.
• Tacit collusion is firms indirectly coordina9ng ac9ons by signaling their inten9on to reduce output and maintain pricing
above compe99ve levels.

II. INSTITUTIONS GOVERNING DOMESTIC AND INTERNATIONAL COMPETITION

1. Key Concept
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Domes9cally, an9trust laws focus on collusion and predatory pricing. Interna9onally, an9dumping laws discriminate
against foreign firms and protect domes9c firms.
2. Key Terms
• An9trust policy is government policy designed to combat monopolies and cartels.
• An9dumping laws is law that makes it illegal for an exporter to sell goods below cost abroad with the intent to raise
prices aner elimina9ng local rivals.
• Collusive price se|ng is price se|ng by monopolists or collusion par9es at a level higher than the compe99ve level.
• Compe99on policy is government policy governing the rules of the game in compe99on.
• Dumping is an exporter selling goods below cost.
• Predatory pricing is an amempt to monopolize a market by se|ng prices below cost and intending to raise prices to
cover losses in the long run aner elimina9ng rivals.

III. ATTACK, COUNTERATTACKS, AND SIGNALING

1. Key Concept
Regarding the drivers for amacks, counteramacks, and signaling, there are three main types of amacks: (1) thrust, (2) feint,
and (3) gambit. Counteramacks are driven by (1) awareness, (2) mo9va9on, and (3) capability. Without talking directly to
compe9tors, firms can use various means to signal rivals.
2. Key Terms
• Amack is an ini9al set of ac9ons to gain compe99ve advantage.
• Blue ocean strategy is strategy that focuses on developing new markets (“blue ocean”) and avoids amacking core
markets defended by rivals, which is likely to result in a bloody price war (“red ocean”).
• Counteramack is a set of ac9ons in response to amack.

IV. LOCAL FIRMS VERSUS MULTINATIONAL ENTERPRISES

1. Key Concept
When confron9ng MNEs, local firms can choose a variety of strategic choices: (1) defender, (2) extender, (3) dodger, and
(4) contender. They may not be as weak as many people believe.
2. Key Terms
• Contender strategy is strategy that centers on a firm engaging in rapid learning and then expanding overseas.
• Defender strategy is strategy that centers on local assets in areas in which MNEs are weak.
• Dodger strategy is strategy that centers on coopera9ng through joint ventures with MNEs and sell-offs to MNEs.
• Extender strategy is strategy that centers on leveraging homegrown competencies abroad.

V. DEBATES AND EXTENSIONS

1. Key Concept
The leading debates concerning compe99ve dynamics consist of (1) compe99on versus an9dumping and (2) compe99ve
strategy versus an9trust policy.

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CHAPTER 16
FINANCING AND GOVERNING THE CORPORATION GLOBALLY

CROSS LISTING: Lis9ng shares in foreign exchange

Eg. Alibaba, Hong Kong based company on US stock exchange

CONCENTRATED OWNERSHIP
•Founders start up firms and completely own and control them on individual or family basis.

DIFFUSED OWNERSHIP
•Publicly traded corpora9ons owned by numerous small shareholders but none with dominant control.
Formal Ins9tu9ons
Legal protec9on of shareholder rights encourages founders to dilute equity to amract minority shareholders and delegate
day-to-day management to professional managers.
Informal Ins9tu9ons
Weak protec9on of shareholder rights mean that founders must run firms directly. Invi9ng outside professional
managers may invite abuse and then.
Informal ins9tu9ons favor collec9vism, well-being of firms is not just business but family name and reputa9on.

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STATE OWNERSHIP
• State owned enterprises (SOEs) are de facto owned and controlled by government agencies, thus SOE managers and
employees have limle mo9va9on to improve performance.

PRINCIPAL-AGENT PROBLEM
Conflict: 1. Informa9on asymmetry
2. Conflict of interests

Moral hazards
• On the job consump9on (such as corporate jets)
• Low risk short term investments (such as maximizing current earnings while cu|ng long term R&D)
• Empire building (such as value destroying acquisi9ons)

Principal – Principal Problem

• Conflict between two classes of principals: Controlling and minority shareholders.
• Controlling shareholders appoint family members as agents

EXPROPRIATION
Ac9vi9es that enrich controlling shareholders at expense of minority shareholders.
•Tunneling: Illegal form of corporate then that diverts resources from the firm for personal or family use.
•Related transac1on: Controlling shareholders sell firm assets to another firm they own at below market prices or spin
off the most profitable part of a public firm and merge it with another private firm they own.

INTERNAL GOVERNANCE BOARD OF DIRECTORS

•Inside director: Member also from top execu9ve.
•Outside director: Non management member.

Principal appoints the Board and Board monitors the Agents.

CEO DUALITY
• CEO doubles as a chairman of board.

EXTERNAL GOVERNANCE
• Exit based mechanism: Shareholders no longer have pa9ence and are willing to “exit” by selling their shares.
1.Market for product compe99on: Compels managers to maximize profits and, in turn, shareholder value.
2.Market for corporate control: Takeover market, where different management teams contest for control rights of
corporate assets.
3. Market for private equity: Investors, onen in partnership with incumbent managers, issue bonds and use the cash
raised to buy firm’s stock, turning shareholders to bondholders, known as leverage buyout (LBO).

LECTURE NOTES
I. FINANCING DECISIONS
1. Key Concept
Equity refers to the stock (usually expressed in shares) in a firm, and debt refers to the loan that the firm needs to pay
back at a given 9me with a prespecified interest. Tapping into a larger pool of capital globally allows firms to lower their
cost of capital.
2. Key Terms
• Bond is a loan issued by the firm and held by creditors.
• Bondholder is a buyer of bonds.
• Corporate governance is the rela9onship among various par9cipants in determining the direc9on and performance of
corpora9ons.
• Cost of capital is the rate of return that a firm needs to pay to capital providers.
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• Cross lis9ng is lis9ng shares on a foreign stock exchange.
• Debt is a loan that the firm needs to pay back at a given 9me with interest.
• Default is a firm’s failure to sa9sfy the terms of a loan obliga9on.
• Equity is the stock in a firm (usually expressed in shares), which represents the owners’ rights.
• Financing is the management of a firm’s money, banking, investments, and credit.
• Shareholder is a firm owner.
II. OWNERS
1. Key Concept
In the U.S. and UK, firms with separa9on of ownership and control dominate. Elsewhere, firms with concentrated
ownership and control in the hands of families or governments are predominant.
2. Key Terms
• Concentrated ownership and control is founders star9ng up firms and completely owning and controlling them on an
individual or family basis.
• Diffused ownership is publicly traded corpora9ons owned by numerous small shareholders but none with a dominant
level of control.
• Separa9on of ownership and control is the dispersal of ownership among many small shareholders, in which control is
largely concentrated in the hands of salaried, professional managers who own limle (or no) equity.
III. MANAGERS
1. Key Concept
In firms with separa9on of ownership and control, the primary conflicts are principal–agent conflicts. In firms with
concentrated ownership, principal–principal conflicts prevail.
2. Key Terms
• Agency cost is the cost associated with principal–agent rela9onships.
• Agency rela9onship is the rela9onship between principals (such as shareholders) and agents (such as professional
managers.
• Agency theory is a theory that focuses on principal-agent rela9onships (or in short, agency rela9onships)
• Agent is an individual (such as a manager) to whom authority is delegated.
• Chief execu9ve officer (CEO) is the main execu9ve manager in charge of the firm.
• Expropria9on is ac9vi9es that enrich controlling shareholders at the expense of minority shareholders.
• Informa9on asymmetry is asymmetric distribu9on and possession of informa9on between two sides.
• Principal is an individual (such as an owner) delega9ng authority.
• Principal–agent conflict is conflict between principals and agents.
• Principal–principal conflict is conflict between two classes of principals: controlling shareholders and minority
shareholders.
• Related transac9on is controlling shareholders selling firm assets to another firm they own at below-market prices or
spinning off the most profitable part of a public firm and merging it with another private firm they own.
• Top management team (TMT) is the team consis9ng of the highest level of execu9ves of a firm led by the CEO.
• Tunneling is a form of corporate then that diverts resources from the firm for personal or family use.
IV. BOARD OF DIRECTORS
1. Key Concept
The board of directors performs (1) control, (2) service, and (3) resource-acquisi9on func9ons. Around the world, boards
differ in composi9on and leadership structure.
2. Key Terms
• CEO duality is the CEO doubling as a chairman of the board.
• Inside director is a member of the board who is a top execu9ve of the firm.
• Outside (independent) director is a nonmanagement member of the board.
V. GOVERNANCE MECHANISMS AS A PACKAGE
1. Key Concept
Internal, voice-based mechanisms and external, exit-based mechanisms combine as a package to determine corporate
governance effec9veness. The market for corporate control and the market for private equity are two primary means of
external mechanisms.
2. Key Terms
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• Exit-based mechanism is a corporate governance mechanism that focuses on exit, indica9ng that shareholders no
longer have pa9ence and are willing to “exit” by selling their shares.
• Leveraged buyout (LBO) is a means by which investors, onen in partnership with incumbent managers, issue bonds and
use the cash raised to buy the firm’s stock.
• Private equity is equity capital invested in private companies that, by defini9on, are not publicly traded.
• Shareholder capitalism is a view of capitalism that suggests that the most fundamental purpose for firms to exist is to
serve the economic interests of shareholders (also known as capitalists).
• Voice-based mechanism is a corporate governance mechanism that focuses on shareholders’ willingness to work with
managers, usually through the board, by “voicing” their concerns.

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